Ollie's Bargain Outlet Holdings Inc

NASDAQ:OLLI

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon and welcome to the Ollie’s Bargain Outlet Conference Call to Discuss Financial Results for the Second 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 reproduction of this call in whole or in part is not permitted without written authorization from Ollie’s. 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 [John] Stasz, Senior Vice President and Chief Financial Officer.

I’ll turn the call over to Jean Fontana, Investor Relations, to get started. Please go ahead, ma’am.

[Jean Fontana, IR]

Thank you, and hello, everyone. A press release covering the Company’s second 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 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 year 2018 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 any 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 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 said, I’ll turn the call over to Mark.

[Mark Butler, Chairman, President and CEO]

Thanks, Jean, and hello, everyone. Thanks for joining us on the call today.

Our second quarter results were very strong across the board. And once again, we exceeded our top and bottom-line expectations. Strong deal flow, new stores and comparable store sales growth drove a 13% increase in our topline. This was our 17th consecutive quarter of positive comps with a 4.4% comp store sales increase on top of an 8% increase on a two-year stack basis. We’re very happy with the broad-based strength across our merchandise categories with two thirds of our departments comping positive.

Our best performing categories included electronics, housewares, lawn and garden, automotive and floor coverings. These strong sales and our tight expense control fueled a 40 basis-point improvement in operating margin and a 48% increase in adjusted net income per diluted share.

We’re very excited about our results for the quarter and the continued momentum of our business heading in the back half of 2018l. At the heart of our performance is our consistent focus on three key drivers, offering terrific deals, growing our store base, leveraging and expanding Ollie’s Army.

Our recipe for success has always been selling good stuff cheap and giving our customers extreme value each and every time they shop with us. We continue to see a growing availability of deals from new and existing vendors. We have great deals across the entire store. And I probably don’t have to say this again, I’m really excited about our toy buyouts. We worked hard to get ahead of this with major toy manufacturers and the stores are going to be packed with great deals. Having a category killer go out of business presents a unique opportunity and we have leaned into it. This is a great opportunity to once again offer our customers more what they want, great brand at drastically reduced prices. All that said, I want to remind everybody that we have been a pretty good toy merchant for a really long time, and we sold our fair share of toys during the past holiday seasons and throughout the years. We’ve been doing this for 36 years now.

New stores are another important driver of our growth story and they continue to perform above our expectations. We opened six stores in the quarter, including our first location in the state of Louisiana, our 22nd state, and remain on track to open 36 to 38 new stores this year, in line with our long-term growth expectations. Including in our store openings in the back half of the year are three new stores in Texas. We’re really excited about entering Texas. We believe it’s going to represent a great opportunity for expansion.

As you may know, we recently acquired 17 former Toys "R" Us sites, consisting of five leased and 12 purchase properties. Just like on the merchandise side, we’re always looking for a great deal and acquiring these sites demonstrates our ability to react to a deal and the opportunistic nature of Ollie’s. As we continue to open profitable new stores and increase awareness of the Ollie’s brand, we’re confident in our ability to open additional successful stores in both new and existing markets with the potential to more than 950 stores nationwide.

Moving on to Ollie’s Army which just keeps getting bigger and bigger. The Bargain Battalion is now almost 9.8 million members strong and makes up at about 70% of our sales. Army members spend significantly more than nonmembers, and customers continue to join the program at a pace that exceeds our store growth. To boost this momentum, we have rolled out some key initiatives for the Army as we’ve spoken about before. We successfully launched the Ollie’s mobile app toward the end of the second quarter and rolled out Ollie’s Army ranks right after that. With ranks, Army members can become a one, two or three-star general and receive various rewards and surprise offers, based on their rank. With our mobile app, we’ve officially entered the digital marketing age and we have the ability to communicate the latest and the greatest deals via the smartphone. The app also makes it easy for members to track their rewards, their current rank and their progress to the next level. We’re in the very early stages of these initiatives and we’re excited to gauge customer response. Our goal is to reward the tremendous loyalty of the Army and keep them coming back.

