Ollie's Bargain Outlet - Earnings Call - Q3 2026

Transcript

Operator (participant)

Good morning and welcome to Ollie's Bargain Outlet's conference call to discuss financial results for the third quarter of fiscal year 2025. Please be advised that this call is being recorded, and the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie's. I would now like to introduce our host for today's call, John Rouleau, Managing Director of Corporate Communications and Business Development for Ollie's. John, please go ahead.

John Rouleau (Managing Director of Corporate Communications and Business Development)

Thank you and good morning, everybody. We appreciate your time and participation. Joining me on today's call from Ollie's are Eric van der Valk, President and Chief Executive Officer, and Robert Helm, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. We ask that you initially limit yourself to one question to ensure that everyone has the opportunity to participate. If you have additional questions, please re-enter the queue. Finally, let me remind you that certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

These risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-K and the quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements. On today's call, the company will be referring to certain non-GAAP financial measures. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures is included in the company's earnings press release. With that all said, it's my pleasure to turn the call over to Eric.

Eric van der Valk (President and CEO)

Good morning. Thank you for joining us today. Our team delivered another strong performance in the third quarter. We opened a record number of new stores, continued to accelerate membership growth in our Ollie's Army loyalty program, widened our price gaps to the fancy stores, and delivered industry-leading sales growth, all while driving significant improvement on the bottom line. We are primed and ready for the final days of the holiday season. Our expanded assortment of seasonal and gift items, along with our amazing deals of brand-name household products, make us the holiday shopping destination. Our comp trends since early October have been strong, and we feel great about our momentum heading into the final weeks of the holiday season. With the better-than-expected third-quarter results and a very good start to the fourth quarter, we are raising our full-year sales and earnings outlook.

Let me provide an update on our strategic growth initiatives and some of the things we are doing from a merchandising, marketing, and supply chain perspective to drive our business. Accelerated unit growth and customer acquisition remain our top priorities. We have a predictable, portable, and profitable store model that is unlike anything else in the market. We have a huge opportunity ahead of us to continue growing. Our long-term target is 1,300 stores, and we are committed to a minimum 10% annual unit growth to get there. We have the talent and have built the infrastructure to exceed our long-term algo and are delivering accelerated unit growth. We opened 32 new stores in the third quarter and 86 for the year, which is 18% growth. This blew away previous Ollie's records and demonstrated our ability to exceed our algo opportunistically.

The current environment has been challenging for many retailers, and this, coupled with long-term consolidation in retail, presents a pivotal opportunity for Ollie's to secure attractive second-generation real estate sites. Our entire team deserves a huge shout-out for their achievements this year. Not only did we open a record number of new stores, all of our stores were open before the fourth quarter. We have not made this happen for years, and this allows us to be 100% focused on driving the business in the final months of the year and the critical holiday shopping period. Thank you again, Ollie's dream team of discount retail, for making this happen. Opening stores is the first component of our growth strategy. Next is winning the hearts and minds of new customers. We have some of the most dedicated and passionate customers in the business and are fiercely committed to this group.

As we continue to open new stores, we are focused on acquiring new customers and turning them into loyal Ollie's Army bargain nuts. Our members shop more frequently and spend over 40% more per visit than non-members. They are very important to our business, and we have an opportunity to strengthen our connection and drive lifetime customer value. We are very pleased with customer growth in the third quarter. New memberships in our loyalty program increased 30% year-over-year, while our customer file increased 12%. We have seen new customer acquisitions strengthen since the first half of the year, and engagement with our existing customers remains strong. Both the younger and higher-income groups were the fastest-growing cohorts in the quarter, which we think is in part driven by the continued reallocation of marketing dollars to digital, consumers seeking value, and customers trading down.

We also continue to enhance the value proposition of our Ollie's Army loyalty program. Last quarter, we talked about the success of the additional Ollie's Army Night and some of the learnings there. The biggest takeaway was the adjustment to the start time of the event. We received positive feedback about the earlier start time and experienced increased foot traffic as a result. The upcoming Ollie's Army Night on Sunday, December 14th, will run from 4:00 P.M. to 9:00 P.M. compared to 6:00 P.M. to 10:00 P.M. last year. If you're not already a member of Ollie's Army, what are you waiting for? We invite you to join, and we look forward to seeing all of you this Sunday. On the merchandising front, let me touch on how we're steering our product mix to drive sales productivity and enhance new customer acquisition.

Our flexible buying model and treasure hunt shopping experience give us unlimited flexibility in how we assemble our product offering. Our buyers are continuously scouring the marketplace to find the best products at the best prices to put together an ever-changing assortment that combines quality, natural brands, and price in a way that can only be found at Ollie's. At the same time, we know that customers are prioritizing their spending around their needs and are looking for value. By focusing on value-driven consumable deals, we achieved mid-single-digit increase in comparable store transactions, attracting new customers and increasing engagement. Our deal flow continues to be very strong and driven in part by the challenging retail environment. On top of this, our growing size and scale is starting to give us the opportunity to steer our category mix.

