Ollie's Bargain Outlet Holdings, Inc. - Annual Report: 2023 (Form 10-K)

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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For the fiscal year ended January 28, 2023

OR

For the transition period from __________ to __________

Commission file number: 001-37501

Ollie’s Bargain Outlet Holdings, Inc.

(Exact name of registrant as specified in its charter)

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(717) 657-2300

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

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☒   No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐   No ☒

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.

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 aggregate market value of the voting stock held by non-affiliates of the registrant as of July 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter), based on the closing sale price per share as reported by the NASDAQ Stock Market LLC on such date, was approximately $3.7 billion. For purposes of this calculation only, the registrant has excluded all shares held in the treasury or that may be deemed to be beneficially owned by executive officers and directors of the registrant. By doing so, the registrant does not concede that such persons are affiliates for purposes of federal securities laws.

The number of outstanding shares of the registrant’s common stock, $0.001 par value, as of March 20, 2023 was 61,947,468.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2023 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed pursuant to Regulation 14A within 120 days after the end of the 2022 fiscal year, are incorporated by reference into Part III of this Form 10-K.

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		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	31
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	[Reserved]	35
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 8.	Financial Statements and Supplementary Data	48
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	73
Item 9A.	Controls and Procedures	73
Item 9B.	Other Information	76
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	76
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	76
Item 11.	Executive Compensation	76
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	76
Item 13.	Certain Relationships and Related Transactions, and Director Independence	76
Item 14.	Principal Accountant Fees and Services	76
PART IV
Item 15.	Exhibits and Financial Statement Schedules	76
Item 16.	Form 10-K Summary	80

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our failure to adequately procure and manage our inventory, anticipate consumer demand, or achieve favorable product margins;

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changes in consumer confidence and spending;

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risks associated with our status as a “brick and mortar only” retailer;

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risks associated with intense competition;

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our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all;

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fluctuations in comparable store sales and results of operations, including on a quarterly basis;

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factors such as inflation, cost increases and energy prices;

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the risks associated with doing business with international manufacturers and suppliers including, but not limited to, potential increases in tariffs on imported goods;

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our inability to operate our stores due to civil unrest and related protests or disturbances;

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our failure to properly hire and to retain key personnel and other qualified personnel;

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changes in market levels of wages;

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risks associated with cybersecurity events, and the timely and effective deployment, protection, and defense of computer networks and other electronic systems, including e-mail;

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our inability to obtain favorable lease terms for our properties;

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the failure to timely acquire, develop, open and operate, or the loss of, disruption or interruption in the operations of, any of our centralized distribution centers;

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risks associated with our lack of operations in the growing online retail marketplace;

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risks associated with litigation, the expense of defense, and potential for adverse outcomes;

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our inability to successfully develop or implement our marketing, advertising and promotional efforts;

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the seasonal nature of our business;

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risks associated with natural disasters, whether or not caused by climate change;

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outbreak of viruses, global health epidemics, pandemics, or widespread illness, including the continued impact of COVID-19 and continuing or renewed regulatory responses thereto;

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changes in government regulations, procedures and requirements; and

•

our ability to service indebtedness and to comply with our financial covenants.

Item 1.

Business.

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Our store base expanded from 303 stores to 468 stores, a compound annual growth rate, or CAGR, of 11.5% and we entered six new states;

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Comparable store sales grew at an average rate of 1.0% per year; and

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Net sales increased from $1.241 billion to $1.827 billion, a CAGR of 10.2%.

