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Good afternoon and welcome to the Ollie’s Bargain Outlet Conference Call to Discuss Financial Results for the First Quarter of Fiscal 2018. 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 the 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 Operating Officer; and Jay Stasz, Senior Vice President and Chief Financial Officer.
I’ll turn the call over to John Rouleau, Investor Relations, to get started. Please go ahead, sir.
Thank you, and hello, everybody.
A press release covering the Company’s first quarter fiscal 2018 financial results was issued this afternoon, and a copy of that press release can be found on the Investor Relations section of the Company’s website.
I want to remind everybody 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 year 2018 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 undertake 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, for a more detailed description of these factors.
We will be referring to certain non-GAAP financial metrics -- measures on this call today, such as 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.
And with that out of way, I’ll turn the call over to Mark.
Thanks, John. And hello to everyone. Thanks for joining us today on our call. We had another very strong quarter, building on our momentum from last year and giving us a solid start to 2018. Strong deal flow and new store performance drove a 21% increase in sales and our 16th consecutive quarter of positive comps. Comparable store sales increased 1.9% on top of a 7.7% increase on a two year stack basis.
Our sales strength was once again broad-based with over half of our departments comping positive. Some of our best performing categories were housewares, furniture, seasonal and automotive. Strong sales and margin combined with tight expense controls drove a 110 basis-point improvement in the operating margin and a 66% increase in adjusted net income.
We are very pleased with the underlying trends in our business and we believe we are well-positioned to continue to deliver strong results in 2018 and beyond. Our strategy remains centered on three key drivers, offering great deals, growing our store base, and leveraging and expanding Ollie’s Army.
We founded Ollie’s almost 36 years ago based on the idea that everybody loves a bargain and our growth and success over these many years clearly proved that. Our ever increasing size makes us more visible and important to major manufacturers as we continue to gain better access to merchandise. As we grow these direct relationships, we are able to offer our customers more of what they want, brand name merchandised at drastically reduced prices.
Our new stores continued to perform above our expectations in the first quarter, benefiting from the great execution by our teams. We opened eight locations during the quarter including our first two stores in Arkansas. We have opened one additional store since quarter end. We have three grand openings scheduled for next week including our first location in Louisiana, our 22nd state. We remain on track to open between 36 and 38 stores this year, right in line with our long-term growth expectations.
We have a strong pipeline of leasing opportunities and we are excited about our prospects for additional stores in both new and existing markets. We have a tremendous runway for growth with the potential to expand our store base to over 950 locations across the country.
Ollie’s Army is bigger and better than ever. The Bargain Battalion now almost 9.3 million strong with growth in membership levels continuing to outpace our store growth. Importantly, members’ average spend is significantly more than non-members and the Army now makes up around 70% of our sales.
As we talked about before, we are rolling out some key initiatives for the Army. We are on target to launch Ollie’s mobile app in the second quarter. This app will make it easy for members to track their rewards and allow us to communicate the latest and the greatest deals. We will also roll out ranks where Ollie’s Army members will become one, two or three-star generals and receive see different rewards and surprise offers based on their level of spending. These program improvements are designed to reward the loyalty of the Army and build lasting relationships with our Bargainauts.
So, to wrap it up. We continue to hit all of our marks and we remain laser-focused on growing our presence in the closeout industry. Our first quarter results were strong, and I feel really good about the start to the second quarter.
We have lots of momentum and we see a lot of opportunity ahead. Believe me, we’re not slowing down. Our business is driven by really great bargains, tight expense control and successful new store openings. It’s the consistency and strength of our model that gives us the confidence that we have a long runway of continued success ahead of us.
I’d like to take this moment to thank our 7,000 team members for their hard work, their dedication and to reinforce how much I appreciate their efforts each and every day. Thank you again for your support of Ollie’s.
I’ll now turn the call over to Jay to take you through our financial results and the 2018 outlook in more detail.
Thanks, Mark. And good afternoon, everyone. We’re very pleased with our solid start to 2018 as we delivered another strong quarter.
