By: Connor W. Konicke, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) is a highly
differentiated and fast-growing retailer that provides brand name merchandise
at extreme discounts. OLLI engages in the retail of closeouts, excess
inventory, and salvage merchandise by offering overstocks, package changes,
manufacturer refurbished goods and irregular items to customers. OLLI operates
in the southern and eastern regions of the United States, with most of the
recent expansion taking place up the east coast.
• Amazon continues to
force liquidation of traditional brick and mortar retail stores, which OLLI
continues to benefit from as they seek to buy merchandise at extreme discounts.
• 2Q 2017 earnings marked
the 9th consecutive quarter of beating on consensus EPS and revenue.
In addition, management raised full year guidance after seeing increased
traffic along with total basket increasing into 3Q.
• In addition, OLLI continues
strong store growth, achieving over 100% new store productivity, despite the
weak brick and mortar retail backdrop.
• Given the favorable
conditions OLLI is seeing from the weak retail environment, OLLI is on track
with their store expansion plans to increase their store base by 4x, reaching
long term store targets of 700-950 stores.
Key
points:
OLLI continues to have a
bright future, with no signs of the traditional brick and mortar retail liquidation
stopping. In addition to having access to a plethora of branded merchandise
from retail liquidation, OLLI has significant opportunity within their store
expansion plan given a low interest rate environment and abundance of empty
retail real estate from liquidation. OLLI’s future success will be contingent
upon the three following strategies: growing their store base, increasing great
bargain product offerings, and leveraging and expanding “Ollie’s Army”.
Currently, OLLI has 247
stores across the southern and eastern parts of the United States, with
potential to growth their base ~4x to 950 stores. Given the strength of the
real estate pipeline as retail stores have been disrupted, paired with OLLI’s
historical success and profitability of opening new stores, OLLI’s unique model
is poised to capture from the majority of most retailer’s headwinds.
In addition, OLLI is
investing heavily and focusing on building and developing their merchant team. As
OLLI continues to expand geographically and enhance their scale, their merchant
team will have increased buying power and ability to buy “great bargain’s” directly
from vendors, offering opportunity for margin expansion as cost of goods
becomes less.
The last part of OLLI’s
success will need to come from leveraging and expanding “Ollie’s Army” member
base. “Ollie’s Army” members, which is OLLI’s promotional strategy that offers
discounts to members, account for roughly 65% of sales. As they continue to
expand, OLLI has been increasing the utilization of data and integrating a
social media strategy to build brand awareness and recruit members to “Ollie’s
Army”.
What
has the stock done lately?
Since OLLI has been added
to the AIM Small Cap Equity Fund on May 2, 2017, the stock has been up ~22%, as
OLLI continues to take advantage of the weak traditional brick and mortar
retailer closeouts. Since management raised guidance on the 2Q earnings call on
August 29, the stock has been up ~8%.
Past
Year Performance:
Over the last year,
OLLI’s stock has appreciated 76.29%, as investors have noticed OLLI’s unique
model in a changing retail environment. Despite rich valuations (39x P/E and
19x EV EBITDA), OLLI continues to show positive signs of strong profitability with
numerous tailwinds to continue to drive share price.
 |
| Source: FactSet |
My
Takeaway
The downside risk to OLLI
will come from management’s failure to execute expansion plans, but given that
OLLI’s has a founder-led management team, I believe the probability of this is
low. OLLI has significant room for growth with an extremely differentiated
business model that suites the disruption in retail nicely. As they continue to
experience revenue growth (17% CAGR from 2012 to 2016) and margin expansion (6.6%
to 11.5% from 2012 to 2016) it is recommended that the AIM Small Cap Equity Fund
should continue to hold OLLI.
