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Should Ollie's Bargain Soft Q1 Comparable Sales Worry You?

Zacks Equity Research

Ollie's Bargain Outlet Holdings, Inc. OLLI came out with first-quarter fiscal 2019 results in early June, maintaining its positive earnings surprise streak. Net sales also surpassed the Zacks Consensus Estimate after missing the same in the preceding quarter. The company sustained its decent year-over-year improvement in both the top and bottom line, while reporting the 20th consecutive quarter of comparable-store sales growth.

However, we note that comparable-store sales — an important indicator of a retailer's health — decelerated sharply on a sequential basis. The metric rose 0.8% during the quarter under review, following an increase of 5.4% and 4.6% registered in the fourth and third quarters of fiscal 2018, respectively. Management informed that increase in average basket was partly offset by fall in transactions. Moreover, unfavorable weather conditions impacted the company’s seasonal business.

Nonetheless, analysts believe that this a short blip, and Ollie's Bargain looks comfortable in sustaining comparable-store sales growth momentum in the upcoming periods. Certainly, the company’s business model of “buying cheap and selling cheap,” cost-containment efforts, focus on store productivity and expansion of customer reward program strengthen its position.

Cumulatively, these have positioned the stock to augment both the top and bottom-line performance in the long run. The stock’s expected earnings per share growth rate of 22.1% for 3-5 years indicates the same. Taking a cue from the past we noticed that net sales have surged at a CAGR of 18.1% from $638 million in fiscal 2014 to $1.241 billion in fiscal 2018, while net income has soared from $26.9 million to $135 million during the aforementioned period.

Management now envisions fiscal 2019 net sales in the band of $1.440-$1.453 billion and adjusted earnings in the range of $2.13-$2.17 per share. This portrays a sharp improvement from net sales of $1,241.4 million and adjusted earnings of $1.83 per share recorded in fiscal 2018.

Wrapping Up

Given limited exposure to tariffs, strong closeout merchandise availability, store growth potential and tight expense management, the market has fairly rewarded the company. Notably, this Zacks Rank #3 (Hold) stock has surged roughly 32.5% in the past six months, outperforming the industry’s growth of 13.1%. But this has taken the valuation quite high.

The stock is currently trading at 37.49X forward 12-month earnings, which compares with 17.38X for the industry and 19.18X for the sector. Moreover, we remain concerned about any increase in supply chain costs and deleverage in SG&A expenses that may weigh upon margins. Management expects gross margin to contract 20-30 basis points during the second quarter of fiscal 2019 but expected to pick-up in the back half of the year.

3 More Hot Picks

Target TGT has an average positive earnings surprise of 2.6% in the trailing four quarters. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zumiez ZUMZ has a long-term earnings growth rate of 13.5% and a Zacks Rank #2.

Costco COST has a long-term earnings growth rate of 8.9% and a Zacks Rank #2.

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