Big Lots' Stock Is Selling Off Following Its Q3 Earnings Miss - Should You Consider It Long-Term?

| About: Big Lots, (BIG)
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Q3 2014 earnings were released on December 5.

The results came in below expectations.

Comparable-store sales increased 1.4%.

The company reaffirmed its full year outlook.

The stock has reacted by falling more than 10%.

Big Lots (NYSE: BIG), the largest broadline closeout retailer in the United States, announced third quarter earnings this morning, with the results coming in below Wall Street's expectations, and its stock has responded by making a sharp move to the downside; let's take a closer look at the results and the company's outlook going forward to determine if we should use this weakness as a long-term buying opportunity or a warning sign to stay away.

Breaking Down The Results

Here's summary of Big Lots' third quarter earnings results compared to what analysts had anticipated and its results in the year ago period:

Metric Reported Expected Year Ago
Earnings Per Share ($0.06) ($0.05) ($0.07)
Revenue $1,107.1 million $1,120.0 million $1,104.9 million

Big Lots reported a net loss from continuing operations of $3.1 million, or $0.06 per share, compared to a net loss of $4.1 million, or $0.07 per share, in the year ago period, as revenue increased 0.2%; these results were driven by comparable-store sales increasing 1.4%, which met the company's guidance of a low single digit increase.

Big Lots' gross profit decreased 0.1% to $430.94 million and its operating loss widened by 41.6% to $4.06 million in the third quarter, as its gross margin contracted 10 basis points to 38.9%; these weak results can be attributed to costs of sales increasing 0.4% during the quarter, which outpaced the company's 0.2% revenue growth.

On a positive note, Big Lots repurchased 2.6 million shares of its common stock, or about 4.7% of its outstanding shares, for approximately $114.8 million during the quarter, leaving approximately $10.2 million for repurchase under the company's $125 million share repurchase authorization announced in August; however, the company then added that it completed this share repurchase authorization during November, so in total, it repurchased 2.8 million shares of its common stock for approximately $125 million over the four month time frame.

As a result of its performance in the first nine months of the year, Big Lots reiterated its full year outlook on fiscal 2014; here's a summary of what it expects to accomplish:

  • Diluted earnings per share in the range of $2.40-$2.50 compared to the $2.45 earned in fiscal 2013.
  • Comparable-store sales growth in the range of 1%-2%.
  • Cash flow from continuing U.S. operations of approximately $250 million.

Lastly, Big Lots provided its outlook on the fourth quarter, calling for the following results:

  • Diluted earnings per share in the range $1.70-$1.80, an increase of 17.2%-24.1% from the $1.45 earned in the year ago period.
  • Comparable-store sales growth in the low single digit percentage range.

It is also worth noting that Big Lots' outlook on the fourth quarter came in line with analysts' expectations, which currently call for earnings per share of $1.76.

Should You Be A Buyer of Big Lots?

Big Lots is the nation's leading broadline closeout retailer, but weak traffic at its stores led it to a disappointing third quarter performance; the company's earnings per share and revenue results fell short of analysts' expectations as comparable-store sales increased just 1.2%. Big Lots' stock has responded to the earnings release by plummeting more than 10% in the trading session and I think it could continue lower from here, but I also think it will lead to a long-term buying opportunity, because its stock now trades at intriguing valuations, including less than 14.5 times fiscal 2015's earnings estimates and less than 12 times 2016's estimates; with this being said, long-term investors should place Big Lots on their watchlists and consider scaling into a position on any continued weakness.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.