Net sales increased 21.1% to $275.7 million. Comparable store sales increased 1.9% on top of 1.7 increase in the first quarter of last quarter and 7.7 increase on a two-year stack basis. The increase in comp store sales was driven by an increase in average basket, partially offset by a reduction in transactions. As Mark said, we opened eight stores during the quarter, ending the period with 276 stores in 21 states, an increase in our store base of 15.5% year-over-year. Our new stores continued to perform above our expectations across both new and existing markets, and we remain very pleased with the productivity of our entire store base.
Gross profit for the quarter increased 21.5% to $112.9 million and gross margin increased 10 basis points to 40.9%. The increase in gross margin was driven by an increase in merchandise margin partially offset by higher supply chain cost as a percentage of net sales.
SG&A expenses increased 17.2% to $72.4 million, primarily the result of additional selling expenses from our new stores, increased sales volume in our remaining store base and investments in personnel to support continued growth. We leveraged SG&A expenses by 90 basis points to 26.2% of net sales.
Operating income increased 31.6% to $36 million and operating margin increased to 110 basis points to 13.1%. Net income increased 60.6% to $30.5 million and net income per diluted share increased 58.6% to $0.46. Included in the $0.46 is $0.06 of excess tax benefits related to stock-based compensation. Adjusted net income which excludes this benefit as well as the after-tax loss on extinguishment of debt, increased 66.4% to $26.6 million or $0.41 per diluted share from $16 million or $0.25 per diluted share in the prior year.
Adjusted EBITDA increased 27.7% to $41 million in the first quarter and adjusted EBITDA margin increased 80 basis points to 14.9%.
Turning to the balance sheet. At the end of the period, we had $27.6 million in cash and no outstanding borrowings under our revolving credit facility. We paid down $25 million in term loan debt during the first quarter and ended the period with total borrowings of $24.2 million.
Inventory at the end of the first quarter increased 11.9% over the prior year, primarily due to new store growth and the timing of deal flow. Capital expenditures were $4.7 million in the quarter compared to $3 million in the prior year as we continued to invest in new store growth.
Turning to our updated outlook for fiscal 2018. We are raising our full year sales and earnings guidance to account for the upside in the first quarter and leaving the remaining quarters unchanged. As such for the year, we now expect total net sales of $1.207 billion to $1.215 billion, comparable store sales growth of 1% to 2%, the opening of 36 to 38 new stores and one relocation, operating income of $152 million to $154 million, adjusted net income of $112 million to $114 million, and adjusted net income per diluted share of $1.69 to $1.72, both of which exclude the excess tax benefits related to stock-based compensation and the after-tax loss on extinguishment of debt, an effective tax rate of 26%, which also excludes excess tax benefits related to stock-based compensation, diluted weighted average shares outstanding of 66 million, and capital expenditures of $23 million to $25 million.
In addition, as we mentioned on our last call, for the second quarter, we are forecasting a total sales increase in the low double digits and a comp store sales increase at the low end of our 1% to 2% guidance.
I will now 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 open.
Thanks, Mark. So, could you speak to the monthly cadence of trends in the first quarter? I think, any color on trends that you saw in May would be helpful as I know weather can shift some seasonal in lawn and garden between the first and second quarter. And then, finally, what if anything have you embedded in terms of the lift from the launch of loyalty that will be taking place in the second quarter? Any color would be helpful.
Yes. Matt, this is Jay Stasz, and I can start with that. And to start with your last question first, we didn’t really embed anything on the lift with the loyalty. So, we bake nothing in for that. We are very conservative like we said we are going to crawl and then walk and run. In terms of the cadence during the quarter, we did see the comp sales grow throughout the quarter. They got stronger as the quarter went on. We don’t speak to specific months. But we were right in line with our comp guidance for the quarter and we were right in line with our plan by month. I mean, it was a funny month because of the shift back to a 52-week year, the shift of the Easter holiday as well as we had some ad shifts within the quarter. So, it was pretty lumpy. But, over the course of those months, the comp did get progressively stronger.
Yes, Matt. I will chime in on the progression of the quarter. And we are certainly expecting to be asked about the weather. And certainly, we had the choppiness like everybody else. But on an overall basis, we generally don’t focus on the weather our stores now. We’re going to be in 22 states. We are up and down the East Coast all the way, we’re on the west side of the Mississippi in one store. So, we don’t think that that had any major, major impact and we did well and as expected right up and down the line.
