Investors in Big Lots (BIG) are not pleased yet with its incoming management as the company continues to see some pressure on the core business. The company took the drastic step of closing its Canadian operations, while US operations appear to be struggling somewhat as well.
These measures should be applauded, and the sell-off might provide investors with a nice long-term entry opportunity, especially if improvements in the US will materialize.
Third Quarter Results
Big Lots generated third quarter revenues of $1.15 billion, up 1.6% on the year before.
While sales rose modestly, the company posted a loss of $9.5 million which compares to a $6.0 million loss in the comparable period last year.
Losses increased towards $0.17 per share, while non-GAAP losses were a penny narrower. Losses came in at double the levels at which analysts were looking for.
Looking Into The Results
Big Lots saw modest sales growth despite poor comparable sales results with sales falling by 2.5%. The company did manage to boost gross margins by 40 basis points to 38.5% of total sales. These margin gains were made undone by increasing costs. Selling, general and administrative expenses rose by 60 basis points to 37.0% of sales.
The company reported increasing operating losses, totaling 1.0% of sales on the back of higher depreciation expenses.
The losses of $0.17 per share were roughly equally divided between the US and Canadian operations. Given the very small revenue base of the Canadian operations, the company has decided to wind down its operations in the country.
.. And Looking Ahead
Fourth quarter adjusted earnings from US continuing operations are seen between $1.40 and $1.55 per share. This compares to last year's non-GAAP earnings of $2.08 per share.
US comparable sales are seen down 6 to 8% for the quarter, marking a further deceleration of growth. Due to the differences in the calendars between both years, comparable store sales are seen down in the low to mid-single digits.
Due to the huge losses in Canada on the back of the closure of the activities and the worsening performance of the US activities, earnings for the full year are set to decline markedly. Full year adjusted earnings per share are seen down from $2.98 per share in 2012, to $1.42-$1.65 on an adjusted basis in 2013.
The new full year earnings guidance is down sharply from an earlier guidance at $2.80-$3.05 per share.
Big Lots ended the quarter with $68 million in cash and equivalents. Borrowings stand at $324 million, resulting in a net debt position of $256 million.
For the first nine months of the year, Big Lots generated revenues of $3.69 billion, up 1.2% on the year before. The company operates in a very low margin business, as earnings fell by 28% to $40.9 million.
At this pace, annual revenues are seen around $5.5 billion. Full year earnings are seen around $90 million, despite the headwinds.
Factoring in the 12% decline on Friday, with shares trading around $32.50 per share, the market values Big Lots at $1.9 billion. This values equity in the firm at 0.35 times annual revenues and 21 times annual earnings.
Big Lots does not pay a dividend at the moment.
Some Historical Perspective
Long-term holders in Big Lots have seen solid returns, despite the lack of dividends. Shares rose from lows of $10 in 2005 to highs of $45 in 2012. Shares retreated to lows around $27 at the end of 2012 and have traded in a $30-$40 trading range in 2013, currently trading around $32 per share.
Between the fiscal 2009 and 2013, Big Lots is set to increase its annual revenues by a cumulative 15% towards $5.5 billion. Earnings hovered around $200 million in recent years and are set to half this year, largely due to the losses of the Canadian operations.
Note that investors have been compensated despite stagnating operations, thanks to large share repurchases. Over the past four years, Big Lots retired roughly a third of its shares outstanding.
During the quarter, Big Lots opened 25 stores boosting its US store count to 1,525. The 78 underperforming Canadian stores will be closed, as they operate with large losses at the moment. Note that the US stores generate sales of $1.11 billion, or around $730,000 per quarter, per store. The 78 Canadian stores generated revenues of just $490,000 per store a quarter, resulting in losses.
Note that Big Lots acquired the Canadian activities in the summer of 2011 to revitalize the struggling activities, but this has clearly failed. Operations are expected to cease in the first quarter of 2014. The closure of the activities will result in an expected loss of $38 to $43 million from the Canadian operations.
While 2013 will be a difficult year, it is important to strip out the incidentals. Backing out the losses of the Canadian operations, Big Lots earns about $150 million at this moment, around 12-13 times earnings.
Back in August of 2012, I last took a look at the prospects for Big Lots. At the time, shares plunged towards $30 per share on the back of its second quarter results after the company lowered the full year outlook for 2012. I noted that Big Lots was facing issues, but the positive thing is that the company acknowledged the troubles and need for improvements.
So far through 2013, the company made progress under its new CEO Campisi to boost margins, while cutting the loss making activities of the firm. Yet investors are not pleased with the large losses related to the closure of the Canadian activities, which are relatively minor, but do produce significant losses. I argue that cutting losses here is a good step, while investors might be uncomfortable as well with the lower earnings at the core US operations.
Backing out the Canadian losses, Big Lots trades at 12-13 times earnings, despite difficult US market circumstances, while leverage is limited. The company continues to take the right steps, and even while it hurts in the short term, investors should applaud these moves.