Foolish Forecast: Big Lots Winning Big

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Deep-discount retailer Big Lots (NYSE: BIG) will report Q4 2006 financial results on Friday, March 9.

What analysts say:

• Buy, sell, or waffle? Of the six analysts covering Big Lots, most seem to discount the discounter's future, with three saying "hold," one saying "sell," and only two saying "buy."
• Revenues. Even so, revenues are expected to grow nearly 10%, to $1.52 billion, from last year's $1.39 billion.
• Earnings. Perhaps more surprisingly, profits are expected to more than double to $0.70 per share.

What management says:
The company restructuring looked rocky at the start of last year, but seemed to catch on as the year progressed. Big Lots was able to consistently exceed analysts' performance estimates, often by wide margins, in each of the next three quarters. Is the deep discounter poised to do so again? After the third-quarter results were announced, management raised guidance for continuing operations to the $0.85 to $0.90 range (excluding $0.05 per share in litigation expenses), though analysts are only expecting $0.70 per share. Wall Street does think management will hit its revenue targets.

What management does:
The turnaround seems to be taking hold, and margins are improving. Big Lots closed down more than 150 underperforming stores and opened fewer new stores, letting the company concentrate on what was working for it. That included focusing on certain segments of its business where it could raise prices slightly higher on name-brand products. The strategy places Big Lots between dollar-store concepts like Dollar Tree (Nasdaq: DLTR), 99 Cents Only (NYSE: NDN), and Dollar General (NYSE: DG), and discount price clubs like BJs Wholesale Club (NYSE: BJ).

While reduced fuel and freight costs contributed to the increase in margins, they were offset somewhat by a strategy to increase Big Lots' inventory turns -- the number of times a company goes through its inventory -- by marking down items at a greater rate. It wasn't enough, though, to offset the higher price of the "average basket," which itself includes larger, more expensive sizes and quantities. This is part of management's "Raise the Ring" strategy, which aims to keep cash registers ringing larger sales for each customer.

Margin	10/05	01/06	04/06	07/06	10/06
Gross	40.1%	39.1%	38.9%	38.7%	38.8%
Operating	1.5%	0.7%	0.9%	1.4%	2.2%
Net	0.8%	(0.2%)	(0.1%)	0.3%	0.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Big Lots' turnaround has been anything but quick. It's long been an ailing and lumbering giant in what it calls "broad-line closeout retailing." Yet even the analysts seem to sense that the change has at last taken hold. They're been raising their projections for profits all quarter long, though perhaps they're still hedging their bets, having been bitten one too many times by the retailer.

Big Lots could yet again surprise the market, though its stock is no longer trading at its former discount. Even so, while its share price has doubled over the past year, its price-to-free cash flow ratio of less than 10 remains very attractive. There might still be some big value left in Big Lots.

Related Foolishness:

• Discount Retailer Gets Discounted
• Small Cheer at Big Lots
• Big Lots Beats the Bets: Fool by Numbers
• Foolish Fundamentals: Margins

Big Lots has earned a one-star rating from Motley Fool CAPS, the new investor intelligence community. Add your voice to the new stock-rating service by joining for free today.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.