Company Quick10K Filing
Quick10K
Ollie's Bargain Outlet
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$56.36 63 $3,578
10-Q 2019-08-03 Quarter: 2019-08-03
10-Q 2019-05-04 Quarter: 2019-05-04
10-K 2019-02-02 Annual: 2019-02-02
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
8-K 2019-08-28 Earnings, Exhibits
8-K 2019-06-25 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-06-06 Earnings, Exhibits
8-K 2019-05-31 Other Events
8-K 2019-05-22 Enter Agreement, Exhibits
8-K 2019-04-25 Amend Bylaw, Other Events, Exhibits
8-K 2019-03-26 Earnings, Other Events, Exhibits
8-K 2019-01-11 Earnings, Exhibits
8-K 2018-12-04 Earnings, Exhibits
8-K 2018-09-05 Earnings, Exhibits
8-K 2018-08-29 Other Events
8-K 2018-06-13 Shareholder Vote
8-K 2018-06-05 Earnings, Exhibits
8-K 2018-01-05 Earnings, Officers, Regulation FD, Exhibits
DG Dollar General 35,842
DLTR Dollar Tree 23,204
BURL Burlington Stores 11,499
KSS Kohl's 7,649
FIVE Five Below 7,035
M Macy's 4,543
HUD Hudson 1,058
BIG Big Lots 859
JCP JC Penney 231
TUES Tuesday Morning 64
OLLI 2019-08-03
Item 1 - Condensed Consolidated Financial Statements (Unaudited)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm
EX-32.2 ex32_2.htm

Ollie's Bargain Outlet Earnings 2019-08-03

OLLI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

Form 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Ollie’s Bargain Outlet Holdings, Inc.
(Exact name of registrant as specified in its charter)


Delaware
(State or other jurisdiction of incorporation)

001-37501
 
80-0848819
(Commission File Number)
 
(IRS Employer Identification No.)

6295 Allentown Boulevard
Suite 1
Harrisburg, Pennsylvania
 
17112
(Address of principal executive offices)
 
(Zip Code)

 (717) 657-2300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

     
Title of Each Class
Trading Symbol
Name of each exchange on which registered
     
Common Stock, $0.001 par value
OLLI
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 
 
Accelerated filer 
 
Non-accelerated filer 
 
Smaller reporting company 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of September 3, 2019 was 63,589,467.




Index



INDEX

 
 
 
PART I - FINANCIAL INFORMATION
Page
Item 1.
1
 
1
 
2
 
3
 
4
 
5
Item 2.
13
Item 3.
24
Item 4.
25
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
25
Item 1A.
25
Item 2.
25
Item 3.
25
Item 4.
25
Item 5.
25
Item 6.
26




Index

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)

   
Thirteen weeks ended
   
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
   
August 3,
2019
   
August 4,
2018
 
Net sales
 
$
333,865
   
$
288,098
   
$
658,719
   
$
563,837
 
Cost of sales
   
209,832
     
175,474
     
401,952
     
338,337
 
Gross profit
   
124,033
     
112,624
     
256,767
     
225,500
 
Selling, general and administrative expenses
   
87,350
     
72,990
     
170,682
     
145,354
 
Depreciation and amortization expenses
   
3,512
     
2,854
     
6,921
     
5,617
 
Pre-opening expenses
   
2,420
     
1,917
     
7,629
     
3,681
 
Operating income
   
30,751
     
34,863
     
71,535
     
70,848
 
Interest (income) expense, net
   
(372
)
   
278
     
(517
)
   
816
 
Loss on extinguishment of debt
   
-
     
-
     
-
     
100
 
Income before income taxes
   
31,123
     
34,585
     
72,052
     
69,932
 
Income tax expense
   
5,953
     
4,737
     
8,165
     
9,630
 
Net income
 
$
25,170
   
$
29,848
   
$
63,887
   
$
60,302
 
Earnings per common share:
                               
Basic
 
$
0.40
   
$
0.48
   
$
1.01
   
$
0.97
 
Diluted
 
$
0.38
   
$
0.45
   
$
0.96
   
$
0.92
 
Weighted average common shares outstanding:
                               
Basic
   
63,517
     
62,444
     
63,351
     
62,306
 
Diluted
   
66,300
     
65,868
     
66,237
     
65,745
 

See accompanying notes to the condensed consolidated financial statements.

1

Index


OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)

Assets
 
August 3,
2019
   
August 4,
2018
   
February 2,
2019
 
Current assets:
                 
Cash and cash equivalents
 
$
78,473
   
$
29,415
   
$
51,941
 
Inventories
   
354,576
     
287,440
     
296,407
 
Accounts receivable
   
1,191
     
1,602
     
570
 
Prepaid expenses and other assets
   
5,403
     
9,918
     
9,579
 
Total current assets
   
439,643
     
328,375
     
358,497
 
Property and equipment, net of accumulated depreciation of $68,569, $56,579 and $60,433, respectively
   
105,321
     
57,991
     
119,052
 
Operating lease right-of-use assets
   
321,428
     
-
     
-
 
Goodwill
   
444,850
     
444,850
     
444,850
 
Trade name and other intangible assets, net of accumulated amortization of $0, $1,992 and $2,160,  respectively
   
230,559
     
232,472
     
232,304
 
Other assets
   
2,540
     
4,081
     
4,300
 
Total assets
 
$
1,544,341
   
$
1,067,769
   
$
1,159,003
 
Liabilities and Stockholders’ Equity
                       
Current liabilities:
                       
Current portion of long-term debt
 
$
269
   
$
10,178
   
$
238
 
Accounts payable
   
91,860
     
69,015
     
77,431
 
Income taxes payable
   
1,414
     
-
     
7,393
 
Current portion of operating lease liabilities
   
54,628
     
-
     
-
 
Accrued expenses and other
   
58,266
     
51,762
     
65,934
 
Total current liabilities
   
206,437
     
130,955
     
150,996
 
Revolving credit facility
   
-
     
-
     
-
 
Long-term debt
   
515
     
11,516
     
441
 
Deferred income taxes
   
55,198
     
57,184
     
55,616
 
Long-term operating lease liabilities
   
264,715
     
-
     
-
 
Other long-term liabilities
   
7
     
7,961
     
9,298
 
Total liabilities
   
526,872
     
207,616
     
216,351
 
Stockholders’ equity:
                       
Preferred stock - 50,000 shares authorized at $0.001 par value; no shares issued
   
-
     
-
     
-
 
Common stock - 500,000 shares authorized at $0.001 par value; 63,592, 62,611 and 63,015 shares issued, respectively
   
64
     
63
     
63
 
Additional paid-in capital
   
611,163
     
592,446
     
600,234
 
Retained earnings
   
406,328
     
267,730
     
342,441
 
Treasury - common stock, at cost; 9 shares
   
(86
)
   
(86
)
   
(86
)
Total stockholders’ equity
   
1,017,469
     
860,153
     
942,652
 
Total liabilities and stockholders’ equity
 
$
1,544,341
   
$
1,067,769
   
$
1,159,003
 

See accompanying notes to the condensed consolidated financial statements.

2

Index


OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)

   
Thirteen weeks ended August 3, 2019 and August 4, 2018
 
   
Common stock
   
Treasury stock
   
Additional
paid-in
   
Retained
   
Total
stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
earnings
   
equity
 
Balance as of May 4, 2019
   
63,492
   
$
63
     
(9
)
 
$
(86
)
 
$
607,241
   
$
381,158
   
$
988,376
 
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
2,432
     
-
     
2,432
 
Proceeds from stock options exercised
   
99
     
1
     
-
     
-
     
1,490
     
-
     
1,491
 
Vesting of restricted stock
   
1
     
-
     
-
     
-
     
-
     
-
     
-
 
Net income
   
-
     
-
     
-
     
-
     
-
     
25,170
     
25,170
 
Balance as of August 3, 2019
   
63,592
   
$
64
     
(9
)
 
$
(86
)
 
$
611,163
   
$
406,328
   
$
1,017,469
 
                                                         
Balance as of May 5, 2018
   
62,358
   
$
62
     
(9
)
 
$
(86
)
 
$
587,857
   
$
237,882
   
$
825,715
 
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
1,910
     
-
     
1,910
 
Proceeds from stock options exercised
   
252
     
1
     
-
     
-
     
2,679
     
-
     
2,680
 
Vesting of restricted stock
   
1
     
-
     
-
     
-
     
-
     
-
     
-
 
Net income
   
-
     
-
     
-
     
-
     
-
     
29,848
     
29,848
 
Balance as of August 4, 2018
   
62,611
   
$
63
     
(9
)
 
$
(86
)
 
$
592,446
   
$
267,730
   
$
860,153
 

   
Twenty-six weeks ended August 3, 2019 and August 4, 2018
 
   
Common stock
   
Treasury stock
   
Additional
paid-in
   
Retained
   
Total
stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
earnings
   
equity
 
Balance as of February 2, 2019
   
63,015
   
$
63
     
(9
)
 
$
(86
)
 
$
600,234
   
$
342,441
   
$
942,652
 
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
4,625
     
-
     
4,625
 
Proceeds from stock options exercised
   
536
     
1
     
-
     
-
     
7,571
     
-
     
7,572
 
Vesting of restricted stock
   
57
     
-
     
-
     
-
     
-
     
-
     
-
 
Common shares withheld for taxes
   
(16
)
   
-
     
-
     
-
     
(1,267
)
   
-
     
(1,267
)
Net income
   
-
     
-
     
-
     
-
     
-
     
63,887
     
63,887
 
Balance as of August 3, 2019
   
63,592
   
$
64
     
(9
)
 
$
(86
)
 
$
611,163
   
$
406,328
   
$
1,017,469
 
                                                         
Balance as of February 3, 2018
   
62,007
   
$
62
     
(9
)
 
$
(86
)
 
$
583,467
   
$
213,019
   
$
796,462
 
Cumulative effect of adopting ASU 2014-09
   
-
     
-
     
-
     
-
     
-
     
(5,591
)
   
(5,591
)
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
3,510
     
-
     
3,510
 
Proceeds from stock options exercised
   
564
     
1
     
-
     
-
     
6,171
     
-
     
6,172
 
Vesting of restricted stock
   
52
     
-
     
-
     
-
     
-
     
-
     
-
 
Common shares withheld for taxes
   
(12
)
   
-
     
-
     
-
     
(702
)
   
-
     
(702
)
Net income
   
-
     
-
     
-
     
-
     
-
     
60,302
     
60,302
 
Balance as of August 4, 2018
   
62,611
   
$
63
     
(9
)
 
$
(86
)
 
$
592,446
   
$
267,730
   
$
860,153
 

See accompanying notes to the condensed consolidated financial statements.

3

Index


OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

   
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
 
Cash flows from operating activities:
           
Net income
 
$
63,887
   
$
60,302
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property and equipment
   
8,369
     
6,723
 
Amortization of debt issuance costs
   
168
     
248
 
Amortization of original issue discount
   
-
     
3
 
Loss on extinguishment of debt
   
-
     
100
 
Gain on sale of assets
   
(13
)
   
(24
)
Amortization of intangibles
   
-
     
167
 
Deferred income tax  (benefit) provision
   
(215
)
   
33
 
Deferred rent expense
   
-
     
994
 
Stock-based compensation expense
   
4,625
     
3,510
 
Changes in operating assets and liabilities:
               
Inventories
   
(58,169
)
   
(32,255
)
Accounts receivable
   
(621
)
   
(331
)
Prepaid expenses and other assets
   
(586
)
   
(4,075
)
Accounts payable
   
14,140
     
(4,776
)
Income taxes payable
   
(5,979
)
   
