Big Lots Expresses Little Confidence

Dec.11.11 | About: Big Lots, (BIG)

Will this holiday season bring big gains to Big Lots? Close-out retailer Big Lots, Inc. (NYSE:BIG) missed Q3 EPS estimates of $0.25 by $0.08 Last Friday morning with shares ending the day Thursday at $39.71. On the Q3 conference call Chairman and CEO Steve Fishman stated,

For those of who have followed Big Lots for any length of time, you know the third quarter has been our most challenging quarter to break through and drive meaningful improvement. It is our lowest volume quarter, and the lowest profit quarter, and quite frankly it has been a transitional quarter.

One week into the holiday shopping season Big Lots gave in line estimates for Q4 outlook based on competitive pressure from rivals Dollar General (NYSE:DG) and Family Dollar (NYSE:FDO). Big Lots is a smaller discount retailer with $2.6B in market capitalization. Competitors surely are feeling the same holiday earnings pressure. Profit margins for Big Lots (4.35%) and Family Dollar (4.54%) both lag Dollar General’s slightly better (4.76%).

Relative to the retail industry the 12.49 times earnings are on the low side. Competitor Dollar General is larger by market capitalization ($13.69B), and proficient in using debt to build new and remodel current locations. Dollar General’s higher price multiple of 21 times earnings is considered a favorite among analysts.

On the conference call, Big Lots stated that it opened 45 new stores during Q3 and closed 15 leaving them with 1445 total stores. In November they opened an additional 23 stores to bring the yearly total to 92 stores. With bruised ribs and a hitch in its giddy-up, commercial real estate is down, but not out, and the company is taking advantage. The company’s highest growth segment is furniture sales which saw double digit growth in Q3. Furniture needs floor space. Big Lots needs to open stores with large square-footage to accommodate the furniture and sell it at more attractive locations.

Selective planned growth, stock repurchases, improved store locations and excess cash for great buys, keeps Big Lots competitive. Cost controls for all discount retailers must adjust constantly. “Black Friday” is no longer all that matters. Retailers are expected to turn profits quarter-to-quarter and year-round. Big Lots shows little confidence but is a slow and steady turtle in this race. Keep an eye on Dollar General, they report next Monday before the market open.

BIG was trading +$0.27 at $37.23 (0.73%) at the time of this writing.

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