OLLI - NASDAQ

Good morning, and welcome to Ollie's Bargain Outlet's conference call to discuss financial results for the second quarter of fiscal year 2025. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the expressed written authorization of Ollie's. Joining today's call from Ollie's management are Eric van der Valk, President and Chief Executive Officer; and Robert Helm, Executive Vice President and Chief Financial Officer. Certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-K and quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements. On today's call, the company will also be referring to certain non-GAAP financial measures. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release. With that, I will now turn the call over to Mr. van der Valk. Please go ahead, sir.

Good morning. Thank you for joining us today. We had a very strong second quarter, and we are operating with the wind in our sales. New store openings, total sales, comparable store sales and adjusted earnings were all ahead of our expectations, and we are raising our full year outlook across the board. Our performance in the quarter is the result of the hard work and commitment of our entire team. We are driving the business to new heights through improved planning, coordination and execution across the organization. We are delivering against our strategic priorities, laying the groundwork for future growth and driving strong consistent results. With so many retailers closing stores or going bankrupt in the past year, there is an opportunity to gain market share through expanding our footprint, acquiring new customers and turning these customers into loyal Ollie's Army members. This is our flywheel, our formula for growth, and we are all over it. Everyone loves a bargain, and it's our mandate to bring great deals to consumers from coast to coast. We have a tremendous opportunity ahead to continue opening new stores and gain market share. This is not growth at any cost, however. We are committed to profitable growth, and we are able to do this through a flexible store model that can be adapted to generate strong returns across different geographies, demographics and store spaces. In the first 6 months of the year, we opened 54 new stores. This is over 4x the number of stores we opened in the same period last year. And in just 6 months, we have exceeded our previous full year unit growth high watermark. During the second quarter, we celebrated the opening of our 600th store in New Hampshire and entered our 33rd and 34th states. With our new stores continue to perform ahead of our expectations and are benefiting from a number of factors, including improved planning and execution, a soft opening schedule and what we call the warm box dynamic. We are committed to delivering double-digit annual unit growth moving forward and have invested in the necessary people and process to deliver this. The bankruptcy filing and subsequent store closures of a number of retailers over the past year have provided a unique opportunity to pick up additional stores that are well suited for our business model. The team has done an excellent job prioritizing the opening of these locations while advancing our pipeline of organic store openings, and we are ahead of plan for the first half. As a result, we are raising our new store target and now expect to open an additional 10 stores for a total of 85 this year. We are equally focused on new customer acquisition and demonstrating our deep appreciation for our most loyal customers. We have some of the most dedicated and passionate customers in this business, and there's an opportunity to strengthen this connection and grow lifetime value. Ollie's Army members shop more frequently and spend over 40% more per visit than nonmembers. They account for more than 80% of our sales and are now more than 16 million strong. This is a devoted group of deal-seeking bargainauts who take pride in saving money. We are fiercely committed to serving this group and enhancing the value proposition of the Ollie's Army program. We made a deliberate and strategic change in the second quarter that did just that. We revamped our annual Ollie's Days event to include an exclusive member-only shopping night, and we limited the promotions for the week to Ollie's Army members. By all accounts, the reimagined event was a huge success and exceeded all expectations. First and most importantly, we rewarded our Ollie's Army members and acquired an abundance of new members. Second, the event was accretive to sales and earnings. Before I turn the call over to Rob, let me quickly call out 2 other company milestones. Ollie's celebrated its 43rd year in business last month. The company opened its first store in Mechanicsburg, Pennsylvania in July of 1982. We also celebrated our 10-year anniversary as a public company and learned that Ollie's is one of the best-performing retail IPOs over a 10-year period since NASDAQ began tracking this in 2014. We appreciate our shareholders for putting their trust in us for the past 10 years. We also value our partners who make this business happen, especially our merchandise suppliers, vendors and manufacturers. We greatly appreciate the deep and long-lasting relationships. Now let me turn the call over to Rob.

