Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Ollie's Bargain Outlets Is Still a Buy

By Matthew Cochrane – Sep 15, 2018 at 8:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of the discount retailer are up more than 100% in the last year, but it's not too late for new investors to profit from its winning business model.

When Ollie's Bargain Outlet Holdings Inc. (OLLI 0.21%) reported its second-quarter earnings last week, the discount retailer showed once again that its ongoing stock price rally is based on sound fundamentals. In the quarter, total net sales grew to $288.1 million, a 13.1% increase year over year, while adjusted earnings per share (EPS) rose 48% to $0.40. Same-store sales, one of the most important metrics in evaluating retail companies, rose 4.4%.

What's driving Ollie's wild success? In reviewing the company's Q2 conference call, transcribed by S&P Global Market Intelligence, a familiar pattern emerges. There appear to be three factors at play, all of which have long been part of Ollie's strategy: It provides solid deals to bargain shoppers; it's expanding its store count; and it continues to grow "Ollie's Army," its affectionately nicknamed loyalty program. Let's take a closer look at each of these to see how they're driving the retailer's growth.

Ollie's Metrics 2018 Q2 2017 Q2 Change
Net sales $288.1 million $254.6 million 13.1%
Adjusted EPS $0.40 $0.27 48%
Number of stores 282 250 12.8%

Data source: Ollie's Bargain Outlet Holdings Inc. 

The best deals around

Ollie's prides itself on offering goods and products at the best prices around. As CEO Mark Butler has said in the past, Ollie's is sometimes not even allowed to advertise the prices it offers on certain brand name goods. Whether that's the truth or just a clever marketing gimmick, it does help give a trip to Ollie's the aura of a treasure hunt, as customers scout the store aisles in search of the latest deals.

Multicolored sales tags displaying special deals.

Ollie's Bargain Outlet attracts customers with great deals. Image source: Getty Images.

During the conference call, Butler again credited the company's relationships with vendors for helping Ollie's offer such deals, specifically calling out its relationships with toy manufacturers as key in landing it exciting products in the wake of the Toys R Us bankruptcy. He stated:

"Our recipe for success has always been selling good stuff cheap, and giving our customers extreme value each and every time they shop with us. We continue to see a growing availability of deals from new and existing vendors. We have great deals across the entire store, and I probably don't have to say this again, I'm really excited about our toy buyouts. We've worked hard to get ahead of this with major toy manufacturers, and the stores are going to be packed with great deals. Having a category killer go out of business presents a unique opportunity, and we leaned into it. This is a great opportunity to, once again, offer our customers more of what they want, great brands at drastically reduced prices."

Store count rising

Ollie's continues to expand both the number of retail locations it operates and the number of states in which is has stores, en route to its long-term goal of having at least 950 U.S. stores. The current store count is 282. This quarter, the company only opened six new locations, but management maintained they were on track to hit their target of 36 to 38 new stores this year. Among those six was the company's first location in Louisiana, bringing the total number of states it's operating in to 22.

This is another area where Ollie's benefited from the demise of Toys R Us -- it picked up 17 of the former toy merchant's locations. As Butler commented, "Just like on the merchandise side, we're always looking for a great deal, and acquiring these sites demonstrates our ability to react to a deal and the opportunistic nature of Ollie's."

An army's swelling ranks

Another advantage Ollie's possesses is its enthusiastic customer base, which the company has leveraged with a loyalty program it calls Ollie's Army. That Army added 500,000 members in just the last quarter to reach 9.8 million, and those customers accounted for nearly 70% of the company's sales.

While the loyalty program has been around for a number of years, Ollie's is adding features that it expects will continue to drive customer engagement. Among them is a new system that ranks members as one-, two-, and three-star generals, based on how much they spend.

The company is also rolling out a new mobile app that will give Army members a heads-up when new deals and products become available, let them know their current rank, and keep them up to date on their progress toward their next "promotion." Of course, the higher your rank, the more special offers you can take advantage of.

Final takeaway

This is a tough time to be investing in the retail sector, as technology and changing consumer habits have seriously disrupted the space in what some have dubbed the "retail apocalypse." Yet Ollie's shares are up 70% year to date, and an incredible 327% since it IPOed just over three years ago, proving that some things -- like a good bargain -- never go out of style.

Ollie's shares are not exactly a bargain. Based on its full-year guidance for adjusted EPS, shares currently trade at a pricey P/E ratio of about 53. Yet given the above bullish factors, the company's current 48% EPS growth, and another quarter in which management has raised guidance, I believe continued market-beating returns are ahead for this fast-growing discount retailer.

Matthew Cochrane has no position in any of the stocks mentioned. The Motley Fool owns shares of Ollie's Bargain Outlet Holdings. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.