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 October 29, 2022

☐	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 December 2, 2022 was 62,239,013.

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					Thirty-nine weeks ended
	October 29,			October 30,		October 29,			October 30,
	2022			2021		2022			2021
Net sales	$	418,072		$	383,487	$	1,277,220		$	1,251,860
Cost of sales		253,396			230,927		827,609			753,655
Gross profit		164,676			152,560		449,611			498,205
Selling, general, and administrative expenses		124,810			114,048		359,549			328,537
Depreciation and amortization expenses		5,872			4,956		16,698			14,109
Pre-opening expenses		4,462			3,343		10,142			8,419
Operating income		29,532			30,213		63,222			147,140
Interest (income) expense, net		(866	)		70		(880	)		111
Income before income taxes		30,398			30,143		64,102			147,029
Income tax expense		7,316			6,958		14,400			34,301
Net income	$	23,082		$	23,185	$	49,702		$	112,728
Earnings per common share:
Basic	$	0.37		$	0.36	$	0.79		$	1.74
Diluted	$	0.37		$	0.36	$	0.79		$	1.72
Weighted average common shares outstanding:
Basic		62,507			63,915		62,603			64,909
Diluted		62,751			64,298		62,810			65,414

See accompanying notes to the condensed consolidated financial statements.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

	October 29,			October 30,			January 29,
Assets	2022			2021			2022
Current assets:
Cash and cash equivalents	$	182,104		$	229,726		$	246,977
Inventories		523,728			471,800			467,306
Accounts receivable		1,363			603			1,372
Prepaid expenses and other current assets		7,157			10,386			11,173
Total current assets		714,352			712,515			726,828
Property and equipment, net of accumulated depreciation of $142,789, $116,088 and $122,632, respectively		170,133			146,675			147,164
Operating lease right-of-use assets		447,922			409,665			420,568
Goodwill		444,850			444,850			444,850
Trade name		230,559			230,559			230,559
Other assets		2,152			2,299			2,203
Total assets	$	2,009,968		$	1,946,563		$	1,972,172
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	445		$	353		$	332
Accounts payable		83,210			121,893			106,599
Income taxes payable		-			-			2,556
Current portion of operating lease liabilities		81,589			73,837			75,535
Accrued expenses and other current liabilities		86,949			78,513			78,246
Total current liabilities		252,193			274,596			263,268
Revolving credit facility		-			-			-
Long-term debt		1,006			724			719
Deferred income taxes		65,418			66,416			66,179
Long-term portion of operating lease liabilities		373,228			344,344			354,293
Other long-term liabilities		1			3			3
Total liabilities		691,846			686,083			684,462
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; 66,665, 66,454 and 66,516 shares issued, respectively		67			66			67
Additional paid-in capital		674,958			661,787			664,293
Retained earnings		933,424			838,995			883,722
Treasury - common stock, at cost; 4,418, 3,382 and 3,816 shares, respectively		(290,327	)		(240,368	)		(260,372	)
Total stockholders’ equity		1,318,122			1,260,480			1,287,710
Total liabilities and stockholders’ equity	$	2,009,968		$	1,946,563		$	1,972,172

See accompanying notes to the condensed consolidated financial statements.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

	Thirteen weeks ended October 29, 2022 and October 30, 2021
												Additional					Total
	Common stock					Treasury stock						paid-in			Retained		stockholders’
	Shares			Amount		Shares			Amount			capital			earnings		equity
Balance as of July 30, 2022		66,652		$	67		(4,054	)	$	(270,323	)	$	672,107		$	910,342	$	1,312,193
Stock-based compensation expense		-			-		-			-			2,590			-		2,590
Proceeds from stock options exercised		12			-		-			-			273			-		273
Vesting of restricted stock		1			-		-			-			-			-		-
Common shares withheld for taxes		-			-		-			-			(12	)		-		(12	)
Shares repurchased		-			-		(364	)		(20,004	)		-			-		(20,004	)
Net income		-			-		-			-			-			23,082		23,082
Balance as of October 29, 2022		66,665		$	67		(4,418	)	$	(290,327	)	$	674,958		$	933,424	$	1,318,122

