Where next for the American consumer?
Are we on the cusp of a sustainable increase in jobs and, thus, a return to normal spending patterns? Or were the summer months just a head fake because states were reopening and workers had $600 a week in government cash flooding their bank accounts?
How this ultimately shakes out will say a lot about the next move in Ollie’s Bargain Outlet (OLLI), a discount retail chain that largely exists in the shadow of discount-retailing behemoths and which is largely unknown west of the Mississippi.
Just last week the Commerce Department released its month retail sales report showing that consumer spending in July rose 1.2%, better than expected and surpassing the reading in February, just before the coronavirus began it’s long-running tour of America. That would seem to bode well for the consumer and the economy, and it would seem to say we’re returning to a sense of normalcy.
- States that reopened are shutting down, which will likely show up in August employment readings;
- The pandemic continues adding 50,000 new cases day in the US, which impacts consumer willingness to venture into shopping malls and such;
- Retailer bankruptcies continue (recent deaths: Lord & Taylor and Tailored Brands, the name behind Men’s Warehouse and Jos. A. Banks, among other);
- Unemployment claims remain at historically elevated levels;
- And the last of the government’s $600, extended unemployment checks ceased to arrive in late-July … and Congress has adjourned until September.
It’s that last point that determine where we go from here in terms of consumers and retailers.
Simply put, tens of millions of jobless families suddenly have not cash coming in. Worse, the federal eviction moratorium ended with the extended unemployment checks, so the economy will likely see an unusual upsurge in people losing their apartments. Or, if they don’t, it will be because they’ve begged, borrowed and scrounged up every nickel they can find to pay their rent. That’s money that won’t go to retail spending.
So, where does that leave Ollie’s?
The stock has essentially tripled from its March lows, leaving it demonstrably overvalued – at least in nominal terms. A PE approaching 50, a price-to-book ratio at nearly 6.5, and price-to-sales at 4.8 are the exact opposite of “discount” and well ahead of competitors such as Dollar General (DG), Dollar Tree (DLTR), Target (TGT), Big Lots (BIG) and others.
The stock has reached those levels for good reason: It caters to the discount shopper, which pretty much defines America these days. And its profit margins, at basically two to three times its competitors, certainly warrant some measure of premium valuation.
Still, year-over-year sales growth is middling at 7.5% … and this question of where goes the consumer next hangs over Ollie’s.
If August consumer sales turn south, which seems probable, retailers could see a sell off. Ollie’s shares would likely take a hit, given their valuation relative to peers and the market as a whole. But that might actually present a buying opportunity.
For even though Ollie’s stock mocks the discount in the company’s name, consumers and the economy aren’t likely to know anything resembling normal for quite a while. The American retail focus will remain on discount goods and everyday low prices. Thus, picking up Ollie’s on a sell-off could be good for a quick rebound trade.