After Ollie's Bargain Outlet Holdings, Inc (NASDAQ:OLLI) reported its 2019 second-quarter earnings recently, shares took a 27% tumble the next day. Investors seemed surprised and displeased that same-store sales and earnings per share (EPS) fell, seemingly changing Ollie's from a high-flying growth stock to a turnaround story overnight. Let's take a look at the highlights to see how it did.

Ollie's Bargain Outlet: The raw numbers

Ollie's Metrics 2019 Q2 2018 Q2 Change
Net sales $333.9 million $288.1 million 15.9%
Adjusted net income $23.5 million $26.1 million (9.9%)
Adjusted EPS $0.35 $0.40 (12.5%)

Data source: Ollie's Bargain Outlet Holdings, Inc.

Four sales tags hanging down, each with a different saying: Everything half price, 50% off sale, and buy one get one free.

Ollie's Bargain Outlet saw shares fall after earnings and same-store sales both decreased year over year. Image source: Getty Images.

What happened with Ollie's Bargain Outlet this quarter?

Ollie's continues to drive growth through store expansion, though with declining earnings and same-store sales, the long-term sustainability of the company's growth trajectory was called into question this quarter.

  • Comparable-store sales fell 1.7%, missing the discount retailer's long-term guidance of positive 1%-2%.
  • Management said the same-store sales decline was driven by three primary factors: (1) first-year stores performing so well that comparisons were difficult, (2) large footprints of Toys-R-Us store conversions that cannibalized sales from existing Ollie's at a higher-than-expected rate, and (3) a larger-than-usual number of store openings in the first half of the year strained the company's supply line and inventory levels.
  • Gross margin contracted to 37.2%, almost 2 whole percentage points lower than it was in last year's second quarter. Management blamed rising supply-chain labor costs, primarily due to the stress from the number of new stores, and a lower-margin mix of products sold.
  • Ollie's opened eight new stores this quarter, bringing its total to 332 stores in 23 states, a 17.7% increase year over year. This brings the total store openings in the first half of 2019 to 29, a higher number than normal and one that pushed Ollie's logistics infrastructure and deal pipeline to its limit. Management said the imminent opening of a third distribution center would enable it to open stores in new territories.
  • The company's balance sheet continues to improve, with its cash balance now $78.5 million, up from $29.4 million at the end of 2018's second quarter, driven by cash flow from operations. During that same period, total borrowings dropped to $0.8 million from last year's total of about $21.8 million.
  • Membership in Ollie's Army, the company's customer loyalty program, rose to 9.7 million active members, a 13.5% increase year over year.

What management had to say

Ollie's CEO and co-founder Mark Butler acknowledged the tough quarter:

This was certainly, by Ollie's standards, a tough quarter. Despite the challenges we faced, we grew our top line by nearly 16%, driven, in part, by strong sales from the 29 stores we opened in the first half of the year, more than double the number opened in the same period last year, including 13 former Toys R Us locations. 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. Comparable store sales were also affected by headwinds from store classes with exceptionally strong first-year sales now normalizing as they entered the comparable store base. Our gross margin in the quarter was pressured by both unfavorable merchandise margin, as well as deleveraging of supply chain costs as we underestimated the impact of our accelerated new store growth on our operations. That said, we have made great strides in correcting these short-term issues, with comparable store inventory levels now back in line with our expectations. With our deal flow as strong as ever, we're delivering great bargains to our customers.

Looking forward

Shareholders will want to watch the company's same-store sales and gross margin the next few quarters to see if management is right that these are temporary headwinds that can be overcome. One huge red flag would be an announced plan for the company to slow down its expansion plans.

Ollie's lowered its full-year guidance after just raising it last quarter. The company is now projecting 2019's total sales to fall between $1.419 and $1.43 billion, gross margin to come in at 39.5%, and adjusted earnings per share to range between $1.95 and $2.00. If Ollie's projections prove correct, shares are currently valued at a price-to-earnings (P/E) ratio of about 28. While that's not cheap, it's certainly much cheaper than shares have been for the past two years.