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  1. Home
  2. / Investing
  3. / Stocks

Ollie's Stock Now a Bargain, Too

Down after an earnings miss, the low-cost outlet retailer is likely poised to perform well, even in a recession.
By DAVE BUTLER
Aug 29, 2019 | 06:00 AM EDT
Stocks quotes in this article: OLLI

Ollie's Bargain Outlet (OLLI)  is down over 26% in after-hours trading, at the time of writing. The decline is a result of the discount retailer reporting fallout in comparable store sales in the second quarter, coupled with a decrease in year-over-year net income.

It looks at first glance like an awful quarter, and the stock should definitely be down. Upon deeper analysis, however, you'll see that the poor results were more related to the relativity of store openings and their impact on comp sales, as well as investments in expansion. More than anything, I think the reason that OLLI stock couldn't handle the news is that the stock trades at a high valuation.

Assuming that this quarter doesn't buck the overall trend, this might be an opportunity for gaining some OLLI stock at a far better price.

Financials: A Silver Lining in Sight

Total sales revenues increased 15.9% year-over-year to $333.9 million. These revenues certainly owe credit to the eight new stores opened during the quarter. In all, Ollie's store counts increased 17.7% year-over-year. CEO Mark Butler noted that the store openings had two impacts on Ollie's in the second quarter. On the one hand, he noted that big sales gains from the 29 new stores opened so far in 2019 contributed to top-line growth. On the other hand, the company had to stretch its inventory between the new stores, putting pressure on what it could put into its preexisting locations.

First year sales from stores opened last year were very strong, added Butler, as a result of entering a new location in a new market. A year later, those sales have normalized to relative levels, therefore encouraging a year-over-year comp sales decline. I really commend management for getting right to the heart of the disappointing quarter. Management admitted that the gross margins were impacted by underestimating the effects that store growth would have on the supply chain. Then again, not having enough supply would imply that demand was stronger than anticipated. To that end, I see a silver lining.

Adjusted earnings, which exclude tax benefits, decreased 9.9% to $23.5 million. That breaks down to 35 cent per diluted share -- a 5 cent decline from last year's 45 cent per diluted share. On an adjusted basis, net income decreased 15.7% to $25.2 million. That breaks down to 38 cents per diluted share; a comparable 15.6% decline year-over-year.

The Stock Stacks Up

Six months of gains have been erased in less than 24 hours. What the stock does Thursday will be very interesting.

If you're going to avoid Ollie's, don't do it over the second quarter. The one reason to avoid owning OLLI would be a general fear in the continued strength of the consumer. Thus far, we haven't seen that, yet. Looking forward, I simply like the discount nature of Ollie's. The low price and buyout inventory let the company perform well, even in a time when consumers are short on cash. In fact, I'd venture to make the assertion that Ollie's would benefit in a recession, gaining market share. The slogan "good stuff cheap" most definitely caters to demand during a downturn in the economy.

One of the key things to note here is that capital expenditures increased $14.7 million year-over-year as the company invested in a third distribution center, coupled with the opening of its new stores. While Ollie's did indeed report a weak quarter upfront, the larger picture shows us a quarter of investment and expansion.

Guidance for fiscal 2019 included adjusted earnings, which excludes tax benefits related to stock-based compensation as well as a gain from an insurance settlement, of $1.95 to $2 per share. Going off of that, the stock's nosedive has it trading at about 28.8-times forward earnings. Yes, that's not cheap. But Ollie's has a track record of delivering gains that not many can match. Overall, I'm simply not going to jump on the bandwagon and fault Ollie's too much for this quarter. If the selloff really gets out of hand Thursday, I might just snag some shares.

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At the time of publication, Butler did not have a position in the securities mentioned.

TAGS: Earnings | Investing | Stocks | Retail

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