Got it. And then, just a follow-up on gross margin. How much was merchandise margin up in the quarter. And I guess, how best to think about merchandise margin opportunity versus higher supply chain costs as we think about the second quarter in the back half of the year?
Sure, Matt. This is Jay. The merchandise margin was up 80 basis points in the quarter and that was offset by the increased supply chain costs which were up by about 70 basis points. So, as you know, we really haven’t changed our annual gross margin target this year. We had talked about 40.1% on the last call and that’s still what we are targeting. So, we knew we’ve anticipated that the supply chain costs are going to be increased and we are expecting that to continue. But we also expect that we’ve got to focus on merchandise margin. And we think we’re going to be able to offset that increase in supply chain side with improved merchandise margin. And Q1 was a good start to that. Certainly having merchandise margin up 80 bps is a strong performance. So, again, we’re looking at margin overall. Gross margin is flat year-over-year at 40.1.
Thank you. Our next question comes from the line of Dan Binder of Jefferies. Your line is open.
Hi. It’s Dan Binder. Two-part question, the first is just sort of attack on to Matt’s question. With regard to merchandise margin, was the source of that simply just better buying or better price management? And did the value proposition change in any way as a result? And then, the second question was around transactions? I think, you noted a slight decline. I was just curious any thoughts around that given all the good work you’ve been doing on the buying side.
Yes. Dan, I think that it’s obviously the case mix as it was a little bit of both. As I said that the buying environment has and continues to be quite vibrant, and we were able to leverage some of those situations. And really paramount to what we do is to try to give America bargain. That’s never going to change. We were able to get some greater deals step up to the plate of which I’m not going to tell you about any of them. And we were able to leverage that situation a little bit and increase the margin when and where possible. On the second part of the question, I’ll let the boys go.
Sure. I can talk to that. Dan, the comp was the 1.9, average basket was about 300 basis points. So, the comp was driven by that transactions, were down about 110 basis points. And like we said before, we don’t look at those metrics and try to manage the business to those metrics. Really, those are a byproduct of the sales mix and the deals in any given quarter. It’s not something we try to manage to. Obviously with the top departments that Mark talked about, housewares, furniture, I mean that’s going to have an average, higher average tickets. So, we’re not surprised that that was the driver. And again, we’re pretty happy with the 16 consecutive quarters of positive comp. We’re more focused on the deal versus some of those metrics but understand we need to talk through those.
Thank you. Our next question comes from Peter Keith of Piper Jaffray. Your question please?
Hey. Good afternoon, guys. Refreshing to have company reporting and not blame weather. The new store metrics were quite strong. And I don’t know if it’s due to the week shift in sales. But at least in our model, it looks like your new store productivity ticked up quite a bit. And I was wondering if there is anything to that with some of the newer stores.
Yes. Peter, this is Jay. And certainly because of the shift back to the 52 weeks and the shift in the sales week, there is a little bit of tailwind on the new store productivity calc, at least the way we calc it. But, it’s still performing north of 100, even on a shifted basis.
And Peter, this is John, just one thing to add to that. One, keeping in mind, what you’ll see as well and we expect to see as probably little bit of headwinds on those new stores in Q2. And that’s why we kind of have the overall total sales in a lower end of the spectrum that we’ve kind of alluded in the call earlier today.
Okay, very good. And then, I’m always curious around the food and consumables business and how that might be trending. I know consumables as a whole isn’t broken out separately. But maybe just give us a little bit of color on how some of the opportunities there are shaping up?
Yes. We find the buying opportunities to be very, very strong. Our position at the moment is very, very strong. Coffee continues to perform at our expectations. We’ve been doing it for quite some time and it’s a major, major piece of our business. And we are very pleased with it. So, the stock level, the inventory, the availability, the offerings, our buying, our margin, everything I feel good about, Peter.
Yes. And Peter, this is John, just a little more color on the food category. There’s definitely deflationary pressures sitting on the coffee k-cups as we’ve alluded to prior. That continues to be a very competitive marketplace that we are dealing with. So, we are definitely having some pressures in the overall food category. We’re holding our own, we’re comfortable with where we’re at.
