Good afternoon, and welcome to Ollie's Bargain Outlet Conference Call to discuss financial results for the Third Quarter of Fiscal 2021. Currently, all participants are in a listed-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 today’s call from management we have John Swygert, President and Chief Executive Officer; Jay Stasz, Senior Vice President and Chief Financial Officer; and Eric van der Valk, Executive Vice President and Chief Operating Officer. I will now turn the call over to Jean Fontana, Investor Relations at ICR to get started. Please go ahead, ma'am.

Thank you, Dave. Good afternoon, and welcome to Ollie's third quarter conference call. A press release covering the Company's 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 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 with respect to 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 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 that we believe may be important for investors to assess our operating performance. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings release. With that I’ll turn the call over to John.

Thanks, Jean, and hello, everyone. Thank you for joining our call today. While this was a very challenging and difficult quarter we remain bullish on the long-term opportunities ahead of us. Looking back on the third quarter, sales and operating performance was primarily impacted by greater than expected supply chain related headwinds, leading to results below our expectations. These headwinds included shipping delays of imported seasonal product into our supply chain network, which in turn create a backlogs in our distribution centers causing delays in shipping the right product to the stores in a timely fashion. We also believe that the sudden rise in inflation had an outsized impact on a portion of our customers who mostly live on a fixed income. While, I'm extremely proud of our team's efforts through these challenging times, we were unable to overcome these headwinds during the quarter. For the third quarter comparable store sales decreased 15.5% compared to a 15.3% increase last year. Compared to 2019, our comparable store sales decreased 1.3%. While we are disappointed with these results, we remain as confident as ever in our business model and believe that many of the factors impacting us right now are transitory in nature. So let me discuss what opportunities we see. First, we remain very excited about the incredible deals being presented to us each and every day. And we expect to see even more deals related to order cancellations, and abandoned goods associated with import shipping delays. Second, we have made meaningful progress in driving improved efficiencies and increased throughput across our distribution centers. And third, we provide exceptional value to our customers, which we believe will benefit our business as this highly inflationary period continues, and consumers trade down. Now, let me address each of these opportunities in more detail,…

Thanks, John, and good afternoon, everyone. I want to start by thanking the entire Ollie's team for their incredible teamwork and dedication throughout the quarter. For the quarter, net sales totaled $393.5 million, a 7.5% decrease from the prior year. Comparable store sales decreased 15.5% in the quarter compared with the prior year. Comparable store sales compared to 2019 declined 1.3%. In the quarter, we opened 18 new stores ending the period with 426 stores in 29 states, a 10.6% year-over-year increase in store count. Since the end of the third quarter, we've opened another four stores for a total of 45 this year, including two relocations and one additional planned opening in late January. These stores drive our growth and we're very pleased with their productivity and cash on cash returns, as our new stores continued to pay for themselves in less than two years. Gross profit decreased 11% to $153 million and gross margin decreased 160 basis points to 39.8% compared to a very strong 41.4% in the same period a year ago. The decline in margin was due to higher supply chain costs primarily import and trucking costs and to a lesser extent higher wage rates in DCs, which more than offset 120 basis point increase in merchandise margin year-over-year. SG&A expenses increased 7.8% to $114 million, primarily due to additional selling expenses from our new stores, excluding a $300,000 gain on an insurance settlement in the quarter SG&A as a percentage of net sales increased 430 basis points to 29.8% as a result of deleveraging due to the decrease in sales. We continue to operate with tight expense controls throughout the organization. Adjusted operating income which excludes the insurance settlement gain totaled $29.9 million, a 48.3% decrease from the prior year. Adjusted operating margin decreased 610…

Certainly. Our first question comes from the line of Matthew Boss from JPMorgan. Your question please?

Great, thanks. So maybe John, to start out, if we think about third quarter comps down 1.3%, relative to 2019, relative to the 3.2% in the second quarter. If we think about that 400 to 500 basis points sequential deceleration, how much would you tie to the supply chain? What's your level of visibility for the remainder of the fourth quarter? And then just what provides you confidence that 1% to 2% is still the long-term comp algorithm?