We are very pleased with our second quarter results and the overall trends and the opportunities in the business as we move into the second half of the year. With this continued momentum and the robust closeout environment, we are raising our sales and earnings guidance for the full year, which Jay will speak to in more detail. We’re bullish on the closeout industry and our ability to execute in this space. Our philosophy of buying chip and selling chip coupled with the tight expense control and successful new store openings has driven our business for 36 years and will continue to do so. Over that time, we grow into an organization of over 7,000 team members who are working harder than ever. It’s their combined experience, their passion and the commitment to the team that makes Ollie’s successful. And I want to thank everyone in the stores, the DC, distribution centers and the store support centers for all their hard work and their dedication. Thank you for your support to Ollie’s.

I’ll now turn the call over to Jay and he will take you through our financial results and 2018 outlook in more detail.

[Jay Stasz, SVP and CFO]

Thanks, Mark, and good afternoon, everyone. We are very pleased with our second quarter results and our performance so far this year.

For the quarter, net sales increased 13.1% to $288.1 million. Comparable store sales increased 4.4% on top of a 4.5% increase in the second quarter of last year and an 8% 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. This year, we were very successful with sales of larger ticket items versus last year when spinners were a hot fad in the second quarter.

As Mark said, we opened six stores during the quarter ending the period with 282 stores in 22 states and increasing our store count of 12.8% 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 12.4% to $112.6 million and gross margin decreased 30 basis points to 39.1%. The decrease in gross margin was due to higher supply chain costs as a percentage of net sales, partially offset by increased merchandise margin. SG&A expenses increased 11% to $73 million, primarily the result of additional selling expenses from our new stores and increased sales volume in our existing store base. We leveraged SG&A expenses by 50 basis points to 25.3% of net sales. Operating income increased 16.9% to $34.9 million and operating margin increased 40 basis points to 12.1%.

Net income increased 51.4% to $29.8 million and net income per diluted share increased 50% to $0.45. Included in the $0.45 is $0.06 of tax benefits related to stock-based compensation. Adjusted net income which excludes these benefits, increased 46.2% to $26.1 million or 48.1% to $0.40 per diluted share from $17.8 million or $0.27 per diluted share in the prior year. Adjusted EBITDA increased 15.4% to $40.3 million in the second quarter and adjusted EBITDA margin increased 30 basis points to 14%. At the end of the period, we had $29.4 million in cash and no outstanding borrowings under our revolving credit facility. We ended the period with total borrowings of $21.8 million.

Inventory at the end of the second quarter increased 13.6% over the prior year, primarily due to new store growth and the timing of deal flow. Capital expenditures were $5.5 million in the quarter compared to $5.7 million in the prior year.

As Mark mentioned, we are raising our full year sales and earnings guidance based on our year-to-date results and expectations for the second half of the year. As such, for the full year, we now expect total net sales of $1,222 million to $1,227 million; comparable store sales growth of 2.5% to 3%; the opening of 36 to 38 new stores and one relocation; operating income of $154 million to $156 million; adjusted net income of $114 million to $116 million; and adjusted net income per diluted share of $1.73 to $1.76, both of which exclude the 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 the tax benefits related to stock-based compensation; diluted weighted average shares outstanding of 66 million; and capital expenditures of $70 million to $75 million with the increase driven by the Toys "R" Us properties.

Let me add few other points that might help you in your modeling. The increase in our sales forecast is driven by the strong momentum in the business overall and expectations around our toy buyouts. Our full-year guidance embeds the comp store sales increase of 2% to 3% for the back half of the year compared to our prior guidance of 1% to 2%. As mentioned on our Q1 call, we continue to experience slight pressures on the cadence of our new store openings, which is impacting our top line sales forecast in the back half of the year. This impact is factored into our revised full-year guidance. We have already opened three stores during the third quarter. Of the remaining 20 to 21 stores scheduled to open in 2018, about 60% will be in Q3 and 40% in Q4 with one opening at the very end of January. As Mark mentioned, we acquired 17 sites, taking over five leases and 12 owned sites from Toys "R" Us. These stores will be part of our annual target of a mid-teen unit growth rate and are not incremental to our store opening plans. For the third quarter, we are forecasting a total sales increase in the mid to upper teens; and for the fourth quarter with the sales shift and one last selling week, we are forecasting a total sales increase in the mid to high single digits.