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Housewares:    cooking utensils, dishes, appliances, plastic containers, cutlery, storage and garbage bags, detergents and cleaning supplies, cookware and glassware, candles, hardware, frames, and giftware;

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Bed and bath:    household goods including bedding, towels, curtains, and associated hardware;

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Food:    packaged food including coffee, bottled non-carbonated beverages, salty snacks, candy, condiments, sauces, spices, dry pasta, canned goods, cereal, and cookies;

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Floor coverings:    laminate flooring, commercial and residential carpeting, area rugs, and floor mats;

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Books and stationery:    novels, children’s, how-to, business, cooking, inspirational and coffee table books, greeting cards and various office supplies, and party goods;

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Electronics: home electronics, cellular accessories, and as seen on television;

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Toys:    dolls, action figures, puzzles, educational toys, board games, and other related items;

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Health and beauty aids:  personal care, hair care, oral care, health and wellness, over-the-counter medicine, first aid, sun care, and personal grooming;

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Seasonal:    summer furniture, air conditioners, fans and space heaters and lawn & garden; and

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Other:    clothing, sporting goods, pet products, luggage, and automotive.

		Percentage of Net Sales
		2022				2021				2020
Consumables			21.6	%			19.8	%			21.0	%
Home			38.3	%			39.8	%			40.8	%
Seasonal			17.8	%			18.1	%			17.4	%
Other			22.3	%			22.3	%			20.8	%
Total			100.0	%			100.0	%			100.0	%

		2022				2021				2020
Stores open at beginning of year			431				388				345
Stores opened			40				46				47
Stores closed			(3	)			(3	)			(4	)
Stores open at end of year			468				431				388

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Print and direct mail: During 2022, we distributed over 700 million highly recognizable flyers. Our flyers are distributed 22 times per year and serve as the foundation of our marketing strategy.  They highlight current deals to create shopping urgency and drive traffic and increase frequency of store visits;

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Television and radio: We selectively utilize creative television and radio advertising campaigns in targeted markets at certain times of the year, particularly during the holiday sales season, to create brand awareness and support new store openings;

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Charity and community events: We are dedicated to maintaining a visible presence in the communities in which our stores are located through the sponsorship of charitable organizations such as Feeding America, Toys for Tots, Children’s Miracle Network, Cal Ripken, Sr. Foundation, and the Kevin Harvick Foundation. We believe supporting these organizations promotes our brand, underscores our values and builds a sense of community; and

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Digital marketing and social media: We maintain an active online presence and promote our brand through our website, our mobile app and social media channels. We also utilize targeted email marketing to highlight our latest brand name offerings and drive traffic to our stores. In addition, we invest in digital marketing where we target both our current and prospective customers.

•	We may not be able to execute our opportunistic buying strategy;

•	Fluctuations in comparable store sales and results of operations, including fluctuations on a quarterly basis, could cause our business performance to decline substantially;

•	Consumer confidence and spending may be reduced in light of factors beyond our control and our financial results may suffer;

•	Competition may increase in our segment of the retail market, which could put negative pressure on our results of operations and financial condition;

•	Identification of potential store locations and lease negotiations may not keep pace with our growth strategy;

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We are a “brick and mortar only” retailer.  Our lack of an online shopping option may mean that we face challenges to grow and retain customers. Our customers, including our loyalty program members, may determine to shop at other stores or through web-enabled services and therefore not be as likely to shop at our stores;

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We may not be able to develop and operate our multiple distribution centers in an efficient or effective manner and that could mean that we do not have sufficient inventory in our store locations. The loss or disruption of one or more of our distribution centers or disruption of our supply chain or third-party shipping carriers could also make it difficult for us to timely receive or distribute goods to our stores;

•	External economic pressures over which we have no or limited control, including inflation, occupancy costs, and transportation costs may reduce our profitability;

•	Inventory management and/or shrinkage or the loss or theft of inventory can result in material negative impacts on our results of operations;

•	We need to be able to hire and retain the right people to run our stores and our distribution centers. We also need to hire and retain managerial personnel, a merchant team, and executive officers. If we are not effective in these areas, our results may suffer; and

•	Comparable store sales and results of operations have fluctuated in the past and may do so again in the future.

•	We are subject to governmental regulations, procedures, and requirements that can lead to substantial penalties if we fail to achieve compliance;

•	We are subject to risks associated with laws and regulations generally applicable to retailers;

•	From time to time we are involved in legal proceedings from customers, suppliers, employees, governments, or competitors; and

•	From time to time we are involved in legal proceedings from stockholders.

