Big Lots' Big Jump a Bit Much

Trading nearly 25% higher the day it released earnings, Big Lots impressed the Street with better-than-expected losses and a quicker exit of the Canadian operations. While the company is certainly improving, the recent price hike looks excessive.

Mar 11, 2014 at 12:49PM

Big-box closeout retailer Big Lots (NYSE:BIG) bucked a few trends upon releasing its most recent earnings last week. For one, the company posted a 30% drop in profit yet avoided a massive market sell-off. In fact, the stock went in the exact opposite direction and posted its largest one-day gain in more than 20 years. Even looking ahead, the company fell flat on first-quarter and full-year 2014 guidance. The market has been relentlessly punishing retailers for even minor misses on estimates, ignoring the effects of extreme weather and a still-tepid economic recovery, but Big Lots saw a different type of extremism. Why is the stock trading at its highs and set for more? Let's take a closer look.

As mentioned, fourth-quarter adjusted income from continuing operations dropped 30% to $1.45 per share -- right at the midpoint of previously issued guidance and excluding a deferred tax benefit from the company's write-off of Canadian operations. Last year, management decided to wind down the Canadian business and use the freed-up cash flow for improvements in the core business.

The net loss from the Canadian business was actually much better than anticipated in the fourth quarter -- just $0.47 per share as opposed to earlier guidance of $0.65-$0.75 per share. Helping a smooth exit, the company was able to sell through more merchandise and clear out inventory, along with asset writedowns and timing of lease liability charges.

Big Lots' results could be categorized as "not awful," but is that a reason to send the stock up by nearly a quarter of its total market value?

Bright spots
It turns out investors do have a couple of reasons to rejoice. In the company's continuing operations, things look to be improving. Management forecast for current-year same-store sales to be flat or slightly positive -- an important milestone from two straight years of declines.

Since the end of February, Big Lots has officially left Canada. While the company will take a substantial charge in the current quarter, this chapter is more or less behind the company.

Domestic stores have a few good things going for them. For one, Big Lots is installing coolers and freezers in its stores to expand its food offerings. The food segment has comped up in the mid single digits lately, making it one of the company's best areas. A bonus to this is that the company is now eligible to accept food stamps -- an important, bullish distinction considering some of Big Lots' target demographics. Also coming in on a nationwide rollout is furniture financing opportunities, allowing lower-income shoppers to purchase bigger-ticket items at the stores. Food and furniture sales together account for nearly two-thirds of Big Lots' business.

For investors, the things to focus on here are cash flow and valuation. Big Lots isn't the bargain it was one week ago, and now trades at nearly 14 times forward earnings prospects. While that's not a rich figure, it eliminates much of the previously obvious discount to intrinsic value. The company expects to generate $165 million in cash flow this year, giving a P/FCF of about 13 times. Again, not particularly expensive, but also not a bargain. Big Lots appears to be stabilizing, but this isn't a story worth a premium.

While there are compelling elements to the recently improved Big Lots, investors should wait for some of this heat to come off the stock. At a lower price, the closeout retailer would be a good bet.

A good bet for investing knowledge
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Michael Lewis has no position in any stocks mentioned, and neither does The Motley Fool. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information