Higher Conviction on OLLI on Short Bias. We flagged OLLI as a name leaning short 4 weeks back after its pre-announcement. The quarter was reported on Thursday and it was great, 2Q finished with 43% comps, 67% gross profit growth, and 175% earning growth. But the company also confirmed what we expected, which is a material slowdown in comps, and guidance that comps should continue to moderate. Management ended the Covid pay bump and expects to leverage SG&A above a 1% comp, that seems like underpaying the market wage rate given the commentary and data we have seen in retail wages lately.
We like that OLLI is one of the few unit growth stories in retail, generally protected from Amazon/ecom competition, and one that should outperform fundamentally in a recession, but the recent upside in sales and earnings is not sustainable. Competition is re-opening, stimulus is waning, and customers have likely pulled forward some consumption with the recent discretionary income boost. Comps likely go negative next year, and with slowing sales and declining EPS we doubt this stock can retain a 25x or better EBITDA multiple. If another round of big stimulus comes soon perhaps a stock sell off gets pushed out, but we see tail EPS power of $2.50-$3.00 and as rate of change in trend fundamentals weakens, and 2021 likely sees declines vs the street expectation of higher EPS y/y, we think that means a stock in the $50-$70 range vs $97 at Friday's close.