A good example of this is the increased investment we made in the seasonal category. As you may have seen in our stores, we dramatically increased the assortment of seasonal decor over the past year, with the most meaningful changes taking place in our Fall Harvest, Halloween, and Christmas categories. We also grew our holiday gift programs that we initially successfully tested last year. The changes have been well received by our consumers, with seasonal being one of our top-performing categories in the quarter and throughout the year. Marketing continues to be a critical lever in fueling the growth of our business, and over the past year, we've been accelerating a major evolution in how we connect with our customers. As consumer attention continues to shift towards digital platforms, our strategy is shifting as well.

By moving from traditional linear and print-heavy approaches to a more dynamic digital-first strategy, we can deliver the right message to the right person in the right place at exactly the right time. A recent comprehensive review of our media mix model indicated a significant opportunity to further reallocate print spend to digital media. Acting on this data, we put a test in place, and our strategic reallocation is already proving out. October was our strongest month of the quarter at a time when we meaningfully reduced our print campaign. This allowed us to leverage our media spend while driving sales above plan in the quarter. More importantly, this is in pursuit of a smarter, more targeted, more modern marketing ecosystem. To support the growth of our business, we continue to invest in our supply chain.

Over the next year, we plan to expand our Texas distribution center by 150,000 sq ft and increase our service capacity by approximately 50 stores to 800. Next on the list is the expansion of our Illinois distribution center, which will start late next year. Our supply chain investments have driven throughput, leveraged costs, and expanded our capacity to buy any deal, anytime, anywhere as we continue on our path of continuous growth. I would like to thank all of our dedicated and hardworking associates. Deep discount retail is not an easy business, and it requires continuous coordination and relentless execution. We came into this year with a very unique opportunity to accelerate our growth and capture abandoned market share from the store closures and distressed retailers. Our team was ready for the challenge and stepped up all year long.

I want to wish everyone happy holidays and hope that all of our team members are able to enjoy time with friends and family. Now, let me turn the call over to Rob.

Robert Helm (EVP and CFO)

Thanks, Eric, and good morning, everyone. We are very pleased with our third-quarter results and the momentum in our business. New store openings, new store performance, sales, and earnings were all ahead of our expectations for the quarter. With the better-than-expected results and a very good start to the fourth quarter, we're raising our full-year sales and earnings outlook. Accelerating new unit growth and expanding the Ollie's Army loyalty program are two big priorities this year. We are delivering on both of these initiatives. We opened 32 new stores in the third quarter and ended the period with a total of 645 stores and an increase of more than 18% year-over-year. Ollie's Army members increased 12% to 16.6 million members strong, driven by new customer acquisition. With the consumer buying closer to need and prioritizing necessity over discretionary items, this has driven strength in consumer staples.

Our flexible buying model has allowed us to feed this trend, which has been very well received by customers. We have also taken advantage of a number of closeout deals that have fueled positive trends in customer acquisition, transactions, and unit volumes. We intentionally pursued these deals to drive customer growth and engagement, even as they put some pressure on average unit retail and basket size. Now, let me run through our P&L numbers. Net sales increased 19% to $614 million, driven by new store openings and comparable store sales growth. Comparable store sales increased 3.3%, driven by a mid-single-digit increase in transactions, which was partially offset by a decrease in average ticket price. Our top five performing categories were food, seasonal, hardware, stationery, and lawn and garden. Gross margin decreased 10 basis points to 41.3%.

The slight decrease was better than our expectations and was driven by higher supply chain costs, primarily incremental tariff expenses, which were partially offset by higher merchandise margins. SG&A expenses and percent of net sales decreased 50 basis points to 29.4%, with the decrease primarily driven by lower professional fees, stock-based compensation, and leverage from the continued optimization of our marketing ecosystem. Pre-opening expenses increased 3% to $7 million in the quarter, driven by new store growth and a million of dark rent expense associated with the former Big Lots locations that were acquired through the bankruptcy auction process. Moving down to the bottom line, adjusted net income and adjusted earnings per share increased 29% to $46 million and $0.75, respectively, for the quarter. Lastly, adjusted EBITDA increased 22% to $73 million, and adjusted EBITDA margin increased 30 basis points to 11.9% for the quarter.

Turning to the balance sheet, our total cash and investments increased by 42% to $432 million, and we had no meaningful long-term debt at the end of the quarter. Given the nature of our business, the strength of our balance sheet is a strategic asset. Our financial stability, the visibility of being a public company, and our size and scale help distinguish us in the closeout and off-price space. As a result, we remain committed to a fortress type of balance sheet as it helps drive our business. Inventories increased 16% year-over-year, primarily driven by our accelerating store growth and strong deal flow. Capital expenditures totaled $31 million for the quarter, with the majority of the spending going towards the opening of new stores, the build-out of the bankruptcy-acquired stores, and to a lesser degree, investments in both our supply chain and existing stores.