And Peter, and this is Jay. The penetration of consumables overall has stayed consistent as of late. It’s a little bit north of 20, like we’ve talked about, really hasn’t changed a whole lot in the last couple of quarters.
Okay. Very good. And may be John, just a follow-up on that. Is there deflationary pressures beyond coffee in your food category or can you guys manage through that with your pricing strategy?
Peter, I think we can manage through that. There is very, very little in very specific categories, but I think we can manage through that without too many issues. The coffee is definitely a headwind that we have to deal with and I think that’s here to stay.
Thank you. Our next question comes from Scott Ciccarelli of RBC Capital Markets. Your question, please?
Hi, guys. I actually have a follow-up to Peter’s, sort of little bit of a different angle, I guess on the new store productivity. What would you guys point to as key reasons, why the NSP has picked up the way it has? I mean, typically, you would see that metric slide just mathematically when comps slide, but that’s not really what we’ve seen and yet NSP continues to trend higher than it has historically?
I think -- Scott, this is John, I will take the first slice of this. So, with regards to the new store productivity increasing over what we’ve seen in the past, a lot of that’s going to be deal-driven in nature which, if you look at our comps over the last four years, we continue to comp against the comp, and we’re up against our own strong number. So, the numbers have increased substantially on a per store average basis as well. I think, the attachment to the brands that we are carrying in these new markets and the visibility [ph] and the name, I think people are attracting to us on a stronger basis than they had in the past. And that’s what I think we continue to see.
And any kind of shift in terms of real estate just with all the real estate being abandoned by so many other retailers, is there more repurposing going on than what you guys have historically done?
I would say, there is a little bit, but I wouldn’t say significantly more. We are in certain cases getting a little bit better real estate sites for some of our stores. We’ve been able to capitalize on some of the Hhgregg sites, which typically has been a little bit better real estate. But overall, we’ve been pretty much tried and true to our model. We haven’t really stepped outside of our normal comfort spot for the most part and we are -- our real estate strategies remain pretty consistent.
Thank you. Our next question comes from the line of Rick Nelson of Stephens. Your line is open.
So, retailers overall are seeing a little better macro backdrop, more traffic to their stores, little better sales. Can you speak to that and how that might impact your business and the quality of your buys?
Well, I think, Rick, twofold. I think that we feel good about where we are at. We feel as though we are seeing perhaps the customer with more money in their pockets. And that gives us a greater opportunity to sell them bargains. We think that certainly if there is more vibrancy, we think that we win on both sides of the equation when business goes down and there is a creation of new product or -- we win on both sides with obsolescence that creates new product or new product create obsolescence. So, anytime we can offer, anytime there is a disruption or an increase in business, we have the opportunity to get bigger, better, brighter, broader deals. And that’s how we make a living is by buying deals direct from manufacturer and selling them to the customer. When the customer has more money, that’s really good too. So, it’s -- we feel really good about where we’re at and how we’re performing. We had a great quarter.
Speaking of opportunistic buys, if you could speak to the toy category, what you’re seeing there in terms of merchandise availability for holiday and maybe store sites that might be available too?
Well, on the toys, certainly we are excited about the Toys"R"Us opportunity. We’re active in the market. We’re buying when the opportunities present themselves. We’ve certainly been in the toy business for many, many, many years. And this is what we do for a living. So, we think that there is going to be a demand to be able to sell toys, but we also think there is going to be a demand for us to be able to buy toys. And we’re doing just fine within my expectations. And I feel really, really good about that. As far as the locations, we’re actively as we are -- as we always do in the marketplace trying to get the best sites we possibly can. In some instances, those sites have come up; in many instances, it takes a little bit of while for this whole situation to be able to flush itself out. And we are expecting to be able to hopefully take advantage of the real estate opportunities as well.
Let me add a little color on the real estate, Rick. With regards to the Toys"R"Us situation, there is north of about 200 sites that are going out on auction here on June 11th. And we’re taking a look at a handful of them, we’re not taking a look at that -- most of them fit into our geographic area or the size of the box doesn’t work or the location doesn’t work. But there is a handful of them where we’re taking a peak at and we’re focusing pretty heavily on that we think will be the right locations for us we don’t currency have a presence. And we’ll pay a lot of attention to that there.
