Ollie's Bargain Outlets (OLLI), which operates a chain of discount retail stores primarily throughout the eastern half of the United States, recently reported financial results for the fourth quarter of fiscal 2019.
For the quarter, revenues increased by 7.5% to $349 million compared to the prior-year quarter, with a double digit increase in the unit count more than offsetting a 3.3% decline in comparable store sales. The weakness in comps reflects the early impact of the pandemic partially offset by strength in the last month of the quarter. But even with this recovery, comps have generally been unimpressive; as shown below, two-year stacked comps in the first quarter declined for the first time in years.
As noted on the call, this lackluster result is unlikely to be repeated. Following the tough start to the first quarter, management saw a material change in the business trend. As CEO John Swygert noted on the conference call, "We saw an immediate impact in the business when the stimulus checks started to come out on April 15th... those funds are continuing to go out into the marketplace, I believe through August."
Gross profits in the quarter increased by 6% to $140 million, with gross margins contracting by 70 basis points to 40.2% as a result of mix shift (primarily higher penetration of consumables, which have lower gross margins) and sales deleverage on supply chain costs.
Adjusted operating income increased by 7% to $43 million, with the headwind on the gross margin line partially offset by lower pre-opening expense due to timing (the net result was a 10 basis point contraction in operating margins to 12.3%). Adjusted net income and adjusted earnings per share both increased by 7% as well.
The company opened a total of 17 stores over the past three months, ending the quarter with a total of 360 stores (up 11% year-over-year). As shown below, store growth has been the primary driver of revenue growth at Ollie's over the past five-plus years. In the long run, management believes the U.S. can support up to 1,000 - 1,100 Ollie's.
As I noted in my previous write-up on Ollie's, the company repurchased $40 million worth of stock in 2019 (all in the third quarter) at an average price of $58 per share. They entered the new fiscal year with $60 million remaining under the current repurchase authorization, but they did not repurchase any shares in the first quarter, and they did not make any comments on their future plans during the call.
Looking ahead, management expects the strong results experienced in April to continue throughout the second quarter. As Swygert noted on the conference call, strength in the business has been broad based in all categories besides luggage. At the same time, he was also quick to note that this trend cannot reasonably be expected to be sustained in the quarters and years to come:
"While the spike in demand is exciting, a few words of caution are needed as to the sustainability of these heightened comp trends... It's important to not get over our skis when we think about our current trends."
In my previous article on Ollie's, I was setting a high bar. Using a 15% discount rate, my model returned a fair value estimate of roughly $30 per share. Mr. Market tried to help me, pushing the stock as low as $34 per share, but it never quite reached a price where I felt comfortable pulling the trigger. To be honest, plenty of other stocks were seeing significant pressure, and Ollie's was not my first thought for a value opportunity. In hindsight, missing on Ollie's in the $30's looks like a mistake: two and a half months later, the stock trades at $95 per share.
Personally, while I understand the optimism that many our feeling for Ollie's in the current environment, I find it hard to justify the current valuation. By my math, the stock currently trades at a forward price-earnings multiple of nearly 50 times earnings. For now, I'll stay on the sidelines. Hopefully, if I'm patient, Mr. Market will give me another chance to take a swing, but that would require a lot of discount from current levels.
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This article first appeared on GuruFocus.