We bought back $12 million worth of our common stock in the quarter and had $293 million remaining under our current share repurchase authorization at the end of the quarter. Lastly, let me run through our outlook for fiscal 2025. We're raising both our sales and earnings outlook for the full year. Our revised outlook flows through the upside in our third-quarter results and mostly keeps our outlook for the fourth quarter in place. It also assumes the current tariffs remain in place for the balance of the year.

Our updated guidance figures are contained in the table in our earnings release posted this morning and include 86 new store openings, net sales of $2.648-$2.655 billion, comparable store sales growth of 3.2%-3.5%, gross margin in the range of 40.3%, operating income of $293-$298 million, and adjusted net income and adjusted earnings per share of $236-$239 million, and $3.81-$3.87, respectively.

These estimates assume depreciation and amortization expenses of $55 million, inclusive of $15 million within cost of goods sold, pre-opening expenses of $25 million, which is slightly higher than the previous guidance, with our pipeline for the first quarter now set, an annual effective tax rate of approximately 24%, which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately $62 million, and capital expenditures of approximately $88 million, which includes the build-out of the former Big Lots locations and the initial expenses associated with the expansion of our DC in Texas. Our fourth quarter comp outlook is now in the range of positive 2%-3%. We will not be opening any additional stores in fiscal 2025, but our new openings in fiscal 2026 are set and will again be front-end weighted.

Given the strength of our pipeline, we expect new store openings in 2026 to remain above our long-term growth algo, and we're targeting 75 new stores next year. In closing, let me thank my fellow team members for their work and dedication this year. We came into the year with a unique opportunity to accelerate our growth and increase our market share. This required a lot of coordination and effort across the organization, and I couldn't be more proud of how our teams have executed this year. With a strong assortment of both seasonal and everyday items, we feel good about our positioning heading into the holidays and are poised to finish the year strong. Happy holidays to all of our associates and team members around the country. Now, let me turn the call back to Eric.

Eric van der Valk (President and CEO)

Thanks, Rob. Looking ahead, we feel very good about our positioning. Customers are looking for value, manufacturers need ways to manage their supply chain, and the retail sector is consolidating. Ollie's benefits from these powerful secular trends, which are reflected in our fundamentals. Our customer base is expanding. Our deal flow has never been better. Our store growth is accelerating. Our price gaps are widening, and our margins are expanding. We are delivering strong and consistent results. We are winning the hearts and minds of customers. And most importantly, we are-

Ollie's!

Operator, we are ready for questions.

Operator (participant)

As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chuck Grom from Gordon Haskett.

Chuck Grom (Senior Retail Analyst)

Hey, good morning, guys. Let's hope you could frame out the state of your consumer in light of your basket commentary. Dollar General also spoke about some ticket compression during times of consumer duress recently and also historically. Then bigger picture, can you talk about your vendor relationships both on the closeout front, but more importantly, the steps you're taking to drive deeper CPG relationships? Thanks.

Eric van der Valk (President and CEO)

Sure. Thanks, Chuck, and good morning. Yeah, I'll start with the second part of your question. In terms of relationships, it's been a difficult environment for many traditional retailers with bankruptcies, store closures, disruptions from tariffs. Customers continue to seek value, and we continue to grow our share of the order book of many vendors, kind of regardless of the space that they're in. In CPG, it's certainly been a big component of that. Our food business is an indication of the strength of not only the customer looking for value in products they need, but also a deal flow that has been particularly strong, in large part as a result of abandoned product or order book space in CPG order books that used to be sold to some of these companies that are no longer around or have consolidated. So that has been very good for us.

It's helped us to open up new relationships as well. You would think at our size and scale that we know everyone, and that's really not true. We still have opportunities to work more directly with various vendors, even in the CPG space, and we've been able to open up some new relationships over the past year that have been very meaningful for us, and it's meeting that customer need to buy to get extreme value in product that they need. In terms of the state of the consumer, we're seeing that the strength, we're seeing strength in the higher-income consumer above $100,000 in household income, strength in upper middle at $65,000 and above.

It's solid lower middle, and we've seen a little bit of, I don't know if it's trade-out or a little bit of softness in the lower-income consumer, which we could potentially attribute to the government shutdown and some of the disruption that happened as a result of that. But we're seeing on the whole that the strength of the upper middle and upper-income consumer more than offsets a little bit of the weakness with that lower-income consumer, and that low middle has been hanging in there, and as we indicated, we've been able to attract a lot more customers and convert them in the loyalty program as well, and we think in part driven by deal flow in CPG product.

