We added OLLI to our Short list last August with the stock around $100. The call was relatively simple. The company had announced peak revenue growth rates on peak gross margin expansion aided by stimulus support and was trading at nearly 25x consensus EBITDA and 40x P/E on those peaked numbers. We expected revenue growth would slow, and turn significantly negative here in 2021 driving big earnings deleverage and a falling multiple. That’s what we are seeing in this quarter with comps down 28% and EPS deleveraging to down 50% YY. We flagged that the company appeared to be underpaying its employees relative to the retail market, ending its covid pay bump last summer and expecting to be able to leverage SG&A on a just 1% comp. In 1Q21 it highlighted it was having to invest in wages driving some deleverage (still likely a go forward inflationary pressure) as well as supply chain gross margin pressure that is offsetting peak merch margins being enjoyed by OLLI like almost everyone in retail today.
The company is highlighting its mid-teens 2 year stack in 2Q, but do the math and you realized that being up 43%, then down 28%, you actually end up only +3%. The other way to look at it, 2Q revenue is 25% ahead of 2019 while avg store count is +23%. Not much of a 2 year comp improvement in a great consumer environment. Perhaps the OLLI result puts the muted Dollar Tree banner result into context as well, given both are brick and mortar only value retailers with suburban/rural store exposure.
Tail EPS power for OLLI is likely in the $3 to $3.50 range. We question the company’s long term store targets, but it still has several years of clear growth runway. As one of the few unit growth stories in retail, and having a business generally protected from Amazon/ecom competition, it should carry a quality growth multiple. However with falling earnings trends, something around 20x PE makes more sense, not its historical 30x+. That puts the after market price around what we think is a fair price. We’d be open to owning OLLI at a reasonable price, with lowered expectations, and a return to accelerating positive comp/earnings trends.