Thank you. [Operator Instructions] Our next question comes from the line of Judah Frommer of Credit Suisse. Your line is open.
Hi, guys. Thanks for taking the question. Maybe first just a follow-up on the real estate. I think previously, you’d said that about a third of stores this year would open in the first half. Is that still the case? And I think the relocation in guidance, if you can give us any color on, what’s going on with that store?
Sure. Judah, the cadence of the stores has not changed. It’s about a third the first half and two thirds the second half. There are obviously some timing issues that we have to deal with in the back half of the year from a cadence perspective that might slip a week or two here or there. But we think it can maneuver to that without any issues that we need to discuss. At this point in time, we still believe and we’re comfortable with the 36 to 38-store guidance that we’ve discussed previously as well.
With regards to the relocation, that was an opportunistic situation that came up since our last call. It happens to be right here in our backyard. There was Hhgregg that went out of business literally right across the street from our store in Pennsylvania here, which happens to be the first store we’ve ever opened. So, we’re going to relocate that store probably about 50 feet away to a larger box, brighter, newer look to it, and we’re excited about it. So, it’s right here in our backyard. So, it will be a good thing to do.
And one a little more high level, I mean you guys -- you called it out in the release, and John said, you guys are -- you’re clearly comping the comp and have been able to do that since coming public. Has there been any change to the internal planning process? I know historically you’ve basically said you don’t have much visibility on comp beyond the current or the next quarter, but has anything changed given your buying availability?
Judah, this is John. I would tell you, the overall process of how we go to market and when we go to market and how we buy, whether it be seasonally or out of season for the next season, nothing has really changed in our process for a very, very long period of time. So, visibility remains about the same. It’s really the momentum and what we feel we can do and the scalability of the model, we continue to see the deals present themselves very strong quarter after quarter. So, we would not change anything in our planning process or how we go to market either.
Thank you. Our next question comes from the line of Chris Prykull of Goldman Sachs. Your line is open.
How are you thinking about your capital structure of the allocation of capital, given it looks like you’ve now swung to a net cash position because you potentially accelerate store growth, there’s share buyback on the table? Any color would be helpful.
Yes. Chris, this is Jay and I can start and these guys might chime in. But yes, we haven’t really changed anything in terms of our capital allocation strategy. And so, what that means is our aim is to pay down the debt first, so we have another $24 million or so of debt to pay down, probably do that later this year. And then, we’re going to step back and like you said, we are going to be in a cash position at the end of the year. We are going to assess our options. We are not going to accelerate growth. That’s something we don’t do. Mark and team have been churning out this pace of growth for many, many years. And we think that’s the right thing to do from the business standpoint. We are not going to do an acquisition or anything like that. But we would look at an opportunistic buyback. We would look at -- we’re looking at down the road like we’ve talked about before late ‘19, ‘20, typically we would lease those if the economics were viable to buy and they made more sense, we might look at using some of the cash for that. But the short answer is, we are going to look at buybacks and we are going to keep our options open and we are going to talk with the Board and our advisors when the time is right.
Great. That’s helpful. And then just a question on Ollie’s Army. I know you’d said there was no real lift embedded within the guidance for the mobile app or changes to the program. Have you done any work to look at either past mobile app rollouts or loyalty program revamps across restaurants or retail to show what the potential opportunity might look like?
Chris, this is John. The answer on that is, no, we have not. That’s not necessarily our style and how do things. But, the reality is, 70% of our sales currently come from the Ollie’s Army. So, we’ve always told everyone to kind of just sit back, let’s see where it goes. We don’t expect any or shattering results from the Army when you’re driving already 70%, you haven’t really done anything on the digital front to change the expectations from the consumers. So, we do think the app is going to be a nice addition to the customer. We don’t necessarily view that as a sales driver. The ranks is something that we hope we can drive incremental visits from the customers based on their ranks and the overall Army. But as we’ve always told everyone, stay with us, let us continue to drive the business. There is no need to embed a higher comp from the process change that we’re trying to do. And if we can get more, we’ll get more. But right now, we’re not getting ahead of ourselves. We plan the model the same way each and every year. And that’s the right way we think to run the business. So, if we do get more from the changes we’ve made it, we will put in the bottom line and the shareholders see the results that we were able to deliver.
