Will Big Lots' Turnaround Keep Boosting the Stock?

Source: Wikimedia Commons.

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On Friday August 29, 2014, Big Lots (BIG +0.00%) will announce its financial results for its fiscal second quarter, and investors hope that the discount retailer will be able to keep posting the encouraging results that have led the stock upward so far in 2014. Even though Big Lots faces substantial competition from dollar-store specialists like Dollar General (DG +2.19%) and Family Dollar (FDO +0.00%), it has started to find ways to carve out its own niche in the sector.

Despite the general popularity of the discount retail industry, Big Lots has struggled for a long time to participate in the sector's overall growth. Coming into fiscal 2014, Big Lots had posted eight consecutive quarters of falling same-store sales, and many investors remained concerned that the discount retailer would continue to sputter out against heavy competition. But the company managed to break its same-store sales decline streak in the first quarter, and important strategic moves to help its customers have given Big Lots new life. Let's take an early look at what has 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.

What's ahead for Big Lots?
Investors have boosted their expectations for Big Lots earnings, raising their outlook slightly both for the just-completed quarter and for the current and next fiscal years. Big Lots stock has soared 27% since late May, reflecting the change in sentiment among investors in the discount retailer.

As Fool Chief Investing Officer Andy Cross noted in his recommendation of the stock back in late 2012, Big Lots is the biggest closeout retailer in the U.S., and the demand for deep-discount merchandise has provided ample free cash flow for the company to use. Yet the challenging retail environment late last year put a big dent in the stock price, as retailers across the industry had to resort to hefty promotional discounting in order to move inventory. In addition, Big Lots finally made the tough strategic decision last December to give up on its efforts in Canada, disclosing a plan to get out of the Canadian market and refocus on the U.S. market. In his update on Big Lots in March, Andy noted that Big Lots' exit from Canada went more smoothly than expected, helping the company move forward more aggressively.

Source: Big Lots corporate website.

Last quarter, though, Big Lots finally saw same-store sales move higher, with a 0.9% gain that accompanied predictions for positive full-year growth in comps and a hike in earnings-per-share guidance. Pressure on margins raised some concerns about the quality of Big Lots' improving numbers, but shareholders were nevertheless quick to respond favorably to the report. In particular, Big Lots' stability in light of a tough winter season was especially noteworthy.

Yet the longer-term moves that Big Lots is taking to enhance profitability will determine its future success. The company is moving more aggressively into the food segment, bringing in coolers and freezers in order to enable it to sell refrigerated and frozen food. Margins on those items are low, but they also drive repeat business from customers, and getting more traffic into stores should help sales continue to climb. At the same time, Big Lots is also looking at providing in-store financing for furniture and other large purchases, with a rent-to-own program having already shown signs of driving greater sales in that key category.

In the Big Lots earnings report, watch to see whether the retailer manages to keep its same-store sales moving in the right direction. In addition, success from its latest initiatives will be important if Big Lots wants to keep up its positive momentum so far this year.