(6,035
)
Accrued expenses and other liabilities
   
(6,967
)
   
(2,055
)
Net cash provided by operating activities
   
18,639
     
22,529
 
Cash flows from investing activities:
               
Purchases of property and equipment
   
(40,351
)
   
(10,241
)
Proceeds from sale of property and equipment
   
42,693
     
43
 
Net cash provided by (used in) investing activities
   
2,342
     
(10,198
)
Cash flows from financing activities:
               
Borrowings on revolving credit facility
   
703,933
     
599,162
 
Repayments on revolving credit facility
   
(703,933
)
   
(599,162
)
Repayments on term loan and finance leases
   
(202
)
   
(27,620
)
Payment of debt issuance costs
   
(552
)
   
-
 
Proceeds from stock option exercises
   
7,572
     
6,172
 
Common shares withheld for taxes
   
(1,267
)
   
(702
)
Net cash provided by (used in) financing activities
   
5,551
     
(22,150
)
Net increase (decrease) in cash and cash equivalents
   
26,532
     
(9,819
)
Cash and cash equivalents at the beginning of the period
   
51,941
     
39,234
 
Cash and cash equivalents at the end of the period
 
$
78,473
   
$
29,415
 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
208
   
$
581
 
Income taxes
 
$
14,357
   
$
16,284
 
Non-cash investing activities:
               
Accrued purchases of property and equipment
 
$
5,425
   
$
1,352
 

See accompanying notes to the condensed consolidated financial statements.



4

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)
 
(1)
Organization and Summary of Significant Accounting Policies

(a)
Description of Business

Ollie’s Bargain Outlet Holdings, Inc. and subsidiaries (collectively referenced to as the “Company” or “Ollie’s”) principally buys overproduced, overstocked, and closeout merchandise from manufacturers, wholesalers and other retailers. In addition, the Company augments its name-brand closeout deals with directly sourced private label products featuring names exclusive to Ollie’s in order to provide consistently value-priced goods in select key merchandise categories.

Since its first store opened in 1982, the Company has grown to 332 retail locations in 23 states as of August 3, 2019. Ollie’s Bargain Outlet retail locations are located in Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Maryland, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Virginia and West Virginia.

(b)
Fiscal Year

Ollie’s follows a 52/53-week fiscal year, which ends on the Saturday nearer to January 31 of the following calendar year.  References to the thirteen weeks ended August 3, 2019 and August 4, 2018 refer to the thirteen weeks from May 5, 2019 to August 3, 2019 and from May 6, 2018 to August 4, 2018, respectively.  References to year-to-date periods ending August 3, 2019 and August 4, 2018 refer to the twenty-six weeks from February 3, 2019 to August 3, 2019 and February 4, 2018 to August 4, 2018, respectively.  References to “2018” refer to the fiscal year ended February 2, 2019, which consisted of a 52-week period.  References to “2019” refer to the fiscal year ending February 1, 2020, which consists of a 52-week period.

(c)
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly the Company’s results of operations, financial condition, and cash flows for all periods presented. The condensed consolidated balance sheets as of August 3, 2019 and August 4, 2018, the condensed consolidated statements of income and stockholders’ equity for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, and the condensed consolidated statements of cash flows for the twenty-six weeks ended August 3, 2019 and August 4, 2018 have been prepared by the Company and are unaudited. The Company’s business is seasonal in nature and results of operations for the interim periods presented are not necessarily indicative of operating results for 2019 or any other period. All intercompany accounts, transactions, and balances have been eliminated in consolidation.

The Company’s balance sheet as of February 2, 2019, presented herein, has been derived from the audited balance sheet included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2019 (“Annual Report”), but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the financial statements for 2018 and footnotes thereto included in the Annual Report.

For purposes of the disclosure requirements for segments of a business enterprise, it has been determined that the Company is comprised of one operating segment.

(d)
Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
5

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


(e)
Fair Value Disclosures

Fair value is defined as the price which the Company would receive to sell an asset or pay to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. In determining fair value, GAAP establishes a three-level hierarchy used in measuring fair value, as follows:

Level 1 inputs are quoted prices available for identical assets and liabilities in active markets.

Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets or other inputs which are observable or can be corroborated by observable market data.

Level 3 inputs are less observable and reflect the Company’s assumptions.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and its credit facilities. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of their short maturities. The carrying amount of the Company’s credit facilities approximates its fair value because the interest rates are adjusted regularly based on current market conditions.

(f)
Recently Adopted Accounting Pronouncements


Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases.  ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing a right-of-use asset and lease liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.

The Company adopted ASU 2016-02 as of February 3, 2019 using the modified retrospective transition method, including the option to not restate comparative periods.  As a part of the adoption process, the Company elected the practical expedients that do not require it to reassess existing contracts to determine if they contain leases under the new definition of a lease, or to reassess historical lease classification or initial direct costs. The Company also adopted the practical expedient to not separate lease and non-lease components for new leases after adoption of the new standard.  In addition, the Company applied a policy election to exclude leases with an initial term of 12 months or less from balance sheet recognition.  The Company did not adopt the hindsight practical expedient and, therefore, will continue to utilize lease terms determined under previous lease guidance.

Adoption of the standard had a material impact on the condensed consolidated balance sheet and related disclosures and resulted in recognition of right-of-use assets of $268.2 million and lease liabilities for operating leases of $269.1 million as of February 3, 2019, while eliminating pre-existing balances for other assets of $6.9 million, deferred rent and tenant improvement allowances of $9.5 million and intangible assets related to favorable leases of $1.7 million which were reclassified to the operating lease right-of-use asset.  The standard did not have a material impact on the Company’s condensed consolidated statements of income, stockholders’ equity or cash flows.  Refer to Note 4 for further details.

6

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


(2)
Net Sales

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of merchandise.  Also included in net sales is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage.  Net sales are presented net of returns and sales tax. The Company provides an allowance for estimated retail merchandise returns based on prior experience.

