Tuesday, November 19, 2019

A Current AIM Small Cap Equity Holding: Ollie’s Bargain Outlet Holdings, Inc. (OLLI, $67.24): “Ollie’s Staying a Bargain”


Ollie’s Bargain Outlet Holdings, Inc. (OLLI, $67.24): “Ollie’s Staying a Bargain”
By: Jack Blum, 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. (NYSE: OLLI) Ollie’s is a retain chain of general merchandise primarily offering closeout deals on brand name goods. They specialize in overstocks, package changes, irregulars, and refurbished goods. Their products include bed and bath items, houseware items, and electronics. They were founded in 1982 in Harrisburg, PA.

• Ollie’s shares have experience volatility in the past year due in the most part to missed sales and EPS in Q2 of 2019.

• Due to these miss fires, management lower FY19 sales guidance. The stock tumbled down 20-25% after these announcements.

• Ollie’s is in the midst of one of their largest expansion periods in their history. From 2014-2018 they have expanded their store base from 176 stores to 303 stores and entered seven new states. Net sales grew at 18.1%, while comparable stores only grew at 4.1%. These new stores and expansion into new states is expected to continue to drive growth.

• Management is confident that the missed targets were just a blip on the radar screen and Ollie’s will continue their stellar performance.

Key points: 

Ollie’s has had an extremely volatile year to say the least. In August, after receiving their second quarter earnings results management adjusted their guidance for net sales. They decreased the target from $1.430 billion to $1.419 billion. These adjustments directly resulted in the stock price tumbling by up to 25%.

Ollie’s has a strong track record to back themselves up on. In a little over two years the stock has doubled in price from around $32 a share in early 2017 to its current price of $67. This is due in large part to their increased store growth over the years, and their advantage in their purchases of retail space. Ollie’s relies heavily on their relationships with top name brands such as P&G, Kellogg’s, Hasbro, GE, and Johnson and Johnson. When these retailers are unable to sell-through their inventory, they turn to Ollie’s to buy up their products. This allows Ollie’s to then turn around and sell these items at up to 70% off factory store prices and back up their trademarked slogan of “Good Stuff Cheap.”

They have benefited largely from the purchase of their new retail space at low prices. They purchased 13 former Toys R Us locations, and this strategy will be one of the reasons how they will be able to continue their expansion while also still growing and meeting sales estimates. The ability for the company to expand beyond the eastern seaboard, is another reason for positivity as they have only expanded as far west as Texas.

What has the stock done lately?

 The stock has decreased in price since their miss in Q3 earnings. However, based on their store expansion and their market expansion there is no reason to believe that they will not continue on their track of growth that they have been on the past couple of years. The negative sentiment of the earnings miss, and the subsequent market reaction has caused the stock price to drop well below its true value.

Past Year Performance:

Over the past year (November 2018-2019), Ollie’s is down 27.73%. But I remain optimistic that the stock price will continue to grow back up towards $70-80 range, due to its business model and continued growth strategies.

Source: FactSet



My Takeaway:

Ollie’s has faced some negativity lately but overall the stock has been one of the main bright spots in consumer discretionary sector of the AIM portfolio. After being added in 2017 with a price target of $44.22, the stock has absolutely smashed expectations. Even though the stock has experienced some turbulence in the past couple months I do not think that this is indicative for the future of the company. My recommendation is that we let this winner recover and show that they still are the solid company that we said they were.


Source: FactSet