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Bear of the Day: Ollie's Bargain Outlet (OLLI)

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Ollie’s Bargain Outlet (OLLI - Free Report) is a Zacks Rank #5 (Strong Sell) that is a value retailer of brand name merchandise at reduced prices. The company offers housewares, bed and bath, food, floor coverings, health and beauty aids, books and stationery, toys, and electronics; and other products, including hardware, candy, clothing, sporting goods, pet and lawn, and garden products. 

The stock performed well during the pandemic, but has missed earnings expectations five out of the last six quarters. This has helped the stock fall over 50% from all-time highs seen in 2020.

While the stock has rallied off 2022 lows, investors might want to be cautious ahead of the next earnings report in March. Estimates are headed lower due to a challenging operating environment.

About the Company

Ollie’s is headquartered in Harrisburg, PA. The company was founded in 1982 and employs 4,700 people. As of Oct 2022, the company operated 463 outlets in 29 states, primarily in the eastern half of the country.

Ollie’s offers products under the following merchandise categories: Housewares (14.9% of 2021 Net Sales), Bed and bath (10.7%), Food (10.3%), Floor coverings (8.6%), Books and stationery (7.9%), Toys (6.4%), Health and beauty aids (5.9%). The remaining sales fit under the “Other” category and include hardware, candy, clothing, sporting goods, pet products, luggage, automotive, seasonal, furniture, summer furniture and lawn & garden.

The company boasts its Ollie’s Army loyalty program. This is a free membership in which you receive special discounts through both regular mail and email. The membership includes a point system in which you earn pone point for every dollar spent.

The company isvalued at $3.5 billion and has a Forward PE of 24. OLLI holds Zacks Style Scores of “F” in Growth and Value. The stock pays no dividend.

Q3 Earnings

The company last reported EPS on December 7th, missing expectations by 10%. Ollie’s reported Q3 at $0.37 v the $0.41 expected and missed on revenues. Despite sales trends improving in October, the company guided Q4 lower and now sees $0.78-.083 v the $0.95 expected.

Ollie's cut FY22 to $1.57-$1.62 v the $1.78 expected and sees same store sales down 3.8%.

Year over year margins were lower and inventories were up 11%. Management commented that they are pleased with the sales trends, but they are challenged by the highly promotional and inflationary environment.

To sum the quarter up the sales are there, but costs to get those sales, as well as inflationary costs, are eating into the bottom line.

Estimates

After the quarter, analysts lowered their estimates and cut their price targets. Over the last 60 days, there have been seven revisions to the downside for the current year. Earnings forced JPMorgan to immediately maintain its underweight and cut their price target from $54 to $42.

Over the last 60 days, estimates for the current have gone from $0.95 to $0.80, a drop of 15%. For next quarter they have fallen 9%, dropping from $0.53 to $0.48.

Looking ahead to next year, analysts have dropped their numbers 11% over the last 60 days, from $2.66 to $2.36.

Technical Take

Bulls have seen a 30% rally off the lows set in late December. This is partially due to the big market move higher since the start of 2023. But it also has to do with technical breaks of the 200-day MA, which caused a short squeeze.

This issue the bulls will have over the next month will be that earnings report due in March. If price gets back under the $52 level, the bears gain back control. If this happens before earnings, the bulls could be at risk of seeing new lows on a bad earnings report.

A move over the November high of $63 and the stock will look pretty good. So investors should expect a big technical fight between the bulls and the bear over the next month. 

Summary

The current atmosphere is not good for deep discount retailers that thrive on margins. In an inflationary environment, margins contract and the company will become less profitable. While inflation has come in, it could be a while before Ollie’s starts to see improvement.

For those interested in the space, a better option in the sector might be Albertsons (ACI). The stock is a Zacks Rank #2 (Buy) that is coming off a 30% EPS surprise to the upside.   


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