Balance as of July 31, 2021		66,388		$	66		(1,132	)	$	(75,661	)	$	658,899		$	815,810	$	1,399,114
Stock-based compensation expense		-			-		-			-			1,627			-		1,627
Proceeds from stock options exercised		65			-		-			-			1,304			-		1,304
Vesting of restricted stock		2			-		-			-			-			-		-
Common shares withheld for taxes		(1	)		-		-			-			(43	)		-		(43	)
Shares repurchased		-			-		(2,250	)		(164,707	)		-			-		(164,707	)
Net income		-			-		-			-			-			23,185		23,185
Balance as of October 30, 2021		66,454		$	66		(3,382	)	$	(240,368	)	$	661,787		$	838,995	$	1,260,480

	Thirty-nine weeks ended October 29, 2022 and October 30, 2021
												Additional					Total
	Common stock					Treasury stock						paid-in			Retained		stockholders’
	Shares			Amount		Shares			Amount			capital			earnings		equity
Balance as of January 29, 2022		66,516		$	67		(3,816	)	$	(260,372	)	$	664,293		$	883,722	$	1,287,710
Stock-based compensation expense		-			-		-			-			7,313			-		7,313
Proceeds from stock options exercised		115			-		-			-			3,866			-		3,866
Vesting of restricted stock		45			-		-			-			-			-		-
Common shares withheld for taxes		(11	)		-		-			-			(514	)		-		(514	)
Shares repurchased		-			-		(602	)		(29,955	)		-			-		(29,955	)
Net income		-			-		-			-			-			49,702		49,702
Balance as of October 29, 2022		66,665		$	67		(4,418	)	$	(290,327	)	$	674,958		$	933,424	$	1,318,122

Balance as of January 30, 2021		66,165		$	66		(702	)	$	(40,401	)	$	648,949		$	726,267	$	1,334,881
Stock-based compensation expense		-			-		-			-			5,959			-		5,959
Proceeds from stock options exercised		246			-		-			-			8,103			-		8,103
Vesting of restricted stock		57			-		-			-			-			-		-
Common shares withheld for taxes		(14	)		-		-			-			(1,224	)		-		(1,224	)
Shares repurchased		-			-		(2,680	)		(199,967	)		-			-		(199,967	)
Net income		-			-		-			-			-			112,728		112,728
Balance as of October 30, 2021		66,454		$	66		(3,382	)	$	(240,368	)	$	661,787		$	838,995	$	1,260,480

See accompanying notes to the condensed consolidated financial statements.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Thirty-nine weeks ended
	October 29,			October 30,
	2022			2021
Cash Flows from Operating Activities:
Net income	$	49,702		$	112,728
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		20,964			18,232
Amortization of debt issuance costs		192			192
Gain on sale of assets		(280	)		(158	)
Deferred income tax provision		(761	)		1,352
Stock-based compensation expense		7,313			5,959
Changes in operating assets and liabilities:
Inventories		(56,422	)		(118,096	)
Accounts receivable		9			18
Prepaid expenses and other assets		3,875			(3,140	)
Accounts payable		(24,050	)		4,543
Income taxes payable		(2,556	)		(10,960	)
Accrued expenses and other liabilities		2,993			(7,979	)
Net cash provided by operating activities		979			2,691
Cash Flows from Investing Activities:
Purchases of property and equipment		(38,937	)		(29,618	)
Proceeds from sale of property and equipment		311			3,105
Net cash used in investing activities		(38,626	)		(26,513	)
Cash Flows from Financing Activities:
Repayments on finance leases		(623	)		(490	)
Proceeds from stock option exercises		3,866			8,103
Common shares withheld for taxes		(514	)		(1,224	)
Payment for shares repurchased		(29,955	)		(199,967	)
Net cash used in financing activities		(27,226	)		(193,578	)
Net decrease in cash and cash equivalents		(64,873	)		(217,400	)
Cash and cash equivalents, beginning of the period		246,977			447,126
Cash and cash equivalents, end of the period	$	182,104		$	229,726
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	286		$	288
Income taxes	$	19,012		$	50,160
Non-cash investing activities:
Accrued purchases of property and equipment	$	7,192		$	1,577

See accompanying notes to the condensed consolidated financial statements.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

(1)	Organization and Summary of Significant Accounting Policies

(a)

Description of Business

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, 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 463 retail locations in 29 states as of October 29, 2022. 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.

