Can Big Lots Earnings Grow in the Shadow of Target and Wal-Mart?

Big Lots (NYSE: BIG  ) will release its quarterly report on Friday, and investors haven't been certain lately about which direction the stock is likely to go. Having rebounded from its worst levels a year ago, the stock is still well off levels it hit in early 2012, and with Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) fighting to capture more cash-strapped shoppers, Big Lots faces competition on all fronts.

For years, Big Lots benefited from the trend toward more aggressive discounting of retail goods, with a focus that greatly resembled a larger-format dollar store. Yet more recently, Big Lots has struggled to find growth, and even though Target and Wal-Mart have also found it difficult to produce the growth rates that investors would prefer to see, they at least have their much greater size to explain their sluggishness in raising revenue. Big Lots faces the challenge of staying relevant as pure dollar stores compete from below while retailers reach down to try to capture market share. Let's take an early look at what's been happening with Big Lots over the past quarter and what we're likely to see in its report.

Stats on Big Lots

Analyst EPS Estimate

($0.08)

Year-Ago EPS

($0.10)

Revenue Estimate

$1.16 billion

Change From Year-Ago Revenue

2.5%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Big Lots earnings catch up this quarter?
Analysts have gotten slightly more pessimistic in recent months about Big Lots earnings, cutting $0.02 per share from their estimates for next fiscal year. The stock has performed well, though, rising nearly 8% since early September.

Big Lots' fiscal second-quarter results showed the challenges the retailer has faced lately. Although a decline of 1.9% in comparable-store sales was obviously disappointing, it was nevertheless better than investors had expected. Although Big Lots' Canadian operations did well, sales in the U.S. were more muted, with electronics suffering particularly large declines compared to year-ago results. The company also projected further weakness, expecting comps to fall between 0% and 2%.

To compete more effectively, Big Lots has taken a page from Dollar General and some of its dollar-store rivals, offering some frozen and refrigerated goods to bring more customers into its stores. That strategy could help Big Lots broaden its appeal beyond the somewhat haphazard offerings of closeout merchandise that it buys from manufacturers looking to sell off some of their inventory at discounted prices. The closeout business produces bargains that Wal-Mart and Target can't match, but the problem is that consumers can't necessarily rely on those deals ever repeating, making it hard to predict whether the store will have items that customers want on any given visit.

Still, Big Lots faces big challenges. The company is working hard to replace underperforming stores with new ones in more favorable locations. But that leaves it in a poor competitive position against Wal-Mart and Target, both of which have well-established locations that are in many cases ideally located to serve their targeted demographics. That's likely one reason why Big Lots plans to close its wholesale operations, with the goal of trying to emphasize its higher-margin businesses to maximize overall profit.

In the Big Lots earnings report, watch to see what CEO David Campisi says about the retailer's future direction. With so much competition in the industry, it'll be tough for Big Lots to find its way into a niche where it can perform well.

The right way to play retail
Look beyond Big Lots and find out about two retailers with especially good prospects. How? Just take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Click here to add Big Lots to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2752980, ~/Articles/ArticleHandler.aspx, 4/24/2014 7:28:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement