The Ollie's Bargain Outlet Selloff Is Overdone

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About: Ollie's Bargain Outlet Holdings, Inc. (OLLI)
by: Mike Berner
Summary

Ollie's stock has declined markedly from its peak, but the selloff looks overdone.

The company's issues look short-term in nature and the fundamentals remain very much intact for long-term growth.

I am holding onto my shares and would buy more at the present valuation.

Last week was tough for shareholders of Ollie's Bargain Outlet (OLLI), who saw the value of their holdings plummet 28 percent in a single day. Overall the stock is down more than 40 percent since it hit an all-time high of $101 in late May. Eight months of gains have been erased in just a few weeks.

The main catalyst for the plunge was the company's atrocious Q2 results, which came in below even the lowest analyst estimate. Earnings-per-share came in at $0.38 vs. the $0.47 consensus, while revenue fell short at $334 million compared to the Street's $340 million estimate. Comparable store sales also turned negative for the first time in recent memory.

Despite clear managerial missteps, though, the core business model remains fundamentally intact. The selloff is overdone. Back in late-2018 when Ollie's stock fell 36 percent, I wrote that shares were a bargain. The stock came roaring back shortly thereafter. I believe this is also the case today.

Managerial Missteps

Newly-opened stores for any retailer tend to outperform older locations. That's why the comparable sales figure exists. In Ollie's case, it seems that the initial outperformance was greater than the norm, but so was the subsequent fall to normal sales levels. The company expanded at a record rate last year, so the impact from new stores entering the comparable store base was especially large. This partly contributed to the negative comps, as CEO Mark Butler explained on the earnings call.

...the 2017 and 2018 new store classes entering the comp base had a higher than normal impact on comparable store sales as these stores performance exceeded 100% productivity in their first year. The 29 stores that we opened in the first half of the year was an all-time high for us.

The company also experienced supply chain issues due to the unexpected demand. There were also some poorly-timed inventory decisions that led to an excess of out-of-season merchandise and a shortage of in-season goods. As a result, Ollie's missed out on sales of summer products like air conditioners and was forced to mark down other merchandise sooner than expected.

Merchandise margin was pressured due to the timing of deal flow which reduced markup on inventory purchases and a concentration of lower margin products sold during the period.

...the supply chain...is something that we...should have been able to get a little bit ahead of, we didn't anticipate that properly. But the margin, the margin miss was timing, was cherry picking, was weather, was the amount of deals that we had that were offered to us at lower margin

It also seems that the company might have expanded too quickly and prematurely saturated some markets. Ollie's opportunistically purchased 13 former Toys R Us locations last year. These new locations were larger stores than the company typically builds, and there was some overlap with existing markets. As a result, Ollie's experienced some cannibalization. The company attributed up to 200 basis points of the -1.7 percent comp figure to overlap.

Going Forward

Up until now, Ollie's has executed flawlessly. The issues described on the earnings call appear short-term in nature, although management predicts that the headwinds will persist through the end of the year. Clearly the company made some mistakes, but I see no signs that shoppers are suffering from Ollie's fatigue. Ollie's competes on price as a destination for bargains on closeout merchandise. Store openings continue to draw large crowds.

Aside from lease obligations, the company has no long-term debt and ended the quarter with $78 million in cash. Ollie's funds its expansion entirely through cash generated through operations, which is remarkable for a public company today. This attests to the strength of the business model. I don't think failure is very plausible. CEO Butler, who still owns almost 10 percent of the company's stock, has every incentive to succeed.

Perhaps the stock was bit overhyped. A 50 percent gain in six months is obviously unsustainable. Butler has promoted his company on shows like Jim Cramer's Mad Money, which likely drew in a large crowd of easily-spooked retail investors. Nevertheless, the recent selloff also doesn't make much sense.

Right now Ollie's is valued at 28 times earnings for an almost $4 billion company. That seems pretty inexpensive relative to the competition and its size. Burlington Stores (BURL), another bargain retailer which recently soared after earnings, is valued at 32 times earnings with a market cap of $13 billion. Dollar General (DG) is selling at 26 times EPS. Walmart (WMT), with a market cap 100 times the size of Ollie's, also sells at a P/E of nearly 26.

Although my personal gains have been diminished, I have no plans to sell my Ollie's stock. Indeed, I would like to add more at the present valuation.

Disclosure: I am/we are long OLLI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.