© Reuters. Citi cuts Ollie’s Bargain Outlet (OLLI) to sell; ‘a slower pace of store openings may be the new normal’
by Michael Elkins
Citi downgraded Ollie’s Bargain Outlet Holdings Inc (NASDAQ:) to a Sell rating (from Neutral) and cut its price target on the shares to $49.00 (from $52.00) following the company’s report. The company recorded a sales pace above Q4 with a 3% increase in comparisons (versus consensus: 0.3%). However, margin trading dollars were weaker than expected and implied guidance.
The analysts wrote in a note: “With 70% of sales being closeouts, we believe this model is difficult to scale from a product access and supply chain perspective, and could limit the store’s long-term potential. . When we saw supply chain issues escalate before the pandemic (in 2019), it highlighted the risk of foreclosure that we believe still exists, and a slower pace of F23 store openings may be the new normal.”
Citi’s concern is that Ollie’s long-term store goal of more than 1,050 will be elusive. Citi has long believed that the pace of store openings would have to slow as they don’t think the supply chain is working well enough to open as many stores as Ollie’s has been targeting.
Citi analysts estimate that in 2018 and 2019, new store productivity was in the 103-110% range. Even though store openings have slowed in 2021/2022, they estimate that new store productivity was in the 80-85% range. Management assumes a productivity of the new F23 store of ~100% vs. ~82% in the last two years. They also assume the promotions will remain muted, which Citi sees as a risk.
Citi thinks it’s smart for management to pull back on new store openings as it has in recent years (45 openings at F23 vs. 37 at F22 and 43 at F21), and while management has indicated a return to 50 At 55 openings as of F24, Citi believes a slower pace of store openings may be the new normal.
OLLI shares fell 3.35% in premarket trading on Monday.