(b)

Fiscal Year

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 thirteen weeks ended October 29, 2022 and October 30, 2021 refer to the thirteen weeks from July 31, 2022 to October 29, 2022 and from August 1, 2021 to October 30, 2021, respectively. References to year-to-date periods ended October 29, 2022 and October 30, 2021 refer to the thirty-nine weeks from January 30, 2022 to October 29, 2022 and from January 31, 2021 to October 30, 2021, respectively. References to “2021” refer to the fiscal year ended January 29, 2022 and references to “2022” refer to the fiscal year ending January 28, 2023. Both periods consist of 52 weeks.

(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 October 29, 2022 and October 30, 2021, and the condensed consolidated statements of income and stockholders’ equity for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021, and the condensed consolidated statements of cash flows for the thirty-nine weeks ended October 29, 2022 and October 30, 2021 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 2022 or any other period. All intercompany accounts, transactions, and balances have been eliminated in consolidation.

The Company’s balance sheet as of January 29, 2022, 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 25, 2022 (“Annual Report”), but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the financial statements for 2021 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.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

(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.

(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)

Impact of the Novel Coronavirus (“COVID-19”)

The ongoing presence of COVID-19 and its potential impact on the Company’s business remains an evolving situation and is highly uncertain. While the Company’s operations during the first thirty-nine weeks of fiscal 2022 did not appear to be negatively impacted, the Company is continuing to experience labor pressures in its stores and distribution centers. The COVID-19 pandemic could further affect the Company’s operations and the operations of its suppliers and vendors as a result of continuing or renewed restrictions and limitations on travel, limitations on store or facility operations up to and including closures, and other governmental, business, or consumer actions. The extent to which the COVID-19 pandemic will impact the Company’s operations, liquidity or financial results in subsequent periods is uncertain, but such impact could be material.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(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 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:

	Thirty-nine weeks ended
	October 29,				October 30,
	2022				2021
	(in thousands)
Beginning balance		$	7,782		$	8,113
Revenue deferred			10,775			11,577
Revenue recognized			(10,786	)		(11,589	)
Ending balance		$	7,771		$	8,101

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:

	Thirty-nine weeks ended
	October 29,				October 30,
	2022				2021
	(in thousands)
Beginning balance		$	2,291		$	1,902
Gift card issuances			3,112			3,499
Gift card redemption and breakage			(3,214	)		(3,488	)
Ending balance		$	2,189		$	1,913

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(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:

	Thirteen weeks ended				Thirty-nine weeks ended
	October 29,		October 30,		October 29,		October 30,
	2022		2021		2022		2021
	(in thousands, except per share amounts)
Net income	$	23,082	$	23,185	$	49,702	$	112,728
Weighted average number of common shares outstanding - Basic		62,507		63,915		62,603		64,909
Incremental shares from the assumed exercise of outstanding stock options and vesting of restricted stock units		244		383		207		505
Weighted average number of common shares outstanding - Diluted		62,751		64,298		62,810		65,414
Earnings per common share - Basic	$	0.37	$	0.36	$	0.79	$	1.74
Earnings per common share - Diluted	$	0.37	$	0.36	$	0.79	$	1.72

The effect of the weighted average assumed exercise of stock options outstanding totaling 791,256 and 408,514 for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively, and 879,134 and 379,657 for the thirty-nine weeks ended October 29, 2022 and October 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 31,057 and 43,159 for the thirteen weeks ended October 29, 2022 and October 30, 2021, and 41,427 and 14,386 for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, 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

Effective February 3, 2019, the Company accounts for its leases under ASC 842, Leases (Topic 842). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease, if available. 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. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company does not act as a lessor.

Ollie’s generally leases its stores, offices, and distribution facilities under operating leases that expire at various dates through 2035. 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 common-area maintenance, insurance, real estate taxes, water and sewer costs, and repairs, on a fixed or variable payment basis, the cost of which, for leases existing as of the adoption of ASC 842, is charged to the related expense category rather than being accounted for as rent expense. For leases entered into after the adoption of ASC 842, the Company accounts for lease components together with non-lease components as a single component for all classes of underlying assets. 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.

Store and office lease costs are classified in selling, general, and administrative expenses and distribution center lease costs are classified in cost of sales on the condensed consolidated statements of income.

