Why Ollie’s Bargain Outlet’s Profit Margin Is So Attractive

Ollie’s Bargain Outlet (NASDAQ:OLLI) specializes in buying liquidated merchandise and reselling its inventory to its loyal base of regular customers, known affectionately as “Ollie’s Army.” In the following segment from Motley Fool Live, Fool.com contributor Asit Sharma and Fool analyst Auri Hughes discuss why this is a fruitful model from a profitability perspective. The two also briefly review the company’s financial condition during the COVID-19 pandemic.

A full transcript follows the video, which was recorded on Aug. 27, 2020.

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Asit Sharma: One of the things, if you like this industry, that is a positive, or if you’re a shareholder, so many of Ollie’s competitors, again like Big Lots, like, let’s say Dollar General is an example. T.J. Maxx is another example. Gross margins in this industry where companies focus on either closeouts or very cheap goods, they tend to be in the 30% range at the best, and then cost of sales, selling, general, and administrative expenses can also be in the 30% range. So there’s not a lot of wiggle room, but Ollie’s consistently has gross margins around 40% or slightly above, and part of their business proposition, their value proposition when they went public, Auri, was to be able to maintain that long-term EBIDTA — earnings before interest, taxes, depreciation, and amortization — as they scaled, and if they can do that, if they can triple their store count and keep a 40% gross margin, that is going to make a pretty persuasive investment case. So I was impressed by that in prepping for this deep dive. All in all, not a bad quarter, given that they had these headwinds here, as you can see. I’m just guesstimating this is somewhere around 8% of sales is their net profit.

Want to just sort of move through, because we don’t have a ton of time left, and talk about the balance sheet. Ollie’s is pretty well positioned for any further shocks from the pandemic. Let’s just quickly look here. So current assets and just take out current liabilities. I always look, first, what’s the working capital on the books, and that looks like it’s about $280 million, and that is well in excess of long-term liabilities, operating lease liabilities being the biggest sort of long-term obligation that they have, because, as I said earlier, it’s a lease model. They’re out leasing stores. They’re not buying real estate for the most part and owning buildings. So this is a pretty solid look here. These don’t have the same exigencies as long-term debt. If you have to break a lease, at least that’s doable. The company has, I think, about another $100 million left on a revolving credit line in addition to some long-term borrowing capability. It looks like they’re over the first shocks of COVID-19, and so the worst-case scenarios that you might have worked through with Ollie’s haven’t come to pass.

Auri, I want to say that in the last conference call, not the one that they just had for this quarter, but the quarter before that, the CFO did a really great job of laying out for investors what their fixed costs truly look like and what kind of wiggle room they had to make some of that variable, to drop off some fixed costs, and made investors very confident in that whatever happened with the pandemic, they thought they’d be able to get through without too much trouble over the next six months to a year. I think now they’re in a slightly higher gear, so in terms of a risk case, I think you can look forward, and they’re in a relatively better position. I mean, we’ve seen so many companies that have gone bankrupt during this, so many retailers that have gone bankrupt during this time. So any thoughts on the income statement and balance sheet? And then we’ll wrap up with a few other thoughts and questions.

Auri Hughes: No, I think for a retailer it’s really strong. It’s profitable. Net cash on the balance sheet, so you’re getting some cash today and some growth. So I think everything you’d want to see in a retailer, higher gross margins than Walmart, (NYSE: WMT) so I think that’s pretty special. Their strategy is working out. We’re going to see if they can maintain that. I think, financially, very positive.

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