Great, appreciate the color. And one last high level one if I could sneak it in. Is there an opportunity to leverage packaways to any greater degree in certain categories like some of the apparel off price players do?
Are you talking about buying out of season, Chris?
Yes.
Yes. We do that every day, all day long and have for 36 years. So, we would perhaps be buying air conditioners at the end of August or September when I have stores only in the northeast. We would buy pool chemicals then when I had geographically the same amounts. So, we buy out of season what we’ve just referred to moments ago as packaways all the time. Because that’s the most opportune time for us to get the best deal and be the most meaningful to the manufacturer.
Any sense for what packaway or what out of season inventory is generally as a percentage of the total, and how that has looked over time?
Yes. Chris, this changes on a seasonal basis. But we kind of use the barometer. It’s probably about 10%, 12% of the overall inventory that sits in the distribution centers at any given point in time, based on the seasonal time of the year we’re looking at.
Thank you. Our next question comes from the line of Elizabeth Suzuki of Bank of America Merrill Lynch. Your line is open.
Great. Thank you. Just a follow-up on Rick’s question. Were you selling any Toys"R"Us inventory in the first quarter to the extent that it had a measurable impact on your comps or earnings or do you see most of that opportunities being on the horizon for the back half of the year?
Yes, what we certainly had -- what happened with Toys"R"Us, came as no surprise to the toy industry. So, last year, we had toys and we sold a lot of toys. There was no impact whatsoever to the first quarter, not anything that would be notable. And certainly, we don’t know how this entire thing will shake out. We think it’s going to be a win, win on both the procurement and the selling side. But, we just want to remind you that this is what we do for a living. And it’s toys this year and it might have been hardware last year, and it might have been housewares last year. This is what we do. So, we happen to be excited about it. We think the customer is going to be excited about it just like they perhaps might have been on rates Rachael Ray or Sunbeam coffee maker.
Great, thanks. And regarding your SG&A investments. Are you still expecting about 20 to 30 basis points of deleverage this year? I think that was the last point I had in my notes. And just given the fact that in the first quarter, it looks like you had a beat on the SG&A side versus what we were expecting at least?
Certainly Elizabeth, this is Jay. And yes, we did have a good performance in the first quarter on the SG&A front. We had modeled that to have a good decrease year-over-year. We may be exceeded that a little bit given the strong sales that we had. But overall yes, we’re still expecting a deleveraging of about 20 basis points, I’d say. And remember that a function of that is we’ve got a 40 basis-point investment embedded in SG&A related to the reinvestment of the tax benefit from the second quarter forward.
Thank you. Our next question comes from the line of Vincent Sinisi of Morgan Stanley. Your line is open.
Just going to this supply chain costs, I know you said that kind of in a sense that you have a little bit more may be flexibility or line of sight given the core of that nature with the higher freight costs. Would you say that what you are seeing today is kind of in line with your expectations? And then, just may be any thoughts for your outlook for the rest of the year, what specifically for freight is embedded in there?
Yes. This is John. With regards to the first quarter, the supply chain costs were pretty much right in line with our expectations. And we do expect to be continued headwinds in the overall remaining part of the year. We don’t have any significant headwinds planned. So, if fuel continues to goes up 10% or 20% more than where it’s at today, that could present a challenge for us in order to offset the increased merch margin. But right now we think we are -- we’ve got the numbers baked in pretty sufficient in order to still come in at 40.1% gross margin on a full year basis. We’ve always said, the pressures on the supply chain continuing year-over-year. I think that you will start to see them lessen as we get later in the year. But they were obviously increasing last year in the latter part of the year. So, you should see us significantly get towards Q3 and Q4, so we should be able to moderate that barring any big changes. We think on the import front, we are in pretty good shape right now but the domestic side of the business, we expect that to continue remainder of the year.
And then, maybe just one follow-up. For the 2Q, rollout of the mobile app and the ranks for the Army. I think, in the past you said that would start and end in 2Q, would be done by 3Q. So, just quickly, is that still the case and is that something that kind of like a flip on for both of those things across the base all at once or how should we think about that rollout during the quarter?
