Introduction
Recently, i learned about this concept “bull whip effect” . It is a supply chain phenomenon describing how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels.
This in turn create an industry by itself where at the top of the supplier chain - the manufacturer has to produce in excess due to the unpredictability from customers. I believe that this phenomenon will last due to the fact that it is almost impossible to forecast accurately the actual quantity of goods required by customers. Thus, they need a channel to sell it instead of disposing it.
This is where i discover - Ollie's bargain outlet. It is the leading discount retailer in United states. It purchase deal from close out manufacturer as well as excess goods due to sudden cancel of orders, etc. It offers brand name items for 20-70% off regular prices. Ollie’s is very possibly the only company in America whose brick-and-mortar stores are not just surviving but thriving. Butler(founder) focuses exclusively on traditional retailing, selling not a thing online.
Business model
One thing that does not change is:
people’s desire for a good bargain on quality items
Discount retailers have a simple, but defensible, model to earning high returns on products selling at a substantial discount:
- A refined, opportunistic buying process. (buying close out deal at deep discount)
- Strong win-win relationships with manufacturers and vendors
- The “Treasure Hunt” effect
- Low operating cost structure
These allow discount retailers to buy merchandise at a significant discount and run a lean operation resulting in excellent returns on capital.
What make ollie different from others?
The treasure hunts effect
Imagine walking across the alley while shopping in ollie and discover that they are selling colgate, clorox products at 20% to 50% discounted price (might be even cheaper than online)
These create the urge to make their purchase on the spot as they dont want to miss the opportunity of getting good stuff cheap as the goods are based on availability. (High inventory turnover, have the ability to take up more deals)
Besides, you can expect different stuffs the next time you visit due to they depends on the availability of goods due to their nature of business (buying close out deal)
creating the urge for them to revisit to ensure they dont miss out good deal (create customer loyalty where they are willing to drive 25minutes to visit them)
These are something that cant be duplicate from your online experience
Great supplier relationship
They have establish a good relationship with their suppliers so that the manufacturer knows who to call when they couldn’t sell their stuffs (a person thrash is another person treasure) (win-win for both parties)
In order to procure from close out deal, sometime, you need to have strong purchasing power (be able to procure in bulk, in cash-high upfront cost, huge storage and has the ability to sell fast to prevent overstocking)
This is important as it will decide how big they can expand as well as how they can compete with their competitor (better relationship, get more inventories, more saving, sell cheaper, more customers- flywheel)
Thus, it is harder for competitor to buy and compete because if you couldn’t sell your thing fast enough, you will have high storage cost, more expensive products). Besides, harder for competitor to get inventories and compete as they usually call ollies first due to their ability to take up more inventories (higher barrier of entries)
Anti-fragile business
They tends to thrive during bad time as they have more opportunity to get a better close out deal.
This also create the perception for their consumers that when they want to get good stuff cheap, they can shop with them (especially when their purchasing power are lower during recession)
They also target to have a mix of 70% closeout deal, 30% everyday value items, which you can get your daily favorite items at value price plus additional surprise from the closeout deal. This creates loyal ollies army who constantly come back for more.
Management
Ex founder and ceo – butler mark – own 13% (No change) and he passed away in 2018.
Change to john Swygert as ceo – about 15 years’ experience in ollie (internally promoted instead of hiring big shot who might not understand the company culture)
The culture has been very frugal and save every penny they can and pass it to the customers (ie: reusing the kmart trolley)
Humble and believe in good stuff cheap. (always look after his business)
Strong boards with a lot of experience in retail especially on the sourcing.
Financial
Capital structure, allocation and balance sheet
Fund business via internally generated funds and make use of debt
No dividend policy and focus on reinvestment as well as share buyback (approved 100mil buyback)
Cash business with high cash flow on hand ($300mil)
Can tap into a credit facility of about 200mil term loan – 94mil of LT loan will mature in 2024 (no liquidity issues and not excessively geared)
Impressive growth and good margin
Maintaining at about 40% gross margin and high net margin (11%) as compare to competitors (2-5%)
Past 5 years net sales growth is about 19% as compare to competitors (2-5%)
Only about 55mil for sales return- less than 1% of sales (high quality goods)
Improving roe, roa as well as roic (maintain at double digits). (Depends on how you calculate as i am using Bloomberg as reference)
Unit economic
Payback period is about 2 years and they are also more profitable as compare to their peers. There are also long runway as they just opened their 400th stores recently and growing strong. With the right unit economic as well as high return on invested capital, the business will continue to thrive and do well.
Risks
The biggest concern for me for this company would be when they have thousands of stores and need to continuously source for closeout deals, there might be issues for them to get the closeout deals that are large enough for their stores due to it is not as predictable and they are lags of typically 9 months (from closeout to transfer to them). When they lost the midas touch, this might eventually drive your customers away from you.
Conclusion
I believe that Ollie bargain outlet has their moat to stay competitive in the industry and there are long runways for them in the future. Their business model are meant to address the inefficiencies in the industry (excessive/close out) and in turn create value for both suppliers and customers.
Apologies for any mistakes and i hope that you can learn something from my analysis. Below are some good reference for you if you are interested in the company. Please comments or let me know about your thought.
https://www.forbes.com/sites/abrambrown/2019/04/01/the-outlandish-story-of-ollies-a-5-billion-retail-empire-that-sells-nothing-online-but-is-beating-amazon/?sh=5d9f05ab50d5
https://www.eaglepointcap.com/blog/ollies-bargain-outlet-discount-retailer-with-a-long-runway
Disclaimer: I/we are long Ollie and this is just for reference purpose and it is not an advice to buy or sell the stocks. Invest at your own discretion.