Yahoo Finance Ollie’s Bargain Outlet (OLLI) Q4 2017 Earnings Conference Call Transcript
Image source: The Motley Fool.
Ollie's Bargain Outlet (NASDAQ: OLLI)
Q4 2017 Earnings ConferencMe Call
April 4, 2018 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good afternoon and welcome to the Ollie's Bargain Outlet Conference Call to discuss the Financial Results for the Fourth Quarter and Full Year Fiscal 2017. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from Ollie's.
And as a reminder, this call is being recorded.
On the call today from management are Mark Butler, chairman, president, and chief executive officer; John Swygert, executive vice president and chief operating officer; and Jay Stasz, senior vice president and chief financial officer.
More From The Motley Fool
I'll turn the call over to John Rouleau, investor relations, to get started. Please go ahead, sir.
John Rouleau -- Managing Director, Investor Relations
Thank you, and hello, everybody. A press release covering the company's fourth quarter and full year fiscal 2017 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section of the company's website.
I want to remind everybody that management's remarks on this call may contain forward-looking statements, including but not limited to predictions, expectations, or estimates, and that actual results could differ materially from those mentioned on today's call. Any such items, including our outlook for the fiscal year 2018 and our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements, which speak only as of today, and we undertake no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our SEC filings.
We encourage you to review these filings, including our annual report on Form 10-K and quarterly reports on Form 10-Quarter, for a more detailed description of these factors.
We will be referring to certain non-GAAP financial metrics on today's call, such as adjusted operating income, EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per diluted share that we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most closely comparable GAAP financial measures are included in our earnings release.
With that said, I'll turn the call over to Mark.
Mark Butler -- Chairman, President, and CEO
Thanks, John, and hello, everyone. Thanks for joining us on the call today. We had another very strong quarter and fiscal year. The fourth quarter was our 15th consecutive quarter of positive comps, and we achieved record top and bottom-line results both in the quarter and the full year.
Our deal flow remains very strong. Our new stores performed above our expectations and we tightly managed expenses. We delivered 35.6% increase in adjusted net income on top of a 25.9% increase in sales. Comparable store sales increased 4.4% in the quarter versus a 2% increase last year and a two-year stack of 7%.
Our sales strength was broad-based with nearly of our departments comping positively. Some of our best performing categories were housewares, health and beauty aids, bed and bath, furniture and clothing.
Our strong fourth quarter was a fitting end to a banner year for Ollie's. In 2017, we achieved the highest sales and earnings in the company's history. For the year, sales increased 21% to nearly $1.1 billion and adjusted net income increased over 33% to $81 million. Since our first store opened almost 36 years ago, our goal has always been to sell good stuff cheap and give our customers real brands and real bargains each and every day.
This has always been our formula for success and continues to be our guiding principle. We're confident in our ability to continue growing the business by focusing on three key drivers: Increasing our offerings of great deals; growing our store base and leveraging and expanding Ollie's Army.
Our overall deal flow remains very strong, and we see a growing availability of products from both existing and new vendors. We're strengthening our relationships with major manufacturers and gaining better access to merchandise. Scale matters, and with 274 stores we strive to be the first call for the majority of all these available deals. The closeout buying environment remains as strong as I've ever seen, and I like where Ollie's is positioned as a growing force and one of the most dynamic retail sectors in America today.
Our new stores performed above our expectations for both the quarter and the full year. We opened 3 new stores during the fourth quarter and 34 stores in the fiscal year including our first store in the state of Rhode Island. Our new store model is built for growth. It's affordable, it's projectable and most importantly, it's profitable.
In 2018, we anticipate opening 36 to 38 new stores including our first stores in Arkansas and Louisiana. We've opened 6 locations so far this year and they are all off to a great start. We have a strong pipeline of leasing opportunities and continue to be excited about our prospects for growth both in the new and existing markets with the potential to grow our store count to over 950, more than 3.5 times our current base of stores.
As we grow our store count, we're expanding and leveraging our base of loyal customers. Ollie's Army is now close to 9 million Bargainaut strong and continues to outpace our store growth. As we've discussed previously, our initiatives for 2018 include the implementations of ranks in Ollie's Army, and Ollie's Army members will receive different rewards and surprise offers based on their level of spending and also the launch of a mobile app that will make it easy for members to track their rewards and allow us to communicate the latest and the greatest deals. These initiatives are designed to reward member loyalty and build lasting relationships with Bargain Battalion.
In summary, we feel very good about the positioning of the business and our ability to continue executing against our strategic growth initiatives in 2018 and beyond. We have a pretty simple model, we buy cheap and we sell cheap. That philosophy coupled with consistent execution, tight expense control and successful new store openings has driven our business for nearly 36 years and remains our focus today.