Thanks, Eric, and good morning, everyone. We are very pleased with our second quarter results and the continued momentum in our business. New store openings, new store performance, comparable store sales, total sales and earnings were all ahead of our expectations for the quarter, and we're raising our sales and earnings outlook for the fiscal year. Accelerating new unit growth and expanding the Ollie's Army loyalty program are 2 big priorities this year. We are delivering on both of these initiatives. We opened 29 new stores in the second quarter and ended the period with a total of 613 stores, an increase of 17% year-over-year. Both our new store openings and new store performance were ahead of our plans for the quarter and first half of the year. Eric spoke to a number of changes to our Ollie's Days event in June. These and other enhancements to our loyalty program are working. We drove strong customer acquisition in a way that benefited sales and protected margin. Ollie's Army members increased 10.6% to 16.1 million, and we estimate that the revamped Ollie's Days event added approximately 100 basis points to comp store sales in the quarter. Now let me run you through our P&L numbers. Net sales increased 18% to $680 million, driven by new store openings and comparable store sales growth. Comparable store sales increased 5% and was driven by an increase in transactions. We saw strong demand for consumer staples throughout the quarter and demand for seasonal items accelerated as the weather normalized in June and July. Our top 5 performing categories were lawn and garden, hardware, food, housewares and domestics. Gross margin increased 200 basis points to 39.9%, and this was better than our expectations. Lower supply chain costs and higher merchandise margins were the primary drivers of the increase. Benefiting merchandise margins in the quarter was strong deal flow and lower shrink. SG&A expense as a percentage of net sales increased 60 basis points to 25.8%, driven primarily by higher medical and casualty claims as well as slightly higher store labor expenses. Consistent with the trends we experienced in Q1, the higher medical expenses were from an unusually high number of severe medical cases. This is not typical for us, and we expect medical expenses to work their way back down as these cases are resolved. Preopening expenses were $9 million in the quarter. Most of the $4 million increase was from the higher number of new store openings this year. We opened 29 stores in the quarter compared to 9 last year. Dark rent associated with the bankruptcy acquired stores was $2.3 million, which was also a factor in the year-over-year increase. Moving down to the bottom line. Adjusted net income was $61 million and adjusted earnings per share increased 26.9% to $0.99 for the quarter. Lastly, adjusted EBITDA increased 26% to $94 million and adjusted EBITDA margin increased 90 basis points to 13.8% for the quarter. Let me also take a moment to comment on our balance sheet. Given the nature of our business, the strength of our balance sheet is a strategic asset. Our financial stability, the visibility of being a public company and our size and scale truly differentiates us in the closeouts and off-price space. As a result, we are committed to maintaining a fortress type of balance sheet on the go forward because it helps drive our business. For the quarter, our total cash and investments increased by 30% or over $100 million to $460 million, and we had no meaningful long-term debt at quarter end. Inventories increased 20% year-over-year, primarily driven by our accelerating store growth and higher in-transit inventory. Capital expenditures totaled $26 million for the quarter, with the majority of the spending going towards the opening of new stores, the build- out of the bankruptcy acquired stores and to a lesser degree, investments in both our supply chain and existing stores. We bought back $12 million worth of our common stock in the quarter and had $304 million remaining under our current share repurchase authorization at the end of the quarter. Lastly, let me run through our outlook for fiscal year 2025. We are raising both our sales and earnings outlook for the full year. Our revised outlook flows through the upside in our first half results and raises our comparable store sales outlook for the third quarter, given the momentum in our business. Our updated outlook also assumes the current tariffs remain in place for the balance of the year. Our updated guidance figures are contained in the table in our earnings release posted this morning and include 85 new store openings, net sales of $2.631 billion to $2.644 billion, comparable store sales growth of 3% to 3.5%, gross margin in the range of 40.3%, operating income of $292 million to $298 million and adjusted net income and adjusted earnings per share of $233 million to $237 million and $3.76 to $3.84, respectively. These estimates assume depreciation and amortization expenses of $54 million, inclusive of $14 million within cost of goods sold, preopening expenses of $23 million, which includes dark rent of approximately $5 million related to the acquired Big Lots locations, an annual effective tax rate of approximately 25%, which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately 62 million and capital expenditures of $83 million to $88 million, which includes the build-out of the former Big Lots locations. As far as the quarterly comps are concerned, we now think our third quarter comp growth could be above our long-term algo of 1% to 2%. We are leaving our fourth quarter numbers in place for the moment as we generally do not update more than 1 quarter ahead at a time. This puts us in the range of 3% in the third quarter and leaves us just below 2% in the fourth quarter. For the remaining new stores, the large majority of these are planned to open in the third quarter. In closing, we are taking advantage of the unique opportunity in this moment to gain market share through accelerated unit growth and enhancements to our Ollie's Army program to aggressively go after these abandoned customers up for grabs. Our actions are clearly working. We are strengthening our competitive positioning, broadening our footprint and setting us up to drive strong shareholder returns for the years to come. Now let me turn the call back to Eric.

