OLLI Needs to Get Its Business Strategy Right

Ollie’s Bargain Outlet Holdings Inc. (OLLI) has plenty of problems these days that extend beyond supply chain bottlenecks.

The company has reported a streak of disappointing financial results in recent quarters, including one last week.

Net sales decreased 7.5% in the third quarter from the prior year to $383.9 million. In addition, comparable store sales decreased 1.3% from the third quarter of Fiscal Year 2019. Over the same period, operating income decreased 47.7% to $45.7 million, and operating margin decreased 610 basis points to 7.0%.

Wall Street didn’t like what it saw, sending the company’s shares sharply lower, following its financial report.

I remain bearish on the stock. (See Analysts’ Top Stocks on TipRanks)

Management’s Take

Management attributes the poor financial performance to supply chain woes.

“Our third-quarter performance was impacted by greater than anticipated supply chain-related headwinds, leading to lower than expected results. While we believe that many of the factors impacting us are transitory in nature and we are taking proactive steps to navigate these challenges, these pressures have continued to impact our business in the fourth quarter,” said John Swygert, President, and Chief Executive Officer.

Meanwhile, he remains bullish about the company’s future, announcing another round of share buybacks, “As we look past 2021, we are confident that we will continue to grow well into the future with the significant white space in front of us and deliver strong growth in both our top and bottom lines as we have for almost 40 years.” Mr. Swygert continued, “Reflecting confidence in our business, we are pleased to announce that our Board of Directors has authorized an additional $200 million share repurchase program.”

That echoes a similar message following a disappointing financial report in the previous quarter. “We continue to face strong year-over-year comparisons in the third quarter as we, once again, delivered record sales and profits last year,” Swygert said.

The Perfect Short?

Quo Vadis President, John Zolidis, a long-term bear on the stock, thinks that Ollie’s shares are a “perfect short.” He further feels that OLLI’s problems are of its own making. “Further, based on last night’s call, we believe that management is still not aware of what it is doing wrong,” he said.

Zolidis further explains, “Instead of looking at its retail format and execution (closeouts are plentiful! they said), management blamed the supply chain environment and made the improbable case that its customer is under financial pressure.”

Meanwhile, management is committing several strategic mistakes, according to Zolidis, like underinvesting in its stores. “If the supply chain mess is not enough evidence, check out OLLI’s D&A, which is an amazing $1.40 per square foot, representing 1% of revenues,” he says. “As a point of reference, Dollar General, which is not exactly Nordstrom, has D&A equal to $4.88 per square foot, more than 3x higher than OLLI.”

In addition, it is “declaring victory on raising prices with negative 15% comps and declines in loyalty program members per average store.” That’s the wrong strategy for a discounter, as it will end up shrinking its market share in the long run.

Wall Street’s Take

Turning to Wall Street, OLLI has a Hold consensus rating, based on four Buys, four Holds, and two Sells assigned in the past three months. The average Ollie’s Bargain Outlet price target of $66.90 implies 33.8% upside potential.

Analyst price targets range from a low of $45 per share to a high of $98 per share.

The Bottom Line

Olli needs to get its business strategy right: Invest in its stores and price its products competitively to maintain market shares. Meanwhile, the analyst community must get its valuation models right in valuing the discount retailer.

Disclosure: At the time of publication, Panos Mourdoukoutas did not have a position in any of the securities mentioned in this article.