Pennsylvania-based discount closeout retailer Ollie’s Bargain Outlet Holdings, Inc. (OLLI) offers famous brand-name goods and merchandise at drastically reduced prices. OLLI’s stock gained 13.9% over the past five days after the company reported first-quarter fiscal 2022 earnings with an updated second-quarter 2022 outlook. The discount chain expects comparable-store sales ranging from flat to up 3% and a gross margin of roughly 34.5%.

However, the retailer fell short of Wall Street expectations on the top and bottom-line performances. OLLI’s comparable-store sales dropped 17.3% from the prior year’s increase of 18.8%. Although the company expects to see a jump in demand for warm weather seasonal products in the second quarter, several headwinds, including consumers grappling with the worst inflation in nearly 40 years and a looming recession, could be a significant signal of concern for the stock. The stock is currently trading 43.8% below its 52-week high of $95.43.

Furthermore, as the extreme value retailer continues to see increased supply chain costs due to higher import and labor costs, the stock could witness a pullback in the upcoming months.

Here’s what could influence OLLI’s performance in the near term:

Headwinds in the Retail Sector

According to the Bureau of Labor Statistics report last month, the consumer price index for all items increased 8.6% from a year ago, the first increase of 10% or more since 1981. Consumers are shifting their discretionary spending habits as they remain concerned about the spike in costs. According to a survey conducted by Toluna from March 23 to 29 of more than 1,000 adults, nearly 61% of Americans say they’re worried about their financial situation because of rising prices.

Historic lows in consumer sentiment amid recession fears could negatively impact the retail sector. Since a softer demand is expected to stick around as consumers watch their budget, retail chains like OLLI can see a drop in sales in the near term.

Dismal Financials

OLLI’s total net sales declined 10.1% year-over-year to $406.7 million for the first quarter ended April 30, 2022, primarily due to a comparable store sales decrease of 17.3%. The discount chain operator’s operating income fell 75.9% to $17.1 million, while its operating margin decreased 1,150 basis points to 4.2%. Moreover, the company’s net income declined 77.3% year-over-year to $12.5 million, and EPS decreased 76.2% from the prior-year period to $0.20. Its adjusted EBITDA decreased 66.9% from the year-ago value to $26.2 million.

Bleak Growth Story

Analysts expect OLLI’s EPS to decline 36.5% in the current quarter (ending July 2022) and 20.3% in fiscal 2023. Also, the retailer failed to beat the Street’s estimates in three of the trailing four quarters.

Its EBIT and net income decreased at CAGRs of 3.4% and 7.1%, respectively, over the past three years. And its EPS declined at an annualized rate of 6.7% over this period.

POWR Ratings Reflect Bleak Prospects

OLLI has an overall rating of D, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. OLLI has a D grade for Sentiment and Stability. Analysts’ expectation that OLLI’s EPS will decline in the current quarter is consistent with the Sentiment grade. And the stock’s relatively high beta of 1.09 is in sync with the Stability grade.

In addition to the grades I’ve highlighted, one can check out additional OLLI ratings for Growth, Momentum, Value, and Quality here.

OLLI is ranked #37 of 45 stocks in the C-rated Specialty Retailers industry.

Bottom Line

Although OLLI’s efforts to increase its store count year-over-year could help improve its current sales trends, concerns related to a higher inflationary pressure and low consumer sentiment could limit its growth potential. Furthermore, its bleak outlook and declining financials could cause its shares to retreat further in the coming months. Therefore, the stock is best avoided now.

How Does Ollie’s Bargain Outlet Holdings (OLLI) Stack Up Against its Peers?

While OLLI has a D rating in our proprietary rating system, one might want to consider taking a look at its industry peers, ODP Corp. (ODP), which has an A (Strong Buy) rating.

OLLI shares were trading at $53.00 per share on Monday morning, down $0.66 (-1.23%). Year-to-date, OLLI has gained 3.54%, versus a -20.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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