In regard to gross margin, we continue to forecast the full year rate of 40.1%. But, in terms of cadence, we expect a 30 to 40 basis-point decrease year-over-year in Q3 and a 30 to 40 basis-point improvement year-over-year for Q4. Additionally, in the back half of 2018, we are modeling $0.01 headwind to EPS due to additional preopening expenses associated with the Toys "R" Us sites.

I will now turn the call back over to Mark before we get into Q&A.

[Mark Butler, Chairman, President and CEO]

Thanks, Jay.

Hey, I just want to take a moment to remind everybody about the fundamentals of our business. Our results, they’re driven by deals which pop up in nearly any product category, such as electronics or toys. When these deals occur, they command prime space in the stores and in our advertising, as well as the focus of the entire team. Obviously, not every deal can or will be incremental. We see this each and every quarter and give and take of our comp sales on a departmental basis. No one is more pumped and bullish about our toy buyouts and sales than me. Ollie’s has been built by consistently executing the complex landscape of closeout retailing. Since going public, we’ve remained consistent in our approach to managing and planning the business. As always, while bullish, we remain calm, conservative in our outlook. We believe it’s a prudent thing to do given the deal nature of our business and the fact that we’re coming against -- and up against our own strong numbers. I once again say, stick with me, don’t get ahead of me, I am not a hired gun. My interest as a shareholder are aligned with each and every other shareholder.

I’ll now turn the call back over to the operator to start the Q&A session. Operator?

[Operator]

Thank you, sir. [Operator Instructions] And our first question will come from the line of Matthew Boss of JP Morgan. Your line is now open.

[Matthew Boss, JP Morgan]

So, Mark, you’re two-year stack comp this quarter was the best in two years. I guess, as we think about the momentum, is it a stronger consumer backdrop, is it execution, maybe combination of both? And I guess, how best to size up the opportunity as we think about the loyalty launch and the $200 million buyout as we consider the back half of the year?

[Mark Butler, Chairman, President and CEO]

Matt, thanks for your comments. We feel really, really good about where we are. We feel good about the momentum in the business. I’d point out once again that two thirds of our departments comp positive for Q2. I think that weather played well for us. We had some great warm weather selling opportunities. The closeout buying environment continues to be strong. I think, in the macro, the consumer just continues to love a bargain. We’ve been saying that for years and years and years. And I think our stores are rock ‘n’ rolling. And we’re really, really excited. The toys -- we’re locked and loaded. We’re excited about the toys. And when you come into our stores, you can see that we have a lot of toys. It commands and it will command a lot of the biggest, the best location in the store. And I think it’s going to really, really help. And we’ve also increased for the first time that I ever have gone over the 2% on the comp store increase projection. So, we’re really excited. We feel really good about it. John, do you have anything you want to add?

[John Swygert, EVP and COO]

No. Matt, I think the only thing I want to make sure we were clear on is with the toys, which we’re very, very excited about, the toy business that we’re talking about and the excitement we have with the toys and the buyouts that we’ve actually completed, it’s not all incremental business. We’ve been in the toy business for 36 years. We’re a toy merchant for the holiday season and we’re toy merchant throughout the entire season. So, this is -- while this is exciting, we do believe there’s some potential lift to the business and hence why we raised our overall comp guidance from a 1 to 2, to 2 to 3. We do believe there is some potential cannibalization that toys will take away from the overall space of the store. But overall, we’re excited about it and we think it will be great to the bottom line.

[Matthew Boss, JP Morgan]

And then, maybe a follow-up for Jay. What was the merchandise margin up in the quarter? And how best to think about merchandise margin versus supply chain pressures embedded in that third and fourth quarter gross margin outlook that you provided?

[Jay Stasz, SVP and CFO]

Sure, Matt. Merchandise margin was up 60 bps in the quarter and supply chain costs offset that. They increased 90 bps in the quarter. So, we were down to 30. As we look into Q3 and Q4, we think those trends are going to continue. We expect favorability in merchandise margin. We’ve seen that in the first two quarters here. We expect that to continue. I mean, on a year-to-date basis, merch margin is probably up about 70 bps and supply chain is up about the same amount. So, we expect those pressures to continue. We think on the supply chain, especially in Q3 with companies reacting to possibly moving product in relation to the tariffs that the pressures will be tough just a little bit in Q3. So, the pressures will be high. And as we enter Q4, we’re going to start to anniversary the costs and the supply chain. So, we think we’re going to be able to get some of that back on the supply chain side and expect merchandise margin to remain trending as it is, which has been strong.