I'd like to thank our nearly 7,000 team members for their incredible work and dedication to the business. Our success is truly a testament to their hard work and their commitment. I'd also like to take a moment and congratulate John and Jay on their recent promotions. As announced in January, John has been promoted to the Executive Vice President and Chief Operating Officer, and Jay has been promoted to Senior Vice President and Chief Financial Officer.
These changes are a planned part of the evolution of our business and put us in a better position to execute and manage our long-term growth. I look forward to continuing to work closely with John and Jay, and I'm confident both are going to excel in their new roles.
Thank you again for everybody's support of Ollie's. I'll now turn the call over to Jay to take you through our financial results and the 2018 outlook in more detail.
Jay Stasz -- Chief Financial Officer and SVP
Thanks, Mark, and good afternoon, everyone. We're thrilled to have delivered another strong quarter and fiscal year. As a reminder, the fourth quarter and full year '17 sales include a 53rd week compared to 52 weeks in fiscal '16.
Net sales increased 25.9% to $356.7 million including $16.5 million from the 53rd week. On a 13-week basis, net sales increased 20%. Comparable store sales increased 4.4% over 2% increase in the fourth quarter of last year and the 7% increase on a two-year stack basis. The increase in comp store sales was driven by an increase in the average basket, partially offset by a slight reduction in transactions.
As Mark said, we opened 3 stores during the quarter ending the year with 268 stores in 20 states, an increase in our store base of 14.5% year-over-year. Our new stores continue to perform above our expectations across both new and existing markets, and we remain very pleased with the productivity of our entire store base.
Gross profit for the quarter increased 23.9% to $140.5 million and gross margin decreased 60 basis points to 39.4%. The decrease in gross margin was in line with our expectations and driven by increased supply chain costs. Merchandise margin for Q4 was flat to last year.
SG&A expense increased 18.2% to $82.5 million and we leveraged SG&A expenses by 150 basis points to 23.1% of net sales.
Operating income increased 34% to $54.4 million and operating margin increased 100 basis points to 15.3% of net sales. Net income increased 186.9% to $70.1 million and net income per diluted share increased 174.4% to $1.07. Included in the $1.07 of net income per diluted share is a $0.50 benefit related to the 2017 Tax Act and the $0.07 benefit related to the accounting change for stock-based compensation. Adjusted net income, which excludes these benefits as well as the after-tax loss on extinguishment of debt, increased 35.6% to $33.1 million or $0.51 per diluted share.
The additional week in the quarter contributed less than a penny to diluted EPS.
Adjusted EBITDA increased 31% and 70 basis points to $59.2 million in the fourth quarter. For the 53 weeks of fiscal '17, net sales increased 21% to $1.077 billion. On a 52-week basis, net sales increased 19.1%. Comparable store sales for the year increased 3.3% versus 3.2% increase in the prior year and a 9.2% increase on a two-year stack basis.
Net income for the year increased 113.5% to $127.6 million or $1.96 per diluted share and adjusted net income increased 33.4% to $81.1 million or $1.25 per diluted share.
Turning to the balance sheet, at the end of 2017, we had $39.2 million in cash and no outstanding borrowings under our revolving credit facility. We paid down approximately $146 million in term loan debt during '17 and ended the year with total borrowings of $49.2 million. Inventory at the end of the year increased 21.5% versus the prior year, primarily due to new store growth and the timing of deal flow.
Capital expenditures totaled $19.3 million in 2017 compared to $16.4 million in '16. The increase year-over-year was driven by the opening of three more stores and completion of our data center during the year.
Turning to our outlook for fiscal '18, bear in mind that our guidance for '18 reflects a 52-week period versus the 53 weeks in '17. For the year, we expect total net sales of $1.2 billion to $1.21 billion, an increase of 13.2% to 14.1% on a 52-week basis; Comparable store sales growth of 1% to 2%; The opening of 36 to 38 new stores and no planned closures; Operating income of $149 million to $152 million; Adjusted net income of $109 million to $112 million; And adjusted net income per diluted share of $1.65 to $1.69, with both of these ranges excluding any impact from the accounting change for stock-based compensation. We are planning an effective tax rate of 26%, lower than prior years due to the 2017 Tax Act, resulting in a benefit of approximately $18 million or $0.27 per diluted share, of which we are planning to reinvest approximately 20% or $0.05 per diluted share. We estimate diluted weighted average shares outstanding of 66 million and capital expenditures of $23 million to $25 million.
Let me add a few other items that might help you in your modeling. The shift back to a 52-week fiscal year in 2018 will face some differences in our quarterly reporting calendar. As a result, we expect the year-over-year growth in our total sales to vary from quarter-to-quarter.
