Ollie's Bargain Outlet Stock Falls on Weak Comps Despite Margin Gains

Ollie's shares fell after weak comparable-store sales overshadowed margin gains, with adjusted EPS of $1.42 beating expectations by 30 cents.

The company is converting former Big Lots stores into new locations, driving nearly 12% store growth and a path to margin recovery through dark rent conversion.

MarketBeat tracks 17 analysts rating OLLI a Moderate Buy with roughly 40% upside, citing expectations for easing headwinds and accelerating share buybacks.

Ollie's Bargain Outlet's (NASDAQ: OLLI) share price fell in the wake of its Q2 release as near-term headwinds overshadowed structural improvements.

The near-term headwind is a weak comp-store showing, with comps down unexpectedly on a contraction in basket size. The weakness runs counter to industry trends, which show other retailers, specifically off-price and discount retailers, doing well, and may be more of a one-off than not.

Management cited weather, consumer headwinds, and an increasingly promotional selling environment as responsible for the top-line miss. Investors should focus on the fact that Ollie's provides value for its customers, as reflected in its loyalty membership base.

It grew 12.7% year over year as of Q2, and it is not the only structural improvement to note.

Ollie's story is converting old Big Lots facilities into new Ollie's Bargain Outlets. The strategy involves high upfront costs, including significant dark rent, but enables rapid growth and a path to margin recovery.

The company grew store count by nearly 12% over the trailing 12 months leading up to the release, and expects to sustain the robust pace through year's end. The path to margin recovery involves turning dark rent into revenue-producing floorspace and leveraging scale. Ollie's business is expanding rapidly, enabling stronger relationships and better deals with its supply chain partners.

Ollie's Mixed Q2 Was Strong Where It Counts

Ollie's Q2 report was not without disappointments. Revenue growth missed expectations, but the 9.1% advance still outpaced most retailers. New stores underpinned growth, offset by weak comp, but there were also strengths.

The main driver was the impact of dark rent conversion on margin, cash flow, and profits, which expanded and outperformed despite the revenue miss. Key details include a 330 basis-point (bps) improvement in adjusted EBITDA margin, a nearly 40% increase in net income, and a 43% increase in adjusted earnings per share (EPS), with adjusted EPS of $1.42 30 cents better than expected.