[Operator]

Thank you. And our next question will come from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open.

[Brad Thomas, KeyBanc Capital Markets]

I just wanted to follow up on that on the comp guidance. I guess, Jay, if I heard you correctly, looking for 2% to 3% in the second half. I guess, just, can you help us think about puts and takes in the sense that you have a little bit easier comparison here in 3Q, presumably had some good momentum at the start of the quarter. Fourth quarter comparison little bit tougher, but that’s of course a quarter where the toys is a bigger part of your business seasonally. Any more color on how you think comps are going to play out between those two quarters?

[Jay Stasz, SVP and CFO]

Sure, Brad. Yes. I mean, high level, to your point, you’re spot on. I mean, we think that we’re going to be in the higher end of the range of the 2 to 3 in Q3. And then, as we come up in Q4, like you said. we put up a 4.4 last year. So, we would expect to be in the low end of the range of the 2 to 3.

[Brad Thomas, KeyBanc Capital Markets]

And then, as I’ve been out to some stores, I’ve spotted some appliances. And I was curious, you give a little bit more color on how prevalent this is and how important that could be for your business?

[Mark Butler, Chairman, President and CEO]

Yes. I think -- Brad, this is Mark, just another deal. We’re able to get our hands on some appliances. I really can’t tell you that we would grow it anymore than what it is. But, it’s not in the majority of the stores, it would be less than 100 stores. And I don’t think I would factor that to have any major impact to the last two quarters of the year.

[Brad Thomas, KeyBanc Capital Markets]

Is that something, Mark, you think could be a more consistent offering in the stores going forward? And if so, do you think, it could become a material part of the business?

[Mark Butler, Chairman, President and CEO]

If the availability did allow itself to be so, we would be very aggressive towards that. But we don’t know if the availability would continue.

[Operator]

Thank you. And our next question will come from the line with Peter Keith of Piper Jaffray. Your line is now open.

[Peter Keith, Piper Jaffray]

Maybe following on Brad’s topic of questions around the appliances. Is there any way to think about that as what the benefit was to Q2 overall?

[Jay Stasz, SVP and CFO]

We don’t call out the impact of the deals on a quarterly basis. We did that with spinners, because that was a unique item. So, we’re not going to get in the habit of calling out the impact. It is just another deal, like anything else. You can see, it’s in our electronics department and our electronics did well during the quarter.

[John Swygert, EVP and COO]

Just to add a little bit to it with regards to the overall appliances, it was nothing like the spinners. So, it is not worthy of calling out. So, while you guys are excited about it, it wasn’t that impactful to our overall businesses, as Mark said earlier.

[Peter Keith, Piper Jaffray]

And then, I was curious on the strategy with the Toys "R" Us stores, particularly those that you acquired. You typically don’t own stores. Are you thinking about some type of sale-leaseback transaction as we look out to 2019? And do you think you guys might get more than what you paid for as a return on those stores?

[Mark Butler, Chairman, President and CEO]

Yes. I’ll go first. And as you know, Peter, it was a very opportunistic situation, very vibrant situation, we were able to get some really, really good sites. I think for -- as far as what will happen in the future, there is the opportunity that might present itself down the road that that bankruptcy is still flushing out. So, there may be additional opportunities. And as far as the financial side, I’ll let the boys talk about that.

[Jay Stasz, SVP and CFO]

To your point, we’re not in the business of owning our store real estate. So, yes, we would look to do a sale-leaseback at some point. We just acquired these sites, so we’re going to start to look at options in regard to a sale-leaseback. We’re not going to do it if the economics aren’t right. So, we could end up holding them but our first choice would be to do a sale-leaseback. And as far as how that really plays out, too early to really say on that. We’ve been talking to people and we’ll let that come when it comes.

[Operator]

And our next question will come from the line of Rick Nelson with Stephens. Your line is now open.

[Rick Nelson, Stephens]

Just to follow up on that store growth opportunity with Toys “R” Us. If you could let us know the timing you think of those openings and how the lease signups look for next year beyond the Toys “R” Us stores?

