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Lampert Out at Big Lots, Outlook Remains Iffy

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Discount big-box retailer Big Lots (NYSE: BIG  ) managed to satisfy the Street in its recent earnings announcement, even though the numbers shrunk year over year. Moreover, beleaguered retail investor Eddie Lampert dumped his stake in the company, according to the fund's latest SEC filings. Valuation metrics look cheap compared to those of some peers, but what are you buying for the price? To make the call, let's take a look at the company's recent earnings and what lies ahead.

Earnings recap 
For the first quarter, net sales at Big Lots actually ticked up a little more than 1% to $1.31 billion. This came in just a hair shy of research firm Zacks' consensus estimate of $1.32 billion. Despite higher sales, same-store growth turned negative by 2.9%. Management cited the oft-employed delayed tax refund and unseasonable weather as the culprits for lower store traffic. On the bottom line, the company beat analyst estimates with EPS of $0.61 per share. The number came in near the high end of management's earlier guidance of $0.53 to $0.65 yet still represents a more than 10% decline from the prior year's earnings.

Big Lots ventured into the north with its acquisition of Canadian retailer Liquidation World. Margins shrank slightly, with operating income suffering a 17% decline from the prior year's quarter to $61.7 million. Management sees growth in the Canadian business, and believes it will be a long-term accretive move for the top line. The investment has yet to show evidence of this, though. So what lies ahead?

The future of Big Lots 
For the rest of the fiscal year, management expects $2.87 to $3.12 in earnings per share. Earlier, the company had expected $3.05 to $3.25. Net sales are set to increase roughly in line with this quarter's gains, while comparables are set to remain flat or down a point.

In the short term, investors should not be expecting much in the way of good news. Management sees comparables down 2% to 4%. Expenses as percentage of sales is likely to increase, as well.

Despite polarizing investors and analysts, Eddie Lampert is a strong judge of retail character, and his ESL fund is officially out of Big Lots after holding the stock since 2011. This, in my opinion, is a rough sign for the company and should signal investors to remain cautious.

If you're looking for a turnaround retail play, there are plenty to choose from that have more attractive economics than Big Lots. The company has already adjusted down its near-term expectations of just-purchased Canadian operations, and management is not convincing us of its capital-allocation prowess. Lampert is known to take active roles in mismanaged retail operations, but clearly this one is no longer on his list.

Valuation remains low, but this one may be a case of the market accurately looking down its nose at a troubled retail play.

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9/30/2016 4:02 PM
BIG $47.75 Down -0.06 -0.13%
Big Lots CAPS Rating: ***