How To Trade Big Lots

| About: Big Lots, (BIG)
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Big Lots (NYSE:BIG) sells closeout merchandise, usually in strip malls. It has a 1-year low of $26.69 and a 1-year high of $42.26. The stock's 50-day moving average is currently $35.81. The company has a market cap of $2.163 billion and a price-to-earnings ratio of 12.63. As of January 28, 2012, the company operated a total of 1,533 stores in two countries: the United States and Canada. It has a market cap of $2.3 billion.

Its merchandising categories include Consumables, Furniture, Home, Seasonal, Play n' Wear, and Hard lines & Other. The Consumables category includes the food, health and beauty, plastics, paper, chemical, and pet departments. The Furniture category includes the upholstery, mattresses, ready-to-assemble, and case goods departments. The Home category includes the domestics, stationery, and home decorative departments. The Seasonal category includes the lawn and garden, Christmas, summer, and other holiday departments. The Play n' Wear category includes the electronics, toys, jewelry, infant accessories, and apparel departments. The Hard lines & Other category includes the appliances, tools, paint, and home maintenance departments.

Analysts are all over the place regarding the stock. Griffin Securities initiated coverage on shares of Big Lots. In a research note to investors on April 4th, as reported by the Wall Street Journal, they set a buy rating on the stock. The contrary view is held by analysts at Zacks who reiterated a neutral rating on shares of Big Lots in a research note to investors on March 18th. They now have a $37.00 price target on the stock. Also, analysts at Raymond James downgraded shares of Big Lots from a "market perform" rating to an "underperform" rating in a research note to investors on March 8th.

Based in Columbus, Ohio, the firm seems to have dodged a bullet from the SEC. It was reported in December by the Wall Street Journal that the SEC and FBI were investigating the retiring CEO Steve Fishman and a $10.4 million stock sale in March 2012. A subsequent disclosure by Big Lots said the SEC asked for information about the trades of other directors and executives as well, while a grand jury subpoena sought documents pertaining only to Fishman. What's involved here is the timing of the sale which occurred on March 20, 2012. On April 23, 2012 Big Lots told investors that sales had slowed and the stock price tumbled 24 percent. The SEC has since indicated to the company that it will not face an enforcement action.

The Shareholder Foundation has instituted a suit against BIG, inviting others that purchased the stock between February 2012 and August 2012 to join their suit. TSF alleges that as a result of defendants' false statements, shares traded at artificially inflated prices between Feb. 2, 2012 and April 23, 2012, reaching a high of $46.81 per share on March 27, 2012.

Then on April 23, 2012, after the market closed, the company provided an update on its First Quarter Sales Guidance. The company, among other things, said that it expects U.S. comparable store sales to be slightly negative compared to its prior guidance. The shares then fell from $45.65 per share on April 23, 2012 to a close of $34.71 per share on April 24, 2012 and declined to as low as $26.86 per share on November 14, 2012. Shares of BIG rebounded and recently closed at $38.78.

So, there is some smoke with BIG that a wary investor may not be able to see through. When the company announced its fourth quarter results for 2012, it said: "Net sales for U.S. operations for the fourth quarter of fiscal 2012 increased 4.4% to $1,704.8 million, compared to $1,632.9 million for the same period of fiscal 2011. Comparable store sales for U.S. stores open at least fifteen months decreased 3.5% for the quarter. Income from continuing U.S. operations totaled $120.1 million, or $2.08 per diluted share (non-GAAP), compared to income from continuing U.S. operations of $119.8 million, $1.83 per diluted share (non-GAAP), for the same period of fiscal 2011. As a reminder, the fourth quarter of fiscal 2012 benefited from an extra week of results due to the retail calendar shift. We believe the extra week benefited fourth quarter results by an estimated $0.05 per diluted share." For the preceding quarter, gross margin was 39.9%, 30 basis points worse than the prior-year quarter. Operating margin was 11.6%, much about the same as the prior-year quarter. Net margin was 6.9%, much about the same as the prior-year quarter.

Nothing really exciting about that, especially given the flat US income. Since it operates in Canada, how did that work out for BIG? The company announced that "net sales for Canadian operations for the fourth quarter of fiscal 2012 totaled $48.6 million and net income of $0.2 million, or $0.00 per diluted share (non-GAAP), compared to net sales of $36.6 million and a net loss of $5.1 million, or $0.08 per diluted share (non-GAAP) for the same period of fiscal 2011."

So, what are they thinking will happen in 2013? In its statements about 4Q 2012, they said: "For the first quarter of fiscal 2013, we estimate our consolidated income from continuing operations will be in the range of $0.53 to $0.65 per diluted share, compared to adjusted income from continuing operations of $0.68 per diluted share (non-GAAP) for the first quarter of fiscal 2012. This guidance is based on an estimated comparable store sales decrease for the consolidated company in the range of 1% to 3% and a total sales increase in the range of 1% to 3% for the first quarter of 2013."

The relative shrinking of same store sales and guidance for 2013 does not inspire confidence for future momentum with BIG. They put up impressive Operating Margin but downward pressure from further falling out of favor could hurt the stock. While it's not over-priced right now, it's not exactly cheap either. If you're a holder of BIG stock, a good move would be to sell out of the money covered calls for the forward month and further reduce your cost basis when those expire. If you're considering a buy, I would wait for improved guidance or a price in the low 30's to enter a new position.

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.