Thanks, Rob. This is a very exciting time for Ollie's. We are delivering extraordinary value to consumers. We are accelerating our unit growth. We are doubling down on customer acquisition. We are delivering profitable growth and consistent financial results. And most importantly, we are Ollie's. Carmen, we are ready for questions.

[Operator Instructions] It comes from the line of Matthew Boss with JPMorgan.

Congrats on a really nice quarter, and you killed the chance this morning. So Eric, could you elaborate on the improving cadence of comp as the second quarter progressed and maybe speak to trends that you've seen in August? And then with the wind in your sales, as you cited, what are you seeing from deal flow given the tariff disruption? Or maybe how would you characterize the state of the closeout industry today?

Great. Yes. Thanks, Matt. I'll cover deal flow and Rob can cover the cadence of comp for the quarter. I feel like a broken record because the answer is always deal flow is strong. It's always strong. There's so many different sources of closeouts in any given quarter. In this particular quarter, as everyone is aware, our model thrives on disruption. Tariffs have created uncertainty in the market, which is disruptive. This has resulted in additional buying opportunities. The retail bankruptcies and store closures have certainly resulted in additional buying opportunities. Some of this is abandoned product that was made for these retailers. And then we're starting to see abandoned product pipelines as well, which are typically very good for us long term. Those are sometimes new relationships or growth of some of our existing relationships. So they tend to be sticky and very good for the pipeline on a long-term basis. And just to remind everyone, our inventory was up 20% at the end of Q2, which is a pretty strong indicator of strong deal flow.

On the quarterly cadence of comps, as you might recall from our Q1 call, the May got off to a slow start. We were essentially flat for the month of May. June began to accelerate and includes the upside that we mentioned relative to the Ollie's Army Night on our prepared remarks. And July was, in fact, the strongest month of the quarter for us.

Our next question comes from the line of Peter Keith with Piper Sandler.

Great results. I want to dig into the Ollie's Army Night from Q2. And maybe comparing it to the traditional December Ollie's Army Night, were there any differences or call-outs as it related to the sales lift or new member adds? And then just any general learnings from that event and how you might think about future events.

Sure, Peter. Thanks for the question. We were very excited about the event moving into the event, and it's very pleased with what ended up happening with the reimagined Ollie's Days event. It surpassed all of our expectations on every level. It drove record-setting customer engagement and Ollie's Army acquisition, and Rob will take us through the numbers in a minute. The Ollie's Army members are a very passionate group who take great pride in saving money, and they just very much appreciated the additional private shopping event. Most stores had very long lines when we opened the doors. I know here in Harrisburg, it was close to 200 people that were waiting to get in, which was super exciting. The organization executed the event very well in every discipline of the company. We did learn a few things to the point of your question, Peter, that we will apply on a go-forward basis, whether it's to the Ollie's Army Night in December or some insights into how our customers think about the benefits of the program. Not ready yet to expand on that because we're finalizing some plans and preparing communication to customers, and you'll hear it alongside of when our customers get that communication.

