Good afternoon and welcome to Ollie’s Bargain Outlet Conference Call to discuss financial results for the First Quarter of Fiscal 2019. 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.

As a remainder, 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 Operating Officer; and Jay Stasz, Senior Vice President and Chief Financial Officer.I will turn the call over to Jean Fontana, Investor Relations, to get started.

Please go ahead, ma'am..

Thank you,.

Good afternoon, everyone.A press release covering the Company's first quarter 2019 financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section of the Company's website.I want to remind everyone that management’s remarks on this call may contain forward-looking statements, including but not limited to 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 2019 and 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 our annual report on Form 10-K and quarterly reports on Form 10-Q, as well as our earnings release issued earlier today for a more detailed description of these factors.We will be referring to certain non-GAAP financial measures on today's call such as 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 the most closely comparable GAAP financial measures to these non-GAAP financial measures are included in our earnings release.With that said, I will turn the call over to Mark..

Thanks, Jean, and hello, everyone. Thanks for joining our call today. We're off to another strong start this year with first quarter results exceeding our top and bottom line expectations. Strong deal flow outstanding new performance and comparable store sales growth drove an 18% increase in our top line.

This was our 20th consecutive quarter of positive comps with a 0.8% comp store sales increase on top of a two-year stack increase of 3.6%.We saw broad based strength across our merchandise categories with over half of our departments comping positive.

Our best performing categories included floor coverings, health and beauty aids, electronics and toys. Tough weather in many of our markets impacted our seasonal business, but we were able to deliver better than top line sales as our new stores crushed it.

As always we successfully controlled our business and delivered strong results and another earnings beat.As we look to the balance of 2019 we remain focused on the execution of our key strategies, offering amazing deals, growing our store base, and leveraging and expanding Ollie's army.

Our proven track record of offering good stuff cheap has driven our success for now almost 37 years. Our amazing deals clearly resonate with our bargain seeking customers. And I'll tell you we continue to get incredible deals from new and existing vendors.

Our ability to capitalize on the disruption in the retail landscape has never been better, as we continue to leverage our growing scale and key vendor relationships.The bigger we get, the greater the opportunities for us to land even more great deals to support even more stores. This will absolutely be the fuel for our continued growth.

New stores once again performed above our expectations in the quarter, further demonstrating the strength of our model. We've been busy. So far this year we've opened 24 stores including 12 former Toys "R" Us locations.

We expect the new stores to continue to be a significant driver of our growth as we see great opportunities to expand the Ollie's footprint with successful new stores in existing and new markets.

We're on target to open 42 to 44 stores in 2019 in line with our long-term growth algorithm.We're planning to enter two new states; Oklahoma and Massachusetts and with these additions we will have reached the halfway mark to 50 states.

As we move toward our goal of tripling our store base to more than 950 stores nationwide, we're investing in our infrastructure. We've made significant investments in our distribution network including the construction of our third DC. We are on budget. We are on schedule and expect to be operational during the first quarter of 2020.

With the new DC we will have three distribution centers with total capacity to serve over 500 stores.We are continuing to grow our loyal base of Ollie's Army members as we expand our retail presence. The Bargain Battalion is now over 9.4 million active members, nearly 11% increase year-over-year.

Our 2018 program enhancements, the Ollie's army ranks and the mobile app were designed to both attract new Army members and to keep us top of mind with current members.

Our goal remains straightforward with every initiative, reward the tremendous loyalty of the Army and keep them coming back.Our philosophy of buying cheap and selling cheap coupled with tight expense control and profitable new store openings has driven our business for almost 37 years and will continue to do so.

This is the model that got us here and we're sticking with it. We've grown our organization over 8000 team members who are working harder than ever.

It's their combined experience and commitment that makes Ollie's successful and I'd like to thank everyone in the stores, the distribution centers, and the store support center for their hard work and their dedication.So to wrap it up, we are very pleased with our strong start to 2019 and I feel good about the business.

Our long-term algorithm, including our 1% to 2% annual comp guidance has not changed. Stick with me. Our new stores are stronger than ever and we're very pleased with the overall trends and the opportunities in the business. We're confident in our ability to continue driving sales and profitable growth this year and into the future.

I'd like to thank you for your support of Ollie's.I'll now turn the call over to Jay to take you through our financial results and the 2019 outlook in more detail..

Thanks Mark and good afternoon everyone. We're very pleased to have delivered another great quarter with strong topline growth, effective management of gross margin, and tightly controlled expenses resulting in adjusted EPS of $0.46 per diluted share, $0.02 ahead of the consensus estimates.Net sales increased 17.8% to $324.9 million.

