Business Overview

Ollie's Bargain Outlet Holdings, Inc. has carved out a unique niche in the dynamic world of discount retail. With a rich history spanning over four decades, this Pennsylvania-based company has established itself as a beacon of value and savings for a growing customer base across 31 states. Ollie's remarkable journey is a testament to its unwavering commitment to delivering unbeatable bargains to savvy shoppers while navigating the ever-evolving retail landscape.

Company History

Founded in 1982 by Mark Butler and a group of fellow former KB Toys employees, Ollie's Bargain Outlet started as a single store in Mechanicsburg, Pennsylvania. The company's business model was built on acquiring excess inventory and closeout merchandise from major manufacturers and retailers, passing the savings on to their customers. In the early years, Ollie's focused on backfilling existing markets and expanding its footprint in the Northeast and Mid-Atlantic regions. By 2012, the company had grown to 124 stores across 14 states. That year, Ollie's established an equity incentive plan to grant stock options to executive officers and key employees as the company prepared for its initial public offering.

Ollie's went public in July 2015, raising over $160 million. The additional capital allowed the company to accelerate its expansion plans, both in existing markets and by entering new states. Despite navigating operational challenges over the years, including supply chain disruptions and the COVID-19 pandemic, Ollie's has maintained its focus on delivering brand name merchandise at extreme values to its customers. By the end of fiscal 2023, Ollie's had grown to 512 stores across 31 states. The company has invested heavily in its people, infrastructure, distribution network, and information systems to support its rapid expansion. Ollie's has also supplemented its opportunistic buying of brand name closeout merchandise with the development of its own private label brands to provide customers with consistently low prices in key merchandise categories.

Financials

Ollie's financial performance has been nothing short of impressive. In the most recent fiscal year ended January 31, 2024, the company reported annual revenue of $2.10 billion and net income of $181.44 million, reflecting the strength and resilience of its business model. The company's operating cash flow for the same period reached $254.50 million, while free cash flow stood at $130.09 million, providing ample financial flexibility to support its growth initiatives.

The company's strong performance continued into the second quarter of fiscal 2024, with net sales increasing 12.4% to $578.4 million, compared to $514.5 million in the same period last year. This growth was driven by a combination of new store openings and a 5.8% increase in comparable store sales. Net income for the quarter rose 16.1% to $49.0 million, up from $42.2 million in the prior year period. Operating cash flow for the quarter was $43.88 million, with free cash flow of $5.59 million.

Ollie's gross profit increased 11.4% to $219.0 million in the second quarter of fiscal 2024, with a gross margin of 37.9%, compared to 38.2% in the prior year period. The slight decrease in gross margin was primarily due to changes in product mix. Selling, General, and Administrative (SG&A) expenses increased 8.2% to $145.7 million but decreased as a percentage of net sales to 25.2% from 26.2% in the prior year period, reflecting leverage of fixed expenses.

Business Strategy

One of the key drivers behind Ollie's success has been its ability to capitalize on market disruptions and capitalize on the declining fortunes of larger retail chains. The company's opportunistic approach to acquiring excess inventory and closing stores has allowed it to expand its presence and strengthen its position in the discount retail arena. For instance, the recent acquisition of 10 former 99 Cents Only Store locations in Texas has provided Ollie's with a strategic foothold in a key market, further enhancing its growth trajectory.

Ollie's differentiated go-to-market strategy, characterized by a unique and engaging "treasure hunt" shopping experience, has been a crucial factor in its success. The company's compelling customer value proposition, coupled with its witty in-store signage and advertising campaigns, have resonated with a diverse customer base, attracting both budget-conscious shoppers and those seeking a fun, bargain-hunting experience.

The company's Ollie's Army loyalty program has also played a pivotal role in fostering customer loyalty and driving repeat business. With over 14.5 million active members as of the end of the second quarter of fiscal 2024, Ollie's has been able to leverage this engaged customer base to better understand their preferences and tailor its offerings accordingly.

