Why a recession is good news for Ollie stocks

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In March 2022, the shares of Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ: OLLI) slipped below $40 for the first time since the pandemic plunge two years prior. Since then, it has almost doubled even if the economic outlook has darkened. Which give?

Simply put, Ollie’s is built for a recession.

When management spoke at the Jefferies Consumer Conference last month, they expressed undeniable confidence. This is because they know deep discount retailers have outperformed in past recessions and are likely to do so again.

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Even with intense competition from dollar stores and warehouse clubs, Ollie’s is well positioned to outperform most when the economy takes a turn for the worse. Let’s see why.

Consumers feel the heat

The American consumer is increasingly restrained by rising grocery prices, $5 gas and inflationary pressures everywhere he turns. And while wages are also on the rise, they have not kept pace with inflation.

As a result, people are falling behind on their bills, maxing out their credit cards and, in extreme cases, dipping into their emergency savings to keep up. The latest reading of consumer confidence from the University of Michigan showed that nearly half of all consumers are seeing their standard of living eroded by inflation.

With stretched budgets, Americans are looking for new ways to stretch the dollar. Frugality and the search for bargains are now fashionable, even essential.

Ollie’s is likely to be a popular destination in the coming months as it offers rock bottom prices on national brands in several categories. Significant discounts can be obtained on household items, food, health and beauty products, clothing and other essentials. The prices are much lower than those of department stores and other large surfaces.

The exchange effect

The growing impact of rising prices and declining credit availability is expected to cause millions of Americans to change their shopping habits. Known as the “downside trade effect”, this means that a significant percentage of the population will seek lower prices to offset inflationary pressures. It’s a phenomenon that usually involves forgoing one’s usual store choices in favor of discount retailers.

In other words, consumers will continue to spend on groceries and household basics, but their spending could change significantly if a recession hits as widely expected. In the trade down scenario, price matters the most. This attracts more consumers to value retailers.

The current environment is not too different from the Great Recession of 2007 to 2009. Although the current job market is stronger, similarities can be drawn between rising fuel and food prices and the slowdown of economic activity.

It’s hard to say when the lower trading effect will occur, but there are signs it could already be underway. Ollie’s management recently suggested that the first phase of change could come from fixed-income and low-income consumers who have no choice but to buy food and essential household items at lower cost.

Eventually, the downward push in trade would require middle-class consumers to adjust their spending habits. This wave should bring many more customers to places like Ollie’s.

Ollie stores are unique

Certainly the Dollar Trees, Walmarts and Costcos of the world should also benefit from a recession. Yet, Ollie’s shopping experience has some unique attributes that could attract an inordinate number of new shoppers to Ollie’s.

The retailer obtains clearance and excess inventory at rock bottom prices and passes the savings on to customers. It’s a unique model that has served Ollie’s well over the past 40 years and helped it survive in the cutthroat world of discount retail. National brands and closeouts account for about two-thirds of sales, with the rest coming from house brands and exclusive brands.

People also love Ollie’s because it can serve as a unique destination. Its warehouse-style stores are packed with unusual deals on a wide range of essentials and discretionary items. This, combined with a treasure hunt atmosphere, makes it a bit of a “poor man’s Costco”. Simple, witty signage also resonates well with customers who are simply there to grab a bargain.

In addition to an emerging shift in demand, Ollie’s has another very significant tailwind. Product availability is on the rise. With manufacturers and retailers like Target struggling to sell excess inventory, more products are becoming available and Ollie’s is gaining influence over pricing.

Over time, Ollie’s plans to expand its footprint primarily on the east coast westward to the tune of over 1,000 locations from the current 439. A key step in this process will be the construction of a fourth distribution center in the Midwest scheduled for early 2024.

Add to that Ollie’s strong financial position and things are looking good for the discount retailer. Traffic seems to be heading towards Ollie and that’s why we’re seeing the stock go up. Still, with Ollie’s still trading around $50 off last year’s high, the stock remains a profitable outlet for recessionary investors.

Article from MarketBeat

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