Ollie's Bargain Outlet Holdings Inc Stock

Good morning, and welcome to Ollie's Bargain Outlet's Conference Call to discuss financial results for the second quarter of fiscal year 2026. Please be advised that this call is being recorded, and the reproduction of this call in whole or in part, is not permitted without the express written authorization of Ollie's.

I would now like to introduce our host for today's call, John Rouleau, Managing Director of Corporate Communications and Business Development for Ollie's. John, please go ahead.

Thank you, Carmen. Good morning, everybody. We appreciate your time and participation. Joining me on today's call from Ollie's are Eric van der Valk, President and Chief Executive Officer; and Robert Helm, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. [Operator Instructions]

Finally, let me remind you that certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-K and quarterly reports on Form 10-Q. Forward-looking statements are made as of the date of this call, and the company does not undertake any obligation to update these statements.

On today's call, the company will also be referring to certain non-GAAP financial measures Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release.

With all of that said, it's now my pleasure to turn the call over to Eric.

Good morning, and thank you for joining us today. We delivered strong earnings growth in the second quarter and continue to execute against our strategic initiatives. Comparable store sales declined 1.8% against a challenging multiyear stack. We believe our sales results were negatively impacted by the combination of less favorable weather, continued economic pressure on the consumer and an elevated promotional environment, which all led to a more challenging backdrop than we originally expected.

Outside of weather-impacted categories, the broader business performed generally in line with our expectations and we continue to see customers actively seeking value. The consumer remains resilient but increasingly selective in how they choose to spend. Lower income customers are prioritizing needs over once shopping closer to need and in many cases, delaying discretionary purchases where they can, while higher income customers continue to trade down in search of value. For over 40 years, we have combined extreme value well-known brands and an ever-changing assortment to deliver a treasure hunt shopping experience unlike anything else in retail. Our assortment spans both the consumable products that customers need and the discretionary products that they want.

Customers come to Ollie's because they know they can find good stuff cheap and every visit offers something new and unexpected. The treasure hunt experience creates a sense of excitement and discovery that keeps customers coming back and helps build a deeper connection with our brand. The combination of price, brands, newness and unexpected fines remains a powerful differentiator for us. Many of the same pressures affecting consumers today are also expanding closeout availability. Our deal flow remains extremely strong, giving us additional opportunities to sharpen our value proposition. At the same time, we are focused on controlling what we can control by optimizing our assortment and category mix. Our flexible closeout model gives us the ability to pursue exceptional deals while strengthening categories that are driving demand.

We are all about growth and our growth starts with opening new stores and acquiring new customers. We opened 50 new stores during the second quarter and 42 during the first half of the year, more than halfway to our full year target of 75. We are investing in our loyal customer base through events and programs that strengthen engagement and deepen our connection with customers.

During the quarter, we held another successful Ollie's Army Night, and wrapped our annual holidays events around our country's 250th birthday celebration. Despite some weather-related challenges, both events drove even stronger customer acquisition and engagement than the year before. Ollie's Army members increased 13% versus last year, and we ended the period with over 18 million bargain ops. At the same time, we are managing our assortment in floor space allocation to better align with today's customer while driving more value and newness. We are expanding categories with a strong product pipeline and white space in the market.

Protein and energy products, beverage, seasonal decor, living room furniture, as well as decor pillows were great examples of this. Most importantly, we are doing this through a disciplined test-and-learn approach that allows us to move quickly, make better merchandising decisions, improve the customer experience and increase sales productivity. Beyond merchandising, we continue to invest in our supply chain to support growth, improve efficiency across the network and enhance our ability to serve our customers. We recently completed the expansion of our Texas distribution center and operations have now normalized.

In the coming months, we will begin expanding our Illinois distribution facility with a planned completion date around this time next year. Together, these investments continue to expand capacity, improve execution and support our long-term growth plans. While we are not satisfied with our second quarter sales performance, we are moving swiftly to execute against our key strategic initiatives with the guiding principle of always putting the needs of our customers first. We are tempering our near-term expectations to reflect the current environment but that does not diminish in any way our confidence in the long term, profitable growth of our business. Value always wins. It will remain our durable competitive advantage.

Before I turn the call over to Rob, I want to thank our entire Ollie's team. Running a closeout retail business is hard work. It takes discipline, creativity, flexibility and relentless execution every day. Our associates continue to work hard servicing our customers and bringing good stuff cheap to our loyal bargainers, and I appreciate them more than words could ever express. Rob?

Thanks, Eric, and good morning, everyone. We delivered strong earnings growth in the second quarter and made a challenging environment. Earnings were better than expected, driven by EPA tariff refunds received in the quarter despite net sales performance below our expectations. Now let me walk you through the results for the quarter. Net sales increased 9.1% to $741 million, driven by new store openings. Comparable store sales decreased 1.8%, driven by flat transactions and a decrease in basket. .

As a reminder, the second quarter was a difficult comparison where we faced mid- to high single-digit comp increases in each of the prior 3 years. Top-performing categories were toys, general merchandise, summer furniture candy and seasonal decor. We saw softer performance in weather-sensitive categories, particularly early in the quarter. Gross margin increased 360 basis points to 43.5%. The increase was driven primarily by EPA tariff refunds. Tariff refunds benefited gross margin by 380 basis points in this year's second quarter. Merchandise margin decreased primarily related to investments in price. Transport remained elevated, but this was more than offset by lower tariff rates.

SG&A expenses as a percentage of net sales increased 80 basis points to 26.6%, primarily driven by the deleverage of fixed costs from the decline in comparable store sales and higher marketing expenses related to one incremental merchandise flier in the quarter. Preopening expenses decreased 42% to $5 million, driven primarily from a fewer number of new store openings and lower dark rent expense.

Moving down to the bottom line. Adjusted net income increased 40% to $85 million and adjusted earnings per share increased 43% to $1.42. Lastly, adjusted EBITDA increased 36% to $127 million and adjusted EBITDA margin increased 330 basis points to 17.1% for the quarter.

Turning to the balance sheet. Our total cash and investments increased 10% to $507 million, and we continue to have no meaningful long-term debt at quarter end. We continue to deploy our capital opportunistically and again stepped our buyback and repurchased $84 million of our common stock in the quarter. Through the first half of the year, we have bought back 1.6 million common shares at a cost of $137 million. At the end of the second quarter, $122 million remained available for future share repurchases under the current share repurchase authorization.

Inventories increased 11% year-over-year, primarily driven by our new store growth. Capital expenditures were $43 million in the quarter, with the majority of the spending going towards the opening of new stores, improvements to existing stores and the expansion of our Texas distribution center.

Now let me wrap up with commentary about our outlook for the full fiscal year. Our updated outlook reflects 2 key changes. First, we have updated our second half sales assumptions to better align with recent sales trends and the current environment. Second, the outlook now includes IEFA tariff refunds received in the second quarter. which we have already started deploying an additional price investments to strengthen our competitive position. Details of our revised fiscal 2026 outlook are included in our earnings press release issued this morning. At a high level, our outlook assumes 75 new store openings, 2 store closures from storm damage, net sales of $2.928 billion to $2.941 billion. Comparable store sales growth of flat to positive 0.5%; gross margin in the range of 41.3%, operating income was $345 million to $350 million, adjusted net income of $275 million to $279 million and adjusted net income per share of $4.57 to $4.65.

Let me provide you with a little more color on our guidance. Starting with comps. We are now planning the back half in line with our second quarter 2-year stack, which translates into comp growth close to flat in the third quarter and up 1% in the fourth quarter.

Moving on to gross margin. There are a lot of dynamics at play here, but our core fundamental thinking around gross margin is unchanged. Our outlook now includes $28 million of tariff refunds net of a 50 basis point investment in price. Some of which we've already begun to deploy in the second quarter. On the supply chain side, we have assumed that current tariff rates and fuel costs remain in place for the balance of the fiscal year. Depreciation and amortization expense is planned at $62 million inclusive of $15 million included in cost of goods sold. Preopening expenses of $21 million, interest income of $22 million, which includes $1 million of interest associated with the tariff refund in the second quarter, an annual effective tax rate of approximately 25%, which excludes the tax benefits related to stock-based compensation.

Diluted weighted average shares outstanding of approximately $60 million which now includes a higher share repurchase level of $175 million and capital expenditures in the range of $103 million to $113 million. In closing, while our outlook reflects a more measured view of the near term, our confidence in the long-term growth opportunity remains unchanged. We continue to see significant runway for growth, maintain a strong balance sheet and are making disciplined investments to strengthen our value leadership position, support our future growth and create long-term shareholder value.

Before turning it back to Eric, let me also express a heartfelt thanks to all of our hard-working team members across the country. I'm grateful for everything they do to serve our customers each day. Eric?

Thanks, Rob. Our team is focused on execution across the business and passionately committed to serving our communities by delivering extreme value on products people want and need. We offer real bargains on real brands in a thrilling fun and pork environment that is like no other in retail. The treasure hunt remains alive and well at Ollie's. We are Ollie's. Operator, we are now ready for questions.

[Operator Instructions] One moment for our first question, please. It comes from Brad Thomas with KeyBanc Capital Markets.

I appreciate the updated guidance, and I wanted to ask about changing behaviors on the consumer front. We know that, that was starting to occur within 1Q to some extent. I'm just wondering if you all could speak to how the consumer may be shopping stores differently or visiting less based on some of the factors out there like higher gasoline prices, price investments from the competitors things like that. Again, just speaking about what you're seeing from your consumer.

Sure. Thanks for your question, Brad. The consumer remains resilient. We do continue to see strong engagement. Traffic was -- just to remind you, traffic was flat for the quarter, which was relatively consistent to the first quarter shopping frequency was down slightly and new customer acquisition was up.

Consistent with the previous quarter, the lower income consumer being very selective, prioritizing needs being -- meaning a little bit more heavier in the consumable related businesses, shopping a little bit less frequency frequently consumers, to your point about -- the question about fuel, we're continuing to see that dynamic that started in March of Q1, where customers are staying closer to home, if they live outside of a certain radius of our stores, and that does tend to connect to income, meaning the lower that consumer is on the income scale the less likely it is for them to travel if they're outside of a certain radius depending on whether they're in a suburban or rural area, they're potentially willing to drive a little bit further in the rural area.

But when you look at this by region in our Western trade areas, which includes parts of the Midwest and Texas. We're seeing where they have tend to have longer drive times that there's even more of a headwind related to fuel with that consumer. And finally, just to speak to the trade down, we are continuing to see higher income customers trading down, and we're drawing that line at around $100,000 in household income and above.

One moment for our next question, please. It comes from Steve Shemesh with RBC Capital Markets.

As I think about your comp guide, it implies a modest acceleration in the back half if we adjust for the flyer timing shift. Can you speak to the comp cadence throughout the quarter where you're trending 3Q to date? And just anything else that's giving you confidence in that acceleration?

Steve, this is Rob. I'll take that question. So for the second quarter, high level, the weather just did not play out as favorably as we had hoped when we set the guidance in June. From -- when you click into the trends, we entered the second quarter with a down transaction trend. We're very encouraged to see that during each month of the quarter, that sequentially improved. We also -- it actually ended the quarter with a positive transaction trends. So that was good to see.

Basket followed a very similar trajectory and basket ended the quarter flat. However, it wasn't enough to make up for the dip in seasonal performance early in the quarter as the weather-sensitive categories were most impacted. Consumables continue to perform well. We see that trend at mid-single digits as we've seen in prior quarters. And then similar to Q1, we saw some softness in the home improvement categories, which has more or less remained the same. From an August date perspective, we updated our guidance today. Our comp guidance is flat for the third quarter. Right now, our August results are running ahead of the plan that we used to build that guidance. That assumes the flyer shift, as you mentioned, and a labor day shift as well.

And for our next question, that comes from Randy Konik with Jefferies.

I guess maybe, Rob, for you. Give us maybe unpack the gross margin a bit ex in the quarter. And then looking out a bit longer term balance of the year and into next year. Just give us some perspective of how you guys are balancing price investment with margin generation as we think about tariffs and different moving pieces of the consumer going forward.

Thanks, Randy. I'll take the first part, and I'll hand it off to you, Eric, for the second part. From a gross margin perspective, it was certainly in a noisy quarter with the tariff refund. The tariff refund accounted for 380 basis points, as I mentioned in my prepared remarks. That was offset by a price investment related to those tariff refunds and mainly concentrated around weather-sensitive categories, quantify that about 70 basis points ex those, that's about 310 basis points. Our gross margin would have been above our guide for the quarter, which was 39.9%. We would have came in around $40.3 to $40.4 million.

Yes, I'll take the second part of your question. Just thinking about where we are, how we navigated Q2 and then how we're looking at the balance of the year, I think it's important be said that we are an everyday low-price retailer. We build trust with customers by being the lowest price of the market and items every day. promotional pricing, like high low pricing, excessive coupons, we believe, for us, a roads customer trust and damages our value proposition, which we take very seriously. We balanced price and margin very carefully, selectively around items, deals, in categories.

So when you look back on the second quarter, our price investments were primarily in existing Ollie's Army loyalty event, making those events even more compelling like Ollie's Army Night Holidays, we discounted seasonally relevant products such as fan and ACs, lawn garden and patio furniture. Extremely relevant, and there were businesses that were challenged as of mid-quarter, which timed well with our Ollie's Days and Ollie's Army Night events. We planned the event at 7 days versus 5 days, so 2 days in addition to which was really planned that way around Independence Day and the timing of Megapay week.

We also tested while we extended actually that event by 2 days, as we looked at the climate, the promotional climate and the weather lineup, we ended up extending it by 2 days. We also tested a personalized offer to incentivize our customers motivate them if they're outside of a certain drive radius of stores. We called the 5 for the Drive, which is a $5 discount on a basket threshold. On the product side, we invested in trend-right and seasonally relevant product. that we know will drive traffic, meaning made price investments to make the prices even more sharp to really get attention of customers. So some examples of that, rents patio furniture, pool chemicals.

So that informs our strategy for the back half of the year, and we've learned as a result of some of this, these taxes we've deployed, what is most productive in motivating the customers. So as we move into the third quarter, we're lighter on Ollie's by promotional activities. So our price investments are more focused on flyer events and special deals in flyers. We are planning for the full year to invest approximately $15 million price investments, and we'll not hesitate to invest beyond this level to strengthen our price leadership position. We do believe is the most important element of our model that with our customers. It is the best thing for us over the long term.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

So a lot of moving parts in here and just want to make sure to understand kind of the change in expectations. First, just in Q2, I think if we back out the tariff refunds, it looks like it's maybe about a $0.35 impact to EPS on the quarter. Just wanted to confirm that. And then as we think about the change in kind of comp expectations and what obviously didn't execute from early June when you guided through the end of the quarter to what you're expecting now. I think you said that you're expecting flattish comps here in Q3 and then plus 1% in Q4.

The compares are a little bit tougher in Q4. So just want to understand if that's more a reflection of thinking the price investments are going to have a more meaningful impact and then just confirming that you're running ahead of kind of that flat expectation in Q3 so far?

Thanks, Jeremy. That's a mouthful. So I'll try to answer all those as distinctly as they can. From a Q2 perspective, the quarter obviously did not play out as we had hoped when we set our guidance back in June. The major shortfall was on the top line. And we think a lot of -- it's hard for us to parse out how much of that was weather versus promotional environment versus state of the consumer since all that more or less happened at the same time. Now the environment around tariffs and the impact, you're right, it's $0.35. That was offset by a 70 basis point investment in price, which we believe probably would not have happened if these tariff refunds were not available out there to fund promotions across the space. So we kind of tether those both together, and that had an impact. .

Two other items within Q2, we continue to see shrink performing favorably. We continue to see supply chain efficiencies, and we're starting to burn in really the benefits from the Princeton, D.C. and having that operating at scale. SG&A delevered obviously on the negative comp. But depreciation preopening tax were all in line with our expectations. And then obviously, share repo was opportunistic and above our expectations with supported earnings. From an outlook perspective, we lowered the sales guidance in the second half, we did that to reflect the trends that we saw in the first half and the environment. There is a slight acceleration in the fourth quarter, which I think Eric will touch on in a moment. our thought process there.

But from the rest of the guide, gross margin was higher between -- I think it was like 52 or 53 basis points, which is really driven by the tariff refund, which is roughly 100 basis points on the year, offset by 50 basis points of price investment, including what we've already done in the second quarter. We also flowed through a small benefit relative to lower shrink in supply chain costs. There is some slight deleverage in the lower sales. And we did take the opportunity to step up the share repurchase and our guidance to $175 million today.

Yes, I think, Jeremy, just to add a little color on Q4. We're particularly excited about Q4 in part because there's some really big shopping days and events that occur in Q4 Black Friday, as an example, or always Army Night in the days leading up to Christmas, which have been increasingly strong for us over the years, and we're very excited about the deal flow that we're seeing, and we're able to secure to excite the customer in that period. And it also -- we have a little bit of flexibility around how we invest in those events at that time of the year, just a different time of the year. And also, on a macro basis, buyers, we're seeing customers shop closer to need and that tends to be sort of the nature of the holiday season.

So we kind of like the macro setup. But this is more about deal flow and Ollie's Army loyalty-related events are, let's say, slight optimism on the acceleration in the Q4 guide.

One moment for our next question, please. It comes from Steven Zaccone with Citi.

I wanted to follow up on the category performance in the second quarter. Can you help us isolate how much seasonal weather drag? And then help us understand some of the category productivity initiatives you have and more color on some of the merchandise assortment changes you're making.

Steve, it's Rob. I can quantify the seasonal drag. So just a straight math on lawn and garden and room air, the categories themselves would have been just over 100 basis points of drag year-over-year. However, those are businesses that drive traffic and drive folks into our store, and you've been to our store before. It's hard not to put another item in your basket. So given the attachment and everything else associated with that, we'd anticipate the drag to be even more meaningful for that than that. Calling out an exact number, it's hard to parse out the difference between weather, the consumer and the elevated promotional environment. So I don't want to I don't want to give you an imprecise number. But it was meaningful and above the straight category math.

Yes. Steve, in terms of category performance, we're pleased with the progress that we're making in improving category productivity especially in seasonal and the Furniture businesses. It's not necessarily material enough for us to move the needle in Q2, but we are continuing to make progress. We're taking this test-and-learn approach informed by both data analysis and qualitative evaluation of categories, reallocating inventory in space to categories where we see the white space in the market away from categories with low sales productivity that we believe are crowded by competition, most importantly, decisions to introduce or expand categories start with the existence of a robust sourcing pipeline of deep discount closeout product. .

We've been methodical in our approach to ensure we understand the customer response before we make any major changes. So test and learn in a handful of stores and really try to understand what's working? What isn't working? And then roll from there. So a lot more to come on this. We're very excited about the progress we're making.

Our next question comes from Edward Kelly with Wells Fargo.

Eric, could we just take a step back on the comp. And I'm just kind of curious as you sort of assess things in here -- you talked a little bit about assortment optimization. And I'm curious as to whether you think any of the weakness in the business relates to the availability of, let's call it, Wow discretionary items, it's called newness in the flyer, newness in the stores and the availability of that product versus what we know is availability of close out overall. Is that having any impact? And then the second question here, just again, trying to dissect comps. How are the big lot stores comping as they are rolling in relative to the base?

Ed, I'll take the first part of the question. The closeout pipeline continues to be strong. So the short answer to your short answer to your question is no, closeout availability is not a reason for a softer comp in Q2. I would point to all the things Rob just mentioned that kind of the collision of a promotional environment, unfavorable weather and a consumer that's under some pressure is more of the reason for coming in below expectations. You think about the product categories that are most important in that time of the year, we were very happy with the deal flow related to those categories, but they don't -- the categories don't necessarily resonate when the weather doesn't cooperate.

And it's an opportunity, too, to just talk about deal flow in general as we move forward and where we sit. We feel very good about our deal flow. It remains strong. We look at this environment we're in and causation of deal flow in this moment. And this competition for customer attention, especially some of these very rapidly moving price investments tend to be focused more on consumables or if you look back on some of the seasonal categories that I believe we were all struggling to sell, especially the first half of the quarter. That -- those price investments have price competition, that competition for market share for attention they all resolve create closeouts, and we're seeing that. And then the other comment to add color is the deal flow and summer seasonal weather-impacted categories, is especially strong in this moment. So that makes for a very good setup for next year in terms of the value we could deliver to the consumer when we come up on Q2.

