No. of Recommendations: 7
I would like to bring attention to this board a stock that a friend of mine asked me to look at recently. I have never been to a Ollie’s Bargain Outlet location, but they have over 200 locations open in the US, mostly concentrated from the northeast to the southeast to the Midwest. There is a location in Orlando, FL and, as luck would have it, I have a business trip to Orlando next week. While there, I plan on visiting a location to get a better idea what they’re exactly comparable to.

However, as their name suggests, they’re a discount retailer that buys overstocked and discontinued merchandise from around the country and then sells this merchandise at their retail locations. From their website:

Ollie’s Bargain Outlet is one of America’s largest retailers of closeouts, excess inventory, and salvage merchandise. Our 227 “semi-lovely” stores sell merchandise of all descriptions and some beyond description.

You’ll find real brands at real bargain prices in every department, from housewares to sporting goods to flooring and to food. Ollie’s buyers scour the world looking for closeouts, overstocks, package changes, manufacturer refurbished goods, and irregulars.

Much of the merchandise comes direct from the finest manufacturers in the country and abroad. For example, if a manufacturer makes too much of an item, or changes their packaging, Ollie’s will buy the overstocked or old packaged items. So, you will always find famous brand name products at Ollie’s, but a lot of them could be last year’s colors, patterns or packaging that traditional retailers won’t sell.

We also work with insurance companies to buy salvage merchandise. If a store in your neighborhood has a flood or fire, Ollie’s may purchase the undamaged inventory and put it in our stores at drastically reduced prices. Yes, it might smell a little smoky, but it’ll be so cheap that you won’t mind!


From http://www.ollies.us/what-is-ollies/

So, for example, recently a giant ocean freight shipping carrier, Hanjin, declared bankruptcy. This has thrown global commerce in chaos because a lot of goods are now stranded on these ships sitting outside ports because no one is paying to offload this merchandise. Ollie’s saw this as an opportunity and released in a press release that they have $100M available to purchase these goods from merchants that can no longer afford to wait for these goods.

See http://investors.ollies.us/phoenix.zhtml?c=254045&p=irol...

I also think macro-tailwinds might be present for quite a while. I don’t necessarily think we’re headed straight for a dire, doomsday-style global recession, but I believe there are signs the global economy might not exactly be healthy either. In a struggling economy retailers like Ollie’s should do quite well, I think.

They seem to be growing their store count at a fairly consistent pace, anywhere between 10-15% YOY. This should continue for a while as they are not even in many places around the country and far from saturated in most states. With a market cap of only $1.6 billion, they would seem to have plenty of room to grow.

Here are the numbers:

Net Sales (millions) Q1 Q2 Q3 Q4
2014 150 201
2015 162 182 175 243
2016 194 211

EPS (adjusted) Q1 Q2 Q3 Q4
2014 0.10 0.24
2015 0.13 0.15 0.11 0.31
2016 0.20 0.21

Net Sales Growth (millions)
2015 TTM Q2 = 695
2016 TTM Q2 = 823
YOY Revenue Growth = 18.4%

EPS Growth (adjusted)
2015 TTM Q2 = 0.62
2016 TTM Q2 = 0.83
YOY EPS Growth = 33.9%

P/E (Check Current Price) = 26.76/0.83 = 32.24

1YPEG = 32.24/33.9 = 0.95

Store Count Q1 Q2 Q3 Q4
2014 167 173 176
2015 181 187 200 203
2016 208 216

Comparable Same Store Sales (%) Q1 Q2 Q3 Q4
2014
2015 7.8 3.2 5.0
2016 6.0 3.5

Thoughts? Comments? Concerns? If anyone has ever shopped at Ollie’s I would love to hear their impressions too.

Matt
No position
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No. of Recommendations: 10
Matt,

If anyone asked me for a role model for how to learn about investing, I'd point them to you.

Thanks for posting this idea. I'm tempted to dig into it. However...

Goodwill + Intangibles = 69% of Total Assets (as of 7/30/2016)

The Goodwill represents the purchase price in excess of net assets of the acquired business. When asked, the company characterized this to the SEC as the future economic power of their workforce and going concern value of their operations. The Intangibles represent mostly their trade names.

Why is the 69% ratio a concern?

If they ever decide these assets are impaired, they'd have to be written off which could *dramatically* reduce the net worth of the business, just given the outlier size of the number. This could then lead to adverse debt ratios and possible violation of their covenants with lenders. In addition, if the business is stressed and they need to raise cash fast, they may not be able to sell these assets quickly, or at all. (AOL Time Warner 2001/2002, for example).

Stated differently: Ollie's has a negative tangible book value, meaning without the goodwill and intangibles, they owe more than they own. Companies with negative tangible book value have difficulty protecting themselves in a recession or against competitors.

Bottom Line: Their balance sheet is very weak right now. I'd give this one some time to see if they can strengthen the balance sheet before getting in any deeper.

Thanks,
Ears
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No. of Recommendations: 1
Thanks Ears for the kind words and the insightful comment. I totally missed that on the goodwill!

Matt
No position
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx
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No. of Recommendations: 5
if the business is stressed and they need to raise cash fast, they may not be able to sell these assets quickly, or at all.

In that case they are toast. Yet, this scenario is very rare short of impending bankruptcy. The idea that companies are much more secure because, on paper, their tangible book value seems substantial as opposed to companies with negative tangible book value can be quite misleading without considering the bigger picture.

Thinking of Ollie’s for a moment, if a company (Ollie’s) has healthy free cash-flow and growing earnings they are likely to be able to borrow at reasonable rates on this basis alone. Think of two individuals, one owns a home that is worth a million dollars, but he has little income. The other rents his apartment but has a large, growing, and secure income. Who is the better bet to a lender? It is not necessarily the man with “assets” and a scant income.

To my mind it’s mainly valuation that makes Ollie’s a pass. Longterm debt is just over four times net earnings; not great but probably fairly manageable given healthy and rising earnings.

Some great businesses are serial acquirers with large amounts of “goodwill and intangibles” and consequently a negative book value. When all is said and done it’s earnings that count.

But I agree, Ollie’s has no safety net given a significant and enduring earnings fail. But, considering the business they are in I think this is probably unlikely short of a deep recession.

kelbon
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