Revenue Recognition

Revenue is deferred for the Ollie’s Army loyalty program where members accumulate points that can be redeemed for discounts on future purchases. The Company has determined it has an additional performance obligation to Ollie’s Army members at the time of the initial transaction. The Company allocates the transaction price to the initial transaction and the discount awards based upon its relative standalone selling price, which considers historical redemption patterns for the award. Revenue is recognized as those discount awards are redeemed. Discount awards which are issued upon the achievement of specified point levels are valid for a maximum of 90 days from the date of issuance.  At the end of each fiscal period, unredeemed discount awards and accumulated points to earn a future discount award are reflected as a liability.  Discount awards are combined in one homogeneous pool and are not separately identifiable.  Therefore, the revenue recognized consists of discount awards redeemed that were included in the deferred revenue balance at the beginning of the period as well as discount awards issued during the current period.  The following table is a reconciliation of the liability related to this program (in thousands):


 
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
 
Beginning Balance
 
$
9,055
   
$
8,321
 
Revenue deferred
   
8,028
     
5,861
 
Revenue recognized
   
(7,142
)
   
(5,553
)
Ending Balance
 
$
9,941
   
$
8,629
 

Gift card breakage for gift card liabilities not subject to escheatment is recognized as revenue in proportion to the redemption of gift cards.  The rate applied to redemptions is based upon a historical breakage rate.  Gift cards are combined in one homogenous pool and are not separately identifiable.  Therefore, the revenue recognized consists of gift cards that were included in the liability at the beginning of the period as well as gift cards that were issued during the period.  The following table is a reconciliation of the gift card liability (in thousands):


 
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
 
Beginning Balance
 
$
1,448
   
$
1,223
 
Gift card issuances
   
2,253
     
1,966
 
Gift card redemption and breakage
   
(2,285
)
   
(2,009
)
Ending Balance
 
$
1,416
   
$
1,180
 

7

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


(3)
Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding after giving effect to the potential dilution, if applicable, from the assumed exercise of stock options into shares of common stock as if those stock options were exercised and the assumed lapse of restrictions on restricted stock units.

The following table summarizes those effects for the diluted earnings per common share calculation (in thousands, except per share amounts):


 
Thirteen weeks ended
   
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
   
August 3,
2019
   
August 4,
2018
 
Net income
 
$
25,170
   
$
29,848
   
$
63,887
   
$
60,302
 
Weighted average number of common shares outstanding – Basic
   
63,517
     
62,444
     
63,351
     
62,306
 
Dilutive impact of stock options and restricted stock units
   
2,783
     
3,424
     
2,886
     
3,439
 
Weighted average number of common shares outstanding – Diluted
   
66,300
     
65,868
     
66,237
     
65,745
 
Earnings per common share – Basic
 
$
0.40
   
$
0.48
   
$
1.01
   
$
0.97
 
Earnings per common share – Diluted
 
$
0.38
   
$
0.45
   
$
0.96
   
$
0.92
 

The effect of the weighted average assumed exercise of stock options outstanding totaling 281,328 and 266,285 for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, and 213,506 and 195,512 for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, were excluded from the calculation of diluted weighted average common shares outstanding because the effect would have been antidilutive.

The effect of weighted average non-vested restricted stock units outstanding totaling 219 and 345 for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, and 14,673 and 13,339 for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, were excluded from the calculation of diluted weighted average common shares outstanding because the effect would have been antidilutive.

(4)
Commitments and Contingencies

Commitments

On February 3, 2019, the first day of Ollie’s fiscal year 2019, the Company adopted ASU 2016-02, Leases, which requires that lessees recognize right-of-use assets and lease liabilities for all leases on the balance sheet.  Ollie’s generally leases its stores, offices and distribution facilities under operating leases that expire at various dates through 2034.  These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus contingent rentals based on a percentage of annual sales.  A majority of the Company’s leases also require a payment for all or a portion of insurance, real estate taxes, water and sewer costs and repairs, the cost of which is charged to the related expense category rather than being accounted for as rent expense.  Most of the leases contain options to renew for three to five successive five-year periods.  The Company is generally not reasonably certain to exercise renewal options, therefore the options are not considered in determining the lease term, and associated potential option payments are excluded from the lease payments.  Ollie’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

Lease costs are classified in selling, general and administrative expenses on the condensed consolidated statements of income.  Lease costs for operating leases for the thirteen weeks ended August 3, 2019 and August 4, 2018 were $16.4 million and $12.1 million, respectively.  Lease costs for operating leases for the twenty-six weeks ended August 3, 2019 and August 4, 2018 were $31.7 million and $24.1 million, respectively.
8

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


The following table summarizes the maturity of the Company’s operating lease liabilities as of August 3, 2019 (in thousands):

2019
 
$
34,186
 
2020
   
60,455
 
2021
   
59,442
 
2022
   
53,260
 
2023
   
48,868
 
Thereafter
   
118,849
 
Total undiscounted lease payments (1)
   
375,060
 
Less:  Imputed interest
   
(55,717
)
Total lease obligations
   
319,343
 
Less:  Current obligations under leases
   
(54,628
)
Long-term lease obligations
 
$
264,715
 


(1)          Lease obligations exclude $45.3 million of minimum lease payments for leases signed, but not commenced.

The following table summarizes other information related to the Company’s operating leases as of and for the twenty-six weeks ended August 3, 2019 (dollars in thousands):

Cash paid for operating leases
 
$
31,846
 
Non-cash right-of-use assets obtained in exchange for lease obligations
   
56,461
 
Weighted-average remaining lease term
 
7.2 years
 
Weighted-average discount rate
   
4.5
%

The Company adopted the new lease standard in the first quarter of 2019 as discussed in Note 1, and as required, the following disclosure is provided for periods prior to adoption.  As of February 2, 2019, the following is a schedule by year of future minimum rental payments required under non-cancelable operating leases, including renewal periods that were reasonably assured and that had initial or remaining lease terms in excess of one year, excluding any payments related to insurance, taxes, or maintenance (in thousands):

2019
 
$
60,804
 
2020
   
56,106
 
2021
   
49,226
 
2022
   
42,724
 
2023
   
34,876
 
Thereafter
   
65,218
 
Total minimum lease payments
 
$
308,954
 

Related Party Leases

The Company has entered into five non-cancelable operating leases with related parties for office and store locations. Ollie’s made $0.7 million and $0.6 million in rent payments to such related parties during each of the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively.