From a big lot storage perspective, we talked about this a bit over the last couple of quarters. They're in the second year now up against the honeymoon period from the grand opening. Typically, our model would be to see a reverse waterfall where we'd see a negative mid-single digit to even high single-digit negative in the second year. We're seeing that moderate in part because of the soft opening approach that we've taken. So we're seeing more of a low to mid, and that trend still is holding Ed.

One moment for our next question that comes from Matthew Boss with JPMorgan.

So Eric, on the flat same-store sales this year versus the 2% algorithm that you had laid out multiyear, so continued strong deal flow you cited and the price investment this year. I guess, what do you think is making up the 200 basis point delta for this year? And then what's your confidence to anniversary all of these actions and reaccelerate comps next year?

Sure. So when you look at Q2, we -- a lot of this pressure that we're talking about occurred sort of the first half of the quarter. And it was challenging to have the crystal ball as to how the quarter would play out related to especially the pressure on seasonal business. So we believe that as we move into Q2 of next year, first of all, that we'd have a more average weather related condition. And we believe that a lot of what we were doing with price investments is a reaction to the competitive environment and ensuring that our values continue to stand out in an environment where a lot of our competitors were investing in price, especially the liquidation of weather-impacted categories.

So that's an unusual environment. So like I guess that like said in very plain English, there isn't going to be this windfall of tariff refund to the extent that we know it this time next year, which doesn't provide the checkbook for accelerated price investments, along with weather that just did not cooperate. I can't speak for the state of the consumer a year from now. I have our time speaking for the state of the consumer a month from now. So that's a question where fuel prices may land too is a question.

And then Matt, overall, our model is built to comp. Our buyers are able to buy the best values in the marketplace, which gives us the opportunity to drive comps year in, year out. Stores of all vintages continue to comp. Even some of our oldest stores and as you know, you've been following the story a very long time. Our track record on comp has been very good. Over the 10-year time horizon where we've been a public company, I think, only 3 years where we've negatively comped during that time period. And most of that was related to COVID in some of our own internal challenges. So I think after this environment clears to Eric's point, I think that this is a weird year and that we'll be back to operating like Ollie's in '27 and beyond.

And our next question comes from Anthony Chukumba with Loop Capital Markets.

So I had a question about seasonal, more from respective of, is there anything we have to be concerned with winter, right? In other words, like obviously, you were definitely negatively impacted in air conditioners and outdoor furniture. As you said, it was at least 100 basis points of comp probably more. Is there any like big winter product seasonal sales that we need to kind of be aware of or keep an eye or is it much more kind of a summer phenomenon?

Thanks, Anthony. It's definitely more of a summer phenomenon. So when you look at the back half of the year, there's a little bit of question around kind of October, November as you're kind of transitioning from Q3 into Q4 as to where the weather falls -- has some impact, but it's really a matter of weeks. If you look at the meaningfulness, the materiality of the winter weather impacted categories, and it's less than it is in the summer. So it's not nothing, but it's less material.

And so when we look at stacked, Anthony, as well, the third and fourth quarter, when you look further back in the 3- and 4-year stack, we're up against much more moderated stacks. The second quarter was, by far, the toughest comparison that we're going to have all year long. And probably one of the toughest comparisons we've had as a company because we've had multiyear strength in the second quarter.

Our next question is from Peter Keith with Piper Sandler.

This is Sarah Morin on for Peter Keith. Just looking towards 2027, how much visibility do you have into the new store pipeline? And have you been seeing any changes in quality or availability of the locations given the current retail environment?

No real changes to the environment. Real estate availability remains very good. We continue to be ahead of the pipeline, and we feel very confident about next year. we have our pipeline mainly in place for the upcoming year. 2028 and beyond, we're not speaking about yet, and we'll update it at a point in the future.

One moment for our next question. It comes from Scot Ciccarelli with Truist.

I guess I still have some questions around your comments on the promotional environment. I guess, just given your closeout model, I don't really recall competitive promotions as a big factor you've historically faced or at least noted in the past. So any color around that would be helpful. And then also why couldn't we see an acceleration in promotional intensity as it seems like a lot of retailers are planning to invest back in price in the back half?

I'm not sure I understand the second part of your question, but what do you mean by acceleration, Scott?

Well, just in terms of most of the companies that have reported over the last couple of weeks, they're all talking about investing more in price in the back half. And so if we saw heightened promotional activity for you guys in the second quarter. Like is that kind of built into the model? You guys are assuming it's going to be even deeper promotions from all the competitors out there.

I got you. Okay. Yes. In the second quarter, you're right in what you're saying, Scott, we typically don't talk about the promotional environment. This was a highly unusual environment. I think with the combination of tri-fuel investments that were more exaggerated in the middle of the quarter in addition to drag on seasonal weather summer weather impacted categories and so the clearance activity. that took place out there that was much more aggressive than we've seen in the past. It did cause us to take a little bit differently about how we liquidate businesses and how we price certain goods. And I called out some examples earlier.

As you look into the back half of the year, I mean we've communicated that we're spending $15 million over the course of the year, I think $10 million-ish of that is in the back half. So we are expecting to continue to invest in price. And I'll just emphasize, not knowing with certainty what the environment is going to look like from a promotion standpoint that if we need to invest more than $50 million, we will, we'll ensure that we are the price leader. We'll ensure that we maintain our price gaps and that we have the attention to the customer as we move into the back half of the year.

I can't speak to what retailers did in Q2 versus the back half of the year and how they chose to report that out how they invested and whether some of those investments are more back half of what you did, you'd only tell you what we're doing. And primarily, that is to make sure we're the best price in the market.

Our next question comes from Simeon Gutman with Morgan Stanley.

So the -- if you look back at when Ollie's has comped negative, it was almost always lapping a big compare to prior year, which you are a little bit following a lot of rapid store growth, which you've had, and then you've also cited some weather effects, and you've always recovered from it. But can you try to isolate the weather effects, not all regions, probably have the same impact and then as far as rapid store growth, are there regions where there's perhaps less cannibalization. So are you able to pinpoint maybe a little more with more precision some of these sort of onetime headwinds to your comp, so we can understand, I guess, the recovery back?

Sure. Simeon, this is Rob. I'll take that. I gave some quantification earlier, that's about the best that I can quantify. I can add the qualitative that we've seen the most softness in comp in parts of the Midwest and Texas. The challenge that we have in terms of isolating and pinpointing is there's 2 dynamics that play in those regions. One, they had the greatest degree of unseasonable weather and two, they happen to have the longest driving times, which are impactful when you're thinking about an elevated gas price environment.

Both of those phenomenons we would deem to be somewhat transitory. So hoping that in a nutshell in there, that gives you the answer that you're looking for in terms of when you can think about a return to a more regular comp cadence.

Our next question is from Chuck Grom with Gordon Haskett.

Just as we exit 2026, can you clarify what the jumping point is going to be for gross margins when you're guiding to 41.3%. I think there's a 50 basis point net positive impact here from the refunds. Just how do we think about the jumping point from that? And then can you just remind us when you move a CERC from -- or a flyer from one quarter to another, how much that positively impacted 2Q results? .

And then the last one for me, just on the quarter-to-date. I know you don't like to go there, but it does sound like it's positive. But I think you're net neutral now on flyers. I know you just dropped on this morning. So just 3 quick ones for me.

I'll answer about the gross margin algo and then I think Eric will take the flyer and then hopefully, somebody else take the third question. From an algo perspective, our views on the business haven't really changed over the longer term, even though we're in this short-term kind of moment in time. We are still on the long-term target of 4.5%. You're right to call out the additional 50 bps from the net tariff noise from the refunds less the price investments. In the short term, our view is the current pricing environment is being fueled in large part by tariff refunds which are limited in terms -- finite in terms of dollars and represent a moment in time.

We think that likely plays out over the balance of this year to some of the earlier comments that were made. Zooming out beyond this year, our strategy remains being the lowest price in the market anywhere and maintaining our leadership position in value and price gaps over retailers. Our flexible buy model allows us to drive this value with customers while delivering great returns to shareholders. And we continue to see more leverage from scale, but we're not ready to change any thinking relative to how we think about gross margin.

Yes, Chuck, I'll take the flyer question. It's probably important to talk about why we did what we did. And I think we talked a little bit about this on the Q1 call, we do routinely make changes to flyer timing based on the way the calendar sets up primarily. In this case, we actually made the change because in the past, we've not run a flyer event between holidays and early to mid-August. So we've been kind of blank dark on communicating in that way to the customer over a fairly elongated period of time when you consider we're out there at least monthly, if not more often, the rest of the year. We saw white space and deep discount closeout product for back-to-school and back to college and didn't like that we were dark for that elongated period of time.

So we shifted the flyer, as you indicated, from August into the last week of July. I think it's important to consider that, that flyer occurred at the very end of July. So it was just a handful of days that fell into August and the reason I think the setup for the thought process on why we made the move is important is it was the launch introduction of newness with the back-to-college back-to-school businesses. So it wasn't just about the flyer event and the impact of marketing around that event on one quarter versus another. It was about getting out in front of the customer with products that we felt was very relevant at a time that align with need. And we like what we saw out of that. It had a relatively immaterial impact on but it's definitely been more meaningful for Q3. And again, that's not about the flyer shift. It's about the setup of those businesses.

I don't know the quarter-to-date question, I think, was the last -- the flyer shift in the...

Well, the flyers shift is we literally get no benefit from as of yet, Chuck, because it just literally dropped this morning. Our stores are just opening now. .

Yes. I think the advice for those that are looking at the weekly or daily cadence of our business is to wait until end of next week, not this week but next week. It's the -- our intra-quarter shifts we're making as well. So I would attempt to read our business mid-September. The trying to compare quarter-to-date trends to last quarter is extremely difficult. We've done it, and it's informed our guide. So I think that's the most important point to make to everyone out there.

One moment for our next question. It comes from Mary Sport with Bank of America.

I was wondering if you could just provide a few more details on performance by income cohort. I know you mentioned that you're still seeing high income trading down, but what did you see for the middle and lower incomes? And if there was some trade out, did you see a return of those customers after you were able to implement some of those price investments during the quarter.

Sure. Yes, when you look at Q2, it was relatively consistent to Q1, we saw on the income side, I already mentioned we saw the higher income consumer trading down, kind of drawing the line around $100,000 household income. On the trade-out side, not trade out, but less frequent shopping headwind that we were seeing with lower income consumer. We saw that relatively consistent to Q1 and we're drawing that line at $65,000 income or below.

I think it's also important to note because we're very focused on attracting a younger customer that we're continuing to see great momentum in attracting and retaining younger consumers. And I'm going to define it today as ages 35 to 55 with -- especially with some strength in the 35% to 45% range. So we're very encouraged by that. We do think that our product offering has become -- some of our product anyway, it's become more appealing to younger customers, and that is delivered, and we're shouting about it to consumers in a place where they tend to be looking, meaning in various digital platforms so that we're able to reach them with our continued increasing sophistication in digital marketing. Did I get all your questions? Mary, I don't know if I missed.

One moment for our next question. It comes from Mark Carden with UBS.

This is Matthew Rothway on for Mark. So as it relates to your fuel price assumption, are you still expecting roughly 20 to 30 basis point margin headwind from fuel? Has anything changed around your thinking there? And then any initial thoughts on how you're approaching your fuel assumption for next year?

I'll take that. You're spot on. The fuel pressure continues to be in the range of, say, 20 to 30 basis points. That's what we saw in the second quarter, and that's what we got baked into the balance of the year, which is not new news. We had that in our previous guidance as of the last call. In the second quarter, however, that was completely offset -- more than offset by tariff refunds. When we think out to next year, it's just a little bit early for us to start talking about guidance for next year. We still have a lot of year to go this year. We'll give you an update when we have our third quarter call.

Ladies and gentlemen, this will conclude our Q&A session and conference for today. We want to thank everyone for participating, and you may now disconnect.

Good morning, and welcome to Ollie's Bargain Outlet's Conference Call to discuss financial results for the first quarter fiscal year 2026. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the expressed written authorization of Ollie's. I would now like to introduce our host for today's call, John Rouleau, Managing Director of Corporate Communications and Business Development for Ollie's. John, please go ahead.

Thank you, Carmen. Good morning, everybody. We appreciate your time and participation. Joining me on today's call from Ollie's are Eric van der Valk, President and Chief Executive Officer; and Robert Helm, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. [Operator Instructions]

Finally, let me remind you that certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-K and quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements.

On today's call, the company will be referring to certain non-GAAP financial measures. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release. With all that said, and out of the way, it's my pleasure to turn the call over to Eric.

Good morning, and thank you for joining us today. We are pleased with our first quarter results and the outstanding performance of our team. We delivered strong earnings growth driven by solid top line results and unit growth, robust margins and disciplined expense control. These results underscore the durability of our business model, the strength of our value proposition and our ability to execute through a challenging consumer backdrop.

Sales and traffic trends were strong across the board early in the quarter. As the quarter progressed, we began to see divergent trends across our different regions. The combination of unseasonable weather and surging fuel prices put pressure on a few key categories such as lawn and garden and summer furniture. With our stores being located in more rural and suburban areas, we also think the rapid spike in gas prices led to some trip consolidation, which impacted traffic. Rob will speak to this in a few minutes, but the areas with more favorable weather significantly outperformed those with unseasonable weather. As we move through the second quarter, we think there is the potential to benefit from pent-up demand in weather-sensitive categories.

Touching on the consumer for a moment. Customers are shopping closer to need more than ever before, but also remain resilient. In the first quarter, the environment shifted very quickly with surging gas prices impacting shopping patterns with a focus on trip consolidation. This primarily impacted the lower-income consumer, particularly those driving longer distances to the store. We saw further strengthening of trade-down, but typically in these moments of economic stress, lower-income consumers trade out more quickly than upper income trade-in. Our continued focus on productivity and efficiency initiatives throughout our model gives us the flexibility to strengthen our value proposition when the consumer needs it most.

As we move forward, we will further reinforce our strong value proposition with a renewed emphasis on exceptional deals that are extremely relevant in this moment. This fuels the closeout market and our business model. We benefit from disruption and volatility and we are seeing this in both the quantity and quality of the deals. Our deal flow has been extremely strong, which gives us an additional opportunity to further strengthen our value proposition and invest in price.

Outside of this, we are focused on controlling what we can control and executing against our strategic priorities. We remain on target to open 75 stores this year, including having opened our first store in the great State of Minnesota, and we are growing rapidly in the Midwest. Our next priority is growing Ollie's Army loyalty program. These are our best customers who account for more than 80% of our sales. Our focus here is attracting new members to the program and retaining them through a variety of marketing channels.

Growth in our loyalty program was again strong in the quarter, increasing 13% to 17.5 million members. Our Ollie's Army members received special access to various events, deals and discounts. One of these events is Ollie's Army Night, which we hold twice a year. These exclusive shopping nights celebrate our best customers. The next event will take place on Sunday, June 14, from 5 to 9 p.m. The date is 1 week earlier than last year, which was moved up due to the Father's Day shift.

We will also be running our annual Ollie's Days event in the second quarter. America loves the bargain, and we could not think of a better way to celebrate our country's 250th birthday than with a blowout event. We invite you to join us and see the amazing deals for yourself. If you're already a loyalty member, you will be hearing more about these events in the coming weeks. If you're not a member, why not? Signing up is free and easy. One other note on event cadence. We routinely make adjustments based on timing of key events throughout the year. We are shifting one flyer event out of the third quarter and into the second quarter from August to July.

On the top of things we can control is optimizing category mix to drive sales productivity. We went after the seasonal decor category last year with great success, and we continue to build on that success in the first quarter. Even with the headwind of an early Easter, seasonal decor was one of our top-performing categories. We also shrank our wall-to-wall carpet offering and replaced this with a limited assortment of living room furniture. This proved to be a good swap with the added furniture business improving sales productivity by over 100% in the same floor space.

We are excited by these early wins and we'll apply our learnings to other areas of the store. We are working on rightsizing and optimizing the assortments of other downtrading categories, such as books and flooring. For competitive reasons, we're going to be a bit guarded in how much we share publicly. Most importantly, I'm excited we have built the framework and a test and learn process that leverages data to make more informed merchandising decisions to drive productivity.

On the supply chain side, we are reinvesting in our distribution centers to drive throughput, productivity and capacity. We completed the replacement of the warehouse execution system in our Texas DC early in the quarter. This was our last remaining DC to receive the upgrade, and we are seeing productivity benefits across the network. The expansion of our Texas distribution center is progressing as scheduled and should be completed early in the third quarter. Later this year, we will begin expanding our Illinois distribution center.

The two expansions will increase our network capacity to over 850 stores. On top of all of this, we bought back $53 million of our common stock in the quarter. We are an opportunistic retailer. Our business model thrives on buying good stuff, cheap. This quarter that included our own stock. Everyone loves a bargain and so do we. On that note, I'll turn the call over to Rob, who will take you through our financial results in more detail. Rob?

Thanks, Eric, and good morning, everyone. We are pleased with our execution and the positive impact this is having on our results across the P&L. This drove better-than-expected earnings growth in the quarter. New stores and customer acquisition remain our top 2 priorities, and we continue to deliver on both. We opened 27 new stores in the first quarter, an increase of more than 15% and ended the period with 672 stores in 35 states. At the same time, we added almost 500,000 net new Ollie's Army members in the quarter and grew our loyalty program by 13% to 17.5 million members.

Now let me walk you through the P&L. Net sales increased 14% to $659 million, driven by new store openings and comparable store sales growth. Comparable store sales increased 1.7%, driven by an increase in basket. Top-performing categories were food, general merchandise, hardware, seasonal decor and stationery, while weather-sensitive categories underperformed, such as lawn and garden and summer furniture. As Eric mentioned, performance varied by region, primarily driven by weather patterns with the East, Midwest and Central markets all outperforming their respective plans, while the South largely underperformed. The biggest drag in the South was the lawn and garden category. The slower selling of bulky seasonal products also led to throughput constraints in our Texas distribution center, which impacted the Southern region.

Gross margin increased 80 basis points to 41.9%. This was above our expectation and driven by lower supply chain costs. Higher fuel costs were more than offset by lower tariff expenses. Merchandise margin was slightly higher. SG&A expenses were well managed and flat as a percentage of sales in the quarter. Preopening expenses were in line with expectations and decreased 3% to $6.4 million. The decrease was driven primarily by lower rent expense, specifically the dark rent associated with the bankruptcy acquired sites last year. This was partially offset by a higher number of new store openings.

Moving down to the bottom line. Adjusted net income increased 21% to $56 million and adjusted earnings per share increased to $0.91. Lastly, adjusted EBITDA increased 22% to $88 million, adjusted EBITDA margin increased 80 basis points to 13.3% for the quarter.

Turning to the balance sheet. Our total cash and investments increased $111 million or 27% to $526 million, and we continue to have no meaningful long-term debt at the end of the quarter. With our strong balance sheet and the consistency of our earnings and cash flows, we stepped up our buyback and repurchased $53 million worth of our common stock in the quarter. As a reminder, we are targeting annual buyback levels at roughly 50% of free cash flow and raising our outlook to $125 million this year. Our buyback activity reflects our confidence in the durability and earnings power of our business model.

Inventories increased 12% year-over-year, primarily driven by our new store growth. Capital expenditures were $25 million in the quarter, with the majority of the spending going towards the opening of new stores, the improvement of existing stores and the expansion of our Texas distribution center.

Let me wrap up with commentary about our outlook for the full fiscal year. First, we remain confident in our ability to deliver against our earnings algo of mid-teens growth. Solid sales growth, strong margins, controlled expenses and the stepped-up buyback all support earnings growth this year. At the same time, we are cognizant of the state of the consumer right now. They are prioritizing their spending around their needs and driving a little less if they can. Weather is still a bit of lingering factor, and we don't have the benefit of higher tax refunds to offset some of these pressures in the second quarter.

Our comp target remains a positive 2% for the full fiscal year. Our current trends are running below this level, primarily reflecting continued weather volatility and ongoing pressure on the lower-income consumer. While a significant portion of the quarter remains ahead of us and we could benefit from a normalization of weather patterns and lower income spending, we currently believe second quarter comps could look similar to the first quarter. As a result, we are making a small update to our full year sales outlook to reflect current trends and raising our full year earnings per share outlook to account for the results in the first quarter.

All of our outlook figures are contained in the table in our earnings release posted this morning. Our full year guidance includes 75 new store openings, net sales of $2.98 billion to $3 billion, comparable store sales growth in the range of 2%, gross margin in the range of 40.7%, operating income of $340 million to $348 million, adjusted net income and adjusted net income per share of $271 million to $277 million and $4.45 to $4.55, respectively.

Let me give you some of the additional assumptions behind these numbers. Starting with tariffs. We benefited from the lower levels provided by the SCOTUS decision and assume these remain in place through July. In the back half of the year, we have left the higher pre SCOTUS tariff assumptions in our guidance. Lastly, we have not considered the benefit of any tariff refunds in our outlook. Our earnings guidance also assumes higher fuel costs for the balance of the year.

Depreciation and amortization expenses of $63 million, inclusive of $15 million within cost of goods sold; preopening expenses of $22 million; an annual effective tax rate of approximately 25%, which excludes the tax benefits related to stock-based compensation; diluted weighted average shares outstanding of approximately 60.9 million, which now includes a higher share repurchase level of $125 million; and capital expenditures are expected in the range of $103 million to $113 million, which includes almost $20 million for the expansion of our Texas and Illinois distribution centers.

In closing, let me thank all of our hard-working team members across the country. It is what you do day in, day out that makes Ollie's a special company. Now let me turn the call back over to Eric.

Thanks, Rob. Our team did a great job navigating a far more dynamic and challenging environment than we've seen in quite some time. The consumer today is under pressure and increasingly focused on stretching their hard-earned dollars. We remain focused on our strategic priorities, executing with discipline and most importantly, continuing to serve our customers. This is at the core of what we do best.

For more than 40 years, our commitment to our customers has been to make their lives better by selling good stuff cheap. We will continue to uphold that commitment by managing our cost and pricing to deliver the best value in retail today. We are executing well and delivering strong results. We are investing in our future and excited about the opportunities that lie ahead. We are committed to supporting loyal bargainauts in their time of need. We are proud to say, we are Ollie's.

Operator, we're ready for questions.

[Operator Instructions]

One moment for our first question, please. It comes from Matthew Boss with JPMorgan.

So Eric, maybe could you elaborate on the cadence of comps that you spoke to in the first quarter? Maybe if we thought about it relative to plan and just your confidence in delivering roughly 2 comps for the year? And then near term, is there a way to break out maybe the trends that you're seeing by category or by region in order to parse through the impact of weather that you may be seeing that seems to give you the confidence in delivering similar comps in the second quarter to what you've delivered in the first quarter despite the softer start?

Sure. Yes, Rob will take that.

Matt, this is Rob. I'll take that. So for the first quarter, all 3 months of the quarter were positive, which was encouraging. February was the strongest month. That was up about mid-single digits. April -- March was positive and then April ticked up slightly, which was notable because we had the Easter shift into March this year.

As I mentioned in the call, we saw diversion trends across the quarter, across the country when the gas prices started to spike and the weather didn't really shift as quickly as it normally does. The East, Midwest and Central all experienced more normalized conditions and they beat plan by 100 to 200 basis points. The South where it was hot and we saw drought-like conditions, that region lagged between 100 to 300 basis points. The biggest drag on those regions was clearly lawn and garden.

From a Q2 perspective, we talked about our trends quarter-to-date. We are running behind our full quarter guide for the second quarter. Comp trends in what we call our core comp categories, the consumables categories remain strong. It's really outdoor seasonal product that we're seeing the biggest impact. We do think that the weather will change. It always -- it gets hot every year. It always does. We're seeing some of that weather come this weekend. So there is a potential for pent-up demand. But we have a lot of quarter ahead of us. We have a big Ollie's Days, big Ollie's Army Night plans in celebration of the 250th birthday this year. So we're confident that we have what we need to deliver on the guidance.

That's great color. And then maybe, Rob, just to switch gears. Could you break apart the drivers of your raised gross margin outlook? And maybe a different way to think about it is, what's the best way to consider the potential flow-through of better buying relative to opportunities that this provides you to reinvest into value? .

Yes. From a gross margin perspective, most of our elevated gross margin guide is coming off of our outperformance in the first quarter. We left most of the gross margin in place for the balance of the year. We do -- we are buying better, as we mentioned in the call. And we do think that, that gives us the opportunity to invest in price. Our bias continues to be market share to reinvest in customer loyalty and to drive the top line while delivering on what we guided to originally when we entered the year.

Our next question comes from Randy Konik with Jefferies.

It will be really helpful if we could, I guess, double-click on the consumer environment, give us some initial broad strokes about trip consolidation, some trade-down or trade-out, trade-in. And it would be really helpful if you can kind of just elaborate on that a bit more, some more granularity. What you're seeing in the quarter? Any kind of changes, particularly in the South if weather has changed in a couple of markets, a couple of stores would be helpful as well. Just a little flavor there would be great.

Sure, Randy. I'll take that. Yes. I would say I'll start with your last question first. We have seen these green shoots as the weather changes regionally even for moments. 2 or 3 days of a weather trend that's more favorable, we're seeing green shoots in our business, where we see a meaningful spike in the overall business and traffic in these stores and a recovery of the seasonal businesses. So it does give us confidence that when the weather is a little bit more cooperative in these areas that the business comes back and that confidence in our guide for Q2 or our thoughts around comps for Q2.

In terms of the state of the consumer I said that we saw a meaningful change over the last few months that really started at the beginning of March, coming out of the geopolitical environment and then the spike that happened almost overnight in surge in gas prices coupled with extreme weather, uncertainty around the economic backdrop, we did see a meaningful change in shopping patterns. Customers bought what they needed, very close to need. Consumables were very strong. [ Cede ] and defer purchases on nonessentials, including weather-related items. They also shop stores closer to home.

We saw an acceleration of high-income customers, actually the most significant acceleration we've seen in quite some time. So the trade-down was very strong in higher income. We're defining here as over $100,000 in household income. The pace of the trade-out also accelerated, and it netted out about flat, where when you look at previous quarters, either the low-income consumer was a bit more stable or there was a slight trade-out of low consumer and the upper -- the higher income consumer more than made up for that trade-out. So for the quarter, it ended up netting out flat.

We also see, just to add a little bit more color, a higher concentration of older fixed income customers that it's -- we have a higher concentration of those customers and they're a relatively weak cohort for us in the quarter, which was new for us. We do know that for all the years we've been in business that value always wins. We believe we're very well positioned with a strong value proposition as customers continue to adjust the environment and that we will win, too.

Great. Super helpful. And then just following up, if you think about your comp guide for the year, how should we be thinking about traffic versus ticket contribution given what we saw in the first quarter. Just any thoughts there would be helpful.

And then I remember last year, maybe it was the fourth quarter where new store productivity was a little underwhelming given the way you opened stores, I guess, soft versus grand opening. Just give us some thoughts on how you're thinking about these openings this year, how that's going to change perhaps or not change versus last year? And how you think about new store productivity trends in this year's cohort versus last year?

Sure. I'll answer the traffic versus ticket. Rob will take the new store productivity. We -- I guess the real transparent answer is we don't really think about traffic versus ticket. So it's always our goal to drive traffic, and that's the most positive way to continue growing our business, and we've been very successful at that for many, many, many quarters and for the history of the company.

So that is our goal. That is our priority. But we don't really think about the components because it's a very dynamic environment in terms of -- our business model is very dynamic in terms of how we buy, it's an opportunistic business model. You'll remember last year in Q2 moving into Q3, we had a bit of a ticket drag due to the nature of the deal flow, and we drove a bit of a lower ticket which resulted in very strong transaction lift, and we were very happy with that even though there was a ticket drag.

So we manage it according to the deal flow environment and we're never -- we never shy away from a deal that we believe is compelling and will excite a customer, no matter what the ticket might be.

From a new store productivity perspective, I would say that the new stores were similarly impacted, so some of the impacts that we saw in the comp base. So it makes it a little bit more difficult to assess what the true impact of that -- what the true impact of the soft opening was. Overall, we're pleased with the 2026 store openings. And the new store productivity came in only slightly below our plan -- our original plan.

Our next question comes from Steven Shemesh with RBC Capital Markets.

I wanted to follow up on an earlier one on reinvestment. So you said you'll reinvest in price but also raised the gross margin guidance was hoping you can maybe speak to how consumers are responding to price investment or promotions that you've already put in the market that gives you confidence that you've embedded enough cushion to actually move the needle on top line?

Sure. Thanks, Steve. Rob mentioned it earlier, our bias is always to drive market share in investing in prices the way that we do it. We know how to motivate customers through compelling deals. That's probably the simplest way to answer the question, and we deliver compelling deals. Our growing buying power and better execution resulted in stronger margins, which gives us the confidence we can continue to invest in price and maintain strong product margins as we move forward. It will further reinforce the strength of our value proposition, our emphasis on exceptional deals, an extremely relevant product in this moment.

So for competitive reasons, we don't share a lot of details, but I'll highlight a handful. So we do have an aggressive plan as we move through Q2. We're not waiting for the weather to break. We have an aggressive plan to invest in price. It starts with the most compelling deals. I call it lighting up deals and making the deals even more compelling than they were, so that really means and simply put that the price gaps on some of our deals will be even wider than they were. Although we're happy with our price gaps and our price gaps are very similar in Q1 to where they've been running, we're going to get even wider on select deals.

And those -- just to emphasize, the pricing for us is an everyday low price value proposition. We're fiercely committed to everyday low price. So this isn't some sort of temporary price. These are adjustments to price that are the ongoing price and prevailing price for the item for us. We're investing in trend in highly relevant product, which is also a reflection of our growing size and scale and buying power. We're enhancing Ollie's Army events. So anything that we consider even semi promotional in nature is an investment or a reward for a loyal customer that's in the Army, which includes stimulating customers who live at a bit of a distance from stores where we've seen less frequency over the last couple of months. And we're continuing to press forward with speed to -- on our sales productivity initiatives.

That's very helpful. I appreciate the color there. And then just as a follow-up, obviously, a very challenging consumer environment, a lot changed very quickly during the quarter, but we also did have higher tax refunds that other companies have called out as a benefit. So question is, do you think you received any benefit from the tax refunds being higher on a year-over-year basis? And if not, why do you think that was the reason? .

Steve, I would say that the way we've talked about tax refunds in the past and really nothing has changed is that more money in the consumer's wallet is always better. But we didn't see any notable spikes or green shoots of sales as the tax refund season rolled out. So I don't think it was meaningful, but it's hard to assess.

Understood. I appreciate all the color. Best luck moving forward.

Our next question comes from Ed Kelly with Wells Fargo.

Eric, a question for you and then maybe like a follow-up from Robin here. So regarding the flyer, philosophically, can you just maybe give us some context on like the shifting that's been taking place. So you had one that moved a little bit earlier in April. Obviously, now you had one coming in July. I think investor perception is that this is happening in response to sales, but I think you maybe have some operational reason for this stuff.

And then in the context of that flyer moving forward into July, Rob, how are you thinking about the second half outlook? I mean you do have some easier compares. Just curious how you're thinking about the balance of the year after like the Q2 lap that we all are talking about here?

Sure. Thanks, Ed. And as always, I appreciate your flyer question. So -- and I've been reflective since the last call on how I answered the question when you asked and we did offer a little more color on this call about a flyer shift. We didn't have a shift in Q1 just to reinforce that. I've been a bit reticent to share details on flyer shifts or any event shifts for competitive reasons. I've reflected on that, and I'm still reticent to share details, but I think it's a good question to answer about our thought process on flyers, Ed, and to kind of debunk the assumption that our flyer timing is somehow dynamic enough that we would shift intra-quarter.

We make all our flyer event decisions in January in that period, and we don't shift. I can't remember in my time here ever shifting a flyer event after we set the calendar, which is before the fiscal year starts. And at that point, we've set Q1 permanently and we're just refining and setting more permanently the balance of the year. So we're not making decisions about flyer shifts in real time. We make these decisions way upfront.

We make decisions based on the timing of events typically and of course, we look back on our history on the performance of the events related to the timing. When I say events, primarily they are holidays we're talking about in Easter. As it moves around year-to-year, it's one of those events that we need to plan around. I mentioned earlier Father's Day is another one. We're not going to hold it on Ollie's Army Night on Father's Day, although perhaps some families just like kick their family out of the house and send them to Ollie's, which we'd appreciate. But -- so we do make those decisions based on the timing of -- primarily the timing of holidays well in advance.

In the case of July, I'll give you the -- the Q1 -- the Q3 to Q2 shift. I will give you a little bit of color that we have a very significant gap in the calendar between our last June event in our first August event, and that's always bothered us, and we really haven't ever done anything about it. We miss a period of time in the month of July that is very back-to-school oriented. And so we wanted to see what we could do with that, that we were spacing our events out a little more like we space events out the rest of the year and trying something a little bit different with a certain time of the year that typically we don't try to play as strongly in. So that was our thought process around Q2.

And in terms of the full year guide, I just want to put into perspective, we're talking about tens of basis points below the 2 in the first half and potentially tens of basis points above the 2 in the second half. And to Eric's point, for the third quarter, we've planned this flyer shift since January. We understand the impact of flyers, and we understand that what we're up against when we shift one. So we're set up with the plan. We're set up with the product, and we know what we need to do to be able to drive the sales in the third quarter.

And our next question comes from the line of Mary Sport with Bank of America.

I was wondering if you could give us an update on the state of the closeout environment and just what you're seeing there?

Sure. Yes, the closeout environment, it's been a highly disruptive environment for the consumer, which creates opportunities for us. We continue to benefit also from the consolidation of retail. In terms of the strength of the pipeline and the consolidation of retail customers that are out there buying closeouts, has continued to be very helpful to us.

But most importantly, consumers under pressure, I mean suppliers are under pressure, inventories are out of balance, and suppliers are more motivated to move product. The larger deals, we continue to see consolidation of the buyers' results in larger deals available on our ability to buy all of what a supplier potentially is offering. That continues to be a story for us. It has been a story for us probably for the last year or 2 at this point, and we continue to gain momentum at it. So simply put, we're continuing to see an increase in both the quantity and the quality of the deals.

One moment for our next question, please. It comes from Brad Thomas with KeyBanc Capital Markets.

Eric, since you've taken over as CEO, I think you've really tried to be proactive about playing offense and driving sales, bringing in new customers, I was wondering if you could just speak to where you're seeing the biggest opportunities as we think about the balance of the year. In particular, how are you thinking about the effectiveness of the second time of doing an annual Ollie's Army Night in June?

Sure. I -- so yes, I guess when you look at it overall, we are very aggressive about driving compelling deals, newness in managing the productivity -- the space productivity, sales productivity in our stores. So those are things we're doing, call it, more incrementally as we move forward and have been.

It all starts with product. Product being strong deals with meaningful price gaps and also highly relevant product, which includes trend product, which isn't a foreign concept for Ollie's. We've been in and out of trend product over the years, but I believe we could do trend product even better. And there are many examples of that, and it could vary category by category, but we are driving a lot more trend product as well. So that -- those are the main ways in which we're aggressively proactively driving top line.

I would mention Ollie's Army as well, and I'll come back to the Ollie's Army Night question, Brad. The Ollie's Army has been even larger priority for us in driving the growth of the program. We're aggressive in how we market it and making some of these events like the second Ollie's Army Night or Ollie's Days event and some other things we're doing, even more exclusive and even more special for the customer, making the program more compelling, which helps to attract new customers to the program. It also helps with retention.

Our stores and I'll give the cashiers a ton of credit are doing an even better job in convincing people to join the Ollie's Army program, which you think is an easy sales pitch, but some customers can be a bit resistant to share personal information. So they're doing a great job of selling the program in. We're supporting our cashiers by making the program even more compelling, which gives them even more selling points with the consumer to get those new customers that come in our store convinced to sign up immediately, which gives us the ability to understand that customer better and market to them and tailor marketing to them, which plays into the trend product concept as well.

When it is we have trend product, we could deliver marketing to these customers in various digital channels primarily very directed to drive urgency around some of this trend product we have in stores. So we're very excited about how all that comes together so nicely.

As far as Ollie's Army Night is concerned, we feel very good about the event. We are going to be making a small adjustment to the event that hasn't yet been communicated to the public. So I'm not going to share for competitive reasons that adjustment, but we do look at these events as opportunities to simulate and excite and reward our customers. So we're always looking at opportunities to make adjustments to make the events even more compelling and it convinced people to jump off their couches and run into the store and stand in a line to get special discounts and the exclusivity of shopping the store without the general public.

That's great. And if I could ask a follow-up on gross margin to Rob. Just as we think about some of the moving pieces here, the flyer, what's happening in seasonal right now. Any more details that you'd be able to share about how to think about the cadence of gross margin through the year? .

We'd expect the cadence of grosses to be very similar for the balance of the year to what we saw last year. I think that's the best way to model it. That includes some tariff relief in the second quarter, which is offset by higher fuel prices. And then we've run the higher fuel prices out for the balance of the year, and we have some other offsets in there. But Overall, cadence is very similar for the balance of the year.

Our next question comes from Peter Keith with Piper Sandler.

Curious on the furniture offering that started in the quarter. I guess, is it -- is this going to be something now that you're going to keep in stores on a go-forward basis as you reflect on Q1? Or do you think there's things that you could be doing better with furniture to improve that productivity? And then lastly, with that 100% improvement in space productivity, I guess, did that actually drive any benefit to comp? It seems like it could have had maybe a 50 basis point lift overall.

Sure, Peter. Yes, I appreciate the question about furniture. Just to remind us, we identified furniture as a white space opportunity, a replacement to a very low productivity category, wall-to-wall carpet, which had been down turning for us for years.

I'll just -- just on your math, I'll hit it right on the front side. We reset approximately 50% of the stores over the course of the quarter. It's not a big business overall. It's never been a significant business. It's been like a 1%-ish business and wall-to-wall carpet, obviously, was worth even less than that. So it's not necessarily a material impact on Q1, but we do believe this and other sales productivity initiatives, when you add them all up, as we get them all moving along, will become a meaningful comp mover. But this one on its own in Q1 did help move the comp, but not necessarily in a material way.

We were very pleased with the early performance of the business, but I'm going to call it early performance. We put furniture in all stores as part of call it, just a deal that we did in February. It was advertised, but the intention to replace the wall-to-wall carpet was only to go forward in 50% of the stores, at least at this point in time. We're learning, we're making adjustments. We'll expand into additional stores as we continue the reperformance.

And I think your question about what did we learn and how do we think about the assortment on a go-forward basis, for competitive reasons, I'm not going to share detail on this, but I will say that we have learned and we are making some adjustments, nothing all that meaningful, though. We were mostly right in what we did. And I think the adjustments I would characterize as continuing to bring some newness to the customer and make sure that the product offering is in scale. That being said, there are certain components of the business that are more basics oriented that may not change as much. But having a nice rotation of styles out there, I think is important in our business model to continue to reinforce the surprise and delight aspect of our business.

And then the other comment I'll share is that we have the confidence based on what we've seen in the business to date, which included testing in Q4 that we are no longer putting wall-to-wall carpet in any new stores going forward and furniture is being set in most of those stores, the majority of those stores, the handful of stores that are relatively -- are smaller footprints. We may not set furniture in, but the vast majority of stores will have furniture and now have wall-to-wall carpet on a go-forward basis.

Our next question comes from Steven Zaccone with Citi.

Could we talk about SG&A planning for the rest of the year. And I'm curious, since you're running behind from a comp perspective here in the second quarter to date, talk about the ability to flex SG&A if comps come in a little bit below plan? .

SG&A guidance is similar to what we have seen, what we guided originally for the year. In the first quarter, the pressure that we had seen in the past, medical expenses and workers' comp and casualty claims came in pretty neutral. So that was a good sign to see. Some of the things that we've done to moderate that expense have taken hold in those actions.

For the first quarter, we were actually up against elevated utilities expense. I think a lot of folks have talked about it. That was almost a deleverage of about call it, 15 basis points in the quarter alone. We wouldn't expect for that to really repeat. A lot of it was coming off of the winter conditions. But we're in a position where our bias is to invest to drive market share. We were driving gross margins on the top side of the P&L. So we feel well positioned with our guidance that we're able to invest where we need to, particularly in the marketing to drive sales in the back half of the year.

Okay. Great. And then the follow-up I had is just trying to understand the commentary about running behind. First, does that mean you're decel'd from April and they're running negative? And help us understand the level of pent-up demand in seasonal, right, that can get you to accelerate on top of tougher compares as you go over the next couple of months? .

