Good afternoon and welcome to the Ollie's Bargain Outlet Conference Call to discuss Financial Results for the Second Quarter of Fiscal 2017. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from Ollie's. And as a reminder, this call is being recorded.

On the call today from management are Mark Butler, Chairman, President, and Chief Executive Officer; John Swygert, Executive Vice President and Chief Financial Officer; and Jay Stasz, Senior Vice President of Finance and Chief Accounting Officer. I will now turn the call over to Mr. Stasz to get started. Please go ahead, sir..

Thank you and hello everyone. A press release covering the Company's second quarter fiscal 2017 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the Company's website.

I also want to remind everyone that management’s remarks on this call may contain certain forward-looking statements including predictions, expectations, or estimates and that actual results could differ materially from those mentioned on today's call.

Any such items including our outlook for fiscal year 2017 and our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on these forward-looking statements, which speak only as of today, and we undertake no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our SEC filings.

We encourage you to review these filings, including the Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q, for a more detailed description for these factors.

We will be referring to certain non-GAAP financial measures on today's call such as adjusted operating income, EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per diluted share that we believe may be important to investors to assess our operating performance.

Reconciliations of these non-GAAP financial measures to the most closely comparable GAAP financial measures are included in our earnings release. I will now turn the call over to Mark..

Thanks Jay and hello to everyone. We are very excited about our second quarter results and the underlying trends in our business. Bargain is our middle name and with our focus on building strong vendor relationships and finding deals, we continue to offer our customers great bargains on brand name merchandize every day.

Our customers continue to respond to these great deals and great brands. Strong deal flow, consistent margins and tight expense control all contributed to our exceptional performance in this quarter. Comparable store sales increased 4.5% against a two-year stack of 11.3%.

Our sales strength was broad based with nearly half of our departments comping mid-single or higher. Some of our best performing categories were toys, health and beauty aids, flooring, bed and bath and electronic accessories. We continue to see a strong performance from our new stores and remain confident in our ability to open stores.

We opened 11 stores during the quarter and remain on track to open 33 to 35 locations this fiscal year. All of our leases have been executed for our planned 2017 openings and we continue to see a strong pipeline of leasing opportunities.

We are thrilled that Ollie's Army membership levels continue to grow ahead of sales and our members continue to spend significantly more than non-members. This has been a consistent trend in Ollie's Army for many years. As some of you may know we recognized two big milestones during the second quarter.

Ollie celebrated its 35th anniversary and we opened our 250th store. Good Stuff Cheap was the cornerstone behind the business 35 years ago, and I'm proud to say it’s still our guiding principal today, it’s what we sell everyday and bargains will never ever go out of style.

With our growing size and scale leading the stronger relationship with vendors and better access to merchandize, we believe we are well positioned to take advantage of these inventory opportunities and continue to sell real brands at real bargain prices direct to the consumer.

Our entire organization has been built from the ground up to capitalize on these great deals in the marketplace and in my 35 years at Ollie's I've never seen a better environment and our business had never been stronger. I want to thank more than 6,000 team members for their hard work and their dedication at Ollie's every day.

It's the people, their passion for our business and their commitment to the Ollie's way that continues to drive our success. Some of these people have been with the business for a very long time. We've come a long way together in the past 35 years. Every area of the business is operating at an extremely high level.

We're hitting our marks in every segment of the business. It's the teams working together that drive sales and our bottom line results. Thanks again to each and every one of you and I'll now turn the call over to John, he'll take you through our financial results in more detail..

Thanks Mark and good afternoon everyone. For the second quarter net sales increased 20.5% to $254.6 million. Comparable store sales increased 4.5% against a 3.5% increase in the second quarter of last year and 11.3% increase on a two-year stack basis.

The increase in comparable store sales was driven by the increase in both transactions and average basket. We opened 11 stores during the quarter and ended with 250 stores in 20 states increasing our store count by 15.7% year over year.

We continue to see our new stores perform above our expectations and we remain pleased with the overall productivity of our entire store base. Gross profit increased 19.6% to $100.2 million and gross margin decreased 30 basis points to 39.4%.

The decrease in gross margin was primarily due to a decrease in merch margin partially offset by favorable distribution center and transportation cost. SG&A expenses increased 13.9% to $65.8 million.

This was primarily related to higher selling expenses from our new stores opened over the past year, increased sales volumes in our existing store base and investments in personnel to support our continued growth. As a percentage of net sales, we leveraged SG&A expenses by 150 basis points to 25.8%.

