Bargain Outlet's Bold Expansion And Tactical Moves Set Stage For Long-Term Growth

Key Takeaways

• Expansion plans and strategic buyouts aim to significantly increase Ollie's store count and boost market presence in key regions.
  
• Operational improvements and new marketing strategies target productivity gains, customer loyalty, and sustainable sales growth.
  
• Pressure on gross margins and consumer stress in big-ticket categories, along with high capital expenditures for expansion, could strain profitability and growth.

Catalysts

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

• Ollie's Bargain Outlet plans to expand its store count from 525 to over 1,300 in the long term, which would significantly increase its revenue generation capacity.
  
• The operational improvements in supply chain efficiency and the opening of a new distribution center in Illinois are expected to enhance productivity and margin improvement.
  
• The buyout of locations from 99 Cents Only Stores represents an opportunity to accelerate store growth, potentially boosting revenue and market presence, particularly in strong markets like Texas.
  
• The introduction of a co-branded Visa credit card aims to increase customer loyalty and spending, likely boosting revenue and enhancing net margins by driving higher basket sizes.
  
• Enhanced marketing efforts targeted towards acquiring and retaining younger and higher-income customer demographics could sustain comp store sales growth and improve earnings over time.

Ollie's Bargain Outlet Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ollie's Bargain Outlet Holdings's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $253.4 million (and earnings per share of $3.96) by about November 2027, up from $203.6 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 32.0x on those 2027 earnings, up from 27.8x today. This future PE is greater than the current PE for the US Multiline Retail industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Ollie's Bargain Outlet Holdings Future Earnings Per Share Growth

Risks

• The potential impact of competitor liquidation sales could temporarily affect sales in the surrounding areas, possibly impacting revenue growth in the near term.
  
• The mix shift towards lower-margin products like air conditioners and consumables in Q2 has put pressure on the gross margin rate, which may continue to affect overall profitability if sustained.
  
• Big-ticket items like flooring, mattresses, and furniture are experiencing weak sales across the industry, indicating consumer stress that could affect Ollie's ability to grow revenues in these categories.
  
• The expansion and opening of new stores, while a growth opportunity, requires significant capital expenditures, which could strain operating margins if these new locations do not perform as expected.
  
• Hyperlocal issues with shrinkage have plateaued but remain above pre-pandemic levels, and if not controlled, could continue to impact net margins negatively.

Valuation

• The analysts have a consensus price target of $103.47 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 $115.0, 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 $2.9 billion, earnings will come to $253.4 million, and it would be trading on a PE ratio of 32.0x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $92.15, the analyst's price target of $103.47 is 10.9% 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.