Ollie’s Bargain Outlet: Expansion Opportunities and Risks

Close-out merchandise specialist Ollie’s Bargain Outlet (NASDAQ:OLLI) has a simple method for juicing revenue over the long term in addition to lifting comparable sales: Open more stores. Motley Fool contributor Asit Sharma and analyst Aurie Hughes discuss the potential for additions to Ollie’s store base — and the risks that will inevitably follow as it expands its retail footprint.

A full transcript follows the video.

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Asit Sharma: Here’s a breakdown, and you see the stars are the distribution centers, the DCs. So here we have Texas, and it’s a really nice expansion. Let’s talk about this for just a second. So, Auri, I’ve seen different companies with what’s called white-space opportunities. If you took this map, there’s another company which is in the retail business called Dunkin’ Donuts, but they don’t sell anything but doughnuts, sandwiches, beverages. They’re not in the business of selling close-out items, but their map looks a lot like Ollie’s. They have this footprint in the Northeast and Mid-Atlantic. They’ve got a little bit of contiguous western expansion, and actually then Dunkin’ jumps over the map, jumps over all this area here to California, which is an expansion priority for them.

But one of the arguments for this company, as Auri told us, they do well in rural areas. They’re in some cities as well. They’re not only in rural areas, but that’s where they have an edge. There’s a lot of great space. Although these are not densely populated spaces, there’s a lot of great white space for them to keep expanding, and they could continue to go in this contiguous fashion westward. What are your thoughts on the map and the opportunity here in terms of an expansion strategy and geography, Auri?

Auri Hughes: So I guess my best thought is I’m cautiously optimistic because one of the issues Ollie’s had last year was Toys R Us went bankrupt and they took this opportunity to buy these old warehouses where the Toys R Us were, and some of them close to pre-existing Ollie’s locations. so this was actually a bad decision by management in hindsight, and what happened was same-store sales dropped, so that’s the sales growth within an individual store, because you had members going to other Ollie’s locations that were not far from pre-existing Ollie’s locations.

So I’m opportunistic about the growth, but I think they’re going to have to be very strategic about where they’re putting these locations, because they’re at 300-plus stores now and if we go to a thousand, are you going to cannibalize your own sales? That’s my only concern, but looking at the map, lots of white space, lots of rural areas. I see opportunity on paper.

Sharma: Yeah, and this is a really great point. So we’ve seen different chains — since we’re in the retail space, let’s again look at food as a great example. We’ve seen many companies, even the best-run companies, grapple with this concept of cannibalization or self-cannibalization. Starbucks is what I’m thinking of. They’ve tried so many iterations of how to build their revenue base through store count, and before the pandemic, I believe they had kept a strategy for many years of opening smaller stores but very close by to some bigger stores, and that hasn’t always worked out well for Starbucks.

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