For the present circumstances, you couldn’t get a more relevant industry than the discount retail ecosystem, which makes sector player Ollie’s Bargain Outlet (NASDAQ:OLLI) a must-watch stock. Sure, we can talk about the winter holidays; that’s always going to boost retail sentiment. However, the real reason why OLLI stock symbolizes a bullish idea is that the company’s underlying business model actually works.
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Earnings Showcase is Just the Beginning for OLLI Stock
You can speculate on whether a business will eventually do the right thing. Or, in the case of OLLI stock and the underlying retail enterprise, you can prove to investors that you know what you’re doing. If anybody had doubts, those concerns likely evaporated when Ollie’s released its third-quarter earnings report.
As TipRanks reporter Kailas Salunkhe mentioned, the closeout merchandise retailer posted sales of $480.1 million, beating the consensus target by nearly $10.6 million. Just as well, the figure represented a 14.8% year-over-year lift. On the bottom line, Ollie’s delivered earnings per share of $0.51, exceeding the consensus view by $0.06. Following the encouraging report, OLLI stock popped higher.
And the print continued to get better as you read on. For example, comparable store sales increased by 7%. Further, the company expanded its total store count by approximately 9% to 505 locations. As Salunkhe wrote, “The rise in revenue, coupled with a 100 basis-point expansion in operating margin, enabled the company to increase its net income by 37.8% year-over-year to $31.8 million.”
Looking ahead, management anticipates that revenue for Fiscal Year 2023 will land between $2.097 billion and $2.104 billion. This range compares favorably to the prior estimate of $2.076 billion to $2.091 billion. Also, EPS should land between $2.77 and $2.83 versus the prior outlook between $2.65 and $2.74.
Fundamentally, the biggest takeaway arguably centers on consumers’ willingness to open their wallets for Ollie’s. With inflation still very much elevated against pre-pandemic norms, the company is grabbing as much market share as possible. That’s huge for OLLI stock.
Ollie’s is All About Margins, Margins, Margins
If you need to wrap up the bullish case for OLLI stock in three words, it would be the same word repeated three times: margins. Specifically, the discount retailer has witnessed a recovery of its gross margin following a rough cycle in Fiscal Year 2022 (ended January 2023). Moving forward, OLLI stock leverages a key advantage over rivals.
As multiple financial resources pointed out, Ollie’s gross margin slipped to a five-year low of 35.9% at FY23 end. However, in the most recent quarter, its gross margin shot up to 40.4%. Roughly speaking, a gross margin of 40% has been the average during the company’s pre-pandemic years, and that translates to Ollie’s not having to rely on margin-killing discounts to get people through its doors.
In sharp contrast, rivals like Dollar General (NYSE:DG) offer a similar business model but at the cost of slowly eroding its gross margin. Sure, it, too, is getting people through the door. However, the business risks unsustainability if it can’t protect its profitability.
Indeed, gross margins are practically everything for discount retail investments like OLLI stock. That’s because this metric needs to be as high as possible due to the enormous operating expenses: salaries, location upkeep, utilities, overtime for off-business-hour restocking cycles, etc. By the time you get to the bottom line, you’re dealing with razor-thin margins.
A Deceptively High Valuation
Now, if there is a glaring reason why an investor might not consider OLLI stock, the discussion may center on valuation. More to the point, OLLI trades at a trailing-year earnings multiple of 28.4x. By strictly comparing the numbers, DG appears to be a relatively discounted idea. The market prices shares at only 14.6x earnings.
However, an argument can be made that OLLI stock symbolizes a deceptively high multiple. No, it’s not a discount, but the company clearly resonates with its core consumers, and it achieves this resonance without killing its margins. That’s worth the premium in the multiple, based on the available data.
Is OLLI Stock a Buy, According to Analysts?
Turning to Wall Street, OLLI stock has a Moderate Buy consensus rating based on eight Buys, three Holds, and one Sell rating. The average OLLI stock price target is $88.25, implying 20.9% upside potential.
The Takeaway: OLLI Stock is Worth the Price of Admission
Ollie’s Bargain Outlet is a discount retailer that is poised to do well in the winter holidays and beyond. The company’s strong financial performance, including a recent increase in its gross margin, suggests that it is well-positioned to compete in the retail sector. While the valuation of OLLI stock may appear high at first glance, its strong fundamentals suggest that it’s worth the premium.