Excluding $300,000 of transaction related expenses from the prior year, we leveraged SG&A expenses by 140 basis points during the quarter. Operating income for the third quarter increased 35.6% to $29.8 million and operating margin increased 130 basis points to 11.7%.

Excluding the $300,000 of transaction related expenses incurred in the second quarter of last year, adjusted operating income increased 34% and adjusted operating margin increased 120 basis points. Net income increased 50.1% to $19.7 million and net income per diluted share increased 42.9% to $0.30.

Excluding the income tax benefits due to the accounting change for stock-based compensation this year and excluding transaction related expenses net of taxes in the prior year, adjusted net income increased 34% to $17.8 million and adjusted net income per diluted share increased 28.6% to $0.27.

EBIITDA increased 33.4% to $32.8 million and adjusted EBITDA increased 31.6% to $34.9 million for the second quarter. At the end of the quarter, we had $24.8 million in cash and no outstanding borrowings under $100 million revolving credit facility. We ended the quarter with total debt of $129.2 million compared $197.7 million last year.

Capital expenditures totaled $5.7 million in the second quarter of fiscal 2017 compared to $5.2 million in the second quarter of fiscal 2016. Turning to our outlook for fiscal 2017.

We are raising our total net sales to a range of 1.045 to 1.052 billion, raising our comparable store sales range to 2 - between 2% to 2.5%, reiterating the opening of 33 to 35 new stores and no closures, raising our operating income to a range of $127 million to $129 million, raising our net income per diluted share to a range of $1.23 to $1.26 and our adjusted net income per diluted share to 1.16 to 1.19.

Excluding the impact of the accounting change for stock-based compensation, our outlook assumes an effective tax rate of approximately 38% in the back half of the year and we have slightly increased our full-year diluted share count estimate to 65 million.

With a $65 million prepayment of debt in the first quarter, our interest expense is now estimated to be in the range of $5 million to $5.5 million. Capital expenditures are still expected to be $18 million to $20 million.

Total depreciation and amortization expense including the component that runs through cost of goods sold is consistent with the last quarter projected at $12 million to $12.5 million for the year. As a reminder fiscal 2017 is a 53 week year, with the extra week occurring in late January.

We continue to estimate the extra week will add approximately $80 million to sales in less than half a penny to diluted earnings per share. With that said I would like to turn the call back over to the operator to start the Q&A session.

Operator?.

[Operator Instructions] Our first question comes from the line of Matthew Boss of JP Morgan. Your line is now open..

Congrats on a nice quarter guys. So on your top line trajectory, is it traffic or ticket that has exceeded your expectations in both the first and the second quarter so far.

And just as we look to the back half of the year, any notable changes in category mix or key opportunities with the army that you're excited about just as we think about opportunities year over year..

Matt, I'll take the part of the question and Mark will probably finish it. But with regards to the overall transactions and the average basket, as you know we don't actually count traffic in our stores, really the deal drives the overall traffic into our stores.

But I would tell you in the second quarter of this year, we definitely had a much higher transaction rate about 75% of our total comp increase was transaction driven and the 25% was really to the average basket size. So we saw a nice flow of traffic into the stores.

And over the past couple years, we've seen about a 50/50 split in the overall transactions and average basket that we've been able to come out with our model and I think that's a nice mix that we’d like to see on a go-forward basis..

Matt the deal flow I feel really, really good about where we're at. The pipeline is full, our guns are loaded. We're ready to rock and roll in the second half of the year. And we had some leaders as I pointed out in the call, toys was very strong for us. HBA continues to grow for us.

Flooring, bed bath, which would be domestic product, you know sheets, pillow cases that kind of thing and electronic accessories. So we continue to keep doing what we're doing. The phone keeps ringing, the opportunities are really, really strong and I just feel really, really good about where we're at..

And then just a follow up, within the gross margin, what exactly is driving the merchandise margin contraction.

And I guess as we look forward, I’m thinking we should assume continued contraction in 3Q, but then as we lap the four quarters should we assume stabilization in 4Q in the merchandise margin and beyond from that?.

Matt, with regards to the overall margin, we’ve kind of indicated starting last year that we expected to see a contraction in the merch margin with some increased sales and some consumable products and some lower margin brand names that we're selling.

So we have seen that compression in Q1, it got a lot better in Q2, we expect to see a modest contraction in Q3 and then I would say almost flat maybe slightly, slightly negative in Q4, but you’ll start to see it flatten out. And we still are holding to our 40.3% full-year gross margin as we indicated initially in Q1..

