Ollie's Bargain Outlet (NAS: OLLI) - Another Discount Retail 10-Bagger?
White space analysis of Ollie's Bargain Outlet using alternative data
Happy New Year! I wish I had been able to write more over the last 4 months, but I’ll hopefully be posting more regularly in 2021. I got the chance to work on some pitches through my fall semester, but I haven’t had a chance to publish any of them so be on the lookout for more Hidden Compounders ($VSAT, $SAM, and $DISH coming soon). Before I start posting those, my piece today is an older pitch that I did with a couple of my other classmates on the discount retail market. This is a two-part series starting with OLLI and then diving into Five Below (FIVE) within the next few days. Anyone who knows me can say that I have a slight obsession with discount retailers. While most brick and mortars are busy hiring restructuring bankers, discount retail continues to amaze shoppers, suppliers, and shareholders. Whether it’s Dollar General, Burlington, Ross (ROST), or TJ Maxx (TJX), there’s been a massive expansion of discount centered stores in the US since the Great Recession. However, what differentiating value does OLLI offer in this landscape?
Ollies Bargain Outlet ($OLLI)
Founded in 1982, Ollie’s has slowly expanded all across the Northeast and is starting to bring the Ollie’s Army to the rest of the US. Ollie’s Bargain Outlet operates in a similar segment to Big Lots, Burlington, Ross, etc… where they buy closeout merchandise and then sell it for on average 40% cheaper than what they consider, “fancy stores”.
Competitive Advantage 1: Getting the buyout inventory at reasonable prices is a relationship game that OLLI has been practicing for 30+ years. After studying the smaller players’ catalogs like Peter Harris Clothing, Bargain Hunt, or Roses, I’ve gained a newfound appreciation for their merchandising team. They are able to sell branded goods at a similar price as Peter Harris’s unbranded items. OLLI’s scale, creativity, and savviness have allowed them to get better deals than their competitors which they can then roll back into savings for their consumers. An example of this is OLLI placing a 100M cash offer ad on the WSJ for some heavily discounted goods from the bankrupted Hanjin Shipping. The scale also allows them to drive costs down in the private label space which is now 30% of their sales. I believe their strong relationships with vendors and opportunistic merchandising have translated successfully to their financials. They maintain an operating margin of 13% — greater than their peers at their maturity. Below, I’ve included a chart of each store’s margins when they were at Ollie’s maturity. Although they’re aiming to maintain their 40% GM, I believe there’s some room for SG&A improvement down the line with the scale and increased data utilization through Ollie’s army program.
Competitive Advantage 2: OLLI’s items are much cheaper than TJX / ROST since the audience they cater to varies. Although those two stores are discount oriented, TJX / ROST goods tend to be more like a pair of Nike shorts rather than a pair of Russell shorts, which creates differing value propositions for their consumers. OLLI’s average consumer household income is 55K with newer customers in the 40K range while Ross is at 63K, and a Coresight report says that TJX shoppers are even wealthier than Ross consumers. Their range of offerings — dented dishwashers, cheap wedding dresses, and flooring — offers a unique value proposition since these are goods that TJX / ROST won’t touch due to the opportunity cost of space they face. I hypothesize that they are oftentimes the only ones competing for these goods providing growing cost advantages for the firm. Additionally, OLLI is the only one able to successfully sell them since their brand has a reputation of being a little bit "out there". These unique goods are beneficial because it draws lots of consumers who then get lost in the bargain hunt (part of the reason why e-commerce doesn’t work). Additionally, 75% of ROST’s sales are clothing, so entering markets like flooring, ~7% of OLLI sales, would be a brand new space for them. Big Lots may have a similar selection to OLLI but their margins are significantly worse, partially driven by worse merchandising strategy.
Competitive Advantage 3: OLLI has the worst Sales per square foot (Table 1) out of its comps which creates a significant opportunity cost for its competitors in their current form. This is normally worrying, but their store-level economics are still fine with a 1.6-1.7 year payback period (Table 2 from Credit Suisse) which rivals some of their peers like ROST (divided capex by new store by backed out new sales, used OLLI’s 15% 4-wall EBITDA). They mitigate their low sales per square foot with a lower Capex per squarefoot which I imagine is because of their minimal in-store decoration, cheaper cost of inventory, and low pre-opening costs. Why is this only attractive for OLLI? It’s because their brand stands for the antithesis of a “fancy store” allowing them to have incredibly few fixtures in store and low preopening costs. Speaking of economics, investors should have confidence given OLLI’s steady increase on targeted cash-on-cash returns over the years (Table 3) and their March announcement suggesting 1050 potential stores compared to their previous 800 store assumption.
