Citi double-upgrades Ollie's Bargain Outlet to Buy, shares climb

Investing.com -- Citi analysts double-upgraded Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) to Buy from Sell and raised the price target from $64 to $133, pointing to the company's strong positioning in the evolving retail landscape.

“The “treasure hunt” shopping experience resonates with the today’s consumers search for value, and OLLI’s agile buying organization is set to capitalize on merchandise disruption from retail closures, supply chain, and tariffs turmoil,” analysts said in a note.

OLLI shares rose around 3% in premarket trading Wednesday. 

Citi outlined several key points driving its double upgrade.

Firstly, the firm's analysis suggests that the closeout business, where Ollie's is a leading player, is an attractive growth area, especially as consumers continue to prioritize value.

The company's recent success in terms of sales volume and store count indicates a scalable business model across the United States.

“We believe the closeout industry is well positioned to capture market share in the current retail landscape as value remains paramount for the consumer,” analysts led by Steven Zaccone wrote.

The retailer's competitive edge is expected to strengthen with increased scale, drawing parallels to the success seen in off-price apparel retail.

Despite trading at a premium compared to its historical averages, Ollie's stock is still considered to be trading at a discount to its pre-pandemic levels, suggesting room for multiple expansion.

Citi highlighted Ollie's recent momentum over the past two years, which has enabled it to expand its sales volumes and store openings successfully. The closure of smaller competitors is viewed as an opportunity for Ollie's to gain market share and enhance its merchandise offerings and brand recognition.

“The recent success and growing scale make OLLI’s long-term store target of 1,300 stores, or double today’s store count, more achievable. Importantly, the methodical opening cadence across states and regions ensures growing brand awareness and successful new openings,” the note states.

Analysts also pointed out that Ollie's is well-equipped to navigate disruptions caused by retail closures, supply chain challenges, and tariffs, particularly under the uncertain conditions expected in 2025.

The retailer has managed the impact from Big Lots (NYSE:BIG)' liquidation sales effectively, and the bankruptcy of Big Lots could potentially reduce competition in the closeout sector.

Lastly, Citi finds Ollie's long-term financial algorithm attractive, with expectations of steady same-store sales (SSS) growth, unit growth, high gross margins, and double-digit EBITDA growth.

While acknowledging the rising cost of doing business, Citi believes that Ollie's is set up for success in the coming years, with the potential to outperform operating margin estimates.

“Buying opportunities should be plentiful from industry disruption, store growth is accelerating, and there is potential for upside to the ~40% gross margin target based on OLLI’s growing scale,” analysts said.

On the other hand, Citi said key risks to its Buy rating include weaker-than-expected sales due to macroeconomic challenges, intensified competition in closeout sales, and limited margin improvement as supply chain and freight benefits diminish and operating expenses remain high.