Sustained Sales Growth And Critical Investments Propel Retail Innovation And Market Expansion

Key Takeaways

• Sustained operational efficiency and strategic investments indicate a solid foundation for future growth, potentially improving both revenue and net margins.
• Expansion strategies and the introduction of a co-branded Visa credit card for loyalty members are likely to enhance customer loyalty and market share.
• Risks include competitor liquidation impact, higher marketing and labor costs, supply chain vulnerability, and potential strain from aggressive expansion and acquisitions.

Catalysts

About Ollie's Bargain Outlet Holdings

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

What are the underlying business or industry changes driving this perspective?

• The company is executing at a high level, with nine consecutive quarters of comparable store sales growth, indicating sustained operational efficiency and customer responsiveness which is likely to impact revenue positively.
• Strategic investments in supply chain, marketing, and technology have led to better productivity and consistent financial results, suggesting a strong foundation for future growth, possibly affecting both revenue and net margins.
• Acquisition opportunities, such as the 99 Cents Only Stores, and a targeted expansion to over 1,300 stores in the U.S., are set to accelerate growth and may lead to increased market share, influencing future revenue.
• The introduction of a co-branded Visa credit card designed for Ollie's Army loyalty program members could enhance customer loyalty and spending, which may positively impact revenue and net margins through higher sales and potentially greater efficiency in marketing spending.
• The operational shift to include more full-time associates in select stores aims at reducing turnover and improving store execution. This could lead to higher productivity rates and enhanced store performance, potentially improving earnings by lowering operational costs and enhancing sales.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ollie's Bargain Outlet Holdings's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $250.7 million (and earnings per share of $3.97) by about September 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 29.8x on those 2027 earnings, up from 27.0x today. This future PE is greater than the current PE for the US Multiline Retail industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The potential impact from competitor liquidation sales might negatively affect Ollie’s sales and margins in the short term, as it could disrupt the consumer spending patterns towards Ollie’s.
• The introduction of a co-branded credit card could increase administrative and marketing costs, impacting net margins if the uptake or utilization of the credit card does not meet expectations.
• A higher mix of full-time associates being tested could lead to increased labor costs, which may pressure operating margins if not offset by improved store execution and productivity.
• The reliance on deal flow from closeouts and overstocks as a primary source of inventory could risk revenue stability if there are supply chain disruptions or reduced availability of desirable closeout merchandise.
• Aggressive expansion plans, including opening new stores and integrating acquired 99 Cents Only Stores, might strain operational execution and capital resources, impacting earnings if the new stores do not perform as expected or if integration challenges arise.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $102.2 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 $250.7 million, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $89.56, the analyst's price target of $102.2 is 12.4% 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.