Please ensure Javascript is enabled for purposes of website accessibility

Is Big Lots Stock a Buy?

By Lawrence Rothman, CFA – Jun 9, 2020 at 7:44AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After the stock underperformed for years, the company's first-quarter results showed marked improvement. Is now the time to buy?

After trailing the S&P 500 for the last few years, Big Lots (BIG 1.69%) stock has turned in an impressive performance so far this year.

Deemed an essential retailer, it was one of the few businesses that stayed open during the pandemic. No doubt this helped boost Big Lots' results, and the company reported a strong fiscal first-quarter (ended May 2). Same-store sales (comps) rose 10.3%, and its adjusted earnings per share increased 37.0% year over year to $1.26.

Is this recovery fleeting, or can investors be confident that Big Lots is moving in the right direction?

A bunch of tags with different sayings such as Big Sale, Best Offer, and Final Sale.

Image source: Getty Images.

Making changes

After reporting weak comps and adjusted operating income for several years, management launched Operation North Star in late 2018. The strategy's objectives are to "drive profitable long-term growth, fund the journey, and create long-term shareholder value."

Management hopes to deliver growth by strengthening its furniture, seasonal, and soft home categories; increasing the number of stores; and growing its e-commerce business (including online orders and in-store pick up). The plan also includes investing in the "store of the future," which moved furniture front and center and placed seasonal and soft home goods to the left and right.

Early results weren't promising with comps increasing only 0.3% in fiscal 2019, and adjusted operating income falling from $229.0 million to $207.9 million.

This year got off to a slow start too. CEO Bruce Thorn stated on the fiscal first-quarter earnings call: "As you all know, our quarter got off to a slow start in February, driven in part by a pull forward of sales from heavy promotional activity in January." However, he also noted that as local governments implemented stay-at-home orders in March, people flocked to Big Lots to stock up on everyday items. This is a key source of strength for the company going forward.

Starting this year, Big Lots rolled out "The Lot" and expects to have this format in more than half of its stores by year-end. This program gets the company back to its roots by offering various merchandise for special occasions or seasons at a discount. In the stores where management launched this effort and a new checkout procedure, comps improved about 1% for each program.

Its low-priced goods, combined with a tough economy that improves its ability to offer closeout merchandise and drive store traffic, should play well into Big Lots' strengths.

The dividend remains

True, the board of directors hasn't raised the dividend since 2018. But unlike other companies that cut their payouts, Big Lots has maintained its $0.30 dividend, which translates to a nice 3.3% yield. With a payout ratio of just 17%, this dividend looks secure. If results improve, the board of directors will likely begin raising it once again.

The stock price has more than tripled from the lows it hit in mid-March. However, the forward price-to-earnings ratio is still only eight times. While the company has only reported one quarter of improving results, there's not much downside risk at this price. Meanwhile, investors can enjoy a generous dividend while tracking the company's progress and any momentum behind its sales growth. These two factors make this a stock worth taking a flyer on.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Big Lots, Inc. Stock Quote
Big Lots, Inc.
BIG
$18.68 (1.69%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.