The following table summarizes the maturity of the Company’s operating lease liabilities by fiscal year as of October 29, 2022:

	October 29,
	2022
	(in thousands)
Remainder of 2022	$	12,817
2023		106,766
2024		88,161
2025		71,303
2026		64,284
Thereafter		164,469
Total undiscounted lease payments⁽¹⁾		507,800
Less: Imputed interest		(52,983	)
Total lease obligations		454,817
Less: Current obligations under leases		(81,589	)
Long-term lease obligations	$	373,228

⁽¹⁾

Lease obligations exclude $36.2 million of minimum lease payments for leases signed, but not commenced.

Index

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

The following table summarizes other information related to the Company’s operating leases as of and for the respective periods:

	Thirty-nine weeks ended
	October 29,			October 30,
	2022			2021
	(dollars in thousands)
Cash paid for operating leases	$	70,157		$	63,532
Operating lease cost		70,656			64,177
Variable lease cost		7,649			5,532
Non-cash right-of-use assets obtained in exchange for lease obligations		48,083			50,780
Weighted-average remaining lease term	6.5 years			6.7 years
Weighted-average discount rate		3.4	%		3.6	%

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.

(5)	Accrued Expenses and Other

Accrued expenses and other consists of the following:

	October 29,		October 30,		January 29,
	2022		2021		2022
	(in thousands)
Compensation and benefits	$	16,047	$	23,475	$	19,270
Insurance		11,209		6,778		9,626
Deferred revenue		9,960		10,014		10,073
Sales and use taxes		9,860		7,700		5,968
Real estate		8,124		7,102		7,234
Advertising		7,247		5,715		8,531
Freight		3,585		1,468		2,073
Other		20,917		16,261		15,471
	$	86,949	$	78,513	$	78,246

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OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

(6)	Debt Obligations and Financing Arrangements

Long-term debt consists of finance leases.

The Company’s 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”). Loans under the Revolving Credit Facility mature on May 22, 2024. In addition, the Company may at any 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, 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 October 29, 2022, the Company had no outstanding borrowings under the Revolving Credit Facility, with $92.7 million of borrowing availability, outstanding letters of credit commitments of $7.0 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 a financial covenant, 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 covenant is 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 thirty-nine weeks ended October 29, 2022.

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 condensed consolidated balance sheet as of October 29, 2022, 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.

(7)	Income Taxes

The effective income tax rate for the thirteen weeks ended October 29, 2022 was a provision of 24.1%, or $7.3 million, compared to a provision of 23.1%, or $7.0 million, during the thirteen weeks ended October 30, 2021. The increase in the effective income tax rate for the thirteen weeks ended October 29, 2022 compared to October 30, 2021 was primarily driven by the impact of discrete items recognized, primarily stock-based compensation, in the thirteen weeks ended October 29, 2022.

The Company’s effective income tax rate for the thirty-nine weeks ended October 29, 2022 was a provision of 22.5%, or $14.4 million, compared to a provision of 23.3%, or $34.3 million, for the thirty-nine weeks ended October 30, 2021. The decrease in the effective income tax rate for the thirty-nine weeks ended October 29, 2022 compared to October 30, 2021 was primarily driven by the impact of discrete items recognized in the thirty-nine weeks ended October 29, 2022 related to a decrease in the overall state tax rate of $1.1 million.

The Company is subject to tax in the United States. The Company files a consolidated U.S. income tax return for federal income tax purposes. The Company is no longer subject to income tax examinations by U.S. federal, or state and local tax authorities for tax years 2016 and prior.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues arise as a result of a tax audit, and are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

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OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

(8)	Equity Incentive Plans

During fiscal 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 is 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 October 29, 2022, there were 2,219,681 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 for the thirty-nine weeks ended October 29, 2022 follows:

						Weighted
				Weighted		average
				average		remaining
	Number			exercise		contractual
	of options			price		term (years)
Outstanding at January 29, 2022		1,109,315		$	55.30
Granted		328,938			43.97
Forfeited		(105,388	)		59.30
Exercised		(114,696	)		33.71
Outstanding at October 29, 2022		1,218,169			53.93		7.4
Exercisable at October 29, 2022		497,483			50.62		5.8

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OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

The weighted average grant date fair value per option for options granted during the thirty-nine weeks ended October 29, 2022 and October 30, 2021 was $20.62 and $33.80, 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:

	Thirty-nine weeks ended
	October 29,			October 30,
	2022			2021
Risk-free interest rate		2.63	%		1.33	%
Expected dividend yield		-			-
Expected life (years)	6.25 years			6.25 years
Expected volatility		44.40	%		38.38	%

The expected life of stock options is 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 expected volatility, the Company uses its historical information over the expected life of the option granted 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.