And in terms of the financials, if you recall, we were -- we went into this event with pretty muted expectations. We were doing this purely as an enhancement and for a customer acquisition, not for a short-term gain in our P&L. The sales exceeded all of our expectations by far, and we talked about it driving 100 points of comp to the quarter. From a gross margin perspective, it was very neutral to our gross margin for the quarter, and we're really pleased about where our gross margins ended up on the full quarter. In terms of customer acquisition, our customer acquisition for the week was up almost 60%. So that well outpaced our sales gain that we got from the event. And the last thing that I would end off with is we were very nicely surprised with how it performed in respect to the December night, where the sales actually exceeded the December night, which we felt was awesome considering we're not in a peak holiday moment.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

Congrats, guys. I love the energy this morning. Hoping we peak ahead to 2026 a bit and how you're thinking about store growth. And I guess more broadly, earnings power. It seems to me that $4.50 to $5 is certainly an achievable number. And maybe, Rob, can you talk about the opportunities for gross margins over the next couple of years and how you see it flowing?

Sure. Thanks, Chuck. I'll take the store growth piece, and Rob will speak to earnings power. We're committed to delivering the 10% annual unit growth. It's our long-term algorithm on a go-forward basis. We acknowledge that there are moments in time where we may have opportunities to outpace that 10% unit growth target and flex up. And we're in one of those moments with the bankruptcies and store closures and the market share opportunity, we've been able to accelerate, and it doesn't take that off the table in future years to potentially consider. When you look into 2026, there are sufficient opportunities out there to continue to drive accelerated growth. And we would expect another year of elevated openings. We'll provide more color specifically on that in the Q3 call.

In terms of earnings power, Chuck, we don't get too ahead of ourselves, so I'm not going to give too much in terms of concrete numbers today. But what I would say is we're starting in the back half of this year, we're going to start to see the benefits of higher and earlier openings over the past 12 calendar months. We've opened 88 stores at this point. And that will flow through the second half and the annualization will be a big impact for earnings growth for 2026 as well as potentially another year of elevated growth, as Eric refers to. We will also gain some leverage of not having to incur the dark rent for the bankruptcy acquired stores as well as improving trends in medical and casualty as some of those costs are transitory for this year. In terms of gross margin, we haven't really rethought the algo in terms of going above 40%. We are guiding to above 40% for this year, but that's really a product of how we performed year-to-date and not a change to the long-term algo. What does this mean for 2026 earnings? Assuming no radical changes to the current environment, it potentially looks like double-digit top line growth that translates into faster growth on the bottom line in the mid-teens.

Comes from the line of Brad Thomas with KeyBanc Capital Markets.

Great quarter here. I wanted to follow up maybe a little bit off of the last question from Chuck and just asking about the SG&A side of things. And could you help us think a little bit about SG&A leverage, both in the back half and how that may feed into the long- term algorithm? And then perhaps, Eric, I could sneak in kind of a high-level one for you. The quarter was really interesting with you changing some kind of long-standing practices from Ollie's that seem to work very well. And I was wondering if you could just talk a little bit about maybe some cultural changes and the willingness to maybe look for new opportunities like that.

I'll take the first part, Brad. We're really excited about how we're executing right now and hitting all our core marks, the value proposition, store openings, accelerated growth, customer acquisition, you name it. Unforeseen costs happen from time to time, and that's what we're seeing with medical and casualty right now. While these costs are putting a little pressure on our first half SG&A, they don't structurally change how we think about our long-term algo or how we're managing this business. So when we come into the back half, we do -- we have put provision for higher medical in the back half, but we are up against some higher expenses in the back half of last year, specifically executive comp leading up to the leadership transition last year, some of our pursuit expenses around Big Lots. So we had planned to leverage and we do plan to leverage in the back half, and we feel comfortable about delivering our guidance for the full year.

