Ollie’s Bargain Outlet goes on sale

Key points

• Ollie’s Bargain Outlet is growing at a market-beating pace and it is buying back shares.

• The stock price pulled back following the release opening a new window of opportunity.

• Guidance is favorable and might be cautious given the trends.

• 5 stocks we like better than Ollie’s Bargain Outlet.

If you’ve been looking for a good time to get into Ollie’s Bargain Outlook (NASDAQ: OLLI), that time could be now. The stock is pulling back after a solid report that brings nothing but good news for investors. The takeaways include shifting trends and accelerating purchasing habits, including traffic from younger and more affluent shoppers. That is a solid sign that consumers are turning to off-price retailers to fight inflation, and Ollie’s is positioned to benefit from the shift.

“Customers are responding to our compelling deals, resulting in accelerating transaction trends, and we are encouraged to see our product offerings appealing to a wider customer base that includes higher income and younger-age shoppers,” said John Swygert, President and Chief Executive Officer.

No reason to sell in Ollie’s results

Ollie’s Bargain Outlet’s Q1 results give no reason to sell other than that they might have been stronger. The company reported $459.15 million in net revenue for a gain of 12.9%, which beat the consensus by 200 basis points. The gain was driven by a 4.5% increase in comps and an 8.4% increase in net-new store count. TJX Companies, the leader in off-price retail, grew only 3.5%, and the dollar stores only performed slightly better than that.

The best news is that margins were expanded despite increased deal-making, product mix shifting toward consumables, and increased shrinkage reported across the retail spectrum. Profit at all levels grew by at least 80%, with most comparisons up by at least 140%. The company’s operating margin expanded by 420 basis points to drive a 145% increase in adjusted earnings. The adjusted $0.49 also beat by $0.02 and led to an increase in the guidance.

Ollie’s exec increased the revenue and earnings guidance for the year. The new ranges have the low-ends near the previous high-ends and above the Marketbeat.com consensus figures. The new guidance also expects additional strength later in the year and may be cautious given the current trends. In that light, Ollie’s may increase the guidance again and provide a stronger catalyst.

Ollie’s; premium growth deserves premium value

Ollie’s trades at a relatively high valuation of 29X its earnings outlook compared to its peers. TJX trades at 22X, Dollar Tree at 21X, and names like Kohl’s and Dollar General trades at even lower valuations. Most of those stocks also pay dividends but are not growing at the same pace. Ollies is forecasting at least 12.3% growth for the year which will outpace competitors by at least 600 basis points. Peers may be larger, but they do not have the same potential for future growth, and Ollie’s is taking advantage of its potential and gaining market share in its territories.

Ollie’s doesn’t pay a dividend, but it does buy back shares. The company bought $12.3 million in Q1, about 0.3% of the market cap. The company has $126.5, or about 3.4% of the market cap left under the current authorization and may be expected to increase when the current cap is reached.

The technical outlook: Ollie’s Bargain outlet gets bought on the dip 

Shares of OLLI fell more than 5% following the Q1 release and moved below the short-term moving average. However, that was met by buyers who stepped in above the long-term EMA to provide support. The move shows resistance to higher prices but also rising support that may lead to a new high later this year.