What happened
Shares of Ollie's Bargain Outlet Holdings (OLLI -0.67%) got crushed on Friday after the company reported earnings for the second quarter of 2020. The stock dropped 9% for the day, but the company's financial results were actually really strong, and trends look good for the upcoming third quarter.
The trends driving Ollie's good results in Q2 might not be there going forward, and investors are likely getting nervous about that. And considering the stock has more than tripled from 2020 lows, investors are doubly enticed to bank profits now.
So what
In Q2, Ollie's total net sales grew an astounding 58.5% year over year to $529 million. The company benefited from being an essential retailer, staying open while some other retail companies were forced to temporarily close. These windfall sales helped bolster bottom-line results as well. Non-GAAP (adjusted) earnings came in at $99 million -- up a whopping 295% from last year.
Ollie's stores are stocked with items it secures at a discount. It's always in search of a bargain it can pass on to customers. While that's a cool business model, it's lumpy and extremely hard to manage when sales unexpectedly surge as they did. Nevertheless, the company's inventory is only down 7.7%, a testament to the company's effective management team. Consider Big Lots' inventory fell 18%, and certain items were actually depleted during the latest quarter.
Ollie's stock, however, did sell off after the Q2 report. The same can be said with most discount-retail companies that have benefited from the coronavirus; their stocks are down over the last several days.
Many of these stocks traded near 52-week highs. And these businesses have undoubtedly benefited from coronavirus stimulus money, stimulus that is running out. Given it's unlikely Ollie's, Big Lots, and others can maintain sales growth at these levels, investors are selling now at the highs, motivated by the economic uncertainty ahead.
Image source: Getty Images.
Now what
That may be shortsighted. Ollie's is one of the few retail chains that actually expanded during the pandemic. In Q2, it opened six new locations. In addition to what it's already opened, the company plans to open 46 locations in 2020. And this isn't an outlier year. Ollie's has 366 locations right now, but long term it plans on 1,050.
Q2 was an exceptionally profitable quarter for Ollie's, and it's not reasonable to expect this level of activity all the time. But its bottom-line boost will help considerably as it expands its footprint and opens new distribution centers. It's also helpful to have extra cash on hand in case a big merchandise deal becomes available. In short, while the Q2 boost may be temporary, it provides long-term fuel for the growth engine.