Chuck Grom (Senior Retail Analyst)

Thanks, Eric.

Eric van der Valk (President and CEO)

Thanks, Chuck.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Matthew Boss from JPMorgan.

Matthew Boss (Equity Research Analyst)

Great, thanks. So could you elaborate on the components of the third-quarter comp, particularly the growth in transactions maybe relative to the second quarter versus drivers of the basket decline, and just how this fits into your customer acquisition strategy? And separately, could you speak to the cadence of monthly comps that you saw in the third quarter and just help define the strong start that you cited in the fourth quarter, maybe notably trends that you saw before and after Black Friday weekend?

Robert Helm (EVP and CFO)

Hey, Matt. I'll chime in on the first part, and then Eric will take the second part about the customer acquisition. We were very pleased with our comp in the third quarter. The positive 3.3% is above our guidance of the positive 3% for the entire quarter. We saw a mid-single-digit positive transaction trend, which is actually an acceleration off of Q2 when you normalize it for the incremental Ollie's Army Night event that we added during that quarter. The basket was the piece that was down. That was down low single-digits, and that was driven by a decline in AUR that was in the high single-digits. From a cadence perspective, we were pleased with the flow of the quarter. We saw a little bit of slowdown midway through the quarter. It was at a time when unseasonably warm weather and the initial government shutdown took place.

So I'm not sure how much is attributable to either component, but we saw momentum return in October when the weather changed. We exited the quarter with very strong momentum. That momentum has carried into November. Quarter-to-date trends are currently running ahead of our guidance. And that AUR that was a high single-digit decline is now a positive low single-digit increase to our AUR. So all in all, between the assortment and where we're running from a momentum perspective, we feel very confident to deliver our guidance in the fourth quarter and deliver the year.

Eric van der Valk (President and CEO)

Hi, Matt. I'll just add a little bit of color on AUR. We really don't overtly manage AUR at Ollie's. We manage price gaps. We saw an opportunity in Q3, and it speaks a little bit to Chuck's question about CPG and strength of CPG. We saw an opportunity to invest in price, especially consumables. We also had opportunities to buy some very compelling low AUR deals in craft and seasonal in a couple of other categories, and we took the opportunity to invest in lower AUR deals that we believe customers would respond very favorably to, and they did, and that really drove our traffic over the course of Q3. It also made us a lot of friends, and it helps us to win hearts and minds and helps us to win loyal customers that will be customers for life, so we like this investment in price.

We like this investment in low AUR. We're in this for the long haul in terms of customer acquisition and retention, and we were very happy with the outcome.

Matthew Boss (Equity Research Analyst)

Great color. Nice to hear on the momentum.

Eric van der Valk (President and CEO)

Thank you.

Robert Helm (EVP and CFO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Steven Zaccone from Citi.

Steven Zaccone (U.S. Broadlines and Hardlines Retail Analyst)

Great. Good morning. Thanks very much for taking my question. Wanted to follow up there. The customer acquisition trends, can you talk about the growth you're seeing with new customers and then overall customer retention? And then as it relates to the Ollie's Army Night in December, how has your planning for that event changed at all based on the learnings from adding an additional night in June this year?

Eric van der Valk (President and CEO)

Sure. Thanks, Steve. In terms of customer acquisition, very happy. One of the strongest from an acquisition standpoint we've ever experienced as a company. Our retention is also very good. Customer reactivations are also strong. So we're hitting on all cylinders in terms of Ollie's Army. Acquisition remains a key focus. It's product newness, brands, new brands, great pricing, the investing in price that we've done. It improves store experience. The digital marketing, we believe, also is helping to drive a new customer into our stores. We're seeing, in terms of the makeup of new customers that we're acquiring to the Army, we're seeing a younger customer. Our strongest cohort was 18 to 34 years old, which really blew us away because typically it's more in the mid-30s to mid-40s. That was our second strongest cohort from an acquisition standpoint, was 35 to 44.

From an income standpoint, I commented a little bit when Matt asked his question, but upper middle and higher income were the strongest in terms of acquisition of the Army. In terms of Ollie's Army Night, I kind of made the comment on the call about our learning from the summer event. We had such an enthusiastic response from customers about the earlier start time of the event. If you remember, we started the event at 5:00 P.M. So we made an adjustment given the time of the year and the weather in a lot of places to start this event at 4:00 P.M. The event's actually one hour longer, runs until 9:00 P.M. Many of the customers that commented favorably about the earlier start time in June were older customers, the kind of customers like the dinner at 5:30 P.M. and watched Jeopardy at 7:00 P.M.

That's a shout-out to my 84-year-old dad because that's him, but that's the customer that appreciates the earlier start time. In terms of how we're thinking about it, we're not actually thinking about the outcome any differently. Currently, it's all accounted for in our guidance, and so we're not banking on any significant incremental contribution from the day itself.

