This Under-the-Radar Growth Stock Is Down 30% From Its High but It's a Stock to Buy on the Dip

Shares of closeout retail chain Ollie’s Bargain Outlet (OLLI -1.83%) have outperformed the S&P 500 since its market debut in 2015. But financial results slipped roughly a year after the pandemic began and the stock tumbled. From the start of 2021 through the end of 2022, Ollie’s stock was down 43%.

Ollie’s slump lasted long enough for investors to forget about its market-beating history. Many lost interest in the business and moved on to flashier things. Now under the radar, the company just completed a comeback year and has set high expectations for the future.

Ollie’s stock is still sitting about 30% below its high reached back in 2020. And I believe it’s a sneaky stock to buy on this prolonged dip, as I’ll explain here.

Ollie’s big comeback

Ollie’s stocks its more than 500 stores with excess and closeout merchandise from other companies. It’s not the only retail chain that does this. But it runs a tight ship, as evidenced by its enviable profit margins.

Brick-and-mortar retail chains are characterized by slim profit margins. By contrast, Ollie’s is able to source its merchandise cheap enough to consistently do better than most. Over the last 10 years, its gross margin has remained near 40% and its operating margin has hovered around 10%.

OLLI Gross Profit Margin data by YCharts

These profit margins took a step back in 2021 and 2022 because Ollie’s was struggling with expenses. Supply chain costs went up as did labor expenses, hitting margins. But the company bounced back in a big way in 2023.

In 2023, Ollie’s had record net sales of $2.1 billion, up 15% from 2022. The company’s gross profit margin rebounded from less than 36% to almost 40%. And its operating income surged an impressive 74% year over year to $228 million.

In summary, the numbers looked great for Ollie’s across the board. Therefore, I believe the company has officially moved past its multi-year slump. Here’s what that means for investors now.

Can Ollie’s beat the market again?

I believe that Ollie’s stock can return to outperforming the S&P 500 for a simple reason: This profitable chain is poised for outsized growth.

Ollie’s says it believes it can one day have 1,300 locations, up from 512 at the end of its fiscal 2023. What’s exciting is this is a new target — its previous one was 1,050 locations. But a new study indicated that it can run more stores than it thought. This is the second time it’s increased its long-term estimate since going public.

For its fiscal 2024 (which started Feb. 4), Ollie’s expects to open 48 new locations, which would be a little more than 9% growth. This rapid expansion is a good move by management, in my opinion, because there’s clearly consumer demand for these stores. For evidence, same-store sales increased most years, including the company’s 5.7% growth in fiscal 2023.

In coming years, Ollie’s sales should soar as it opens new stores and as sales increase at old stores. Assuming that the company can maintain its profit margins, then its profits should soar as well. And this assumption is reasonable, given the aforementioned 10-year trend for margins.

For investors who buy today, Ollie’s stock is cheap. Management expects to earn roughly $250 million in operating income in its fiscal 2024. With its current market valuation of $4.9 billion, Ollie’s stock trades at only 19 times its expected operating income, which isn’t bad at all.

Moreover, Ollie’s is in great financial shape, which makes this a safer investment. The company is virtually debt-free (only $1 million in long-term debt) and has well over $350 million in cash, cash equivalents, and short-term investments.

This strong financial position can fuel Ollie’s growth but it can also reward shareholders. The company has reduced its share count by 6% over the last three years through stock buybacks. And it has the means to continue this process in coming years and consequently boost shareholder value.

In conclusion, Ollie’s stock is overlooked because investors don’t realize that the business bounced back in 2023 after a couple of forgettable years. The company is setting sales records, plans to open new stores, is maintaining profit margins, and the stock is cheaply valued. These factors all point toward Ollie’s stock being a good buy today.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Ollie’s Bargain Outlet. The Motley Fool has a disclosure policy.

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