Contingencies

From time to time the Company may be involved in claims and legal actions that arise in the ordinary course of its business. The Company cannot predict the outcome of any litigation or suit to which it is a party.  However, the Company does not believe that an unfavorable decision of any of the current claims or legal actions against it, individually or in the aggregate, will have a material adverse effect on its financial position, results of operations, liquidity or capital resources.

Sale-Leaseback

On May 31, 2019, OBO Ventures, Inc. (“OBO”), a wholly owned subsidiary of the Company, entered into a sale-leaseback transaction with an unaffiliated third-party involving 12 former Toys “R” Us store locations which were acquired by OBO on August 29, 2018.  OBO received approximately $42.0 million for the 12 locations, which resulted in no net gain or loss.  Each of the 12 leased locations has 15-year lease terms with options for renewal and $34.6 million is included in operating lease liabilities as of August 3, 2019.

9

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


(5)
Accrued Expenses and Other

Accrued expenses and other consists of the following (in thousands):


 
August 3,
2019
   
August 4,
2018
   
February 2,
2019
 
Compensation and benefits
 
$
11,985
   
$
11,557
   
$
16,438
 
Deferred revenue
   
11,357
     
8,629
     
10,503
 
Insurance
   
4,572
     
5,198
     
6,159
 
Sales and use taxes
   
4,529
     
3,815
     
3,464
 
Freight
   
4,528
     
4,113
     
4,496
 
Real estate related
   
4,173
     
3,888
     
3,748
 
Advertising
   
1,374
     
1,968
     
5,678
 
Other
   
15,748
     
12,594
     
15,448
 
   
$
58,266
   
$
51,762
   
$
65,934
 

(6)
Debt Obligations and Financing Arrangements

Long-term debt consists of the following (in thousands):


 
August 3,
2019
   
August 4,
2018
   
February 2,
2019
 
Term loan, net
 
$
-
   
$
21,173
   
$
-
 
Finance leases
   
784
     
521
     
679
 
Total debt
   
784
     
21,694
     
679
 
Less: current portion
   
(269
)
   
(10,178
)
   
(238
)
Long-term debt
 
$
515
   
$
11,516
   
$
441
 

The Company’s prior credit facilities consisted of a $200.0 million term loan, which was fully paid as of February 2, 2019, and a $100.0 million revolving credit facility, which included a $25.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans. Loans under the prior credit facilities would have matured January 29, 2021, however, the Company made voluntary prepayments under the prior term loan facility totaling $48.8 million during 2018, paying the balance in full.

On May 22, 2019, the Company completed a transaction in which it refinanced its credit facility (the “Credit Facility”). The Credit Facility provides for a five-year $100.0 million revolving credit facility, which includes a $45.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans (the “Revolving Credit Facility”). The loans under the Revolving Credit Facility mature on May 22, 2024. In addition, the Company may, at any time and from time to time add term loan facilities or additional revolving commitments up to $150.0 million pursuant to terms and conditions set out in the Credit Facility.

The interest rates for the Credit Facility are calculated as follows: for Base Rate Loans, the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or the Eurodollar Rate plus 1.0%, plus the Applicable Margin, or, for Eurodollar Loans, the Eurodollar Rate plus the Applicable Margin. The Applicable Margin will vary from 0.00% to 0.50% for a Base Rate Loan and 1.00% to 1.50% for a Eurodollar Loan, based on availability under the Credit Facility.  The Eurodollar Rate is subject to a 0% floor.

Under the terms of the Revolving Credit Facility, as of August 3, 2019, the Company could borrow up to 90.0% of the most recent appraised value (valued at cost, discounted for the current net orderly liquidation value) of its eligible inventory, as defined, up to $100.0 million.

As of August 3, 2019, the Company had no outstanding borrowings under the Revolving Credit Facility, with $91.1 million of borrowing availability, letter of credit commitments of $8.7 million and $0.2 million of rent reserves. The Revolving Credit Facility also contains a variable unused line fee ranging from 0.125% to 0.250% per annum.

The Credit Facility is collateralized by the Company’s assets and equity and contains financial covenants, as well as certain business covenants, including restrictions on dividend payments, which the Company must comply with during the term of the agreement. The financial covenants include a consolidated fixed charge coverage ratio test of at least 1.0 to 1.0 applicable during a covenant period, based on reference to availability. The Company was in compliance with all terms of the Credit Facility during the twenty-six weeks ended August 3, 2019.

The provisions of the Credit Facility restrict all of the net assets of the Company’s consolidated subsidiaries, which constitutes all of the net assets on the Company’s consolidated balance sheet as of August 3, 2019, from being used to pay any dividends or make other restricted payments to the Company without prior written consent from the financial institutions that are a party to the Credit Facility, subject to material exceptions including proforma compliance with the applicable conditions described in the Credit Facility.

10

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


(7)
Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for discrete events occurring in a particular period. The effective tax rates for the thirteen and twenty-six weeks ended August 3, 2019 were 19.1% and 11.3%, respectively. The effective tax rates for the thirteen and twenty-six weeks ended August 4, 2018 were 13.7% and 13.8%, respectively. The effective tax rates during the thirteen and twenty-six weeks ended August 3, 2019 were affected by excess tax benefits related to stock-based compensation of $1.7 million and $9.8 million respectively. The thirteen and twenty-six weeks ended August 4, 2018 included a similar discrete tax benefit of $3.8 million and $7.7 million, respectively.

