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Ollie's Bargain (OLLI) Down on Q2 Earnings Miss, View Cut

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Shares of Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) plunged roughly 28% during the after-market trading session on Aug 28. The stock came under pressure following the company’s lower-than-expected second-quarter fiscal 2019 results. Although net sales improved, earnings per share fell sharply from the year-ago period. Further, the company witnessed dismal comparable-store sales performance. Margins also shrunk on a year-over-year basis. Cumulatively, these compelled management to trim fiscal year view.

Notwithstanding this short-term blip, management is optimistic about its business model of “buying cheap and selling cheap,” and remains focused on improving store productivity and expansion of customer reward program, Ollie's Army.

Quarterly Results

Ollie’s Bargain delivered adjusted earnings of 35 cents a share that fell short of the Zacks Consensus Estimate of 46 cents. The figure also declined 12.5% from the year-ago quarter on account of increased cost of sales and higher SG&A expenses.

Meanwhile, net sales improved 15.9% to $333.9 million but came below the consensus mark of $339.8 million. The increase in the top line can be attributed to robust new store performance, including 29 stores opened in the first half of fiscal 2019.

However, comparable-store sales declined 1.7% during the quarter under review, following an increase of 0.8% in the preceding period. We note that the figure also compared unfavorably with 4.4% increase registered in the prior-year quarter.

Cannibalization of comparable stores and short-term supply chain pressures hurt the comparable-store sales performance. Moreover, store classes with outstanding first-year sales now normalizing as they entered the comparable store base, acted as headwind.

While gross profit rose 10.1% to $124 million, gross margin shriveled 190 basis points to 37.2% owing to deleverage in supply chain costs and lower merchandise margin. Operating income declined 11.8% to $30.8 million, whereas operating margin shrunk 290 basis points to 9.2% on account contraction in gross margin and deleveraging of SG&A expenses.

SG&A expenses jumped 19.7% to $87.4 million due to higher number of stores. As a percentage of net sales, SG&A expenses increased 90 basis points to 26.2%.

Adjusted EBITDA decreased 6.8% to $37.5 million during the reported quarter, while adjusted EBITDA margin fell 280 basis points to 11.2%.

Store Update

During the quarter under review, the company opened eight outlets, thereby taking the total store count to 332 in 23 states as of Aug 3, 2019. In fiscal 2019, the company intends to open 42 new stores.

Financial Aspects

Ollie’s Bargain, which carries a Zacks Rank #2 (Buy), ended the quarter with cash and cash equivalents of $78.5 million, total borrowings (consisting solely of capital lease obligations) of $0.8 million, and shareholders’ equity of $1,017.5 million.

The company incurred capital expenditure of $20.2 million during the quarter under review owing to new store openings and investments in the third distribution center. Management anticipates capital expenditure in the range of $75-$80 million for fiscal 2019.

Guidance

Management now envisions fiscal 2019 adjusted earnings in the band of $1.95-$2.00 per share down from the prior estimate of $2.13-$2.17 but is still higher than $1.83 reported in fiscal 2018. The current Zacks Consensus Estimate for fiscal 2019 is pegged at $2.17 and could witness a downward revision in the coming days.

Ollie's Bargain now forecasts net sales between $1.419 billion and $1.430 billion, down from $1.440-$1.453 billion projected earlier. However, the trimmed view still shows an improvement over $1.241 billion generated in the prior year. The consensus mark for the same is pegged at $1.45 billion.

The company now expects comparable-store sales to decrease in the range of 0.5-1.5%, which is down from 4.2% increase reported in fiscal 2018. The company had earlier forecast comparable-store sales growth of 1-2% for fiscal 2019.

Operating income is projected in the band of $174-$178 million for the current fiscal year, down from the prior estimate of $190-$194 million. Management now anticipates gross margin to be 39.5% down from 40.1% projected previously.

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