Steven Zaccone (U.S. Broadlines and Hardlines Retail Analyst)

Okay. Thanks for the detail. Best of luck.

Eric van der Valk (President and CEO)

Sure. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets.

Brad Thomas (Managing Director and Equity Research Analyst)

Good morning, and thank you. You did a nice job here of driving leverage, even with such a large increase in stores here this quarter. I was hoping you could talk a little bit more about some of the levers that you're pulling in SG&A and perhaps an early look at how to think about that into next year. Thanks.

Robert Helm (EVP and CFO)

Sure. I'll take that question, it's Rob. We have an incredible white space opportunity ahead. We have a predictable, portable, and profitable model that's unlike anything else in the marketplace. The model itself generates an incredible amount of free cash flow, and it's a unique operating model that can be scaled over time. Our focus is really positioning the business, not for next year, but for the next 5 to 10 years to deliver consistent sales and earnings growth over time. But to your point, we're also focused on delivering near-term results. Thinking ahead to 2026, we anticipate benefiting from the full-year annualization of the step change in the new stores that we opened. We'd expect to benefit from a favorable real estate environment, setting up another year of strong and elevated growth.

Our new store openings being front-loaded for next year is also positive, and we also should have the rolloff of the dark rent that we incurred for the Big Lots locations that we acquired. At the same time, we're going to continue to reinvest in the business to support growth and do face some cost pressures like medical, which still remain at elevated levels. But what that means for earnings in 2026 is we will be able to leverage this business, leverage the SG&A, assuming no radical changes in the environment, and drive double-digit top-line growth with mid-teens bottom-line growth.

Brad Thomas (Managing Director and Equity Research Analyst)

Great. Very helpful.

Eric van der Valk (President and CEO)

Maybe I just comment on the marketing aspect of it because that was a highlight from Q3. As we move forward, I commented in the script a bit that the business has so much potential digital, has the ability to reshape how we reach and engage with our customers. And we've been on a multi-year path now to transform our marketing to be much more digital-first, applying data analytics to ensure we get the right return out of our marketing spend, especially the digital space. We did learn that there's a significant opportunity to reallocate print dollars into digital. It was a net save in Q3 on a go-forward basis. To the point of your question, Brad, how do we look at this in future years? It's more of a reallocation of print into digital. The reallocation in Q3 specifically was cutting postcards from non-responders.

So those are solo mail delivered postcards, and we virtually saw no impact. October was the best-performing month, and that's the month in which we cut the postcards. So longer term, we're looking at continuing that transformation, accelerating the movement out of print and linear media into digital, which should be great for driving top line. We don't look at it as necessarily an SG&A opportunity.

Brad Thomas (Managing Director and Equity Research Analyst)

That makes sense. Thanks, Eric. Thanks, Rob.

Operator (participant)

Our next question comes from the line of Sarah Morin from Piper Sandler.

Sarah Morin (Equity Research Associate)

Hi. This is Sarah on for Peter. Thanks for taking our question. What kind of opportunities do you see to improve sales productivity, and then how are you thinking about ability to optimize category mix? And then if you do lean more into consumables, I'm wondering what does this imply for the longer-term gross margin? Is 40% still kind of that right target?

Eric van der Valk (President and CEO)

Sure. Sarah, I'll take the first part of your question. Rob will take the consumable mix impact to gross margin. Closeouts are the lifeblood of our business, and we still look at it as the most important way in which we demonstrate and deliver value to our customer. As we continue to grow, though, we're seeing opportunities to leverage our size and scale to more overtly steer our category mix, whether that's steering our closeout mix into new brands, new vendors, new categories, or emphasizing categories. We're much more in the driver's seat than we've been in the past. Given the sheer amount of product that's being presented to us on an ongoing basis, given our size and scale, the most challenging decisions we have to make is what not to buy, and that's becoming more and more challenging as we continue to move forward.

A good example of this in Q3 is that we were able to drive consumer staples, including our food category, to a new level, which we'll get to your question about impact on gross margin. We're seeing that we are one of the few buyers out there of substance in that business. The closeout excess inventory space for CPG seasonal was the other example where we steered our category mix to have much more emphasis on seasonal, so we're going to continue steering as we move into future years and maximizing our sales productivity as we go forward.

Robert Helm (EVP and CFO)

Let me touch on the gross margin for a moment. Our guidance of 40.3% is above our long-term algo of 40%. We have quite a number of tailwinds within gross margin this year. The first one to speak to is really our size and scale in the closeout environment, which has been quite good. Markdowns and shrink has also been lower, and that's been offset to some degree by higher supply chain costs and tariff expenses. We're not giving guidance for 2026 today, and that's something we'll give in a couple of months. But what I would say broadly about gross margin is we manage this business, as Eric said, to price gaps to the fancy stores. Our price gaps have expanded at a time that we've also expanded margins, so that feels quite good.

