"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.
Three-year Revenue Growth (%)
Three-year Ebitda Growth (%)
Current Operating Margin (%)
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.
ROIC-WACC (Economic profit)
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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