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The Science of Hitting
The Science of Hitting
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Ollie's: 'Our Best Quarterly Results in Our 38-Year History'

A look at the discount retailer's second-quarter results

September 09, 2020 | About:

Ollie's Bargain Outlets (NASDAQ:OLLI), a leading discount retail chain that primarily operates in the eastern United States, recently reported financial results for the second quarter of fiscal 2020.

For the quarter, revenues increased 59% year-over-year to $529 million, largely due to a 43% increase in comparable store sales (double digit growth for both transactions and average ticket), as well as a 10% increase in the unit count to 366 stores. As President and CEO John Swygert noted, the record results reflected Ollie's ability to offer the right products at great prices during a period of heightened levels of customer demand as a result of the pandemic. Importantly, this strength continued through quarter end, with comps running up high-teens in August.

Sales strength was broad based, with 20 of the company's 21 product departments reporting positive comps in the quarter, led by health and beauty aids, housewares, bed and bath, flooring and electronics. Unsurprisingly, luggage had a tough quarter given lackluster travel activity. In addition to higher spend among its core customers, the company found success attracting new business, with Ollie's Army reporting 11 million active members at quarter end, up 13% year-over-year.

Gross profits in the quarter increased by 67% to $207 million, with gross margins expanding by 190 basis points to 39.1% by 70 basis points to 40.2% as a result of improved merchandise margins and sales leverage (which reduced supply chain costs as a percentage of revenues).

As a result of higher gross margins and meaningful operating leverage (with SG&A as a percentage of revenues declining 560 basis points), operating income tripled to $92 million. As shown below, the company's trailing twelve month (TTM) operating margin in the quarter was 14%, roughly 200 basis points higher than where this metric has been on average since Ollie's went public five years ago (the 17% operating margin in the second quarter is the primary reason for this divergence).

Adjusted earnings were $1.04 per share compared to $0.35 in the year ago period.

The company ended the period with a total of 366 stores (up 10% year-over-year), inclusive of 21 net new stores opened in the first six months of the year. New stores have been the primary driver of revenue growth at Ollie's over the past five-plus years, with the unit count nearly doubling in the five years through 2019. If all goes as planned, this will continue to be the key growth engine for the company. Management believes the U.S. can support more than 1,000 locations, implying another 600 new units over the next decade or so.

Ollie's continues to be in a strong financial position, with more than $300 million in net cash on the balance sheet at quarter's end. Despite this, after repurchasing $40 million of stock in the third quarter of fiscal 2019, the company has been inactive since. At the end of the second quarter, the company had 66 million shares outstanding, an immaterial change from the year ago period.

Conclusion

While this was clearly a fantastic quarter for Ollie's, it's not sustainable; as Swygert noted on the call, "We clearly benefited from macro elements, such as government stimulus, lifestyle changes and having our stores open, while other retailers were closed for a portion of the quarter."

Personally, while I understand the optimism many feel given the recent success and the company's long-term growth prospects, I think that's somewhat accounted for in today's valuation. Granted, that will prove incorrect if they get to 1,000 stores over the next decade without any degradation in the unit economics, resulting in 15% - 20% annualized EPS growth. By my math, the stock trades at roughly 30 times forward earnings (assuming they earn ~$3 per share in both 2020 and 2021).

While I'm disappointed that I missed a chance to invest in the company at a cheap price in March, that's water under the bridge. For now, I'll stay on the sidelines as I await a better price.

Disclosure: None

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The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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