But we do have a flexible buying model where if we can't be the lowest price in the market and we can't have that wide of a price gap, we simply won't buy the item and we'll move on to the next item.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Lorraine Hutchinson from Bank of America.

Mary Sport (Equity Research Associate)

Hey, good morning. This is Mary Sport on for Lorraine. Could you talk a little bit about what you're seeing from your new stores? Are they still performing ahead of expectations, particularly those in bankruptcy locations? And then also you talked a little bit in the past about making changes to more of a soft opening versus a grand opening, especially for the new stores in bankruptcy locations. Is there any update on how the soft openings are going, and is that a strategy that you expect to continue to employ moving forward? Thank you.

Robert Helm (EVP and CFO)

Sure. This is Rob. I'll take this question. Good morning. New store performance has been extremely strong. We've essentially beat plan across 85% of the stores that we've opened this year, so we're very pleased with that. With respect to the "reverse waterfall" that we've had historically, we are now getting our first looks at the comping stores when we really started that exercise of soft opening versus grand opening with the 99 Cents Only Stores in the fall of 2024, so far, what we're seeing in results is that the reverse waterfall has flattened quite a bit, so the second year typically in our model was a comp decline, and we're seeing that second year for those 99 Cents Only Stores certainly being much flatter, which bodes for a flatter comp in years three and four as well.

Mary Sport (Equity Research Associate)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Scot Ciccarelli from Truist.

Josh Young (Equity Research Senior Associate)

Hey, good morning, guys. This is Josh Young on for Scot. So could you just give us an update on the performance you're seeing from your stores that are in a similar market to the now-closed Big Lots locations? And then as we think about new stores and you've kind of accelerated the pace of openings here, have there been any operational stresses you've had to work through, whether that might be supply chain or labor, anything to call out there?

Robert Helm (EVP and CFO)

Sure. I'll take the first part with Big Lots. I think Eric can take the second part with the operations. We're excited about the performance we're seeing where the Big Lots have closed. These stores continue to outperform the rest of the chain. The best performers are roughly the, call it, 290 stores within five miles of a Big Lots closure where it has not reopened. Those stores remain to be running between low single-digit and mid-single-digit lift versus the rest of the chain. The, call it, 110 locations where Big Lots closed and then a variety of wholesalers reopened the stores. We're roughly seeing the same trends there. Maybe a tick lower, but still better performance than the balance of the chain.

Eric van der Valk (President and CEO)

Yeah, Josh, I'll take the second part of your question. I think you dovetailing onto the first part of your question, and the question asked earlier about soft openings and reverse waterfall. We went into this year not only investing in infrastructure, supply chain infrastructure, project management teams, real estate, store development, the construction teams, the store leadership teams to ensure that we could grow at this accelerated pace. But we also went into this year with the soft open approach, which takes some of the stress out of the process in that with the hard opening dates, you center all of your efforts around hitting this one exact date, and it results in a lot of extraordinary, what we call it, Ollie's muscle-through-it type moments where the teams get pushed to their limit and they become exhausted.

We also paced our openings out over the course of the first three quarters so that we weren't opening too many stores in any given week, which allowed us to spread our resources out across the fleet. And it allowed us to successfully deliver the 86 stores. We're tired. It was a tremendous effort for the team, so I'm not indifferent to what it took to accomplish this. But we went in with a plan. We executed the plan, and it worked out well, successful. We're ready to do it again for 2026.

Josh Young (Equity Research Senior Associate)

Got it. Thanks, guys.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Anthony Chukumba from Loop Capital Markets.

Anthony Chukumba (Managing Director, Senior Research Analyst, and Consumer Sector Head)

Good morning. Thank you for taking my question. So you talked in your prepared remarks about the fact that you have this increased seasonal merchandise assortment as well as an expanded holiday gift program. If I remember correctly, last year, a lot of the holiday gifts were essentially a closeout from Big Lots. But I'm assuming, and correct me if I'm wrong, but with a lot of the seasonal gifts, it's direct sourced from Asia. I guess, first off, let me know if that's correct or not, and then also just what are the margin implications of direct sourcing of the seasonal and the holiday gift as opposed to closeout. Thank you.

Eric van der Valk (President and CEO)

Yeah, Anthony. Seasonal gifts are a combination of direct source and closeout. To your point, though, they tend to be a little bit more direct source depending on the category, especially true of seasonal. We were fortunate this year to have the ability to buy closeouts and seasonal as a result of some of the retail bankruptcies and some of the store closures. So we had more closeouts as a percentage of our seasonal assortment than we typically see. Yes, but a lot of it's direct source gifts. You're remembering a specific closeout we bought last year that was kind of stocking stuffer-oriented gifts. That's true. There's a combination of produced for us and closeouts in gifts tends to be a little bit more produced.

