Ollie's Bargain Outlet Shares Are Not a Bargain

The company's underinvestment places it behind the competition

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Panos Mourdoukoutas
Mar 22, 2021
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Ollie's Bargain Outlet Holdings Inc. (

OLLI, Financial) shares aren't a bargain on Wall Street, according to Quo Vadis Capital President John Zolidis, who has been bearish on the stock recently.

"Our bearish opinion on Ollie's Bargain Wholesale Outlet (

OLLI, Financial) was reinforced by last night's reported results and commentary on FY21," he wrote. "Why? Our view is not based on closeout supply concerns or difficult comparisons. Rather, we believe the company has taken prices up too much (merchandise margins were up again in 4QFY20) and underinvested in its stores and business."

Last week, Ollie reported fourth-quarter adjusted earnings of 97 cents per share, beating Wall Street's estimates of 85 cents per share. Net sales came in at $515.8 million, exceeding the consensus estimate of $488.37 million.

Over the past three years, Ollie's sales grew by 14.4% and its Ebitda rose 16.7%, beating Walmart (

WMT, Financial) and Target's (TGT, Financial) numbers.

Target

Walmart

OLLI

Three-year Revenue Growth (%)

7.9

5.7

14.4

Three-year Ebitda Growth (%)

4.2

8.7

16.7

Current Operating Margin (%)

6.66

4.03

15

Market Price

$187.10

$131.77

$90.10

Intrinsic Value

$112.63

$124.41

$115.62

It also beats Walmart in a key value metric, economic profit, meaning that the company enjoys a strong competitive advantage and creates significant value for its shareholders as it grows.

Company

ROIC

WACC

ROIC-WACC (Economic profit)

Target

14.95%

6.74%

8.21%

Walmart

8.31%

3.67%

4.64%

OLLI

16.19%

9.35%

6.84%

Meanwhile, Ollie's shares trade below the GuruFocus intrinsic value estimate of $115.62, making it a bargain.

But Zolidis doesn't think so, pointing to the company's underinvestment, which places it behind the competition.

"OLLI pulled back on Capex and spent only $33M or 1.6% of revenues on sales during FY20," Zolidis said. "This should be below maintenance Capex. Most of the other broadline and discount retailers we follow doubled down and increased store and digital investments last year. Not OLLI."

Zolidis points to another problem Ollie has been facing, which is declining customer traffic.

"Transactions have been negative at same-stores in nine of the last 12 quarters, and that includes FY20," he said. "Traffic was again negative in 4QFY20 even as consumers came in during January to spend stimulus funds."

He also noted comps were negative for four quarters before the Covid-19 pandemic, and he sees little evidence that Ollie attracted new customers during 2020.

To fix the problem of declining store traffic, Ollie must boost cap spending, which means a lower Ebit margin and lower intrinsic value.

Zolidis has a sell rating on the stock.

Disclosure: I own Target shares.

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I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.