Ollie's Bargain Outlet: Rating Downgrade As Upside Is No Longer Attractive

Core Viewpoint - The company has downgraded its rating for Ollie's Bargain Outlet (OLLI) from buy to hold due to increased valuation, despite a positive fundamental outlook and expected growth [2][9]. Financial Performance - OLLI reported 2Q24 earnings with same-store sales growth (SSSG) of 5.8%, leading to total revenue of $578.4 million, reflecting a 12.4% year-over-year growth [3][4]. - Gross margin decreased by 30 basis points year-over-year to 37.9%, attributed to a shift in product mix [3]. - Operating expenses grew by 8.2% year-over-year to $145.7 million, but EBIT margin expanded by 30 basis points to 10.5%, resulting in a net margin improvement of 20 basis points and operating EPS of $0.78, marking approximately 16% year-over-year growth [3][4]. Growth Drivers - The growth in SSSG was supported by positive trends in transaction numbers, basket size, and average unit revenue, with transaction growth being the largest contributor [4]. - OLLI's new customer acquisition strategy, including an improved email program and a new co-branded credit card, is expected to sustain SSSG momentum [5]. Market Position and Competition - Management noted continued momentum in 3Q24, tracking ahead of internal expectations, despite potential headwinds from Big Lots' liquidation affecting OLLI's trade areas [6]. - The company anticipates meeting its FY24 SSSG target of 2.7% to 3.2%, supported by strong 1H24 performance and underlying demand strength [6]. Valuation and Future Outlook - OLLI is considered a top performer in the discount/value retail space, justifying its premium valuation relative to peers, although the recent increase in valuation has made the upside less attractive [7]. - Consensus estimates for FY25 EPS are $3.73, driven by low-teens revenue CAGR and net margin expansion, suggesting a share price target of approximately $100, indicating about 5% upside [8].