Can Big Lots Earnings Grow in the Shadow of Target and Wal-Mart?

Big Lots (BIG -0.58%) will release its quarterly report on Friday, and investors haven't been certain lately about which direction the stock is likely to go. Having rebounded from its worst levels a year ago, the stock is still well off levels it hit in early 2012, and with Wal-Mart (WMT 1.32%) and Target (TGT -0.70%) fighting to capture more cash-strapped shoppers, Big Lots faces competition on all fronts.

For years, Big Lots benefited from the trend toward more aggressive discounting of retail goods, with a focus that greatly resembled a larger-format dollar store. Yet more recently, Big Lots has struggled to find growth, and even though Target and Wal-Mart have also found it difficult to produce the growth rates that investors would prefer to see, they at least have their much greater size to explain their sluggishness in raising revenue. Big Lots faces the challenge of staying relevant as pure dollar stores compete from below while retailers reach down to try to capture market share. Let's take an early look at what's been happening with Big Lots over the past quarter and what we're likely to see in its report.

Stats on Big Lots

Source: Yahoo! Finance.

Can Big Lots earnings catch up this quarter?
Analysts have gotten slightly more pessimistic in recent months about Big Lots earnings, cutting $0.02 per share from their estimates for next fiscal year. The stock has performed well, though, rising nearly 8% since early September.

Big Lots' fiscal second-quarter results showed the challenges the retailer has faced lately. Although a decline of 1.9% in comparable-store sales was obviously disappointing, it was nevertheless better than investors had expected. Although Big Lots' Canadian operations did well, sales in the U.S. were more muted, with electronics suffering particularly large declines compared to year-ago results. The company also projected further weakness, expecting comps to fall between 0% and 2%.

To compete more effectively, Big Lots has taken a page from Dollar General and some of its dollar-store rivals, offering some frozen and refrigerated goods to bring more customers into its stores. That strategy could help Big Lots broaden its appeal beyond the somewhat haphazard offerings of closeout merchandise that it buys from manufacturers looking to sell off some of their inventory at discounted prices. The closeout business produces bargains that Wal-Mart and Target can't match, but the problem is that consumers can't necessarily rely on those deals ever repeating, making it hard to predict whether the store will have items that customers want on any given visit.

Still, Big Lots faces big challenges. The company is working hard to replace underperforming stores with new ones in more favorable locations. But that leaves it in a poor competitive position against Wal-Mart and Target, both of which have well-established locations that are in many cases ideally located to serve their targeted demographics. That's likely one reason why Big Lots plans to close its wholesale operations, with the goal of trying to emphasize its higher-margin businesses to maximize overall profit.

In the Big Lots earnings report, watch to see what CEO David Campisi says about the retailer's future direction. With so much competition in the industry, it'll be tough for Big Lots to find its way into a niche where it can perform well.

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