Sure, Matt, I would tell you where my confidence comes in is that, we've really worked very hard to get the DCs aligned, to get the throughput of the DCs at the levels that we need them to be at. And we feel very confident that as we said on the call Pennsylvania and Georgia are operating at optimal levels, and the newer Texas DC is getting there and will be there shortly. So I don't believe that the issues with the DCs are going to prevent us from getting the goods to the stores in a timely fashion, compounded by the late deliveries of some very important seasonal product puts an undue pressure on us that I don't expect to see again. We're working very hard to offset those delays in the future. And we believe we're well-positioned in order to get the goods in on a timely basis upload them to the stores when they need them. Obviously, we got a late start to it this year. We actually received a lot of our toys and seasonal in November, and we still have some goods on the water that probably will make for the holidays, so we are a little bit short there. And we'll continue to improve on that piece. But then the long-term algo is fully intact. I believe once we hit -- till we focus on 2022, we'll be back in shape and continue to deliver long-term algo. Q1 will be tricky, as we’re ramping against an 18% comp from all the stimulus that occurred, so that one will be a little bit of a challenge for us to compare against. But I think going forward after that we will be in line with our long-term algo and deliver the numbers that you guys are used to seeing.

Great. And then Jay, to follow up on gross margin. So the fourth quarter guide assumes that 200 basis points moderation on a two year stack relative to the third quarter. Could you just break down the gross margin drivers behind that moderation sequentially? And I think you gave some color on the first quarter. But if we think about gross margin for next year, help us to think about it relative to the 38.6 to 38.8 level that that will come out this year at?

Yeah, Matt, so the gross margin headwind that we're talking about in Q4 is really being driven by these increased import costs. That is the driver. I mean, our merchandise margin is intact and right in line with historical levels. So, that's the driver of the import costs, just like we talked about. And then can you ask again, your second question?

Just gross margin for next year as a whole relative to the guide that you have this year for gross margin rate?

Yeah, so we would expect we're going to see continued pressure, like we said in the first-half, it's going to normalize back in the back-half, right. So Q3 and Q4 if you model that are going to be right in line with where they would be on a typical run rate for us and the normalized Q3 and Q4. We're not giving guidance for ‘22. But right, you probably ballpark with the pressure that we're going to see in Q1 and then it's going to get it sequentially a little bit better in Q2, but still be under pressure, but probably, I would say 38.2 to 38.4, 38.5 somewhere in that range.

Matt, just add clarity to that and make sure everyone understands it, the back-half of ‘22, we're expecting to be back in line with our historical gross margins that you guys have been accustomed to see. So if you annualize the back-half, we'd be back at the close to the 40%, but because of the pressure in the first-half, that's going to bring us down probably to 38, 38.2 to somewhere in that neighborhood.

Okay, great. Best of luck.

Thanks, Matt.

Thank you. Our next question comes from the line of Simeon Gutman from Morgan Stanley. Your question, please?

Hi, everyone, good evening. I know this may end up beating a dead horse by the time this call is over. But I want to talk about how transitory these supply chains are -- the supply chain issues are. Obviously, comps being negative on a two year basis shows some cracks. And I think you mentioned the circular couldn't be as good as it could be. Can you also talk about in stock position across the store and any categories that are particular issues?

Yeah, Simeon the issues really are transitory in nature in our opinion, obviously, there's certain times where the imports are very, very important to us. And when you bring in toys, holiday and heaters, that's an important time for us. And we didn't get the goods in timely enough. And when they were late arriving, they put pressure on us to be able to get our normal product into the supply chain. So that created some issues for us to be able to get the product we wanted to have, to be able to advertise and the deals got pushed behind the imports as those had to come in. And that's something that we don't expect to repeat. We're getting ahead of it at this point in time. And we're pushing hard to make sure we don't have the same issue occur as an organization, and we're very focused on it. So there's not a permanent issue with the supply chain from our perspective. Like we said, we got to right size our contracts with the carriers what we've done. In the past it worked then, it doesn't work now, so we got to make some adjustments there. With regards to the sequential 1.3% down over a two year period, with all that we've gone through probably not too bad, definitely not happy with it, not impressed with it, and we're not pleased with it at all internally here. The availability of deals and goods are out there, we just kind of get better at flowing them in timely getting to the stores, for our stores to be able to have them meet the sales plan. So we feel very confident that we'll be back in stocks here and we got a late start to the holiday season. But we're going to really look forward to 2022 get the stores back in the right position and get the inventory flowing in the manner we needed to be in in stock for the stores. And I think we'll be right back where we need to be.

So thanks for that. It sounds like you're pretty confident that this will pass. I guess just for completeness, I wanted to ask, did you give any thought or consideration to slowing down the opening engine just so you can focus on fixing the supply chain and not get distracted by openings? Or, it's just the level of confidence you have is high and it wasn't part of consideration?