Sure. I'm not exactly comfortable given exactly where we are quarter-to-date. We typically don't give that kind of color. We wanted to give the color in this moment about running behind our full quarter guidance, but we're going to leave it at that. From a seasonal perspective, our seasonal business in the first half is very meaningful to us. It could be 15% to 20% of our sales for any given quarter. So that bodes nicely for the fact that we didn't see those sales come in, in the first quarter. We know that it's going to get warm and the season is going to change, and it bodes well that there's pent-up demand for the second quarter. What that number is and where we'll ultimately land, I'll have to pull out my crystal ball, but I'll tell you it gets hot every year.

Our next question comes from Simeon Gutman with Morgan Stanley.

One more stab at that same question. Can you just give us a perspective that that seasonal category needs to grow mid-single digits or double digits now to make up for the plan in order to get back to where you'd like to be? And then I have one follow-up.

I'm not sure how to answer that question, Simeon. In terms of the seasonal business, we've seen when there are green shoots of demand from a daily basis, the comp can be in excess of double digits, well in excess of double digits. When it gets hot, consumers run to the store and they buy the products they need for the outdoor seasonal. So we're confident, and we've seen that as the weather normalizes in those regions, the sales come back. The other piece that we're encouraged by is that our core comp, our core category comp consumables remains very strong. And that's well in excess of what the overall company's comp is. And we think that when the weather moderates, that they'll come back in line together.

Yes. We own the inventory. The values are compelling. We shop the competition often to make sure our price gaps are solid, wide enough, super compelling deals. And I'll just remind us, and I said it earlier, we're also not waiting for the weather to break. We're taking aggressive action to invest in price, to light up key deals, investing in trend and highly relevant product, making our Ollie's Army events extremely compelling, stimulating customers who are driving a little bit of a longer distance from stores. So all those things, along with we hope, the weather, as Rob said, it always gets hot breaking -- get us closer even in excess of our target for Q2.

Okay. And a follow-up, how did you do so well on driving supply chain savings that something, I guess, front-end loaded because it sounds like, I don't know if that holds the rest of the year? And then what is the game plan? Or what are you thinking about regarding tariff refunds? Are you going to wait and see?

So in terms of supply chain savings, we've been working on productivity initiatives throughout our business. Supply chain is definitely one of the areas where we've worked on very hard. We've seen supply chain savings pretty much in every aspect of supply chain, except for fuel costs, which weighed on us. From a tariff perspective, we have filed for our tariff refunds. To date, we have received an immaterial amount of the tariff refunds and we're going to wait and see for the balance of the tariff refunds like everyone else. The one piece to point out is the tariff refund is not anywhere considering our guidance.

Our next question comes from Anthony Chukumba with Loop Capital Markets.

So you mentioned downsizing books and flooring. Maybe you don't want to answer this question for competitive reasons, but just any sense for what you'd replace that square footage with any general ideas?

I appreciate the question. And yes, we have a plan and no, I'm not going to answer for competitive reasons. I was actually reticent to even share that we're looking at books and flooring. But those are 2 businesses that are -- have been downtrading in the industry. Flooring may be a little bit more transitory when you look at some of other retailers out there that are in the flooring business related to housing and pressure on housing.

But we look at flooring, not as a business that we would exit, but as a business that we need to reposition in and to ensure that we are in -- that we have a reason for being in flooring and that we're competitively positioned where we want to be there in whatever white space we could find. And books has been a down trading business for years, and that's a macro that I think everybody is familiar with. For us, books is a bit of a reassorting to make sure that we are carrying the most relevant books, which is somewhat about the different subcategories of books that we're in, but it's also continuing to recognize, and we've been on this path for years now.

I started talking about it probably 4 years ago, as we move forward with new stores and with some of the remodel initiatives, downspacing books in favor of other categories and even moving books, which used to be in the front of every store in front of the front door and the absolute best space of the store to a secondary space, not a space that was lost in but a secondary space in the store and downsizing. So this is just a continuation of that, potentially an acceleration of that. But we're going to stay in the Book business. We're committed to the Book business. We're going to stay in the flooring business. We're committed to those 2 businesses. And back to it, yes, we do have a plan for what would go in its place. And we'll share it when it becomes customer-facing.

Got it. And just as a quick follow-up on furniture. I know one of the things that you guys had, we're thinking about with furnitures that you don't offer delivery and some of the furniture pieces are quite large. I mean, any updated thoughts there and maybe like partnering up with someone or is it just still going to be kind of like drive -- borrow your cousin's pickup truck to throw the recliner in the back?

Yes, it's a good question. And also another good question, I'll put out there is financing and how you think about credit related to furniture and deferred payments and all that. They are all things that we've considered. We're very -- we're worldly and mindful of what's going on in the industry in that business. Keep in mind, it's maybe a 1% or 2% business long term. It's not necessarily meaningful enough for us to become, I guess, a full-service furniture destination. We don't think of the business that way. We think of the growth of the business. But honestly, mostly I thought of -- mostly we thought of, we didn't want to be in the wall-to-wall carpet business anymore. So this was, we thought, a good alternative.

On delivery, we tested it and the customer didn't respond well to it. So if we give away the delivery, meaning free delivery, then our values -- either values won't be as good or there's margin compression in the business. And we decided to price it at a price gap that was compelling instead of building in free delivery in having customers -- some customers have the ability to bring an element, some maybe don't and having that be a point of friction.

When we price delivery to cover the cost of delivery, the customer is not willing to spend it. For the most part, they're just not willing to spend. So the jury is not necessarily out. It's not -- I'm not like saying that's a final answer, but we did test it and didn't like the result, and we're currently not offering delivery. Customers seem to figure it out, and I realize not all of them figured out, and it's a reason some may not buy. We do let people purchase in advance and plan to pick up at a later date. So we give people the flexibility to reserve a piece, and we're seeing many customers take advantage of that, and they'll pick up on the weekend.

So they may come in on a Tuesday and make the purchase and come back on a Saturday or Sunday, when they have a pickup truck available or they have the time to go rent a truck, they figured it out. So, so far, it seems to be working. The credit aspect of that is to be determined. As you know, we do have an Ollie's credit card and there is something we could consider there. We have talked about and maybe that's a move to consider as it would apply to some other big-ticket businesses that we're in, like mattresses is a good example. So that's a TBD.

Our next question comes from Chuck Grom with Gordon Haskett.

On 1Q, can you guys provide the composition of the comp between traffic and ticket just so we have it? And then for 2Q, sorry to beat a dead horse here, but just to clarify, are you -- it sounds like you expect the quarter to be up 1 point, but you're behind that today. I just want to get that right?

Start with the last part, you're correct. We would expect for the second quarter comp to be slightly lower than the 2, similar to the first quarter. From a first quarter comp dynamics, it was almost entirely basket. Traffic was positive but only slightly positive. We believe that trip consolidation weighed in.

Okay. Great. And then, Eric, just on the comment regarding more price actions here in the second quarter, it doesn't sound like you have any anticipation for that to impact the overall gross margin rate. I just want to clarify if that's the case. And I guess, historically, when you've invested in price, the success that you've had with those actions?

Sure. Yes, the answer on the gross margin question is we remain confident in delivering the margin for Q2 and for the year, which is definitely a testament to our consolidation of buyers in the closeout space that we're in and better execution. So we remain confident that we have the margin that we can invest in price as we move forward. We have been quite effective at this. We do have a lot of experience in doing this. And it's really part -- it is part of what we do. We may be getting more aggressive in this moment based on where we see the state of the consumer and where we could read into some of what happened in Q1 and looking at our seasonal businesses as well and making sure that we're on top of those businesses.

But we have levers to pull, and we like where we're at. We like especially where we're at in a very good deal flow and the ability to bring great deals to the consumer that's going to motivate them to shop.

Our next question is from Jeremy Hamblin with Craig-Hallum Capital Group.

I'm going to approach it from a little different angle. In terms of just a hypothetical, Rob, if you had a minus 2% comp in Q2 or a plus 2%, that type of hypothetical range, what would the impact be on full year EPS, which you're guiding to about $4.50 this year? I mean, are we talking about a $0.10 difference or $0.20?

Very immaterial. For the second quarter alone, right, Jeremy, that's what your question was, you posed, of minus 2% to a positive 2%?

Yes, yes.

Immaterial.

Right. Got it. All right. And then just in terms of unit growth, you've had pretty consistent unit growth here. You're reiterating the 75 unit growth guidance for the year. As you look ahead and you guys have approached unit growth in very much a contiguous market fashion. Is there any expectation that there would be a change in that contiguous growth and the types of kind of numbers here, the 75 units or so that you're going to do this year, is there anything that you see in the outlook for the market that would make that change here in the coming years?

No. That's a simple answer. We don't see a change. The real estate pipeline has been strong, has remained strong. So a lot of vacancies out there related to the consolidation of retail, a lot of the stores that have closed, which I rattle them off. We're all familiar with them, but a lot of those stores are sitting out there and we have become even more attractive tenant to landlords out there. So we have the confidence that we can continue to deliver.

On the 10% unit growth, which is -- 75 is a little ahead of the 10% unit growth for this year, but it's pretty close, if you said 75 for next year, pretty close to 10% for next year. So we don't see anything that would give us any less confidence. We can continue to deliver at least through '27. It's hard to have visibility beyond '27, but we have confidence at least for the next 2 years. And the contiguous growth question, you say contiguous, we're still committed to continuous growth, 100%. Every now and then we challenge ourselves on that. And we always come back with conviction, contiguous growth works best for us.

Our next question comes from Scot Ciccarelli with Truist Securities.

Another gross margin question. So as it's been pointed out, you do have a bit more of a mix shift to consumables. That's typically lower margin, you're being more aggressive on pricing to provide more value, also potentially gross margin negative. So what are the positive offsets that help us reconcile to the higher gross margin guide for the year?

The #1 starts and stops with its size and scale and the consolidation of closeout buys. We're getting better margins on closeout buys across the landscape, including the food and consumables space. In addition to that, productivity benefits, right? So we're improving on the supply chain lines. The fuel headwind is a relatively minor headwind for us, call it, 20, 30 bps. Tariffs more than offset that in the first quarter and in the second quarter. And the last piece I would tell you is we are experiencing lower shrink. That was a headwind that we saw for several years, continue to do better there.

Got it. And then just a follow-up. Given your balance sheet cash flow and kind of where cash yields are today, can we see the buyback program scale even beyond the new $125 million target?

There is potential for that. We are committed to 50% of our free cash flow target. As we drive our cash flows higher, we will reinvest in a number of areas in the business, including ourselves and the stock. I would expect for the buyback at these levels to be similar in Q1 -- similar in Q2 as it was in Q1.

Our next question is from Mark Carden with UBS.

So the first one is to follow up right there on fuel. You called out building in higher prices earlier into the balance of the year. So if we see a resolution to the conflict that's on the sooner side, would you expect to recover a good chunk of those 20 to 30 basis points you just outlined. Just trying to piece out how much of an impact this dynamic may have given how [ fluid it has been ].

We would invest it in price, but sure.

I mean, it's hard to tell, right? It's an uncertain and rapidly shifting environment. We thought that it was good to be conservative on our gross margin guide with all the different factors and pieces that we've discussed today. But there was some relief, Eric's right, we would -- our bias is to drive market share and awareness, and we would continue to do that while delivering on our numbers to the street.

Got it. That's helpful. And then as a follow-up, you guys called out consolidation for some of your more rural customers, just given the higher fuel prices that they're facing. Have you guys historically seen this behavior accelerate or decelerate when fuel prices cross certain psychological thresholds like $4 a gallon or $5 a gallon or is it tended to be less cut and dry there?

It's a little less cut and dry. It's really -- this year and the first quarter was really about the speed of the increase and the rapid nature of what we've seen here. We think that the consumers likely will rationalize this. And we've seen them be resilient and shopping closer to need. I think the point that we've been trying to make on this call is that weather is a need and drives a need. And so if the weather is not cooperating and there's not a need for seasonal product, the customer is going to defer, especially in this environment.

Yes. And I think the other point is we've made already, but I'll just repeat it, is the trade-down and the acceleration of the trade-down, which we did see the greatest acceleration of trade-downs than we have seen in many quarters in Q1. So we like to think that, that acceleration would continue and would help them more fully offset the trade-out.

Ladies and gentlemen, this concludes our Q&A session and conference for today. We want to thank everyone for participating. You may now disconnect.

Good morning, and welcome to Ollie's Bargain Outlet's Conference Call to discuss financial results for the fourth quarter and fiscal year 2025. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie's. I would now like to introduce our host for today's call, John Rouleau, Managing Director of Corporate Communication and Business Development for Ollie's. John, please go ahead.

Good morning. Thank you, everybody. We appreciate your time and participation. Joining me on today's call from Ollie's are Eric van der Valk, President and Chief Executive Officer; and Robert Helm, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for questions. To ensure that everyone has the opportunity to participate, we ask that you limit yourself to one question. For additional questions, please reenter the queue.

Finally, let me remind you that certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in the company's earnings release and filings with the SEC, including the annual report on Form 10-K and the quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements. On today's call, the company will also be referring to certain non-GAAP financial measures. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release. With all of that said, it's now my pleasure to turn the call over to Eric.

Good morning, and thank you for joining us today. We had a strong fourth quarter to cap off an exceptional year. Both comparable store sales and earnings were ahead of our expectations, and we delivered on all of our strategic objectives in 2025. We entered last year with a number of ambitious goals.

Most notable of these was to accelerate our growth and capitalize on opportunities in the market, including real estate, merchandise, customers and talent. All of this required considerable planning and execution, and our team delivered. We opened a record 86 stores last year, which was significantly higher than our previous record of 50 stores. All stores were opened in the first 3 quarters, another first for us. We moved to a soft opening strategy, which simplified the process and improved our execution.

Our next goal was to enhance and drive growth in the Ollie's Army loyalty program. We added an Ollie's Army night in June. We made our Ollie's Days event exclusive to members only. We gave members advanced notice on special events, and we rolled out the Ollie's credit card. Our stores did an amazing job communicating the benefits and enrolling customers in the loyalty program. Great job team. Your efforts paid off. The result was stronger customer acquisition growth the entire year.

New memberships in our Ollie's Army loyalty program increased 23% and our total customer file increased by more than 12%. On top of the accelerated membership growth, we are welcoming a wider breadth of customers. America loves a bargain. And as we grow from East to West, we are expanding our customer demographics. Our unprecedented deal simply cannot be beat, and we are clearly benefiting from consumers seeking value and trading down.

It's not just trade down, however. We are also reaching a younger customer through digital marketing tactics. Finally, we are reinvesting in our stores and improving the customer shopping experience. All of this is driving an expanded customer base. Our next objective was to go after merchandise-related opportunities. Our mission is to sell Good Stuff Cheap. We do this through a flexible off-price buying model that leverages our growing buying power across suppliers and manufacturers around the world.

Our growing size and scale and continued consolidation of the retail industry has resulted in better access to merchandise, and our deal flow is off the charts. This gives us more control and flexibility in how we build our merchandise assortment. A good example of this were changes we made to the seasonal category. Seasonal decor is an area that continues to grow in the marketplace, and there is a white space opportunity here.

At the same time, toys is an area that continues to evolve away from traditional to more interactive products. With this in mind, we increased our investments in seasonal decor and changed our approach to toys. These changes resonated with our customers and were big wins in the fourth quarter. Our last initiative was to continue reinvesting in our business to support future growth.

We have strengthened our bench in many critical areas, including planning and allocation, marketing and new store development. We also increased our distribution center throughput through expansion and automation, and we continue to improve our store and customer experience. Looking ahead, we will build on our momentum and progress in pursuing these initiatives in 2026. Our flywheel for growth starts with the opening of new stores and the availability of real estate continues to be strong. We are planning to open 75 stores this year, and these will be a mix of new and existing markets as we continue to expand contiguously.

We recently celebrated entering our 35th state with the opening of our store in Austin, Minnesota. We celebrated the grand opening last week with a long line of enthusiastic customers that stretch down the side of the building. It was great to meet and talk to so many good people. Austin loves deals, and we are proud to be part of your community. Thank you, Austin and Minnesota. The birthplace of bargains has arrived with more stores coming soon.

In addition to Minnesota, we will also be entering New Mexico later this year. With a total of 658 stores in 35 states, we are only at the halfway mark of our long-term goal of more than 1,300 stores. It's such an invigorating time to be with Ollie's with so much growth ahead of us. While new stores remain the cornerstone of our growth, we are also focused on driving comparable store sales through better execution, leveraging our growing size and scale and improving sales productivity.

We touched on strengthening our product assortment. We are also seeing opportunities arise in areas such as real estate and talent. When you combine this with the fact that we reinvest in the business every year because of our strong sales, profitability, cash generation and balance sheet, it feels like we have reached an inflection point.

With these dynamics, we are confident in our ability to continue executing the business and driving consistent results. Our growth and the continued consolidation of the retail sector is leading to more buying power and expanding our access to products. This gives us the ability to balance our value proposition with our margin profile and strengthen both over time.

Based on the structural changes to our business, we feel a comp target of 2% and a gross margin target of 40.5% is sustainable and strikes the right balance between price and margin. We also believe that this stability and strong free cash flow now allows us to commit to returning higher levels of excess cash to shareholders through share repurchases.

Combining 10% unit growth, 2% comp growth and a commitment to stepping up share repurchases, we are confident in delivering consistent mid-teens EPS growth while reinvesting back into the business to support profitable long-term growth and reach our target of 1,300 stores. In 2026, our focus will be on improving the in-store customer shopping experience, sharpening our dynamic marketing media mix model, expanding our IT application development capabilities and further integrating technology and data analysis across the enterprise, including leveraging proven AI with appropriate solutions for our business model, growing our planning and allocation bench and capabilities and increasing our distribution capacity by expanding our Texas and Illinois facilities and laying out plans for our fifth DC.

There is so much potential to continue to develop and grow our business, but we are doing this in a calculated fashion, staying true to our business model, strong culture and our new long-term growth algorithm. We are super proud of our achievements in fiscal 2025. We delivered against virtually every single metric and goal we set out for ourselves at the beginning of the year. But now that's behind us. We are focused on building on our success, seizing new opportunities, delivering another year of Good Stuff Cheap to our customers and strong results for our shareholders.

Let me wrap up by recognizing and thanking all of our dedicated associates and team members. Every one of you plays an important role in serving our loyal discount customers and fulfilling our mission. Serving our communities by selling Good Stuff Cheap is not just a tagline. It's our purpose, our passion and our reason for being. Thank you for everything you do. Now let me turn the call over to Rob.

Thanks, Eric, and good morning, everyone. We were very pleased with our fourth quarter results and the underlying trends in the business. Earnings were slightly ahead of our expectations, driven by solid comp growth, healthy margins and disciplined expense control. New stores and customer acquisition remain our 2 top priorities, and we continue to deliver on both of these. We opened a record 86 stores last year, an increase of more than 15% and membership growth in Ollie's Army remained strong, up more than 12% for the year to 17 million members.

Now let me walk you through the P&L. Net sales increased 17% to $779 million, driven by new store openings and comparable store sales growth. Comparable store sales increased 3.6%, driven by an increase in both basket and transactions. Seasonal, consumables, hardware, stationery and sporting goods were our top-performing categories.

Our comp sales increase was above our expectations in the quarter, even more so when factoring in the impact of severe winter weather. Major storms around Black Friday weekend, the weekend of Ollie's Army Night and the end of January caused a significant number of store closures and disruptions to the business.

Given our store geography, we were particularly hard hit by the weather. While comp store sales were ahead of expectations, new store sales were slightly below our plan. This was a different trend than the rest of the year as our new stores outperformed expectations in the first 3 quarters. In hindsight, we underestimated the flattening of the reverse waterfall for the new stores in year 1 from the soft opening strategy. This proved to be more impactful in the fourth quarter than what we observed earlier in the year because of the higher engagement levels with our Ollie's Army members during the holiday season.

The majority of our new stores be planned for this full year and the flattening of the reverse waterfall is something we continue to study. Gross margin of 39.9% was above plan for the quarter, but approximately 80 basis points lower than last year, which was largely due to planned investments in price. SG&A expenses were well managed in the quarter. Excluding the $5 million of onetime expense related to the modification of equity awards for our Executive Chairman in last year's fourth quarter.

SG&A expense as a percentage of net sales decreased 40 basis points to 24.2%. The decrease was primarily driven by the leverage of our fixed costs from the increase in comparable store sales and benefits from our optimization efforts in marketing. Preopening expenses decreased 53% to $2.3 million, driven by the earlier timing of new store openings this year versus last year.