Brad, yes, in terms of -- I appreciate your question. This is an excellent business model, which is an amazing foundation. It has a massive competitive moat. So when you think about changing how we look at our business as we move forward, there are tweaks, there are adjustments that we'll make. And it's really just being committed to ensuring that our business remains super relevant to the consumer. And our prejudice is our commitment to our Ollie's Army members and welcoming new members into the program. So our orientation over the past couple of quarters has been more around enhancements to the Ollie's Army program and how does we acquire and retain people in the program. But nothing is off the table. I just want to emphasize that it's an amazing model. So when we think about continuing to make improvements and on this path to continually improving our business, again, they're more tweaks and small changes. And you mentioned culture, which is something that we at Ollie's are very, very passionate about our strong culture and making sure that we all have a great sense of who we are and how we behave as a team, and that really is foundational and a key part of our success. And much of what we think of as our kind of core values from a culture standpoint came from our founders, and it's part of the legacy that they've left us. And maybe it's a little bit modernized today versus what it may have been 43 years ago, but it still has the fabric of the founders as part of that, and it's what's made us successful for 43 years. We've done a much better job of making sure people understand it, both internally and externally which has been very, very good for us.

Our next question comes from the line of Steven

Our question was on new store economics. Can you just talk about how some of the new stores are performing, how these new stores compared to prior cohorts since you've accelerated the unit growth? And then just given the acceleration in store growth, at what point will you need a new distribution center?

I'll take the first part. Eric will take the second part. We have some of the strongest new store economics in the business, which have been very stable over time. We've long said that our model is portable, profitable and predictable. The model is also flexible, which allows for us to open and operate different sized stores across a wide range of demographics and geographies, all while maintaining mid-teens 4 walls and strong payback periods. The other strength of our model is our fortress balance sheet and our ability to generate strong cash flows. We can use this strong capital position to opportunistically fund our growth in whatever manner generates the highest rate of return as was the case with the bankruptcy acquired stores. So in terms of the current cohort of stores we're opening this year, they're nicely performing above plan as a group. And I would say that the payback periods for the organic openings are very consistent with what we've seen in the past. The payback periods for the bankruptcy acquired stores are a little bit longer because there's upfront costs in terms of the dark rent component and the build-out costs that we're now on the hook for. But all in all, we're very pleased with the openings for this year.

On the DC question, Steve, we have the ability to expand our distribution center in both Texas and in Illinois. And we do plan to expand both those buildings in the coming, call it, 18 months, give or take. So each building's expansion is approximately 200,000 feet and adds another 50 stores of service for a total of 100 stores, which takes us somewhere in the, say, mid-800s in terms of total capacity from a store count standpoint. The fifth building, just to answer the question specifically, is 3-plus years out, so call it 3 to 4 years out. And we'll update, provide more color most likely on the Q4 call as to what that road map looks like a little bit more concretely.

Our next question is from Kate McShane with Goldman Sachs.

We just wondered how did the customer acquisition look from the Ollie's Army Night? Just you've indicated you were reaching a broader consumer with a younger cohort over the last couple of quarters. Did the Ollie's Army Night reflect this at all?

I'll answer this one, Kate. We didn't see much of a differential in what we saw in the rest of the quarter in the Ollie's Army Night results. For the quarter, our customer -- our new customers were up across the I would say, mid- upper income and higher income levels reflective of trade down. And then in the existing customers, the biggest trend that we saw, which is a long-term trend that we're seeing is our customer file is getting younger in the existing customer base as our digital strategies are really taking hold and driving that cohort.

If we could just ask a second question, and this kind of mirrors an earlier question about culture. Eric, you spent a lot of time working and refining the supply chain at Ollie's before you became CEO. I was wondering if you could talk through how some of that work is resulting in the strength and what you're seeing with the business today.

