We recently compiled a list of the 10 Best Discount Retailer Stocks to Buy. In this article, we will look at where Ollies Bargain Outlet Holdings (OLLI) stands against other discount retailer stocks to buy.
Overview of the Discount Retail Sector
With half a decade of geopolitical chaos, recession in Europe, and above-target inflation, the US economy has remained resilient. The primary reason behind this is the American consumer: their spending makes up around 70% of the country’s gross domestic product. However, recent calculations have been showing a decline in amount of money Americans are spending.
A recent survey by accounting firm KPMG corroborated this pattern, finding that while people were optimistic about their economic standing, they harbored doubts and skepticism about the direction the US economy is headed. The survey also found that nearly 65% of participants expected to do more discount shopping this year. Around 60% of this number made $200,000 or more. In addition, around 14% said that they were planning to use buy now, pay later services.
Brian Moynihan, CEO of Bank of America, said that he also noticed a slowing in purchase rates of his customers. Consumer payments grew by 3.5% since last year, down from a 10% growth from the year before. This included measurement through checks, credit cards, and ATM withdrawals.
The discount retail industry in the US thus holds a promising outlook. This positive outlook is fueled by technological advancements, changing consumer preferences, and strategic adjustments. Shoppers across the retail industry are prioritizing value over everything else, including cheap prices. This is why retailers like Dollar Tree Inc. are struggling, while business in stores like Target and Walmart is booming. A similar trend is also taking place in other industries, with companies like Applebee undergoing increasing sales while consumer sentiments about giants like McDonald’s are showing signs of waning.
The Consumer Goods and Retail Outlook 2024 report by Economic Intelligence forecasts global retail sales to grow by 6.7% in dollar terms in 2024. While 85% of these sales are expected to stem from brick-and-mortar stores, 2024 is expected to be the strongest growth year for offline retail after 2021. Inflation is also easing in 2024, but that does not seem to affect increasing consumer preference for lower prices, prioritization of basic life goods, and an unwillingness to pay hefty delivery fees. These factors are likely to drive consumers on a bargain-hunt to discount retailers.
The discount retail industry is one of the most resilient sectors in the face of economic unpredictability, strengthened by its ability to offer affordable services and goods. Product discount campaigns are emerging across the country, showing positive development trends and becoming some of the hottest topics in retail. Effective inventory management, better pricing, and operational initiatives are likely to boost sales in discount retail companies, provided they offer the one thing customers are increasingly looking for: value.
The US led the largest market for discount store retail across the globe in 2023, amassing $128 billion in sales. According to data reported by The Wall Street Journal, average consumer spending on grocery items at discount retailers increased 71% between October 2021 and June 2022. In addition, consumer patterns are also showing an increased inclination towards e-commerce, which is pushing companies to solidify their digital presence. Successful retailers are endeavoring to meet their customers both in-store and online, which is why 9 out of the top 10 e-commerce websites are run by retailers with brick-and-mortar stores.
Similar trends are appearing across the world, with discount stores rising to a prominent industry standing over the past years in the US, Europe, and Japan. Zhang Qiang, founder and CEO of Hitgoo, a discount retail chain, said that the next decade in China is likely to be marked by discount store expansion. Since the discount store model focuses on food and daily use merchandise, it can be successful in both the domestic and international market, presenting new opportunities.
Our Methodology
We used the Finviz stock screener to identify stocks in the discount retailers business. We then shortlisted the stocks that were the most widely held by hedge funds, as of Q2 2024. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Best Discount Retailer Stocks to Buy
Ollies Bargain Outlet Holdings (NASDAQ:OLLI)
Number of Hedge Fund Holders: 27
Ollies Bargain Outlet Holdings (NASDAQ:OLLI) operates as a retailer of brand-name closeout merchandise and excess inventory. Principally, the company buys overstocked, overproduced, and closeout merchandise from wholesalers, manufacturers, brokers, distributors, and other retailers to sell to its customers. It operates in a warehouse format, featuring a wide array of categories ranging from hardware, clothing, and sporting goods to health and beauty, food, electronics, and much more.
The company has more than 513 stores across the US. It expects to open around 50 stores in 2024, with 70% of the openings taking place in the second half of the year. The company’s ultimate goal is to surpass the benchmark of 1,300 stores. To support its continued growth, Ollies is investing in supply chain, marketing, information technology, and its processes, all to streamline execution.
Ollies Bargain Outlet’s (NASDAQ:OLLI) exceptionally affordable deals give it a strong edge in the market. Its comparable store sales grew by 5.8% in Q2 2024, driven by growth in both basket and transactions. The company’s 42 years of industry experience, scale, and size is another strategic advantage fueling its growth. While other retailers sell stuff cheap, Ollies Bargain Outlet’s (NASDAQ:OLLI) holds a value proposition of selling “good” stuff for cheap. It sells nationally branded products at prices 20% to 70% lower than other stores, which resonates with its audience and shows no signs of going out of style. Customers are increasingly responding to the company’s deals and discounts, driving growth.
Ollies Bargain Outlet’s (NASDAQ:OLLI) also acquired several 99 Cents Only stores and is prioritizing their opening to accelerate its store growth over the next 18 months. A majority of these stores are set to open in September, and are expected to drive growth for the company because of their strategic locations. The company’s net sales increased by 12%, reaching $578 million due to new store growth and a 5.8% increase in comparable store sales.
Harding Loevner Global Small Companies Equity Strategy made the following comment about Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) in its Q3 2023 investor letter:
“In the US, discount retailer Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) gained sharply after the company reported accelerating same-store sales growth as higher-income customers found value in the company’s offerings.”
Overall OLLI ranks 8th on our list of the best department store and discount retailer stocks to buy. While we acknowledge the potential of OLLI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