Comparable store sales increased 0.8% resulting in our 20th consecutive quarter of positive comps.

The increase in comp store sales was driven by an increase in average basket partially offset by a decrease in transactions.As Mark mentioned, we did see some weather related headwinds throughout the quarter, but by managing elements within our control we delivered strong results.

During the quarter we opened 21 new stores ending with 324 stores in 23 states, an increase in store count of 17.4% year-over-year.

Our new stores continue to perform above our expectations across both new and existing markets and we are very pleased with the productivity of our entire store base.Gross profit for the quarter increased 17.6% to $132.7 million and gross margin was consistent with the prior year at 40.9% as both merchandise margin and supply chain costs as a percentage of net sales were flat to last year.

SG&A expenses increased 15.2% to $83.3 million primarily the result of additional selling expenses from our new stores and the increased sales volume in our existing store base. SG&A as reported included a gain of $565,000 from an insurance settlement.

Excluding this gain we leveraged SG&A expenses by 40 basis points to 25.8% of net sales.Preopening expenses increased to $5.2 million and deleveraged 100 basis points due to the number and timing of new store openings year-over-year. We opened 21 stores in the first quarter this year compared to eight stores last year.

Operating income increased 13.3% to $40.8 million.

Excluding the gain from the insurance settlement, adjusted operating income increased 11.8% to $40.2 million and adjusted operating margin decreased 70 basis points to 12.4% as a result of the deleveraging of preopening expenses.Net income increased 27.1% to $38.7 million and net income per diluted share increased 28.3% to $0.59.

Included in the $0.59 is the benefit of $0.12 from tax benefits related to stock-based compensation.

Adjusted net income which excludes these benefits and the after-tax gain from the insurance settlement in the first quarter this year and the loss on extinguishment of debt in the first quarter last year increased 13.5% to $30.2 million and adjusted net income per diluted share increased 12.2% to $0.46.

Adjusted EBITDA increased 13.7% to $46.6 million.

At the end of the quarter we had $58.5 million in cash and no outstanding borrowings under our revolving credit facility.As previously announced, we recently amended our credit agreement providing for our five-year $100 million revolving credit facility and subject to certain conditions an additional $150 million of incremental term loan or revolver commitments for a total borrowing capacity of $250 million.

We also recently completed the sale-leaseback transaction pursuant to which the 12 former Toys “R” Us store locations that we acquired last year were sold for approximately $42 million.Inventory at the end of the quarter increased 19.2% over the prior year primarily due to new store growth and the timing of deal flow.

Capital expenditures increased to $20.1 million in the quarter compared to $4.7 million in the prior year period due to investments in our third distribution center, new stores and maintenance capital.Turning to our outlook we are raising our full year guidance to reflect first quarter results.

While we believe the first quarter was strong, we remain prudent in how we plan the business given that we operate in a deal driven environment and we are lapping a very strong year.

As we said last quarter, our plans are in line with our long-term annual target to maintain unit growth and 1% to 2% comp store sales increase which drives adjusted net income growth of approximately 20%.We now expect total net sales of $1.440 billion to $1.453 billion, an increase of 16.5% at the midpoint of the range, comparable store sales growth of 1% to 2%, the opening of 42 to 44 new stores with no planned relocations or closures, adjusted operating income of $190 million to $194 million, adjusted net income of $142 million to $145 million and adjusted net income per diluted share of $2.13 to $2.17, both of which exclude the tax benefits related to stock-based compensation and the after-tax gain from the insurance settlement.A couple of additional points to help you in your modeling.

While there is no change to our full year gross margin forecast of 40.1%, we want to clarify our quarterly guidance. We anticipate an approximate 20 to 30 basis point decrease in 2Q compared to the prior year which we will pick up in the back half of the year.

The cadence of our new store openings remains approximately 60% in the front half and 40% in the back half.$5.2 million of our expected $11 million in preopening expenses were incurred in Q1 resulting in approximately $5.8 million to be spent during the remainder of the year.

We expect to incur approximately 35% of the remaining preopening expenses in Q2, 45% in Q3 and 20% in Q4.

Our CapEx outlook remains the same at $75 million to $80 million driven by the construction and build out of our new distribution center in Texas and investments in new and existing stores.I'll now turn the call back over to the operator to start the Q&A session.

Operator?.

Certainly. [Operator Instructions] Our first question comes from the line of Matthew Boss from JP Morgan.

