Munger, Ollie and Saul

Investment Analysis Clubs Saul’s Investing Discussions
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Charlie Munger says “Invert always invert.” In other words figure out how not to do things and you’re a long way toward figure out how to do them. Or, tell me where I’m gonna die so I won’t go there.

So I took a wicked haircut on my position in Ollie’s Bargain Outlets yesterday. Really more of a scalping with a hide-wallop and then drawn-and-quartering. They ran into all sorts of problems building out new stores. They had trouble understanding how new stores cannibalized sales from nearby existing stores and some inventory issues. I like the brand, the story and the idea of bargains with so many struggling consumers, but looks like a very hard business to make money in.

On the bright side, I wanted a little diversity and I got it. Adding a nice big fat loser to my beautiful winners adds some bold red accents to the all-green port. This gives the stock pastiche a distinctly early holiday feel. So that’s nice.

The pure logic of cloud/SaaS, of light business models that are easier to scale and run is, I guess too difficult for some Fools like me to fully appreciate. Anyway, thought I’d share this life lesson. I’m really good at learning it as I’ve learned at least six times in last two years.

And a quick thing to my long married-Foolish friends. I’m up big on port thx to this board. Still the boss-wife upon hearing about my Ollie’s move scowled and said simply, “Moron.” I thought about correcting her, “It’s Fool dear” but I wasn’t wearing my helmet.

Fool On,

BD

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BD, you win the internet today. :slight_smile:

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BD,

After OLLI reported, I revisit a post I made on the Fool’s OLLI premium board back in May with a follow up post. Here what I wrote on that board this week(apologies to those without access to the Fool’s premium boards):

Gives “locked and loaded,” a whole new meaning, eh?

See this post for context:

https://discussion.fool.com/4056/say-what-olli-cc-transcript-341…

The contrast between the CEO’s, shall we say “exuberant” confidence in May and this quarter’s results is notable.

Here is CEO Butler in May: Yeah. We’re really, really confident. I mean, we are really, really locked and loaded, the deals have been flying. I absolutely am speaking with 100% confidence as I did about two years ago that I’ve never seen it better. It continues. We are ready for the spring selling season, just need a little break on this weather, but I got all the confidence. We’re ready to roll. We’ve done quite well, as I told you, although it’s not going to move the needle, Matt, but in the clothing area, most recently, obviously, we had the run on the toys, we had a great houseware Q4, we did very well in candy, but the HBA continues to be strong. I really feel good about where we’re at.

And CEO Butler yesterday: This was certainly, by Ollie’s standards, a tough quarter. Despite the challenges we faced, we grew our top line by nearly 16%, driven, in part, by strong sales from the 29 stores we opened in the first half of the year, more than double the number opened in the same period last year, including 13 former Toys R Us locations. The exceptional strength, rapid pace of openings and larger footprint of these new stores impacted comparable store sales through increased cannibalization and supply chain pressures that reduced comparable store inventory levels. Comparable store sales were also affected by headwinds from store classes with exceptionally strong first-year sales now normalizing as they entered the comparable store base. Our gross margin in the quarter was pressured by both unfavorable merchandise margin as well as deleveraging of supply chain costs as we underestimated the impact of our accelerated new store growth on our operations. That said, we have made great strides in correcting these short-term issues, with comparable store inventory levels now back in line with our expectations.

Hmmm…Something doesn’t really add up here, how could things change so much in three short months? Interesting too that Butler cherry picks the top-line growth to highlight when in fact the company had a horrible quarter. Here’s what I wrote about the CEO statements back in May on the conference call:

“Hmmm. I’m getting that funny caveat emptor, heebie geebie investor feeling.”

Whilst my “spin” detector was at high alert last quarter, it is now fully pinned at the top of its range. Here are all the important facts beyond what is highlighted in the CEO statement:

Comparable store sales decreased 1.7% from a 4.4% increase in the prior year.

The Company opened eight stores during the quarter, ending the period with a total of 332 stores in 23 states, an increase in store count of 17.7% year over year.

Net income decreased 15.7% to $25.2 million and net income per diluted share decreased 15.6% to $0.38.

Adjusted net income(1) decreased 9.9% to $23.5 million and adjusted net income per diluted share(1) decreased 12.5% to $0.35.

Adjusted EBITDA decreased 6.8% to $37.5 million.

https://investors.ollies.us/news-releases/news-release-detai…

Finally, it is worth re-reading this statement and letting it sink in:

The exceptional strength, rapid pace of openings and larger footprint of these new stores impacted comparable store sales through increased cannibalization and supply chain pressures that reduced comparable store inventory levels. Comparable store sales were also affected by headwinds from store classes with exceptionally strong first-year sales now normalizing as they entered the comparable store base. Our gross margin in the quarter was pressured by both unfavorable merchandise margin as well as deleveraging of supply chain costs as we underestimated the impact of our accelerated new store growth on our operations.

Increased cannibalization; supply chain pressures; headwinds from store classes with exceptionally strong first year sales now normalized (chuckle, snort, lol); gross margin “pressured” by unfavorable merchandise margin; deleveraging of supply chain costs; we underestimated impact of accelerated new store growth on operations.

If all of that doesn’t give an OLLI investor pause, I’m not sure what would.

Looks like whatever it was that was “locked in loaded” back in May has backfired on OLLI here in August. It’s probably time for leadership to stop trying to sell investors on the stock and start focusing on better managing and leading the business.

Swift…
No position OLLI

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I WAS an OLLI stock holder as well; purchased in early 2018 and sold the first week of August at $78.64. The great thing about investing in a modest sized retail outfit like Ollie’s is that you don’t have to be a financial analyst crunching numbers at your desk to figure out how things might be going. All you have to do is get out from behind your desk, hit the road and visit a few stores. That is exactly what I did here in the Balt/Wash area in late July. My road show ended after 2 store visits…I had seen enough. Far too many spots available in the parking lot, limited foot traffic in stores, no lines at the check out registers, tired looking merchandise, disheveled and dirty stores and extremely light inventory in the stores compared to what is typically a retailer busting at the seams with product to sell.

To say I saw this huge drop coming would be incorrect. I simply saw an operation that I did not want to own; the huge drop was probably due to some of the observations I made, but it was obviously a coincidence rather than great timing on my part.

Interestingly enough, I still believe there is a place for Ollie’s on the brick-n-mortar retail landscape. They operate in a great “treasure hunting”, bargain-searching niche that has served the likes of TJ Maxx very well. In time, they will realize that they feel victim to the “growth for growth’s sake” pressures of Wall Street, they will fire some Retail Buyers, straighten out their inventory problems, close non-performing stores and get back to focusing on what they do best. I just didn’t feel like waiting around when there are so many other places to put my money.

H

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