Moving down to the bottom line, adjusted net income increased 16% to $85 million and adjusted earnings per share increased 17% to $1.39. Lastly, adjusted EBITDA increased 16% to $127 million and adjusted EBITDA margin decreased 10 basis points to 16.3% for the quarter. Turning to the balance sheet. Our total cash and investments increased by more than 31% or $134 million to $563 million, and we had no meaningful long-term debt at the end of the quarter.

We remain committed to maintaining a very strong balance sheet because of the credibility this gives us with our various partners across the industry. Inventories increased 18% year-over-year, primarily driven by our new store growth and strong deal flow. Capital expenditures were $18 million for the quarter, with the majority of the spending going towards the opening of new stores, the improvement of existing stores and to a lesser degree, investments in our supply chain. We did pull some new stores forward in early 2026, which drove CapEx and preopening a little higher than our expectations.

We bought back $34 million worth of our common stock in the quarter and $74 million for the full fiscal year. At year-end, we had $259 million remaining under our current share repurchase authorization. We are stepping up the buyback in 2026, and I will speak to this more in a moment. Lastly, let me run through the way we are thinking about the business and our initial outlook for fiscal year 2026.

Let me start with tariffs. The tariff situation obviously remains very fluid, and the current lower levels could be temporary. Bigger picture, tariffs are just another form of disruption, and we benefit from disruption. Whatever happens, we would expect to mitigate any margin pressure from tariffs. Before running through our guidance for 2026, let me comment on how we are thinking about our new long-term growth algorithm that Eric quickly touched on.

We operate a flexible and fluid business that generates stable returns and very strong cash flows. Our strong growth, along with the consolidation of retail gives us greater ability to scale and drive the business. With all of this, we feel confident in targeting annual comparable store sales growth of 2% and annual gross margin of 40.5% moving forward, acknowledging that there will be some variability to comps and margin between the quarters based on deal flow, seasonality and a few other factors.

The 40.5% annual gross margin target is our current baseline target, and our thought process is to reinvest anything over and above this back into our value proposition to our customers. Lastly, we are targeting to return approximately 50% of our free cash flow back to investors through share repurchases going forward. Our first and best use of cash is and will always be reinvesting into the business to support long-term growth. However, between our very strong balance sheet and stable cash generation, we are confident in committing to a higher level of share repurchases that benefits long-term EPS growth.

Our initial guidance figures reflect these changes and are contained in the table in our earnings release posted this morning, and they include 75 new store openings, net sales of $2.985 billion to $3.013 billion, comparable store sales growth in the range of 2%, gross margin in the range of 40.5%, operating income of $339 million to $348 million, and adjusted net income and adjusted net income per share of $270 million to $277 million and $4.40 to $4.50, respectively.

These estimates assume depreciation and amortization expenses of $63 million, inclusive of $15 million within cost of goods sold, preopening expenses of $22 million, with the majority of this in the first half of the year, an annual effective tax rate of approximately 25%, which excludes the tax benefits related to stock-based compensation.

The tax rate is slightly higher than 2025 due to higher levels of nondeductible compensation. Diluted weighted average shares outstanding of approximately 61.4 million, which includes a stepped-up share repurchase level of approximately $100 million. And finally, capital expenditures are expected to be in the range of $103 million to $113 million, which includes almost $20 million for the expansion of our Texas and Illinois distribution centers.

Similar to last year, we expect our new store openings to again be front-end weighted with the majority of openings planned for the first half. In closing, let me also acknowledge and congratulate my fellow team members. While we continue to integrate technology into how we do things, we will always be a people-led business that relies on each and every team member to play their part. 2025 was a terrific year on all accounts, and I am excited about the opportunities that lie ahead for our team. Now let me turn the call back over to Eric.

Thanks, Rob. In closing, I'd like to share that we are well positioned and laser-focused on continuing to deliver profitable growth. We are committed to driving strong and consistent execution every hour of every day. We are proud of what we do in service of our customers. We are excited about the opportunities ahead. And last, but certainly not least, we are always. Operator, we are now ready for questions.

[Operator Instructions] It comes from the line of Peter Keith with Piper Sandler.

Interesting on the algo change, certainly exciting from -- moving from the historic 1% to 2% comp annual target up to now 2%. So kind of subtle, but I would still say meaningful. Could you give us the thought process and why you're doing that now? And maybe I guess what gives you the confidence you can sustain that going forward?

Sure. Peter, thanks for your question. We do believe we're at an inflection point. We -- with the accelerated growth last year and looking at $3 billion in sales for next year, our growing size and scale is leading to better access to merchandise and deals. It's allowing us to steer our merchandise selection and our category mix much more deliberately than we were able to do in the past. Our flexible buying model allows us to get in and out of products and categories fluidly. So with more consistent access to incredible deals and the improvements we made throughout the business of the organization, we feel like a 2% comp algo is sustainable.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

I read the chance the 9.5%, I think this morning, nice effort. My question is on sales productivity. You've noted changes being made to the size of certain assortments such as shrinking carpeting books and toys just now. Where are you guys in that journey? And at $130 in sales per square foot, I'm curious for your best stores, where that productivity sits? And then last question would be, in our field work, we've observed furniture in stores. Is that just a seasonal drop? Or are you guys leaning into that category more deeply?

Thanks, Chuck. Appreciate it. I think I was on the 10.0% on the champ, but okay, it's alright. You could be at 9.5%. Room for improvement, we like that. Yes. In terms of space productivity, we are thinking about space productivity differently now than we have in the past.

We first consider where we provide the best values in the most relevant merchandise categories where we can chase a closeout pipeline. So I would stress the fluidity, the flexibility of our business and the category mix is sometimes a following of the closeout pipeline. But our growing size and scale gives us better access to deals, which I said earlier, results in -- it's resulting in more long-term partnerships with the vendor community and more partnerships with the vendor community.

The more expansive access to the merchandise is putting us in the driver's seat in steering categories and assortments. We've also been on a journey thinking about this, how we value store space, how we drive higher space productivity within the box for multiple years at this point, beginning with some of the learnings that we took away from our remodel program several years ago, and it's resulted in our confidence to accelerate some investments in the business and to steer categories in a more deliberate way.

We're also making investments, as I mentioned on the call, in planning allocation and stores to further seize these opportunities. Furniture is a great example. I'm glad you brought it up of a category that we've looked at, where there's tremendous white space in the market as a result of retail consolidation.

So I throw out there, Big Lots, Value City, American Freight are good examples. of retail consolidation that's happened somewhat recently, and it's opened up white space in what I would characterize as the deep discount furniture business with kind of opening price point, living room furniture is kind of what we're going after.

With our opportunistic buying model, we're well positioned to chase the business and move in and out of categories. We began testing expanded furniture last year, actually late last year in some stores, and we like the results of the test. We were looking forward at what we believe to be an outsized tax refund season and sees what we thought would be a unique opportunity to introduce the business in a very big way in almost every store at the same time as the tax refunds were coming in.

But to answer your question about is this transitory? Is it deal? Are we driving it now? And what does it mean for future? We're early innings at this. We're about 7 weeks or so into the introduction of the business. President's Day weekend was the kind of the grand introduction of it. We do believe it has a place in our stores long term, and we're going to stay at the business. It may not be every store, but it's probably most stores or at least more than half the stores.

This being said, the most challenging decisions that we make here are what not to buy, whether that's deals or categories. So the most challenging decision we have to make that we have made for about half the stores is that we're going to exit the wall to wall carpet business, which is relatively unproductive. And we like what we're seeing in furniture, and we believe that's an adequate replacement and that we'll get more sales productivity out of furniture versus wall to wall carpet in, again, more than half our stores.

So again, early read. We like what we see. I wouldn't speak today about -- you quoted the $130 sales per square foot about what the road map looks like around that. At this point, we have strategies around category mix management that will drive improved selling productivity. We're not making a specific commitment to what that looks like in future years today.

Our next question comes from the line of Matthew Boss with JPMorgan.

So Eric, on the inflection point that you cited to kick off the call. So two questions. First, could you elaborate on the comp strength relative to plan that you saw in November and December? How best to quantify the weather impact on the fourth quarter? And have you seen any change in comp momentum so far in the first quarter relative to the 3 to 4 comps that you delivered in the fourth quarter? And Rob, separately, I guess, could you just elaborate on the performance that you're seeing in your new stores relative to plan and just expectations for productivity that you embedded in the guide for this year relative to 2025?

This is Rob. I think I'll take all of that. So the comps in Q4, we were pleased with the comp results. It was driven by both increases in transactions and basket. It was basket led with basket taking kind of 2/3 of it and transactions 1/3. The monthly cadence traded in a pretty tight range. We were pleased with the holiday season. We had a very nice holiday season.

In January, our exit rate would have been the strongest comp of the quarter had it not been for the winter storm impact, which was very significant where we had hundreds of stores closed for a number of days in that last week of the quarter. And momentum has spilled over into Q1. We're pleased with where we're positioned. We feel like we can deliver on our guidance. Our deal flow is amazing, and our assortment for the spring season is incredible.

From a new store perspective, I think it's important to put all of it into context. First, the majority of our stores be planned for the full year. So we're very pleased with that result. Second, the new stores were impacted actually disproportionately from the comp stores during that last week of the quarter because of geography. So that was also a piece. But in terms of trend and what we're seeing, what we saw in Q4 was a timing dynamic, which related to our soft opening strategy, which flattened the early sales curve, but it improved execution of these stores.

This improved execution, helped us open these stores earlier and really helped us step up from the historical cadence from 50 stores to 86 stores this last year. We knew this would impact the maturity curve in some way. But what we feel that it does is we feel that it impacts the shape of the curve, but not the long-term productivity, profitability or opportunity in any of these stores over the longer term.

In terms of what we've embedded in guidance, we've considered this performance in the fourth quarter into our guidance into our new store productivity. The way that the street calculates new store productivity is slightly higher this year versus last year because of the step-up in the 86 stores coming into the store base. But we're comfortable with our guidance, and we feel that we're in a good position to deliver.

Our next question comes from Steven Shemesh with RBC Capital Markets.

There are obviously a lot of consumer cross currents at the moment if we think about an evolving tariff landscape, inflation maybe picking up a bit higher tax refunds, as you alluded to, and now the Middle East situation impacting gas prices and consumer confidence. Anything you can share on the overall state of the consumer and kind of what you're seeing from a consumer behavior standpoint? And a related question, I mean, I think there's always an ongoing debate about closeout availability. You somewhat alluded to this in your response to an earlier question, but maybe just a state of the union there as well of your confidence in maintaining a high degree of quality in stores, especially as you ramp up store growth.

Sure. Thanks, Steve. Thanks for your questions. In terms of the state of the consumer, consumers are seeking value, and we're here for them. The strength we're seeing in trade down has continued with our upper income cohorts. It's -- there's momentum there in trade down. The lower income -- the lowest of our cohorts, a little bit weak. The trade down is more than offsetting the weakness in the lower income cohorts.

We're also seeing strength in consumables, which is an indication of where the consumers' mindset is. It's continuing to be a very strong business for us. The deal flow is lining up very, very nicely, which is a good segue to deal flow with the consumer demand in consumables for us.

The deal flow for us, it's off the charts. With the consolidation of retail that's taken place, definitely outsized consolidation in retail over the past year. We are seeing deal flow in just about every category that's off the charts. And again, I mentioned consumables, but that's definitely been a strong pipeline for us in consumables. So we're extreme value retailer. We're comfortable with where we are from a price gap standpoint, very competitively positioned. So we're in good shape.

Our next question comes from Steven Zaccone with Citi.

I wanted to ask about the real estate environment. Just help us understand how you're balancing new store growth versus investing in some of these initiatives to drive higher store productivity. And then this year calls for 75 new stores, which is slightly above 10% unit growth. Should we expect this unit growth above 10% to continue for a couple of years?

Thanks, Steve. It's Rob. I'll take that question. The real estate environment remains strong and availability is very good. 2025 was actually one of the biggest years of store closures that we've seen over the last 10. But we're focused on building a long-term durable business model that compounds earnings growth year after year. We feel that the best way to do this now is by balancing our new store growth with other initiatives to improve the in-store shopping experience across the remainder of our fleet. But touching on the go forward, we think that 10% unit growth is probably the right way to think about it beyond 2026. 2025 and 2026 were really above algo because of the outsized consolidation of stores that we've seen in the last 12 to, say, 24 months.

Our next question comes from the line of Kate McShane with Goldman Sachs.

Is there a way to quantify the comp growth of Ollie's membership versus what is coming from new store growth. And we are wondering if the Ollie's Army demographic is changing in line with what you are seeing just in the stores?

I'll take the first part, and then I'll hand it off to Eric for the second part. I -- we haven't separated that out in the past historically. We think about Ollie's Army as a single metric, and we're looking to grow it through new stores predominantly. But what I would say is all vintages continue to comp on Ollie's Army store growth. And it's an important goal that we set for our store teams in communicating the benefits out to our customers each and every day.

Yes. I mean we're very pleased overall with the Ollie's Army performance on the quarter and on the year in terms of the growth, the excitement that our customers have around the program, the enhancements to the program, the conversion that our stores have driven with the customers -- the new customers that are coming in to make them part of the Army to make them part of our loyal bargainauts, part of our Ollie's family. So that's -- we're firing on all cylinders as it concerns Ollie's Army.

Our next question comes from Anthony Chukumba with Loop Capital Markets.

Congrats on a strong 2025.

Thank you.

I was interested in the seasonal business in the fourth quarter, specifically, how much of that strength was closeout as opposed to some of the direct source stuff that you did, particularly in terms of decorations and also gifts.

Sure. The seasonal business typically is more non-closeout, more source, more production goods. Last year, we did see a fairly healthy pipeline of closeout goods of excess inventory that was out there as a result of retail consolidation with manufacturers and product that was left behind from retailers that are out of business that was in transit, et cetera.

So it was a combination. I'm not going to quote the percentage on it, but it was actually a fairly healthy combination of closeouts that is somewhat unusual for that business. Gift is the same to an extent. We don't usually get into specific deals on this call, but we did have outsized gift-related deals a year ago, we were up against that were closeout related.

Some of what we bought was closeout and some of what we bought was production. And we had a very strong gift business this year. So we were able to comp our business that was a little bit more closeout driven in '24 with a little bit less closeout driven product in '25. And we were very proud of our value proposition, our price gaps on that product. It does speak to the evolution of our business as we continue to grow being maybe more like an off-pricer with closeouts as the most important driver of our value prop. And that's how we see our business as we move forward, especially as we continue to grow in size and scale.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Good job in '25. If you take the sort of this newer financial algo compared to previous, so two, it's a little bit higher than what you were comfortable underwriting. Gross margin is certainly higher. Can you just tell us then what happens on the other side of it? Are you saying that margin grows at a faster rate, two, and EPS grows faster? Or is there something inhibiting higher SG&A? I'm sorry if I missed that piece, but I'm trying to put one before and after together.

This is Rob, Simeon. I'll take that question. We're not thinking about margin growth necessarily differently under this algo. What we're moving from is a 1% to 2% to a 2%, which shows the confidence that we have based on this inflection point, based on our size and scale. Margin, we're thinking as the current baseline target. We're thinking not to exceed 40.5% in the short term.

We think that this is the right balance between price and margin at the moment. And if we have the opportunity to exceed, we would reinvest that back into customer loyalty to drive additional market share at this moment. From an SG&A perspective, at the 2% comp, we would expect for 10 basis points of leverage, which is built into our guidance. And then EPS will grow in the mid-teens on the bottom line, and that will be supplemented by share repurchases, but that's not how we're getting there. We're getting there through the core strength of the algo throughout the P&L.

Yes, Simeon, I just want to stress the point on margin about reinvesting in price. Nothing has changed here, we reinvested price, 40.5% is the new 40.0% period.

Our next question comes from Scot Ciccarelli with Truist.

This is Josh Young on for Scot. So how much benefit do you think you're capturing at this stage from Big Lots? And could we see sales slow in the back half as you cycle those orphan sales that you were able to capture?

This is Rob. I'll take that one. The stores that have overlapped the former Big Lots locations, whether they closed, never came back or they closed and reopened under the variety wholesalers umbrella are some of the strongest locations in our fleet over the past year. But similar to COVID, when we were talking about 2-year, 3-year, 4-year comp stack, Big Lots is in the rearview mirror and what they were is not coming back. We will continue to benefit from their absence in real estate and access to product and sourcing and talent, all while continuing to wear share of wallet with our incredible deals and bargains. But our model has always thrived on the long-term consolidation in retail and Big Lots is no different.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group.

And I'll add my congratulations on a really strong year. I wanted to ask about dark rent, which you saw impact in 2025. What was the total dark rent in '25? And if you have some dark rent that you're expecting in 2026, what would that amount be? And then also, you talked about returning capital to shareholders maybe in a little bit bigger way. You've got well over $0.5 billion in cash and generated about $300 million of operating cash flow in '25. Would you think about stepping up like the share repurchase plan to a $300 million, $400 million level, just something that given the cash flow that you generate, and current balance and strong balance sheet. Just curious if that's under consideration.

Sure. This is Rob. I'll take those questions. Dark rent expense was $5 million for the Big Lots locations in 2025. Not all of this was incremental. And typically, our organic locations incur some level of dark rent, it's typically in the range of a month or so as we merchandise the store. We do have more normalized assumptions included within preopen this last year. But as you do the math, I think the piece that you're trying to solve for is our investment in improving the shopping experience and the remodel program, which we have now added back into 2026 is included in our guidance numbers.

So that's on the preopening side. On the buyback side, the way we're thinking about buybacks is it's a supplement to our algo. It's not a substitute for earnings growth. We're very comfortable with the commitment of returning 50% of our free cash flow generation back to the shareholders. The $100 million, we believe, is a conservative target. If we're able to generate higher levels of operating cash flow, we'll aim to stick to that 50% return of free cash flow. We're not looking to do a short-term pop, we're looking for steady compounding earnings growth over time.

[Operator Instructions] We have a question from Edward Kelly with Wells Fargo.

Nice quarter. On the marketing side, I was hoping that you could touch on maybe some of the changes in the marketing strategy, and you mentioned optimization. And then related to this on the flyer, any shifts on the flyer that we should be thinking about this year or other special promotions for '26?

Ed, I love that you asked flyer question, and count offers and flyers as well. On the marketing question, before I get into flyers, we continue to optimize our marketing through our dynamic media mix model. It allows us to reallocate spend towards higher return channels, and it's more fluid in terms of timing. This has been a journey -- a multiyear journey at this point as we reduce our reliance on what I call the inevitable reduction of print media.

It's been in decline for many, many years, continues to be in decline. It's really not about spending more. It's about using data to be more precise and more efficient. We've already seen the result of some of that work over the past 6 months, as you can see from a reduction of marketing spend over the last 6 months.

Again, it's not about reducing. It's about a more efficient spend. We also have meaningfully reduced our print spend over time, a little ahead of the decline of the print media that's available to purchase, which is where all the reduction is coming from. The approach gives us much more flexibility, as I touched on, digital is much more flexible, which helps facilitate responding to deal flow, seasonality, customer engagement is much more fluid and flexible. It's in near real time, and we can stay very disciplined on expense control.

In terms of your flyer-related questions, we -- so we -- our history here is that flyers are big events in the material of the quarter. We're not thinking of it that way anymore. And I am not going to talk about changes to flyer timing going forward. I get a little bit concerned with our growing size and scale and approaching $3 billion in sales next year with "Ben from Spider-Man with great power comes great responsibility", and we have great buying power in the closeout business. And I'd rather not project to the vendor community and to our competitors out there, what we're doing with flyers or what we're doing with managing our mix on a go-forward basis, et cetera. So we're committed to the 2% algo period every quarter. So that's how we're looking at it. So that is the answer to your flyer question.

Thank you. And ladies and gentlemen, this will conclude our conference for today. Thank you for participating. You may now disconnect.

Thank you.

Good morning, and welcome to Ollie's Bargain Outlet conference call to discuss financial results for the third quarter of fiscal year 2025. Please be advised that this call is being recorded, and the reproduction of this call in whole or in part, is not permitted without the express written authorization of Ollie’'s. I would now like to introduce your host for today's call, John Rouleau, Managing Director of Corporate Communications and Business Development for Ollie’'s. John, please go ahead.

Thank you, and good morning, everybody. We appreciate your time and participation. Joining me on today's call from Ollie's are Eric van der Valk, President and Chief Executive Officer; and Robert Helm, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. We ask that you initially limit yourself to one question to ensure that everyone has the opportunity to participate. If you have additional questions, please reenter the queue.

Finally, let me remind you that certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-K and the quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements.