Thank you. Our next question comes from the line of Dan Binder of Jefferies. Your line is now open..

Thanks, it’s Dan Binder, congrats on a good quarter. I have a couple of questions for you. First on just new store productivity, really impressive, maybe you could speak a little bit about what you think its driving that.

And then on debt pay down, obviously generating good free cash flow, just kind of curious if you could speak to your plans going forward on that? And then lastly with regards to guidance, it looks like you've built in the pass-through to Q2 upside, not so much continuation of that trend in the back half, if you could just speak to what you're seeing in the business?.

Yeah. Thanks, Dan. This is Mark. I'll give you a little color on the new stores and I'll let John and Jay talk about some of the metrics, but I feel really good about our new stores. Certainly, we've had previous conversation about Florida and Florida is doing absolutely fine, but so is Rhode Island. All of our stores are operating at a very high level.

We're really executing well. So I feel really good about where we're going, we're now at 3.8 on the new store pro forma and all of our stores are pacing even above that. So we're thrilled. I think the consumer is responding.

I think we're getting the name brands, real brands at real bargain prices and then we're able to express that and promote that to the consumer and they are absolutely responding. So I feel really good about where we are in our new stores and our new store performance.

We've got a store opening up, a grand opening -- official grand opening tomorrow morning in Monroeville, Pennsylvania and that place is going to rock. So I'm feeling really good..

Dan, with regards to the overall comp sales for the full year versus where we’re landing for the first and second quarter we obviously had a pretty nice second quarter at a 4.5% comp. We did have some positive impact during the quarter related to the fidget spinners that we have in our stores.

So we’re not modeling out any increase in our comp store sales in Qs 3 and 4.

We’re pretty much holding about where we're at and I'll kind of reiterate where we say we expect to land for Q3 and Q4 and then on a full year basis once again, but the Q3, we would expect to be on the high end of 1% to 2%; Q4 would be expected in the low end of 1% to 2% and a full year of 2% to 2.5% comp.

So as you know, we’re pretty conservative in our modeling and how we go to market and we believe that’s a prudent way to do in the deal driven business that we operate in. Capital allocation policy, I’ll let Jay take that one as well..

Yeah. Dan, this is Jay and you'd asked about debt paydowns. I mean, right, we ended the quarter at 24.8 million of cash and basically, it's the same answer as we’ve talked about before. We're keeping our options open. We’re certainly discussing it with the Board and management.

I think we're going to get through the back half of the year, see what our cash position is at the end of the year and then we'll assess our options at that time. Right now, given the stock price certainly, debt pay down might be something we would do, but we're going to look at all the options..

Thank you. Our next question comes from the line of Brad Thomas of KeyBanc Capital Markets..

Let me add my congratulations as well on a strong quarter here. Mark, I wanted to follow up just about the comment that you made about having never seen a better environment before, it's a dynamic you've talked about for a number of quarters here now.

I was hoping you could talk about what's different now in terms of the environment and maybe just give us an update on the dialogue that you all have with some of these manufacturers and how you're continuing to build on a relationship with them and how much increased consistency you're able to get out of some of these manufacturers?.

Yeah.

Well, I think we have talked about it before, Brad and I think I firmly believe that ringing the bell and becoming a publicly traded company has helped us enormously because now when we have either a phone call with a manufacturer calling us or us attending one of the major trade shows and we go in and we’re a publicly traded company all of a sudden, it has a little bit more panache and people pay attention to us more.

We certainly have become a little bit more active in the consumables business. That's been part because we also have the size and scale to be more meaningful to some of these consumable companies.

As we've talked before, somebody is and I don't blame you for asking me who are these relationships with and my personality, I would never tell you, because that's, you'll see that in the store, but these are major name brands, many of them I can't advertise at all ever and these are relationships where we're able to take problems off of their hand, inventory reductions, overstocks, any reason that these guys might have an opportunity.

Anytime there's a disruption in the marketplace, I think we have the ability to be able to benefit from it, but the consumer has been responding and certainly that's allowed us to be more bullish on the procurement side. But it's just the phone and the deals.

It's just -- I've not ever seen it so vibrant, but we are locked and loaded to be able to handle these deals, which is a tremendous position for us to be in and we're continuing to open up the stores and that allows us to continue to buy more and more and bigger and better deals..

That's great. And then I was hoping you could just talk about maybe the visibility that you think you have over the next couple of quarters, particularly the holiday quarter. That's one where brick and mortar retailers have struggled in recent years, as more shoppers are going online and you all have really bucked that trend.

