Ollie’s Big Strategic Mistake By TipRanks

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© Reuters. Ollie’s Big Strategic Mistake

Ollie’s Bargain Outlet Holdings Inc. (OLLI) continues to commit a big strategic mistake: it raises prices even as it loses customer traffic, which is the wrong strategy for a discounter. That’s according to Quo Vadis President John Zolidis, a long-term bear on the stock.

How do they do it? “They call it ‘IMU’ or initial mark-up,” says Zolidis. “There are two ways to get IMU. One is paying less, the other is raising the price, but they don’t always say whether it’s “buying better” or higher prices. Nevertheless, it amounts to the same thing – choosing profits for the firm over value for the customer.”

This writer is bearish on the stock. (See Ollie’s Bargain Outlet Holdings Inc. stock charts on TipRanks)

Disappointing Q2 Results

Zolidis’s comment follows Ollie’s second-quarter report on Thursday afternoon, which missed top and bottom line analyst estimates. Net sales decreased 21.4% to $415.9 million. Operating income decreased 50.3% to $45.7 million, and operating margin decreased 640 basis points to 11.0%.

Olli’s disappointing results appeared as other brick-and-mortar retailers reported strong earnings and sales, citing increasing foot traffic. That could explain why Wall Street sent the company’s shares sharply lower in after-hours trading.

Nonetheless, management was pleased with its performance, focusing on comparable store sales and EBITDA over two year period rather than net sales and operating margins. “We are very pleased with our results for the second quarter as we delivered comparable store sales growth of 15.3% on a two-year stack basis, well ahead of our long-term growth algorithm, and adjusted EBITDA growth of 44% as compared to 2019,” stated John Swygert, President, and Chief Executive Officer. “Our performance reflects the strength of our business model as well as outstanding execution by our team, particularly with the headwinds of heightened supply chain challenges.”

Many Challenges for OLLI

Zolidis sees more headwinds other than supply chain problems for the discount retailer. Problems making him bearish on the stock include: underinvestment in stores and infrastructure (lowest capex/ foot in the industry); weak customer metrics (negative comps in year one, negative transactions, meager loyalty program growth); unfavorable pricing action (taking up IMUs); pressure from rising distribution and transportation expenses; and lack of scalability and inherent volatility of the closeout model (70% of goods are closeout).

“Ultimately, we believe the company needs to reinvest in the consumer offer via lower prices, increased service levels in the stores, requires increased infrastructure investment, and probably will have to move to a lower penetration of closeouts as it grows,” he adds. “Together we see these factors resulting in lower structural margins than in the past, which in turn should justify a lower multiple for the shares, currently trading at 25x P/E and 16x EV EBITDA on FY22 estimates. “

TipRanks assigns a Smart Score of 4 to the stock, citing poor sentiment and weak technicals.

Still, the analyst community is moderately bullish on the stock. The 12 Wall Street analysts following the stock have an average price target of $83.33 with a high forecast of $108.00 and a low forecast of $56.00. The average Ollie’s Bargain Outlet Holdings Inc. price target represents a 16.1% change from the last price of $71.75.

Meanwhile, management remains optimistic for the rest of the year. “We continue to face strong year-over-year comparisons in the third quarter as we, once again, delivered record sales and profits last year,” Swygert added. “For the third quarter of fiscal 2021, we expect comparable stores sales growth of 5% to 7% on a two-year stack basis. Deal flow remains as strong as ever, despite temporary supply chain challenges, and we continue to leverage our expertise and relationships in the closeout industry to secure the very best deals for our customers.”

Summary and Conclusions

Olli’s shares took a big beating on Wall Street after reporting disappointing Q2 results. Yet that doesn’t make them a bargain, according to one analyst, who sees many challenges for the company, including a strategic mistake: raising prices as sales decline.

Disclosure: At the time of publication, Panos Mourdoukoutas did not have a position in any of the securities mentioned in this article.

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