Harrisburg, Pa.-based Ollie's Bargain Outlet Holdings (OLLI) is quickly becoming one of the more interesting but little-known recent retail stories. If you are not familiar with the name, it has a regional presence with 216 stores in 19 eastern states. Pennsylvania, Ohio, New York, Virginia and North Carolina account for more than half of total locations.
I've frequented two local locations, and shopping at Ollie's is definitely an experience. In fact it's fun. There are a lot of second-tier brands to go along with the name brands in the cluttered stores, but the prices are decent.
During yesterday's excursion, I couldn't help but think that Ollie's is the final resting place for brand varieties that just don't catch on, after seeing peanut butter and jelly Pop Tarts, Party Cake Peeps, and Cap'n Crunch All Berries Cereal, to name a few. You could obtain season six of The Office on DVD for five bucks, as well as countless "As Seen on TV" products, not to mention a great selection of books.
Ollie's is the new Big Lots (BIG) , but it's starting to get a lot more attention, and for good reason. Store count has grown by 35% since year-end 2013, and revenue is up 53% during the same period. Gross margins are in the 40% range, but net margins are even more impressive, 4.7% last year, and 5.8% on a trailing 12-month basis. As a discounter, the company is profitable every quarter, and does not have the same level seasonality as traditional retailers.
Big Lots, with 1,449 stores in 47 states, towers over Ollie's in terms of size and presence. It also boasts gross margins in the 40% range, but operating costs are higher, and net margins have been in the 2.2% to 3.3% the past four years, down from 4% to 4.5% the prior three years.
Ollie's shares are up 55% year to date, and that's despite two secondary offerings by the private equity firm that took the company public. Positive quarterly earnings surprises have not hurt, either.
Despite all of the positives, however, I have some reservations about the stock. First, it isn't exactly inexpensive, trading at 25x next year's earnings. Admittedly, that's certainly not a "priced for perfection" multiple for a rapid grower like Ollie's, but that still does not make it cheap. Second, the company has a negative tangible book value, due to a large amount of intangible assets. That's certainly not a showstopper, but does give cheap value investors some pause.
The biggest concern I have is the company's enterprise value (EV) relative to store count. With an EV of $1.73 billion, and 216 stores, that puts the EV/store metric that I use for comparative purposes at $8 million. For Big Lots, EV is not much bigger at $2.33 billon, but its much larger store count puts the EV/store metric at $1.6 million.
There's a whole lot of growth built into Ollie's current valuations. The company thinks it can get to 950 stores over time at it expands into newer states. Still, there will be some stumbles along the way.
I prefer Ollie's stores to Big Lots. I'm even a member of Ollie's Army, the company's points/discounts program. I'm just cautious on the stock at these levels -- perhaps not unexpected from a myopic value investor.