Analysts Defend Ollie's Bargain After Disappointing Earnings, Guidance Cut

Value retailer Ollie's Bargain Outlet Holdings Inc OLLI reported disappointing second-quarter results Wednesday afternoon and reduced its full-year guidance. 

Despite an immediate reaction to the downside, two notable Street analysts continue to view the stock favorably.

The Analyst

Bank of America Merrill Lynch analyst Jason Haas maintained a Buy rating on Ollie's Bargain with a price target lowered from $110 to $75.

KeyBanc Capital Markets analyst Bradley Thomas maintained at Overweight, price target lowered from $110 to $90.

BofA: Q2 A 'Rare Execution Misstep'

Ollie's second-quarter miss is a function of a "rare execution misstep," Haas said in a Thursday note. 

Comps fell 1.7% versus expectations of 2.5% growth. The retailer attributed the big miss to cannibalization from new stores and supply chain issues at distribution centers. The company was also negatively impacted by cold and wet weather throughout May.

Other negative readouts from the quarter include a 194-basis point drop in gross margins and an 80-basis point decline in merchandise margins, the analyst said. 

Encouragingly, Ollie's said it is "pleased" with its performance in August, and new store openings remain on track at a mid-teens growth rate, he said. 

The long-term growth story remains unchanged, although the company is "less deserving" of a premium multiple exiting Wednesday's report, according to BofA. 

KeyBanc: Guidance Remains Strong

Ollie's management revised its 2019 full-year EPS outlook lower from $2.16 to a range of $1.96 to $2, which is disappointing — but the company remains in a "healthy position" to gain market share over the long term, Thomas said in a Wednesday note.

Ollie's has a path to operating 950 stores throughout the U.S. and generating longer-term 1% to 2% comp growth, 17% to 20% annual EPS growth and flat-to-slightly higher margins, the analyst said. 

Despite a concerning second-quarter print, the company has shown "strong consistency" in margins, new store economics and sales results since its July 2015 IPO, he said.

Ollie's "cyclically insulated business model" remains unchanged and adds another positive element to the stock, Thomas said. 

Finally, Ollie's stock is likely to remain rangebound until it can demonstrate improved results, especially against a difficult fourth-quarter comparison, according to KeyBanc. 

Ollie's shares were plunging 23.9% to $59.18 at the time of publication. 

Benzinga's Take: If a recession occurs in the coming years, Ollie's deep value reputation will become increasingly important, especially for consumers shopping for name brands. 

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