Ollie's Bargain Outlet(OLLI) - Differentiated, Consumer Retailer Stock Analysis
Ollie's is a retailer with a high return on investment on their new stores, long runways for growth that provides “Quality Stuff Cheaper” using economies of scale to loyal customers
Disclaimer: The information provided is not financial, investment, tax or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or any other financial instruments. For more information read the disclaimer.
Welcome to the Modern Growth Investing newsletter! If you’re new subscribe below so you don’t miss my weekly updates on growth businesses and investing!
I post threads on Twitter about growth businesses and investing!
Give me a follow @ModernGrowthIn1 and like and share this post, it helps me out a lot.
With that out of the way, let’s dive in!
Mission
Good Stuff Cheap
Ollie’s has a very simple mission that everyone can relate to, get good stuff cheap for their Ollie’s army(members of their loyalty program) and other customers and consumers. This mission shows us that Ollie’s wants to provide awesome quality at a reasonable price(just like I like the businesses/stock I own).
History
Check out Ollie’s history at the following link!
Ollie’s People and Culture
As of January 30, 2021, Ollie’s employed more than 9,800 associates, approximately 4,400 of whom were full-time and approximately 5,400 of whom were part-time. Ollie’s believes in attracting, developing, and retaining quality talent is key to their growth, and their success depends on cultivating an engaged and motivated workforce.
Ollie’s offers a compelling work environment with meaningful growth and career-development opportunities. This starts with the opportunity to do challenging work and learn on the job and is supplemented by programs and continuous learning that help their team build skills to advance. Ollie’s encourages a promote-from-within environment when internal resources permit.
Ollie’s Leadership Institute (“OLI”) is a program that is used to equip field associates with the ability to advance their careers. Each OLI participant receives an individual development plan, designed to prepare them for their next level position. Reflecting Ollie’s belief in “homegrown” talent, OLI is the preferred source for new supervisors and team leaders. In 2020, over 60% of their current district team leaders were internally promoted to their position. Company-wide, over 70% of their field positions were filled by internal promotions. Ollie’s believes their training and development programs help create a positive work environment and result in stores that operate at a high level.
Business Overview
Ollie’s was founded based on the idea that “everyone in America loves a bargain.”
Ollie’s is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices. Known for their assortment of “Good Stuff Cheap,” they offer customers a broad selection of brand name products, including housewares, bed and bath, food, floor coverings, health and beauty aids, books and stationery, toys, and electronics. Their differentiated go-to-market strategy is characterized by a unique, fun, and engaging treasure hunt shopping experience, compelling customer value proposition, and witty, humorous in-store signage and advertising campaigns. These attributes have driven their rapid growth and strong and consistent store performance.
Ollie’s has grown to 415+ stores in 28 states as of August 2021. Ollie’s no-frills, “semi-lovely” warehouse-style stores average approximately 33,000 square feet and generate consistently strong financial returns across all vintages, geographic regions, population densities, demographic groups, real estate formats, and regardless of any co-tenant. Ollie’s business model has resulted in positive financial performance during strong and weak economic cycles.
Ollie’s constantly changing merchandise assortment is procured by a highly experienced merchant team, who leverage deep, long-standing relationships with hundreds of major manufacturers, wholesalers, distributors, brokers, and retailers. These relationships enable Ollie’s merchant team to find and select only the best buys from a broad range of brand names and closeout product offerings and to pass drastically reduced prices along to customers. As Ollie’s grows, their increased scale has provided and will continue to provide with even greater access to brand name products as many large manufacturers favor large buyers capable of acquiring an entire deal. Ollie’s merchant team augments these deals with directly sourced products, including Ollie’s own private label brands and other products exclusive to Ollie’s.
Business Model
Product Strategy
Ollie’s offers a highly differentiated, constantly evolving assortment of brand-name merchandise across a broad range of categories at drastically reduced prices. Ollie’s ever-changing assortment of “Good Stuff Cheap” includes brand name and closeout merchandise from leading manufacturers. Ollie’s augments brand name merchandise with opportunistic purchases of unbranded goods and Ollie’s domestic and direct-import private label brands in underpenetrated categories to further enhance the assortment of products.
Ollie’s focus is on buying cheap to sell cheap and source products as unique buying opportunities present themselves. Ollie’s merchandise mix is designed to combine unique and brand name bargains at extremely attractive price points. This approach results in frequently changing product assortments and localized offerings which encourage shopper frequency and a “shop now” sense of urgency as customers hunt to discover the next deal.
The common element of Ollie’s dynamic merchandise selection is the consistent delivery of great deals to customers, with products offered at prices up to 70% below department stores and fancy stores and up to 20-50% below mass-market retailers. Ollie’s product price tags allow customers to compare competitor’s prices against Ollie’s prices to further highlight the savings they can realize by shopping at Ollie’s stores.