For the first and third quarters, we are forecasting total sales increase in the mid to upper teens. For the second quarter, we are forecasting a total sales increase in the low double-digits. And for the fourth quarter and as a result of the one less selling week, we are forecasting a total sales increase in the mid to high single digits.
On a comparable store sales basis, we are forecasting comps to be consistent across each of the quarters in the 1% to 2% range. We are forecasting a flat gross margin for the year of approximately 40.1%. As mentioned, we are currently planning to reinvest approximately 20% of our savings from the 2017 Tax Act in our associates. Beginning in the second quarter, these reinvestments are expected to impact SG&A by approximately 40 basis points.
And as a result, we are forecasting SG&A to de-lever 20 to 30 basis points in 2018.
We expect depreciation and amortization expense to be in the range of $14 million to $14.5 million including approximately $2.5 million that runs through the cost of goods sold. We anticipate net interest expense to decrease to approximately $1.5 million. Given the continued strength of our new stores, we are now modeling first-year sales at $3.9 million. The cadence of our new store openings this year is more weighted to the back half of 2018.
Approximately one-third of our openings will be in the first half of the year and two-thirds in the second half. In 2017, our store openings were more evenly split between the two halves of the year.
In 2018, we will adopt a new accounting standard related to revenue recognition which impacts certain aspects of our accounting for Ollie's Army and our gift cards. The 2018 outlook reflects this impact which we've estimated as a $2 million reduction in revenue for the year.
I'll now turn the call over to John for some more thoughts on the first quarter.
John Swygert -- Chief Operating Officer and EVP
Thanks, Jay. With 15 consecutive quarters of positive comps, we are up against our own good numbers, and there are no easy comparisons going forward. Having said that, the underlying trends in our business remain very strong and we remain confident in our ability to continue driving top-line sales and profitable growth. There are still several important weeks of business left in the first quarter.
We are pleased with our quarter-to-date sales trends and would expect our first quarter comparable store sales to be at the high end of our annual guidance of 1% to 2%. We celebrated a grand opening of two stores today and are pleased with the initial performance of our new stores this year.
As Mark said, we feel very good about all the underlying trends in our business from deal flow to expense control to new stores. The consistency and strength of our business model combined with our growing size and scale give us confidence in our ability to continue driving shareholder value.
Questions and Answers
Operator
Thank you. [Operator Instructions]. And the first question will come from the line of Matthew Boss with JP Morgan. Your line is now open.
John Rouleau -- Managing Director, Investor Relations
Operator, he may be muted. Could you ask him to check his line?
Operator
Thank you. [Operator Instructions]. And the first question will come from the line of Matthew Boss with JP Morgan. Your line is now open.
John Rouleau -- Managing Director, Investor Relations
Operator, he may be muted. Could you ask him to check his line?
Operator
Pardon me. Matthew Boss, please check your line to see if you're on mute.
Brad Thomas -- KeyBanc Capital Markets
We can jump to the next one and we'll circle back to him if he gets back on.
John Swygert -- Chief Operating Officer and EVP
Thank you. And the next question will come from the line of Brad Thomas with Key Capital Markets. Your line is now open.
Jay Stasz -- Chief Financial Officer and SVP
Hey, good afternoon, guys. Congratulations on another great quarter and a very strong year. A couple of questions, if I could, maybe first on the outlook for store growth. If I'm doing my math right, then 36 to 38 stores, looks like about 13% to 14% door growth, which should be kind of at the lower end of your mid-teen range that you've historically done.
I guess, could you talk a little bit about the outlook for stores this year and maybe the potential for you to accelerate that if you find some good locations that you might be able to sign?
Brad Thomas -- KeyBanc Capital Markets
Sure, Brad, this is John. With regards to the overall cadence of our store growth, we said 36 to 38. We feel it's pretty much right in line with what we've been experiencing for the last several years and in line with our expectations and the 14% 15% range. So, if there are opportunities that we could step on the gas a little bit for this year, we would.
But I don't foresee us getting above the 38 store number for this year. There is a little bit delay in the cadence of the store openings this year. Last year, in the first half, 50%. The second half this year, we're planning a third in the first half and two thirds in the second half of the year.
Most of that's just related to the nature of the business thus opportunistically seeking out sites and then some construction delays out in the marketplace there, it's just something that's taken longer to get completed than we would have liked. But nothing that's concerning us and nothing we're worried about. So, the pipeline is full of stores, and we're continuing to move forward with our real estate strategy to be intact what we've done historically.
Jay Stasz -- Chief Financial Officer and SVP
And Brad, this is Jay, I'll just add on to that. I mean, right, this is right in line with our long-term algorithm, mid-teens unit growth which drives our mid-teen revenue growth.
