Acquiring Big Lots Leases And Launching Stores Will Boost Reach

Key Takeaways

• Acquiring store leases from Big Lots and repurposing assets boosts market share and profitability, supporting long-term growth.
  
• Efficient buying model and private label credit card drive revenue consistency, enhance customer loyalty, and strengthen competitive position.
  
• Operational challenges, cost pressures, and tariff uncertainties could strain Ollie's Bargain Outlet's near-term earnings and financial health, despite potential long-term benefits.

Catalysts

Operates as a retailer of brand name merchandise in the United States.

• Ollie's acquisition of 40 additional store leases from Big Lots, which are located in existing trade areas and have below-market rents, could lead to increased profitability and expanded revenue due to boosted market share and customer base.
  
• The company's ability to capitalize on store closures and bankruptcies by acquiring abandoned assets is expected to fortify its competitive positioning, resulting in long-term revenue growth and improved net margins.
  
• The flexibility of Ollie's buying model allows it to navigate uncertainties in the closeout market effectively, ensuring a stable supply of merchandise and contributing to consistent revenue and stable margins.
  
• The accelerated store openings, with approximately 75 new locations planned, are anticipated to drive significant revenue growth, while the potential for market share gains from Big Lots closures could provide additional sales boosts.
  
• The launch of a private label credit card, which has shown an increase in basket sizes, could enhance revenue and customer loyalty, providing a forward-looking catalyst for earnings growth.

Ollie's Bargain Outlet Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ollie's Bargain Outlet Holdings's revenue will grow by 12.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $296.1 million (and earnings per share of $4.73) by about April 2028, up from $199.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, up from 31.7x today. This future PE is greater than the current PE for the US Multiline Retail industry at 13.4x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Ollie's Bargain Outlet Holdings Future Earnings Per Share Growth

Risks

• The acquisition of Big Lots store leases involves significant pre-opening expenses and dead rent, which could pressure near-term earnings despite potential long-term benefits, affecting overall net margins.
  
• The reliance on Big Lots locations for accelerated growth may introduce operational challenges, reminiscent of past supply chain issues, posing risks to efficient revenue generation.
  
• Tariff disruptions and uncertainties in direct imports from China, comprising a significant portion of the business, could lead to increased costs and potential revenue impact if prices are not managed effectively.
  
• The pressure on big-ticket item sales, amid a consumer environment under financial strain, might hinder broader revenue growth and affect the sales mix, impacting overall earnings performance.
  
• Increased investments in store openings and new initiatives, like the private label credit card, could strain resources and elevate costs, possibly affecting net income and overall financial health if expected returns are delayed.

Valuation

• The analysts have a consensus price target of $125.333 for Ollie's Bargain Outlet Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $296.1 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of $103.49, the analyst price target of $125.33 is 17.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.