Yes, Simeon, it was not part of our consideration at all. We don't think our supply chain is broken. We think we have a hiccup and I think everybody does in the marketplace. And we the way we had gone to contract before it didn't work. It doesn't work on a long-term basis for a company our size. So these issues we're having are definitely transitory in nature. There's nothing structurally wrong with our supply chain or distribution center network. So we didn't even give it a thought to slow down the growth, as we believe we're in good shape right now. We're going to continue to flow to the store, so I don't think we have any hesitation to open anywhere from 50 to 55 stores, and I think next year is 50 to 53. So we think we're well-positioned to fill those stores and do good next year.

Great. Okay. Appreciate the color and good luck through the holidays.

Thank you.

Thank you. Our next question comes from the line of Peter Keith from Piper Sandler. Your question, please?

Hey, good afternoon, everyone. So I know you did address briefly the inventory level at the end of the quarter, but maybe just to give people some confidence in what you're sitting on. Could you break apart what is sitting in transit right now that wasn't available for sale?

Yeah, Peter of the 19% increase about 25% of that was on the water/import product that was not available for us to sell. The other 25% was in the DCs and was late arriving product that we got to the stores after the third quarter was completed. And the remaining portion is the capitalized cost and inventory.

Okay. And so then my next question would just be using this inventory position, if I’m reading it correctly, it sounds like you feel better about the inventory position with the fourth quarter versus the third. You're not totally out of the woods, but it seems better. But you're kind of guiding for the similar two year stack comp. So is that am I reading it correctly, you feel better about the inventory, but just you're holding that two year to be conservative? A - John Swygert Peter, we feel much better about where we're at today on the inventory side. We did get a late start to Q4, we had a lot of our toys and seasonal on the water at the end of Q3. So we did a lot of shipping and receiving in the early part of the fourth quarter, which would be November. So our stores got a lot of toys and seasonal during the month of November, so we got a little bit of a late start. So I feel real good where we're sitting today. I would have liked to be sitting where I'm at today in the beginning of November. So I'm about a month later. So we got a little uphill to climb, so there's no reason for us to stretch and get ahead of ourselves. I think we need to set an expectation where we think will be, where we think we're going to land. If we do better, we do better. But we are positioned much better today than we were a month ago.

Okay, sounds good. Good luck with the holiday.

Thanks, Peter.

Thank you. Our next question comes from the line of Edward Kelly from Wells Fargo. Your question, please?

Yeah, hi, guys. Good afternoon. I'm just kind of curious if you could just take a step back for us. First, I'm curious as to what the cadence of the comps looked like throughout the quarter. And then I was hoping you could help us to understand the timing of kind of what happened here. Because when you reported Q2, you were sort of a third of the way through, you guided it to your staff about five to seven. And presumably you had no visibility on some period after that. So I'm just kind of curious as to how all of this progressed, and worked its way into the stores. And then, what you think the timing of that normalization ends up looking like?

Yeah, on a normal basis, Ed, I would have expected probably a 30 day, 40 day earlier arrival than probably where we're at today. We couldn't see and we didn't have clear visibility out of the call at the end of August. Obviously, that's four weeks into the 13 week portion of the quarter. But we were moving goods, we just weren't moving them fast enough at the rates we wanted to pay. So we had to shift gears mid quarter and start making some bigger decisions to get the goods moving into the pipeline to be able to make the holiday sales and the heater sales. So that was something that in hindsight, we should have moved a little bit earlier, but we were just trying to be opportunistic where we were, and we were moving the cans, we just moved quite as many as we needed to get to be at the level we wanted to be at. So in hindsight, I'd be wanting to move earlier next year, which we will to be in a better position. I think that only bodes well for us in terms of our confidence for next year for the holiday selling season in our Q3 and Q4 results.

And when do you think the opportunity starts working its way into your sales around the supply chain disruption that's occurring today? And, when a lot of that disruption ends up being your opportunity and when you can capitalize on that?

Ed, I would tell you our merchants would probably say that these opportunities, a few of them have started to arise. But the bulk of these opportunities will start in January or later after the holiday season. I think there's still 80 ships out there in Long Beach and so who knows what's on them. It's somebody product who needs them prior for the holiday season that they didn't get or some other category that'll be something they won't take their cancel order. So I think we are well-positioned to capitalize on those cancel orders. Sometimes they take a little bit of time to become available to us. But I would tell you 2022 should be a pretty good year for deals that will become available to us related to a lot of this supply chain disruption that's happening.

Okay. Thank you.

Thank you, Ed.

Thank you. Our next question comes from the line of Jason Haas from Bank of America. Your question, please?