Operator
Great. And if I could follow-up then on the margin outlook here for the year. Jay, you noted the 40 basis points investments in the business and SG&A. Any color you could share on the timing of how that starts to flow through by quarter over the course of the year? And then just on the gross margin side of things, anything we should take into consideration as we're modeling the quarters?
Matthew Boss -- JPMorgan Chase
Sure. So, on the SG&A, the reinvestment of the tax benefit. We've got that model to start beginning in the second quarter. And again, it's about 20% of the $18 million.
So, that's how we have that model. And from a gross margin standpoint, right, I think, we would follow pretty closely along, if you do the map, to last year's quarters. But that said, right, I mean, overall, the goal of the margin is a goal of 40%. We've always been able to manage around that 40%.
I mean, in this year, certainly, we've got headwinds just like a lot of other people on the supply chain side that we're going to have to deal with as far as the tightening trucking market, increasing fuel costs, as well this year we're going to annualize on a full year basis the fact that we've taken down additional square footage at our D.C. and Commerce, Georgia. So, we've got all that baked into our outlook, and we believe at a high level that those increased costs will be offset by increased merchandise margin. And that's ultimately how we get to a flat margin year-over-year at the 40.1%.
Mark Butler -- Chairman, President, and CEO
The next question will come from the line of Matthew Boss with JP Morgan. Your line is now open.
Jay Stasz -- Chief Financial Officer and SVP
So, larger picture, Mark, I guess, as we think about this year, what's the best way to think about the quarterly cadence of comps. I think you said it would be pretty consistent. But, any comments on the first quarter-to-date? And then just larger picture, any change in the overall availability of goods as we think about the backdrop going forward?
Matthew Boss -- JPMorgan Chase
Yes. I'll go certainly with the goods and the merchandising side. And, Matt, Matt, this is as good as I've ever seen it been. The phone keeps ringing, the buyers keep buying, we keep getting great deals, we get major name brands, we're selling in the drastically reduced prices, and then most importantly, the consumer is coming and responding to our offerings.
At a very high level, and the boys can give you somewhat more specifics, but you know Matt, how I run and we plan the business with a 1% to 2% comp that's very, very consistent. We're up against our own good numbers. And there is a little bit of shift this year, because of some of the holidays and this 53rd week. So, there is a little bit noise in everything, but not so much in the comps, but in everything else.
But the boys can give you a little bit more of the quarterly cadence.
Mark Butler -- Chairman, President, and CEO
Sure. Matt, this is Jay and I can speak to that. From a comp standpoint, we are planning a 1% to 2% comp and that's generally consistent across the quarters. We do have little noise in our total sales, which we spoke to.
But from a comp standpoint, it's very consistent. And as far as nuancing that by quarter, we would look at Q1 and Q3 to be toward the high-end of the 1% to 2% comp range in Q2 and Q4 would be toward the low end. And that's simply just looking at our past year performance from the two-year stack. And of course, we know that in Q2 last year, we had an impact from the spinners.
Operator
And then, just a follow-up. Can you talk about the decision that you made to invest 20% of the tax savings back into the business and your associates? Are you seeing any changes in the competitive backdrop, anywhere in particular? And with this reinvestment, do you think this brings you back up to the competition or anything additional we need to think about from a wage pressure perspective going forward?
Dan Binder -- Jefferies
Yes, Matt, we just candidly have not felt and experienced any pressure, but we do think it's the right thing and a prudent thing to do because we do think that the competitive landscape is likely to change by what we understand it too. So, we want to be prepared. It certainly could be in training. It could be in our new store opening procedures and processes.
It could be in wages. It could be all of the above. But what we want to do is most importantly maintain the level of our associates that we have been able to enjoy and make sure that we take care of them. And we think this is the right way to plan the business and we will make a good business decision that's in all shareholders' mind is going to be a good one.
Mark Butler -- Chairman, President, and CEO
Thank you. The next question will come from the line of Dan Binder with Jefferies. Your line is now open.
John Swygert -- Chief Operating Officer and EVP
Thanks. Congrats on a good quarter. My question is kind of an extension to some of the other ones. Just first on the Q1 period.
I know it's not a surprise to anybody that the weather has been challenging. Just curious, when you look at the slight deceleration in the comp of year two versus what you just reported, is most of that a function of the seasonal businesses? And then, secondly, on the freight side, you mentioned some pressures there. I was just wondering if you could quantify what that looks like and what your exposure to the spot market looks like?
Dan Binder -- Jefferies
Yes. Dan, this won't come as a surprise to you, I'd say. I don't agree with the deceleration. We're up against our own good numbers.
And we feel really good about where we are right now in Q1. We still got some really, really important weeks ahead of us. But we feel overall very, very good. As far as the other question...
