[Sold as of Q3 2023 for a total gain of +44%. This thesis was written up retrospectively on the date below and refers to prices on Apr. 1, 2022.]
Date: Jul. 24, 2023
Ollie's Bargain Outlet is a discount retailer with an impressive growth story: steadily rising revenues, no debt, and satisfactory free cash flows. It is my view that the cash flows are likely to increase with time as the company claims that new stores earn back their fixed costs after only 2 years. Ollie's leases 476 locations across 29 states in the southeastern US, and intends to expand to 1,000 locations.
I discovered this company in March of 2022 where the stock tumbled from a high of $110 to $39 after a series of disappointing earnings, citing lower demand as the pandemic stimulus ended and consumer spending cooled. The market cap of the company fell from a peak of $7B in 2020 to a bottom of $2.5B in 2022.
It is possible investors valued OLLI as a defensive retailer, and expected revenues and earnings to continue undisturbed coming out of the pandemic. However, the experience of last year has given strong evidence that Ollie's is in fact highly cyclical, and its revenue and profits will wax and wane with consumers' spending habits. This information was previously unavailable as OLLI went public in 2015 and has only shared revenues going back to 2010, leaving out the story during the 2007-2008 recession.
The absence of debt is a positive, as Ollie's competitors (Big Lots, Five Below, Dollar Tree, and Dollar General) all have significant leverage. Ollie's is the smallest of the bunch, but has shown great prudence by taking on no debt, and has funded its operations with its own cash flows.
At $43 per share, this seemed like a fair deal. At the current price of $72, I may be paying too much for the growth story, and I believe the stock has run away from the earnings somewhat. Given the higher price, I believe there are better bargains out there with a bigger margin of safety.