Great. Thanks for taking my question. So in addition to the supply chain issues, you mentioned that you're seeing some signs that your customer may be under pressure. You mentioned some inflationary factors. So I'm just curious if you could talk a little bit more about what you're seeing in regards to that.

Jason this is John again. With regards to -- we obviously know we have a low end customer. And we are seeing that those customers are shopping less frequently, just from the mere fact that they have less disposable income. We're not necessarily a consumable organization, we have about 20%, 22% of our business consumables. We have a lot more in the discretionary side. So folks who are right now being crunched a little bit with either gas prices, or food prices, they may be selectively making one stop somewhere else, and not coming to as frequently as they used to. And people are still feeling -- the higher income level people are still feeling pretty good. But we do believe that the trade down effect is coming with the increased pressures are going to continue to feel on the inflationary side, but they have not started trading down. So we're dealing with one side of our business that's getting crunched a little bit more than we'd like to see them at this point, and we're not seeing the trade down because people are still feeling like they have decent amount of money and they're coming, they're just not here yet.

Got it. That makes sense. And then I also wanted to ask about some of the strategic changes that you've made. So I know in the past, we've talked about the dry powder strategy. I think in the last call, you had mentioned taking down some deliveries to stores to one times per week and some of the other supply chain changes that were being made. So I'm just curious about the progress that you've made on those initiatives.

Sure, I'll take it. Jason, this is Eric van der Valk. We continue to make progress over the course of the quarter. We upgraded the leadership team, primarily in the Georgia and Texas facilities, which included the general managers, and some of the managers and supervisory level individuals as well. And those teams have hit the ground running at a sprint, and we've made tremendous progress, as John indicated, really, in all three buildings, including Texas made significant progress over the course of the quarter. And over the last several weeks now into Q4, they're achieving a level throughput that's exceeded their historical high. So pretty happy where that building is headed as well, even though it disappointed us toward the end of Q3. In terms of process changes, we're pleased with the change in delivery frequency to store which just to make sure we remember what we did, we took what was a two stop truck or two half truck deliveries to each store each week and consolidated to a one truck delivery to each store each week. So they're getting the same amount of freight, but on one delivery which simplifies the operation. They're getting all the same product, they're getting a delivery seven days apart now rather than every three or four days. It simplifies the operation on the distribution side as well as on the store side in an easier task to work one sort versus two. So I won’t get into too much detail there. But we're relatively happy with how that’s all worked out. We needed to make some changes on the operation side as well to accommodate for that change, and to ensure that we're taking any human capital constraints on the store side into account and making sure the product flows to…

Yeah, it does. Maybe for John, if I could squeeze another one in just on the dry powder keeping open to buyers open longer. Just curious about if any of the supply chain stuff caused you to reconsider that strategy, or do you still think it's been the right move in this type of environment?

Yeah, I think that the dry powder strategy is one that's very important than the closeout sector we operate in, so we're definitely committed to it. During challenging times dry powder gets difficult for us to manage because the buyers are struggling with the goods getting in timely and it gets a little more confusing to what's coming and when, and they have to make adjustments. So we're looking to get back to more stable dry powder right now. The deal flow is strong, the buyers are bought pretty full. So the dry powder right now is not necessarily as dry as I'd like to see it. But with all the challenges we've had the buyers are doing their best to make sure we secure what they need in order to get the inventory into the boxes. So dry powder is probably two months away from right now, they're pretty much bought up for December and January. And we'll get back to dry powder concept here in 2022.

Got it. That's helpful color. Thanks.

Thanks, Jason.

Jason, just to quickly add because I forgot to mention the warehouse management system investments, we continue to make investments in warehouse management as well in the system enhancing it. We've installed some handheld technology in Q3. We're very happy with the results of that and some other automation work. So we're continuing to make IT investments as well.

Great. Thank you.

Thank you. Our next question comes from the line of Paul Lejuez from Citi. Your question, please?

Hey, guys, I'm curious what percent of goods you guys import directly and curious if there was a decision this year to do more direct imports than what you would normally do relative to relying on more domestically sourced closeouts? And also curious what percent of your sales are toys, heaters and seasonal in the fourth quarter. Thanks.