Restricted Stock Units

Restricted stock units (“RSUs”) are issued at the closing price of the Company’s common stock on the date of 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 thirty-nine weeks ended October 29, 2022 is as follows:

				Weighted
				average
	Number			grant date
	of shares			fair value
Non-vested balance at January 29, 2022		125,483		$	69.15
Granted		235,103			44.01
Forfeited		(33,420	)		52.03
Vested		(44,856	)		67.84
Non-vested balance at October 29, 2022		282,310			50.45

Stock-Based Compensation Expense

The compensation cost for stock options and RSUs which have been recorded within selling, general, and administrative expenses related to the Company’s equity incentive plans was $2.6 million and $1.6 million for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively, and $7.3 million and $6.0 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively.

As of October 29, 2022, there was $23.3 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 2.8 years. Compensation costs related to awards are recognized using the straight-line method.

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OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

October 29, 2022 and October 30, 2021

(Unaudited)

(9)	Common Stock

Common Stock

The Company’s capital structure consists of a single class of common stock with one vote per share. The Company has authorized 500,000,000 shares at $0.001 par value per share. Additionally, the Company has authorized 50,000,000 shares of preferred stock at $0.001 per value per share; to date, however, no preferred shares have been issued. Treasury stock, which consists of the Company’s common stock, is accounted for using the cost method.

Share Repurchase Program

On December 15, 2020, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of shares of the Company’s common stock. On March 16, 2021, the Board of Directors of the Company authorized an increase of $100.0 million in the Company’s share repurchase program. Both of these authorizations are authorized to be executed through January 2023. On November 30, 2021, the Board authorized an additional $200.0 million to repurchase stock pursuant to the Company’s share repurchase program, expiring on December 15, 2023. Shares under both authorizations may be purchased from time to time in open market transactions (including blocks), privately negotiated transactions, accelerated share repurchase programs or other derivative transactions, issuer self-tender offers, or any combination of the foregoing. The timing of repurchases and the actual amount purchased will depend on a variety of factors, including the market price of the Company’s shares, general market, economic and business conditions, and other corporate considerations. In addition, the authorizations are subject to extension or earlier termination by the Board of Directors at any time.

During the thirty-nine weeks ended October 29, 2022, the Company repurchased 602,805 shares of its common stock for $30.0 million, inclusive of transaction costs, pursuant to its share repurchase program. These expenditures were funded by cash on hand. As of October 29, 2022, the Company had $150.0 million remaining under its share repurchase authorization. There can be no assurance that any additional repurchases will be completed, or as to the timing or amount of any repurchases. The share repurchase program may be discontinued at any time.

(10)	Transactions with Affiliated and Related Parties

During the thirty-nine weeks ended October 29, 2022, the Company purchased excess inventory of $0.5 million from a subsidiary of Hillman Solutions, Inc. where John Swygert, President and Chief Executive Officer of Ollie’s, is a member of its Board of Directors. There were no purchases made from Hillman Solutions, Inc. or any of its subsidiaries in 2021.

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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 filed with the Securities and Exchange Commission, or SEC, on March 25, 2022 (“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. and subsidiaries.

