What happened
Shares of discount retail chain Big Lots (BIG) shot higher on Tuesday after the company reported financial results for its fiscal second quarter. As of 1:37 p.m. ET, Big Lots stock was up by 31%.
Based on a jump like that, you might expect that the brick-and-mortar chain reported good results for the period, which ended July 29. However, I must emphasize that the numbers weren't anything close to good: Net sales dropped by 15% year over year, and it booked a staggering net loss of $250 million. But the market had expected even worse numbers, and Big Lots' relative outperformance is why its stock headed upward.
So what
Big Lots had trailing 12-month net sales of over $5 billion compared with a market capitalization of less than $200 million prior to Tuesday's rally. That's an extraordinarily low valuation, reflecting just how pessimistic investors are about this business.
However, its fiscal Q2 results weren't all bad. For starters, Big Lots' gross margin improved to 33% from 32.6% in the prior-year period, even though it marked down prices to move inventory.
Moreover, Big Lots' management recently completed a sale-leaseback transaction on a distribution center and some company-owned stores. The details aren't important here, but the transaction improved the company's liquidity, which further fueled investor optimism for this business.
Now what
Big Lots expects its sales to continue dropping in 2023, albeit at a slower rate than they fell during the first half of the year. So there are signs that things are stabilizing, which is good.
But longer term, I think it's fair to question Big Lots' ability to deliver consistent growth. For perspective, trailing 12-month sales are about where they were a decade ago, signaling that the company struggled to find growth opportunities even prior to its current headwinds. For this reason, Big Lots isn't a stock I'll be adding to my portfolio right now.
