What happened
Shares of discount retailer Ollie's Bargain Outlet Holdings (OLLI +4.13%) went down on Friday after the company reported financial results for the third quarter of 2020. The Q3 numbers weren't bad, but they came with a warning of slowing growth for the fourth quarter. This displeased investors and, as a result, the stock was down 11% as of 11 a.m. EST.
So what
For Q3, Ollie's generated net sales of $414.4 million, good for 26.7% year-over-year growth. This growth came from a combination of opening new stores and sales growth at older stores (known as comparable-sales growth). Brick-and-mortar retailers in particular benefit from sales growth because it leverages the fixed cost of its real-estate portfolio. Accordingly, the company gained operating leverage, causing net income to surge 67.7% to $45.2 million.
Image source: Getty Images.
If the market only looked backwards, then Ollie's stock would likely be going up today. But the market looks ahead and it doesn't like what it sees for Q4. In the press release, CEO John Swygert said, "Quarter-to-date, our comparable store sales increases are tracking in the low single-digits." For perspective, comp-sales were up 43% and 15% in the past two quarters. A low single-digit increase is a big sales drop-off and it's why the stock is down today.
Now what
Slowing sales shouldn't surprise anyone. The COVID-19 pandemic caused certain businesses to boom and I believe they can be broken into two categories. The first category is an acceleration of permanent trends -- things like e-commerce and financial technology. The other category applies to Ollie's -- it had a nice temporary sales bump because it sells cheap merchandise and (more importantly) was actually open. As life returns to normal, it's logical for its sales to revert to pre-pandemic levels.
However, while the market looks ahead, it doesn't look ahead very far. Generally speaking, average people can outperform market pundits by extending their vision beyond just the next quarter. In Ollie's case, it's opening new stores around the country and runs a profitable business -- which could make this retail stock a good buy for patient investors.