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^st of the following year. References to “2022” refer to the 52-week period of January 30, 2022 to January 28, 2023. References to “2021” refer to the 52-week period of January 31, 2021 to January 29, 2022. References to the “third quarter of fiscal 2022” and the “third quarter of fiscal 2021” refer to the thirteen weeks of July 31, 2022 to October 29, 2022 and August 1, 2021 to October 30, 2021, respectively. Year-to-date periods ended October 29, 2022 and October 30, 2021 refer to the thirty-nine weeks of January 29, 2022 to October 29, 2022 and January 31, 2021 to October 30, 2021, 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 Note 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, capital market conditions, 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, but not limited to, supply chain challenges, legislation, national trade policy, and the following: our failure to adequately procure and manage our inventory, anticipate consumer demand, or achieve favorable product margins; changes in consumer confidence and spending; risks associated with our status as a “brick and mortar” only retailer; risks associated with intense competition; our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all; the risks associated with doing business with international manufacturers and suppliers including, but not limited to, potential increases in tariffs on imported goods; outbreak of viruses, global health epidemics, pandemics, or widespread illness, including the continued impact of COVID-19 and continuing or renewed regulatory responses thereto; our inability to operate our stores due to civil unrest and related protests or disturbances; our failure to properly hire and to retain key personnel and other qualified personnel; changes in market levels of wages; risks associated with cybersecurity events, and the timely and effective deployment, protection, and defense of computer networks and other electronic systems, including e-mail; our inability to obtain favorable lease terms for our properties; 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; 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, the expense of defense, and potential for adverse outcomes; our inability to successfully develop or implement our marketing, advertising, and promotional efforts; the seasonal nature of our business; risks associated with natural disasters, whether or not caused by climate change; changes in government regulations, procedures, and requirements; and our ability to service indebtedness and to comply with our financial covenants together with each of 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.

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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, bed and bath, food, floor coverings, health and beauty aids, books and stationery, toys, and electronics. 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.

COVID-19 Update

The COVID-19 pandemic has significantly impacted the U.S. and global economies, resulting in business slowdowns or shutdowns, reduced economic activity, changes in consumer behavior, and changes in the mindset and availability of the labor force. We continue to monitor the impact of the pandemic on our business, including on our associates, customers, business partners, and supply chain.

We continue to take measures to protect the health and safety of our associates and customers, a primary concern of our management team. We have also taken measures to support the communities that we serve to address the challenges posed by the pandemic.

Following the onset of the pandemic through the first quarter of 2021, our net sales benefited from increased consumer spending associated with federal stimulus funds for said pandemic. At this point, there is uncertainty with regard to any additional stimulus measures and, as a result, there may be potential changes in consumer spending behavior or demand. In addition, we are experiencing labor pressures at both our stores and distribution centers, higher import and trucking costs, and supply chain disruptions due to the impacts of COVID-19 and related measures. We are increasing our hiring efforts in certain impacted markets and working closely with our suppliers and transportation partners to mitigate the impact of the supply chain challenges. The potential significance and duration of these elevated costs is uncertain, and we will continue to assess and respond to current and evolving conditions.

As we continue to monitor the ongoing impact of the COVID-19 pandemic and potentially take actions based on the requirements and recommendations of federal, state and local authorities, we intend to focus on managing the business for future long-term growth. In certain circumstances, there may be developments outside our control, including resurgences of COVID-19 or other viruses and, in particular, new and more contagious or vaccine resistant variants, requiring us to refine our operations. Refer to Part I, Item 1A. Risk Factors of our 2021 Form 10-K for a full discussion of the risks associated with the COVID-19 pandemic.

Our Growth Strategy

Since the founding of Ollie’s in 1982, we have grown organically by backfilling existing markets and leveraging our brand awareness, marketing and infrastructure to expand into new markets in contiguous states. We have expanded to 463 stores located in 29 states as of October 29, 2022.

Our stores are supported by three distribution centers, one each in York, PA, Commerce, GA and Lancaster, TX. We are in the process of expanding our York, PA distribution center, which will provide an additional 200,000 square feet of distribution capacity and is expected to be completed in the first half of 2023. On October 17th, 2022, the Company entered into a purchase agreement to acquire a parcel of land in Princeton, Illinois for the construction of its fourth distribution center. The purchase agreement is subject to normal post-execution, pre-closing activities with an anticipated closing date in the first quarter of fiscal 2023. With the expansion of our York, PA distribution center and the addition of our fourth distribution center, we believe our distribution capabilities will support over 700 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 2.2 million square feet; and

●

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

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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.

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 new store sales of approximately $4 million in their first full year of operations.

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 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 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.

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, rising interest rates, 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 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 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.

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Net Sales

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of the 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, rising interest rates, 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 that correspond with declines in general consumer spending habits. We believe we also 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.

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.

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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 margin is impacted by product mix, as some products generally provide higher gross margins, by our merchandise mix and availability, and by our merchandise cost, 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 is reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals. Our disciplined buying approach has produced consistent gross margins 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 expense, occupancy costs for stores and the store support center, insurance, corporate infrastructure, and other general expenses. 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.

