This Multiline Retail Stock Can Offer Better Returns Compared To Costco

COST: Costco logo

We believe that Ollie’s Bargain Outlet Holdings stock (NASDAQc: OLLI) is currently better valued than Costco stock (NASDAQ: COST). Costco’s current price-to-operating income ratio of 45x is higher than levels of 15x for OLLI. But does this gap in valuation make sense? We don’t think so, especially if we look at the fundamentals of these companies. More specifically, we arrive at our conclusion by looking at historical trends in revenues and operating income for these companies. Our dashboard Better Bet Than COST: Pay Less To Get More From OLLI has more details – parts of which are summarized below.

1. Revenue Growth

Costco’s revenue grew at an average rate of 9% over the last three years, as compared to revenue growth of 19% for Ollie’s Bargain Outlet. Both companies’ models positioned them to meet the increased demand for budget-conscious consumers – undoubtedly benefiting from the Covid-19 stimulus.

  • Ollie’s Bargain Outlet Holdings is a discount retail chain selling both staples and discretionary items (toys, home goods, electronics, hardware). The company seeks out excess inventory from suppliers to be sold at a substantially discounted price in warehouse-like stores. It specifically targets brand-name merchandise while purchasing the inventory. In the fiscal second quarter (ended July 31), comparable store sales decreased 28.0% from the prior year’s extraordinary 43.3%, but resulting in a two-year stack of positive 15.3%.
  • Costco is a warehouse club operator. The company collects fees from its members and sells items in bulk at rock-bottom prices while making most of its operating margin from these membership fees. This is despite the fact that these fees account for only 2% of the company’s total revenues. Moreover, it passes on cost savings to consumers by eliminating overhead costs like a salesperson and ornamental buildings – a business model oddly well-suited to the current economic times. The company reported comparable sales growth of 15.1% in the fiscal third quarter (ending May 9), excluding the impact of gas and foreign currency fluctuations.
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2. Operating Income Growth

The three-year average operating income growth for Costco stands at 10%, much lower than 29% for Ollie’s. Better revenue growth for the latter led to higher operating income. Looking at the last twelve-month period, OLLI’s growth in operating income was three times higher than Costco’s.

The Net of It All

Ollie’s Bargain Outlet Holdings has seen higher growth in revenues and operating income than Costco in the last three years. Yet, it appears to be cheaper than Costco. Despite better profit and revenue growth, OLLI has a comparatively lower price-to-operating income ratio. We think this gap in valuation will eventually narrow over time to favor the less expensive name, Ollie’s Bargain Outlet Holdings.

Costco’s underperformance in revenue and operating income growth compared to Ollie’s reinforces our conclusion that the stock is expensive compared to its peer. COST Stock Comparison With Peers shows how it compares against other peers on metrics that matter.

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