Ollie’s: A Tough Close to 2019

Ollie’s Cut price Outlet Holdings Inc. (NASDAQ:OLLI), which operates a chain of price reduction retail outlets principally in the japanese 50 percent of the United States, not long ago documented benefits for the fourth quarter of fiscal 2019. For the quarter, revenues amplified seven% to $422 million, with a double digit enhance in the unit depend more than offsetting a five% decline in similar retail outlet sales (take note that this is lapping a two-12 months stack of 10% gains). The weak spot in comps in the fourth quarter was because of to a shorter holiday break buying period (six fewer times in between Thanksgiving and Xmas), as perfectly as a bet on the toys category that did not pay back off. As CEO John Swygert famous on the convention simply call, “this proved to be a more challenging sales time period than we anticipated.”

For the 12 months, Ollie’s revenues amplified 13% to $1.41 billion, with a fourteen% enhance in units offset by a 2% decline in comps (lapping an enhance of 4% in 2018, with the two-12 months stack in-line with management’s extensive-time period anticipations). As demonstrated under, Ollie’s retail outlet depend has practically doubled in excess of the earlier five many years, to 345 units at 12 months close 2019.

Gross earnings in 2019 amplified 12% to $556 million, with gross margins down 60 foundation points to 39.five% on increased supply chain expenditures. Adjusted operating cash flow amplified five% to $171 million, with operating margins down 100 foundation points to 12.1% on reduce gross margins, as perfectly as deleveraged operating expenditures on reduce sales for every retail outlet. Adjusted net cash flow amplified at a similar speed to operating cash flow, up mid-solitary digits to $129 million. The similar is genuine for diluted earnings for every share, which amplified seven% 12 months in excess of 12 months to $2 for every share.

For the 12 months, Ollie’s created $one zero five million in funds from functions, which was down from 2018 because of to net functioning capital investments. They spent $34 million on investing routines, with $seventy seven million for new outlets and a 3rd distribution center offset by $42 million in proceeds from a sale-leaseback transaction involving 3 previous Toys “R” Us outlets.

In 2019, the corporation spent $forty million to invest in 689,000 shares of stock at an ordinary price tag of $fifty eight for every share. The entirety of those people repurchases happened in the 3rd quarter as of now, $60 million continues to be below the firm’s repurchase authorization.

Ollie’s will facial area some brief-time period tension as a final result of the novel coronavirus (Covid-19). As administration famous on the simply call, only 20% to 25% of their business falls into the “essentials” category, which contains consumable merchandise in foods, cleaning provides and private cleanliness. For their ordinary shopper, we may perhaps be coming into an financial surroundings the place added paying out funds will be hard to arrive by. As a final result, Ollie’s is on the lookout to refocus its merchandising attempts.

While the around time period may perhaps present some troubles for the retailer, I feel the company’s balance sheet will provide ample help throughout this time period. They at present have more than $100 million in funds and no debt, alongside with $100 million out there on their credit history line.

Summary

What would make Ollie’s interesting for possible buyers is management’s belief that they can still triple the retail outlet depend. That expansion arrives with really desirable unit economics. The financial investment to open up a new Ollie’s is roughly $1 million, including inventory, fixtures and other devices, on which the corporation generates, on ordinary, 50 percent a million dollars in operating cash flow for every 12 months. In my head, that indicates each individual $1 million invested in the business is most likely to final result in $five million or more of marketplace value. That’s a good return on financial investment if you can get it. Presented those people figures, it’s not challenging to see why buyers have traditionally paid out up for Ollie’s expansion prospective buyers.

However, that has commenced to improve. The passing of co-founder Mark Butler in December 2019 released “key guy possibility.” Throw in current fairness weak spot and Ollie’s is instantly buying and selling at $39 for every share, down more than fifty% from a 12 months back. At today’s price tag, the corporation is valued at roughly 20 periods trailing earnings.

Just after a difficult quarter, the questions stay: is this corporation prepared to run devoid of Butler? Will there be a clean changeover from his fifteen-plus many years of management to a new CEO? I do speculate if the administration group he developed around him is truly prepared to get the lead. We’re going to uncover out soon enough: the effects of the coronavirus will be an early take a look at for the new CEO.

Looking forward to 2020, there may perhaps be rationale for warning. As administration famous on the earnings simply call, they’ve confronted major headwinds in current times, with comps down 10% to 20%. While a quarter of Ollie’s sales are in the “essentials” category, that leaves the other 3-quarters of the business out to dry. In my head, this could be a 12 months of sizable comp retail outlet sales declines, reduce margins and slowing unit expansion. Through that lens, Ollie’s has a forward price tag-earnings multiple that could be around thirty periods.

Taking into consideration what Mr. Market place is offering proper now, that does not strike me as the most effective opportunity. Making use of a fifteen% price reduction amount, my design returns a fair value estimate of roughly $thirty for every share. For those people causes, I’m firmly on the sidelines for now.

Disclosure: None

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About the author:

The Science of Hitting

I am a value trader with a extensive-time period concentration. My intention is to make a compact selection of significant decisions a 12 months. In the phrases of Charlie Munger, my most well-liked technique is “endurance adopted by really intense conduct.” I run a concentrated portfolio – a handful of equities account for the vast majority of its value. In the eyes of a businessman, I feel this is ample diversification.