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Big Problems for Big Lots in the Third Quarter

By Brian Shaw - Dec 6, 2013 at 5:30PM

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Big Lots shares were crushed following an earnings release headlined by reduced guidance and the closure of the company's stores in Canada.

Big Lots' (BIG 0.67%) third quarter earnings release was nothing short of a disaster. For the quarter, the company fell short of consensus estimates for both revenue and EPS. To make matters worse, the company's guidance was slashed for the full year and the company announced plans to cease operations in Canada. With disappointing results and a pessimistic view going forward, it is not surprising that shares of Big Lots declined as much as 15% following the earnings release. Clearly, larger competitors such as Wal-Mart (WMT -11.38%), Target (TGT -1.81%), and Dollar General (NYSE: DG) are doing a better job luring bargain hunters than Big Lots.

Abandoning international growth
Most companies look to international markets as a tremendous growth opportunity. In this context, Big Lots' decision to close all 78 of its Liquidation World and Big Lots locations in Canada stands out as a significant red flag. By retreating from Canada and becoming a domestic-only retailer, Big Lots is essentially giving up on international growth at a time where such opportunities are a primary growth driver for U.S. retailers. By contrast, Big Lots competitor Target Corp. has identified Canada as their next big market with plans to open 124 Canada locations this year and a goal of reaching $6 Billion in annual sales in Canada by 2017. 

Domestic same store sales are declining
While Big Lots' management cites lack of traction in Canada as a reason for "focusing resources" in the United States, the company's performance domestically has not been stellar; this comparison of same store sales (SSS) growth illustrates this point:

CompanyQuarter End DateDomestic SSS Growth
Big Lots 11/2/13 (2.5%)
Wal-Mart 10/31/13 (0.3%)
Target 11/2/13 0.9%
Dollar General 11/1/13 4%

Sources: Big Lots, Wal-Mart, Target, and Dollar General third quarter earnings releases.

The third quarter marked the sixth consecutive quarter in which Big Lots has reported declines in domestic SSS. Based on this weak performance domestically, it is clear that the company's struggles won't be solved by leaving Canada. 

Guidance is lowered... yet again
Lowered guidance is never a good thing, but it is particularly concerning with respect to Big Lots given that management has lowered its outlook for 2013 every quarter:

Guidance DateManagement's 2013 Adjusted non-GAAP EPS Outlook
Q4 2012 $3.05-$3.25
Q1 2013 $2.87-$3.12
Q2 2013 $2.80-$3.05
Q3 2013 $2.40-$2.55

Source: Big Lots quarterly earnings releases

These quarterly reductions are not small; the high end of management's range is now over 20% less than it was to start the year. Lowering guidance every single quarter is a clear indicator that management does not have a firm grasp on the challenges facing the company and how these challenges are impacting the company's profitability. 

Why invest in Big Lots?
The concept of closeout shopping has plenty of merit given consumers' increasing desire to find bargains. However, bargain hunters have more options than ever for finding the best deals available. Mobile apps from companies ranging from Amazon.com to RetailMeNot provide customers with real time access to price comparisons and coupon information; this allows consumers to find the deals they want on the products they want without having to "hunt." Meanwhile, big box retailers like Wal-Mart and Target are competing heavily on price while providing both name brands and a reliably consistent selection of products. 

These two trends and competition from numerous other retailers are putting significant pressure on Big Lots and its business model. As a result of these pressures, recent results, and the company's current outlook, it doesn't appear as though there are any positive catalysts waiting to launch Big Lots higher. While Big Lots figures out its e-commerce and omni-channel strategies, investors should not expect the company to do anything more than tread water.

Investors looking to outperform the market should remain very skeptical of investing in a company like Big Lots that is struggling to stay afloat. As always Foolish investors should always do their own research before making any investment decisions.

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Stocks Mentioned

Big Lots, Inc. Stock Quote
Big Lots, Inc.
BIG
$32.86 (0.67%) $0.22
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$131.35 (-11.38%) $-16.86
Target Corporation Stock Quote
Target Corporation
TGT
$215.28 (-1.81%) $-3.97

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

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