Big Lots (BIG -0.58%) has been on a roll this year, which is a nice change after its weak results coming into 2020. In fiscal 2019, same-store sales rose by a tepid 0.3%.
By contrast, the retailer has reported strong sales and earnings growth in 2020. The fact that its stores were able to remain open through the pandemic no doubt helped. However, the impact of the coronavirus wasn't entirely responsible for this year's gains.
It's time to take a deeper dive into the business and determine how likely it is that the retail chain will be able to continue boosting its top and bottom lines.
Image source: Big Lots
Things are going well
In its first two fiscal quarters, comps increased 10.3% and 31.3%, respectively. Importantly, the strong sales gains flowed to earnings too. In the second quarter, which ended Aug. 1, adjusted earnings per share skyrocketed to $2.75 from $0.53 a year prior.
Management attributed those gains to people rushing out to buy more home products during the period's shelter-at-home mandates. Big Lots was able to continue serving customers throughout the period as state authorities deemed it an "essential retailer" while many of its competitors had to close their doors to the public.
However, the company should also get credit for strong execution and having the right merchandise assortment. Many retailers started reopening stores during the second quarter, but people were still drawn to Big Lots.
In addition, management also introduced a couple of new initiatives during the period, including The Lot and Queue Line. The former groups goods from different areas to promote certain occasions (e.g. fall camping), while the latter speeds up the checkout process. In more than 45% of its stores, management stated The Lot raised comps by one to two percentage points, and the Queue Line increased comps about one percentage point.
Can it keep it going?
On Sept. 29, Big Lots provided an update for the current quarter that should ease any nagging doubts investors may have about the company's ability to keep its growth going. Two-thirds of the way through its fiscal third quarter, management now expects to report a mid-teens percentage comps increase. This would trounce analysts' consensus estimate of 10%.
Management credited the progress to its Operation North Star strategy. Certainly, strengthening its offerings in the home furnishings category as part of its first objective -- driving profitable long-term growth -- has helped boost sales. Big Lots is also having success with other initiatives to support this goal, such as improving store presentation and growing e-commerce sales.
Offering merchandise that people want is great for business, but it's only part of the Big Lots story. As a closeout retailer, the appeal to shoppers is quality goods at an attractive price. While it sounds like a simple business model, it is hard to execute, and the company certainly has competition in its niche. However, recent results give me confidence that Big Lots can maintain the positive traction it has established, and it's now full steam ahead heading into the fiscal fourth quarter, which includes the important holiday shopping season.
Big Lots' share price has more than tripled over the last six months, and as management continues to execute on its growth initiatives, there is potential for more upside. The stock also comes with a $0.30 quarterly dividend, which at current prices gives the stock a 2.7% yield. That combination makes Big Lots stock a compelling investment opportunity.