Product Segments

Ollie's operates as an extreme value retailer of brand name merchandise, offering a broad selection of products across various categories:

1. Housewares: Kitchen gadgets, cookware, dinnerware, glassware, décor, and bedding. 2. Bed and Bath: Towels, bedding, bath accessories, and other related items. 3. Food: Canned goods, cookies, crackers, salty snacks, candy, and other consumables. 4. Floor Coverings: Floor care products, area rugs, and tile. 5. Health and Beauty Aids: Cosmetics, fragrances, pharmacy, and personal care items. 6. Books and Stationery: Books, magazines, office supplies, and other stationery products. 7. Toys: A variety of toys and games across different age groups. 8. Electronics: Consumer electronics, including TVs, digital devices, and accessories.

This diverse product offering has enabled Ollie's to deliver consistent financial performance and growth, while its focus on providing brand name merchandise at extreme values has resonated with customers.

Growth Prospects

Looking ahead, Ollie's growth story appears poised to continue. The company's long-term target of more than 1,300 stores across the United States, coupled with its proven ability to execute and adapt to market conditions, suggests a promising future. The recent expansion of its distribution network, including the completion of a fourth distribution center in Princeton, Illinois, further reinforces Ollie's capacity to support its ambitious store growth plans.

As of the end of the second quarter of fiscal 2024, Ollie's had expanded to 525 stores across 31 states, with plans to open a total of 50 new stores for the full year, less two store closures. The company noted that its southern states, particularly Texas, saw the strongest regional performance during the quarter.

Challenges and Risks

However, Ollie's is not without its challenges. The company must navigate the evolving retail landscape, marked by the rise of e-commerce and the shifting consumer preferences. Additionally, the potential impact of macroeconomic factors, such as inflation and changes in consumer spending patterns, could pose risks to Ollie's growth trajectory.

Management and Leadership

Despite these headwinds, Ollie's has demonstrated its resilience and adaptability time and again. The company's seasoned management team, led by CEO John Swygert, has consistently executed its strategy with precision, driving consistent financial performance and shareholder value creation.

Financial Outlook

For the full fiscal year 2024, Ollie's has raised its guidance, projecting total net sales of $2.276 billion to $2.291 billion, with comparable store sales growth of 2.7% to 3.2%. The company expects a gross margin of approximately 40% and operating income of $252 million to $259 million. Adjusted net income is projected to be between $199 million and $203 million, with adjusted earnings per diluted share of $3.22 to $3.30.

For the third quarter, Ollie's is projecting comparable store sales to be flat, reflecting potential disruption from competitor liquidation sales. However, the company expects comparable store sales in the fourth quarter to be slightly above their long-term algorithm of 1% to 2% due to a shift in the flyer.

Liquidity and Financial Position

Ollie's maintains a strong financial position, with a debt-to-equity ratio of 0.05598 as of the second quarter of fiscal 2024. The company had $353.10 million in cash, cash equivalents, and short-term investments, along with $89.00 million available under its $100 million revolving credit facility. Ollie's current ratio stood at 2.77, with a quick ratio of 1.22, indicating a healthy liquidity position.

Industry Trends

The closeout industry continues to grow in size, with consolidation on both the retailer and manufacturer sides leading to more product flow and excess inventory available. This trend bodes well for Ollie's business model, which relies on opportunistic buying of closeout and excess inventory.

Conclusion

In conclusion, Ollie's Bargain Outlet Holdings, Inc. stands as a shining example of a discount retailer that has carved out a unique and sustainable niche in the highly competitive retail industry. With its unwavering focus on delivering unbeatable bargains, a differentiated customer experience, and a proven ability to capitalize on market opportunities, Ollie's is poised to continue its remarkable growth journey, solidifying its position as a leading force in the off-price retail landscape. The company's strong financial performance, strategic expansion plans, and robust liquidity position provide a solid foundation for future success in the dynamic retail environment.