Ollie’s Bargain Outlet (NASDAQ: OLLI) is recommended as a buy due to its strong position in the current economic climate. OLLI has a history of strong execution and is well-positioned to continue benefiting from consumers seeking value. The company’s value pricing strategy and expansion plans supported by a healthy balance sheet and favorable industry trends make it an attractive investment opportunity.
OLLI operates as a retailer offering a wide range of products at discount and closeout prices, targeting US consumers. As of the fourth quarter of 2023, the company had 512 operating stores in the US. OLLI has a competitive advantage due to its ability to source and negotiate lower costs of inventory acquisition. This advantage, coupled with its strong execution, has resulted in consistent gross and EBIT margins over the past decade.
A review of OLLI’s fourth-quarter 2023 financials shows positive earnings per share of $1.23, exceeding consensus estimates of $1.16. The company’s 3.9% same-store sales growth and a 290 basis point gross margin expansion to 40.5% contributed to this performance. This consecutive quarter of positive growth demonstrates OLLI’s ability to benefit from the macro environment and its strong execution.
Analysts believe OLLI is well-positioned to continue its momentum, potentially exceeding management’s guidance for fiscal year 2024. The guidance includes a revenue range of $2.248 to $2.273 billion, implying 7.5% growth at the midpoint, and same-store sales growth of 1% to 2%. However, analysts believe the top-line guidance is conservative due to several factors.
Firstly, demand momentum remains strong, with management indicating continued strength in same-store sales in the first quarter of 2024. OLLI also has a steady stream of deals flow, providing opportunities to increase customer traffic and sustain its value pricing strategy.
Secondly, the uncertain macro conditions and OLLI’s value strategy are expected to resonate with consumers seeking cheaper alternatives. Thirdly, the company sees an opportunity to accelerate its store growth rate given the attractive industry backdrop, including store closures by competitors such as Macy’s and Family Dollar.
In the long term, the total addressable market for store openings has expanded due to migration trends. OLLI has shown strong execution, opening 45 new stores in fiscal year 2023 and increasing its long-term store target to 1,300, with two-thirds of future growth planned in new markets. This target is achievable, considering Family Dollar’s current store count of 8,359.
Assuming OLLI continues to execute and opens the same number of stores as in fiscal year 2023, it has a growth runway of approximately 17.5 years. This, combined with the expected same-store sales growth of 1-2%, translates to low-teens revenue growth in fiscal year 2024, exceeding the implied growth guide.
OLLI’s strong balance sheet provides confidence in its ability to continue opening stores. The company has $353 million in cash and negligible debt, allowing it to easily finance its capital expenditures. Positive free cash flow generation further supports its growth plans.
Analysts believe OLLI can grow at approximately 10% in the near term, driven by store growth and same-store sales growth. However, margin expansion may be limited due to reinvestment in the business. While OLLI benefits from the weak macro environment, a severe recession could negatively impact its performance. However, analysts remain bullish due to the company’s strong position and growth opportunities.
