Big Lots: Be Careful Here

| About: Big Lots, (BIG)
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Big Lots continues to be one of the best discount retailers out there.

The stock is better traded than invested in.

I discuss Q3 results and expectations for the future.

Big Lots, Inc. (NYSE:BIG) continues to be one of the best discount retailers out there. It has competed with both the big box stores and the dollar stores. But its stock has struggled and has mostly traded sideways, although it has slowly climbed a bit higher. I will add that as far as trading is concerned the stock has been volatile over the last year as a whole. Given this up and down volatility, the name has been a great trading stock but less of a solid investment name. In fact, it is one of the BEST trading stocks I have seen in the last year. Is this investable though? The reality is that it is a rather profitable company and it is in an interesting niche in between a dollar type store and big box store. This has allowed the name to target a wide range of consumers.

Now let's take a look at some history. I initiated coverage in the spring of 2015 with a buy rating at $43.80. The stock is now up 17% from this call and I think, over time, should be moving higher. So what is going on? Well, the stock has climbed and clawed higher only to be hit after news of earnings or wage hike fears or on economic data etc. The stock was quite weak into the fall, actually falling well below by buy call point, but started to regain footing after the elections.

So how is it performing? Well its Q3 was better than I expected. In fact, the company reported income of $1.4 million or $0.03 per share. If we exclude certain items the company saw a gain of $1.9 million or $0.04 per share. This crushed analysts' estimates by $0.05 who were looking for a loss as a consensus estimate. It is also worth noting that this performance far surpassed guidance for the quarter as well. But what about the sales figures?

Surprisingly these missed estimates slightly by $10 million. This is a huge figure to focus on for Big Lots with all of the competition it faces. Net sales actually fell 1% year-over-year due to the closing of underperforming stores. They came in at $1.11 billion. What is a little disappointing and very surprising is that comparable store sales for stores open at least 15 months were flat; really at the lower end of its guidance of flat to up 2%. That is a big negative for me. Inventory ended quarter at $1.036 billion, compared to $1.047 billion for the third-quarter of fiscal 2015. That number is solid, but declined 1%. Because there is a lower store count, inventory per as a whole stayed about flat despite the overall decline.

What I continue to like about the company is that it has a strong balance sheet. Big Lots ended Q3 with $60 million of cash and cash equivalents and $363 million of borrowings under its credit facility compared to $62 million of cash and cash equivalents and $335 million of borrowings under its credit facility as of the end Q3 2015.

So why did the borrowing increase? 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. 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. The repurchase program was exhausted in May of 2016. That means the company bought back 11% of the float. That is huge, but at this time there are no plans to do more buybacks, which is slightly disappointing. It is important to note that the company also declared a dividend of $9 million for shareholders, or $0.21 for the third quarter.

All in all, I thought this quarter was stronger than expected. Same store sales have me concerned. Looking ahead to Q4, which covers the strong holiday season, the company sees an adjusted loss from continuing operations of $2.18 to $2.23 per diluted share, versus income of $2.01 per diluted share last year. Comparable store sales look so-so, and are expected to be flat to up 2%. For 2016 as a whole, the earnings outlook has been increased and should come in at $3.55 to $3.60, up from $3.45 to $3.55. While this is strong, Big Lots continues to be best traded and not invested in.

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.