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Ollie's (NASDAQ:OLLI) Posts Better-Than-Expected Sales In Q3


Full Report / December 06, 2023

Discount retail company Ollie’s Bargain Outlet (NASDAQ:OLLI) reported Q3 FY2023 results topping analysts' expectations, with revenue up 14.8% year on year to $480.1 million. The company's full-year revenue guidance of $2.10 billion at the midpoint also came in slightly above analysts' estimates. It made a non-GAAP profit of $0.51 per share, improving from its profit of $0.37 per share in the same quarter last year.

Ollie's (OLLI) Q3 FY2023 Highlights:

  • Revenue: $480.1 million vs analyst estimates of $469.3 million (2.3% beat)
  • EPS (non-GAAP): $0.51 vs analyst estimates of $0.45 (13.7% beat)
  • The company raised its revenue guidance for the full year to $2.10 billion at the midpoint
  • Gross Margin (GAAP): 40.4%, up from 39.4% in the same quarter last year
  • Same-Store Sales were up 7% year on year
  • Store Locations: 505 at quarter end, increasing by 42 over the last 12 months

Often located in suburban or semi-rural shopping centers, Ollie’s Bargain Outlet (NASDAQ:OLLI) is a discount retailer that acquires excess inventory then sells at meaningful discounts.

For example, if Walmart orders huge quantities of toys based on a new Disney movie but the movie flops and the popularity of that toy never materializes, Walmart may sell those in bulk to Ollie’s at pennies on the dollar rather than discount the items and try to sell them individually. This is often done to clear shelf space for new products.

Ollie’s buying approach focuses on finding excess inventory or overstocked items from other retailers, so selection can change quickly and be varied. Shopping at Ollie’s is often a treasure hunt–what the consumer loses in reliable selection or the latest trends is made up for with very low prices. Prices of Ollie’s merchandise can be as much as 70% off other full-price retailers. Housewares and home decor, snacks, toys and games, and electronics are key product categories at the typical Ollie’s store.

The core customer is the value-conscious shopper who values a one-stop shop for many of a household’s needs. This customer is willing to physically go to stores and spend more time searching for the right merchandise since Ollie’s has a very limited online presence.

Discount General Merchandise Retailer

Broadline discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.

Off-price and discount retail competitors include TJX (NYSE:TJX), Ross Stores (NASDAQ:ROST), and Burlington Stores (NYSE:BURL).

Sales Growth

Ollie's is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.

As you can see below, the company's annualized revenue growth rate of 9.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new stores and grew sales at existing, established stores.

Ollie's Total Revenue

This quarter, Ollie's reported robust year-on-year revenue growth of 14.8%, and its $480.1 million in revenue exceeded Wall Street's estimates by 2.3%. Looking ahead, analysts expect sales to grow 12.6% over the next 12 months.

Number of Stores

When a retailer like Ollie's is opening new stores, it usually means it's investing for growth because demand is greater than supply. Since last year, Ollie's store count increased by 42 locations, or 9.1%, to 505 total retail locations in the most recently reported quarter.

Ollie's Operating Retail Locations

Taking a step back, the company has rapidly opened new stores over the last eight quarters, averaging 9.6% annual growth in its physical footprint. This store growth is much higher than other retailers and gives Ollie's a chance to scale towards a mid-sized company over time. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Ollie's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 2.3% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Ollie's is reaching more customers and growing sales.

Ollie's Year On Year Same Store Sales Growth

In the latest quarter, Ollie's same-store sales rose 7% year on year. This growth was an acceleration from the 1.9% year-on-year increase it posted 12 months ago, which is always an encouraging sign.

Gross Margin & Pricing Power

Ollie's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 37.2% gross margin over the last eight quarters. This means the company makes $0.37 for every $1 in revenue before accounting for its operating expenses. Ollie's Gross Margin (GAAP)

Ollie's produced a 40.4% gross profit margin in Q3, marking a 1 percentage point increase from 39.4% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q3, Ollie's generated an operating profit margin of 8.1%, up 1.1 percentage points year on year. This increase was encouraging, and we can infer Ollie's was more disciplined with its expenses or gained leverage on fixed costs because its operating margin expanded more than its gross margin.

Ollie's Operating Margin (GAAP)

Zooming out, Ollie's has done a decent job managing its expenses over the last eight quarters. It's produced an average operating margin of 8.2%, higher than the broader consumer retail sector. On top of that, its margin has improved by 3.1 percentage points year on year (on average), an extremely encouraging sign for shareholders.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q3, Ollie's reported EPS at $0.51, up from $0.37 in the same quarter a year ago. This print beat Wall Street's estimates by 13.7%.

Ollie's EPS (Adjusted)

Between FY2019 and FY2023, Ollie's adjusted diluted EPS grew 27.2%, translating into an unimpressive 6.8% average annual growth rate. This growth, however, is materially higher than its revenue growth over the same period, showing that Ollie's has excelled in managing its expenses (leading to higher profitability).

On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 22.5% year-on-year increase in EPS.

Key Takeaways from Ollie's Q3 Results

With a market capitalization of $4.70 billion, Ollie's is among smaller companies, but its $264 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We enjoyed seeing Ollie's raise its revenue guidance for next quarter and exceed analysts' revenue expectations this quarter, driven by robust same-store sales growth (7% vs expectations of 3.5%). We were also excited its adjusted EBITDA and EPS outperformed Wall Street's estimates. Management noted that "consumers remain under pressure and are looking for ways to save money on [the] branded merchandise they need and want in their homes". Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 3.6% after reporting and currently trades at $79.07 per share.

Is Now The Time?

Ollie's may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Ollie's isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been a little slower over the last four years, but at least growth is expected to increase in the short term. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its brand caters to a niche market. On top of that, its mediocre same-store sales performance has been a headwind.

Ollie's price-to-earnings ratio based on the next 12 months is 24.8x. In the end, beauty is in the eye of the beholder. While Ollie's wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.

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