Mark Butler -- Chairman, President, and CEO
Yes. Dan, this is John. There have been some weather issues that we're all dealing with the marketplace. So, we're really not seen, as you can see with us going to the high end of the 1 to 2 range for the quarter, coming off of a two-year stack of a 7.7% two-year stack.
We're up against our own good numbers as we said. So, we don't see that as a deceleration. We think that our numbers are strong. The business trends are moving forward in the right fashion.
We are excited about it. And obviously, we are going to try to do better than we've put out there. But, we are going to also try to be prudent in our guidance to you guys.
Dan Binder -- Jefferies
Understood. And then, on the freight side, any color around quantifying those pressures and then just what your exposure is to spot market, which seems to bear most of the pressures?
Jay Stasz -- Chief Financial Officer and SVP
Exposure to what, Dan?
Operator
The spot market on freight.
Elizabeth Suzuki -- Bank of America
Yes, Dan. This is Jay. That's not just something we're going to quantify on the call.
John Swygert -- Chief Operating Officer and EVP
Thank you. And the next question comes from the line of Elizabeth Suzuki with Bank of America. Your line is now open.
Elizabeth Suzuki -- Bank of America
Hey, guys. Are there other investments that you are planning with the other 80% of the tax benefit that would be considered incremental that you wouldn't have already put into new stores?
Mark Butler -- Chairman, President, and CEO
Liz, this is John. The answer to that is no. The other 80% would basically flow through to the shareholders. There's no other incremental delayed projects or incremental projects we are looking to do with the tax savings.
We will continue to generate cash and pay down debt. But other than that, there's no other progress that we would delay that we need to do on the horizon.
Elizabeth Suzuki -- Bank of America
Great. And has there been any response to the press release you put out regarding purchasing Toys R Us closeout inventory and just how does the deal flow look there? And what do you see is the potential opportunity both from a merchandise standpoint and a real estate standpoint?
John Swygert -- Chief Operating Officer and EVP
Well, this is what we do for a living. And anytime there is a disruption in any kind of mercantile business, we think we have the opportunity to be able to take advantage of it. And this unique opportunity, we might be able to also get some sites. I will point out that the subject we're talking about many of those sites is not even vacant yet.
But, we think that there may be opportunities for that, the merchandise side. Toys are not a big portion, they are a substantial portion, a meaningful portion of our business. And it excites the consumer. We do think there is an opportunity there.
We think there is going to be a lot of product available. And we just wanted to remind everybody how we do make a living, and that if they do have any product that we might be able to help them out and might be a win-win for both of us. And then, the third thing is there might be some human capital that we'll be able to take advantage of because it's going to be a lot of experienced store managers and the system managers that are out there that might need employment. We'd love to be able to talk to them as well.
So, this is a constant reminder, this is how we make a living. Whether it would be a disruption in the container market maybe a year or year half ago or anytime there is a closing of stores or closing of a factory, anytime there is a disruption, we have the ability to be able to take advantage of it.
Operator
Great. And just a quick follow-up on that is that for toys, generally what are the margins, gross margins tend to run at in terms of above or below or at company average?
Unidentified Analyst -- Unidentified
Liz, this is John. We don't normally give margins on a departmental level. But, I would tell you toys are somewhere in the right in the middle of the road for us.
Mark Butler -- Chairman, President, and CEO
Thank you. The next question will come from the line of Peter Keith with Piper Jaffray. Your line is now open.
Unidentified Analyst -- Unidentified
Hi, guys, it's actually [Inaudible] for Peter today. Just a follow up on the toy space. Compared to exploring goods benefit, you guys saw of Sports Authority liquidation couple of years ago. Can you maybe size up the opportunity here for toys? And also would you expect benefits to be more geared to the holiday season or can you perhaps see benefits in Q2 and Q3?
Jay Stasz -- Chief Financial Officer and SVP
Well, I think that the toys certainly sell better in the first quarter. We wouldn't quantify the fourth quarter, I'm sorry. We wouldn't quantify how big it's going to be, because I'm going to tell you, it's very, very early in the process and we don't know. But, we are ready, willing and able to take advantage of the situation.
We can take the product, we have the logistic capabilities, we have the cash to be able to turn any product into cash for these manufacturers. So, don't know how it's going to shake out yet, but we do think it might be an opportunity. But that being said, just like there was an opportunity in sporting goods, there is an opportunity perhaps in toys this year, something always pops up, and we're ready, willing and able to take advantage of it.
Operator
Okay, great. And just as a follow-up there, say perhaps closeout opportunity is robust in toys, would you anticipate like incremental freight headwind around that or is the toy closeout baked into your freight outlook?