•	We may fail to maintain the security of information we hold relating to personal information or payment card data of our customers, employees, and suppliers;

•	We may not adequately prepare for or respond to existing and future privacy legislation; and

•	We may not be able to timely or adequately maintain or upgrade our technology systems needed for operations.

•	If our estimates or judgments relating to significant accounting policies prove to be incorrect, we could suffer negative financial results; and

•	Changes to the accounting rules or regulations could have material adverse effects on our results of operations.

•	There is risk associated with our fluctuating quarterly operating results and we may fall short of prior periods, our projections or the expectations of securities analysts or investors;

•	We may not declare dividends on our common stock in the foreseeable future; and

•	There are provisions in our organizational documents that could delay or prevent a change of control.

•	Our credit facility can limit our ability to find other sources of financing;

•	There are covenants contained in our credit facility that we must meet in order to be able to use it;

•	If we are unable to generate sufficient cash flow to meet debt service it could negatively impact our liquidity; and

•	We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance long-term stockholder value.

•	national and regional economic trends in the United States;

•	changes in gasoline prices;

•	changes in our merchandise mix;

•	the weather;

•	changes in pricing;

•	changes in the timing of promotional and advertising efforts; and

•	holidays or seasonal periods.

•	energy and gasoline prices;

•	disposable income of our customers, which may be impacted by unemployment levels, personal debt levels and minimum wages;

•	interest rates and inflation;

•	discounts, promotions, and merchandise offered by our competitors;

•	negative reports and publicity about the discount retail industry;

•	outbreak of viruses or widespread illness, including COVID-19, and behavioral changes from a fear of contracting such viruses or illness;

•	general economic and industry conditions;

•	food prices;

•	the state of the housing market;

•	customer confidence in future economic conditions;

•	fluctuations in the financial markets;

•	tax rates and policies; and

•	natural disasters, war, terrorism and other hostilities.

•	entry of new competitors in our markets;

•	increased operational efficiencies of competitors;

•	online retail capabilities of our competitors;

•	competitive pricing strategies, including deep discount pricing by a broad range of retailers during periods of poor customer confidence, low discretionary income, or economic uncertainty;

•	continued and prolonged promotional activity by our competitors;

•	liquidation sales by our competitors that have filed or may file in the future for bankruptcy;

•	geographic expansion by competitors into markets in which we currently operate; and

•	adoption by existing competitors of innovative store formats or retail sales methods, including online.

•	requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes and reducing profitability;

•	increasing our vulnerability to general adverse economic and industry conditions; and

•	limiting our flexibility in planning for, or reacting to changes in, our business, or in the industry in which we compete.

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authorize our Board to issue, without further action by the stockholders, up to 50,000,000 shares of undesignated preferred stock;

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subject to certain exceptions, require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

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specify that special meetings of our stockholders can be called only by a majority of our Board or upon the request of the Chairperson of the Board or the Chief Executive Officer;

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establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board;

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prohibit cumulative voting in the election of directors; and

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provide that vacancies on our Board may be filled only by a majority of directors then in office, even though less than a quorum.

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any derivative action or proceeding brought on behalf of the Company;

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any action asserting a claim of breach of a fiduciary duty owed by, or any wrongdoing by, any director, officer, or employee of the Company to the Company, or the Company’s stockholders;

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any action asserting a claim arising pursuant to any provision of the Delaware General Corporate Law, the certification of incorporation (including as it may be amended from time to time), or the fourth amended and restated bylaws;

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any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or the fourth amended and restated bylaws; or

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any action asserting a claim governed by the internal affairs doctrine.

•	increase our vulnerability to adverse general economic or industry conditions;

•	limit our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;

•	make us more vulnerable to increases in interest rates, as borrowings under our Credit Facility are at variable rates;

•	limit our ability to obtain additional financing in the future for working capital or other purposes;

•	require us to utilize our cash flows from operations to make payments on indebtedness, reducing the availability of our cash flows to fund working capital, capital expenditures, development activity, and other general corporate purposes; and

•	place us at a competitive disadvantage compared to our competitors that have less indebtedness.