On today's call, the company will be referring to certain non-GAAP financial measures. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release. With that all said, it's my pleasure to turn the call over to Eric.

Good morning. Thank you for joining us today. Our team delivered another strong performance in the third quarter. We opened a record number of new stores, continued to accelerate membership growth in our Ollie’'s Army Loyalty Program, widen our price gaps to the fancy stores and delivered industry-leading sales growth all while driving significant improvement on the bottom line. We are primed and ready for the final days of the holiday season.

Our expanded assortment of seasonal and gift items along with our amazing deals of brand name household products make us the holiday shopping destination. Comp trend since early October have been strong, and we feel great about our momentum heading into the final weeks of the holiday season with a better-than-expected third quarter results and a very good start to the fourth quarter, we are raising our full year sales and earnings outlook.

Let me provide an update on our strategic growth initiatives and some of the things we are doing from a merchandising, marketing and supply chain perspective to drive our business. Accelerated unit growth and customer acquisition remains our top priority. We have a predictable, portable and profitable store model that is unlike anything else in the market. We have a huge opportunity ahead of us to continue growing. Our long-term target is 1,500 stores, and we are committed to a minimum 10% annual unit growth to get there. We have the talent, and have built the infrastructure to exceed our long-term algo and are delivering accelerated unit growth. We opened 32 new stores in the third quarter and 86 for the year, which is 18% growth. This blew away previous Ollie's records and demonstrated our ability to exceed our algo opportunistically. The current environment has been challenging for many retailers and this, coupled with long-term consolidation of retail, presents a pivotal opportunity for Ollie's to secure attractive second-generation real estate sites. Our entire team deserves a huge shout out for their achievements this year.

Not only do we open a record number of new stores. All of our stores were opened before the fourth quarter. We have not made this happen for years and this allows us to be 100% focused on driving the business in the final months of the year and the critical holiday shopping period. Thank you again, Ollie's dream team of discount retail for making this happen. Opening stores is the first component of our growth strategy. Next is winning the hearts and minds of new customers. We have some of the most dedicated and passionate customers in the business and are fiercely committed group. As we open -- as we continue to open new stores, we are focused on acquiring new customers and turning them into loyal Ollie’'s Army Bargain knots. Our members shop more frequently and spend over 40% more per visit than nonmembers. They are very important to our business, and we have an opportunity to strengthen our connection and drive lifetime customer value. We are very pleased with customer growth in the third quarter. New memberships in our Loyalty Program increased 30% year-over-year, while our customer profile increased 12%. We have seen new customer acquisitions strengthen since the first half of the year and engagement with our existing customers remain strong. Both the younger and higher income groups were the fastest-growing cohorts in the quarter, which we think is in part driven by the continued reallocation of marketing dollars to digital, consumers seeking value and customers trading down.

We also continue to enhance the value proposition of our Ollie's Army Loyalty Program. Last quarter, we talked about the success of the additional Ollie's Army Night and some of the learnings there. The biggest takeaway was the adjustment to the start time of the event. We received positive feedback about the earlier start time and experienced increased foot traffic as a result. The upcoming Ollie's Army Night on Sunday, December 14, will run from 4 to 9 p.m. compared to 6 to 10 p.m. last year. If you're not already a member of Ollie's Army, what are you waiting for? We invite you to join and we look forward to seeing all of you this Sunday.

On the Merchandising front, let me touch on how we're steering our product mix to drive sales productivity and enhance new customer acquisition. Our flexible buying model and treasure hunt shopping experience give us unlimited flexibility in how we assemble our product offering. Our buyers are continuously scouring the marketplace to find the best products at the best prices to put together an ever-changing assortment that combines quality, national brands and price in a way that can only be found at Ollie's. At the same time, we know that customers are prioritizing their spending around their needs and are looking for value. By focusing on value-driven consumable deals, we achieved mid-single-digit increase in comparable store transactions, attracting new customers and increasing engagement. Our deal flow continues to be very strong and driven in part by the challenging retail environment. On top of this, our growing size and scale is starting to give us opportunity to steer our category mix.

A good example of this is the increased investment we made in the Seasonal category. As you may have seen in our stores, we dramatically increased the assortment of seasonal decor over the past year, with the most meaningful changes taking place in our Fall Harvest, Halloween and Christmas categories. We also grew our Holiday Gift Programs that we initially successfully tested last year. The changes have been well received by our consumers with Seasonal being one of our top performing categories in the quarter and throughout the year. Marketing continues to be a critical lever in fueling the growth of our business. And over the past year, we've been accelerating a major evolution in how we connect with our customers. As consumer attention shifts continues to shift towards digital platforms, our strategy is shifting as well.

By moving from traditional linear and print-heavy approaches to a more dynamic digital-first strategy, we can deliver the right message to the right person in the right place at exactly the right time. A recent comprehensive review of our media mix model indicated a significant opportunity to further reallocate print spend to digital media. Acting on this data, we put a test in place and our strategic reallocation is already proving out. October was our strongest month of the quarter at a time when we meaningfully reduced our print campaign. This allowed us to leverage our media spend while driving sales above plan in the quarter. More importantly, this is in pursuit of a smarter, more targeted, more modern marketing ecosystem. To support the growth of our business, we continue to invest in our supply chain.

Over the next year, we plan to expand our Texas distribution center by 150,000 square feet and increase our service capacity by approximately 50 stores to 800. Next on the list is the expansion of our Illinois distribution center, which will start late next year. Our supply chain investments have driven throughput, leverage costs and expanded our capacity to buy any deal, anytime, anywhere as we continue on our path of continuous growth.

I would like to thank all of our dedicated and hard working associates. Deep discount retail is not an easy business, and it requires continuous coordination and relentless execution. We came in this year with a very unique opportunity to accelerate our growth and capture abandoned market share from the store closures and distressed retailers. Our team was ready for the challenge and stepped up all year long. I want to wish everyone happy holidays and hope that all of our team members are able to enjoy time with friends and family.

Now let me turn the call over to Rob. .

Thanks, Eric, and good morning, everyone. We are very pleased with our third quarter results and the momentum in our business. New store openings, new store performance, sales and earnings were all ahead of our expectations for the quarter. With better-than-expected results and a very good start to the fourth quarter, we're raising our full year sales and earnings outlook.

Accelerating new unit growth and expanding the Ollie's Army loyalty program are two big priorities this year. We are delivering on both of these initiatives. We opened 32 new stores in the third quarter and ended the period with a total of 645 stores, an increase of more than 18% year-over-year. Ollie's Army members increased 12% to 16.6 million members strong, driven by new customer acquisition. With the consumer buying closer to need and prioritizing the necessity over discretionary items, this has driven strength in consumer stables. Our flexible buying model has allowed us to feed this trend, which has been very well received by customers. We have also taken advantage of a number of closeout deals that have fueled positive trends in customer acquisition transactions and unit volumes.

We intentionally pursued these deals to drive customer growth and engagement even as they put some pressure on average unit retail and basket size. Now let me run through our P&L numbers. Net sales increased 19% to $614 million, driven by new store openings and comparable store sales growth. Comparable store sales increased 3.3%, driven by a mid-single-digit increase in transactions which was partially offset by a decrease in average ticket price. Our top 5 performing categories were Food, Seasonal, Hardware, Stationery and Lawn Garden. Gross margin decreased 10 basis points to 41.3%. The slight decrease was better than our expectations and was driven by higher supply chain costs, primarily incremental tariff expenses were partially offset by higher merchandise margins.

SG&A expenses as a percent of net sales decreased 50 basis points to 29.4%, with the decrease primarily driven by lower professional fees stock-based compensation and leverage from the continued optimization of our marketing ecosystem. Preopening expenses increased 3% to $7 million in the quarter, driven by new store growth and $1 million of Dark rent expense associated with the former [indiscernible] locations that were acquired through the bankruptcy auction process.

Moving down to the bottom line. Adjusted net income and adjusted earnings per share increased 29% to $46 million and $0.75, respectively, for the quarter. Lastly, adjusted EBITDA increased 22% to $73 million, and adjusted EBITDA margin increased 30 basis points to 11.9% for the quarter.

Turning to the balance sheet. Our total cash and investments increased by 42% to $432 million, and we had no meaningful long-term debt at the end of the quarter. Given the nature of our business, the strength of our balance sheet is a strategic asset. Our financial stability, the visibility of being a public company and our size and scale helps distinguish us in the closeout and off-price space.

As a result, we remain committed to a fortress type of balance sheet that helps drive our business. Inventories increased 16% year-over-year, primarily driven by our accelerating store growth and strong deal flow. Capital expenditures totaled $31 million for the quarter, with the majority of the spending going towards the opening of new stores, the build-out of the bankruptcy acquired stores and to a lesser degree, investments in both our supply chain and existing stores. We bought back $12 million worth of our common stock in the quarter and had $293 million remaining under our current share repurchase authorization at the end of the quarter.

Lastly, let me run through our outlook for fiscal 2025. We we're raising both our sales and earnings outlook for the full year. Our revised outlook flows through the upside in our third quarter results and mostly keeps our outlook for the fourth quarter in place. It also assumes the current tariffs remain in place for the balance of the year. Our updated guidance figures are contained in the table in our earnings release posted this morning and include, 86 new store openings, net sales of $2.648 billion to $2.655 billion, comparable store sales growth of 3.2% to 3.5%, gross margin in the range of 40.3%. Operating income of $293 million to $298 million, and adjusted net income and adjusted earnings per share of $236 million to $239 million and $3.81 to $3.87, respectively. These estimates assume depreciation and amortization expenses of $55 million, inclusive of $15 million within cost of goods sold, preopening expenses of $25 million, which is slightly higher than the previous guidance with our pipeline for the first quarter now set an annual effective tax rate of approximately 24%, which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately $62 million and capital expenditures of approximately $88 million, which includes the buildout of the former Big Lots locations and the initial expenses associated with the expansion of our DC in Texas.

Our fourth quarter comp outlook is now in the range of positive 2% to 3%. We will not be opening any additional stores in fiscal 2025, but our new openings in fiscal 2026 are set and will again be front-end weighted. Given the strength of our pipeline, we expect new store openings in 2026 to remain above our long-term growth algo, and we're targeting 75 new stores next year.

In closing, let me thank my fellow team members for their work and dedication this year. We came into the year with a unique opportunity to accelerate our growth and increase our market share. This required a lot of coordination and effort across the organization, and I couldn't be more proud of how our teams have executed this year. With a strong assortment of both seasonal and everyday items, we feel good about our positioning heading into the holidays and are poised to finish the year strong. Happy holidays to all of our associates and team members around the country. Now let me turn the call back to Eric.

Thanks, Rob. Looking ahead, we feel very good about our positioning. Customers are looking for value, manufacturers need ways to manage their supply chain and the retail sector is consolidating. Ollie's benefits from these powerful secular trends, which are reflected in our fundamentals. Our customer base is expanding. Our deal flow has been better. Our store growth is accelerating our price gaps are widening and our margins are expanding. We are delivering strong and consistent results. We are winning the hearts and minds of customers, and most importantly, we are Ollie's. Operator we are ready for questions.

[Operator Instructions] Our first question comes from the line of Chuck Grom from Gordon Casket.

I was hoping you could frame out the state of your consumer in light of your basket commentary. [ DG ] also spoke about some ticket compression during times of consumer dress recently and also historically. And then bigger picture, can you talk about your vendor relationships, both on the closeout on but more importantly, the steps you're taking to drive deeper CPG relationships?

Sure. Thanks, Chuck, and good morning. Yes, I'll start with your -- the second part of your question. In terms of relationships. It's been a difficult environment for many traditional retailers with bankruptcy store closures, disruptions from tariffs. Customers continue to seek value. And we continue to grow our share of the order book of many vendors kind of regardless of the space that they're in. And CPG has certainly been a big component of that.

Our Food business is an indication of the strength of not only the customer looking for value in products they need, but also a deal flow that has been particularly strong in large part as a result of abandoned product or order book space and CPG order books that used to be sold to some of these companies that are no longer around or have consolidated. So that has been very good for us. It's helped us to open up new relationships as well.

You would think our size and scale that we know everyone, and that's really not true. We still have opportunities to work more directly with various vendors even in the CPG space, and we've been able to open up some new relationships. Over the past year that have been very meaningful for us. And it's meaning that customer need to buy -- to get extreme value in product that they need.

In terms of the state of the consumer, we're seeing that the strength. We're seeing strength in the higher income consumer, above $100,000 in household income, strength in upper middle, it's $65,000 and above. It's solid lower middle, and we've seen a little bit of, I don't know if it's trade out or a little bit of softness in the lower income consumer, which we could potentially attribute to the government shutdown and some of the disruption that happened as a result of that. But we're seeing on the whole that the strength of the upper middle and upper income consumer more than offsets a little bit of the weakness with that lower income consumer and that low middle has been hanging in there. And as we indicated, we've been able to attract allow more customers and convert them in the Loyalty Program as well, and we think, in part, driven by deal flow in CPG product.

Our next question comes from the line of Matthew Boss from JPMorgan.

Great. So could you elaborate on the components of the third quarter comp, particularly the growth in transactions maybe relative to the second quarter versus drivers of the basket decline? And just how this fits into your customer acquisition strategy?

And separately, could you speak to the cadence of monthly comps that you saw in the third quarter and just help define the strong start that you cited in the first quarter, maybe notably trends that you saw before and after Black Friday weekend?

Matt, I'll chime in on the first part and then Eric will take the second part about the customer acquisition. We were very pleased with our comp in the third quarter, the positive 3.3% is above our guidance of the positive 3% for the entire quarter. We saw a mid-single-digit positive transaction trend, which is actually an acceleration off of Q2 when you normalize it for the incremental Ollie's Army Night event that we added during that quarter.

Basket was the piece that was down that was down low single digits, and that was driven by a decline in AUR that was in the high single digits. From a cadence perspective, we were pleased with the flow of the quarter. We saw a little bit of slowdown midway through the quarter. It was at a time when unseasonably warm weather and the initial government shutdown took place. So not sure how much is attributable to either component. But we saw momentum return in October when the weather changed. We exited the quarter with very strong momentum. That momentum is carried into November. Quarter-to-date trends are currently running ahead of our guidance. And that AUR that was a high single-digit decline is now a positive low single-digit increase to our AUR. So all in all, between the assortment and where we're running from a momentum perspective, we feel very confident to deliver our guidance in the fourth quarter and over the year.

Matt, I'll just add a little bit of color on AUR. We really don't overtly manage AUR at Ollie's. We manage price gaps. We saw an opportunity in Q3. And it speaks a little bit to Chuck's question about CPG and strength of CPG. We saw an opportunity to invest in price, especially consumables. We also had opportunities to buy some very compelling low AUR deals in Craft and Seasonal and a couple of other categories. And we took the opportunity to invest in lower AUR deals that we believe customers would respond very favorably to and they did, and that really drove our traffic over the course of Q3.

It also made us a lot of friends and it helps us to win hearts and minds and helps us to win loyal customers. It will be customers for life. So we like this investment in price. We like this investment in low AUR. We're in this for the long haul in terms of customer acquisition and retention. And we were very happy with the outcome.

Our next question comes from the line of Stephen Zarcone from Citi.

I wanted to follow up there. The customer acquisition trends, can you talk about the growth you're seeing with new customers and then overall customer retention? And then as it relates to the Ollie's Army Night in December, how is your planning for that event changed at all based on the learnings from adding an additional night in June this year?

Sure. Thanks, Steve. In terms of customer acquisition, very happy, one of the strongest from an acquisition standpoint, we've ever experienced as a company. Our retention is also very good. customer reactivations are also strong. So we're hitting on all cylinders in terms of all these Army. -- acquisition remains a key focus. It's product newness, brands, new brands, great pricing, the investing in price that we've done and improved store experience. The digital marketing, we believe also is helping to drive a new customer into our stores. We're seeing in terms of the makeup of new customers that were acquired to the Army. We're seeing a younger customer. Our strongest cohort was 18 to 34 years old, which was -- which really blew us away, is typically -- it's more in the mid-30s to mid-40s. That was our second strongest cohort from an acquisition standpoint. It was 35 to 44. I did from an income standpoint, I commented a little bit when Matt asked his question, but upper middle and higher income were the strongest in terms of acquisition of the Army.

In terms of Ollie's Army Night, I kind of made the comment on the call about our learning from the summer event we had such an enthusiastic response from customers about the earlier start time of the event. If you remember, we started our we started the event at 5:00 p.m. So we made an adjustment given the time of the year and the weather in a lot of places to start this event at 4:00 p.m. The event is actually one hour longer runs until 9 p.m. Many of the customers that commented favorably about the earlier start time in June were older customers, the kind of customers like the dinner 5: 30 and watch jeopardy at 7. That's a shout out to my 84-year-old dad because that's him, but he -- that's the customer that appreciates the earlier start time.

In terms of how we're thinking about it, we're not actually thinking about the outcome any differently. Currently, it's all accounted for in our guidance. And so we're not banking on any significant incremental contribution from the day itself.

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

You did a nice job here of driving leverage even with such a large increase in stores here this quarter. I was hoping you could talk a little bit more about some of the levers that you're pulling in SG&A and perhaps an early look at how to think about that into next year?

Sure. I'll take that question. It's Rob. We have an incredible whitespace opportunity ahead. We have a predictable, affordable and profitable model that's unlike anything else in the marketplace. The model itself generates an incredible amount of free cash flow. And it's a unique operating model that can be scaled over time. Our focus is really positioning the business not for next year, but for the next 5 to 10 years to deliver consistent sales and earnings growth over time. But to your point, we're also focused on delivering near-term results. Thinking ahead to 2026, we anticipate benefiting from the full year annualization of the step change in the new stores that we opened. We'd expect to benefit from a favorable real estate environment, setting up another year of strong and elevated growth.

Our new store openings being front loaded for next year is also positive. And we also should have the roll-off of the dark rent that we incurred for the Big Lots locations that we acquired. At the same time, we're going to continue to reinvest in the business to support growth and do face some cost pressures like medical, which are still remain at elevated levels. But what that means for earnings in 2026 is we will be able to leverage this business, leverage the SG&A, assuming no radical changes in the environment and drive double-digit top line growth with mid-teens bottom line growth.

Maybe I'd just comment on the marketing aspect of it because that was the highlight from Q3. As we move forward, I commented in the script a bit that the business has so much potential that Digital has the ability to reshape how we reach and engage [Audio Gap] --

but what I would say broadly about gross margin, is we manage this business, as Eric said, to price gaps to the fancy stores. Our price gaps have expanded at a time that we've also expanded margins. So that feels quite good. But we do have a flexible volume model where if we can't be the lowest price in the market, and we can't have that wide of price gap, we simply won't buy the item and we'll move on to the next item.

Our next question comes from the line of Lorraine Hutchinson from Bank of America.

This is [ Mary Smart ] on for Lorraine. Could you talk a little bit about what you're seeing from your new stores? Are they still performing ahead of expectations particularly those in bankruptcy locations? And then also you talked a little bit in the past about making changes to more of a soft opening versus a grand opening, especially for the new stores and bankruptcy locations. Is there any update on how the soft openings are going? And is that a strategy that you expect to continue to employ moving forward?

Sure. This is Rob. I'll take this question. New store performance has been extremely strong. We've essentially be planned across 85% of the stores that we've opened this year. So we're very pleased with that.

With respect to the "reverse waterfall" that we've had historically, we are now getting our first look at the comping stores when we really started that exercise of soft opening versus grand opening with the 99 Cents only stores in fall 2024. So far, we're seeing in results is that the reverse waterfall has flattened quite a bit. So the second year typically in our model was a comp decline and we're seeing that second year for those 99 Cents only stores, certainly being much flatter, which bodes for a flatter comp in years 3 and 4 as well.

Our next question comes from the line of Scott Ciccarelli from Truist.

This is Josh Young on for Scott. So can you just give us an update on the performance you're seeing from your stores that are in similar markets that have been now closed Big Lot locations? And then as we think about new stores and you've kind of accelerated the pace of openings here, there been any operational stresses you've had to work through or that might be supply chain or labor? Anything to call out there?

Sure. I'll take the first part with Big Lots. I think Eric can take the second part with the operations. We're excited about the performance we're seeing where the bigs have closed. These stores continue to outperform the rest of the chain. The best performers are roughly the, call it, 290 stores within 5 miles of a Big Lots closure where it has not reopened. Those stores remain to be running low single digit between low single-digit and mid-single-digit lift versus the rest of the chain. The call it, 110 locations where Big Lots closed and then variety of wholesalers reopen the stores, we're roughly seeing the same trends there, maybe a tick lower but still better performance than the balance of the chain.