Your question please?.

Mark, maybe by category, what exceeded versus missed your internal plan in the first quarter, any comments on May and just your confidence in comping the tougher comparisons on [tap] [ph] for the remainder of the year?.

Yes, well Matt, the top three departments performers were floor covering, HBA, electronics and toys, and toys so that everybody doesn't get wound up, toys, this isn’t a very, very big mover for us in the quarter, but we did very well compared to last year. So we really have been doing very well in floor covering.

We've got a lot of great deals and a lot of great product. So I would say that is the most exciting thing that we have going on right now.As far as May, obviously we all know we can't speak to -- I feel good about where we are. The weather has not been favorable.

We're not the only retailer in America that is saying that, but anything that we feel is going to be corrected with a little bit of warm weather and we're locked and we're loaded in warm weather and seasonal products which are performing well.Air conditioners with a warm night are really going to kick in. We've got plenty of them.

We've got great buys. We've been buying them all year long, so I'm excited about that. And our lawn and garden and our patio were locked and loaded. And any kind of real pop that we were expecting in Q1 we're expecting to come in Q2 much like we discussed putting Q1 and Q2 together when we were at your retail roundup..

Perfect. And then just a followup on the stores, so new store productivity of almost 100% remains pretty far above your target model.

I guess what are you seeing in your most recent openings? And can you just talk to the interplay between new stores and same-store sales given you are raising revenues today despite comps the at the low-end for the quarter?.

Sure Matt, this is Jay and I can talk to the new store productivity and you are right, I mean the stores are performing extremely well, extremely strong, this class as well as the prior classes.

So we are seeing and we're planned right now on an annual basis above the 100% and part of that has to do with the cadence of our stores being frontloaded this year versus last year.

But like we've talked about, those new stores and several classes have been very strong and I think from a comp standpoint, we are seeing some headwinds as those stores enter the comp base. It's something that we've mentioned a little bit. We're seeing it from our reverse waterfall standpoint as well as a cannibalization standpoint..

You know, I think Matt from our perspective as well, obviously the new stores are performing very strong as Jay said, but the reverse waterfall impact and we're still able to deliver the positive comps in 20 quarters a row. So we're very excited about being able to grow as rapidly as we're growing and continuing to deliver these comp store sales..

That's great, best of luck guys..

Thanks Matt..

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

Your question please?.

Hey, good afternoon, guys..

Hey Brad..

First question just around tariffs and if you could give us your latest thinking on for one, the financial impact of the 25% with three tariffs on your current guidance? And then more broadly, how you see the tariffs and change in the retail industry and how you all react to that more broadly would be great?.

Sure Brad, this is Jay and I'll start with that. As far as our guidance, right our tariffs are embedded in the margin, they are actually part of our supply chain costs, but we are sticking to the 40.1% gross margin on an annual basis. And for us, what we have baked into the model is really the 10% tariffs on the third list, list 3.

If that moves up from 10 to 25 what we're thinking is that we wouldn’t have a major impact on margin, one, just because the level of imports we do and then the imports that are actually impacted by tariffs is not very material.

And maybe more importantly is that like Mark talks about, we are a price follower, so we think that if the tariffs move from 10% to 25% the market will react which will drive retail prices up and we'll follow along with that which will keep our margin intact..

Got you.

And then Jay, I think you talked about gross margin being down in 2Q, you picking it up in the back half of the year, what's driving that pressure in 2Q and what's changed versus the way you had forecast the quarters originally?.

Yes Brad, good question. Nothing has really changed. This is kind of actualizing Q1 and our model with our actual product mix and our actual costs on supply chain. It's just kind of refining that and cleaning it up, actualizing it and just there is a little bit of shift in cadence, but no major call outs to it..

Got you, thank you very much..

Thanks Brad..

Thank you. Our next question comes from the line of Elizabeth Suzuki from Bank of America.

Your question please?.

Great, thanks guys.

Just sort of following up on the tariff question, have you seen any opportunities for interesting deals in the fallout of the tariff environment for other retailers that are maybe more impacted than you are?.

Yes, that's a great question and while we are ready, willing and able to take advantage of any disruption, we haven’t seen a lot come through with that because I believe there is a possibility that if and when the additional 15% goes through, that might become a little bit more accentuated and there might be some more canceled orders.

But at the 10% it appears that most people have been able to mitigate or be able to navigate the waters with the 10%, but we have not seen major deal flow in relation and because of that Liz..

Okay, great.

