What happened

Shares of Ollie's Bargain Outlet (OLLI -0.41%) were sliding today after the discount retailer missed estimates in its third-quarter earnings report.

As of 12:47 p.m. ET, the stock was down 12.4% on the news. 

So what

Ollie's, which offers deep discounts on name-brand closeout merchandise and excess inventory, said that comparable sales in the quarter rose 1.9%, and overall revenue increased 9% to $418.1 million, missing estimates at $429.1 million.

Ollie's, which only sells through its stores, continues to rapidly expand its brick-and-mortar footprint, adding 15 stores in the quarter, or a 9% increase from the previous year, to 463. 

Gross margin fell by 40 basis points to 39.4% due to higher supply chain costs and a slight decrease in merchandise margin, and overall operating margin declined 80 basis points to 7.1%. The company finished the quarter with adjusted earnings per share of $0.37, which was up from $0.34 in the quarter a year ago but short of the consensus at $0.41.

Management was pleased with the improvement in gross margin compared to the first half of the year and said softness in the last two weeks of October, the end of the quarter, weighed on overall results. 

CEO John Swygert added, "Although we have seen an improvement in sales trends since October, we are operating in a highly promotional and inflationary environment," meaning margins will remain under pressure.

Now what

The market also seemed disappointed with Ollie's guidance, which called for comparable sales growth of flat to up 2% in the fourth quarter and total revenue of $540 million to $550 million, which was below expectations at $562.7 million.

On the bottom line, the company sees adjusted earnings per share of $0.78 to $0.83, which compares to estimates of $0.95.

While the guidance helps explain the sell-off, Ollie's still seems well positioned to gain market share in a recessionary environment, given its deep discounts, and the store growth indicates the company sees a significant market opportunity ahead. 

Therefore, investors shouldn't be discouraged by a modest miss in one quarter.