Ollie's Bargain Outlet Holdings, Inc. Common Stock 2027 Q2 Earnings Call

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 please limit yourself to one question so that we can get to as many people as possible within the one-hour time limit. 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.

Those 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 quarterly reports on Form 10-Q. Forward-looking statements are made 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 also be referring to certain non-GAAP financial measures. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release. With all of that said, it's now my pleasure to turn the call over to Eric.

Good morning, and thank you for joining us today. We delivered strong earnings growth in the second quarter and continue to execute against our strategic initiatives. Comparable store sales declined 1.8% against a challenging multiyear stack. We believe our sales results were negatively impacted by the combination of less favorable weather, continued economic pressure on the consumer, and an elevated promotional environment, which all led to a more challenging backdrop than we originally expected. Outside of weather-impacted categories, the broader business performed generally in line with our expectations, and we continue to see customers actively seeking value. The consumer remains resilient, but increasingly selective in how they choose to spend. Lower income customers are prioritizing needs over wants, shopping closer to need, and in many cases, delaying discretionary purchases where they can, while higher income customers continue to trade down in search of value.

For over 40 years, we have combined extreme value, well-known brands, and an ever-changing assortment to deliver a treasure hunt shopping experience unlike anything else in retail. Our assortment spans both the consumable products that customers need and the discretionary products that they want. Customers come to Ollie's because they know they can find good stuff cheap, and every visit offers something new and unexpected. The treasure hunt experience creates a sense of excitement and discovery that keeps customers coming back and helps build a deeper connection with our brand. The combination of price, brands, newness, and unexpected finds remains a powerful differentiator for us. Many of the same pressures affecting consumers today are also expanding closeout availability. Our deal flow remains extremely strong, giving us additional opportunities to sharpen our value proposition.

At the same time, we are focused on controlling what we can control by optimizing our assortment and category mix. Our flexible closeout model gives us the ability to pursue exceptional deals while strengthening categories that are driving demand. We are all about growth, and our growth starts with opening new stores and acquiring new customers. We opened 50 new stores during the second quarter and 42 during the first half of the year, more than halfway to our full-year target of 75. We are investing in our loyal customer base through events and programs that strengthen engagement and deepen our connection with customers. During the quarter, we held another successful Ollie's Army Night and wrapped our annual Ollie Days events around our country's 250th birthday celebration. Despite some weather-related challenges, both events drove even stronger customer acquisition and engagement than the year before.

Ollie's Army members increased 13% versus last year, and we ended the period with over 18 million bargainers. At the same time, we are managing our assortment and floor space allocation to better align with today's customer while driving more value and newness. We are expanding categories with a strong product pipeline and white space in the market. Protein and energy products, beverage, seasonal decor, living room furniture, as well as decorative pillows were great examples of this. Most importantly, we are doing this through a disciplined test and learn approach that allows us to move quickly, make better merchandising decisions, improve the customer experience, and increase sales productivity. Beyond merchandising, we continue to invest in our supply chain to support growth, improve efficiency across the network, and enhance our ability to serve our customers. We recently completed the expansion of our Texas distribution center, and operations have now normalized.

In the coming months, we will begin expanding our Illinois distribution facility with a planned completion date around this time next year. Together, these investments continue to expand capacity, improve execution, and support our long-term growth plans. While we are not satisfied with our second quarter sales performance, we are moving swiftly to execute against our key strategic initiatives with the guiding principle of always putting the needs of our customers first. We are tempering our near-term expectations to reflect the current environment, but that does not diminish in any way our confidence in the long-term profitable growth of our business. Value always wins. It will remain our durable competitive advantage. Before I turn the call over to Rob, I want to thank our entire Ollie's team. Running a closeout retail business is hard work. It takes discipline, creativity, flexibility, and relentless execution every day.

Our associates continue to work hard servicing our customers and bringing good stuff cheap to our loyal bargain hunters, and I appreciate them more than words could ever express.

Rob. Thanks, Eric, and good morning, everyone.

We delivered strong earnings growth in the second quarter amid a challenging environment. Earnings were better than expected, driven by IEEPA tariff refunds received in the quarter, despite net sales performance below our expectations. Let me walk you through the results for the quarter. Net sales increased 9.1% to $741 million, driven by new store openings. Comparable store sales decreased 1.8%, driven by flat transactions and a decrease in basket. As a reminder, the second quarter was a difficult comparison where we faced mid to high single-digit comp increases in each of the prior three years. Top performing categories were toys, general merchandise, summer furniture, candy, and seasonal decor. We saw softer performance in weather-sensitive categories, particularly early in the quarter. Gross margin increased 360 basis points to 43.5%. The increase was driven primarily by IEEPA tariff refunds.

Tariff refunds benefited gross margin by 380 basis points in this year's second quarter. Merchandise margin decreased, primarily related to investments in price. Transportation remained elevated, but this was more than offset by lower tariff rates. SG&A expenses as a percentage of net sales increased 80 basis points to 26.6%, primarily driven by the deleverage of fixed costs from the decline in comparable store sales and higher marketing expenses related to one incremental merchandise flyer in the quarter. Pre-opening expenses decreased 42% to $5 million, driven primarily from a fewer number of new store openings and lower dark rent expense. Moving down to the bottom line, adjusted net income increased 40% to $85 million, and adjusted earnings per share increased 43% to $1.42. Lastly, adjusted EBITDA increased 36% to $127 million, and adjusted EBITDA margin increased 330 basis points to 17.1% for the quarter.

Turning to the balance sheet, our total cash and investments increased 10% to $507 million, and we continue to have no meaningful long-term debt at quarter end. We continue to deploy our capital opportunistically and again stepped up our buyback and repurchased $84 million of our common stock in the quarter. Through the first half of the year, we have bought back 1.6 million common shares at a cost of $137 million. At the end of the second quarter, $122 million remained available for future share repurchases under the current share repurchase authorization. Inventories increased 11% year-over-year, primarily driven by our new store growth. Capital expenditures were $43 million in the quarter, with the majority of the spending going towards the opening of new stores, improvements to existing stores, and the expansion of our Texas distribution center.

Now let me wrap up with commentary about our outlook for the full fiscal year. Our updated outlook reflects two key changes. First, we have updated our second half sales assumptions to better align with recent sales trends and the current environment. Second, the outlook now includes IEEPA tariff refunds received in the second quarter, which we have already started deploying in additional price investments to strengthen our competitive position. Details of our revised fiscal 2026 outlook are included in our earnings press release issued this morning.