And just in general, have any recent retail store closures been helping to drive the strong close out environment and any noteworthy opportunities that you would want to call out?.

Not on the liquidation side because by and large most of them have been smaller and apparel based or footwear based.

Obviously we've been able to benefit most recently in this year with the opening of some of the Toys "R" Us sites that we were able to procure and buy and/or take over the leases from last year, but not on the retail merchandise side, no..

Okay, great, thank you..

Thank you..

Thank you. Our next question comes from the line of Randy Konik from Jefferies.

Your question please?.

Hey, thanks a lot. Mark, I just wanted to ask you, if you think about the long term, and you think about the ability as you're getting bigger, you are scaling more, you are going more vendor direct.

Give us some perspective of more of how, where you were in vendor direct in the past, where you are today, where do you think maybe things can go? Just trying to -- or if you see, if you're looking at the chessboard you see the pieces unfolding over the next five years, where do you kind of think about the biggest areas of opportunity in the business potentially to occur over the long term?.

Yes, I think that, and Jay has got the exact - the approximately percentage of our direct, but when we started the march on this public company venture we still had a great deal of our product that we're getting through close out distributors, and middle men and brokers and we're seeing our relationships increase with these manufacturers, I think that what I had said in the past and even at most recently at ICR, I think that we are certainly positioned well and innovation breeds obsolescence.So we love it when a manufacturer comes out with a new product, because the only other thing that's going to happen besides the new product is that going to have old product, and we are able to be able to take advantage of that.

Certainly over the last few years in particular Randy, we've made great strides in CPG and the consumables within our organization and we're careful not to let that upset our cake mix because the consumables we certainly operate on lower gross margin than we do on hard goods closeouts. But we don't see any slowdown.Our phone keeps ringing.

The deals have been very, very plentiful, and we are, as I've said the last call on previous we're appropriately overbought. I love it.

And we're anxiously looking forward to and buying each and every day in particular, a category that I can speak of is toys where we're buying to not only meet, but certainly to beat our incredible results that we had on the toys and the toy business last year. So I think that's - we will expect that to be an area of growth this year..

Got it.

And when you think about new stores in new markets, let's say, in 2018 versus years past, you're now going to be up to almost half the states, I guess, at the end of next year or this year, what's changed in terms of pace of awareness levels? It seems as if something has improved from awareness of the brand or the concept has gotten quicker than in the past in more recent past.

Just give us some perspective of what you think is different there? What you think - because in the news report said it’s amazing, so, I’m just curious on different strategies and different uptick you’re seeing with the awareness levels of the concept?.

Yes, Randy this is John. With regards to the new stores, what we’ve seen is obviously with our scale and [indiscernible] being public I just think there's more awareness of the brand.

We have opened up in what we believe was going to be a hot market when we entered Florida and that’s planned to be – that's come up to be the truth for us and we've seen some great results there. But we continue to open up stores in every market we've been, in the new markets it’s just been well-received.

I think what it says to us is America wants a bargain and we continue to give them what they want..

Yes, I think Randy, what - another thing that we see and we're excited, John just pointed out Florida. Although I don't have the intimate knowledge of Texas that I did with Florida and that might be related only to vacation time.

I think Texas is going to be - we're told it's going to be pretty good and we're very, very excited and Texas is a big state. And we have four stores open there right now. We're going to open up one or two more this year in Texas. And then in the next year that's going to be a major growing area for us.

We're going to open up a bunch of stores in Texas.So, I think we're going to see similar results when we really open up and start really pressing Texas. And of course Texas, we have to get the DC open Randy. That’s the main thing. That's - one could say why aren’t you doing it now, but we've got to get to the DC so we can get our goods to the stores..

Perfect. Thanks, guys very helpful..

Thanks, Randy..

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

Your question please?.

Hi, guys. Two questions.

The first is with about 60% of your store openings in 1Q coming from the former Toys "R" Us locations, is the size of those stores much different than your typical prototype? I guess I'm wondering if we are to look at your NSP like on a square foot basis, for instance, what would that look like relative to the way we would calculate it?.

Scot, this is John. With regards to the TRU sites on average, they were and are larger than our historical sites. They're probably 20% bigger in total square footage than we would normally open. In terms of sales per square foot, probably too early for us to comment on that. Let us get a little more time under our belt to see how these guys come out.

They come out of the gates very strong and we're very pleased with the results thus far, but we don’t have enough information yet to really tell you the sales per square foot compared to our overall mature chain.

