What happened
Shares of Ollie's Bargain Outlet Holdings (OLLI 0.15%) rose 49.5% in the first half of 2020, according to data provided by S&P Global Market Intelligence. As a retailer of essential goods, it was able to stay open throughout the coronavirus shutdown. And as a discount retailer, it was a strong consideration for consumers wanting to save money during uncertain economic times.
The last few months have completely reversed the trend for Ollie's Bargain Outlet stock. Prior to the pandemic, shares were slipping due to the company's lackluster results.
So what
In March, Ollie's released its earnings for full-year 2019. Net sales were up 13% from 2018 to $1.4 billion, but this was entirely attributable to new locations. Sales at existing locations, known as comparable-store sales, actually fell 2.1% for the year.
By the time the company released earnings, the stock was in free fall. The COVID-19 pandemic sent most stocks down, especially retailers like Ollie's. Then the company didn't provide guidance for 2020 because of the coronavirus, which only sent the stock down further.
But it wasn't long until Wall Street wised up to Ollie's potential during the pandemic. Its stores stayed open the entire time, thanks to the essential retail goods found within. Furthermore, it was only logical to assume consumers were shopping at Ollie's, as furloughed workers searched for bargains.
In May, Ollie's released first-quarter earnings results showing a 3.3% drop in comps, and a 14% drop in net income. Those results weren't great and mostly predate the effects of COVID-19. But it appears investors looked past these results to the rest of 2020's potential. Management again didn't provide guidance or percentages, but it did note a "really nice spike in the business" after people began receiving their U.S. stimulus checks.
That was enough to confirm what investors had hoped: that Ollie's Bargain Outlet was a good bet in the current economic climate. The stock is up as a result.
Image source: Getty Images.
Now what
If Ollie's Bargain Outlet is currently experiencing a sales boom, here's why it would be great for long-term shareholders. The company didn't pause new store openings, it's primary growth strategy. Going into 2020, it planned to open between 47 and 49 new locations. This plan hasn't changed, although the coronavirus might delay some progress.
Roughly half of new locations will be supported by Ollie's new distribution center in Texas. Building out the stores supported by that center helps the company gain operating leverage. So it's important for growth plans not to slow. However, building new stores is pricey. Management expects capital expenditures of up to $35 million in 2020, mostly due to unit growth.
A sales boom could result in a temporary bumper crop of profits. These can be reinvested quickly to build new locations and drive operating leverage. New locations will drive sales growth, while operating leverage can drive net income growth. Both are great for shareholders.
