Ollie’s Bargain Outlet Holdings, Inc. $OLLI

My Investment Checklist

1.      Is the company undervalued?

EV/EBIT: 17.77

Price/Sales: 2.92

Price/Free Cashflow: 16.73

$OLLI trades at a slight discount to the market, which is interesting given that they’re a fast grower and offer surprisingly good margins.

2.      Can I easily explain what the company does?

Yes, they are a discount retailer who sell goods in a warehouse setting similar to Costco.  It’s also worth noting that their inventory differs regularly.  This creates a unique shopping experience for customers, as they get a different assortment every time they stop in. 

3.      Does the cash flow statement line up with income statement?

Yes, cashflows for the most part have been higher than reported earnings:

Ollie’s really hasn’t done much with this excess cash, other than build up a giant cash pile:

In fairness they’re planning on opening 50 stores this year, so a decent chunk of that is likely to go towards CAPEX in the near future.  Having said that the company has next to no debt and hasn’t spent more than $75M in any given year on CAPEX. 

4.      Is the Balance Sheet Healthy?

Total Debt: $397.92M

Total Cash: $472.17M

Current Ratio: 3.27


5.      How profitable is the business?

Gross Margins: 40.04%

Net Margins: 13.83%

ROE: 21.32%

8-yr Revenue CAGR: 29.32%

My jaw hit the floor when I took a peek at Ollie’s profitability metrics.  Don’t tell the tech bros but $OLLI is low-key a compounder.  Furthermore the company has been remarkable consistent in regards to profitability:

I can’t say enough good things, this is a wonderful business and anyone who tells you otherwise is a complete pea brain.

6.      Is management rewarding shareholders?

$OLLI does not give a dividend, however they do have a share repurchase plan in place.  Ollie’s has $170.4M available for repurchase thru 2023.  That’s roughly a 3% yield in 18 months or 2% per year (assuming all shares are repurchased at the current levels).  This is technically above average, but could be significantly improved given their balance sheet strength. 

7.      How does the company stack up against their peers?

Ollie’s has a very unique business model and no true apples to apples competitor.  However, Costco $COST gives off some of the same vibes:

$COST Price/Sales: 0.93

Gross Margins: 13.01%

EV/EBIT: 26.82

Costco focuses more on food, so it’s not surprising to see their margins are meaningfully lower.  However $COST is cheaper on a price/sales basis and does return more capital to shareholders.  Be that as it may, $OLLI is objectively more profitable and a faster grower.  Moreover $OLLI is trading at ~ 60% of $COST’s valuation from an operating earnings/cashflow prospective.  Again probably not the most fair comparison but Ollies offers the better risk/return IMO.

8.      What’s the counter argument?

Bears point to $OLLI’s slowing earnings growth and lack of price movement as areas of concern.

Ollie’s does face a tough comp from last year, but after this upcoming quarter the comps become easier.  Furthermore $OLLI is starting to accelerate store openings, which should lead to increased revenues in the future.  In other words; yes earnings are slowing but only for a quarter or two and then it’s back to growth.  Furthermore, the price movement argument I find to be a silly.  I understand that momentum is a real factor, but I’m a long-term investor and plan on holding a company for at least 2 years.  It seems ludicrous not to buy a stock, because it’s been trading sideways for a year!

9.      Is the company unsexy, uncool, or contrarian?

Ollie’s has 7 analysts covering the stock, all of which have hold ratings out.  I have a sneaky suspicion that a couple of those analysts want to give $OLLI a buy rating, but don’t have to stones to stick out their neck on a relatively obscure name.  For this reason $OLLI is contrarian.  Additionally I would consider the stock to be uncool and unsexy, because well it’s a discount brick and mortar retailer.

10.  Is there something I think the market may be missing?

Looking purely at quantitively measures I would assume this company would be trading at a premium to the market.  It’s modestly more profitable than average, has zero debt, and is growing like gangbusters!  Mr. Market must be implying that last year’s earnings were an aberration.  In fairness they did significantly outperform years prior:

However the company is still rather small with a $5.52B enterprise value and only 397 stores open in 25 states.  It doesn’t take a genius to figure out that Ollie’s can keep growing at a high rate for years to come.  Operating income may be flat for 2022, but after that I would expect to see revenues continue growing at 10-15% per year, while maintaining good margins.

Final Thoughts:

              Below is the following guidance management gave in their last earnings report:

“Our new store model targets a store size between 25-35K square feet and an average initial cash investment of approximately $1M, which includes store fixtures and equipment, store-level and distribution centers inventory (net of payables) and pre-opening expenses.  We target new store sales of approximately $4M in their first full year of operations.”

              If we assume 10% net margins (which is conservative historically) that’s a 40% ROIC!!!!!  Truly unbelievable!  In fairness management did state new store sales begin tapering off after the first year.  Even still, if those numbers get cut in half that’s a 20% ROIC, which of course is elite!

               Moreover management put forth a goal to open 50 new stores in 2021.  At $4M per store that’s a $200M revenue increase, or expected top line growth of ~ 10.5% from last year.  With that said, it’s likely that margins contract a bit.  Assuming Ollie’s does $2B in sales over the next 12 months with a 11.5% operating margin, would yield a forward EV/EBIT of 24.  This is not super cheap, as I think a fair value would be around an EV/EBIT of 30, but does provide a ~25% margin of safety.

              In closing $OLLI is a very interesting investment idea.  I would like to see management provide more color in regards to capital allocation ie; share buybacks, paying off remaining debt, increased CAPEX, really anything!!!  However the stock could easily be a 10 bagger if held for long enough.  For these reasons I’m strongly considering starting a position, as $OLLI is a wonderful company at a good (not fair) price!

***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours.  This article is intended for educational purposes only and in no way should be interpreted as investment advice.