Ollie's Bargain Outlet: We Need A Breather, Run A House Position

We have traded Ollie's Bargain Outlet Holdings (NASDAQ:OLLI) stock several times in the last few years, but have not revisited the stock in a few months since our last buy call for a trade in March of last year. We enjoyed solid gains on that buy, nearly 50%, but now we think it is time to take profit. We do not rate shares a sell, but a hold at these levels. One good approach is to sell your initial investment plus 20% profit and let the gains run. Turn this into a long-term investment, something we encourage in our service. That said, it is a hold here because we think if we end up with a small recession that a store like this, discount merchandise reseller type stores, stand to gain as consumers trade down. Ollie's has had mixed performance in its operations depending on their merchandise buyout strategy and how well it passes to consumers. It is pretty volatile with some really strong quarters, and others which have been weak. Management has worked to expand operations and open up new shops and attract new customers. The company has battled through supply chain issues, labor shortages, and rising transport costs. Moreover, high inflation had been weighing on the company's ability to acquire bulk discount merchandise at favorable prices, and to sell it to customers. Ollie's discount pricing has worked and the company has grown market share, despite competing with both the big-box type stores and lower end dollar stores with overstock merchandise.

We strongly encourage waiting for a pullback as shares need a breather. We think share are more attractive in the $60s if not the $50's frankly, so after this run up, the valuation is a bit stretched for the growth being offered. revenues were up, and earnings performance was solid. The just reported Q2 was mixed, but there was strength relative to consensus. The company saw higher sales and earnings from a year ago, and while this was expected, it was stronger than anticipated, but the outlook is murky. Let us discuss.

Ollie's Bargain Outlet Holdings Q2 performance

In Q2, OLLI saw net income that tripled from a year ago to $42.2 million from $14.1 million. Net income per diluted share rose to $0.67 on an adjusted basis, which was a beat of $0.06 versus consensus, and up from $0.22 last year. EBITDA was up 146% to $64.0 million while margins increased 670 basis points to 12.4%.

This beat on earnings came on the back of a strong sales figure. Q2 sales were $514.5 million and beat consensus estimates by $15 million. Net sales jumped 13.7% year-over-year. Of course the one figure we watch more than any other is comparable sales. Comparable sales increased 7.9% from the prior year, which saw a 1.2% increase in comps. This is very healthy growth.

Forward view

The company is in a strong position, which is why we want to hold shares, but it is foolish not to book some profits for the next opportunity. However we want investors to hold a position due to the operational performance and expected trends. The CEO acknowledged this strength and stated:

We feel very good about the current trends and momentum of our business. With over 40 years of closeout buying experience and growing relationships across the industry, we are seeing very strong deal flow, and our customers are clearly responding. In the second quarter, comparable store sales increased 7.9%, with nearly 70% of our product categories contributing to the increase. On top of the strong deal flow, changes to our marketing program and investments in our people and supply chain are driving better execution and an even more exciting shopping experience for our customer. Given the better than expected performance in the second quarter and continued momentum in our business, we are raising our full-year guidance and remain confident in our ability to return to our long-term algorithm of double-digit sales growth, 40% gross margin, and double-digit EBITDA growth

That is right, it was a beat and raise with operating income now seen at $216 million at the midpoint for the year up from $211 with EPS at $2.70 up from $2.61. Still, the valuation is a bit stretched, even with this welcomed news, but the balance sheet is strong.

Ollie's Bargain Outlet Holdings' balance sheet

Make no mistake, the company has a healthy balance sheet. OLLI's cash and cash equivalents balance as of the end of Q2 was $310 million, up from $218 million at the end Q2 2022. OLLI had no borrowings outstanding under its $100 million revolving credit facility and $91.6 million of availability under the facility as of the end of the quarter. OLLI ended the period with total borrowings, consisting solely of finance lease obligations, of $1.7 million. That is hardly any debt. The company also spent $26 million on CAPEX and spent $16.7 million in cash to repurchase shares.

Valuation of Ollie's Bargain Outlet Holdings' stock

Growth is back, for now, but we argue that the pace will normalize and slow again. The value here does not justify the forward growth from here. OLLI did buy back shares but does not pay a dividend. That remains one slight negative. While the outlook for the year is strong, we are currently trading at a little under 28 times forward earnings estimates. This is expensive relative to many niche retailers. This valuation is just too expensive in our opinion. Our last buy call came in the high teens FWD multiples. Our early look for 2024 is for about 3.00 in EPS, which would be about 10% growth. A little pricey for 28 times 2023 EPS, and still the price is 25X 2024 EPS estimates. While the company is performing operationally well, we think a lot of this is priced in here. Take some profit.

Final thoughts

This is a great trading stock and we have enjoyed strong gains in a few months here. We think it is wise to run a house position here. The valuation is stretched, and we think shares need a breather.

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