Sunday, December 16, 2018

A Current AIM Program Small Cap Equity Holding: Ollie’s Bargain Outlet (OLLI) by: Nathan Zirpolo. “Good Stuff Cheap”

Ollie’s Bargain Outlet (OLLI, $69.08): “Good Stuff Cheap”
By: Nathan Zirpolo, 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. (NYSE:OLLI) provides retail of salvage merchandise, excess inventory and closeouts products. Products include housewares, electronics, toys, and food offered to customers in 297 store locations across the Eastern half of the United States.

• Ollie’s experienced a 17.6% drop after the release of Q3 earnings, a very steep sell-off for a company that reported better-than-anticipated revenue and earnings.

• Management has indicated that it has plans to one day operate 950 stores nationwide.

• Ollie’s has fallen close to 30% under the firm’s 52 week high of $97.61 due to the recent sell-off of 17.6%.

• Due to third quarter results, Ollie’s is using continued momentum to raise sales and earnings guidance for the full year of 2018.

Key points:

Despite a recent sell-off, Ollie’s Bargain Outlet Holdings, Inc. remains a buy. With a chance at a possible recession in the near future, Ollie’s has made a strong effort to decrease debt and plans to be debt free by the end of fiscal 2018.

With the goal of one day operating 950 stores nationwide, Ollie’s has opened 37 new store in the current year, using old Toys”R”Us locations. The company has acquired a total of 18 former Toys"R"Us sites, including 12 purchased properties and 6 leased. With a plan to open new stores at a 12.1% year-over-year rate, the company just purchased land in Texas to build a new distribution center. The 615,000 square-foot center has the ability to service 150-200 stores, presenting the large opportunity to increase market share in locations surrounding the distribution center.

Higher supply chain margins has served as a possible risk for the company, due to the company’s gross margins being directly affected. In Q3, gross margin decreased 50 basis points, but was partially offset by increased merchandise margin. A constant increase in SG&A expenses also serve as a risk to the company. Increasing 11% in Q2 and 15.1% in Q3, the rise in SG&A expenses can be attributed to increasing sales volume in existing stores and selling expenses from new stores.

What has the stock done lately?

Since reporting earnings on December 4th, the company has decreased 17%. Given the fact the guidance issued in the third quarter was an increase from the guidance issued in the second quarter, the company sell off seems a little overdone. Furthermore, the company has seen sales jump 19.1% YoY and EPS increase 45.5% YoY.

Past Year Performance:

OLLI is currently trading at $69.08, an increase in value of 29.73% over the past year. During 2018, the company’s sales increased at a faster rate than their main competitors, a main reason for the company’s success over the last year.

Source: FactSet

My Takeaway:

While there has been some recent volatility, Ollie’s Bargain Outlet Holdings, Inc. has strong financials due to strong cash generation and strong performance. Furthermore, management has plans to continue to grow and expand to new markets, giving the company long-term goals. Overall, the company is relatively safe and the recent sell-off should not be a reason to trade the stock. By having long term goals and a focus on increasing both retail stores and distribution centers, there is a high chance that Ollie’s stable, long-term returns.

Source: FactSet