Mark, how much visibility do you feel like you have into this fourth quarter and how confident do you feel in the merchandise you’re going to have and what new marketing might we see from this year?.

Well, we've never been that type of a company that has the ability to predict the go forward quarters. I will tell you that certainly we've had some pretty good fortune over and we're up against real numbers and we're conservative by nature and we're, Q3 and Q4 are for real. We're up against our own good numbers.

We've had some pretty good fortune with some great weather, where our stores are geographically located over the years, but I do feel and probably the thing you really want to hear is, I do feel really good about our potential inventory situation in the brands and the bargains that we're going to be offering the customer in Q3 and Q4, but as far as like real visibility, I know we get asked that all the time, we're just not that type of a company..

Thank you. [Operator Instructions] Our next question comes from the line of Peter Keith of Piper Jaffray..

I wanted to just dig into Ollie's Army a little bit. If you could give us the updated metrics of where you stand through Q2 and then have you seen the Army numbers represent a greater percentage of sales as that base continues to grow..

Yeah. Peter, this is Jay. And right now at the end of the quarter, we ended with 8.4 million Ollie’s Army members versus 6.7 million a year ago, which is a growth of about 27%. So it's continuing to outpace sales and the other metrics are very consistent.

They continue to spend, more approximately 40% more per visit than the non-Ollie’s Army member and they account for over 65% of our sales, which is -- those are strong numbers and they've been pretty consistent for several quarters..

And then Mark, just to follow up on some of your comments regarding consumables, is that a dynamic that you expect will continue with sort of, we'll call it, improved consumables, close out availability and then do you think that's having any beneficial impact to general traffic trends, maybe driving a bit more repeat traffic from the consumables nature of the product..

Yeah. Look, I think that's true. I think Peter, certainly years ago and now we don't even talk about coffee anymore, because it's a staple, but I think coffee helped us with that years ago and I believe the consumable and with the HBA and the houseware product, that's something that the people need all the time every day.

So I do think that that's helping with our traffic. So I think, years ago, you said, what’s after coffee. What I got to do is I got to figure out what's after the consumables and we're working on it.

We got things, a lot of offers coming through with manufacturers that we never even knew existed or some that wouldn’t even give us the time of day, but I do think that it's quite astute that we absolutely, I think, are seeing additional traffic in that respect..

Thank you. Our next question comes from Scot Ciccarelli of RBC Capital Markets..

When you look at major product categories, obviously you’ve talked quite a bit, Mark, about the expansion you've had in the consumer space –.

Operator, I think we lost Scott.

Are you still there?.

Yes. Scott did disconnect..

Okay. So we’re giving a moment for him to maybe re-queue up..

Yes, sir. Scott, your line is now open..

Hello..

Scott Ciccarelli, you may begin with your question..

My apologies. I’m sorry. I was disconnected guys. Sorry about that.

So my question was regarding, you guys have expanded into major product categories like the consumable, you talked about that a lot earlier Mark, one area you haven’t historically focused is the apparel segment, just given all the challenges facing retailers in the apparel space, is that an area you guys would potentially look at expanding or is that just too different of a customer shopping experience..

Yeah. We’re not fashion oriented guys in that respect. I don’t think I’d be a [indiscernible] I don’t think we’re set up for that. We don’t have the dressing rooms, the racks, the thing. That being said, Scott, as you know, we, for our customers, the camouflage wear is very, very important.

The work wear is very, very important and we sell plenty of that and tube socks and sweat shirts and t-shirts, but fashion oriented I think would come at extreme risk and I don’t think we’re set up and there is absolutely no thought process on that, on us entering that realm, Scott..

Got it. Thank you. And then second question was just regarding, and you guys talked about trying to do more data collection from Ollie’s Army, can you provide us an update with kind of where you are in that process..

Sure, Scott. This is John.

With regards to our Ollie’s Army initiatives with our BI tool and obviously the concept of starting to do some more data mining with our customer database that we have, we are still working on and we are up and running, we’re learning as we continue to garner through the data, we’re learning how to run the piece of equipment, the software to gather the data, but it’s something that’s going to take us a little bit of time and we will continue to work through it and we’ll let you know as we progress and see more things come out of it..

Thank you. [Operator Instructions] And I'm showing no further questions. Thank you. At this time, I would like to turn the conference back over to Mr. Butler for closing remarks..

Thank you, operator and thank you everyone for listening to our second quarter earnings call. We continue to see strong performance in the business and we look forward to updating you again in early December when we report our third quarter results. Thank you and have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day..