Yes, absolutely. We're very proud as an organization of what we accomplished on the supply chain side, we have 4 distribution centers that are operating with great momentum. We're especially proud of what we've accomplished in our Princeton, Illinois distribution center, which is now -- we're anniversarying its opening here last year and some of the automation that we've installed. So it's definitely part of this foundation of -- that we've created to propel growth into the future. It's key to it. And we've also made a number of changes in transportation, which go back a couple of years now, but in terms of how we procure international freight and those we've seen dividends from, and we have the capacity now in any uncertain environment to be able to address the needs of the business and to do them in a cost-effective way, and that really wasn't the case a few years ago. I mean you mentioned culture and culture to me is really the most important element of what it takes for us to be successful and motivate people, and that starts with our passion for serving customers who are on a tight budget and just really appreciate the values we offer. And we're all committed really to that first and to each other to make that happen. And that's really no different for our distribution centers and it is for our stores or people here in our store support center in Harrisburg. We're committed to the cause, committed to each other, and we understand what it means to deliver and what it means to that consumer base. We really have a heart for our consumer.

[Operator Instructions] Our next question comes from the line of Scot Ciccarelli with Truist.

Two questions. First, can you provide us an update on what you're seeing at your Ollie's stores that were in a similar market to Big Lots stores that have been closed? And then secondly, historically, you guys had a bit of a reverse new store waterfall process where new stores would open really strong with your grand openings and then you'd incur a bit of a comp drag as that store moved into the comp base. Just given this year's unit acceleration, is that something we should be thoughtful of as we roll into '26?

Sure. This is Rob. I'll take this one, Scot. We're excited about our performance that we're seeing in the stores where the Big Lots were closed. This is the first full quarter that has not been impacted by some type of store closing from the Big Lots chain. So we're starting to see the trends a little more clearly. The best performers out of where Big Lots closed are the overlapping stores where they closed and have not reopened. That's, call it, 290-ish stores. In the stores where the Big Lots has reopened, those stores are still performing well. With a 5% comp, it's a little hard to separate the standouts from the underperformers, though. So I would say in that 290 store set, we're seeing between the low single-digit to mid-single-digit comp above the balance of the chain. That's holding in place as we've discussed in the past. From a new store waterfall perspective, our new stores are performing really well. The vast majority of our stores this year are performing over plan. We're not sure about what it means about the reverse waterfall yet because we're only a year or so into these bankruptcy acquired stores in these warm boxes where we made the approach change to our soft opening cadence. So we're watching the data. We're looking at it, but -- and we're going to study in the back half, and we'll have updates as we go along.

And it comes from Steven Shemesh with RBC Capital Markets.

Nice results. Just wanted to circle back on the comp. So strong result and with the May being flat and improving throughout the quarter, it sounds like the exit rate was in the high single-digit, low double-digit range. So as we just try to kind of like triangulate 3Q being in the 3% range off of an easier compare. I'm just curious, have you seen anything different quarter-to-date? Is there anything to keep in mind from a compare perspective? Or is there just a lot of quarter left?

There's certainly a lot of quarter left, and we typically have a pretty conservative approach to how we guide and remaining in the 1% to 2% long-term algo. Us signaling today the 3% certainly shows that we believe that we have the wind in our sales, and we're operating with good momentum right now. And you're very accurate on the exit rate on Q2. That's right about where we were at.

Got it. Okay. That's very helpful. And then just a bigger picture question on gross margin and understand that the baseline is 40%. But as we think about what's changed over the last handful of years, supply chain costs peaked up during the pandemic, and they've since been coming down, still running above pre-pandemic levels, but you are running above that 40% gross margin now. So I guess on the quarter and then just bigger picture, like what has changed from a merchandising margin perspective that's allowed you to overdeliver despite the higher supply chain costs?

Yes. Thanks, Steve. The -- it's our size and scale. It remains to be seen what this means long term. But our size and scale has resulted in buying power. It's attracted new suppliers to us. It's expanded existing relationships and we're able to buy better. So we typically pass that along in investing in price and our customers are rewarded for it. We've been able to do both. We've expanded our price gaps, and we're delivering elevated margin. So in this moment, it feels very good.

And I would just say that we're flowing product better through our distribution centers into our stores with our people. We're executing really well on all fronts. So that's underpinning it. And that comes in the form of lower supply chain costs, but also lower markdowns to a degree. And then shrink has been a tailwind. And that's one thing to note. We now have 3 quarters of positive shrink trend under our belts. But we have not changed our guidance in the back half, which is still on that elevated number that we had saw in the previous quarters.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum.

Congrats on the impressive results. I wanted to just come back to the medical and casualty costs and just see, Rob, if you could share what is the incremental cost expected both for the full year '25, but also baked into the second half of the year? And then just want to come back to Q2 in particular because you have such outsized results now over a multiyear period or 3-year stacks, 20%. Gross margin in Q2 by far the best that you've ever had in Q2. And just see, is there something that's changed in the mix of product that is driving both gross margin upside but also sales upside? I mean, I know, obviously, the Ollie's Days added 100 basis points, but any other color you can share?

I'll take the first part of this, and maybe I'll take the second part. But -- so for the first part, from the medical perspective, it was essentially all of our deleveraged last year. And that was a similar trend that we saw in Q1. We have a slight improvement baked into that in Q3 and Q4. And that's based on the fact that we are starting to see some early signs of the trend softening here as we get into the third quarter. So that's that. So if we have an improvement where they revert to kind of what we've seen historically, we'd have some upside within our numbers. From a gross margin sales perspective on the second quarter, I think Eric mentioned size and scale, our ability to size and source better deals, drive better costs get better access to goods, that's all part of it. I would also say the strength of our consumables business. That's a high frequency, high visit business that kind of carries us through what typically was a little bit of a summer doldrums quarter. I think that underpins kind of the frequency. And then when we showcase as great deals and assortment as we do, you get attachment, you get folks coming in and grabbing those great deals off of those visits.

Yes. I'd just add a little bit of color. It's also the consolidation of the closeout market. There aren't as many buyers out there for closeouts. And so as the biggest buyer, we believe, in the country for closeouts, that market share of closeouts comes to us. And we have a very tenured experienced buying team with the acumen to really leverage the moment and consume that market share, and that's just what we're doing. We've been very, very aggressive about establishing new relationships, expanding existing relationships. It's not the case where we just pick up the phone. It's both proactive seeking and our phone is ringing a lot more as a result of this consolidation. So we do believe that's going to have lasting positive consequences for us.

Our next question comes from Mark Carden with UBS.

So I wanted to ask another one on Big Lots. Just how meaningful were the differences in sales capture between warm boxes in your existing footprint? So said another way, how should we think about the Big Lots contribution going to your same-store sales versus your new store productivity? And then what are you seeing with respect to the Ollie's Army sign-ups from some of these former Big Lots customers?

I would say on the top line, not a noticeable difference between our organic openings and our Big Lots openings. A little bit of lift potentially because there is that warm [ docs ] dynamic. I would say the most meaningful difference from a profit flow-through perspective is better operating margins than the bottom line because the rents in these locations were, in many cases, much, much lower than some of the deals that we're signing today. Second, can you repeat?

I'll get it, Mark, on the second question, the Ollie's Army. So we are seeing outpaced growth in our new stores. And I haven't -- candidly haven't parsed that down to Big Lots versus non- Big Lots, but the majority of them are Big Lots. So we're definitely seeing accelerated acquisition in those newer stores. So our stores are doing a great job communicating the story around the program and the value that it offers to consumers. A lot of the consumers coming into our Big Lots stores are talking -- sorry, Big Lots converted Ollie's stores are talking about their familiarity with deep discount and Big Lots and how it reminds them of Big Lots from 10 years ago and that they really appreciate the value that we offer, and it becomes an easier sales, so to speak, at register than to convince them to sign up. We're also seeing very nice growth in our comp stores, which is great, but definitely outpaced in new stores.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Lauren Ng on for Simeon. I just were curious about what specifically was driving that higher merch margin. Is this maybe more a result of better buying or product mix or maybe both? And then a follow-up is just on the Q2 comp of the 5%. Can you share how much is this coming from maybe stores ramping versus your mature stores?