Yes. Right now, Vincent, we are looking at the mobile app and the ranks to be rolled out pretty much in their entirety by the end of Q2, the very early part of Q3. So, we will be doing actual testing latter part of Q2, here we’d be looking at the mobile app getting some more traction. Soft launch that we’re using today have about 1,500-1,600 people that are on it and testing it and working off the bugs in it. The ranks, we’re going to do a just a geographic rollout later here prior in the month of July and they’ll ready to go here at the end of July with both of those applications. So, I think it will be in early Q3 when they’ll both be up and running and being used by consumers.
Hey, Vince, this is Mark. Nobody is more excited about the mobile app than me. Don’t get ahead of me. Stick with us on the comps. It’s going to be really, really exciting; it’s going to be in a tip sense with letting people know we got deals just -- nobody is more wound up than I am. But everybody stick with me.
Thank you. Our next question comes from the line of Edward Kelly of Wells Fargo. Your line is open.
My first question is just on Q1. I am just trying to better understand the new store productivity number that’s coming through in the model. Was there any positive calendar shift in Q1? I know there was a shift in week. So, I am just wondering the NSP number, should we be just taking what we’ve got here and extrapolating that going forward or is there something unusual there?
This is Jay and I’ll start. I mean certainly, there was -- we talked about the total sales shifting being higher in Q1 and Q3 and at the lower end of Q2 and Q4. And a function of that is the calendar shift back to 52-week year. So, there is certainly an impact from that in the Q1. I mean, when I do my rough math, my new store productivity number is about 124 or something on a shifted basis. If you go back to normalized shift apples-for-apples on an as reported -- moving away from the as reported basis, it’s probably just north of 100%. And I think that’s closer to what we’ve been running. Last year, I think we were about 109, 108. I mean all of that’s historically higher than what we’ve been running. We planned the business closer to the low to mid-90s that’s how we think about it. That’s how we plan the business. But we haven’t been exceeding that -- but we haven’t been exceeding it 124 -- we’ve been exceeding north of 100.
Great. That’s helpful. And then, I just wanted to ask a question about health and beauty aids. This by far has been your fastest growing category over the last two years. Clearly, it’s been a traffic driver. You didn’t mention in the category this quarter. I’m just hoping you could talk about where you stand in terms of adding assortment, expected performance of the category in 2018?
Yes. This is John. With regard to HBA, obviously last year HBA was a real strong performer for us. We had a lot of -- new access to product that we hadn’t had in the past. And as any part of our business, it is deal-driven. So, we move in and out of categories all the time. HBA is performing just fine. It’s still comping positive compared to last year but just wasn’t one of our top five. So, we expect HBA to continue to move forward in the right direction. But last year was a new -- we introduced new items and new categories and now we’re up against our own good number again. So that guidance kind just leveled off and has continued to move in the right direction. So, there is nothing wrong with it by any means, but it’s something that we’re sitting there and seeing it annualized on a positive basis. So, we’re excited about it.
And our availability from these CPGs just continues to get stronger. The offerings are bigger and better, and main brands that are really, really meaningful to the consumer. So, we’re really excited about where we’re at, we’re excited about the product we have in the store and the rate that it’s selling to the consumer.
And Mark, just one last one for you. So, in terms of traffic, if we think about the last few years, consumables played overall a pretty big role it seemed, K-cups, HBA, a couple of years of that. It is the -- the traffic that we’re seeing today is just a function of cycling a lot of that. And then, as we think about, obviously you’re always going to ask about like the next driver. Is the next driver really loyalty, or are there other things out there that you’re also thinking about?
This is Jay and I can start with that. I mean, certainly, right, we don’t have -- we don’t measure traffic, we don’t have traffic counter. So, we go by transaction and use that as a guide. And you’re spot on. I mean, if we look at ‘16 and ‘15 and look back, especially in the first quarter. I mean, those are strong comps and we had strong, strong transaction numbers. So there is no doubt, we’re coming up against that.