[Jay Stasz, SVP and CFO]

This is Jay and I will start and John and Mark may chime in. We’re not going to get into commenting a whole bunch on ‘19. But, in terms of the Toys “R” Us stores, we expect -- we got five lease sites, we expect to open four of those in the back half this year. So, that will be part of the 20 to 21 stores that are still to open to open. So, that leaves one lease sites and then the 12 purchase sites. And our expectation on those sites is to open those in the first half of next year. It’s just -- we don’t have the capacity right now to do it sooner. And like I said on the call, they are going to fold into our normal mid-teen unit growth rate. And as far as ‘19, our hope -- and again, we really haven’t started the model that I don’t want to talk a whole lot about it, but we would expect to get back to a more normalized cadence, which is kind of 50% in the first half of the year, 50% of the openings in the back half. I think the Toys “R” Us sites put us in a good position to do that.

[Rick Nelson, Stephens]

Fair enough. And any comments on the rents there, how they would compare to the corporate average?

[John Swygert, EVP and COO]

Yes. Rick, this is John. With regards to the overall rents, we believe we were pretty optimistic in the purchasing of these sites and the all leases we purchased as well. In some cases, a few of these stores were little bit higher than our Company average and in some cases they are about in line with our Company average, which typically runs the gamut on our overall new store growth. We have this very similar cadence of rents that we’re seeing. So, the overall numbers we’re able to get in these sites are we think very favorable from our perspective.

[Operator]

Thank you. And our next question will come from the line of Judah Frommer with Credit Suisse. Your line is now open.

[Judah Frommer, Credit Suisse]

First, maybe just to ask the toys questions from little bit of a different angle. The new stores that you’re taking on, do you factor anything going forward for potentially better real estate, maybe repeat shopping from customers that used to shop Toys "R" Us stores there? And can you help us with toy margins? I know you’ve given kind of like bookings for your margins in the past, where do they fall in the spectrum?

[John Swygert, EVP and COO]

Yes. Judah, this is John. With regards to the overall sites and factoring in any incremental sales volume for these sites, that’s not something we would lean into. As a company, we model pretty consistently from our overall stores that we look at our pro forma of about $3.9 million or -- for $3.9 million in the first year of sales. We expect to do the same thing with these stores. Keep in mind that almost all the sites we do take down are always second-generation sites, very similar to these Toys "R" Us sites. So, we’re not sure exactly what we’ll see out of the sites. So, we don’t want to get ahead of ourselves. And any goodness that comes from these sites, we will take it and run with it, but we’re going to model the same when we model all of our other new stores. It’s just another retail site that we’ve gotten opportunity to take down and we are going to do the same as we’ve always done.

[Jay Stasz, SVP and CFO]

And in regards to margin, Judah, this is Jay. It’s right in our cake mix. We don’t really go on and talk about departmental margins. But, it’s going to be right in the sweet spot for us.

[Judah Frommer, Credit Suisse]

Okay, great. And sorry, if I missed this, but the supply chain pressure, is that all freight? Is there other stuff going on there as well? And then, beyond that, maybe Mark, if you could help us with just kind of how you feel about the health of the consumer and what seems to be a supportive economy?

[Jay Stasz, SVP and CFO]

Sure, Judah. This is Jay. The headwinds on the supply chain is primarily driven on the trucking side, absolutely. And we are seeing a little bit of increase in our labor at the DCs which we’ve talked about before, but the majority is on the trucking side and the fuel costs being just so high year-over-year and the capacities.

[Mark Butler, Chairman, President and CEO]

As far as consumers concerned, they’re responding to what we’re doing. We’re hitting all of our marks. We’re giving them bargains, and real brands, real bargain prices and they are reacting, our business has never been stronger. The deal flow continues to be very, very vibrant. And I’m really excited about where we are, where we finished the quarter, how I am feeling about it and the prospects obviously with our raised guidance, I feel good about the prospects that we have going in Q3 and Q4. Consumer seems to be reacting to what we’re doing. And I’m just thrilled.

[Operator]

Thank you. And our next question will come from the line of Vincent Sinisi with Morgan Stanley. Your line is now open.