From a merch margin perspective, we chalked it up to strong deal flow, better margin on deals than we expected. Mix was more in line with where we thought it was going to be. And we also saw lower shrink, which also assisted the gross margin. In terms of comps in terms of relatively new stores versus vintages, we saw broad-based strength across all cohorts. It was really just how high the comp was across all the different cohorts of stores that we track.

And our last question comes from Edward Kelly with Wells Fargo.

Nice quarter. I want to add my congratulations. A couple of questions for you. I just wanted to follow up on the questions around the gross margin. Obviously, Q2 was a great performance. I don't know, maybe the strongest Q2 that you guys have had. Just curious as to why we should be modeling a decline in the back half. I mean it does sound like there's some conservatism in there. Curious as the impact of tariffs that -- how that might flow through, particularly as you get into the fourth quarter. And then I had a bigger picture question, which I guess is probably for you, Eric, which is I'm curious as to what's happening with your product mix. I mean, obviously, closeout opportunity is very strong. So I don't know if that percentage of the mix is up. And then what's happening with product that vendors may be making for Ollie's? I know you've had some of that ramp over time, but I think it was still small. But I'm just curious as to whether you're getting more of like consistent flow from vendors that they're using you as well in terms of like made for Ollie's kind of product.

Well, that was a lot. I'll try to answer at least a part of it, and then you might have to remind me. On the gross margin line, we are planning a deceleration in gross margin off the first half. You know us for a long time and have been following us. We're the kind of folks like to underpromise and overdeliver. We feel like our guidance gives us the opportunity to execute in the environment. If we need to take the opportunity to invest in price, we have the room while we can still deliver to the Street. So that's kind of how we're thinking about the gross margin. There's also that outstanding performance we had in the fourth quarter last year, we're over 40%. That typically is not something that we would plan to when we enter a year. And so we've left our fourth quarter guidance in place. So that also kind of drags down the gross margin in the second half.

Yes. I think, Ed, in terms of tariffs, we're price followers in the market. So we'll take a similar approach that we take even in an environment that isn't disrupted by tariffs where if we can't buy a product, whether it's import or closeout, and offer the right price in the market and maintain a price gap that we can be proud of, then we just don't buy the item. So what that means is we're going to be priced right. We're going to maintain our price gaps and the mix adjust accordingly, according to our sourcing and whether that's counter sourcing in various countries to chase the latest news in terms of tariff adjustments that have been made or counter sourcing and replacing substituting products that we might import with other products that we could buy here in the U.S., especially in the closeout market, but just fiercely committed to making sure we maintain our value proposition all the way through and meet our obligation to the shareholders to provide the merch margin that we're expected to provide. So that's really the answer in terms of how we're navigating tariffs. It's -- the closeout import mix hasn't changed materially to date. It's really hard to say what that may look like in coming quarters. We're navigating it one press release at a time in terms of where the tariffs are moving, but we're committed to ensuring we offer the right values. The other piece of your question, I believe, was about production closeouts or manufactured closeouts or engineered closeouts, however you might like to refer to them. We buy product in the closeout market from suppliers who may have the product as a result of deliberately manufacturing the product. It could be an overrun. It could be an end of run production situation or it could be it was produced for us to cover something that may have been produced for us a year prior. And candidly, we don't ask a whole lot of questions about the origin story of the product. If we can get it for the right price, offer it at the right retail price to our consumer and meet the financial obligation in terms of our IMU, then we're buying the item. What I can tell you kind of refers back to the very first question Matt asked about the deal flow is that there's more than enough product out there to buy. We haven't felt compelled to go down the path of contracted manufactured -- production manufactured product. So we're still fairly opportunistic. But we realize that at our size, the supplier vendor community is supporting volume, both on their end and on our end. And it does make our business in some pockets more predictable and more stable, which is great for us long term.