Competitive Advantage 4: Ollie’s Army (OA) loyalty program has a 27% 5-year CAGR compared to the 18% 5-year CAGR store growth indicating that there’s a higher uptake of army members in new and / or existing stores than in years past. The growth of the loyalty program is important because the OA members spend 40% more than non-OA members. A hidden advantage here is the recent rollout of their app and “ranks” which should encourage more purchases. More importantly, these should improve Ollie’s understanding of the consumer which should then benefit merchandising and as a result, margins. I believe Ollie’s is incredibly behind on utilizing data and lacks targeted promotions. This offers additional upside for OLLI going forward with improved margins and a widening moat.
So say there’s a moat around this concept and the unit economics are great, how large can this get? This is especially important for OLLI since management has emphasized that their long term story is predicated on the growth of stores, not comps. Here’s the variant view on stores: OLLI’s hidden success in both subsurban and rural markets results in larger potential store counts than the market expects.
The analysis looked at Pennsylvania locations of 7 different retailers. As much as stores like FIVE and TJX advertise their ability to locate anywhere, the farthest they often go is “semi-rural” which is why their % Rurality of the County that an Average Store is Located in is so much lower than Ollie’s. As a result, Ollie’s is able to uniquely dominate the rural areas as they are oftentimes the only at-scale non-grocery retailer in some of these towns. When we first evaluated Ollie’s, we believed that they would be located in similar locations to FIVE and TJX, however, our analysis above showed multiple incidents when they were the only store along with Dollar Tree to be located in some parts of PA. This matters because it indicates that Ollie’s model is versatile in its ability to grow and that it can potentially get past this 1050 store count. With two long term store count bumps in the last 5 years, Ollie’s should give investors confidence in their ability to grow past current projections. Now, it’s hard to understand why these other brands haven’t entered the market, but it could be mainly because of how they’d have to change merchandising for these markets.
Bed, Bath, and Beyond (BBBY) is obviously a very different concept compared to OLLI, but they both have very similar square feet per store and are oftentimes located in the same complex as each other. This gives me some confidence that they have a similar store radius which is further confirmed by the fact that OLLI and BBBY (more successful in suburban markets / some success in rural) are able to hold 45 and 42 stores in PA, respectively. BBBY at its peak was able to get to 1500+ stores across US (obviously e-commerce changed things), but if OLLI can successfully concentrate at similar rates as BBBY then maybe OLLI can get to a store count significantly above their current 1050 announced target. Check out Ollie’s Cranberry Township, PA and Cherry Hill, NJ stores on google maps to understand the vastly different markets that they thrive in.
What if ROST / TJX creates another concept that specifically caters to this rural lower-income audience — they’d have to beat OLLI on the two things consumers value a) merchandising and b) price. It’s hard to prove the intangible value of Ollie’s merchandising abilities. However, I think it’s evident in their savviness to find and go after random deals which then tie into their quirky brand image. I think OLLI knows their customer really well, and it may be a reason why the new owners of the Christmas Tree Shops (another buyout retailer) don’t want to challenge OLLI and are deciding to focus on a forgotten niche they say that is between OLLI and Home Goods instead. On price, I think it’d be hard to be OLLI since they’re rolling the value back to the consumer as they hit the 40% GM. I think if ROST / TJX were less clothing focused then they could be real competition, but OLLI sells everything and anything which is a very different value prop / business to merchandise — something others could easily struggle with. In fact, ROST decided to operate in the deeper discount segment with their acquisition of DD’s, which is a clothing focused store. They would face a battle between creating a potential competitor or an opportunity cost of including lower sales per square foot items in DDs. Home Goods is almost like a higher-end version of Ollie’s, so I doubt TJX has an interest in operating in a lower-income market / has the expertise. Upstarts lack merchandising abilities, capital (potentially worse unit economics so they can’t self-fund), and worse brand appeal. Lastly, Dollar stores are too large to maintain an effect buyout selection, and their price caps created by their brand (sell goods less than 5 dollars) prevent them from selling some of the same goods that Ollie’s sells.
Ollie’s seems to have a decent growth story with the potential to add 40-50 stores yearly with a 3% SSS. This likely means that they are a high single-digit / low teens EBITDA grower over the next decade which could change to mid-teens growth if management feels like they can open more than 50 stores a year. I think this, in addition to the uncertainty caused by the death of the founder / CEO, Mark Butler, and an overall deceleration of comps prior to COVID have caused them to trade at a relative discount to other peers like Five Below or Floor and Decor Outlet. Trading at 24x GAAP earnings off of the COVID spike, I think Ollie’s still looks reasonably valued, but the upside remains limited. OLLI clearly has a lot of white space for growth, but management continues to suggest that they are constrained to the 50 new stores a year. This should lead to a massive deceleration on topline growth, and SSS should continue to be in the low-single digits which means that you’re no longer buying the 15-20% grower that Ollie’s was once known for.
Hope you enjoyed this piece. Feel free to DM me on Twitter with feedback and subscribe below if you haven’t already. The schedule for future posts should include Five Below, Viasat, Boston Beer, and Dish.