Description

Ollie’s Bargain Outlet (OLLI) has rallied to basically an all-time high despite being one of the worst performing retailers that stayed open during the covid pandemic shut downs.  The company had problems with inventory and negative comps coming into the pandemic and the pandemic did not fix them.  The stimulus checks provided Ollie’s consumers (usually on the lower end of the income scale) with a temporary boost.  I believe the stimulus will end at the end of July and comps will decline meaningfully and this makes Ollie’s a timely short. 

Ollie’s is a chain of big box retail stores that offers discounted/closeout items at cheap prices.  Member Afton1 wrote Ollie’s up as a short at $60 in March of 2018- that post gives good background on the company.  Today the stock is $98 and Ollie’s is arguably in a worse position than before covid.  Of the stores that stayed open during COVID, Ollie’s comps are by far the least impressive.  Nevertheless, the stock has rallied dramatically from the lows and now trades near a 52-week high.

First, it should be noted that Ollie’s never shut their stores.  So one might expect some kind of benefit from COVID as customers stopped shopping other places and went to what was open. How has Ollie’s done relative to other big box retailers that stayed open during the COVID-lockdowns?

WMT- Q1 SSS ex fuel - +10.9%

TGT - Q1 SSS +10.8%

HD - Q1 SSS +6.4%

LOW - Q1 SSS +11.2% 

BIG - Q1 SSS +11.1%

OLLI - Q1 SSS -3.3%

Not very well.  While most other big box stores got double digit comp lifts (including BIG the most relevant comparable to OLLI), Ollie’s had declining same store sales.  

On their conference call Ollie’s said, “So let me break this down, as we shared with you last quarter, we experienced significant sales pressure in the initial consumer reaction to COVID-19. That volatility in our sales continued in the following weeks. We responded quickly to reassure customers that we are still open and here to serve their needs. Our marketing message was very focused and deliberate. Our stores are open, we have the good you need at great prices and we are taking every precaution to keep you safe.

We expanded our offerings of high demand items and source new products including certain essential items unavailable in other stores in addition to providing great deals across all our categories. These actions resulted in broad-based comp improvement across all departments. We then experienced a surge in sales in mid-April as people began to receive their stimulus money's. The rebound in our comps enables us to end the quarter down 3.3%, a considerable improvement from trends discussed in our last call.”

So what’s going on here?  Comps looked really bad and then the stimulus came in and gave Ollie’s a boost.  It should be noted that Q4 comps before covid were -4.9%.  Not *that* much of a boost I guess.  But it sounds like before the checks things were much worse.  So then, what happens when the stimulus checks go away?  It seems to me that Ollie’s comps will plunge again.

Furthermore, Ollie’s has no online business at all.  So it isn’t like they can shift to online purchases like Target or others have.  If COVID cases spike again soon from the protests or later this fall, then Ollie’s is going to be vulnerable from people not wanting to be out again.

So what’s the bull case/risk to a short?  From my perspective it is really two-fold.  1) COVID will drive many other retailers out of business providing a better than usual opportunity for Ollie’s to buy inventory and 2) Ollie’s will continue to grow their store base.

With respect to better than usual opportunities to acquire inventory, this is probably somewhat true.  However, to take advantage Ollie’s will most likely have to buy lots of inventory and sit on some of it for the next season.  This will burn cash and isn’t guaranteed to work out.  If Ollie’s core customer is very stimulus check-dependent and the stimulus checks go away, will the customer be there to buy the inventory?  It’s not clear to me that she will.

Ollie’s will likely continue to grow their store base.  The company ended Q1 with 360 stores up from 203 in 2015.  It plans to open 47-49 stores this year.  I’d imagine some of the pain other retailers face will make finding store locations even easier than before.  Ollie’s claims that the chain can ultimately support 900+ stores.  I’m less certain.  Big Lots has been around for a while with this same model and has 1,400 stores.  It trades at a whopping 8x Earnings.  If Ollie’s ultimately ends up at 8x EPS on 900 stores, I’m not sure the stock is meaningfully higher than it is today.  EBIT on 300 stores was $171 million last year.  Let’s round up to $200 million and multiply by 3 for the store expansion.  So when OLLI gets to 900 stores, let’s say EBIT is $600 million.  Ignore interest and tax it at 21% that gets you to net income of $474 million/65 million shares and you are looking at $7.29 in EPS once the growth story is complete.  So it’s already trading at 13x - a huge premium to BIG and the stores won’t be built for a decade.  Ollie’s has been around since 1982.  I’m not sure why 35 years in America suddenly needs Ollie’s everywhere.  It seems like a discretionary treasure hunting bargain sort of store that some consumers will like, but it isn’t going to change the retail landscape.

Valuation-wise Ollie’s seems priced for perfection.  The company trades at over 40x EPS FY2021 EPS estimates and 4x EV/sales. And this for a retailer that is extremely sensitive to the stimulus checks that are likely to go away soon?  

Risks:

There are of course some risks here.  The most important one is if stimulus checks get extended.  Given that personal income went up dramatically as a result of the checks (see https://www.bea.gov/data/income-saving/personal-income), my sense is that the political will for continuing to pay people more than they were making when they were working just isn’t there.  But when it comes to predicting what happens in Washington your guess is as good as mine, so I'd say this is a risk.

Ollie’s may also get big buying opportunities on inventory and better store locations/rent as a result of the struggles of other retailers, especially any that enter chapter 7 bankruptcy (not too many of those so far).

Ollie's balance sheet is fairly clean, their only real long term obligations are leases. You are playing for a mutliple re-rating, not bankruptcy with Ollie's. They also might try to buy back stock or something, but that hasn't been their custom (share count hasn't declined since they've been public).

Catalyst

Ollie’s comps plummet when the stimulus checks run out.