But I think it's going to be - it should be pretty comparable, maybe a little bit lighter when we see in the overall boxes that we have today..

Got it. I guess I'm just trying to figure out Jay's comment that you are planning for NSP to be north of 100. Is that a function of the Toys "R" Us because the stores are bigger or is it more because of the frontend loading? Just trying to size those deltas..

Scot, yes, it's really driven by the frontend loading and the cadence more than anything..

Got it. Okay. And then secondly, can you help quantify the impact of the reverse waterfall and higher level of cannibalization that you cited before? I know you guys have talked about that reverse waterfall impact.

I don't think I've heard a whole lot about cannibalization in a while, so just wondering if you could kind of help us provide a little color on that? Thanks..

Yes, Scot. That's one of those things where we're opening these stores very strongly, which is great, but we are seeing those headwinds. But at this point, we're not ready to give specific quantification of that. We're kind of still peeling the onion on it. In general, it's something that we can see out there, we can see the impact.

But generally, it's just hard to calculate the - and isolate that impact specifically, so we’re not ready to quantify it..

So the idea of citing it as some kind of like a bigger call out just because of the faster number of stores then Jay, store opening?.

Yes. It's - as it compounds with these strong classes in 2017 and 2016 and 2018 is just something that we've discussed before generally and we talk about it internally, but it's part of the cake mix..

Yes and Scot, we just - we want to bring it up because we're seeing it and we thought it was prudent for us to tell you guys about it..

Got it. Okay. Thanks a lot, guys..

Thank you..

Thank you. Our next question comes from the line of Judah Frommer from Credit Suisse.

Your question please?.

Hi. Thanks for taking my questions.

Maybe first just getting back to tariffs for a second, some of the questions we get are, are tariffs kind of the impact limited to private label within your business? Do you see impact in the 70-ish percent of product that is sourced on close out? Can you help us just kind of with the different drivers and different areas of the business?.

Yes. No, the bulk of that close out product is all sourced domestically. So there's no impact from that. Really, right, on the private label you said and we do have some direct factory deals that are impacted.

That might be about 20% of our purchases come from overseas, but then of that there's only a portion that are impacted by tariffs, call it 15% to 20% is what we've seen historically.

So at the end of the day the amount of purchases impacted by tariffs is about 3% to 5%.And again, if the retail market moves we’re price followers not price setters so we would look - one, we would look to change retail if the big box stores change in retails and are always on the lookout.

Mark is always pushing his buyers if there's a tariff impact to try to get a better buy with our suppliers..

Okay. Perfect.

And then maybe, Mark, can you help us historically when you have kind of some late spring rainy weather what have you seen in terms of kind of that pop that you’re talking about in Q2 for seasonal merchandise maybe specifically lawn and garden hot weather?.

Yes, I think we look at it a couple of things. For us it is more lawn and garden, patio furniture and air conditioners and pool chemicals. So when you have a less than favorable weather pattern, there's not too many people that were opening up their pools. We fully expect them to open their pools. We fully expect to be able to sell shock and chlorine.

We the lawn furniture just hasn't been nice. We have plenty of lawn furniture.We're ready. We're locked. We're loaded and we just need a little bit of good weather and then if we have a couple of nights that it's really, really tough to sleep that's when the air conditioners really take off and we're fully expecting that the heat is going to come.

They've been performing just fine down south, but air conditioners sell better up north because of central air systems.But we think, and we really do look and we've been on, I don't know four or five calls like this before where we look at Q1 and Q2 as merchants together as the selling season we take it right through July and August..

Great. Thanks a lot..

Thank you..

Thank you. Our next question comes from the line of Rick Nelson from Stephens.

Your question please?.

Thank you.

Can you just provide an update on some of the newer categories like apparel and pets some, are you adding any new buyers to the company to pursue other merchandise categories?.

Yes. There's no other categories that we're going after and apparel was one of the positive comping departments in Q1 and we see a nice trend in Q2. We don’t have any other or any new buyers coming onboard that we would announce. As far as additional categories, other than the 21 that we have, we don't see any other additions, Rick..

Okay. Got you. And….

And by the way, pet - in Pets, we've been doing and focusing on, it's just been performing very, very well and continues to do well..

Great. Good to hear. You’re sitting around a big pile of cash, $58 million. You've got another $42 million that came from the sale leaseback.

If you could speak to if that should continue to grow, I’d say, where do you see the cash position absent buybacks and what sort of level of cash do you think you need to run the business?.

