Ollie's Bargain Outlet Holdings: Hoping To See Momentum In Recovery

Summary

Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) is a retail company that operates stores selling name-brand items at low, closeout prices. Products offered by the company include goods such as food, cleaning supplies, books, office supplies, and more. There is plenty of room for OLLI to expand into new and existing markets, in my opinion. OLLI is in a good position to continue gaining market share thanks to its already substantial and expanding brand recognition and the buoyant purchasing climate that has ensued in the wake of significant retail dislocation. Although I think OLLI has a sustainable business model and growth story, I anticipate there will be some unpredictability in the near term. I believe this uncertainty is well reflected in management guidance as they anticipates to open 44 new stores, which is lower than its long-term target of 50-55 per year. Additionally, gross margin is also expected to remain below its historical average. This stock is on hold until there is clear evidence that the turnaround is gaining traction.

4Q22 results/1Q23 performance so far

OLLI reported an adjusted EPS of $0.84 for 4Q22, with the SSS beat being partially offset by another weak gross margin performance, leading to an adjusted EBIT margin of 12.1%. Management has projected FY23 EPS of $2.49-$2.58 based on same-store sales growth of 1%-2%, the opening of 44 net new stores, a gross margin of 39.3%-39.6%, and an operating income margin of 10.2%-10.6%. In addition, management provided some commentary on recent trading performance, in which they noted the company's current positive momentum. That means quarterly SSS is currently outpacing the 3% growth seen in 4Q22.

Operational updates

High-income customers continue to trade down to OLLI, On the other hand, the trend of low-income customers leaving OLLI seems to have stabilized and is no longer decreasing at a significant rate as it was before. I believe there's an opportunity for management's FY23 guidance to increase if this pattern holds, as trade down trends are more than offsetting trade out trends. I also like to highlight that OLLI's deals continue to be a primary driver of demand, and that the company is making strategic price investments to motivate customers. Meanwhile, the company's compelling value proposition has the potential to draw in more affluent customers looking to save money in the current inflationary climate. Management has also noted that there are enticing opportunities available from both new and existing suppliers, making the current closeout environment one of the strongest in a long time. I believe OLLI will continue to exercise restraint and discretion when making purchases, despite management's comment that there is a great deal of variety in the bargains they are seeing in such diverse categories as health and beauty, home goods, clothing, and so on. All in all, OLLI's size and established vendor relationships put it in a prime position to reap the benefits of the current closeout climate.

Guidance

After experiencing instability for a couple of years due to repeated lockdowns, the management's guidance for FY23 indicates a consistent trend of improvement. The guidance suggests a return to pre-covid NSP levels by FY23, with a steady recovery aided by consumers' favorable attitude towards "value buys," strong performance in non-discretionary areas, and opportunities in brand building and marketing. The management's forecast for FY23 also predicts an increase in gross margin of 320-340 basis points, to 39.1-39.3%. I expect a stronger improvement in 1H23 as OLLI recovers from the impact of higher supply chain costs in 2022, followed by a more gradual expansion in 2H23 as supply chain costs return to normal. If there are no further disruptions in the supply chain, the management expects GPM to increase to approximately 40% in the near future. However, the EBIT margin appears to be structurally eroded as the management believes that SG&A has increased structurally due to wage and utility increases.

Conclusion

OLLI operates in a favorable closeout environment and has a compelling value proposition that has allowed it to continue gaining market share. While there may be some unpredictability in the near term, management's FY23 guidance appears to embed a steady trend of recovery, and the company's size and established vendor relationships put it in a prime position to reap the benefits of the current closeout climate. I think the potential for more affluent customers looking to save money in the current inflationary climate could further boost demand. Although OLLI's gross margin is expected to remain below its historical average, gross margin should see an improvement in FY23. Overall, the stock is on hold until there is clear evidence that the turnaround is gaining traction.