Yes, Josh, I'll take the second part of your question. I think dovetailing on to the first part of your question. The question I asked earlier about soft openings and reverse waterfall. We went into this year not only investing in infrastructure, supply chain infrastructure, project management teams, real estate, store development, the construction teams the store leadership teams to ensure that we could grow at this accelerated pace. But we also went into this year with the soft open approach, which takes some of the stress out the process in that with the hard opening dates, you centered all of your efforts around hitting this one exact date, and it results in a lot of extraordinary what we call it Ollie's muscle through it, type moments where the teams get pushed to their limit and they become exhausted. We also paced our openings out over the course of the first 3 quarters so that we weren't opening too many stores in any given week, which allowed us to spread our resources out across the fleet. And it allowed us to successfully deliver the 86 stores.

We're tired. It was a tremendous effort for the team. So I'm not indifferent to what it took to accomplish this. But we went in with a plan. We executed the plan and it worked out well successful. We're ready to do it again for 2026.

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

So you talked in your prepared remarks about the fact that you have this increased seasonal merchandise assortment as well as an expanded holiday gift program. If I remember correctly, last year, a lot of the holiday gifts were essentially closed out from Big Lots. But I'm assuming -- correct me if I'm wrong, but a lot of the season on the gift, it's a direct sourced from Asia. I guess, first off, let me know if that's correct or not, then then also just what are the margin implications of direct sourcing of the seasonal and the holiday gift as opposed to closeout?

Yes, Anthony. The seasonal gifts or combination of direct source and close out. To your point, they tend to be a little bit more direct source, depending on the category, especially true of seasonal. We were fortunate this year to have the ability to buy closeouts and seasonal as a result of some of the retail bankruptcies in some of the store closures. So we had more closeouts as a percentage of our seasonal assortment than we typically see.

Yes, but a lot of it's direct sources. Gifts, you're remembering a specific closeout we bought last year that was kind of stocking stuffer oriented gifts. That's true. There's a combination of produce for us and closeouts in gifts -- tends to be a little bit more produced. What we're seeing with our continued increase in -- as we've accelerated our growth and our continued increase in size and scale and leverage, we were able to buy this product at even better margin. It's not a headwind. .

Our next question comes from the line of Mark Carden from UBS.

So building on your marketing spend commentary, on the dollar shift from print to digital, you noted you cut on some of the post cards. How are you thinking about the traditional print flyers role going forward in your advertising strategy? And would you expect to make any incremental changes on that front in the coming quarters?

We still do believe in the flyer events how we deliver the message to the customer is where we'll continue to evolve. We primarily use share mail for the print piece, but that flyer has also distributed in various digital channels, and we get a tremendous amount of engagement from those traditional channels around -- or digital channels around the -- those flyer events. So we're still flyer event-driven were less print delivered flyer event driven. We'll continue to shift dollars away from print into digital to ensure that the message gets out there to our customers, and we continue to drive these events.

We'll shift at a somewhat accelerated pace given we have a tremendous amount of data, and we've learned a lot over the last couple of years about digital, and we'll make smart decisions about ensuring that our flyers still get the exposure, but we're using a more form of media that's going to reach more people long term. I call print, especially for shared mail, it's the kind of the inevitable decline of print media, like ultimately, it's declining whether we like it or not. So we need to get -- make sure we stay ahead of that.

[Operator Instructions] Our next question comes from the line of Simeon Gutman from Morgan Stanley.

This is Lauren Ng on for Simeon. First, can you maybe walk through your expectations for the Q4 comp? You mentioned quarter-to-date trends are currently ahead of the guide. So maybe how should we think about this in the context of Q4 and maybe what's driving your expectations for this acceleration?

And then quickly, just following up on gross margins, are you able to help us size the impact of the tariff-related expenses on the Q3? And it looks like the Q4 gross margin contracts pretty meaningfully year-over-year. Is this primarily driven by the tariff impacts?

Well, I'll try to address that question, but I think it was six-parts. So if I forget part, let me know. From a comp perspective, I just want to clarify, we did not say that comps need to accelerate and meet the guidance. We said that comps are currently running ahead of our guidance quarter-to-date. What gives us confidence in delivering that for the balance of the quarter is our strength in our transaction trends, which we've seen in the mid-single digits, pretty much for all of the year this year, as well as the complexion step change in our AUR, which is now positive low single digits versus a negative high single digits in the third quarter.

In terms of gross margin for fourth quarter, we'd always plan the gross margin to be in the mid-39% range. That's kind of how we think about the fourth quarter historically. We do have a number of tailwinds this year in gross margin that I outlined between lower markdown rates, benefits from shrink, our ability to follow other retailers with price gaps and take price on tariff-impacted products. So all in all, we feel good in delivering the fourth quarter gross margin. We were just always going to be conservative so that we position our guidance that we can deliver to our shareholders, but we can also take the necessary actions that we need to, to manage our business and deliver to our customers.

Our next question comes from the line of Ed Kelly from Wells Fargo.

I was curious as to maybe just some early thoughts on the 2026 comp build. And I'm kind of thinking about it in the context of the big tailwind, which obviously you are benefiting from or taking advantage of that for some stores, does that normalize next year?

Then as we think about the Big Lot, the store openings from this year, which many of them were Big Lots conversions, do they act like the 99 Cents only stores, meaning flattish or low-ish comp in year 1? And then when you pull all that together, does that basically kind of mean that the highest probability outcome or way to start would be your traditional sort of like 1% to 2% comp guide? And then how do you think about like opportunities associated with that? Obviously, there's some fiscal stuff coming next year with tax cuts. And I'm curious as to how you think that might play out for you?

This is Rob. I'll take that question. So listening to your question and you answered it for me with a positive 1% to 2%. I was giggling a little bit when I was thinking about it. So from a comp guidance perspective for next year, we'll likely stay on algo. We like the beauty of the algo, it's how we manage our business, that's how we set our cost structure each year. But it's not lost on us that there are tailwinds, potential tailwinds to the comp guidance for next year.

I think the potential for elevated tax money in the first half of the year is certainly a piece of it. Big Lots market share capture should be the gift that keeps giving. And we'd expect for that to be a multiyear share capture. AUR which was a drag this year, potentially, we don't see those types of drags from year to year. So I think all in all, there's a number of factors to be positive about next year's comp guidance. Well, like you said in your question, we'll reset in the positive 1% to 2% and then we'll seek to deliver from there. And you know what we say, we don't turn the registers off.

Our next question comes from the line of Kate McShane from Goldman Sachs.

This is [indiscernible] on for Kate McShane. For the 2026 pipeline of 75 stores, could you maybe expand more on the drivers behind this? And any color on the new store pipeline, like maybe anything you're doing differently? And what are you seeing in the real estate environment and unit growth longer term?

Sure. Yes, we are guiding to 75 stores. Opening new stores remains our highest, the best use of capital and the investments that we made in accelerating growth really paid off. We're pleased with how we executed getting to the 86 stores this year, and the front-loading that we've been able to achieve of getting all the stores opened by into Q3, opening on budget, outperforming projections, et cetera. When we look at the environment moving into 2026 there's enough real estate to fuel growth. The 75 is already set. We have -- we had deals most leases signed. There's still vacancy out there from all of the distressed retailers and bankrupt retailers that have gone out, including a disproportionate number of Big Lots vacancies that weren't available or were available to purchase, but not purchased as part of the bankruptcy auction process that were then available for us to pick up on the open market. So a disproportionate number of the 75 are Big Lot stores, which we like a lot because those Big Lot stores, what we call warm boxes because they have a discount customer who was just shopping in that store literally 5 minutes ago. We reopen as an Ollie’'s. We've seen a lot of success over the past year with those stores.

So we feel very good about the 75, and we'll continue to evaluate based on opportunities that are in the market and not thinking to extend past 75. We feel like it's the right number at this point when we balance our accelerated growth with other strategic priorities that we have in place for 2026. That's a very respectful number of 75.

Our next question comes from the line of Jeremy Hamblin from Craig-Hallum Capital Group.

I wanted to just come back to the unit openings and get a sense, Rob, for what what you're expecting in terms of preopening expense next year given kind of the impacts of dark rent this year and the timing that you're suggesting with a bit more in the front half of the year than the back half of the year? That's kind of part one.

And then two is, just in terms of the DC expansions, that you're looking at and looking at the Illinois facility next year, what type of impact do you see on margins, if any, related to those efforts?

I'll take both of those actually. So from a preopening perspective, I think the easiest way to think about it was -- we had $5 million of Big Lots dark rent in this year when we acquired those stores, we're on the clock immediately -- and so you subtract that out -- and then flex the preopening expense for the number of unit openings between the 86 and the 75 and you should be able to get reasonably close to where we're going to land the '26 guidance.

From a margin perspective, on the expansion, back in the day when we were opening distribution centers, and we were smaller with less of a sales base with a little bit more of an impact gross margin in terms of drag when we either open a new distribution center or expanded distribution center. Now that the Yes. The shift has gotten so big. We'd expect a nominal impact and would anticipate that we would be able to fully offset that [Audio Gap] to our guidance.

If I could just one follow-up here on tariffs as well. As we look ahead to next year with the China tariffs being pulled down here by 10 percentage points. Would you expect, as we look at kind of holiday season impacts around gross [indiscernible] margins to be a bit lower next year, if nothing else changes on policy front.

I think, Jeremy, just consider we manage our price gaps. We're a fast follower in terms of price, and the whole world is experiencing the same impact of tariffs, 10% less across [Audio Gap]. It's the same. So if they invest in price, adjust their price, lower the price, increase their price, or whichever direction the tariffs may move because there's still a little uncertainty around at this point as well. Then [Audio Gap]. We're a fast follower. We're adjusting price, ensuring that we are maintaining our price gaps. So a long way of saying that I would expect if tariffs go down, eventually the markets adjust [indiscernible] price coming down some, we're coming down some to maintain our price gap -- not expecting it to be some sort of unexpected positive win from a gross margin standpoint in the same way that it wasn't a negative for us as tariffs were increased.

That concludes today's call. Thank you for participating. You may all now disconnect.

Good morning, and welcome to Ollie's Bargain Outlet's conference call to discuss financial results for the second quarter of fiscal year 2025. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the expressed written authorization of Ollie's. Joining today's call from Ollie's management are Eric van der Valk, President and Chief Executive Officer; and Robert Helm, Executive Vice President and Chief Financial Officer.

Certain comments made on today's call may constitute forward-looking statements, and these are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-K and quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements. On today's call, the company will also be referring to certain non-GAAP financial measures. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release.

With that, I will now turn the call over to Mr. van der Valk. Please go ahead, sir.

Good morning. Thank you for joining us today. We had a very strong second quarter, and we are operating with the wind in our sales. New store openings, total sales, comparable store sales and adjusted earnings were all ahead of our expectations, and we are raising our full year outlook across the board. Our performance in the quarter is the result of the hard work and commitment of our entire team. We are driving the business to new heights through improved planning, coordination and execution across the organization. We are delivering against our strategic priorities, laying the groundwork for future growth and driving strong consistent results. With so many retailers closing stores or going bankrupt in the past year, there is an opportunity to gain market share through expanding our footprint, acquiring new customers and turning these customers into loyal Ollie's Army members. This is our flywheel, our formula for growth, and we are all over it.

Everyone loves a bargain, and it's our mandate to bring great deals to consumers from coast to coast. We have a tremendous opportunity ahead to continue opening new stores and gain market share. This is not growth at any cost, however. We are committed to profitable growth, and we are able to do this through a flexible store model that can be adapted to generate strong returns across different geographies, demographics and store spaces.

In the first 6 months of the year, we opened 54 new stores. This is over 4x the number of stores we opened in the same period last year. And in just 6 months, we have exceeded our previous full year unit growth high watermark. During the second quarter, we celebrated the opening of our 600th store in New Hampshire and entered our 33rd and 34th states. With our new stores continue to perform ahead of our expectations and are benefiting from a number of factors, including improved planning and execution, a soft opening schedule and what we call the warm box dynamic.

We are committed to delivering double-digit annual unit growth moving forward and have invested in the necessary people and process to deliver this. The bankruptcy filing and subsequent store closures of a number of retailers over the past year have provided a unique opportunity to pick up additional stores that are well suited for our business model. The team has done an excellent job prioritizing the opening of these locations while advancing our pipeline of organic store openings, and we are ahead of plan for the first half. As a result, we are raising our new store target and now expect to open an additional 10 stores for a total of 85 this year.

We are equally focused on new customer acquisition and demonstrating our deep appreciation for our most loyal customers. We have some of the most dedicated and passionate customers in this business, and there's an opportunity to strengthen this connection and grow lifetime value. Ollie's Army members shop more frequently and spend over 40% more per visit than nonmembers. They account for more than 80% of our sales and are now more than 16 million strong. This is a devoted group of deal-seeking bargainauts who take pride in saving money. We are fiercely committed to serving this group and enhancing the value proposition of the Ollie's Army program.

We made a deliberate and strategic change in the second quarter that did just that. We revamped our annual Ollie's Days event to include an exclusive member-only shopping night, and we limited the promotions for the week to Ollie's Army members. By all accounts, the reimagined event was a huge success and exceeded all expectations. First and most importantly, we rewarded our Ollie's Army members and acquired an abundance of new members. Second, the event was accretive to sales and earnings.

Before I turn the call over to Rob, let me quickly call out 2 other company milestones. Ollie's celebrated its 43rd year in business last month. The company opened its first store in Mechanicsburg, Pennsylvania in July of 1982. We also celebrated our 10-year anniversary as a public company and learned that Ollie's is one of the best-performing retail IPOs over a 10-year period since NASDAQ began tracking this in 2014. We appreciate our shareholders for putting their trust in us for the past 10 years. We also value our partners who make this business happen, especially our merchandise suppliers, vendors and manufacturers. We greatly appreciate the deep and long-lasting relationships.

Now let me turn the call over to Rob.

Thanks, Eric, and good morning, everyone. We are very pleased with our second quarter results and the continued momentum in our business. New store openings, new store performance, comparable store sales, total sales and earnings were all ahead of our expectations for the quarter, and we're raising our sales and earnings outlook for the fiscal year. Accelerating new unit growth and expanding the Ollie's Army loyalty program are 2 big priorities this year. We are delivering on both of these initiatives. We opened 29 new stores in the second quarter and ended the period with a total of 613 stores, an increase of 17% year-over-year. Both our new store openings and new store performance were ahead of our plans for the quarter and first half of the year.

Eric spoke to a number of changes to our Ollie's Days event in June. These and other enhancements to our loyalty program are working. We drove strong customer acquisition in a way that benefited sales and protected margin. Ollie's Army members increased 10.6% to 16.1 million, and we estimate that the revamped Ollie's Days event added approximately 100 basis points to comp store sales in the quarter.

Now let me run you through our P&L numbers. Net sales increased 18% to $680 million, driven by new store openings and comparable store sales growth. Comparable store sales increased 5% and was driven by an increase in transactions. We saw strong demand for consumer staples throughout the quarter and demand for seasonal items accelerated as the weather normalized in June and July. Our top 5 performing categories were lawn and garden, hardware, food, housewares and domestics. Gross margin increased 200 basis points to 39.9%, and this was better than our expectations. Lower supply chain costs and higher merchandise margins were the primary drivers of the increase. Benefiting merchandise margins in the quarter was strong deal flow and lower shrink.

SG&A expense as a percentage of net sales increased 60 basis points to 25.8%, driven primarily by higher medical and casualty claims as well as slightly higher store labor expenses. Consistent with the trends we experienced in Q1, the higher medical expenses were from an unusually high number of severe medical cases. This is not typical for us, and we expect medical expenses to work their way back down as these cases are resolved. Preopening expenses were $9 million in the quarter. Most of the $4 million increase was from the higher number of new store openings this year. We opened 29 stores in the quarter compared to 9 last year. Dark rent associated with the bankruptcy acquired stores was $2.3 million, which was also a factor in the year-over-year increase. Moving down to the bottom line. Adjusted net income was $61 million and adjusted earnings per share increased 26.9% to $0.99 for the quarter. Lastly, adjusted EBITDA increased 26% to $94 million and adjusted EBITDA margin increased 90 basis points to 13.8% for the quarter.

Let me also take a moment to comment on our balance sheet. Given the nature of our business, the strength of our balance sheet is a strategic asset. Our financial stability, the visibility of being a public company and our size and scale truly differentiates us in the closeouts and off-price space. As a result, we are committed to maintaining a fortress type of balance sheet on the go forward because it helps drive our business. For the quarter, our total cash and investments increased by 30% or over $100 million to $460 million, and we had no meaningful long-term debt at quarter end.

Inventories increased 20% year-over-year, primarily driven by our accelerating store growth and higher in-transit inventory. Capital expenditures totaled $26 million for the quarter, with the majority of the spending going towards the opening of new stores, the build-out of the bankruptcy acquired stores and to a lesser degree, investments in both our supply chain and existing stores. We bought back $12 million worth of our common stock in the quarter and had $304 million remaining under our current share repurchase authorization at the end of the quarter.

Lastly, let me run through our outlook for fiscal year 2025. We are raising both our sales and earnings outlook for the full year. Our revised outlook flows through the upside in our first half results and raises our comparable store sales outlook for the third quarter, given the momentum in our business. Our updated outlook also assumes the current tariffs remain in place for the balance of the year. Our updated guidance figures are contained in the table in our earnings release posted this morning and include 85 new store openings, net sales of $2.631 billion to $2.644 billion, comparable store sales growth of 3% to 3.5%, gross margin in the range of 40.3%, operating income of $292 million to $298 million and adjusted net income and adjusted earnings per share of $233 million to $237 million and $3.76 to $3.84, respectively.

These estimates assume depreciation and amortization expenses of $54 million, inclusive of $14 million within cost of goods sold, preopening expenses of $23 million, which includes dark rent of approximately $5 million related to the acquired Big Lots locations, an annual effective tax rate of approximately 25%, which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately 62 million and capital expenditures of $83 million to $88 million, which includes the build-out of the former Big Lots locations.

As far as the quarterly comps are concerned, we now think our third quarter comp growth could be above our long-term algo of 1% to 2%. We are leaving our fourth quarter numbers in place for the moment as we generally do not update more than 1 quarter ahead at a time. This puts us in the range of 3% in the third quarter and leaves us just below 2% in the fourth quarter. For the remaining new stores, the large majority of these are planned to open in the third quarter.

In closing, we are taking advantage of the unique opportunity in this moment to gain market share through accelerated unit growth and enhancements to our Ollie's Army program to aggressively go after these abandoned customers up for grabs. Our actions are clearly working. We are strengthening our competitive positioning, broadening our footprint and setting us up to drive strong shareholder returns for the years to come.

Now let me turn the call back to Eric.

Thanks, Rob. This is a very exciting time for Ollie's. We are delivering extraordinary value to consumers. We are accelerating our unit growth. We are doubling down on customer acquisition. We are delivering profitable growth and consistent financial results. And most importantly, we are Ollie's. Carmen, we are ready for questions.

[Operator Instructions] It comes from the line of Matthew Boss with JPMorgan.

Congrats on a really nice quarter, and you killed the chance this morning. So Eric, could you elaborate on the improving cadence of comp as the second quarter progressed and maybe speak to trends that you've seen in August? And then with the wind in your sales, as you cited, what are you seeing from deal flow given the tariff disruption? Or maybe how would you characterize the state of the closeout industry today?

Great. Yes. Thanks, Matt. I'll cover deal flow and Rob can cover the cadence of comp for the quarter. I feel like a broken record because the answer is always deal flow is strong. It's always strong. There's so many different sources of closeouts in any given quarter. In this particular quarter, as everyone is aware, our model thrives on disruption. Tariffs have created uncertainty in the market, which is disruptive. This has resulted in additional buying opportunities. The retail bankruptcies and store closures have certainly resulted in additional buying opportunities.

Some of this is abandoned product that was made for these retailers. And then we're starting to see abandoned product pipelines as well, which are typically very good for us long term. Those are sometimes new relationships or growth of some of our existing relationships. So they tend to be sticky and very good for the pipeline on a long-term basis. And just to remind everyone, our inventory was up 20% at the end of Q2, which is a pretty strong indicator of strong deal flow.