Depreciation and Amortization Expenses

Property and equipment are stated at original cost less accumulated depreciation and amortization. Depreciation and amortization expenses 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 and amortization are computed on the straight-line method for financial reporting purposes. Depreciation as it relates to our distribution centers is included within cost of sales on the condensed consolidated statements of income.

Pre-Opening Expenses

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.

Operating Income

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

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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 U.S. generally accepted accounting principles (“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 operating income, net income and net income per diluted share 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 income or expense, depreciation and amortization expenses and income taxes. Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense. 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 net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA, 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 factors, 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.

Store Openings and Closings

We opened 15 and 18 new stores in the third quarters of fiscal 2022 and fiscal 2021, respectively. In connection with these store openings, we incurred expenses of $4.5 million and $3.3 million for the third quarters of fiscal 2022 and fiscal 2021, respectively. We opened 35 new stores and closed three stores, two in connection with relocations, in the thirty-nine weeks ended October 29, 2022 and opened 41 new stores, including two relocated stores, and temporarily closed one additional store due to weather-related events in the thirty-nine weeks ended October 30, 2021. In connection with these store openings and closings, we incurred expenses of $10.1 million and $8.4 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, 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.

Index

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 thirty-nine weeks ended October 29, 2022 and October 30, 2021 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.

	Thirteen weeks ended						Thirty-nine weeks ended
	October 29, 2022			October 30, 2021			October 29, 2022			October 30, 2021
	( dollars in thousands)
Condensed consolidated statements of income data:
Net sales	$	418,072		$	383,487		$	1,277,220		$	1,251,860
Cost of sales		253,396			230,927			827,609			753,655
Gross profit		164,676			152,560			449,611			498,205
Selling, general and administrative expenses		124,810			114,048			359,549			328,537
Depreciation and amortization expenses		5,872			4,956			16,698			14,109
Pre-opening expenses		4,462			3,343			10,142			8,419
Operating income		29,532			30,213			63,222			147,140
Interest (income) expense, net		(866	)		70			(880	)		111
Income before income taxes		30,398			30,143			64,102			147,029
Income tax expense		7,316			6,958			14,400			34,301
Net income	$	23,082		$	23,185		$	49,702		$	112,728
Percentage of net sales ⁽¹⁾:
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		60.6			60.2			64.8			60.2
Gross profit		39.4			39.8			35.2			39.8
Selling, general and administrative expenses		29.9			29.7			28.2			26.2
Depreciation and amortization expenses		1.4			1.3			1.3			1.1
Pre-opening expenses		1.1			0.9			0.8			0.7
Operating income		7.1			7.9			4.9			11.8
Interest (income) expense, net		(0.2	)		—			(0.1	)		—
Income before income taxes		7.3			7.9			5.0			11.7
Income tax expense		1.7			1.8			1.1			2.7
Net income		5.5	%		6.0	%		3.9	%		9.0	%
Select operating data:
New store openings		15			18			35			41
Number of closed stores		(1	)		(1	)		(3	)		(3	)
Number of stores open at end of period		463			426			463			426
Average net sales per store ⁽²⁾	$	915		$	916		$	2,864		$	3,089
Comparable stores sales change		1.9	%		(15.5	)%		(5.4	)%		(11.3	)%

(1)

Components may not add to totals due to rounding.

(2)

Average net sales per store represents the weighted average of total net weekly sales divided by the number of stores open at the end of each week for the respective periods presented.

Index

The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented:

	Thirteen weeks ended					Thirty-nine weeks ended
	October 29, 2022			October 30, 2021		October 29, 2022			October 30, 2021
	( dollars in thousands)
Net income	$	23,082		$	23,185	$	49,702		$	112,728
Interest expense (income), net		(866	)		70		(880	)		111
Depreciation and amortization expenses ⁽¹⁾		7,362			6,398		21,123			18,410
Income tax expense		7,316			6,958		14,400			34,301
EBITDA		36,894			36,611		84,345			165,550
Non-cash stock-based compensation expense		2,590			1,627		7,313			5,959
Gain from insurance settlement		-

INDEX

PART I - FINANCIAL INFORMATION		Page
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
	Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021	1
	Condensed Consolidated Balance Sheets as of October 29, 2022, October 30, 2021 and January 29, 2022	2
	Condensed Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021	3
	Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 29, 2022 and October 30, 2021	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 6.	Exhibits	28