Should You Buy Big Lots' Turnaround?

Many big-box retailers would like to put 2013 behind them because of their lackluster performances. Big Lots' (NYSE: BIG  ) fiscal 2013 was no different. The company's comparable-store sales, or comps, a keenly followed metric by investors in the retail industry, which measures sales open at least one year, have been in the red for the last two fiscal years, declining 2.7% year-over-year for two years in a row.

However, the trend reversed when Big Lots announced its first-quarter fiscal 2014 results. It posted comps growth for the first time in the last eight quarters, 0.9% versus the year-ago quarter. Let's take a look at the underlying business and how it stacks up against other discount retailers such as Wal-Mart Stores (NYSE: WMT  ) and Dollar General (NYSE: DG  ) .

A robust performance
As a result of a better-than-expected quarterly performance, the stock rallied strongly after the results, touching a new 52-week high. Big Lots' earnings per share from continuing operations in the U.S. came in at $0.50, way ahead of the consensus estimates . Its Canadian operations, which it has discontinued, posted a loss of $0.44 per share versus expectations of $0.76 to $0.71. Lower-than-expected losses came on the back of favorable settlements on lease terminations and deferred tax benefits.

The estimate-beating earnings were driven by revenue growth of 1.1% versus the year-ago quarter. The revenue growth, though apparently small, is impressive if we consider the negative impact of the harsh winter weather and general weakness in the retail industry.

On the merchandising front, four of the seven categories were positive during the quarter, with food being the strongest. So the initiatives that Big Lots has undertaken to refine its business model are working well and it is connecting well with its customers.

The strategies going forward
Looking forward, in order to fuel comps growth in the food category, Big Lots is rolling out store coolers and freezers. It is on course for roll-outs this year at approximately 600 stores, which will take its total to 725 . Even though food is low-margin, it's an important category that represents frequent repeat purchases. In theory, this will increase foot traffic driving the purchase of other, higher margin items.

Big Lots took a page out of Conn's book with a rent-to-own initiative for big-ticket items like furniture. It even extends this initiative to customers who have bad credit ratings. The furniture financing program is live in about 800 stores and the company is on course to extend this to approximately 1,300 stores by the end of the second quarter . The results are impressive as Big Lots is seeing incremental furniture sales in the high single to low double-digit range. Looking forward, the program will drive sales and the bottom line when Big Lots extends it to other categories in its stores.

No growth story is complete without expansion and marketing plans. During the quarter, Big Lots opened eight new stores and shuttered five, ending with a tally of 1,496 stores . The company is spending on e-commerce, and expects these operations to go online in 2015. On the marketing front, simplified print advertising and email offerings for rewards members helped drive sales in the quarter.

What about the competition?
While Big Lots is turning around from its streak of dismal performances, Dollar General has been on a roll and its fiscal 2014 started on a strong footing. On the back of comps growth of 1.5% year over year, the discount retailer posted 6.8% sales growth during the first quarter. For the 25th consecutive quarter in a row, it registered growth in consumer traffic and average ticket. Earnings per share came in at the lower end of guidance at $0.72 .

Going forward, Dollar General expects fiscal 2014 sales growth in the range of 8%-9%, fueled by square-footage growth of 6%-7% and comps growth of 3%-4% versus the prior year. It expects earnings per share in the range of $3.45-$3.55. In contrast, Big Lots expects earnings in the range of $2.35-$2.50 per share , on the back of flat to slightly positive net sales growth and 1%-2% comps growth.

On the other hand, Wal-Mart expects fiscal 2015 earnings per share in the range of $1.15-$1.25 . During the first quarter it registered a minuscule 0.8% increase in sales versus the year-ago period and it was quick to blame the inclement weather for its lackluster growth, but it delivered comps within its guided range.

On the bright side, its Neighborhood Markets format delivered 5% comps growth . Buoyed by the strong performance of Neighborhood Markets, it is accelerating its roll-out, aiming for 180 to 200 Neighborhood Market stores in fiscal 2015.

The bottom line
Slowly but steadily, Big Lots is turning around. On the back of store expansions and consumables growth, the company's strong performance should continue. It has given strong guidance as well, and smart strategies such as its rewards program and the roll-out of its rent-to-own initiative should help Big Lots sustain its performance.

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