[Michael Kessler, Morgan Stanley]

Hi, guys. This is actually Michael Kessler on for Vinny. Thanks for taking my question and congrats on a great quarter as well. So, my first question, so I noticed, I think the new store productivity, just quantitative basis, little bit different in, low 60s by our calculation. I know there’s some calendar shift is going on there. So, I was wondering if you just kind of give us a sense of how that looks like on a like-for-like basis. Was that still basically in line kind of the 90% range that you guys aim for usually?

[Jay Stasz, SVP and CFO]

Michael, this is Jay. And yes, you’re spot on with that. Because of the shift of calendar, and we talked about this, Q2 is high 60s, near 70, and we’re going to have the same phenomenon in Q4 just because of the sales shift. But, on a more normalized unshifted basis, we’re right in line with high 80s to low 90s, so right in line with our expectations. The stores are performing well.

[Michael Kessler, Morgan Stanley]

And then, I just wanted to follow-up on a different topic, actually. You guys leveraged SG&A pretty well this quarter. I’d imagine a big portion of that being leveraging kind of a strong comp you had. Is that the case? And then, were the tax reform investments, I think you mentioned kind of starting this quarter -- was that as expected, was there -- how does that look going for the rest of the year here?

[Jay Stasz, SVP and CFO]

You’re right. The SG&A leverage, a large chunk of that was just the sales with the 4.4 comp we were able to get good leverage like on advertising and store payroll. A portion of it was related to tax reinvestment. We spent maybe about a third of what we had planned in Q2. So, we probably got probably 20 to 25 bps of this on the SG&A line in the quarter from that, the fact that we didn’t spend it. We do continue to model the tax reinvestment in the back half. We’ve got about $0.04 of reinvestment planned, which is probably about 30 bps or so on a gross basis to SG&A. We’re keeping that in our model in the back half. And the investments so far like we’ve talked about before, we’ve spent that on our benefit plans and we’ve spent it probably in wages at the DC. We haven’t yet had to do a major shift at the store level, hiring from an hourly standpoint. We haven’t felt the need to increase our starting wage across the board. But that said, again, we’re kind of keeping that in the plan. We’ve got 20 to 21 stores still to open in the back half. So, we expect there could be some challenges, could be some headwinds to that. And then, if we do experience that that’s where we would reinvest.

[Operator]

Thank you. And our next question will come from the line of Paul Lejuez with Citigroup. Your line is now open.

[Kelly Crago, Citigroup]

Hi. This is Kelly Crago on for Paul. Thank you for taking my question. We noticed a healthy amount of toy buys on our store visit. But, I think you didn’t call it out as a strong performer. Did you see a better a pipeline in toys in 2Q and could you just remind us again, how big the toy category is in the fourth quarter?

[Jay Stasz, SVP and CFO]

Sure. Kelly, this is Jay. I can start with that. So, bear in mind that toys year-over-year, we had the spinners in that category. So, that was obviously a big headwind to overcome. So, toys on an absolute basis didn’t really perform that well. I mean, that said, if you’ve been in our stores, you can see some of the selection of toys that we got. And if you exclude those spinners, the underlying toy business was actually pretty good. So, that’s good news. On an annual basis, our toys are 5.5% or so of our sales. And we’ve talked about this, in Q4 obviously spikes; it goes about double that.

[Operator]

Thank you. And our next question will come from Edward Kelly with Wells Fargo. Your line is now open.

[Edward Kelly, Wells Fargo]

I just wanted to circle back on the SG&A question. If I look at SG&A this quarter, there is a large area of upside, at least for us. SG&A dollars versus Q1 were very close, which is not actually that normal. And if you think about sort of like SG&A for store or just SG&A growth generally, at 11% range on square footage growth is much higher. It’s just a low number. So, I’m just trying to understand what’s taking place within the SG&A. You’ve had a tremendous amount of success here over the last year and half, it seems to be continuing. But, I just want to understand what’s driving that.

[Jay Stasz, SVP and CFO]

This is Jay and I will start. I don’t think there is anything too unusual in there. Obviously with the sales shifts, right, we see that from quarter to quarter causing some noise. On a full-year basis, we’re forecasting SG&A to be flat or maybe call it 10 bps higher than OI. So, we’ll be right in line on an annual basis. What we did see in the quarter, like I said, with the strong sales performance, we did see leverage in our store costs, including our payroll and we also did see some leverage from a marketing standpoint. So, just good leverage there and then the tax did contribute to the 50 basis-point improvement year-over-year.