Scott Ciccarelli -- RBC
Obviously, the freight outlook is really our cost to ship goods to stores. So, I would say, on the overall purchasing cycle, the freight is baked into our numbers and our margins for the full year basis.
Mark Butler -- Chairman, President, and CEO
The next question comes from the line of Scott Ciccarelli with RBC. Your line is now open.
Scott Ciccarelli -- RBC
Maybe I misunderstood the comment. But, Mark, did you say that just over half of your categories comp positive in the quarter? I guess I'm trying to square that with the nearly 4.5% comp that you did post and what looks like about 5.5% comp in January.
Mark Butler -- Chairman, President, and CEO
Yes. I think it was about half of them that did. But, I think it's normal. That's consistent with probably many previous quarters, Scott, very, very consistent.
Scott Ciccarelli -- RBC
Okay. So, in other words, a typical quarter complexion is really you have half of your categories flat to slightly negative, and you've got another half that is up basically high-single-digits to double-digits, that's the normal cadence?
John Swygert -- Chief Operating Officer and EVP
Certainly could be and it's all deal driven.
Operator
And then, second question, one more on the store expansion. The 36 to 38 stores expected for this year, should we actually start to think about that as a good rate to use for future expansion in terms of a number or should we continue to think in terms of percentage store growth figure, because I guess, I've always kind of thought about on a percentage basis?
Rick Nelson -- Stephens
Scott, this is John. I would say for right now, I would look at it on a percent basis. I think, they'll come to a point in time where we hit a certain number of stores that would make me start thinking on a store basis, but we have not reached that yet. I think we're going to be closer to 50 to 55 stores on an annual basis before we start to maybe go away from a percentage perspective and go to a whole a number.
John Swygert -- Chief Operating Officer and EVP
The next question comes from the line of Rick Nelson with Stephens. Your line is now open.
Rick Nelson -- Stephens
Leverage was better than expected obviously, accounts and store productivity are the driver to that. But if you could speak to the rent markets today maybe versus a year ago, are you seeing more attractive rent rates?
John Swygert -- Chief Operating Officer and EVP
Rick, this is John. With regards to the rental rates in the marketplace, and we've always been a very opportunistic rent selector per se. So, in terms of the overall rent per square foot or changes in the market for us over the last several years, it's actually been pretty much very consistent. We've been able to take advantage of some of the boxes that have gone out and maybe get slightly better locations in certain situations that we were in the past.
But, the rent on an overall basis has been very consistent over last several years for us.
Rick Nelson -- Stephens
Thanks for the color. Also, like to ask about your rollout plans for the period, Ollie's Army and how you see that impacting financials?
Jay Stasz -- Chief Financial Officer and SVP
Rick, I'll take a little bit but Mark may take in here. But with regards to the ranks within the Army, it's I would say a pretty simple program. Remember, these folks make up the majority of our sales already. So, we already have a very, very loyal following.
We're looking at ways to try to get the folks who are not as active as we want them to be to become a little more active, to get to the next level and reward those ones who are active by giving them additional incentives. I don't want to go into specifics. We're actually in the creation of the program as we speak today. But, what will happen is we'll have a one star and two stars and three-star General within the Army and basically, more they spend and they get to certain ranks, the more we're going to offer to them from a special discount perspective or special offers that other folks may not get within the Army.
We'll be able to bucket these three different groups of people to try to motivate to one star to become two stars and the two stars to become three stars but in terms of our overall quantification of the Army and the financial impact, we are not going to go there at this point in time. We are going to see what happens and how that rolls. As we said, we have a very loyal following. So we're not sure how much that will drive incremental sales, but we believe the program will add loyalty to it.
We're not sure of the overall drivers behind it. And also we're also introducing pretty much at the same time in Q2, we're going to introduce the mobile approximately, which will give another avenue for folks who want to carry their smartphone and know what their point balances at any given time, have their coupons on their phone at any point in time, their card number, all those things that make it easier to operate and understand the program. We're pleased to give them another vehicle to help hopefully enhance loyalty as well.
Operator
Finally, if I could ask on the balance sheet, you've reduced debt year-over-year by looks like a $150 million. You've got $38 million left and more than sufficient free cash to reduce debt. I am wondering what your thoughts are beyond debt paydown?
Patrick McKeever -- MKM Partners
This is Jay and I can speak to that. We've got about $49 million of debt when you include the current portion in there. But, as you know, as we've talked about, our plan for this year is to pay that debt down. So, we would expect to be debt free by the end of the year.
And we'd probably end the year with a cash balance of about $70 million to $80 million at that point after the debt paydown. So, I think that's kind of step one for us. And then, as we move into next year and that cash starts to build further, we are going to continue to have discussions internally and with our Board about what makes sense from a capital allocation standpoint and the best way to use that excess and return value to the shareholders. But that's going to be a discussion really once we get through this year.
