Ollie’s Bargain Outlet and Big Lots are often viewed as peers, but they have different business models. Ollie’s is more like a membership model with a loyal customer base known as Ollie’s Army (which makes up 80% of its sales), has less reliance on big-ticket hard goods (which account for roughly 50% of Big Lots sales), and a far smaller geographic footprint (476 locations distributed across the East compared to Big Lots' national footprint with 1427 locations). Moreover, Big Lots has found itself more pressured by competitors and is pivoting its real estate strategy by shifting to rural markets that don’t have a Walmart, Target, or other mass merchant store. All that said, the 2021 and 2022 comparative bases also were highly influential to the one-year comp trend as the comp rates to 2019 for the two retailers are similar.
Ollie's Bargain Outlet
Ollie’s Q1 2023 results came in above expectations. Store productivity has broadly returned to 2019’s levels on a comparable basis, and while profits were up sharply year-over-year, margins are still sharply down from 2019 (EBITDA margins are down -360 basis points) due to higher wage costs, supply chain inefficiencies, higher shrink, and the sales mix shifting to consumables (that mix shift is a conscious move by the company to drive harder into deep and disruptive value consumables, similar to discount, dollar, and club stores). Top-performing categories were food, candy, health & beauty, lawn & garden, and flooring. Interestingly, management shared that the higher theft/shrink was both internal and external in cause. This was the first indication that we’ve heard that the industry’s theft/shrink surge is partially internally originated.
CEO John Swygert shared, “Consumers are under a ton of pressure right now, and they're flocking to value, and we are definitely bucking the trend. We talked about this last year, late in the year in Q3, Q4, and we had kind of said 2023 should really set up to be a great year for us and should play right into our model, and we're seeing it happen." Ollie's Army "enlistees" were up +15% year-over-year, which reflects the consumer’s desire for greater value.
Management stated that they remain on track for 45 new stores in fiscal 2023 and reiterated their long-term target to have 1,050 stores with 50-55 stores annually. Texas is one of Ollie’s biggest new markets, and over the past three years, Ollie’s opened 22 new locations in the state to the first class of five stores that were opened in late 2018/early 2019. The table below compares average visits per location for the past three months versus the same months in 2019 and uses Ollie’s strong legacy business in Pennsylvania. Unfortunately, we don’t see such a favorable story for those more recent openings. The earlier class of five produced 86% of the Pennsylvania average. The newer class, plus those five, are now only producing 71% of Pennslyvania’s average. We can also see the softer contributions from new locations in general as comp-sales are roughly even with 2019’s level, whereas average sales per all locations are down -10% and average sales per new location are -15%.
Big Lots has had a very difficult past year and there appears to be no relief on the horizon, especially in big-ticket home and seasonal. Also, there is continued fallout from the bankruptcy of their largest furniture supplier. Last quarter, management announced a cost reduction program and sale-leasebacks for its distribution centers, headquarters, and owned stores to improve liquidity. This quarter brought deep clearance activity to convert inventory to cash, a suspension of its dividend, additional expense take-outs ($230M more targeted), and a reduction to its capex budget. Store openings that have been already slated for this year will continue (17 stores), but the company has pulled back on its plans for future store openings for now.
The business burned through -$155M in cash in the quarter, leaving it with $51M on the balance sheet; $240M of additional cash will come from the asset sales, with management targeting a Q2/Q3 2023 closing date. Like a lot of brands, Big Lots’ profitability is being pressured by the lower sales and adverse product mix (lower price points, lower mark-ups, and more sales of consumables/food products).
For the quarter, the only categories that saw sales increase versus 2019 were electronics and apparel. While management is hopeful that the business will turn with easier 2H 2023 comparisons, we are more concerned given that traffic hasn’t bounced in May as it did for HomeGoods, and especially given its expense reductions and an overall retail environment that has become more difficult, value-oriented, and competitive (everyone is gunning for market share).