[John Swygert, EVP and COO]

This is John. It kind of just goes to how we manage this business. We run a very lean operation and we don’t invest at a higher rate than we need to. So, while we leveraged pretty, pretty strong compared to Q1 of this year, our sales are only $13 million more than what I think Q1 was as well. So, most of our costs are going to be variable in nature. So, the G&A front of it is a fixed element that we’re not spending ahead of our sales growth. So, our mantra is kind of tight expense control and that we control the business, and everything flows through much higher than other retailers able to deliver when they’re not performing. So we continue to manage the business that way, and we plan to do that for a long-term basis.

[Edward Kelly, Wells Fargo]

Great. That’s helpful. And then, I just wanted to also circle back on the labor front and the wage investment. Can you just talk about what you’re seeing from a turnover perspective, both at like the store manager level, hourly worker level, any pressure at all that you’re seeing there? And then, the decision to, at this point, not raise wages at the store level, what’s driving that and how should we be thinking about that going forward? Are you considering not raising those wages? I’m just trying to figure out how we should be think about modeling this.

[John Swygert, EVP and COO]

We will only increase wages when we need to increase wages. We’re not going to increase wages just because others are doing so. Most importantly, we’re not necessarily a minimum wage payer. We pay above minimum wage for our employees and we pay competitively, market by market by market. So, we do labor studies in every market we go into. So, we pay competitively when we enter those markets. And we’ve done that for a long period of time. So, we’re competitive running into the marketplace, we’ve not had any increase in our store management turnover or our hourly turnover from what we’ve seen historically as a retailer. So, once we see or if we see anything, we’ll definitely adjust accordingly. We’re not afraid to do so, but we’re not just going to throw money out there just because others are talking about it. And most importantly, our average wage we’re paying at store level is pretty competitive for what’s in the market today.

[Operator]

Thank you. And our next question will come from the line of Randy Konik with Jefferies. Your line is now open. [Operator Instructions] And our next question will come from the line of Patrick McKeever with MKM Partners. Your line is now open.

[Patrick McKeever, MKM Partners]

Just on the -- Jay, I think you said transactions were down year-over-year and the comp was driven by higher average baskets. So just confirming that. And then just wondering if any thoughts on -- or any details around the drivers of the higher average basket? And then, the other one was just on the app, wondering what you’re seeing with the app, how many downloads and what kind of usage and whatnot?

[Jay Stasz, SVP and CFO]

Patrick, I’ll start on the transactions and average basket. Yes. The average basket was up pretty strong in the quarter, was up about 7%, transactions were down about 2.6%. And we expected that. I mean from a transaction standpoint, if you think about the year ago quarter with spinners, I mean obviously high velocity, fat item is going to drive a lot of transactions. But like we said before, really for us, what drives our business and what drives our comp are deals. The average basket and the transactions are a byproduct of our deals and our sales mix in any given quarter. We don’t worry about it that much as much as folks like you. I understand you have to talk about and understand it. We’re more focused on getting the next deal. And with 17 quarters of positive comps, we’re pretty excited about that. And part of it is, we’re just coming up against our own strong numbers.

[Mark Butler, Chairman, President and CEO]

And Patrick, with regards to the mobile app, we just rolled that out right at the end of quarter. So, there’s not a whole lot of data available from our perspective. We’ve kind of rolled it out slowly. Thus far through yesterday, we had just north of 50,000 new users on the app. So, we feel pretty excited about it. But, we’ll see where it all ends up at the end of the day. But, it’s definitely moving in right direction and get us into digital age and give us the ability to speak to the consumer on a more real-time basis and they actually have all of the data related to the Army right at the fingertips.

[Operator]

Thank you. That concludes today’s question-and-answer session. So, now, it is my pleasure to turn the conference back over to Mr. Mark Butler, Chairman, President and Chief Executive Officer, for closing comments or remarks.

[Mark Butler, Chairman, President and CEO]

Great. Thank you. And thanks everyone for participating in our call and your support of Ollie’s. We feel great about our results for the quarter. Looking ahead, we’re encouraged by the current trends and we remain confident in our ability to continue driving sales and profitable growth. We look forward to sharing our results with you on our third quarter call in early December. Thank you very much and have a great day.

[Operator]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.