On the quarterly cadence of comps, as you might recall from our Q1 call, the May got off to a slow start. We were essentially flat for the month of May. June began to accelerate and includes the upside that we mentioned relative to the Ollie's Army Night on our prepared remarks. And July was, in fact, the strongest month of the quarter for us.

Our next question comes from the line of Peter Keith with Piper Sandler.

Great results. I want to dig into the Ollie's Army Night from Q2. And maybe comparing it to the traditional December Ollie's Army Night, were there any differences or call-outs as it related to the sales lift or new member adds? And then just any general learnings from that event and how you might think about future events.

Sure, Peter. Thanks for the question. We were very excited about the event moving into the event, and it's very pleased with what ended up happening with the reimagined Ollie's Days event. It surpassed all of our expectations on every level. It drove record-setting customer engagement and Ollie's Army acquisition, and Rob will take us through the numbers in a minute. The Ollie's Army members are a very passionate group who take great pride in saving money, and they just very much appreciated the additional private shopping event.

Most stores had very long lines when we opened the doors. I know here in Harrisburg, it was close to 200 people that were waiting to get in, which was super exciting. The organization executed the event very well in every discipline of the company. We did learn a few things to the point of your question, Peter, that we will apply on a go-forward basis, whether it's to the Ollie's Army Night in December or some insights into how our customers think about the benefits of the program. Not ready yet to expand on that because we're finalizing some plans and preparing communication to customers, and you'll hear it alongside of when our customers get that communication.

And in terms of the financials, if you recall, we were -- we went into this event with pretty muted expectations. We were doing this purely as an enhancement and for a customer acquisition, not for a short-term gain in our P&L. The sales exceeded all of our expectations by far, and we talked about it driving 100 points of comp to the quarter. From a gross margin perspective, it was very neutral to our gross margin for the quarter, and we're really pleased about where our gross margins ended up on the full quarter.

In terms of customer acquisition, our customer acquisition for the week was up almost 60%. So that well outpaced our sales gain that we got from the event. And the last thing that I would end off with is we were very nicely surprised with how it performed in respect to the December night, where the sales actually exceeded the December night, which we felt was awesome considering we're not in a peak holiday moment.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

Congrats, guys. I love the energy this morning. Hoping we peak ahead to 2026 a bit and how you're thinking about store growth. And I guess more broadly, earnings power. It seems to me that $4.50 to $5 is certainly an achievable number. And maybe, Rob, can you talk about the opportunities for gross margins over the next couple of years and how you see it flowing?

Sure. Thanks, Chuck. I'll take the store growth piece, and Rob will speak to earnings power. We're committed to delivering the 10% annual unit growth. It's our long-term algorithm on a go-forward basis. We acknowledge that there are moments in time where we may have opportunities to outpace that 10% unit growth target and flex up. And we're in one of those moments with the bankruptcies and store closures and the market share opportunity, we've been able to accelerate, and it doesn't take that off the table in future years to potentially consider. When you look into 2026, there are sufficient opportunities out there to continue to drive accelerated growth. And we would expect another year of elevated openings. We'll provide more color specifically on that in the Q3 call.

In terms of earnings power, Chuck, we don't get too ahead of ourselves, so I'm not going to give too much in terms of concrete numbers today. But what I would say is we're starting in the back half of this year, we're going to start to see the benefits of higher and earlier openings over the past 12 calendar months. We've opened 88 stores at this point. And that will flow through the second half and the annualization will be a big impact for earnings growth for 2026 as well as potentially another year of elevated growth, as Eric refers to. We will also gain some leverage of not having to incur the dark rent for the bankruptcy acquired stores as well as improving trends in medical and casualty as some of those costs are transitory for this year.

In terms of gross margin, we haven't really rethought the algo in terms of going above 40%. We are guiding to above 40% for this year, but that's really a product of how we performed year-to-date and not a change to the long-term algo. What does this mean for 2026 earnings? Assuming no radical changes to the current environment, it potentially looks like double-digit top line growth that translates into faster growth on the bottom line in the mid-teens.

Comes from the line of Brad Thomas with KeyBanc Capital Markets.

Great quarter here. I wanted to follow up maybe a little bit off of the last question from Chuck and just asking about the SG&A side of things. And could you help us think a little bit about SG&A leverage, both in the back half and how that may feed into the long-term algorithm? And then perhaps, Eric, I could sneak in kind of a high-level one for you. The quarter was really interesting with you changing some kind of long-standing practices from Ollie's that seem to work very well. And I was wondering if you could just talk a little bit about maybe some cultural changes and the willingness to maybe look for new opportunities like that.

I'll take the first part, Brad. We're really excited about how we're executing right now and hitting all our core marks, the value proposition, store openings, accelerated growth, customer acquisition, you name it. Unforeseen costs happen from time to time, and that's what we're seeing with medical and casualty right now. While these costs are putting a little pressure on our first half SG&A, they don't structurally change how we think about our long-term algo or how we're managing this business.

So when we come into the back half, we do -- we have put provision for higher medical in the back half, but we are up against some higher expenses in the back half of last year, specifically executive comp leading up to the leadership transition last year, some of our pursuit expenses around Big Lots. So we had planned to leverage and we do plan to leverage in the back half, and we feel comfortable about delivering our guidance for the full year.

Brad, yes, in terms of -- I appreciate your question. This is an excellent business model, which is an amazing foundation. It has a massive competitive moat. So when you think about changing how we look at our business as we move forward, there are tweaks, there are adjustments that we'll make. And it's really just being committed to ensuring that our business remains super relevant to the consumer. And our prejudice is our commitment to our Ollie's Army members and welcoming new members into the program. So our orientation over the past couple of quarters has been more around enhancements to the Ollie's Army program and how does we acquire and retain people in the program.

But nothing is off the table. I just want to emphasize that it's an amazing model. So when we think about continuing to make improvements and on this path to continually improving our business, again, they're more tweaks and small changes. And you mentioned culture, which is something that we at Ollie's are very, very passionate about our strong culture and making sure that we all have a great sense of who we are and how we behave as a team, and that really is foundational and a key part of our success.

And much of what we think of as our kind of core values from a culture standpoint came from our founders, and it's part of the legacy that they've left us. And maybe it's a little bit modernized today versus what it may have been 43 years ago, but it still has the fabric of the founders as part of that, and it's what's made us successful for 43 years. We've done a much better job of making sure people understand it, both internally and externally which has been very, very good for us.

Our next question comes from the line of Steven Zaccone with Citi.

Our question was on new store economics. Can you just talk about how some of the new stores are performing, how these new stores compared to prior cohorts since you've accelerated the unit growth? And then just given the acceleration in store growth, at what point will you need a new distribution center?

I'll take the first part. Eric will take the second part. We have some of the strongest new store economics in the business, which have been very stable over time. We've long said that our model is portable, profitable and predictable. The model is also flexible, which allows for us to open and operate different sized stores across a wide range of demographics and geographies, all while maintaining mid-teens 4 walls and strong payback periods. The other strength of our model is our fortress balance sheet and our ability to generate strong cash flows. We can use this strong capital position to opportunistically fund our growth in whatever manner generates the highest rate of return as was the case with the bankruptcy acquired stores.

So in terms of the current cohort of stores we're opening this year, they're nicely performing above plan as a group. And I would say that the payback periods for the organic openings are very consistent with what we've seen in the past. The payback periods for the bankruptcy acquired stores are a little bit longer because there's upfront costs in terms of the dark rent component and the build-out costs that we're now on the hook for. But all in all, we're very pleased with the openings for this year.

On the DC question, Steve, we have the ability to expand our distribution center in both Texas and in Illinois. And we do plan to expand both those buildings in the coming, call it, 18 months, give or take. So each building's expansion is approximately 200,000 feet and adds another 50 stores of service for a total of 100 stores, which takes us somewhere in the, say, mid-800s in terms of total capacity from a store count standpoint. The fifth building, just to answer the question specifically, is 3-plus years out, so call it 3 to 4 years out. And we'll update, provide more color most likely on the Q4 call as to what that road map looks like a little bit more concretely.

Our next question is from Kate McShane with Goldman Sachs.

We just wondered how did the customer acquisition look from the Ollie's Army Night? Just you've indicated you were reaching a broader consumer with a younger cohort over the last couple of quarters. Did the Ollie's Army Night reflect this at all?

I'll answer this one, Kate. We didn't see much of a differential in what we saw in the rest of the quarter in the Ollie's Army Night results. For the quarter, our customer -- our new customers were up across the I would say, mid- upper income and higher income levels reflective of trade down. And then in the existing customers, the biggest trend that we saw, which is a long-term trend that we're seeing is our customer file is getting younger in the existing customer base as our digital strategies are really taking hold and driving that cohort.

If we could just ask a second question, and this kind of mirrors an earlier question about culture. Eric, you spent a lot of time working and refining the supply chain at Ollie's before you became CEO. I was wondering if you could talk through how some of that work is resulting in the strength and what you're seeing with the business today.

Yes, absolutely. We're very proud as an organization of what we accomplished on the supply chain side, we have 4 distribution centers that are operating with great momentum. We're especially proud of what we've accomplished in our Princeton, Illinois distribution center, which is now -- we're anniversarying its opening here last year and some of the automation that we've installed. So it's definitely part of this foundation of -- that we've created to propel growth into the future. It's key to it. And we've also made a number of changes in transportation, which go back a couple of years now, but in terms of how we procure international freight and those we've seen dividends from, and we have the capacity now in any uncertain environment to be able to address the needs of the business and to do them in a cost-effective way, and that really wasn't the case a few years ago.

I mean you mentioned culture and culture to me is really the most important element of what it takes for us to be successful and motivate people, and that starts with our passion for serving customers who are on a tight budget and just really appreciate the values we offer. And we're all committed really to that first and to each other to make that happen. And that's really no different for our distribution centers and it is for our stores or people here in our store support center in Harrisburg. We're committed to the cause, committed to each other, and we understand what it means to deliver and what it means to that consumer base. We really have a heart for our consumer.

[Operator Instructions] Our next question comes from the line of Scot Ciccarelli with Truist.

Two questions. First, can you provide us an update on what you're seeing at your Ollie's stores that were in a similar market to Big Lots stores that have been closed? And then secondly, historically, you guys had a bit of a reverse new store waterfall process where new stores would open really strong with your grand openings and then you'd incur a bit of a comp drag as that store moved into the comp base. Just given this year's unit acceleration, is that something we should be thoughtful of as we roll into '26?

Sure. This is Rob. I'll take this one, Scot. We're excited about our performance that we're seeing in the stores where the Big Lots were closed. This is the first full quarter that has not been impacted by some type of store closing from the Big Lots chain. So we're starting to see the trends a little more clearly. The best performers out of where Big Lots closed are the overlapping stores where they closed and have not reopened. That's, call it, 290-ish stores. In the stores where the Big Lots has reopened, those stores are still performing well. With a 5% comp, it's a little hard to separate the standouts from the underperformers, though. So I would say in that 290 store set, we're seeing between the low single-digit to mid-single-digit comp above the balance of the chain. That's holding in place as we've discussed in the past.

From a new store waterfall perspective, our new stores are performing really well. The vast majority of our stores this year are performing over plan. We're not sure about what it means about the reverse waterfall yet because we're only a year or so into these bankruptcy acquired stores in these warm boxes where we made the approach change to our soft opening cadence. So we're watching the data. We're looking at it, but -- and we're going to study in the back half, and we'll have updates as we go along.

And it comes from Steven Shemesh with RBC Capital Markets.

Nice results. Just wanted to circle back on the comp. So strong result and with the May being flat and improving throughout the quarter, it sounds like the exit rate was in the high single-digit, low double-digit range. So as we just try to kind of like triangulate 3Q being in the 3% range off of an easier compare. I'm just curious, have you seen anything different quarter-to-date? Is there anything to keep in mind from a compare perspective? Or is there just a lot of quarter left?

There's certainly a lot of quarter left, and we typically have a pretty conservative approach to how we guide and remaining in the 1% to 2% long-term algo. Us signaling today the 3% certainly shows that we believe that we have the wind in our sales, and we're operating with good momentum right now. And you're very accurate on the exit rate on Q2. That's right about where we were at.

Got it. Okay. That's very helpful. And then just a bigger picture question on gross margin and understand that the baseline is 40%. But as we think about what's changed over the last handful of years, supply chain costs peaked up during the pandemic, and they've since been coming down, still running above pre-pandemic levels, but you are running above that 40% gross margin now. So I guess on the quarter and then just bigger picture, like what has changed from a merchandising margin perspective that's allowed you to overdeliver despite the higher supply chain costs?

Yes. Thanks, Steve. The -- it's our size and scale. It remains to be seen what this means long term. But our size and scale has resulted in buying power. It's attracted new suppliers to us. It's expanded existing relationships and we're able to buy better. So we typically pass that along in investing in price and our customers are rewarded for it. We've been able to do both. We've expanded our price gaps, and we're delivering elevated margin. So in this moment, it feels very good.

And I would just say that we're flowing product better through our distribution centers into our stores with our people. We're executing really well on all fronts. So that's underpinning it. And that comes in the form of lower supply chain costs, but also lower markdowns to a degree. And then shrink has been a tailwind. And that's one thing to note. We now have 3 quarters of positive shrink trend under our belts. But we have not changed our guidance in the back half, which is still on that elevated number that we had saw in the previous quarters.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum.

Congrats on the impressive results. I wanted to just come back to the medical and casualty costs and just see, Rob, if you could share what is the incremental cost expected both for the full year '25, but also baked into the second half of the year? And then just want to come back to Q2 in particular because you have such outsized results now over a multiyear period or 3-year stacks, 20%. Gross margin in Q2 by far the best that you've ever had in Q2. And just see, is there something that's changed in the mix of product that is driving both gross margin upside but also sales upside? I mean, I know, obviously, the Ollie's Days added 100 basis points, but any other color you can share?

I'll take the first part of this, and maybe I'll take the second part. But -- so for the first part, from the medical perspective, it was essentially all of our deleveraged last year. And that was a similar trend that we saw in Q1. We have a slight improvement baked into that in Q3 and Q4. And that's based on the fact that we are starting to see some early signs of the trend softening here as we get into the third quarter. So that's that. So if we have an improvement where they revert to kind of what we've seen historically, we'd have some upside within our numbers.

From a gross margin sales perspective on the second quarter, I think Eric mentioned size and scale, our ability to size and source better deals, drive better costs get better access to goods, that's all part of it. I would also say the strength of our consumables business. That's a high frequency, high visit business that kind of carries us through what typically was a little bit of a summer doldrums quarter. I think that underpins kind of the frequency. And then when we showcase as great deals and assortment as we do, you get attachment, you get folks coming in and grabbing those great deals off of those visits.

Yes. I'd just add a little bit of color. It's also the consolidation of the closeout market. There aren't as many buyers out there for closeouts. And so as the biggest buyer, we believe, in the country for closeouts, that market share of closeouts comes to us. And we have a very tenured experienced buying team with the acumen to really leverage the moment and consume that market share, and that's just what we're doing. We've been very, very aggressive about establishing new relationships, expanding existing relationships. It's not the case where we just pick up the phone. It's both proactive seeking and our phone is ringing a lot more as a result of this consolidation. So we do believe that's going to have lasting positive consequences for us.

Our next question comes from Mark Carden with UBS.

So I wanted to ask another one on Big Lots. Just how meaningful were the differences in sales capture between warm boxes in your existing footprint? So said another way, how should we think about the Big Lots contribution going to your same-store sales versus your new store productivity? And then what are you seeing with respect to the Ollie's Army sign-ups from some of these former Big Lots customers?

I would say on the top line, not a noticeable difference between our organic openings and our Big Lots openings. A little bit of lift potentially because there is that warm [ docs ] dynamic. I would say the most meaningful difference from a profit flow-through perspective is better operating margins than the bottom line because the rents in these locations were, in many cases, much, much lower than some of the deals that we're signing today. Second, can you repeat?

I'll get it, Mark, on the second question, the Ollie's Army. So we are seeing outpaced growth in our new stores. And I haven't -- candidly haven't parsed that down to Big Lots versus non- Big Lots, but the majority of them are Big Lots. So we're definitely seeing accelerated acquisition in those newer stores. So our stores are doing a great job communicating the story around the program and the value that it offers to consumers. A lot of the consumers coming into our Big Lots stores are talking -- sorry, Big Lots converted Ollie's stores are talking about their familiarity with deep discount and Big Lots and how it reminds them of Big Lots from 10 years ago and that they really appreciate the value that we offer, and it becomes an easier sales, so to speak, at register than to convince them to sign up. We're also seeing very nice growth in our comp stores, which is great, but definitely outpaced in new stores.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Lauren Ng on for Simeon. I just were curious about what specifically was driving that higher merch margin. Is this maybe more a result of better buying or product mix or maybe both? And then a follow-up is just on the Q2 comp of the 5%. Can you share how much is this coming from maybe stores ramping versus your mature stores?

From a merch margin perspective, we chalked it up to strong deal flow, better margin on deals than we expected. Mix was more in line with where we thought it was going to be. And we also saw lower shrink, which also assisted the gross margin. In terms of comps in terms of relatively new stores versus vintages, we saw broad-based strength across all cohorts. It was really just how high the comp was across all the different cohorts of stores that we track.

And our last question comes from Edward Kelly with Wells Fargo.

Nice quarter. I want to add my congratulations. A couple of questions for you. I just wanted to follow up on the questions around the gross margin. Obviously, Q2 was a great performance. I don't know, maybe the strongest Q2 that you guys have had. Just curious as to why we should be modeling a decline in the back half. I mean it does sound like there's some conservatism in there. Curious as the impact of tariffs that -- how that might flow through, particularly as you get into the fourth quarter.

And then I had a bigger picture question, which I guess is probably for you, Eric, which is I'm curious as to what's happening with your product mix. I mean, obviously, closeout opportunity is very strong. So I don't know if that percentage of the mix is up. And then what's happening with product that vendors may be making for Ollie's? I know you've had some of that ramp over time, but I think it was still small. But I'm just curious as to whether you're getting more of like consistent flow from vendors that they're using you as well in terms of like made for Ollie's kind of product.

Well, that was a lot. I'll try to answer at least a part of it, and then you might have to remind me. On the gross margin line, we are planning a deceleration in gross margin off the first half. You know us for a long time and have been following us. We're the kind of folks like to underpromise and overdeliver. We feel like our guidance gives us the opportunity to execute in the environment. If we need to take the opportunity to invest in price, we have the room while we can still deliver to the Street. So that's kind of how we're thinking about the gross margin.

There's also that outstanding performance we had in the fourth quarter last year, we're over 40%. That typically is not something that we would plan to when we enter a year. And so we've left our fourth quarter guidance in place. So that also kind of drags down the gross margin in the second half.

Yes. I think, Ed, in terms of tariffs, we're price followers in the market. So we'll take a similar approach that we take even in an environment that isn't disrupted by tariffs where if we can't buy a product, whether it's import or closeout, and offer the right price in the market and maintain a price gap that we can be proud of, then we just don't buy the item. So what that means is we're going to be priced right. We're going to maintain our price gaps and the mix adjust accordingly, according to our sourcing and whether that's counter sourcing in various countries to chase the latest news in terms of tariff adjustments that have been made or counter sourcing and replacing substituting products that we might import with other products that we could buy here in the U.S., especially in the closeout market, but just fiercely committed to making sure we maintain our value proposition all the way through and meet our obligation to the shareholders to provide the merch margin that we're expected to provide.

So that's really the answer in terms of how we're navigating tariffs. It's -- the closeout import mix hasn't changed materially to date. It's really hard to say what that may look like in coming quarters. We're navigating it one press release at a time in terms of where the tariffs are moving, but we're committed to ensuring we offer the right values.

The other piece of your question, I believe, was about production closeouts or manufactured closeouts or engineered closeouts, however you might like to refer to them. We buy product in the closeout market from suppliers who may have the product as a result of deliberately manufacturing the product. It could be an overrun. It could be an end of run production situation or it could be it was produced for us to cover something that may have been produced for us a year prior. And candidly, we don't ask a whole lot of questions about the origin story of the product. If we can get it for the right price, offer it at the right retail price to our consumer and meet the financial obligation in terms of our IMU, then we're buying the item.

What I can tell you kind of refers back to the very first question Matt asked about the deal flow is that there's more than enough product out there to buy. We haven't felt compelled to go down the path of contracted manufactured -- production manufactured product. So we're still fairly opportunistic. But we realize that at our size, the supplier vendor community is supporting volume, both on their end and on our end. And it does make our business in some pockets more predictable and more stable, which is great for us long term.

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