(8)
Equity Incentive Plans

During 2012, Ollie’s established an equity incentive plan (the “2012 Plan”) under which stock options were granted to executive officers and key employees as deemed appropriate under the provisions of the 2012 Plan, with an exercise price at the fair value of the underlying stock on the date of grant. The vesting period for options granted under the 2012 Plan was five years (20% ratably per year). Options granted under the 2012 Plan are subject to employment for vesting, expire 10 years from the date of grant and are not transferable other than upon death. As of July 15, 2015, the date of the pricing of the Company’s initial public offering, no additional equity grants will be made under the 2012 Plan.

In connection with its initial public offering, the Company adopted the 2015 equity incentive plan (the “2015 Plan”), pursuant to which the Company’s Board of Directors may grant stock options, restricted shares or other awards to employees, directors and consultants. The 2015 Plan allows for the issuance of up to 5,250,000 shares. Awards will be made pursuant to agreements and may be subject to vesting and other restrictions as determined by the Board of Directors or the Compensation Committee of the Board. The Company uses authorized and unissued shares to satisfy share award exercises. As of August 3, 2019, there were 3,135,719 shares available for grant under the 2015 Plan.

Stock Options

The exercise price for stock options is determined at the fair value of the underlying stock on the date of grant. The vesting period for awards granted under the 2015 Plan is generally set at four years (25% ratably per year). Awards are subject to employment for vesting, expire 10 years from the date of grant, and are not transferable other than upon death.

A summary of the Company’s stock option activity and related information follows for the twenty-six weeks ended August 3, 2019 (in thousands, except share and per share amounts):


 
Number
of options
   
Weighted
average
exercise
price
   
Weighted
average
remaining
contractual
term (years)
 
Outstanding at February 2, 2019
   
3,746,422
   
$
15.29
       
Granted
   
289,729
     
80.05
       
Forfeited
   
(18,813
)
   
62.05
       
Exercised
   
(535,891
)
   
14.13
       
Outstanding at August 3, 2019
   
3,481,447
     
20.61
     
5.2
 
Exercisable at August 3, 2019
   
2,553,853
     
10.87
     
4.1
 

The Company uses the Black-Scholes option pricing model to value its stock option awards.  The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The expected life of stock options was estimated using the “simplified method,” as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants.  The simplified method is based on the average of the vesting tranches and the contractual life of each grant.  For stock price volatility, the Company uses its historical information since its initial public offering as well as comparable public companies’ as a basis for its expected volatility to calculate the fair value of option grants.  The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.
11

Index
OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 3, 2019 and August 4, 2018
(Unaudited)


The weighted average grant date fair value per option for options granted during the twenty-six weeks ended August 3, 2019 and August 4, 2018 was $24.97 and $18.77, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted average assumptions in the following table:


 
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
 
Risk-free interest rate
   
2.42
%
   
2.70
%
Expected dividend yield
   
-
     
-
 
Expected term (years)
 
6.25 years
   
6.25 years
 
Expected volatility
   
25.88
%
   
25.85
%

Restricted Stock Units

Restricted stock units (“RSUs”) are issued at a value not less than the fair market value of the common stock on the date of the grant. RSUs outstanding vest ratably over four years or cliff vest in one or four years. Awards are subject to employment for vesting and are not transferable other than upon death.

A summary of the Company’s RSU activity and related information for the twenty-six weeks ended August 3, 2019 is as follows:


 
Number
of shares
   
Weighted
average
grant date
fair value
 
Non-vested balance at February 2, 2019
   
220,200
   
$
35.75
 
Granted
   
58,990
     
80.20
 
Forfeited
   
(799
)
   
75.90
 
Vested
   
(57,140
)
   
33.70
 
Non-vested balance at August 3, 2019
   
221,251
     
47.98
 

Stock-Based Compensation Expense

The compensation cost for stock options and RSUs which has been recorded within selling, general and administrative expenses was $2.4 million and $1.9 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively and $4.6 million and $3.5 million for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively.

As of August 3, 2019, there was $20.0 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.9 years.  Compensation costs related to awards are recognized using the straight-line method.

(9)
Subsequent Event

On March 26, 2019, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of shares of the Company’s common stock, which has a two-year term.  The shares to be repurchased may be purchased from time to time in open market conditions.  Pursuant to the share repurchase program, the Company has purchased 241,231 shares subsequent to August 3, 2019 through September 4, 2019 for a total cost of $13.5 million inclusive of transaction costs.

12

Index


ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Ollie’s Bargain Outlet Holdings, Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the year ended February 2, 2019 filed with the Securities and Exchange Commission, or SEC, on March 29, 2019 (the “Annual Report”). As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “Ollie’s,” the “Company,” “we,” “our” and “us” refer to Ollie’s Bargain Outlet Holdings, Inc.

We operate on a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday nearer to January 31 of the following year. References to “2019” refer to the 52-week period from February 3, 2019 to February 1, 2020. References to “2018” refer to the 52-week period from February 4, 2018 to February 2, 2019. The fiscal quarters or “second quarter” ended August 3, 2019 and August 4, 2018 refer to the 13 weeks from May 5, 2019 to August 3, 2019 and from May 6, 2018 to August 4, 2018, respectively.  Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as “could,” “may,” “might,” “will,” “likely,” “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “continues,” “projects” and similar references to future periods, prospects, financial performance and industry outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, including tax legislation, and the following: our failure to adequately procure and manage our inventory or anticipate consumer demand; changes in consumer confidence and spending; risks associated with intense competition; our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all; our failure to hire and retain key personnel and other qualified personnel; our inability to obtain favorable lease terms for our properties; the failure to timely acquire, develop, and open, the loss of, or disruption or interruption in the operations of, our centralized distribution centers; fluctuations in comparable store sales and results of operations, including on a quarterly basis; risks associated with our lack of operations in the growing online retail marketplace; risks associated with litigation and the outcomes thereof; our inability to successfully implement our marketing, advertising and promotional efforts; the seasonal nature of our business; risks associated with the timely and effective deployment and protection of computer  networks and other electronic systems; the risks associated with doing business with international manufacturers including, but not limited to, potential increases in tariffs on imported goods; changes in government regulations, procedures and requirements; and our ability to service indebtedness and to comply with our financial covenants together with the other factors set forth under “Item 1A - Risk Factors” contained herein and in our filings with the SEC, including our Annual Report. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which such statement is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.  You are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.

13

Index

Overview

Ollie’s is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices.  Known for our assortment of products offered as “Good Stuff Cheap,” we offer customers a broad selection of brand name products, including housewares, food, books and stationery, bed and bath, flooring, toys and hardware.  Our differentiated go-to market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns.

Our Growth Strategy

Since 1982, when we were founded, we have grown organically by backfilling in existing marketplaces and leveraging our brand awareness, marketing and infrastructure to expand into new markets in contiguous states.  In 2003, Mark Butler, our co-founder, assumed his current role as President and Chief Executive Officer.  Under Mr. Butler’s leadership, we expanded from 28 stores located in three states at the end of fiscal year 2003 to 332 stores located in 23 states as of August 3, 2019.

Our stores are currently supported by two distribution centers, one in York, PA and one in Commerce, GA, which we believe can support between 350 to 400 stores.  In 2018, we acquired a 58-acre parcel of land in Lancaster, TX to construct our third distribution center which will be approximately 615,000 square feet and will support 150 to 200 additional stores.  We have invested in our associates, infrastructure, distribution network and information systems to allow us to continue to rapidly grow our store footprint, including:

growing our merchant buying team to increase our access to brand name/closeout merchandise;

adding members to our senior management team;

expanding the capacity of our distribution centers to their current 1.6 million square feet plus an additional 615,000 square feet once the new distribution center is fully operational; and

investing in information technology, accounting, and warehouse management systems.

Our business model has produced consistent and predictable store growth over the past several years, during both strong and weaker economic cycles.  We plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies:

growing our store base;

increasing our offerings of great bargains; and

leveraging and expanding Ollie’s Army, our customer loyalty program.

We have a proven portable, flexible, and highly profitable store model that has produced consistent financial results and returns.  Our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately $1.0 million, which includes store fixtures and equipment, store-level and distribution center inventory (net of payables) and pre-opening expenses.  We target first-year new store sales of approximately $3.9 million.

While we are focused on driving comparable store sales and managing our expenses, our revenue and profitability growth will primarily come from opening new stores.  The core elements of our business model are procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins.  In addition, our new stores generally open strong, immediately contributing to the growth in net sales and profitability of our business.  We plan to achieve continued net sales growth, including comparable stores sales, by adding additional stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers.  We also plan to leverage and expand our Ollie’s Army database and marketing strategies.  In addition, we plan to continue to manage our selling, general and administrative expenses (“SG&A”) by continuing to make process improvements and by maintaining our standard policy of reviewing our operating costs.

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Our ability to grow and our results of operations may be impacted by additional factors and uncertainties, such as consumer spending habits, which are subject to macroeconomic conditions and changes in discretionary income.  Our customers’ discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment. The potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers.
 
Our key competitive advantage is our direct buying relationships with many major manufacturers, wholesalers, distributors, brokers and retailers for our brand name and closeout products and unbranded goods.  We also augment our product mix with private label brands.  As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal.

How We Assess the Performance of Our Business and Key Line Items

We consider a variety of financial and operating measures in assessing the performance of our business.  The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.

Number of New Stores

The number of new stores reflects the number of stores opened during a particular reporting period.  Before we open new stores, we incur pre-opening expenses described below under “Pre-Opening Expenses” and we make an initial investment in inventory.  We also make initial capital investments in fixtures and equipment, which we amortize over time.

We opened 29 stores during the twenty-six weeks ended August 3, 2019.  We expect new store growth to be the primary driver of our sales growth.  Our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods.  Our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states.  Our new stores often open with higher first-year sales levels as a result of greater advertising and promotional spend in connection with grand opening events but decline shortly thereafter to our new store model levels.

Net Sales

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of merchandise.  Also included in net sales is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage.  Net sales are presented net of returns and sales tax.  Net sales consist of sales from comparable stores and non-comparable stores, described below under “Comparable Store Sales.”  Growth of our net sales is primarily driven by expansion of our store base in existing and new markets.  As we continue to grow, we believe we will have greater access to brand name and closeout merchandise and an increased deal selection, resulting in more potential offerings for our customers.  Net sales are impacted by product mix, merchandise mix and availability, as well as promotional activities and the spending habits of our customers. Our broad selection of offerings across diverse product categories supports growth in net sales by attracting new customers, which results in higher spending levels and frequency of shopping visits from our customers, including Ollie’s Army members.

The spending habits of our customers are subject to macroeconomic conditions and changes in discretionary income.  Our customers’ discretionary income is primarily impacted by gas prices, wages, and consumer trends and preferences, which fluctuate depending on the environment.  However, because we offer a broad selection of merchandise at extreme values, we believe we are less impacted than other retailers by economic cycles. These cycles correspond with declines in general consumer spending habits and we benefit from periods of increased consumer spending.

Comparable Store Sales

Comparable store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year.  Comparable store sales consist of net sales from our stores beginning on the first day of the sixteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved.  Comparable store sales are impacted by the same factors that impact net sales.

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We define comparable stores to be stores that:
 
have been remodeled while remaining open;

are closed for five or fewer days in any fiscal month;

are closed temporarily and relocated within their respective trade areas; and

have expanded, but are not significantly different in size, within their current locations.

Non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months.  Stores which are closed temporarily, but for more than five days in any fiscal month, are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales.

Opening new stores is the primary component of our growth strategy and as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales.  Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.

