A strained consumer ‘plays right into’ the hands of this discount retailer

Investors hesitant to buy consumer-facing stocks after last week’s slate of earnings reports should look at Ollie’s Bargain Outlet , according to several analysts. In recent days, companies from McDonald’s to Starbucks to 3M have warned that a long-awaited consumption slowdown due to higher prices — particularly for those on the lower end of the income spectrum — is growing more apparent. But Wall Street sees a clear opportunity stemming from Ollie’s value tilt. “You still have this consumer who is wary,” said Loop Capital managing director Anthony Chukumba, citing stubbornly high inflation and rising gasoline prices. “That all really kind of plays right into Ollie’s hands.” Trade-down winner Though the pace of price increases has cooled since last year’s peak, it’s still notably above the Federal Reserve’s annual target of 2% after pandemic-induced interest rate cuts and fiscal stimulus. So far, consumers have largely continued to spend in the face of growing uncertainty about their personal finances , helped by a strong labor market and rising wages. But cracks are starting to show as segments of consumers move to tighten their belt. That makes Harrisburg, Pennsylvania-based Ollie’s, however, in a sweet spot, with consumers more willing to hunt — and switch from traditional shopping destinations — for lower prices. Price tags were 45% lower on average at Ollie’s than Amazon and Walmart , according to Bank of America data. Ollie’s, which has more than 500 stories in 30 states, is known for its “closeout” inventory , extra stock that manufacturers or other companies want to clear out quickly. “We think that Ollie’s is positioned well to benefit from trade-down and expect resilience from its core consumers looking to stretch their dollar,” BofA analyst Melanie Nuñez wrote to clients Monday, reinstating the bank’s coverage of the stock at a buy rating. Her $92 price target implies about 17%% upside from Monday’s close. Ollie’s has outperformed in past periods of economic slowdowns, Bank of America said. Same-store sales were unchanged in 2008 but climbed 7.9% in 2009 during the Global Financial Crisis, Nuñez noted. Ollie’s is “offering value when consumers need it most,” she said. Multiple tailwinds Similarly, Chukumba upgraded Ollie’s to a buy from hold last month and raised his price target $10 to $90, suggesting a 14% rally from Monday’s close. They’re two of several optimistic analysts on Wall Street. The average analyst has a buy rating and target for shares suggesting upside of more than 12%, according to LSEG. Ollie’s shares are lagging the broader market in 2024 with a gain of almost 5% versus the S & P 500’s 9% gain. In 2023, however, Ollie’s soared 62%. OLLI 1Y mountain Ollie’s shares over the past 12 months. Truist’s Scot Ciccarelli joined the bull camp last week. He also raised his rating to buy from hold and hiked his price target by $6 to $86, equal to Ollie’s rising another 9%. In addition to liking the “increasingly powerful” focus on value, Ciccarelli said Ollie’s is also in the process of “reverting back” to what has been the company’s steady growth. That comes after a difficult period starting in 2019 after Ollie’s purchase of Toys “R” Us locations caused supply chain and financial pressures. That was followed by a shortage of goods during the pandemic. Loop Capital’s Chukumba also said inroads made with manufacturers to routinely buy their products directly is another tailwind behind Ollie’s. That’s because it can make consumers view the business as more akin to a TJ Maxx or Ross Stores , with a typical assortment of brands on shelves, as opposed to a treasure hunt-style store where shoppers never know what to expect. BofA’s Nuñez said ongoing closures and bankruptcies in the retail sector will help Ollie’s avoid inventory shortages. Less competition means stronger relationships with vendors, which can in turn help Ollie’s secure inventory. Part of the Bank of America investment thesis rests on consumer willingness to trade down. Any volatility in what is available for Ollie’s to buy at a discount, or increased competition from e-commerce platforms such as Amazon or Temu, can also hurt shares, Nuñez noted. An under-the-radar idea A lesser-known way to play the same trend is FirstCash , Chukumba’s said. The pawn shop chain can see more demand as cash-strapped consumers utilize its upfront loan service, he said. FirstCash has risen almost 10% so far in 2024, slightly outperforming the S & P 500 . Other analysts are also optimistic on the stock, with the average Wall Street rating a buy and consensus price target suggesting shares can jump 19% over the next year. “You’re seeing a really nice result in the core U.S. pawn business, once again, because of this environment,” Chukumba said.