Benzinga | Jan 14, 2021 11:24AM EST

Ollie's Has A Sourcing Problem, BofA Says In Downgrade

Discount retail chain Ollie's Bargain Outlet Holdings Inc. (NASDAQ:OLLI) has a sourcing problem, as the supply of the closeout merchandise Ollie's typically acquires is lower than expected, according to BofA.

The Ollie's Analyst: Jason Haas downgraded Ollie's from Buy to Underperform with a price target lowered from $105 to $82.

The Ollie's Thesis: Ollie's typically acquires merchandise in bulk when other retailers are forced to close their doors and liquidate their inventory.

Yet expectations for a "meaningful" second wave of retail closures in the first quarter of 2021 are unlikely to play out, Haas said in a Thursday downgrade note.

On a square foot basis, store closures in Ollie's categories -- excluding apparel -- were higher by 91% year-over-year in the first three quarters of 2020, but were down 91% year-over-year in the fourth quarter, the analyst said.

Related Link: Recap: Ollie's Bargain Outlet Q3 Earnings

"We have historically seen a roughly nine-month lag between store closures and the impact on same-store sales, implying potential sourcing difficulties through 2021," he said.

In addition, a combination of higher freight costs, a weaker U.S. dollar and higher raw material costs imply that Ollie's also faces headwinds in importing items from overseas suppliers, Haas said.

This is more of a "secondary issue," as only 20% of merchandise is imported, of which around 80% comes from China, the analyst said.

Tax refunds in 2021 could be down 11% year-over-year, as unemployment benefits are a taxable source of income, but not withheld by most people who receive them, he said.

Once tax season comes, this could become a "negative surprise" for many Ollie customers, Haas said.

OLLI Price Action: Shares of Ollie's Bargain Outlet Holdings were trading lower by 1.71% at $94.39 at last check.

Photo by Dwight Burdette via Wikimedia.