Big Lots Looks Appealing on Innovative Management

Discount big-box retailer Big Lots (NYSE: BIG  ) , not lately known for its strong performance, came in ahead of analyst expectations on adjusted net income, though guided low -- the latter being the comment du jour for nearly every retail operation throughout the recent earnings season. A closer look at the earnings reveals some mixed news, with little else than the EPS beat to celebrate, but still the market took what good news there was and ran with it. Even with last week's advance, Big Lots trades at an attractive 10.6 times forward earnings. Let's take a look at recent earnings and a peak into the future to see if this big-box retailer is worth a spot in your portfolio.

Earnings recap 
For the second quarter, Big Lots saw its top-line sales stay virtually flat from the prior year (up 0.06%) to $1.23 billion. Same-store sales fell just less than 2%, which was actually better than internal guidance of 2% to 4%. The analyst beat came in on the bottom line, where the company earned an adjusted $0.31 per share. On the high end of previous guidance, management expected $0.27 per share, along with analyst expectations a good bit lower. In the prior year, the company had earned $0.36 per share.

In the U.S. specifically, sales ticked up a bit more -- up 0.4%, while same-store sales fell 2.2%. The hardest-hit merchandising area appears to be electronics, which management quoted as being down in the low double digits compared to the prior year.

Encouragingly, Canadian sales ticked up 8.2% with same-store sales up 8.3%. The company has three branded Big Lots stores and 76 Liquidation World stores. The company had bought the Canadian LW chain back in 2011 for $20 million.

Looking ahead, the company is expecting a softer third quarter, as are most retailers. In the U.S., the company is expecting anywhere from a loss of $0.03 per share to income of $0.02 per share. Same-store sales are forecast in the range of flat to a 2% decline. For the fourth quarter -- by far the biggest quarter for retailers -- the company expects a $2.02 to $2.12 per-share profit and comps in the range of flat to up 2%.

With the exception of the Canadian stores, there wasn't anything too exciting regarding the company's financials, despite the stock gains. So what gives?

Strategy shifts 
Big Lots management has been testing frozen and refrigerated food items in five test markets, and seeing encouraging early results. While this isn't much cause for celebration, it is indicative of management exploring new areas, especially since some of the older, less-profitable segments are proving stale.

New CEO David Campisi has acted swiftly in his first 100 days in the captain's seat. In the earnings call, he outlined a new campaign to get back to customer service and satisfaction -- an area in which he believes the stores have fallen flat. Campisi is clearly headed toward service and merchandising shifts, along with new marketing campaigns and an attempt to reach out beyond the core customer.

As mentioned above,  Big Lots trades at less than 11 times forward earnings. The company also trades at an EV/EBITDA of just 5.35. While the stock has gained nicely over the past year -- up nearly 16% -- there is certainly still room to run in terms of valuation.

If management is successful in turning around the brand and convincing Wall Street that Big Lots is a growing entity, investors can expect multiple expansion along with sales growth -- making this company a potentially attractive retail pick.

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