Big Lots' Big Surprise

| About: Big Lots, (BIG)
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Q4 earnings are out, and I discuss the results.

While there was not much out of the ordinary, there were a few surprises.

Trade or invest in the name?

Big Lots, Inc. (NYSE:BIG) is one of the best discount retailers out there hands down. It has managed to compete with both the big box stores and the dollar stores. It is an interesting player in the space as it fits somewhere between the two. But its stock has struggled and has mostly traded sideways, making it a strong trading stock, especially with its volatility over the last year as a whole. Given this up and down volatility, the name has been less of a solid investment name, but I have felt that at or near its 52-week lows, this name could always be comfortably bought. In fact, it is one of the BEST trading stocks I have seen in the last year. Is it investable though?

The reality is that it is a rather profitable company and is approaching a 52-week high. I initiated coverage in the spring of 2015 with a buy rating at $43.80. The stock is now up 25% 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 the news of earnings, or wage hike fears, or on economic data, etc. over the years. This has contributed to the volatility in the name (reinforcing the stock as one that can be traded). The stock was very weak in the second half of 2016, but picked up steam along with the market following the November 2016 elections.

Is the name performing and justifying this share price rise? Well, the company's Q4 was better than I expected. In fact, the company reported income of $90.1 million or $1.99 per share. If we exclude certain items, the company saw a gain of $102 million or $2.26 per share. This beat analysts' estimates by $0.04 and even surpassed its own expectations of $2.18 to $2.23. But what about the sales figures?

Once again I was surprised to see that sales slightly missed estimates (by $10 million). This is a huge figure to focus on for Big Lots with all of the competition it faces. While the earnings beat was strong, it means expenses were well controlled because sales came up short. Net sales actually fell 0.3% year over year due to the closing of underperforming stores. It 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 up just 0.3% (at the low end of its 0-2% guidance). That is a big negative for me. Inventory ended quarter at $859 million compared to $850 million at the end of Q4 2015. That number is solid, with just a 1% move. Because there is a lower store count, inventory per store, as a whole, moved up 2%.

I have said this before and will reiterate. What I continue to like about the company is that it has a strong balance sheet. Big Lots ended Q4 with $51 million of cash and cash equivalents and $106 million of borrowings under its credit facility. This is compared to $54 million of cash and cash equivalents and $62 million of borrowings under its credit facility as of the end Q4 2015. I will point out, however, borrowings are down $200 million from Q3 2016. Recall that borrowing increased for two reasons. First, to support strategic plans of closing/relocating stores and reshaping existing stores and, second, the company has been investing in share repurchase activity as well as dividends. A year ago, the board reauthorized a share repurchase of up to $250 million of its common shares. The repurchase program was exhausted in May of 2016, and the company bought back 11% of the float. It is important to note that the company also paid a dividend of $9 million for shareholders, or $0.21 per share, for the quarter. Shareholders should be pleased as the company just raised its dividend 19% to $0.25.

All in all, I thought this quarter was stronger than expected especially on the earnings front and on its balance sheet. Sales continue to be a sticking point for me, particularly same-store sales. However, this is another quarter that reinforces the fact this is a trader's stock and is good for short-term investments when the stock gets hit. Looking ahead to 2017, the company sees an adjusted income from continuing operations of $3.95 to $4.10 per diluted share versus income of $3.64 per diluted share that we saw in 2016. Comparable store sales look so-so, and are expected to be up 1% to 2%. While this is strong, Big Lots continues to be best traded and not invested in, in my opinion.

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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.