Discount stores have performed wonderfully in this period of rampant inflation, rising gas prices, and higher interest rates. As macroeconomic and geopolitical events put enormous pressure on consumers, they've been turning to deep discounters to stretch their dollars further.

That wasn't the case for the latest business update from Big Lots (BIG 3.47%), however, as the discount home furnishings retailer widely missed Wall Street sales and earnings expectations. Considering that some other mass merchandise discounters like Walmart and Target also badly missed expectations during a deteriorating economic climate, it may just be that this will be a period where only the truly deep discounters can thrive.

Hundred-dollar bill burning.

Image source: Getty Images.

A big disappointment

Big Lots said net sales for the first quarter tumbled 15.4% to $1.37 billion as comparable-store sales collapsed 17% from the year-ago period. That led to a loss of $11.1 million, or $0.39 per share. Last year it had reported revenues of $1.63 billion and earnings of $2.62 per share, completely crushing analyst forecasts of $1.46 billion and $0.95 per share, respectively.

While the discounter said the quarter got off to a good start in February and March, things fell off in April as the business "materially slowed" because of inflation, supply chain issues, and consumers no longer having stimulus checks to spend on goods.

That stands in contrast to deep-discount chains like Dollar Tree (DLTR -1.81%), which faced similar circumstances yet blew away Wall Street expectations.

The difference is likely due to Dollar Tree's stores being focused on food and everyday essentials that allow penny-pinching consumers to get more bang for their discretionary buck. The dollar store has gone to great lengths to orient its businesses to focus on consumables that will draw in repeat customer traffic, which was evident in their numbers.

Dollar Tree saw sales climb 6% from last year as comps rose 4.4%, leading to a 48% gain in earnings per share.

Forklift unloading trailer of boxes.

Image source: Getty Images.

A bummer of a year

Unfortunately for Big Lots, it doesn't see the situation improving anytime soon and will "again lose money" in the second quarter, although it is taking "aggressive actions" to reverse course in the back half of the year. It hopes there will be a significant improvement in the third quarter, and by the fourth quarter, it expects it will have returned to being in line with the year-ago results.

CEO Bruce Thorn said, "We believe the slowdown was caused by the spending pressure our consumers felt from higher gas prices and broader inflation, which is affecting discretionary spending across the retail industry."

Last year certainly was a tough comparison to go up against, as a populace generally freed from lockdown restrictions and in possession of stimulus checks, which economists now blame for the rampant inflation we're experiencing, went on a shopping spree.

Last year, Big Lots saw a 13% increase in sales, and profits nearly doubled from 2020. Same-store sales surged over 11% last year. 

Compared to 2019 though, Big Lots sales were up 5% on a 1.5% gain in comps, though it did suffer a reversal from the $15.5 million in profits it generated back then. It's clear that the current environment is taking a toll.

Discounting the discounter

Big Lots stock still looks fairly rich for a company expecting near-term losses and flat performance for the year. Shares trade at 23 times trailing earnings, 18 times next year's estimates, and a lofty 45 times the free cash flow it produces.

Investors might want to wait until the stock of this discount retailer is a bit more discounted themselves before buying.