Ollie's Bargain Soft Comps Performance May Hurt Top Line

Persistence of sluggish comparable-store sales performance may hurt Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) top line. We note that comparable-store sales — an important indicator of a retailer's health — declined 1.7% during the second quarter of fiscal 2019, following an increase of 0.8% in the preceding period. The figure also compared unfavorably with an improvement of 4.4% in the prior-year quarter.

Cannibalization of comparable stores and short-term supply chain pressures hurt the comparable-store sales performance. Management now expects comparable-store sales to decrease in the range of 0.5-1.5%, which is down from an increase of 4.2% reported in fiscal 2018. The company had earlier forecast comparable-store sales growth of 1-2% for fiscal 2019.

Apart from this dismal margin performance also remains a concern. Notably, gross margin shriveled 190 basis points to 37.2% owing to deleverage in supply chain costs and lower merchandise margin. Meanwhile, operating margin shrunk 290 basis points to 9.2% on account contraction in gross margin and increase in SG&A expenses.

The aforementioned factors and lower-than-expected second-quarter fiscal 2019 results compelled this discount retailer to trim fiscal year view. Management now envisions operating income in the band of $174-$178 million for the current fiscal year, down from the prior estimate of $190-$194 million. Gross margin is anticipated to be 39.5% down from 40.1% projected previously.

The company 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. Net sales are projected between $1.419 billion and $1.430 billion, down from $1.440-$1.453 billion estimated earlier. These were enough to trigger downward spiral in shares.

The past three months have not been a smooth ride for Ollie's Bargain, as shares of this Zacks Rank #5 (Strong Sell) company have fallen 30.4% compared with the industry’s decline of 17.1%. Since the announcement of results, the stock has plunged almost 23%.

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