2024-01-06 02:00:39 ET
Summary
- OLLI reported strong growth in Q3 2023, with sales exceeding expectations and gross margin increasing.
- I expect OLLI to easily meet its FY23 guidance and could potentially outperform it.
- OLLI's attractive assortment and ability to capitalize on closeout deals position it well for future growth.
Summary
Readers may find my previous coverage via this link . My previous rating was a buy as I believed Ollie's Bargain Outlet Holdings (OLLI) near-term performance was going to outperform expectations, continuing the momentum it saw in 1Q23. I am reiterating my buy rating for OLLI as the business continues to perform positively in terms of store growth and comparable sales growth. I expect OLLI to continue benefiting from the current macro environment, making it a prime time to open more stores to scale even larger.
Financials/Valuation
OLLI reported 3Q23 net sales growth of 14.8% y/y to $480.1 million, above consensus of $469 million. The strong growth outperformance was driven by strong comparable store sales growth of 7% and contributions from new stores (OLLI added 60 stores in the quarter, which equates to 12% growth). The great performance did not stop at the top line. OLLI gross margin also increased 105 bps y/y to 40.4%. Favorable supply chain costs were the main factor driving the increase in gross margin. Consequently, OLLI reported EPS of $0.51, representing 38.9% growth from 3Q22 and higher than consensus estimates of $0.45.
Based on author's own math
Based on my view of the business, OLLI should be able to meet management FY23 guidance very easily, given the strong momentum so far. While my model follows management's guidance, I note that OLLI could outperform guidance, as I suspect management is downplaying its 4Q23 guidance (more below). For FY24, I expect growth to taper down to 10% as OLLI loses the benefits of the current trade downturn, as I believe the economy will gradually recover. However, because of the larger scale, I believe margins will continue to improve. I benchmarked FY24 margins to FY18 levels, implying a gradual recovery to pre-covid levels. I am not changing my view on what valuation OLLI should trade, as I still expect valuation to trade back to 30x forward PE, which is where OLLI has historically traded on average. Over the past 10 years, there have only been a few moments where OLLI traded at the current level, and it has recovered to the average all the time. I expect the same to happen.
Comments
Without a doubt, 3Q23 was a splendid quarter and I have high hopes for this growth momentum to continue into 4Q and FY24. The main reason I am confident is because management has noticed a strong flow of closeout deals, and new opportunities are being created as manufacturers innovate, change product sizes and packaging, and compete for shelf space in retail. The implication of OLLI's robust closeout deal flow is that they were able to acquire a desirable assortment of brand-name products, which they then sell to traditional retailers at steep discounts. This, in my opinion, puts OLLI in a strong position to capitalize on the present climate of value-conscious consumers. As a positive sign of the continuing trade downtrend, management also noted robust growth from clients with household incomes exceeding $150,000.
Looking ahead, I expect OLLI's attractive assortment will continue to drive demand, and given management commented that they entered 4Q with momentum (remember that 3Q23 comparable sales growth was 7%), I believe management's 4Q23 comparable sales guidance of 3.0% could be conservative as it implies a sequential slowdown. Specifically, management raised FY23 comparable sales growth expectations to 5.3%-5.6% (a step up from the prior 4%-4.5% guide). This implies 4Q comparable sales growth of 2.5% to 3.5% (3% at the midpoint). This appears to be counterintuitive to what management is saying, where they noted consumers are looking for ways to save money on branded merchandise and the fact that business is supported by continued tailwinds from strong deal flows.
The closeout deal flow is very strong. Consumers remain under pressure and we are looking and are looking for ways to save money on branded merchandise they need and want in their homes. Source: 3Q23 earnings
The way I see it, the OLLI value proposition and scale advantage are going to further shine in the coming quarters. As consumers remain value-oriented, this drives traffic to OLLI, which enables OLLI to scale even larger. Scale is important because it enables OLLI to drive a virtuous cycle of improved inventory procurement opportunities and sales growth. As of 3Q23, OLLI has 505 stores, and management plans to open an additional 7 stores in 4Q23, bringing the total store count to 512. On a y/y basis, this is 9.4% growth. I believe the rate at which OLLI is opening its stores is pretty good evidence that it is seeing positive demand traction, and I think now is the best time for OLLI to grow its store base. My reasons are:
- There is good visibility to demand (trade down and consumers being value-oriented);
- A larger scale built today will enable the business to be more competitive in the coming economic upturn. Management noted that as the company scales, they are receiving better access to deals across categories and vendors.
- OLLI has a strong balance sheet. As of 3Q23, OLLI has $263.9 million of cash and equivalent securities with no debt. In fact, the OLLI balance sheet is in such a good position that it can continue to facilitate capital returns to shareholders (OLLI repurchased 142K shares for $10.8M and has $98.4M of remaining capacity under its current share repurchase program).
Risk & Conclusion
Management might have overestimated the consumer spending strength, which could be a disaster for medium-term growth, as OLLI opened too many stores in recent periods. This will impact revenue growth and earnings growth as revenue is not able to keep up with the growth in fixed costs.
I maintain my buy rating for OLLI due to its strong performance and growth momentum. The company's robust 3Q23 results surpassed expectations with notable store and comparable sales growth, along with improved gross margins. OLLI's ability to capitalize on closeout deals and cater to value-conscious consumers positions it favorably, reflected in management's positive outlook and raised comparable sales guidance for FY23. With a debt-free robust balance sheet, I believe OLLI is in a very good shape to continue investing for growth and returning capital to shareholders.
For further details see:
Ollie's Bargain Outlet Holdings: Strong Performance So Far, Momentum Should Continue