Is This The Beginning of the End for Big Lots?

Will shutting down the Canadian business prove fruitful for the company?

Feb 21, 2014 at 11:25AM

Big Lots (NYSE:BIG) became a victim of global economic pressures as it failed to report any profit in its third quarter. The retailer also decided to shut down its Canadian business. Will this decision fuel Big Lots' recovery, or will it prove unfruitful? Let's analyze Big Lots in detail alongside rivals Target (NYSE:TGT) and Dollar General (NYSE:DG) to find out.

Third-quarter report
In the third quarter, Big Lots reported a dull performance as it incurred a loss of $0.17, which widened from a loss of $0.10 in the year-ago quarter; analysts expected earnings per share of positive $0.24. Revenue, though, edged up 1.6% to $1.15 billion while Big Lots' same-store sales dropped by 2.5%.

Sales at Big Lots' US operations grew by 1.8%, but comparable sales declined by 2.5%. The loss from the company's US operations stood at $0.07 per share. Big Lots' Canadian operations posted a loss of $0.09 per share as sales and comps declined by 1.9% and 0.9%, respectively.

What's cooking at Big Lots?
Big Lots has finally decided to shut down its Canadian operations, and this will take place by the end of the first quarter of fiscal 2014. The decision came after the company accepted the fact that its efforts to turn around its business in the region won't be fruitful as it continues to incur heavy losses.

Big Lots bought the Canadian business in 2011 in a bid to enter the retail market in the nation, but since then its performance hasn't impressed. The company has 73 Liquidation World stores, five Big Lots stores, and two distribution centers in Canada. While retailers like Wal-Mart, Target, and Costco are expanding their businesses in the region, Big Lots hasn't come up with a solution that can turn its losses into profits. This move will reduce Big Lots' losses to some degree but it certainly casts a shadow of doubt over the company's future prospects.

While Big Lots blames its Canadian business for its lackluster performance during the quarter, the company's position in the US market is also by no means satisfactory. In the third quarter, the loss from US operations almost contributed equally to the company's overall loss. Furthermore, consumer spending in the US is still low as big retailers like Wal-Mart and Target have consistently reported weak comps. In the latest quarter, comparable sales at Wal-Mart declined by 0.3%, while Target's comps grew by just 0.9%. In a nutshell, quitting Canada won't be enough to turn the tables for the company unless Big Lots improves its US business.


The table shows Big Lots' deteriorating performance, indicating that the company's growth outlook is rather dim. The company's earnings have gone down from a profit of $0.61 per share in the first quarter to a loss of $0.16 in the latest quarter. The company's year-over-year sales have grown but the growth has been almost negligible. Moreover, management has been lowering its full year guidance from time to time.

For the current quarter, Big Lots expects earnings per share of $0.65 to $0.90, which includes a loss from its Canadian business in the range of $38 to $43 million.

In the next few quarters, the company plans to invest in its e-commerce and omni-channel operations. Apart from this, the company has recently launched a furniture financing program to attract more shoppers.

Target's latest quarterly performance wasn't up to the mark as its EPS fell to $0.54 from $0.90 in the same quarter of the previous year. Earlier, the company planned on opening 124 stores in Canada by the end of fiscal 2013. However, Target is now facing several lawsuits due to the infamous security breach which resulted in more than 70 million credit and debit cards being hacked. Target has also lowered its full-year EPS guidance to $4.59-$4.69. At the moment, the company needs a major turnaround to regain investors' confidence.

Dollar General had an admirable third quarter, posting strong earnings growth of 14% along with sales growth of 10.5%. Same-store sales also increased by 4.4%. The company is in-line with its goal of opening 650 stores in fiscal 2013 as 577 stores have already been opened. Dollar General plans to open 700 more stores in 2014 and anticipates its store square footage will jump by 6% to 7% during the year. Moreover, Dollar General is in the process of selling and leasing back 233 of its underperforming stores; the cash generated through the deal is expected to be invested in stock buybacks.

Final thoughts
Big Lots is going downhill; the company's third-quarter report reflects its weak position as its growth continues to decline. The company's decision to close operations in Canada will reduce its losses but it puts a big question mark over its future growth prospects. In addition, Big Lots' business in the US is also in a downward spiral as it failed to earn any profit in the recent quarter. The company needs a major turnaround before it will start to generate substantial profits once again. Considering all of this, Big Lots doesn't present a good investment opportunity at this point in time.

So who is taking over retail?
It's apparent that Big Lots isn't about to dominate the retail sector any time soon. To learn about two retailers with especially good prospects at taking the sector over, 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.

Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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