Product categories
Brand name and closeout merchandise
Brand name and closeout merchandise represented approximately 70% of 2020 merchandise purchases. Ollie’s focus is to provide huge savings to customers primarily through brand-name products across a broad range of merchandise. Ollie’s experienced merchant team purchases deeply discounted, branded, or closeout merchandise primarily from manufacturers, retailers, distributors, and brokers. This merchandise includes overstocks, discontinued merchandise, package changes, canceled orders, excess inventory, and buybacks from retailers and major manufacturers.
Non-closeout goods/private label
Non-closeout goods and private label products collectively represented approximately 30% of 2020 merchandise purchases. Ollie’s augments the breadth of brand name merchandise with non-closeout and private label merchandise. In categories where the consumer is not as brand conscious, such as food, home textiles, and furniture, or when Ollie’s may not be offering a current brand name merchandise deal, Ollie’s will buy deeply discounted unbranded merchandise. These extreme value offerings are mixed in the stores with brand-name merchandise. Ollie’s also has a variety of domestic and direct-import private label merchandise and exclusive products sold under numerous brands. These high-quality products are developed in key categories such as housewares and are designed to create brand-like excitement and complement brand-name merchandise.
Check out what Ollie’s offering right now at their stores on the following link!
Product mix
Ollie’s product offerings include:
Housewares: cooking utensils, dishes, appliances, plastic containers, cutlery, storage and garbage bags, detergents and cleaning supplies, cookware, and glassware, fans and space heaters, candles, frames, and giftware
Bed and bath: household goods including bedding, towels, curtains, and associated hardware
Food: packaged food including coffee, bottled non-carbonated beverages, salty snacks, condiments, sauces, spices, dry pasta, canned goods, cereal, and cookies
Floor coverings: laminate flooring, commercial and residential carpeting, area rugs, and floor mats
Health and beauty aids: personal care, hair care, oral care, health, and wellness, including PPE related to the COVID-19 pandemic, over-the-counter medicine, first aid, sun care, and personal grooming
Books and stationery: novels, children’s, how-to, business, cooking, inspirational and coffee table books, greeting cards, and various office supplies and party goods
Toys: dolls, action figures, puzzles, educational toys, board games, and other related items
Electronics: air conditioners, home electronics, cellular accessories and as seen on television; and
Other: hardware, candy, clothing, sporting goods, pet products, luggage, automotive, seasonal, furniture, summer furniture, and lawn & garden.
The following chart shows the breakdown of 2020 net sales by merchandise category:
Merchandise procurement and distribution
Merchandising team
Ollie’s 20-member merchant team maintains strong, long-standing relationships with a diverse group of suppliers, allowing Ollie’s to procure branded merchandise at compelling value for customers. This team is led by three senior merchants and has over 100 combined years of experience at Ollie’s. Ollie’s merchants specialize by the department in order to build category expertise, in-depth knowledge, and sourcing relationships. Ollie’s believes their buying approach, coupled with long-standing and newly formed relationships, enables Ollie’s to find the best deals from major manufacturers and pass drastically reduced prices along to customers. Ollie’s plans to further invest in and grow their merchandising team in order to expand and enhance their sourcing relationships and product categories.
Check out the merchandise team at the following link!
Merchandise procurement
Ollie’s merchants maintain direct relationships with brand manufacturers, regularly attend major tradeshows and travel the world to source extreme value offerings across a broad assortment of product categories. Ollie’s are an ideal partner to major manufacturers because their merchants are experienced and empowered to make quick decisions. Each opportunity is unique and their merchants negotiate directly with the supplier to lock in a particular deal. Ollie’s ability to select the most attractive opportunistic purchases from a growing number of available deals enables them to provide a wide assortment of goods to customers at great bargain prices.
Ollie’s dedication to building strong relationships with suppliers is evidenced by a 16-year average relationship with their top 15 suppliers. As Ollie’s continues to grow, the increased scale will provide Ollie’s with even greater access to brand name products since many major manufacturers seek a single buyer to acquire the entire deal.
Distribution and logistics
Ollie’s distributes over 95% of merchandise from distribution centers in York, PA (603,000 square feet), Commerce, GA (962,000 square feet), and Lancaster, TX (615,000 square feet). In order to minimize the amount of time retail stores devote to inventory management, merchandise is seeded with price tickets and labeled with a bar code for shipping.
Ollie’s stores generally receive shipments from distribution centers two to three times a week, depending on the season and specific store size and sales volume. Ollie’s distribution capabilities can support a range of 500 to 600 stores over the next several years.
Ollie’s stores
Ollie’s operates 415+ stores, averaging approximately 33,000 square feet, across 28 contiguous states in the eastern half of the United States. Ollie’s highly flexible real estate approach has proven successful across all vintages, geographic regions, population densities, demographic groups, real estate formats, and regardless of any co-tenant. Ollie’s business model has resulted in positive financial performance during strong and weak economic cycles. Ollie’s has successfully opened stores in six new states since 2016, highlighting the portability of the new store model. The following map shows the number of stores in each of the states in which Ollie’s operated as of January 30, 2021:
Store design and layout
Ollie’s warehouse format stores incorporate the same philosophy: no-frills, bright, “semi-lovely” stores, and a fun, treasure hunt shopping experience. Ollie’s presents their stores as “semi-lovely” to differentiate the stores from other traditional retailers and to minimize operating and build-out costs. Ollie’s stores also welcome customers with vibrant and colorful caricatures together with witty signage. Ollie’s attempts to make customers laugh and poke fun at Ollie’s and current events. Ollie’s believes that by disarming customers by getting them to giggle a bit, they are able to look at and trust products for what they are—extremely great bargains.
The store layout and merchandising strategy help to encourage a “shop now” sense of urgency and increase the frequency of customer visits as customers never know what they might come across in stores. Ollie’s make it easy for customers to browse stores by displaying a frequently changing assortment of products on rolling tables, pallets, and other display fixtures. Ollie’s store team leaders are responsible for maintaining the treasure hunt shopping experience, keeping the stores clean and well-lit, and ensuring customers are engaged.
Expansion opportunities and site selection
Ollie’s disciplined real estate strategy focuses on infilling existing geographies as well as expanding into contiguous markets in order to leverage distribution infrastructure, field management team, store management, marketing investments, and brand awareness. Ollie’s flexible store layout allows us to quickly take over a variety of low-cost, second-generation sites, including former big-box retail and grocery stores.
By focusing on key characteristics such as proximity to the nearest Ollie’s store, ability to leverage distribution infrastructure, visibility, traffic counts, population densities of at least 50,000 people within ten miles, and low rent per square foot, Ollie’s has developed a new store real estate model that has consistently delivered attractive returns on invested capital.
Ollie’s Army
Ollie’s customer loyalty program, Ollie’s Army, stands at 11.6 million members as of January 30, 2021. In 2020, Ollie’s Army members accounted for over 75% of net sales and spent approximately 37% more per shopping trip, on average, than non-members. Ollie’s engages new and existing Ollie’s Army members through the use of witty phrases and signage; examples include “Enlist in Ollie’s Army today,” “become one of the few, the cheap, the proud” and “Ollie’s Army Boot Camp…all enlistees will receive 15% off their next purchase.” In addition, for every $250 Ollie’s Army members spend, they receive a coupon for 10% off their next entire purchase. In 2018 Ollie’s introduced Ollie’s Army ranks to the program. For the first $250 and $500 members spend in a calendar year, they receive a coupon for 20% and 30% off of one item, respectively. Ollie’s continues leveraging the data gathered from the proprietary database of Ollie’s Army members to better segment and target marketing initiatives and increase shopping frequency.
Find out more about Ollie’s army at the following link.
Ollie’s TAM
Ollie’s believes there is an opportunity for more than 1,050 Ollie’s locations across the United States based on internal estimates and third-party research conducted by Hoffman Strategy Group, a retail real estate feasibility consultant that provides market analysis and strategic planning and consulting services.
Growth Strategies
Grow store base and Comparable Store Sales - Ollie’s new store openings and a focus on increasing comparable store sales will be the primary driver of continued, consistent growth in sales and profitability.
Increase offerings of great bargains - Invest in merchandising team in order to expand and enhance sourcing relationships and product categories, which will drive shopping frequency and increase customer spending.
Leverage and expand Ollie’s Army - Recruit new Ollie’s Army members and increase their frequency of store visits and spending by enhancing distinctive, fun and recognizable marketing programs, building brand awareness, further rewarding member loyalty and utilizing more sophisticated data-driven targeted marketing.
Ollie’s Financials
Following is the income statement for 2020.
Following is the balance sheet for 2020.
Following is the cash flow statement for 2020.
Revenue - $1.8B
Revenue Growth - 28%
Gross Margin - 40%
Earnings Margin - 13.4%
Free Cash Flow as part of Total revenues - 18.3%
Total Debt/Equity - 0.50 (Strong Balance Sheet)
Return On Equity - 26%
Net Cash - $447M
EV - $6.223B (Assuming $6B market cap, $0.67B total debt and $0.447B cash)
EV/Revenue 2020 - 3.4x
P/E Ratio - 24.8
P/FCF Ratio - 18.2
We can see the trajectory of Net Sales and Comparable Store Sales for Ollie’s in the following image.
