Why There Is Still Hope for Big Lots

What is Big Lots doing to achieve a turnaround?

Zahid Waheed
Zahid Waheed
Apr 16, 2014 at 10:05AM
Consumer Goods

During the last few quarters, Big Lots' (NYSE:BIG) performance has remained far below par. As a result, the company's management is taking several steps to turn the tables. Let's examine the prospects of these new strategies before moving on to Dollar General (NYSE:DG) and Costco Wholesale (NASDAQ:COST).

Fourth-quarter results
In the fourth quarter, Big Lots' earnings plunged 30% from last year to $0.98 per share. However, the retailer beat its guidance of $0.65 to $0.90 a share. Although total sales dipped 6.2% to $1.64 billion, they beat Wall Street's expectations of $1.61 billion. Net sales from US operations fell 7.3% to approximately $1.6 billion, while same-store sales declined by 3%. The company earned $1.45 per share from its U.S continuing operations, surpassing analysts' estimates of $1.40 a share.

The loss from the Canadian business declined to $0.47 per share, narrower than the anticipated loss of $0.65 to $0.75 a share. Since the company wasn't expecting to return to profitability in the region any time soon, it closed all its Canadian stores in February.

What is Big Lots up to?
In the last few quarters, Big Lots' earnings have taken a hit amid lower demand in the US and Canada. Since taking over, Big Lots' CEO David Campisi has taken some bold steps to get the retailer back on track, including shutting down the Canadian business.

This year, Big Lots will close 50 existing stores and open 30 new locations in the US. The company will also be expanding its food offerings at stores; it has already started to add more coolers and freezers.

Management has noticed that the stores with coolers and freezers tend to outperform those without them. Campisi said on the earnings call, "We put the coolers in the stores, and we started selling the product right away."

During the call, the retailer also announced a share-repurchase program of $125 million. The buyback program kicked off on March 11.

Big Lots will roll out a furniture-financing program at the end of the third quarter. The company expects great results, as performance in test stores has been solid. The retailer is also investing heavily in the e-commerce segment; however, it will take a year before it starts selling online. Big Lots already lags most of its competitors, which are succeeding with their e-commerce platforms.

Big Lots has also developed a special team with the sole purpose of managing the company's costs efficiently. Management believes that this initiative will enable the company achieve an operating margin of more than 6%.

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For the current quarter, Big Lots expects earnings per share to be in the range of $0.40-$0.45. The company anticipates earnings per share of $2.25 to $2.45 for fiscal 2014, while comps are expected to grow by 2%.

From the above table, we can see that Costco is the most expensive among all three retailers; it has the highest price-to-earnings and price-to-book-value ratios. Big Lots and Dollar General look more or less the same, although Dollar General appears to be slightly more expensive. But Dollar General's 52-week return is also somewhat better than Big Lots, which justifies its higher price tag.

Industry peers
Dollar General's recent quarterly results fell short of expectations. Revenue decreased 6.8% year over year to approximately $4.5 billion, missing Reuters' estimate of $4.6 billion. Earnings inched up to $1.01 a share from $0.97 per share in the year-ago quarter. Comparable sales grew by 1.3%, buoyed by robust sales of the company's tobacco products.

The sales slowdown was attributed to bad weather, a competitive environment, and weak consumer confidence. The government's recent cut to food stamps was also concerning to the retailer. Amidst the prevailing challenges, the retailer expects its same-store sales to grow only 3% to 4% this year.

Costco reported a steep 15% decline in net income  for the holiday quarter amid lower international profits, adverse currency fluctuations, and lackluster performance in the non-food segment. Deep discounts during the holiday season also took a toll on the company's earnings. Costco reported per-share earnings of $1.05, which also missed the average estimate of $1.17. However, revenue increased 6% to $26.3 billion.

Final thoughts
Big Lots had an average fourth-quarter performance. However, Campisi is taking the right initiatives to improve the company's declining sales by introducing a special team for cost cutting, adding of more coolers and freezers, and launching the furniture-financing program. These three plans will prove to be fruitful, which is why I expect a better performance from the company this year. But Big Lots still hasn't made any significant progress in e-commerce, which for me is a worrying sign. The company is losing many potential shoppers by delaying its entry into the online segment.

Taking all of this into account, I believe Big Lots will make a slight recovery this year. Still, it would be prudent to further monitor the company in the next few quarters before investing. Hence, I remain neutral on Big Lots at this point in time.