Ollie's Bargain Outlet: Rating Downgrade As Upside Is No Longer Attractive

seekingalpha09-12

I recommend a hold rating for Ollie’s Bargain Outlet stock due to valuation concerns, despite a positive fundamental outlook and solid growth performance.OLLI reported strong Q2 results with 12.4% ...

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Paper Boat Creative Investment action I recommended a buy rating for Ollie’s Bargain Outlet (NASDAQ:OLLI) when I wrote about it in June, as I turned more positive about OLLI’s ability to grow at my expected rate (10%) with margin expansion. Based on my current outlook and analysis, I recommend a hold rating. The reason for my downgrade is not because of a poor fundamental outlook. But rather, it is because valuation has moved up since my last update, and the upside is no longer attractive. Review OLLI reported 2Q24 earnings in late August, where it saw same-store-sales growth [SSSG] of 5.8%, driving total revenue to $578.4 million (12.4% y/y growth). Gross margin compressed by 30bps y/y to 37.9%, driven by lower merchandise margin caused by product mix shift impacts. While operating expenses (SG&A) grew 8.2% y/y to $145.7 million, because of faster revenue growth, OLLI saw its EBIT margin expand by 30bps y/y to 10.5%. Consequently, this led to 20bps improvement in net margin, driving operating EPS to $0.78, or ~16% y/y growth. Just as I had expected from my previous update, OLLI delivered solid revenue growth of 12.4%, and the SSSG of 5.8% was driven by strength across all underlying drivers. The number of transactions, basket size, and average unit revenue [AUR] all saw positive growth in 2Q24, and importantly, transaction growth was the largest driver of SSSG. Two major datapoints validate that OLLI is benefiting from this weak macroenvironment: (1) SSSG cadence in 2Q24, and (2) the mix of products that drove the strong SSSG. On the former point, SSSG cadence in 2Q24 saw an accelerating trend, with July experiencing the highest SSSG (on a two-year stack basis), suggesting no signs of momentum slowing down. Regarding the latter, 2Q24 SSSG strength was broad-based, with 50% of OLLI’s product categories contributing to the increase. Looking ahead, the success OLLI had with its new customer acquisition strategy gives hope that this SSSG momentum can be sustained for the near term. Firstly, the improved email program with OLLI’s army has grown by 8% y/y to 14.5 million members (up from 14.2 million in 1Q24). Secondly, OLLI rolled out its new co-branded credit card last month (August) that automatically enrolls cardholders in OLLI’s army, and this should enable OLLI to significantly widen its reach and grow the number of members. Thirdly, the influencer program continues to enable OLLI to capture demand from younger demographics.   Goldman Sachs Indeed, based on management’s noted quarter-to-date trends in 3Q24 (i.e., August), it saw continued momentum from July and is tracking ahead of their own internal expectations. This again illustrates the underlying demand strength, as August has one less flyer (shift from 3Q24 to 4Q24). That said, I agree with management being cautious in their 3Q24 SSSG guidance (flat SSSG guide), as the liquidation of Big Lots will surely have an impact on OLLI given the overlap (courtesy of Goldman Sachs research). Per management words, Big Lots has roughly 100 of their stores overlapping OLLI’s trade areas (5 to 30 miles radius), and the expected headwind is around 100 to 200 bps. However, I wouldn’t extrapolate this pocket of elevated competition into 4Q24, as most of Big Lots efforts to liquidate inventories should be more or less over when 3Q24 ends. As such, I believe OLLI should have no issues meeting its FY24 SSSG target of 2.7 to 3.2% (raised from the prior guide of 1.5 to 2.3%). As a reference, 1H24 average SSSG is 4.4%, so even if we assume 3Q24 SSSG to be flat, it implies 4Q24 needs to report 4% SSSG to meet the high end of the FY24 SSSG guide. I believe this is doable given 1H24 performance, the underlying demand strength, traction with new customer acquisition, one additional flyer in 4Q24, and the continued uncertain macro environment. Also remember that the 100 to 200 bps of headwind from Big Lots' liquidation may not materialize, allowing OLLI to perform better in 3Q24, which eases the burden on 4Q24 to perform. Finally, just to cycle back to a key point I flagged out previously—supply of value products—it was encouraging to hear that the closeout supply remains robust and OLLI is not seeing any competition in terms of securing attractive deals. Importantly, because of the increase in size of the closeout industry, it continues to put large-scale buyers like OLLI in a very favorable position to capture more of this supply (i.e., it is easier to deal with large-scale players as they have more buying power and can handle more volume). Valuation BloombergBloomberg OLLI continues to be one of the preferred businesses to own in this macroenvironment, and it has demonstrated solid execution in capturing demand. Relative to peers in the discount/value retailer space, it remains a top performer in terms of growth. Hence, I believe it makes sense for OLLI to continue trading at a premium vs. its peer group in the near-term. However, the valuation has ticked up since I last wrote about it, making the upside less attractive today. Consensus is calling for FY25 EPS of $3.73, driven by ~low-teens revenue CAGR and ~40bps of net margin expansion vs. FY23. OLLI should easily achieve this based on recent performance. Assuming OLLI trades at the current 27x forward PE on $3.73, it equates to a share price target of ~$100 or ~5% share price upside. Final thoughts  My recommendation is a hold rating. I still think the fundamental outlook is positive, where OLLI should continue to demonstrate robust revenue growth, driven by increased transaction volume and basket size. However, I believe the upside is less attractive today because valuation has moved up since I last wrote about it.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2466201345"}