What we're seeing with our continued increase in, as we've accelerated our growth and our continued increase in size and scale and leverage, we're able to buy this product at an even better margin, and it's not a headwind.

Anthony Chukumba (Managing Director, Senior Research Analyst, and Consumer Sector Head)

Thank you.

Eric van der Valk (President and CEO)

Thanks, Anthony.

Operator (participant)

One moment for our next question. Our next question comes from the line of Mark Carden from UBS.

Mark Carden (Director of Equity Research)

Good morning. Thanks so much for taking the question. So building on your marketing spend commentary on the dollar shift from print to digital, you noted you cut on some of the postcards. How are you thinking about the traditional print flyer's role going forward in your advertising strategy? And would you expect to make any incremental changes on that front in the coming quarters?

Eric van der Valk (President and CEO)

We still do believe in the flyer events. How we deliver the message to the customer is where we'll continue to evolve. We primarily use Shared Mail for the print piece, but that flyer is also distributed in various digital channels, and we get a tremendous amount of engagement from those traditional channels around our digital channels around those flyer events. So we're still flyer event-driven. We're less print-delivered flyer event-driven.

We'll continue to shift dollars away from print into digital to ensure that the message gets out there to our customers and we continue to drive these events. We'll shift at a somewhat accelerated pace given we have a tremendous amount of data, and we've learned a lot over the last couple of years about digital, and we'll make smart decisions about ensuring that our flyers still get the exposure, but we're using another form of media that's going to reach more people long term. I call print, especially for Shared Mail, it's kind of the inevitable decline of print media. Ultimately, it's declining whether we like it or not, so we need to make sure we stay ahead of that.

Mark Carden (Director of Equity Research)

Thanks so much. Good luck, guys.

Eric van der Valk (President and CEO)

Thanks.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our next question comes from the line of Simeon Gutman from Morgan Stanley.

Lauren Ng (Equity Research Associate)

Hi, this is Lauren Ng for Simeon. Thanks for taking our question. First, can you maybe walk through your expectations for the Q4 comp? You mentioned quarter-to-date trends are currently ahead of the guide. So maybe how should we think about this in the context of Q4 and maybe what's driving your expectations for this acceleration? And then quickly just following up on gross margins, are you able to help us size the impact of the tariff-related expenses on the Q3? And it looks like the Q4 gross margin contracts pretty meaningfully year-over-year. Is this primarily driven by the tariff impacts? Thank you.

Robert Helm (EVP and CFO)

I'll try to address that question, but I think it was six parts. If I forget part, let me know. From a comp perspective, I just want to clarify. We did not say that comps needed to accelerate to meet the guidance. We said that comps are currently running ahead of our guidance quarter-to-date. What gives us confidence in delivering that for the balance of quarter is our strength in our transaction trends, which we've seen in the mid-single-digits pretty much for all of the year this year, as well as the complexion step change in our AUR, which is now positive low single-digits versus a negative high single-digits in the third quarter.

Eric van der Valk (President and CEO)

Gross margin.

Robert Helm (EVP and CFO)

In terms of gross margin for fourth quarter, we'd always planned the gross margin to be in the mid-39% range. That's kind of how we think about the fourth quarter historically. We do have a number of tailwinds this year in gross margin that I outlined between lower markdown rates, benefits from shrink, our ability to follow other retailers with price gaps and take price on tariff-impacted products. So all in all, we feel good in delivering the fourth quarter gross margin. We're just always going to be conservative so that we position our guidance that we can deliver to our shareholders, but we can also take the necessary actions that we need to to manage our business and deliver to our customers.

Lauren Ng (Equity Research Associate)

Okay. Great. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ed Kelly from Wells Fargo.

Ed Kelly (Managing Director of Equity Research)

Hi. Good morning, guys. Thank you for taking my question. I was curious as to maybe just some early thoughts on the 2026 comp build. And I'm kind of thinking about it in the context of the big tailwind, which obviously you are benefiting from or taking advantage of that for some stores. Does that normalize next year? Then as we think about the Big Lots store openings from this year, which many of them were Big Lots conversions, do they act like the 99 Cents Only Stores, meaning flattish or lowish comp in year one? And then when you pull all that together, does that basically kind of mean that the highest probability outcome or way to start would be your traditional sort of like 1%-2% comp guide? And then how do you think about opportunity associated with that?

Obviously, there's some fiscal stuff coming next year with tax cuts, and I'm curious as to how you think that might play out for you. Thanks, guys.

Robert Helm (EVP and CFO)

Hey, Ed. This is Rob. I'll take that question. So I was listening to your question, and you answered it for me with a positive 1%-2%. I was giggling a little bit when I was thinking about it. So from a comp guidance perspective for next year, we'll likely stay on algo. We like the beauty of the algo. It's how we manage our business. It's how we set our cost structure each year. But it's not lost on us that there are tailwinds, potential tailwinds to the comp guidance for next year. I think the potential for elevated tax money in the first half of the year is certainly a piece of it. Big Lots market share capture should be the gift that keeps giving. And we'd expect for that to be a multi-year share capture.

