Big Lots, Inc. (NYSE:BIG) continues to be one of the best discount retailers out there. But its stock has struggled. It has been volatile over the last year, and barring what looks to be a major rally today, has been flat for the last year. Of course, today looks like there will be a nice rally following news of a strong Q1 earnings report. The name has been a great trading stock but less of a solid investment name. But the reality is that it is a rather profitable company and it is in an interesting niche. It's not quite a dollar store nor is it a big-box store either. It kind of falls in between and targets a wider range of consumers. I initiated coverage in the spring of 2015 with a buy rating at $43.80. The stock is now up 10% from this call and is likely to be much higher today. So what is going on?
Well, the stock has been hit in recent months, for several reasons, including the fear over wage hikes. The stock was quite weak in Q1 2016, but started to regain footing here in Q2. So how is it performing? Well Q1 was much better than I expected. In fact, the company reported income of 38.6 million or $0.79 per share. If we exclude certain items the company saw a gain of $39.9 million or $0.82 per share. This crushed analysts' estimates by $0.12. I was looking for even less, so I am very pleasantly surprised. Of course, it is a year-over-year improvement from the gain of $0.61 a year ago. That is a nice move. It is also worth noting that this performance far surpassed guidance which called for $0.66 to $0.72 per share in earnings.
What about sales? This is a huge figure to focus on for Big Lots with all of the competition it faces. Well net sales actually increased 2.5% year-over-year due to the closing of underperforming stores. They rose to $1.312 billion, beating estimates by $10 million. What is most important to note is that comparable store sales for stores open at least fifteen months increased by a solid 3% for the quarter, toward the higher end of its guidance of low single digits.
Inventory ended quarter at $807 million, compared to $835 billion for the first-quarter of fiscal 2015. Not bad. Because there is a lower store count, inventory per store was down. What I continue to like about the company is that the company has a strong balance sheet. Big Lots ended Q1 with $64 million of cash and cash equivalents and $154 million of borrowings under its credit facility compared to $67 million of cash and cash equivalents and $41 million of borrowings under its credit facility as of the end Q1 2015. So why did the borrowing increase? That jumped out at me. Well, for two reasons. First, to support strategic plans of closing/relocating stores and reshaping existing stores. Second, the company has been investing in share repurchase activity as well as dividends. I should also note however the borrowings under the cre4dit facility have declined by almost half since Q3 2015 when I last checked in on the name
In March 2016, the Board of Directors reauthorized a share repurchase providing for the repurchase of up to $250 million of Big Lots common shares. During Q1 2016 the company pumped $138 million into repurchases, buying back 3 million shares. That would have left $112 million in the repurchase authorization, except as of May 4th 2016 (in Q2) the company exhausted the repurchase program. That means the company bought back 11% of the float. That is huge. It is important to note that the company also declared a dividend of nearly $10 million for shareholders, or $0.21 for the second quarter.
All in all, I thought this was strong and the Street seems to agree as the name is up huge premarket. On top of that, the company has issued solid guidance. In Q2 the company sees income from continuing operations will be in the range of $0.42 to $0.47 per diluted share, compared to adjusted income of $0.41 per diluted share last year. Comparable store sales are the only blemish, and are expected to be flat to up 2% compared to up 2.8% last year. For 2016 as a whole, earnings will be $3.35 to $3.50, a 12% to 18% increase versus last year. Given the solid quarter, the guidance, growing same-store sales, Big Lots is in a strong position. The stock is approaching at a historically reliable buying level and fundamentally looks solid. As such, I continue to rate the stock as a buy.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.