Ollie’s Bargain Outlet Holdings (OLLI) is proud of its slogan “Good Stuff Cheap.” The closeouts retailer opened its first store in 1982 in Pennsylvania and has grown to 315 stores in 23 states, notes Doug Gerlach, editor of Investor Advisory Service.

A typical Ollie’s store is 25,000-35,000 square feet. The company sources from over 1,100 suppliers and offers customers savings up to 70% off name-brand merchandise.

Stores are laid out warehouse style and emphasize a bargain hunting mindset as the nature of securing deals leads to ever-changing inventory. Ollie’s does carry some private label merchandise, but the emphasis is always on the bargain.

To encourage loyalty and repeat business, Ollie’s runs a membership program, “Ollie’s Army,” where customers can earn discount coupons based on purchase volume and repeat visits.

Ollie’s Army has grown to 9.0 million members, 70% women and 30% men. The program is effective as the typical member buys 40% more merchandise than non-members.

Store model economics are excellent. The company is disciplined about expansion by concentrating new stores around existing ones to leverage marketing, distribution and staffing.

A typical store does about $3.9 million of sales annually and generates EBITDA (a measure of cash flow) of 15%, about $600,000. A new store requires an investment of about $1.0 million, pointing to a payback of less than two years.

The firm has no debt and currently generates over $125 million of operating cash flow annually, far more than it needs to open 40-50 new stores a year. We would expect that share repurchases from excess cash flow can add an additional 1%-2% to EPS growth. Add it all up and EPS is expected to grow at least 20% per year.

The valuation of the stock is rich, an estimated 42 times 2019 earnings. This is somewhat mitigated due to the early stage of growth for the chain and that it is cash flow positive with no debt.

Analyst consensus estimates call for yearly average growth of 22% while Value Line projects 25%. We forecast annual EPS growth of 21%.

Five years at this growth pace and a high P/E of 39 could generate a stock price as high as $232. We model a low price of $46, the product of fiscal year 2018 EPS of $2.05 and a low P/E of 22.6. The upside/downside ratio is 3.3 to 1.

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