Citi Analysts Upgrade Ollie's Bargain Outlet

Citi analysts have double-upgraded Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) to Buy from Sell, raising the price target from $64 to $133. This decision highlights the company's strong position in the changing retail environment.

Key Insights

The report emphasized several factors contributing to this upgrade:

• The “treasure hunt” shopping experience appeals to consumers seeking value. Ollie's flexible buying strategy positions it well to benefit from consumer shifts due to retail closures and supply chain challenges.
• OLLI shares increased by approximately 3% in premarket trading on Wednesday.
• The closeout sector, where Ollie's excels, is seen as a promising growth opportunity, especially as consumers prioritize value.
• Recent achievements in sales and a growing store count demonstrate a scalable business model across the U.S.

Analysts, led by Steven Zaccone, believe the closeout industry is well-suited for gaining market share in today's retail landscape where value is key.

Competitive Edge

Ollie's competitive advantage is expected to grow as it increases its market presence, similar to the off-price apparel sector, despite its stock trading at a premium compared to historical averages. The company remains discounted compared to pre-pandemic valuations, signaling potential for further growth.

Citi noted Ollie's momentum over the last two years has led to expanded sales and store openings. The closure of smaller competitors presents an opportunity for Ollie's to enhance its market share and brand presence.

The analysts stated that Ollie’s target of 1,300 stores, double its current count, is more attainable given its recent successes. A measured approach to store openings will continue to boost brand awareness.

Resilience Against Disruption

Ollie's appears well-prepared to handle ongoing retail disruptions, as well as challenges posed by tariffs and supply chain issues, especially as the industry heads into 2025.

Additionally, the retailer has successfully managed impacts from Big Lots' liquidation, potentially lowering competition in the closeout market.

Financial Outlook

Citi's long-term financial outlook for Ollie's shows promise, with expectations of steady same-store sales growth, unit expansion, high gross margins, and double-digit EBITDA growth. While acknowledging rising operational costs, analysts believe Ollie's is poised to excel in the coming years.

Opportunities for buying become plentiful amidst industry disruption, and store growth is on the rise, with potential for exceeding the target of ~40% gross margin as OLLI expands.

Risks

However, potential risks affecting the Buy rating include:
– Weak sales from macroeconomic issues
– Increased competition in closeout sales
– Limited margin growth due to high operating costs as supply chain advantages wane

Overall, Citi remains optimistic about Ollie's prospects while highlighting these risks.