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Shares of Big Lots, Inc. (NYSE:BIG), the North American close-out retailer, lost over 21% of their value over the past week. On Thursday, the company reported a weak set of second quarter results. Furthermore, the company lowered its full year outlook.

Second Quarter Results

Big Lots reported second quarter revenues of $1.22 billion, up 4.4% on the year. On average, analysts were expecting the company to report revenues of $1.24 billion. Sales grew as a result of new store openings, totaling 18 during the quarter.

Net income from continuing operations fell from $35.7 million last year to $22.1 million. Earnings per share came in at $0.36, missing analysts consensus of $0.41. Earnings per share compared to first quarter earnings of $0.69, and last year's second quarter earnings of $0.50 per share.

During the second quarter, Big Lots repurchased roughly 4 million shares at a total costs of $149 million. The repurchases are part of the $200 million share repurchase program announced in May of this year. The company has $45 million available under its share repurchase program at the moment.

CEO Steve Fishman commented on the results:

"Our business needs to be constantly evolving, when we're not changing in merchandise and driving it all the way to the store and ultimately the customer, we fall behind."

Fishman furthermore noted that the discretionary business, which makes up 70% of total revenues, needs improvements before Big Lots can be more upbeat about the future.

Segmental Information

US Operations

Big Lot's US operations reported a 1.7% increase in revenues to $1.18 billion. Comparable sales, for stores older than fifteen months, fell 1.9% on the quarter. Non-GAAP income from continuing operations came in at $0.42 per diluted share, compared to $0.52 last year.

Canadian Operations

Sales for the Canadian operations came in at $35.0 million. The company net lost $3.3 million, or $0.05 per diluted share on a non-GAAP basis.


For the full year of 2012, Big Lots anticipates non-GAAP earnings of $2.80-$2.95 per share. Earlier, Big Lots guided for annual non-GAAP earnings of $3.25-$3.40 per diluted share. Last year, the company earned $2.99 per share.

For the third quarter, the company guides for a $0.20-$0.30 loss per diluted share.

Full year adjusted income from US operations will come in between $3.05-$3.15 per diluted share. This assumes a decline in US comparable store sales in the low single digit range. Total US sales are expected to increase between 3 and 4%.

The Canadian operations are expected to report operating losses between $13-$15 million, or $0.22-$0.26 per diluted share on a non-GAAP basis.

The company cut its forecast for annual cash flows from $190 million towards an expected $125 million.


Big Lots ended its second quarter with $62 million in cash and equivalents. The company operates with $243 million in long term debt under a bank credit facility, for a net debt position of roughly $180 million. The company increased its debt position, to finance its share repurchase program.

For the first six months of 2012, Big Lots reported revenues of $2.51 billion. The company net earned $62.8 million, or $1.01 per diluted share. At this rate, the company is on track to generate annual revenues around $5.4 billion. The company could earn $2.90 per share, or around $180 million in net income.

Valued at $30 per share, Big Lots is valued around $1.9 billion. This values the firm at 0.35 times annual revenues and around 10 times earnings. The valuation compares to a revenue multiple of 0.8 times for Family Dollar Stores (FDO) and 1.7 times for Dollar Tree (DLTR). These competitors trade at 18 and 22 times annual trailing earnings, respectively.

Currently, Big Lots does not pay a dividend.

Investment Thesis

Year to date, shares of Big Lots have fallen 20% in 2012. Shares steadily rose to $47 during the spring of this year. Shares fell significantly in April and on Thursday, after the company warned for its future prospects.

Over the past five years, shares trade roughly flat. Shares moved within a wide trading range of $15-$45 per share. Revenues rose from $4.6 billion in 2008 towards an expected $5.4 billion in 2012. Earnings rose from $150 million to $180 million in the meantime. The company retired roughly a third of its shares outstanding, over the time period, boosting earnings per share.

Shares have fallen roughly a third of their value in merely six months. Just like its business model, large quantities of shares have gone on sale. Investors are worried about the earnings miss, the future prospects, and the fact that total inventories rose by $100 million on the year.

There are few reasons to expect a short-term rebound. Fortunately, the company has recognized the need for change. It made numerous personal changes, and recognizes the need for improvements. I would hold off initiating a long position for the moment. Shares could be picked up in the coming months, although I would wait until the first encouraging signs emerge.

Disclosure: I 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.