Sure. Rick, this is Jay. And I mean, generally speaking, right, we think having $100 million to $150 million of cash on our balance sheet is fine and there's a lot of companies that have even more than that. To your point, right, we're going to have incremental $42 million coming in to the coffers from the sale leaseback.

But we're also this year spending $75 million, $80 million of capital related overall and we're going to finance - we're going to pay for the building out of our third DC in Texas, so that's going to take a chunk of capital and a chunk of cash off our books.So we're comfortable, again, right, where we're at.

We announced the stock buyback last quarter. But again, we'll have maybe $100 million, $150 million of cash on our books. So we're not - we think that's the right level to have from an operating standpoint. We're not rushing just to get that cash off our balance sheet..

Okay. all right I undThat’s correct. Right. Thanks and good luck..

Thank you, Rick..

Thank you. Our next question comes from the line of Edward Kelly from Wells Fargo.

Your question, please?.

Hi, guys. Good afternoon. So, Mark, I just wanted to - I wanted to ask a follow-up on toys. You mentioned on toys that you were buying to beat.

Can you just provide a bit more color on what the market looks like, particularly as the industry cycles out of this disruption we saw last year? And then I guess, as part of this, how much toy inventory are you sort of packing away and is this part of what where your comp - where you get your confident tone sounds around toys this year?.

Yes. We've been after the toys. We went hard obviously even before Christmas of last year in anticipation of this year and I feel good about our purchase.

Obviously we won’t give you the number, but I feel good about where we're at.I will tell you that our philosophy is to try to widen our breadth, widen our assortment of close outs and perhaps maybe don't be quite as deep.

Our philosophy is to focus a little bit more on preschool toys and I think you're going to see a lot of preschool toys in our stores this year. I think our merchant, Scott, has done a phenomenal job and there's plenty of toys that have arrived and will continue to arrive.

But once again, the confidence is that not only are we going to meet the sensational results we had last year, we have every intention of beating that..

Okay. And then I wanted to ask you about SG&A and I was hoping that you could talk about costs and what is a continuation of just robust expense leverage? I mean, you leveraged SG&A on a less than a 1% comp and you leveraged by 40 basis points. It's better than, than sort of how you were thinking about full-year guidance.

I was hoping just to start maybe you could talk about how things played out relative to expectation.

And then beyond that, just bigger picture, what is it about the model that's allowing you to drive such unique leverage despite the strong store growth?.

Sure. And this is Jay, and I'll start and you have a lot of questions back in there, but I'll address what I can and we'll go from there. But you had the leverage. It was good in the quarter. It was 40 basis points. And like you said, we didn't really have it on the comp side but the new stores perform. So the total sales beat our expectations.

So we saw a lot of leverage on the G&A side versus maybe the selling side. We levered our G&A labor.

We had some insurance costs which we were able to lever in the quarter as well as we did get some benefit just overall on utilities driven by rate in the quarter so that's where we got the SG&A leverage in the quarter which is great news.And also just from a culture standpoint, we constantly focus on our expenses and if we don't have to spend the money, we don't spend it and that doesn't change.

That comes from the top with Mark and John and so that will never change.

On an annual basis, we had probably planned all about 10 basis points of leverage on the last call and now with the goodness in Q1, maybe we're closer to 15 or 20 basis points of leverage on SG%A.And then that's just I think as far as our ability to grow stores and continue to lever again it just gets back. That's our culture.

That's the way we go-to-market. We don't have a high-touch environment and if we don't have to spend the expense we don't do it..

Just the way to think about the leverage point on comp over a multiyear basis?.

Yes. I think it stays at that 1 to 1.5. And again, I think if people want to try to take it up as we grow which I understand that, but we run lean and when we run tight, so there are going to be times when we're going to invest in management or other things as we look out over two, three, four years.

So, I wouldn't model anything more than 10 basis points, 15 basis points, 20 basis points of leverage each year..

Okay. Thank you..

Sure. Thank you..

Thank you. Our next question comes from the mind of Paul Lejuez from Citigroup.

Your question please?.

Hey, thanks, guys. Mark, second quarter, now you use the term appropriately overbought and I'm just curious if you feel that there are - if there are any categories that you're a little bit heavier than you'd like to be coming out of 1Q.

I'm also curious if there are any that you felt light end during the first quarter or maybe missed some sales opportunity? And if so, what was the cause of that? And I’ll have a follow-up. Thanks..

Yes, I don't think that I worry at all about any of the inventory levels. I think that I get excited about the inventory levels. I think that I'm excited about where we are in the toys, vis-à-vis where we were last year at this time because we have a lot more knowledge.

