With the recent market pullback, shares of growing retailer Ollie’s Bargain Outlet (OLLI) are priced for a solid return in 2019. The firm was founded in 1982 in Harrisburg, Penn. Since then, the company has expanded to more than 300 stores in the eastern U.S., observes Doug Gerlach, editor of SmallCap Informer.
The stores sell an assortment of merchandise: housewares, food, bed and bath, books, floor coverings, electronics, and toys. The chain’s slogan is “Good Stuff Cheap,” and stores offer a “treasure-hunt shopping experience” where customers never know exactly what they might find.
Much of Ollie’s shelves contain close-out merchandise acquired from other retail stores that have shut down. Recent closures of Toys-R-Us and Sears are the kinds of opportunities that Ollie’s likes to take advantage of, taking on large inventories all at once.
Ollie’s offers a loyalty program for customers, “Ollie’s Army,” which provides incentives, discounts, and brand awareness. Members spend 40% more than non-members per shopping trip, and accounting for more than 70% of sales in fiscal 2017.
While many retail companies are considered cyclical, the discount stores industry is considered defensive. Customers often flock to discount retailers during tough economic times, preferring to shop where their dollars go further.
Since 2013, Ollie’s has grown revenues at a practically straight-lined 18.7%. EPS have grown at a 41.5% annualized pace since 2014 on the strength of continuous margin improvement. Ollie’s claims that the U.S. can support 950 stores, and their two existing distribution centers can support up to 400 stores.
The real estate pipeline for Ollie’s is robust given the disruptions caused in the retail sector by e-commerce, giving the company access to many prime locations given up by other stores. Indeed, the company recently purchased of 12 former Toys “R” Us properties.
We believe Ollie’s will continue to grow revenues at least 20% annually on average over the next five years, with margin expansion fueling EPS growth of 25% a year. Cash flow is good and the balance sheet looks healthy.
Ollie’s current trailing P/E is 28. Capping our future high P/E at 25 may be too conservative, but a high price of $180 is possible. On the downside, we see risk to $55. The reward/risk ratio is 11:1 from the high to the low price, with a 22.5% projected total annualized rate of return.
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