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Here's Why Ollie's Bargain Outlet Stock Is Getting Crushed After Earnings

By Jason Hall – Aug 29, 2019 at 2:41PM

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Shrinking profits and lowered guidance have investors selling in droves.

What happened

Shares of Ollie's Bargain Outlet Holdings (OLLI -3.55%) are down 27.3% at 1:46 p.m. EDT on Aug. 29, following the release of the company's second-quarter results yesterday afternoon. 

Ollie's reported 16% sales growth in the quarter, but that's pretty much where the good news ended. Comparable sales -- sales at stores open more than one year, also called same-store sales -- fell 1.7% in the quarter, and earnings dropped 15.6% to $0.38 per share. 

Woman with shocked expression while looking at computer screen.

This is how a lot of Ollie's shareholders feel right now. Image source: Getty Images.

So what

Ollie's sales growth was driven by new stores. The company said it ended the second quarter with about 18% more stores than it had one year ago. Moreover, management said that the new stores, while performing well, were also responsible for shrinking comps in its existing store base. Moreover, comps didn't just fall from last year's strong 4.4% comps growth, they also decelerated further from its first-quarter results when comps increased 0.8%. 

CEO Mark Butler said, "The exceptional strength, rapid pace of openings and larger footprint of these new stores impacted comparable store sales through increased cannibalization and supply chain pressures that reduced comparable store inventory levels."

Butler elaborated on the weak comps in relation to its newest store format, saying its comps were "also affected by headwinds from store classes with exceptionally strong first-year sales now normalizing as they entered the comparable store base."

Frankly, it's never a good look when comps fall because of new stores, and chances are, a massive amount of today's sell-off is driven by investors hearing management blame falling sales at new stores that have been open barely more than one year, and not feeling very confident in the company's ability to deliver sustained sales growth from those stores. 

Simply put, if new stores peak in their first year, that's a novelty, not a sustainable business model to deliver growth -- at least that's likely how a lot of shareholders (or former shareholders) view today's earnings report. 

Management also backed down on its guidance for the full year. The company now expects net sales between $1.42 billion and $1.43 billion, down from $1.44 billion to $1.453 billion after first-quarter earnings. Comps are now expected to fall between 0.5% and 1.5% for the full year, indicating management expects comps to weaken even further in the second half of the year. Originally, the company was looking to grow comps 1%-2% this year. 

The weight of lower sales growth expectations -- in particular that comps will shrink, reducing the operating leverage its existing stores generate -- will take a bite out of earnings, too. Ollie's operating income and net income guidance were both lowered 8% from the prior guidance. 

Now what

The biggest takeaway? Investing in growth stocks can be hard, and Ollie's fully demonstrates that. Just a year removed from stellar growth metrics, the company's aggressive expansion plans seem to be both driving new stores, but taking a bite out of sales from some older locations. 

Moreover, let's not ignore the fact that many investors are fearful of the "R" word right now: recession. A retailer like Ollie's could very well feel the brunt of weak consumer spending, and it's likely a chunk of today's selling is driven by these fears. 

Add it all up, and Ollie's weak comps and revised outlook should give investors pause. But if management can work through the growing pains and show investors the weak comps are just a short-term problem, its future could still be very bright. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ollie's Bargain Outlet Holdings. The Motley Fool has a disclosure policy.

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