Yes. And I think that our increasing as it has -- we’ve been public for nearly three years now. So, as the visibility of the Company goes up, both in the overall persona and in the general geographic locations that we’re at, we’re just getting more and more and bigger offerings. And we make ourselves available to take additional distribution centers throughout the country. So, as we’ve talked before, when we opened Commerce, Georgia that made the southeast distribution centers for many of the CPGs more viable for them and for us. And when we eventually open our third distribution center, we think the same thing will happen. So, we’re just operating it or hitting all of marks, we’re operating at a very high level and developing and maintaining and strengthening these relationships that we have with the CPGs. We can take a lot of product and we can sell a lot of product, and we make their headaches go away quietly.
Thank you. Our next question comes from the line of Patrick McKeever of MKM Partners. Your line is open.
Just a question on store labor and wages and benefits and some of those things where we are seeing a fair bit of pressure across retail. And I know you are redirecting a good portion of the tax savings for employees. So, my question is, do you think it’s enough or have you seen any even more recent changes and things like employee turnover, store manager turnover that would indicate there might be some additional pressure in that area beyond what you’ve embedded into the guidance for the year? So that’s my first question. And then just the second question is on the second quarter and the guidance for the reaffirmation of the same-store sales guidance, the low end of the 1% to 2% range for the year. I understand it’s reaffirmation but also just trying to reconcile that with the positive comments in the press release about the early trends in the quarter. So, on the -- guiding more toward the 1% for the second quarter, is that more a function of the comparisons especially with the fidget spinner last year but I know that your comparison is difficult as well in the second quarter. So just any color around that would be helpful.
Yes. Patrick, this is John. I will take the labor piece, I will let Jay take the comp store sales piece. So, with regards to labor, we are -- and we’ve mentioned last several calls, we have seen labor pressures in our distribution centers more so than anywhere else in the business. I guess, the function of the tight labor market and the need for warehouse workers has increased. And we have been dealing with that since last year and we continue to deal with that, and we’re adjusting accordingly in order to reduce turnover and attract new people in those boxes. That’s something that we continue to work on. It’s not a material part of the overall reinvestment of the tax savings but it’s there and it’s real.
We have made some changes on the benefit side for employees and invested some dollars in the benefit side of the world for them that would be effective on July 1st that will be part of the tax savings that we’ve put in work for the employee base.
And then most importantly, at the store level, the reinvestment dollars are really set aside for the hourly workers. Our management teams or what not, our turnover has remained very consistent as we have talked in the past. We are not seeing an increase in the turnover on the management front. So, the dollars that have been set aside to react to any issues we may have on a market-by-market basis or an overall macro situation would be to adjust the hourly workers at store level. We have not seen significant pressures there in the markets we work in. We believe it provide a fair ways already today. We have a good work environment, we have a good benefits package and most importantly a nice employee discount for the employees. So we continue to monitor that on a very serious basis and we’ll adjust accordingly. That’s why we’re trying to have everyone -- don’t flow into the bottom line. We’ll use it if we have to. If we don’t need to use it, we won’t use it and flow back to the shareholders. But at this point in time we think it’s coming. And we’ll react when the time is right.
With regards to comps, I’ll let Jay address that with you.
Yes. Patrick, on the comps, I mean you’re spot on. We did kind of reaffirm that of 1 to 2 for the second quarter. And as you know, we’re always going to remain conservative in our outlook. You said that we’re victim of our own success coming up against our own big numbers. And to your point, right, last year, Q2 had spinners in there, which was a little bit just south of a two-point impact on the comp. So, we want to make sure that we’ve got that appropriate. We think it’s the right way to plan the business, getting the deal nature of the business and the strong comp last year in Q2 in the spinners. Of course we’re not going to shut up the registers if we can do better than that. But that’s the kind of thing -- we’re off to a good start so far, but we’ve got a long way to go in the quarter.
Did the spinners have material impact on gross margin in the quarter last year?
No, they did not.
Thank you. At this time, I’d like to turn the call over to Mark Butler for any closing remarks. Sir?
Okay. Thanks everyone for participating in our call and your support of Ollie’s. We feel great about our results to start the year and encouraged by our current trends and are confident in our ability to continue driving sales and profitable growth. We look forward to sharing our results with you on our second quarter call in early September. Thank you and have a good day.
Thank you, sir. And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation and have a wonderful day. You may disconnect at this time.