We also have a lot more customers that came to know us for toys, so I'm excited about that.

With that being a deal-related or driven business, theirs is the ebb and the flow of a deal that we had a big coffee deal last year that we didn't have this year I'm not talking about the major coffee, I'm talking about a specific coffee deal, we didn't have it this year.So, the ebbs and flows of the close up business, they happen each and every day.

I think that the seasonal business performed just fine in Q1. We would have expected it to be better if we would have had better weather. There was a lot of noise in Q1 that we couldn't - we weren't involved in that was the weather, it was a late Easter. There's all the noise about the tax refunds and everything.

So, I was just thrilled with our performance and we're locked and loaded and just needs some sunshine, some hot weather and I feel good about where we're at..

Got you. And then on the new stores, can you distinguish between the performance of the rest locations versus the non-toys locations? I’m curious if you’re seeing equally strong performance at both or if it's the toys boxes. It's really the driver of the better than expected results..

Yes, this is Jay. And we're seeing good performance across both. We're not going to get into splitting those out but both are performing very well..

And you did mention cannibalization, first time that we can remember.

Was that more related to the toys locations or just something you are seeing across the board?.

Paul, this is John. This is really related to across the entire board. We've talked about it previously.

We have not talked about it a ton because we don't necessarily think it's proper to quantify it but it's something that's out there and as we continue to grow the chain and continue to have what we call backfilling in existing markets in strong grand openings and reverse waterfall impacts, there's definitely a drag on the comps. We've had it forever.

We continue to feel it but we just felt it was appropriate to call it out to remind everyone because we don't talk about it a time.

Got you. Thank you. Good luck..

Thank you..

Thank you. Our next question comes from the line of Jeremy Hamblin from Dougherty & Company.

Your question please?.

Congrats on the strong results. Thanks for taking the questions. I wanted to come back to the new unit productivity.

And in thinking about future locations, given the strong performance of the TRU locations, do you think about potentially going a little bit larger in terms of your target model going forward maybe to that 35,000 or 40,000 square foot kind of as your new type of site location?.

Well, I think that the Toys "R" Us sites in particular provided a very, very unique opportunity for us where we could go to bankruptcy court and raise our hand to whether or not we wanted to participate to buy the property and/or buy the lease.

Some of those stores, most of the stores were larger than the average what we have been opening up over the last several to many years.That being said, the non-Toys "R" Us sites are doing phenomenal. They’re hurt - we’re crushing it in all of the stores. So, it's not totally related to just TRU sites.

The TRU sites as a whole were probably more opportunistic for us to get more main and main opportunities at a value price on the rental and or on the ownership which we subsequently have the sale leaseback.

And that could be, that could be - it's way too early for us to know, but we're certainly hoping that those average unit volume per unit are going to do more in a 42,000 square foot store than what we would in a 33,000 square foot store.We're excited. We're excited about the non-TRUs and we're excited about the TRUs.

It's just way, way too early to really quantify the TRU site productivity and keeping in mind that it's 12 of the 42 that we're opening this year and I think we're going to open up a couple of more TRUs this year..

Yes..

Yes, and Jeremy I think we definitely - we've definitely not been seeing anything that makes us feel we need to change our overall new store models, the 30,000 to 33,000 square foot store is where we believe is our sweet spot. And we obviously move off of that number depending on the opportunistic, opportunities we have in the marketplace.

So that's just how we work and we try to average into the 32,000 square foot store..

Okay, great. And then, a followup question on the toy category performance.

And as you look back in history where we've had really strong let's say licensing movies and we've got a slate of them this year that clearly probably presents opportunities for you, how has that excluding kind of the vacuum left by the TRU opportunity, how has it - has the category performed in years in which there's these really big licensing deals that are out there whether it's kind of a Star Wars year or Frozen, and this year we've got a whole slate of them..

Yes. And look, we're able to benefit from it, Jeremy, but I got to tell you, I'm not going to have Toy Story 4. I'm going to have Toy Story probably 2 and 3 product..

Right..

And that's just the nature of the closeout industry. So next year, - in all likelihood next year, I'm going to have Toy Story 4 product. And we certainly, the Olaf Ball is going to sell again once Frozen comes out in the fall.

All of the Toy Story stuff that we have and have bought this year, I think it's going to be released tomorrow and we're going to be bringing Toy Story product into the store in the next week or two. So, it's not anything that we would deem to be a driver specifically. However, we do pay attention to it.

We wish we could get the current, the hottest, the latest, the greatest at close out prices but we usually have to wait a year..

Right. Now, understood, okay. Thanks for taking the questions, guys. Good luck..

Great. Thank you..

Thank you. Our next question comes from the line of Anthony Chukumba from Loop Capital Markets.

Your question, please?.

Thank you for taking my question. I just want to focus very quickly on Ollie’s Army. You mentioned that you have over 9.4 million active members and that was up 11% year-over-year.

Can you provide any color just in terms of what percentage of their sales - what percentage of your sales of Ollie’s Army members account for?And then the only other question I had was, I just want to see if you will provide any commentary just in terms of the member ranks and I mean, if you’re not going to give us numbers, I’d appreciate that, but just any color just in terms of how the member ranks are sort of building out relative to your expectations? Thanks..

Sure, Anthony. This is John. With regards to the overall Army, that makes up just north of 70% of our total sales now which we’re very, very pleased with. They are the most responsive members we have.

They spend about 40% more than non-Ollie’s Army members and obviously frequently visit our store more than our non-members as well.So the Army is stronger than it’s ever been and keeps getting stronger.

We have been making enhancements into the programs that we have to try to make it easier for folks to onboard and give us better opportunity to track them and speak to them and I think we're on the right path of doing that.

The growth is stronger than we’d expected in the quarter, so we're very pleased with that as well.With regards to the ranks, the ranks are very early. Obviously we reset the rank balances at the beginning of the year and we are the two and three stars, we don't want to talk about them.

I would tell you we're very happy with the performance that we've seen, thus far, within our overall changes in the program and we'll report more as we go, even I won't necessary call out the percentage of the ranks, but we are pleased with what we're seeing so far..

Got it. That's very helpful. Thank you..

Thank you..

Thank you. Our next question comes from the line of Chris Prykull from Goldman Sachs.

Your question, please?.

Good evening, guys. Thanks for taking my questions. I just had a quick followup on gross margin. I think you guided 2Q down about 20 basis points to 30 basis points if I heard you correctly.

I guess what was that related to and then was there any markdown risk that you see in 2Q from excess seasonal product?.

Yes, Chris this is Jay. And we do - we just to clarify the cadence we saw in the models that there were some disconnects. So, right we just wanted to clarify that and say 20 basis points to 30 basis point decrease year-over-year in Q2 and then we get that back in the back half of the year. So, on a full year basis we're right at the 40.1%.

So, there's really no fundamental changes in the business or the model just kind of clarifying and doing some housekeeping there..

Got it.

And then expectations for freight and distribution costs throughout the rest of the year?.

Yes well we're - on an annual basis we had planned the 40.1% which was kind of comprised of an increase in merchandise margin of about 20 basis points to 30 basis points and that would be offset by increased costs on supply chain of about 20 basis points to 30 basis points.

We are seeing increased costs in our supply chain primarily related to investments in wages and labor at the DCs as well as on the trucking front, we are seeing increased costs both on inbound and outbound, primarily just due to longer hauls, not so much because of the spot rates or the cost of diesel fuel. But what we are seeing increased costs.

Those costs follow inventory so they come out when the inventory turns more or less. But it's embedded in our full year guidance of margin of 40.1%..

Great. Then if I could just squeeze one last one in. Just on your real estate strategy longer term, I guess, with the Toys "R" Us sites you mentioned those are sort of more fifth and main locations.

Are you looking maybe upgrade existing locations to better sites if you get the chance?.

Chris, this is John. With regards to our stores and our overall performance of our stores, I would tell you, it's really hard to upgrade a store or change a store when you have very, very profitable stores. We find ourselves in that luxury, if you want to say that.

So, we always are looking in the right - if the right space were to become available, we would consider it. But we are not actively - as you can tell and look at our history, we're not big on relocations.Our stores are very profitable, so moving stores is hard to get a payback on it.

But we're continuing to look at existing TRU sites that are available out in the marketplace today and there are still quite a bit of them out there to look at and there's other retailers that have had some issues in the most recent couple of years that have plenty of availability out there as well.

So, we're continuing to take a look at the opportunities to continue to take a good real estate..

Great. Thanks so much and good luck the rest of the year..

Thanks, Chris..

Thank you..

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mark Butler for any further remarks..

Great. Thanks, everyone, for participating in our call and for your support of Ollie's. As you just heard, we had a great start to the year and we're excited for the continued growth in 2019. We look forward to sharing our results with you on our second quarter call in early September. Thank you very much and have a great day..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..