Why a Recession is Good News for Ollie’s Stock

In March 2022, shares of Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) slipped below $40 for the first time since the pandemic plunge of two years prior. Since then, it has nearly doubled even though the economic outlook has become gloomier. What gives?

Simply put, Ollie’s is built for a recession. 

When management spoke at last month’s Jefferies Consumer Conference, they exuded unmistakable confidence. That’s because they know deep discount retailers have outperformed in past recessions and are likely to do so again.

Even with intense competition from dollar stores and warehouse clubs, Ollie’s is positioned to do better than most when the economy hits the skids. Let’s dig into why.

Consumers are Feeling the Heat

The American consumer is getting increasingly strapped by rising grocery prices, $5 gas, and inflationary pressures everywhere they turn. And while wages are also on the rise, they haven’t kept up with the pace of inflation.

As a result, people are falling behind on their bills, maxing out credit cards, and in extreme cases, tapping emergency savings to keep up. The most recent University of Michigan consumer confidence reading showed that nearly half of all consumers are seeing their living standards eroded by inflation.

With budgets stretched, Americans are looking for new ways to stretch the dollar. Frugality and finding great deals is now trendy if not critical. 

Ollie’s is likely to be a popular destination in the months ahead because it offers rock-bottom prices on national brands across several categories. Deep discounts can be had on housewares, food, health and beauty aids, clothing, and other essentials. Prices are well below those of department stores and other mass-market retailers.

The Trade-Down Effect

The mounting impact of higher prices and lower credit availability stands to cause millions of Americans to change their purchase habits. Referred to as the ‘trade-down effect’, it means a significant percentage of the population will seek out lower prices to offset inflationary pressures. It is a phenomenon that typically involves forgoing one’s usual store choices in favor of discount retailers.

In other words, consumers will keep spending on groceries and household staples but where they spend could shift dramatically if a recession hits as widely expected. In the trade-down scenario, price matters most. This draws more consumers to value retailers.

The current environment isn’t too different from the Great Recession of 2007 to 2009. Although the current jobs market is stronger, similarities can be drawn between rising fuel and food prices and slowing economic activity.

It's difficult to say when the trade-down effect will be on, but there are signs it may already be underway. Ollie’s management recently suggested that the early phase of the shift may be coming from fixed and low-income consumers who have no choice but to buy food and household essentials for less.

Eventually, the thrust of the trade-down would involve middle-class consumers adjusting their spending patterns. This wave stands to bring many more shoppers to places like Ollie’s.

Ollie’s Stores are Unique

Granted, the Dollar Trees, Walmarts, and Costcos of the world should also benefit from a recession. Yet there are some unique attributes of Ollie’s shopping experience that could draw an inordinate amount of first-time shoppers to Ollie’s.

The retailer obtains closeout and excess inventory at rock bottom prices and passes the savings on to customers. It is a unique model that has served Ollie’s well for the last 40 years and allowed it to survive in the cut-throat world of discount retail. National brands and closeouts account for about two-thirds of sales with the remainder derived from private label and exclusive brands.

People also like Ollie’s because it can serve as a one-stop destination. Its warehouse-style stores are loaded with unusual deals on a wide range of essential and discretionary items. This combined with a treasure-hunt-like atmosphere makes it a bit of a ‘poor man’s Costco’. Simple, witty signage also resonates well with customers that are simply there to get a good bargain.

In addition to an emerging shift in demand, Ollie’s has another very important tailwind. Product availability is on the upswing. With manufacturers and retailers like Target having a hard time selling their excess inventory, more goods are becoming available and Ollie’s is gaining pricing leverage.

Over time, Ollie’s plans to expand its mostly East Coast footprint westward to the tune of more than 1,000 locations from the current 439. A key step in this process will be the construction of a fourth distribution center in the Midwest slated for early 2024. 

Toss in Ollie’s strong financial position and things are lining up nicely for the deep discount retailer. Traffic appears to be headed Ollie’s way and that is why we are seeing the stock perk up. Yet with Ollie’s still trading approximately $50 below last year’s peak, the stock remains a bargain outlet for recession investors.