Ollie’s has successfully increased their sales and comparable store sales consistently for 5 years at a CAGR of 19.3% and an average of 4.84% each year.
We can see the trajectory of Ollie’s net income, revenues, return on capital, and gross margin in the following image.
Ollie’s has kept their gross margin consistent at 40% and their return on capital at an average of 14% for the last 5 years.
Ollie’s Real Estate ROI
Ollie’s strong unit growth is supported by a predictable and compelling new store model. Ollie’s targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately $1.0 million, which includes store fixtures and equipment, store-level and distribution center inventory (net of payables), and pre-opening expenses. Ollie’s relatively low investment costs and strong new store opening performance, Ollie’s targets first-year annual new store sales of approximately $4.0 million. New stores opened from 2015 to 2019 have generated an average of $4.6 million in net sales in their first full year of operations and produced an average payback period of approximately two years. Ollie’s believes that their consistent store performance, corporate infrastructure, including distribution centers, and disciplined approach to site selection support the portability and predictability of new unit growth strategy.
Insider Ownership
Ollie’s, unfortunately, doesn’t have high insider ownership. Previously they had some insider ownership with their Founder Mark Butler, but he passed away in 2019. You can read more about him here. John Swygert has been the successor of Mark Butler in leading Ollie’s since then. John has ownership of approximately $20 Million in Ollie’s and has been at Ollie’s since 2004, that is 16 years. I think I would definitely give some credit for this ownership as significant insider ownership.
Ollie’s Media
Click the buttons below to check them out!
And while you are at it, check out my Twitter!
Competitive Advantage
“Good Stuff Cheap” - Ever-changing product assortment at drastically reduced prices - Ollie’s stores offer something for everyone across a diverse range of merchandise categories at prices up to 70% below department and fancy stores and up to 20-50% below mass-market retailers. Ollie’s product assortment frequently changes based on the wide variety of deals available. Ollie’s treasure hunt shopping environment and the slogan “when it’s gone, it’s gone” help to instill a “shop now” sense of urgency that encourages frequent customer visits.
Highly experienced and disciplined merchant team - Ollie’s 20-member merchant team maintains strong, long-standing relationships with a diverse group of suppliers, allowing them to procure branded merchandise at compelling values. This team is led by three senior merchants and has over 100 combined years of experience at Ollie’s. Ollie’s well-established relationships with suppliers, together with scale, buying power, financial credibility, and responsiveness, often make Ollie’s the first call for available deals.
Distinctive brand and engaging shopping experience - Ollie’s distinctive and often self-deprecating humor and highly recognizable caricatures are used in stores, flyers, mailers, websites, and email campaigns. This approach creates a strong connection to Ollie’s brand and sets them apart from other, more traditional retailers. Ollie’s “semi-lovely” stores feature these same brand attributes together with witty signage in a warehouse format that creates a fun, relaxed, and engaging shopping environment. Ollie’s offers a “30-day no hard time guarantee” as a means to overcome any skepticism associated with cheap prices and to build trust and loyalty.
Extremely loyal “Ollie’s Army” customer base - Ollie’s best customers are members of Ollie’s Army customer loyalty program, which stands at 11.6 million members as of January 30, 2021. For 2020, over 75% of sales were from Ollie’s Army members, and Ollie’s grew base of loyal members by 13.6% in 2020. Ollie’s Army members spend approximately 37% more per shopping trip at Ollie’s than non-members. Ollie’s identifies their target customer as “anyone between the ages of 25-70 with a wallet or a purse” seeking a great bargain.
Strong and consistent store model built for growth - Ollie’s employs a proven new store model that generates strong cash flow, consistent financial results, and attractive returns on investment. Ollie’s highly flexible real estate approach has proven successful across all vintages, geographic regions, population densities, demographic groups, real estate formats, and regardless of any co-tenant. New stores opened from 2015 to 2019 have generated an average of $4.6 million in net sales in their first 12 months of operations and produced an average payback period of approximately two years.
Final Thoughts
Ollie’s is a highly differentiated retailer that wants to provide “Good Stuff Cheap” to its customers that is to provide “Quality Stuff Cheaper” using economies of scale. They are really creative and efficient in their marketing spend and generate high engagement with their customers through their loyalty program “Ollie’s Army”. They have a high return on investment on their new stores and have long runways for growth. Their merchandising strategy and team provide significant barriers to entry for new players.
Note: A lot of information in this article is compiled from Ollie’s website, SEC filings, and recent presentations/conferences.
If you liked this post you can read other posts about SaaS/Growth stocks here: