Acquisition Of Former 99 Cents Only And Big Lots Stores Boosts Closeout Retail Growth

Key Takeaways

• Strategic real estate acquisitions and infrastructure investments drive growth potential and operational efficiency for Ollie's.
  
• Strong vendor relationships and diversification into consumables enhance revenue growth and market stability.
  
• The unpredictable closeout retail model and leadership risks could result in inconsistent financial performance, impacted by competition, reliance on consumables, and potential tariff increases.

Catalysts

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

• Expansion through acquisition of real estate opportunities, including former 99 Cents Only and Big Lots stores, suggests accelerated store openings and increased revenue potential due to a robust pipeline and front-loaded growth in fiscal 2025.
  
• Strong vendor relationships and increased deal flow from excess inventory position Ollie’s to capitalize on the closeout market's disruption, potentially improving gross margins and boosting future revenue.
  
• Infrastructure investments, such as a new distribution center in Illinois, enhance supply chain efficiency, allowing scalability to up to 750 stores which supports future revenue growth and operational efficiency.
  
• The diversification into consumables has increased demand, potentially attracting a broader customer base and increasing sales frequency, which could impact and potentially stabilize or grow revenues in the long term.
  
• Financial flexibility from a strong balance sheet supports strategic acquisitions and long-term growth initiatives, positioning Ollie’s to improve earnings and shareholder value through strategic investments and opportunistic buyouts.

Ollie's Bargain Outlet Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ollie's Bargain Outlet Holdings's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $282.5 million (and earnings per share of $4.46) by about December 2027, up from $207.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.7x on those 2027 earnings, down from 33.9x today. This future PE is greater than the current PE for the US Multiline Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Ollie's Bargain Outlet Holdings Future Earnings Per Share Growth

Risks

• The unpredictable nature of the closeout retail model creates operational challenges which could lead to inconsistencies in revenue and earnings over time.
  
• The CEO transition could introduce leadership risks that may impact strategic decisions and financial performance, potentially affecting net margins and earnings.
  
• Increased competition during store openings against liquidations from bankruptcies could lead to decreased market share and impact revenues.
  
• Greater reliance on consumables, which have lower merchandise margins, could pressure overall gross margins and reduce net income over time.
  
• Any potential increases in tariffs could raise import costs, which might compress margins and affect net earnings if not managed with adjusted pricing strategies.

Valuation

• The analysts have a consensus price target of $119.87 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 $64.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.0 billion, earnings will come to $282.5 million, and it would be trading on a PE ratio of 32.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $114.94, the analyst's price target of $119.87 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.