•	pay dividends on, redeem or repurchase our stock or make other distributions;

•	incur or guarantee additional indebtedness;

•	sell stock in our subsidiaries;

•	create or incur liens;

•	make acquisitions or investments;

•	transfer or sell certain assets or merge or consolidate with or into other companies;

•	make certain payments or prepayments of indebtedness subordinated to our obligations under our Credit Facility; and

•	enter into certain transactions with our affiliates.

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

		2022
		High				Low
First Quarter		$	55.22			$	37.67
Second Quarter		$	72.27			$	40.40
Third Quarter		$	67.99			$	48.95
Fourth Quarter		$	62.82			$	44.72

		2021
		High				Low
First Quarter		$	98.58			$	80.64
Second Quarter		$	95.43			$	75.75
Third Quarter		$	94.68			$	57.86
Fourth Quarter		$	75.27			$	42.40

Period		Total number of shares repurchased (1)				Average price paid per share (2)				Total number of shares purchased as part of publicly announced plans or programs (3)				Approximate dollar value of shares that may yet be purchased under the plans or programs (3)
October 30, 2022 through November 26, 2022			—				—				—			$	150,073,460
November 27, 2022 through December 31, 2022			110,047			$	46.35				110,047			$	144,972,492
January 1, 2023 through January 28, 2023			135,281			$	50.53				135,281			$	138,196,532
Total			245,328								245,328

Item 6.

[Reserved]

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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adding members to our senior management team;

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expanding the capacity of our distribution centers to their current 2.2 million square feet; and

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

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growing our store base;

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increasing our offerings of great bargains; and

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leveraging and expanding Ollie’s Army.

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have been remodeled while remaining open;

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

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

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

		2022				2021
		(dollars in thousands)
Net sales		$	1,827,009			$	1,752,995
Cost of sales			1,170,915				1,071,749
Gross profit			656,094				681,246
Selling, general and administrative expenses			490,569				447,615
Depreciation and amortization expenses			22,907				19,364
Pre-opening expenses			11,700				9,675
Operating income			130,918				204,592
Interest expense (income), net			(2,965	)			209
Income before income taxes			133,883				204,383
Income tax expense			31,093				46,928
Net income		$	102,790			$	157,455
Percentage of net sales(1):
Net sales			100.0	%			100.0	%
Cost of sales			64.1				61.1
Gross profit			35.9				38.9
Selling, general and administrative expenses			26.9				25.5
Depreciation and amortization expenses			1.3				1.1
Pre-opening expenses			0.6				0.6
Operating income			7.2				11.7
Interest expense (income), net			(0.2	)			-
Income before income taxes			7.3				11.7
Income tax expense			1.7				2.7
Net income			5.6	%			9.0	%
Select operating data:
Number of new stores			40				46
Number of store closings			(3	)			(3	)
Number of stores open at end of period			468				431
Average net sales per store (2)		$	4,043			$	4,254
Comparable stores sales change			(3.0	)%			(11.1	)%

		2022				2021
		(dollars in thousands)
Net income		$	102,790			$	157,455
Interest expense (income), net			(2,965	)			209
Depreciation and amortization expenses (1)			28,903				25,114
Income tax expense			31,093				46,928
EBITDA			159,821				229,706
Gains from insurance settlements			(897	)			(416	)
Non-cash stock-based compensation expense			9,951				8,042
Adjusted EBITDA		$	168,875			$	237,332

(1)

Includes depreciation and amortization relating to our distribution centers, which is included within cost of sales on our consolidated statements of income.

