Shareholders of Ollie's would probably like to forget the past six months even happened. The stock dropped 28.1% and now trades at $76.70. This may have investors wondering how to approach the situation.
Is now the time to buy Ollie's, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Ollie's Not Exciting?
Even though the stock has become cheaper, we’re passing on Ollie's for now. Here are three reasons why OLLI doesn’t excite us, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
With $2.73 billion in revenue over the past 12 months, Ollie's is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers. On the bright side, it can grow faster because it has more white space to build new stores.
2. Operating Margin in Limbo
Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.
Looking at the trend in its profitability, Ollie’s operating margin might have fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 11.4%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Ollie's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.2%, somewhat low compared to the best consumer retail companies that consistently pump out 30%+.
Final Judgment
Ollie's isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 16.3× forward P/E (or $76.70 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.
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