Is Ollie's Bargain Outlet a Bargain for Investors?

Ollie's Bargain Outlet Holdings, Inc. (NASDAQ: OLLI) is a discount retailer that thrives on acquiring excess inventory and selling it to consumers at substantial discounts. With a core business model built on offering "good stuff cheap," Ollie's has carved a niche in the competitive discount retail sector. Ollie's Bargain Outlet’s earnings report for the second quarter of 2024 (Q2 FY2024) provided valuable insights into its performance and potential for future growth.

Ollie's Stock: A Mixed Bag of Results

Ollie's financial report detailed mixed results in the second quarter of fiscal year 2024, showcasing strong revenue growth but falling slightly short of Ollie’s analyst community expectations on earnings. Revenue was up 12.4% year-over-year, reaching $578.4 million, surpassing analyst estimates by 3%. This growth underscores the company's ability to capitalize on consumer demand for discounted goods in the current economic climate.

However, Ollie's non-GAAP earnings per share (EPS) came in at $0.78, slightly below analyst expectations of $0.79. This minor miss might have contributed to the stock's decline of over 8% immediately following the earnings report's release. Despite the slight miss on earnings, Ollie's maintained a positive outlook for the rest of the fiscal year, raising its revenue guidance to $2.28 billion at the midpoint, up from its previous estimate of $2.27 billion. Additionally, the company projected full-year non-GAAP EPS of $3.26 at the midpoint, indicating continued confidence in its growth trajectory.

Beyond the headline numbers, Ollie's demonstrated a steady performance in its gross and EBITDA margins. The company reported a GAAP gross margin of 37.9% in Q2 FY2024, consistent with last year's same quarter. The EBITDA margin remained steady at 12.9%, highlighting the company's ability to control costs and maintain profitability. The company ended the second quarter with 525 stores, representing an increase from 482 stores in the same quarter last year. This aggressive expansion strategy has contributed to the company's strong revenue growth.

A Closer Look at Ollie's Sales Growth

The consistent growth in Ollie's sales is a testament to its effective expansion strategy and ability to attract and retain customers. Over the past five years, the company has achieved an annualized revenue growth rate of 10.6%. This sustained growth results from a combination of factors: opening new stores in underpenetrated markets, increasing sales at existing stores, and effectively leveraging its supply chain efficiencies.

However, while Q2 FY2024 showed a robust 12.4% YoY growth in revenue, the company anticipates a slight deceleration in the next 12 months, projecting an 8% YoY increase in sales. This expected slowdown is likely due to several factors, including the intensifying competition from online retailers and evolving consumer preferences. As online shopping continues to gain traction, discount retailers like Ollie's must adapt to compete effectively.

Analyzing Ollie's Same-Store Sales Growth

Same-store sales growth is crucial for assessing a retailer's ability to attract and retain customers within its established stores. Over the past two years, Ollie's has demonstrated a steady average same-store sales growth rate of 4.6%. While this indicates positive demand within its existing stores, the company experienced a deceleration in Q2 FY2024, with same-store sales rising 5.8% YoY, compared to the 7.9% YoY growth achieved in the same quarter last year. This slowdown may reflect the increasing competitive pressures within the discount retail sector and the broader economic environment.

Ollie's Growth Strategy

Ollie's expansion strategy is centered on aggressively opening new stores in underpenetrated markets. This strategy aims to leverage the company's strong brand recognition and established operational model to expand its reach and capture new customer segments. Additionally, the company is focusing on enhancing its supply chain efficiencies to optimize inventory management and reduce costs. This includes exploring strategic partnerships and implementing innovative technology solutions.

Moreover, Ollie's recognizes the importance of digital presence in today's retail landscape. While the company primarily operates through brick-and-mortar stores, it is investing in initiatives to enhance its online presence and improve customer experience. This includes strengthening its online platform, expanding its e-commerce offerings, and optimizing its customer service channels.

Challenges Facing Ollie's

While Ollie's has demonstrated impressive growth, it's essential to acknowledge the risks associated with investing in the company. The company's success hinges on its ability to secure attractive deals on excess inventory, a process that can be highly competitive and challenging. Volatility in the wholesale market can impact the company's margins and profitability.

Furthermore, Ollie's operates within a highly competitive discount retail landscape. The rise of online retailers like Amazon (NASDAQ: AMZN) and the increasing popularity of e-commerce present significant challenges. These online competitors offer a more comprehensive selection of products, often at lower prices, and provide greater convenience to customers. Ollie's must effectively adapt to this evolving market to remain competitive.

Another significant risk factor for Ollie's is its exposure to economic downturns. During periods of economic uncertainty, shoppers tend to reduce consumer discretionary spending, which can impact demand for discount goods. Ollie's is vulnerable to these economic cycles, as its business relies heavily on customer spending on non-essential items.

A Balanced Perspective

Ollie's Bargain Outlet Holdings continues to demonstrate strong revenue growth and expansion potential, driven by its unique value proposition and aggressive growth strategy. The company's commitment to offering "good stuff cheap" resonates with value-conscious consumers, and its expansion into new markets will likely contribute to further growth in the coming years. However, investors must be mindful of the risks associated with investing in Ollie's, including the competitive pressures from online retailers, the impact of economic downturns, and the challenges of securing attractive deals on excess inventory. Ultimately, Ollie's represents an intriguing investment opportunity for those seeking exposure to the discount retail sector.

The article "Is Ollie's Bargain Outlet a Bargain for Investors?" first appeared on MarketBeat.