Ollie’s Bargain Outlet Holdings, Inc.

Moat: 1/5

Understandability: 1/5

Balance Sheet Health: 4/5

Ollie’s Bargain Outlet is a retailer selling primarily brand name and closeout merchandise at heavily discounted prices.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Ollie’s has a very weak moat that can easily get disrupted. Its reliance on sourcing discounted merchandise makes it susceptible to external pressures and offers limited pricing power. It’s very easy for its competitors to also replicate.

Moat Assessment: 1/5 Ollie’s Bargain Outlet operates in a highly competitive retail sector, where barriers to entry are relatively low and competition is fierce. Unlike companies with strong brand recognition or unique technological advantages, Ollie’s relies primarily on opportunistic purchasing of closeout merchandise, which creates several challenges:

  • Lack of Pricing Power: As a discount retailer, Ollie’s relies on low prices to drive sales. It cannot charge a premium for products. It’s not a differentiated product, and this leaves them susceptible to price competition and limited ability to generate excess returns on capital.

  • Sourcing Dependency: Ollie’s business model depends on finding deals on closeout and overstocked merchandise from various manufacturers, and this supply is not guaranteed and can change at any time. Moreover, other retailers are constantly fighting for the same limited supply. This could lead to a decrease in margins as they pay higher prices for inventory. They’re competing with thousands of other discount retailers who are all looking for similar deals.

  • Replicability: Ollie’s is basically a brick and mortar retailer selling various products. A competitor can easily copy the business model, and they would have no moat preventing them from doing so. They do not have technological advantages or any proprietary processes.

  • No Network Effect: Unlike other businesses, more customers don’t make Ollie’s any more appealing than before. This puts them at a disadvantage.

  • Weak Brand Power: While Ollie’s does have a distinctive brand name, and a dedicated customer base, it lacks brand loyalty of more prominent retailers. Customers are typically drawn by its discounts rather than the brand itself, which means they can easily be enticed by another competitor’s low prices.

Legitimate Risks to the Moat and Business Resilience: Ollie’s faces a number of risks that could erode its competitive advantage and business resilience:

  • Changing Consumer Preferences: Consumer preferences in the discount retail sector can be fickle and highly sensitive to pricing. Any change in consumer behavior can impact Ollie’s attractiveness in the sector.
  • Supply Chain Disruption: Ollie’s reliance on closeout merchandise exposes it to risks associated with supply chain volatility. This can lead to higher product costs, supply shortages and affect profit margins. We have seen this play out already during the 2021-2022 supply-chain issues.
  • Increased Competition: Increased competition from other discount retailers, both online and brick-and-mortar, can put pressure on profit margins and limit future growth. Specifically, e-commerce may disrupt business for brick-and-mortar retailers.
  • Economic Downturn: A recession can reduce consumer spending on discretionary items, affecting the sale of non-essentials, and leading to a decline in Ollie’s revenue. It could also reduce spending in their category (discretionary goods), reducing their purchasing power.
  • Failure of New Store Openings: The ability for the company to continue opening new stores on a sustainable pace is crucial to growth, and issues here can impact both short-term and long-term success.

Business Explanation Ollie’s Bargain Outlet is a discount retailer with a business model centered around purchasing branded merchandise at low costs and reselling it to customers at marked-down prices.

  • Revenue Distribution: Ollie’s generates most of its revenue by selling name-brand products and closeout merchandise in various categories such as housewares, food, books, toys, health and beauty items, clothing, and electronics. As the company is focused on sales of closeout and brand-name products at low costs, and relies on various industries, it is vulnerable to supply shortages in some of those areas.
    • They tend to source these through manufacturer closeouts, retailer liquidation, or other similar means.
  • Industry Trends: The retail sector is becoming even more competitive, with many players fighting for the same customers. With the rise of e-commerce, traditional brick and mortar retailers are facing tough competition in getting more sales. As such, brick and mortar retailers have to try to differentiate themselves with unique products or a better shopping experience. Consumer behavior is also changing as customers are becoming increasingly more sensitive to price and are relying more on online reviews.
    • Ollie’s operates in a highly fragmented discount market with low barriers to entry and intense price competition.
  • Margins: Gross margins have been relatively stable, ranging around 39%, while EBIT margins have been around 8%. Their operating expenses are highly dependent on sales, as they have to continue spending money on staff and store upkeep.
  • Competitive Landscape: The competitive environment for discount retailers is intense. It includes big players like Dollar General and Dollar Tree, along with other off-price retailers and online marketplaces. Ollie’s differentiation comes from opportunistic merchandise purchasing and a treasure-hunt experience in their stores. All of these competitors rely on value-conscious consumers and are constantly trying to get a better deal than the next retailer. This limits the ability of each individual retailer to maintain consistent profits.
  • What Makes Ollie’s Different: Ollie’s differentiates itself with a quirky, treasure-hunt store atmosphere, offering a constantly changing mix of discounted, name-brand merchandise. This treasure-hunt experience creates excitement and an opportunity for finding bargains, which can draw in customers. They rely on a “Good Stuff Cheap” strategy, and they are known for their highly discounted pricing. However, at the same time, their products have almost zero moat to them, they could just sell it next to a competitor and sell the same things. The difference for the consumer will be on price.

Financial Analysis Ollie’s financial position is moderate, with some areas of strength and weaknesses.

  • Balance Sheet: Ollie’s has a decent balance sheet with limited long-term debt and good access to credit. They also have a large inventory, that was $750 million in early 2024, which is typical for a retailer. Most of the company’s assets are in its inventory and stores. The company’s tangible book value has a positive value, at roughly 20% of its sales, as of the last filings, implying that the company’s assets and equity are higher than liabilities.
    • This gives them a rating of 4 out of 5 for balance sheet health.
  • Profitability: The company’s margins have remained around 40%, though the company has been facing pressure in net income, with many one-time charges hurting recent results. There is some pricing pressure in the industry, as well, with the company trying to provide a good deal to consumers.
  • Cash Flow: Ollie’s is a generally cash flow positive business, which they use to reinvest in themselves as well as their buyback program.

Recent Concerns/Controversies: In the most recent earnings calls and recent 10-Qs (latest report is 2024 Q1), Ollie’s management has been consistently stating that they are having difficulty in securing the necessary inventory. This is expected to have a negative impact on margins and earnings for the next quarter as they have to source from higher-priced sellers. However, they expect the long-term supply to recover.

  • They expect a full year of positive comps for 2024.
  • They mentioned that customers are highly receptive to new brands in their stores.
  • They added that they plan to open at least 55 new stores a year.
  • The CEO mentioned that a lot of the supply chain issues are over and they expect a much better inventory going forward.
  • The CFO mentioned that Q1 results were better than expected but that Q2 may have lower margins due to buying from higher priced suppliers.

Understandability: 1 / 5 Ollie’s is a straightforward business model, selling branded products at discounted prices. It’s operations are simple and there is nothing complicated about the company or its products.

  • They rely on a simple supply chain and have a clear target market.
  • Their financials are also straightforward and there isn’t too much that requires more than basic accounting knowledge.