		2022				2021
		(in thousands)
Net cash provided by operating activities		$	114,346			$	45,033
Net cash used in investing activities			(111,454	)			(31,830	)
Net cash used in financing activities			(39,273	)			(213,352	)
Net decrease in cash and cash equivalents		$	(36,381	)		$	(200,149	)

		Less than 1 year				1-3 Years				3-5 Years				Thereafter				Total
		(in thousands)
Operating leases (1)		$	94,286			$	161,696			$	118,844			$	116,575			$	491,401
Finance leases			684				525				-				-				1,209
Purchase obligations (2)			4,300				-				-				-				4,300
Total		$	99,270			$	162,221			$	118,844			$	116,575			$	496,910

(1)	Operating lease payments exclude $45.5 million of legally binding minimum lease payments for leases signed, but not yet commenced.

(2)

Purchase obligations represent $3.0 million associated with a construction agreement for the expansion of our York, PA distribution center (entered into on March 7, 2022) and $1.3 million associated with the purchase agreement for the purchase of a parcel of land in Princeton, IL for our fourth distribution center (fully executed on October 17, 2022).

Item 7A.

Quantitative and Qualitative Disclosures about Market Risks

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors

Ollie’s Bargain Outlet Holdings, Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Ollie’s Bargain Outlet Holdings, Inc. and subsidiaries (the Company) as of January 28, 2023 and January 29, 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended January 28, 2023, and the related notes and financial statement schedule I - condensed financial information of registrant (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 28, 2023, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 24, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Evaluation of excess inventories

 

As discussed in Note 1(h) to the consolidated financial statements, the Company utilizes the retail inventory method. The retail inventory method involves the use of judgments and estimates, such as the timing of permanent markdowns, to account for excess inventory that may impact the valuation of ending inventory. Factors considered in the determination of permanent markdowns include inventory obsolescence, excess inventories, current and anticipated demand, age of the merchandise and customer preferences. As of January 28, 2023, the Company’s inventory balance was $470.5 million.

 

We identified the evaluation of excess inventories as a critical audit matter. Especially challenging auditor judgement was required to evaluate the timeliness of permanent markdowns due to the subjective nature of the audit procedures applied to evaluate the time period in which the excess inventories warranted a permanent markdown.

 

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the evaluation of excess inventories. This included controls related to inventory permanent markdowns, including controls over the review of the excess inventory analysis, which provided the time period inventories have been outstanding, in order to identify excess inventories. To test the timeliness of permanent markdowns, we assessed the reliability of the excess inventory analysis, and we involved information technology professionals with specialized skills and knowledge, who assisted in evaluating the reliability of the aged inventory items by product type. In addition, we evaluated the Company’s determination of timely permanent markdowns by analyzing the Company’s excess inventory analysis.

 

/s/ KPMG LLP

 

We have served as the Company’s auditor since 2009.

 

Harrisburg, Pennsylvania

March 24, 2023

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share amounts)

See accompanying notes to the consolidated financial statements.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share amounts)

See accompanying notes to the consolidated financial statements.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands)

See accompanying notes to the consolidated financial statements.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes to the consolidated financial statements.

Ollie’s Bargain Outlet Holdings, Inc. and subsidiaries (collectively referred to as the “Company” or “Ollie’s”) principally buys overproduced, overstocked and closeout merchandise from manufacturers, wholesalers, distributors, brokers, 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 468 retail locations in 29 states as of January 28, 2023. Ollie’s Bargain Outlet retail locations are located in Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, and West Virginia.

 

Ollie’s follows a 52/53-week fiscal year, which ends on the Saturday nearer to January 31^st of the following calendar year.  References to the fiscal year ended January 28, 2023 refer to the 52-week period from January 30, 2022 to January 28, 2023 (“2022”). References to the fiscal year ended January 29, 2022 refer to the 52-week period from January 31, 2021 to January 29, 2022 (“2021”).  References to the fiscal year ended January 30, 2021 refer to the 52-week period from February 2, 2020 to January 30, 2021 (“2020”).

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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:

Ollie’s financial instruments consist of cash and cash equivalents, investment securities, accounts receivable, accounts payable and the Company’s credit facilities. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and accounts payable are representative of their respective fair value because of their short-term nature. 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. Under the fair value hierarchy, the fair market values of cash equivalents and the investments in treasury bonds are Level 1 while the investments in municipal bonds are Level 2. Since quoted prices in active markets for identical assets are not available, these prices are determined by the third-party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.

		As of January 28, 2023
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Market Value
		(in thousands)
Short-term:
Treasury Bonds		$	55,274			$	-			$	(83	)		$	55,191
Municipal bonds			4,891				-				(8	)			4,883
Total		$	60,165			$	-			$	(91	)		$	60,074

Investment securities as of January 28, 2023 all mature in one year or less.

Inventories are stated at the lower of cost or market determined using the retail inventory method on a first-in, first-out basis. The cost of inventories includes the merchandise cost, transportation costs, and certain distribution and storage costs. Such costs are thereafter expensed as cost of sales upon the sale of the merchandise.

Inherent in the retail inventory method are certain management judgments and estimates including, among others, merchandise markups, the amount and timing of permanent markdowns, and shrinkage, which may significantly impact both the ending inventory valuation and gross profit.

Factors considered in the determination of permanent markdowns include inventory obsolescence, excess inventories, current and anticipated demand, age of the merchandise, and customer preferences. Pursuant to the retail inventory method, permanent markdowns result in the devaluation of inventory and the resulting gross profit reduction is recognized in the period in which the markdown is recorded.

Property and equipment are stated at original cost less accumulated depreciation and amortization. Depreciation and amortization are calculated over the estimated useful lives of the related assets, or in the case of leasehold improvements, the lesser of the useful lives or the remaining term of the lease. Expenditures for additions, renewals, and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed on the straight-line method for financial reporting purposes.

The useful lives for the purpose of computing depreciation and amortization are as follows:

Software	3 years
Automobiles	2 - 5 years
Computer equipment	5 years
Furniture, fixtures, and equipment	7 - 10 years
Buildings	40 years
Leasehold improvements	Lesser of lease term or useful life

The Company amortizes intangible assets over their useful lives unless it determines such lives to be indefinite.  Goodwill and intangible assets having indefinite useful lives are not amortized to earnings, but instead are subject to annual impairment testing or more frequently if events or circumstances indicate that the value of goodwill or intangible assets having indefinite useful lives might be impaired.

Goodwill and intangible assets having indefinite useful lives are tested for impairment annually in the fiscal month of October.  The Company has the option to evaluate qualitative factors to determine if it is more likely than not that the carrying amount of its sole reporting unit or its nonamortizing intangible assets (consisting of a tradename) exceed their implied respective fair value and whether it is necessary to perform a quantitative analysis to determine impairment.  As part of this qualitative assessment, the Company weighs the relative impact of factors that are specific to its sole reporting unit or its nonamortizing intangible assets as well as industry, regulatory and macroeconomic factors that could affect the inputs used to determine the fair value of the assets.

If management determines a quantitative goodwill impairment test is required, or it elects to perform a quantitative test, the test is performed by determining the fair value of the Company’s sole reporting unit.  Fair value is determined based on the Company’s public market capitalization. The carrying value of goodwill is considered impaired when the reporting unit’s fair value is less than its carrying value and the Company would record an impairment loss equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit.

For 2022, 2021 and 2020, the Company completed an impairment test of its goodwill and determined that no impairment of goodwill existed.

If management determines a quantitative analysis of intangible assets having indefinite useful lives is required, the test is performed using the discounted cash flow method based on management’s projections of future revenues and an estimated royalty rate to determine the fair value of the asset, specifically, the Company’s tradename.  An impairment loss is recognized for any excess of the carrying amount of the asset over the implied fair value of that asset.

For 2022, 2021 and 2020, the Company completed an impairment test of its tradename and determined that no impairment of the asset existed.

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

The Company measures the cost of employee services received in exchange for stock-based compensation based on the grant date fair value of the employee stock award.  For stock option awards, the Company estimates grant date fair value using the Black-Scholes option pricing model.  For restricted stock unit awards, grant date fair value is determined based on the closing trading value of the Company’s stock on the date of grant. In both cases, stock-based compensation is recorded on a straight-line basis over the vesting period for the entire award.

Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation and amortization.

Selling, general, and administrative expenses (“SG&A”) are comprised of payroll and benefits for stores, field support, and support center associates.  SG&A also include marketing and advertising expense, occupancy costs for stores and the store support center, insurance, corporate infrastructure, and other general expenses.

Advertising costs primarily consist of newspaper circulars, email campaigns, media broadcasts and prominent advertising at professional and collegiate sporting events and are generally expensed the first time the advertising occurs. Advertising expense for 2022, 2021 and 2020 was $62.4 million, $52.2 million and $41.4 million, respectively.

The Company generally leases its store locations, distribution centers and office facilities. Many of the lease agreements contain rent holidays, rent escalation clauses and contingent rent provisions – or some combination of these items.  For leases of store locations and the store support centers, the Company recognizes rent expense in SG&A.  For leases of distribution centers, the Company recognizes rent expense within cost of sales.  All rent expense is recorded on a straight-line basis over the accounting lease term, which includes lease renewals determined to be reasonably certain.

The Company recognizes operating lease assets and liabilities at the lease commencement date in accordance with ASC 842, Leases (Topic 842).  Operating lease liabilities represent the present value of lease payments not yet paid.  Operating lease assets represent the Company’s right to use an underlying asset for the lease term.  The Company’s lessors do not provide an implicit rate, nor is one readily available, therefore the Company uses its incremental borrowing rate based on the portfolio approach, which applies one rate to leases within a given period. The incremental borrowing rate is used to discount future cash flows and is an estimate which is determined by an analysis of the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms and current market conditions.

Pre-opening expenses consist of expenses of opening new stores and distribution centers, as well as store closing costs.  For opening new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses, and store setup 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 opening distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses, and occupancy costs. Store closing costs primarily consist of insurance deductibles, rent, and store payroll.

Under a number of the Company’s insurance programs, which include the Company’s employee health insurance program, its workers’ compensation and general liability insurance programs, the Company is liable for a portion of its losses. The Company estimates the accrued liabilities for its self-insurance programs using historical claims experience and loss reserves. To limit the Company’s exposure to losses, a stop‑loss coverage is maintained through third‑party insurers.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.

Ollie’s files consolidated federal and state income tax returns. For tax years prior to 2018, the Company is no longer subject to U.S. federal income tax examinations. State income tax returns are filed in various state tax jurisdictions, as appropriate, with varying statutes of limitation and remain subject to examination for varying periods up to three to four years depending on the state.

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:

		Fiscal year ended
		January 28,				January 29,				January 30,
		2023				2022				2021
Weighted average number of common shares outstanding – Basic			62,495				64,447				64,748
Incremental shares from the assumed exercise of outstanding stock options and vesting of restricted stock units			209				431				1,125
Weighted average number of common shares outstanding – Diluted			62,704				64,878				65,873

The effect of the weighted average assumed exercise of stock options outstanding totaling 858,413, 425,718, and 322,238 as of January 28, 2023, January 29, 2022, and January 30, 2021, 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 39,342, 22,546, and 12,047 as of January 28, 2023, January 29, 2022, and January 30, 2021, respectively, were excluded from the calculation of diluted weighted average common shares outstanding because the effect would have been antidilutive.

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 issued upon the achievement of specified point levels are subject to expiration.  Unless temporarily extended, the maximum redemption period is 45 days.  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:

		Fiscal year ended
		January 28,				January 29,				January 30,
		2023				2022				2021
						(in thousands)
Beginning balance		$	7,782			$	8,113			$	8,254
Revenue deferred			14,446				15,290				17,813
Revenue recognized			(14,098	)			(15,621	)			(17,954	)
Ending balance		$	8,130			$	7,782			$	8,113

Gift card breakage for gift card liabilities not subject to escheatment is recognized as revenue in proportion to the redemption of gift cards. Gift cards do not expire. 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: