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Ollie's Still Merits a Spot on Your Watchlist

Despite a bearish earnings report, OLLI stock is showing signs it may be getting ready to reverse its bearish trend. But with short interest remaining high, opportunistic investors should wait...

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This story originally appeared on MarketBeat

But wait for confirmation before going on the long side of OLLI stock

Ollie's Bargain Outlet Holdings (NASDAQ: OLLI) delivered another disappointing earnings report. However, investors may be signaling that the sell-off of OLLI stock is overdone. The stock price has been consolidating in the last 30 days and may be getting ready to reverse its bearish trend.

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But when that reversal will take place is anybody's guess. Short interest remains high and that means OLLI stock may have further to fall. Opportunistic investors should wait for confirmation of a reversal before buying the company's shares.

Having Tough Comparisons to Pandemic Highs

First the good news, the company beat on earnings per share (EPS) for the first time in three quarters. It wasn't a strong beat. But shareholders had to be relieved that the company beat estimates.

However, that's about the only glimmer of good news in what was otherwise a lukewarm report. For the third consecutive quarter, EPS was lower on a year-over-year basis.

In terms of revenue, the story was similar. Ollie's came in with revenue that was below estimates. And revenue has also been below the prior year level for the last three quarters. The company was also seeing weakness in comparable store sales which declined by 10.5%.

The upshot of the report is that Ollie's is having a difficult time building on the momentum that dollar stores enjoyed during the pandemic.

Supply Chain Pressures Remain

As I wrote in a bullish article about Dollar General (NYSE:DG), even dollar stores are now being impacted by inflation. It remains to be seen how well Ollie's will be able to manage this cost pressure. But suffice it to say, it will remain a big story.

Ollie's cited supply chain pressures as remaining an anchor on sales in the previous quarter. This was the quarter that included the all-important holiday season which the company says was weaker due to late deliveries on key items. Moreover, customers decided to do their shopping earlier in the year,

Supply chain difficulties were also cited regarding the company's gross margin which declined by 320 basis points to 36.5%. However, the supply chain wasn't the only culprit. The company also cited higher import and trucking costs and increased wage rates in its distribution centers as putting pressure on margins.

Keep OLLI Stock on Your Watchlist

When I last wrote about OLLI stock, I felt the stock may have been oversold. At the time it was trading about $10 higher than it is today. However, the reasons I gave then still apply now. The company must be able to show that the supply chain difficulties are abating.

Second, it needs to continue building on their growth strategy. On this front, things seem more positive. Ollie's managed to open five stores in the last quarter and is committed to its growth strategy. In fact, the company plans to build 46 to 48 new stores in 2022.

And third, the company needs to make progress on establishing an e-commerce presence. The company didn't allude to any progress on this front.

With all that said, the advantage of dollar stores is their ability to cater to individuals and families who will be the most affected by inflationary pressures. And Ollie's has a reputation for being a "treasure hunt" destination with a loyal base of repeat shoppers that account for up to 80% of the company's business. And each store generates a significant amount of free cash flow.

This should help to offset continued weakness in comparable-store sales. The company projects comparable store sales to be flat to down 1% for the full year 2022. This is why we believe OLLI stock may have further to fall in the short term, but this may be one to watch in the second half of the year.

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