Gross Profit and Gross Margin

Gross profit is equal to our net sales less our cost of sales.  Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit.

In addition, our gross profit and our gross margin are impacted by product mix, as some products generally provide higher gross margins, merchandise mix, availability and merchandise costs, all of which can vary.

Our gross profit is variable in nature and generally follows changes in net sales.  We regularly analyze the components of gross profit, as well as gross margin.  Specifically, our product margin and merchandise mix are reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals.  Our disciplined buying approach has produced consistent gross margins on an annual basis, and we believe helps to mitigate adverse impacts on gross profit and results of operation.

The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers.  As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

Selling, General and Administrative Expenses

SG&A are comprised of payroll and benefits for store, field support and support center associates.  SG&A also include marketing and advertising, occupancy, utilities, supplies, credit card processing fees, insurance and professional services. The components of our SG&A remain relatively consistent per store and for each new store opening. The components of our SG&A may not be comparable to the components of similar measures of other retailers.  Consolidated SG&A generally increase as we grow our store base and as our net sales increase. A significant portion of our expenses is primarily fixed in nature, and we expect to continue to maintain strict discipline while carefully monitoring SG&A as a percentage of net sales.  We expect that our SG&A will continue to increase in future periods with future growth.

Pre-Opening Expenses

Pre-opening expenses consist of expenses of opening new stores and distribution centers.  For new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs, as well as store closing costs.  Pre-opening expenses for new stores are expensed as they are incurred, which is typically within 30 to 45 days of opening a new store. For distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs.

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Operating Income
 
Operating income is gross profit less SG&A, depreciation and amortization and pre-opening expenses.  Operating income excludes interest (income) expense, net, and income tax expense.  We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance.  EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.  We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures.  Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate the Company’s operating results.  We believe that excluding items from net income that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business.

We define EBITDA as net income before net interest expense, loss on extinguishment of debt, depreciation and amortization expenses and income taxes.  Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense, gain from insurance settlement and non-cash purchase accounting items. EBITDA and Adjusted EBITDA are non-GAAP measures and may not be comparable to similar measures reported by other companies.  EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, see “Results of Operations.”

Factors Affecting the Comparability of our Results of Operations

Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.

Historical Results

Historical results are not necessarily indicative of the results to be expected for any future period.

Financing Transactions

Our prior credit facilities consisted of a $200.0 million term loan facility, which was fully paid as of February 2, 2019, and a $100.0 million revolving credit facility, which included a $25.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans.  We made voluntary prepayments under the prior term loan facility totaling $48.8 million during 2018, paying the balance in full.

On May 22, 2019, we completed a transaction in which we refinanced our $100.0 million revolving credit facility (the “Revolving Credit Facility”) to extend the maturity to May 22, 2024.  For further information, see Note 6 under “Notes to Unaudited Condensed Consolidated Financial Statements.”

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Store Openings
 
We opened eight and six new stores in the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively.  In connection with these store openings, we incurred pre-opening expenses of $2.4 million and $1.9 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively.  We opened 29 and 14 new stores in the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively.  In connection with these store openings, we incurred pre-opening expenses of $7.6 million and $3.7 million for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively.

Seasonality

Our business is seasonal in nature and demand is generally the highest in our fourth fiscal quarter due to the holiday sales season.  To prepare for the holiday sales season, we must order and keep in stock more merchandise than we carry during other times of the year and generally engage in additional marketing efforts.  We expect inventory levels, along with accounts payable and accrued expenses, to reach their highest levels in our third and fourth fiscal quarters in anticipation of increased net sales during the holiday sales season.  As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year.  Because we offer a broad selection of merchandise at extreme values, we believe we are less impacted than other retailers by economic cycles which correspond with declines in general consumer spending habits and we believe we still benefit from periods of increased consumer spending.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales.

We derived the condensed consolidated statements of income for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 from our unaudited condensed consolidated financial statements and related notes.  Our historical results are not necessarily indicative of the results that may be expected in the future.

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Thirteen weeks ended
   
Twenty-six weeks ended
 
   
August 3,
2019
   
August 4,
2018
   
August 3,
2019
   
August 4,
2018
 
   
( dollars in thousands)
 
Condensed consolidated statements of income data:
                       
Net sales
 
$
333,865
   
$
288,098
   
$
658,719
   
$
563,837
 
Cost of sales
   
209,832
     
175,474
     
401,952
     
338,337
 
Gross profit
   
124,033
     
112,624
     
256,767
     
225,500
 
Selling, general and administrative expenses
   
87,350
     
72,990
     
170,682
     
145,354
 
Depreciation and amortization expenses
   
3,512
     
2,854
     
6,921
     
5,617
 
Pre-opening expenses
   
2,420
     
1,917
     
7,629
     
3,681
 
Operating income
   
30,751
     
34,863
     
71,535
     
70,848
 
Interest (income) expense, net
   
(372
)
   
278
     
(517
)
   
816
 
Loss on extinguishment of debt
   
-
     
-
     
-
     
100
 
Income before income taxes
   
31,123
     
34,585
     
72,052
     
69,932
 
Income tax expense
   
5,953
     
4,737
     
8,165
     
9,630
 
Net income
 
$
25,170
   
$
29,848
   
$
63,887
   
$
60,302
 
Percentage of net sales (1):
                               
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales
   
62.8
     
60.9
     
61.0
     
60.0
 
Gross profit
   
37.2
     
39.1
     
39.0
     
40.0
 
Selling, general and administrative expenses
   
26.2
     
25.3
     
25.9
     
25.8
 
Depreciation and amortization expenses
   
1.1
     
1.0
     
1.1
     
1.0
 
Pre-opening expenses
   
0.7
     
0.7
     
1.2
     
0.7
 
Operating income
   
9.2
     
12.1
     
10.9
     
12.6
 
Interest (income) expense, net
   
(0.1
)
   
0.1
     
(0.1
)
   
0.1
 
Loss on extinguishment of debt