Ollie's Has A Sourcing Problem, BofA Says In Downgrade

Discount retail chain Ollie's Bargain Outlet Holdings Inc. OLLI has a sourcing problem, as the supply of the closeout merchandise Ollie's typically acquires is lower than expected, according to BofA.

The Ollie's Analyst: Jason Haas downgraded Ollie's from Buy to Underperform with a price target lowered from $105 to $82.

The Ollie's Thesis: Ollie's typically acquires merchandise in bulk when other retailers are forced to close their doors and liquidate their inventory.

Yet expectations for a "meaningful" second wave of retail closures in the first quarter of 2021 are unlikely to play out, Haas said in a Thursday downgrade note. 

On a square foot basis, store closures in Ollie's categories — excluding apparel — were higher by 91% year-over-year in the first three quarters of 2020, but were down 91% year-over-year in the fourth quarter, the analyst said. 

Related Link: Recap: Ollie's Bargain Outlet Q3 Earnings

"We have historically seen a roughly nine-month lag between store closures and the impact on same-store sales, implying potential sourcing difficulties through 2021," he said. 

In addition, a combination of higher freight costs, a weaker U.S. dollar and higher raw material costs imply that Ollie's also faces headwinds in importing items from overseas suppliers, Haas said.

This is more of a "secondary issue," as only 20% of merchandise is imported, of which around 80% comes from China, the analyst said. 

Tax refunds in 2021 could be down 11% year-over-year, as unemployment benefits are a taxable source of income, but not withheld by most people who receive them, he said.

Once tax season comes, this could become a "negative surprise" for many Ollie customers, Haas said. 

OLLI Price Action: Shares of Ollie's Bargain Outlet Holdings were trading lower by 1.71% at $94.39 at last check.

Photo by Dwight Burdette via Wikimedia.

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
date
ticker
name
Price Target
Upside/Downside
Recommendation
Firm
Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsBofA SecuritiesJason Haasretail
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!