AUR, which was a drag this year, potentially, we don't see those types of drags from year to year. So I think all in all, there's a number of factors to be positive about next year's comp guidance. But like you said in your question, we'll reset it at the positive 1%-2%, and then we'll seek to deliver from there. And you know what we say. We don't turn the registers off.

Ed Kelly (Managing Director of Equity Research)

Great. Thanks, guys.

Eric van der Valk (President and CEO)

Thanks, Ed.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Kate McShane from Goldman Sachs.

Hi. This is Grace Cheong for Kate McShane. For the 2026 pipeline of 75 stores, could you maybe expand more on the drivers behind this and any color on the new store pipeline, like maybe anything you're doing differently, and what are you seeing in the real estate environment and unit growth longer term? Thank you.

Eric van der Valk (President and CEO)

Sure. Yeah. We are guiding to 75 stores. Opening new stores remains our highest, the best use of capital. And the investments that we made in accelerating growth really paid off. We're pleased with how we executed, getting to the 86 stores this year, and the front-loading that we've been able to achieve of getting all the stores open by end of Q3, opening on budget, outperforming projections, etc. When we look at the environment moving into 2026, there's enough real estate to fuel growth. The 75 is already set. We have the deals, most leases signed.

There's still vacancy out there from all of the distressed retailers and bankrupt retailers that have gone out, including a disproportionate number of Big Lots vacancies that weren't available or were available to purchase but not purchased as part of the bankruptcy auction process that were then available for us to pick up on the open market. So a disproportionate number of the 75 are Big Lots stores, which we like a lot because those Big Lots stores are what we call warm boxes because they have a discount customer who was just shopping in that store literally five minutes ago. We reopened as an Ollie's. We've seen a lot of success over the past year with those stores. So we feel very good about the 75, and we'll continue to evaluate based on opportunities that are in the market and not thinking to extend past the 75.

We feel like it's the right number at this point when we balance our accelerated growth with other strategic priorities that we have in place for 2026, but it's a very respectful number at 75.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Jeremy Hamblin from Craig-Hallum Capital Group.

Jeremy Hamblin (Senior Research Analyst)

Thanks for taking the questions, and congrats on the sustained momentum. I wanted to just come back to the unit openings and get a sense, Rob, for what you're expecting in terms of pre-opening expense next year given kind of the impacts of dark rent this year and the timing that you're suggesting with a bit more in the front half of the year than the back half of the year. That's kind of part one. And then two is just in terms of the DC expansions that you're looking at and looking at the Illinois facility next year, what type of impact do you see on margins, if any, related to those efforts?

Robert Helm (EVP and CFO)

I'll take both of those, actually. From a pre-opening perspective, I think the easiest way to think about it was we had $5 million of Big Lots dark rent in this year. When we acquired those stores, we're on the clock immediately. You subtract that out and then flex the pre-opening expense for the number of unit openings between the 86 and the 75, and you should be able to get reasonably close to where we're going to land the 26 guidance. From a margin perspective on the expansion, back in the day when we were opening distribution centers and we were smaller with less of a sales base, it was a little bit more of an impact on gross margin in terms of drag when we either opened a new distribution center or expanded distribution center.

Now that the ship has gotten so big, we'd expect a nominal impact and would anticipate that we would be able to fully offset that through our guidance.

Jeremy Hamblin (Senior Research Analyst)

If I could just one follow-up here on tariffs as well. As we look ahead to next year with the China tariffs being pulled down here by 10 percentage points, would you expect as we look at kind of holiday season impacts around gross margins to be a bit lower next year if nothing else changes on policy front?

Eric van der Valk (President and CEO)

I think, Jeremy, just consider we manage our price gaps. We're a fast follower in terms of price. And the whole world is experiencing the same impact of tariffs, 10% less across the entire industry. Other retailers, other importers experience the same. So if they invest in price, adjust their price, lower their price, increase their price, according to whichever direction the tariffs may move, there's still a little uncertainty around this at this point as well. Then we're a fast follower. We're adjusting price, ensuring that we're maintaining our price gaps.

So long way of saying that I would expect if tariffs go down, eventually the market's adjusting price, coming down some, we're coming down some to maintain our price gaps and not expecting it to be some sort of unexpected positive win from a gross margin standpoint in the same way that it wasn't a negative for us as tariffs were increased.

Jeremy Hamblin (Senior Research Analyst)

Got it. Thanks for the color.

Robert Helm (EVP and CFO)

Yep. Thanks, Jeremy.

Operator (participant)

That concludes today's call. Thank you for participating. You may all now disconnect.