I’ve been a huge fan of discount retailer Ollie’s (NASDAQ:OLLI) since it came public a little over a year ago. The stock has been a huge winner for those who waited for the initial overvaluation to work itself off, and indeed, OLLI’s long-term future looks very strong in a variety of ways. Back in June, I touted OLLI’s ability to expand margins over time in addition to its blistering revenue growth as primary reasons why the stock was still a buy. And with the company’s recent Q2 report extremely well received, it seems Ollie’s is off to the races once again.
OIlie’s has long been about its combination of rapid sales growth and margin expansion conspiring to send EPS much, much higher over time. Of late, Ollie’s has continued to do just that, and in Q2, it came through with a better-than-expected sales result. The top line grew better than 16% in Q2 as Ollie’s continues to open new stores – footprint was up 15.5% Y/Y – but more importantly, it also continues to grow comp sales.
Ollie’s is going to open new stores at a fast pace for a long time to come as it only has just over 200 stores at this point. But, in addition to that, the company’s demand for its stores is real and growing over time as it continues to post impressive comp sales numbers. Q2’s 3.5% comp was well in excess of expectations for 2% or less and that is a big reason why the stock was initially up so much off of the report. It seems very clear that Ollie’s has a very direct and sustainable path to sales growth both organically and through new units, and if anything, Q2 strengthened that case.
But what about margins? I love a retailer with expanding margins and that has been a big draw for me in the past with Ollie’s. Gross margins were up 120bps in Q2 as the company continues to execute on building leverage via greater scale. Part of the growing pains of an expanding retailer is that things like the distribution network are expensive but can get leveraged over time as more units enter the system. That is exactly what we’re seeing with Ollie’s as an ever more efficient supply chain continues to boost gross margins. There is a bit of better pricing and sourcing built in as well, but the bulk of the gains are coming from supply chain efficiencies, and that is something that can and should continue for a long time to come. Ollie’s doesn’t have small oscillations in gross margins; it has a clear, sustainable path higher, and it is executing very well against that.
This allowed operating income to rise 110bps to 10.5% (excluding one-time costs of going public last year), and as I’ve said in the past, Ollie’s has a long way to go here. That is a worthy operating margin level for a retailer, but in particular, if you consider how small Ollie’s is and the growth path in front of it, that level of operating margin at this stage in its lifecycle is absolutely outstanding. That’s why I’m so adamantly bullish; this company is already so good, but it will just get better and better over time as it continues to grow.
Estimates have come up slightly in the past few weeks as analysts continue to see improvement in OLLI’s fundamentals. But the bull case for Ollie’s is pretty well publicized at this point, and as such, the stock is going for 28 times this year’s earnings. That is certainly not cheap, and it may very well scare away some value investors. But Ollie’s is a premium growth name, and the simple fact is that if you want to own it, you’re going to have to pay up. I don’t normally pay 28 times earnings for much of anything, but Ollie’s is good enough that I make an exception.
Keep in mind that this is a company that is going to grow earnings at 15% or better for the foreseeable future and that it has a very rare combination of sales growth and margin expansion that is difficult to match. Ollie’s has proven the model works, and given the fact that it continues to impress with comp sales as well as margin expansion, including a Q2 beat, I’m still excited to own this stock. This is one you can buy and forget about for a long time.
Fuente: Seeking Alpha
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