Paul, with regards to our import business, we definitely did not make any concerted effort to bring in more imports. We never try to bring more imports, we try to buy more closeouts. Imports is a necessary part of the business to have continuity in certain categories, you want to have continuity. But we did not make any concerted effort to bring in more of imports. But imports run approximately 20% of our annualized purchases. And that's very important to know, it's annualized, there are certain seasons that it’s heavy in certain seasons it’s very light. So with regards to Q3, it's normally right around 28%, 29% of our purchases on a normal basis. This year because of the late arriving inventory it was closer to 39% that put pressure on our ability to bring in some of our domestic products, so we definitely want to get back to the 28%, 29% or less in the future, so we don't want to repeat what we did. And we'll continue to push that we don't have that much coming in on the import side is going to get in the way of our domestic source closeout, so we don't want to do that. So historically, we've controlled it very, very evenly and had it pretty consistent, but this year with the delays it causes us a little bit of a headache there. And the other question I forgot.

Thought you’ve answered that. What percent of toys, heaters and seasonal.

We normally don't break that out, Paul, but we would tell you that the seasonal business in Q4, I don't know what the number is, I'm not sure what the breakout looks like for toys and heaters.

I think, we don't typically talk about it, but it can get up to 6%, 7% in Q4.

Which part seasonal?

No. So toys and seasonal probably in the fourth quarter, it can ramp up together combined, I would say could be 8% to 10%.

Got it. And then just to make sure I'm clear, do you feel like you're missing those sales completely? Or are you just getting them late and maybe at a lower margin?

Paul, definitely not missing sales completely. We have and had a good amount of inventory, we just weren't at the levels we want it to be. So I'll give you for instance, at the end of Q3, we had about $25 million in less inventory we wanted to at the end of the quarter, and we shipped out $28 million in the month of November to the stores to get us in stock. So it’s really just missing a portion of what we wanted to be at. But it slowed our sales in the month of November because of that, and obviously hurt us in Q3 as well.

Got it. Thank you. Good luck.

Thank you.

Thank you. Our next question comes from the line with Jeremy Hamblin from Craig-Hallum. Your question, please?

Thanks. And I wanted to ask it sounds like you're making some investments in your supply chain technology infrastructure. In terms of thinking about the staffing on that side of the business, do you feel like, Eric, maybe you can answer this, do you feel like you're adequately staffed? And, do you think you're going to have some drag that really carries on given the mismatch of timing of shipments and so forth? How much additional staffing are you going to have into Q1 and potentially into Q2, given what's happened on the timing here, and the fact that we don't have maybe the technology infrastructure to flow inventory in a way that a lot of your competitors do?

Sure, Jeremy, I’ll answer. We do believe we have the technology now to meet the throughput needs of the business as we move forward. These enhancements we're making are to give us even some additional throughput, and to mitigate risk as we continue to move through a environment where we're very challenged from human capital standpoint. And that's obviously not unique to Ollie's. So I look at it as it's additional throughput beyond our needs to drive our business in terms of technology. I don't know if your question about staffing was specifically related to IT. Is that how I should take it? Or was it more general?

No, the staffing more related to your distribution centers, and even at the store level like typically, you're going to have downshift in your staffing levels in Q1, because you're not handling the same type of volume on stocking your shelves. So, just wanted to get a sense that's really what I'm asking about.

As we moved out of the holiday season, we're fairly comfortable with the staffing levels, so we should be able to maintain to continue driving our business. We've been more challenged in this moment, although we're not seeing it as a risk to our business. But it's certainly been a challenge on the seasonal hiring front for us. So I’d answer the question, we're confident as we move through holiday that we will be appropriately staffed in the stores and the distribution centers. We're also continuing to study the market and react to market forces and wage pressure out there to ensure that we continue to be adequately staffed to drive the business.

Yeah, I think one of the big takeaways for us is the issue that we had in Q3 is not a human capital issue. It was really the challenge of the timing of getting the imports in and how they affected our ability to get the imports and the domestic product through the overall DC network. DCs are actually working very well, we've done a great job at hiring new associates, hiring to the levels that we need in order to operate and we’re very excited about the throughput levels we've hit with our Pennsylvania and Georgia DCs and we will continue to push on Texas we're very close. So the throughput issue is pretty much wiped out now. The DCs can ship and process more than the stores can handle. So we've accomplished that we want to accomplish in the DC network. And now we're just working through the last piece with the imports and the headache that that 20% of the business has caused us of the 20% of $1.7 still a big number. So we got to continue to focus on it. And we're going to get better. That's all we can say. We didn't have it setup right and we'll do better.

Great. Thanks for taking the question. Best wishes.

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 John Swygert for any further remarks.

Thank you, operator. Thanks, everyone for your participation and continued support. We wish you a very happy and safe holiday season, and look forward to sharing our fourth quarter results with you on our next earnings call.

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