Wednesday, October 4, 2017

A current AIM Program Small Cap Equity Holding: Ollie's Bargain Outlet Holdings Inc. (OLLI) by Connor W. Konicke."A Hold on Ollie's"

Ollie’s Bargain Outlet Holdings Inc. (OLLI, $46.40): “Putting the Gain in Bargain”
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.


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.