John Swygert -- Chief Operating Officer and EVP
[Operator Instructions]. Our next question will come from the line of Patrick McKeever with MKM Partners. Your line is now open.
Jay Stasz -- Chief Financial Officer and SVP
Just another question on the Ollie's Army, maybe you could just give us the numbers there in terms of the total number of members and the growth rate. And then, a question on gross margin guidance for 2018, you said flatly with some pressure on supply chain offset by I think you said higher merchandise margin. So, my question is just where are you expecting the improvement in merchandise margins in 2018?
Patrick McKeever -- MKM Partners
Yes, Patrick. This is John. I will take the first question and let Jay take the second. With regards to the Ollie's Army, we kind of reiterate some of our statistics, about 8.8 million members strong at the end of the year.
Ollie's Army members make up approximately 70% of our overall total sales of the company as of the end of the year 2017. They spend about 40% more than non-Ollie's Army members. And they are obviously our most loyal customer that we have from that perspective. So, on a five-year basis, the CAGR is just north of 27% on the growth of the Army.
Mark Butler -- Chairman, President, and CEO
And Patrick, this is Jay. In regards to margin, like we said, our long-term goal margin is always around that target of 40%. We have demonstrated an ability over the years to manage through that with the different puts and takes, whether that's transportation or pricing on goods. So, we are confident in our ability to do that.
Like you said, we've got headwinds in our supply chain costs baked into that. So, we are planning an increase in merchandise margin. And a couple of things play into that. In Q4, we saw a 60-bp increase in our margin overall and that was largely fueled by the supply chain costs.
We actually had flat merchandise margin year-over-year for the quarter, which was a good sign. Those margins are trending the right way. And the deal flow, like Mark has said, has been strong and continues to be strong. So, as part of that, obviously, the merchandise margin can fluctuate any quarter based on the sales mix and the pricing and the deals at hand.
But, with the pipeline so strong, we feel like we're in a good position this year to take price related to our merchandise margin.
Operator
And then, I know you said, it doesn't sound like the extended, prolonged probably a better word, winter weather has had much impact on your seasonal businesses. But, I've seen a fair amount of fertilizer and potting soil and outdoor furniture and cushions and those kinds of things in the stores. So, the question is, is there any markdown risk with that merchandise or is there still decent window here within which to sell it at the full prices you have it currently?
Vincent Sinisi -- Morgan Stanley
Yes. Patrick, this is no different than it was 35.5 years ago. This is spot on. Certainly, we have a greater stretch of our geography going from Rhode Island all the way down to Florida and then all the way to the Mississippi.
But, our spot of where we are in the merchandising and the number of pops and the amount of fertilizer were exactly where we want to be. We have absolutely no conversation of any merchandise risk. Certainly, whether it gets warmer in Rochester New York next week, we're probably going to sell a lot of fertilizer than we do this year or that we did right now. But, there is absolute, this is no different than what we've done any other year.
And this isn't the first April that I've gone through that has been this cold. So, we feel really good about where we are and our results. So, we've got a couple of really big weeks ahead of us. And then, by the way, Q2 is right around the corner but we feel good about where we're at.
John Swygert -- Chief Operating Officer and EVP
Thank you. The next question comes from the line of Vincent Sinisi with Morgan Stanley. Your line is now open.
Vincent Sinisi -- Morgan Stanley
Hey, terrific, hi guys. Thanks very much for taking my question and thanks for the color around the quarters in '18 here. Just a quick question or two. Just going back to the associated investment, just want to be sure, certainly understand a lot of companies are doing that.
For you guys, is that concentrated strictly at the associated level? Any change at the manager level or any change or thoughts around just kind of that headcount per store?
Jay Stasz -- Chief Financial Officer and SVP
Vince, this is John. With regards to where our thought process is right now, it's more centered around the associated level from a pure wage perspective that we are looking at other items with regards to benefits and training and whatnot that may not just beat the associated level that can beat the manager level and other areas within the business. But the big crux of the number would be more focused on the associated level. But, we have some other investments we think we can make that will be beneficial to the long-term retention of not only associates but also management level people as well.
So, it's kind of how we're looking at today.
Operator
Okay. All right. And then, just one quick one on the margins for '18. I know that you said obviously kind of some of the supply chain headwinds will continue.
Just to kind of get to that flattish gross margin for the year. What's implied from a freight perspective? Kind of in your outlook that things kind of stay as they are today, does it get better, does it get worse? And then, I guess, kind of anything else outside of freight just on the gross margin line-up that we should be mindful of? Thanks a lot.
Anthony -- Wells Fargo
Vincent, this is Jay. Like I kind of said to Dan, we're not going to quantify a whole lot. But generally speaking, kind of the impacts we're looking at an annual basis is about 30 to 40 basis points from the supply chain cost increases and expecting that to be offset by like amount in the merchandise margin improvement?
Mark Butler -- Chairman, President, and CEO
And the next question comes from the line of Edward Kelly with Wells Fargo. Your line is now open.
Anthony -- Wells Fargo
This is actually Anthony [Inaudible] on for Ed. Thanks for taking our question. So, kind of just sticking on the other side of tax reform here, with consumers starting to see an [Inaudible] pay, especially lower income levels, are you guys seeing anything here on the top-line that begins to flow through and to what extent that's baked into your estimates this year?
Jay Stasz -- Chief Financial Officer and SVP
Yes. Well, I don't think we baked anything more than our consistent planning process. I probably like to remind you that even though we sell good stuff cheap, we're not really, really low-end shoppers. We have a middle of the road shopper.
And we just think that we're going to be as good as the deals and our offerings and we think we've got a good plan. But we haven't baked in any incremental increase because of that. And we feel good about our plan.
Operator
And just as a follow-up on your store productivity, continues to remain pretty elevated for what we're calculating, anything you can comment on there in terms of drivers?
Alvin Concepcion -- Citigroup
I can start with that and see if these guys have anything to chime in. This is Jay. But, from a modeling standpoint, right, we recognize that the new stores have performed above our expectations. So, this year, for our model, we didn't increase our new store plan to 3.9 million from 3.8 million.
And if you do the math from a new store productivity standpoint compared year-over-year we're relatively conservative in that measure still.
Jay Stasz -- Chief Financial Officer and SVP
And the next question will come from the line of Alvin Concepcion with Citi. Your line is now open.
John Swygert -- Chief Operating Officer and EVP
Just wanted to ask another question about your EBIT guidance. I think it's a little bit below consensus expectations and a little bit of margin degradation you talked a little bit about. Is that just an issue you think was for a forecast or is this pretty much in line with what you're planning internally prior to this quarter? And can you talk about some of those puts and takes besides freight and the 53rd week, and another thing we should think about?
Alvin Concepcion -- Citigroup
This is Jay and I can start with that. Really, the impact on the EBIT line is the reinvestment, the tax benefit, that's about 40 bps impact. So that's part of it. And when we look at what was out there on a consensus, there was a little disparity and how people were treating the 53rd week as well as how people were treating the tax benefit from the 2017 Tax Act.
But, I think the big piece you're probably looking at is the reinvestment on the SG&A line.
Mark Butler -- Chairman, President, and CEO
Yes. Alvin, this is John, I think, the big theme to keep in mind for all of us who are reinvesting into our associates through whatever means, you got a little bit of different geography between SG&A and income taxes. So, it does break up and mess up EBIT margins a little bit. So, I think that's probably a common theme, you're going to see among all of us who have significant tax savings where we invested above the line.
Operator
Thank you. And what are you seeing in terms of general consumer sentiment from your customers, post the holidays? It doesn't sound like you're expecting this huge list from folks with higher paychecks, so I am just wondering what you actually are seeing.
Mark Butler -- Chairman, President, and CEO
As I said, I think perhaps a couple of times on the Q&A, I feel good about where we at. Certainly, there's been a little shift in the Easter holiday. I think we are going to be up against the Easter holiday in a few weeks, we had it of course last week. But, we feel really good about where we're at.
We still got some big weeks ahead of us. Sure, we would like the northeast to have a little bit better weather but we feel really good about where we are at. I am happy. I am happy with our stock position.
And I will remind everybody, we are a deal driven business. So, we got really great deals in the store and I am excited about where we're at. So, we feel good.
Operator
Thank you. I am showing no further questions. I would now like to turn the call back over to Mr. Mark Butler, chairman, president and chief executive officer, for any closing remarks.
Duration: 48 minutes
Call Participants:
John Rouleau -- Managing Director, Investor Relations
Mark Butler -- Chairman, President, and CEO
Jay Stasz -- Chief Financial Officer and SVP
John Swygert -- Chief Operating Officer and EVP
Brad Thomas -- KeyBanc Capital Markets
Matthew Boss -- JPMorgan Chase
Dan Binder -- Jefferies
Elizabeth Suzuki -- Bank of America
Unidentified Analyst
Scott Ciccarelli -- RBC
Rick Nelson -- Stephens
Patrick McKeever -- MKM Partners
Vincent Sinisi -- Morgan Stanley
Unidentified Analyst -- Morgan Stanley
Alvin Concepcion -- Citigroup
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
More From The Motley Fool
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
