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Citi downgraded Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI) to a Sell rating (from Neutral) and cut the price target on the stock to $49.00 (from $52.00) following the company’s 4Q earnings report. The company posted a 4Q sales beat with comps up 3% (vs. consensus: 0.3%). However, merch margin dollars came in weaker than expected and implied guidance.
Analysts wrote in a note, “With 70% of sales from close-outs, we believe this model is hard to scale from a product access and supply chain perspective, and could limit store potential long term. When we saw supply chain problems creep up pre-pandemic (in 2019), it highlighted execution risk we believe still exists, and a slower pace of store openings F23 may be the new normal.”
Citi’s concern is that Ollie’s long-term store target of 1,050+ will be difficult to hit. Citi has long believed that the pace of store openings would have to slow as they don’t believe the supply chain is functioning 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 as store openings have slowed in 2021/2022, they estimate new store productivity was in the 80-85% range. Management assumes F23 new store productivity of ~100% vs ~82% the past two years. They also assume promotions will remain muted, which Citi sees as a risk.
Citi believes it’s smart for management to pull back on new store openings as they have the past several years (opening 45 in F23 vs 37 in F22 and 43 in F21), and while management has indicated a return to 50 to 55 openings beginning in F24, Citi believes a slower pace of store openings may be the new normal.
Shares of OLLI are down 3.35% in pre-market trading on Monday.
