Is Ollie’s Bargain Outlets A Value Or A Trap?

Key Points

• Ollie's Bargain Outlet gets an upgrade from JPMorgan, suggesting upward stock price movement is possible. 
• Headwinds cast a shadow of doubt on Ollie's ability to sustain growth. 
• Increasing store count and comps are driving growth, which is expected to continue in 2023. 

A new upgrade from JPMorgan Chase & Co. NYSE: JPM suggests Ollies Bargain Outlet Holdings, Inc NASDAQ: OLLI has value. They upgraded the stock from Underweight to Neutral, which is not an inspiring move but 1 that helps lift the ceiling for the market. An increase in confidence was cited, driven by an expectation the company can sustain growth, improving deal flow, margin recovery and greater visibility. The critical news is that the price target was increased to $66 from $55, opening the door to upward price movement. JPM’s $66 is $4 above the Marketbeat.com consensus, leading the market higher. 

The consensus target assumes the stock is fairly valued at current levels, but the trend in sentiment is more important. The price target is trending higher compared to last year, last quarter and last month and is expected to trend higher in the 2nd half. The price target is increasing because the company is investing in growth and growing despite America's economic headwinds. Results have been mixed over the past year, with mild top-line under-performance offset by accelerating growth. 

Ollie’s Expected To Accelerate Growth In Q1 

Ollie’s is expected to post a significant decline in sequential results due to seasonal factors. The salient point is that the Marketbeat.com consensus of $449 in first-quarter revenue is up 10.5% compared to last year and is accelerating from 9.7% in Q4. Momentum is expected to carry through the end of the year, but growth may slow to lower high-single-digit levels.

The opportunity is that forward estimates have been slow to change due to uncertainty in the broad economy, but that may begin to change now. An increase in the growth outlook, specifically the earnings outlook, will improve the value relative to peers like The TJX Companies NYSE: TJX, which also pay dividends. 

The growth outlook is supported by increased store count and comps. The company reported 5 new stores in Q4 2022, bringing the YOY to 8.8%. That alone is enough to sustain growth near the Q1 pace, not counting improving comps. Comps are also on the rise and are expected to run from 1% to 2% in 2023, but the company has risks. Citigroup NYSE: C issued a downgrade a few weeks before JPMorgan’s upgrade, which essentially offsets it.

In their view, the company’s recent margin miss, scalability, loyalty club weakness and lack of visibility are cause for concern. Citigroup downgraded from Neutral to Sell with a price target of $49, but it is the only negative movement this year. 

Weaker-than-expected retail sales figures are also a cause for concern, but Ollies and its off-price brethren are better suited for these times. Discounting and inventory-clearing actions at major retailers should give Ollie purchasing power regarding selection and price. 

Share Repurchases Help Support Ollie’s Stock 

Ollie’s Bargain Outlets doesn’t pay a dividend, but the company buys back shares which is almost as good. Repurchases totaled $41.8 million in 2022, worth about 1.1% of the market cap. Repurchases are expected to continue in 2023 and may help the stock to reverse course. As it is, the stock price has bottomed but is trending sideways within a range. The market may drift lower within the range before the next earnings report, but support is expected in the $50 to $55 range.