Why Is Big Lots (BIG) Down 16.5% Since Last Earnings Report?


It has been about a month since the last earnings report for Big Lots (BIG). Shares have lost about 16.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Big Lots due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Big Lots Beats Earnings & Sales Estimates in Q2

Big Lots posted an impressive second-quarter fiscal 2020 results. Both top and bottom lines outpaced the Zacks Consensus Estimate and grew year over year. Impressively, comparable sales (comps) increased 31.3% in the reported quarter, on double-digit rise in store traffic, and solid growth in basket across the channels.

Following a robust second quarter, Big Lots’ third quarter is off to a solid start. Its everyday essentials’ assortment and stay-at-home products position the company well going ahead. The company is also on track with its pantry-optimization initiative.

Q2 in Detail

This Columbus, OH-based company reported adjusted earnings of $2.75 per share, surpassing the Zacks Consensus Estimate of $2.71. Moreover, the bottom line increased significantly from 53 cents earned in the prior-year quarter.

Net sales grew 31.3% to $1,644.2 million and outshone the Zacks Consensus Estimate of $1,620 million. The upside can be attributed to robust comps and higher sales growth from new and relocated non-comp stores, slightly offset by lower store count year over year.

Comps were up strongly in May, however the pace moderated in June and more so in July. Nevertheless, the company recorded a high single-digit comps growth in July. Management has been seeing an acceleration of comps from July into August.

Gross profit jumped 37.2% year over year to $683.6 million and gross margin expanded 180 basis points (bps) to 41.6%. Gross margin was driven by robust sell-through in seasonal products, a positive overall shift in product mix toward higher-margin categories and lower markdowns, partly offset with higher shrink.

In the reported quarter, selling and administrative expenses came in at $500 million, up 14.8% year over year. However, the metric (as a percentage of net sales) improved 440 bps from the prior-year quarter to 30.4%.

Furthermore, adjusted operating profit came in at $149.5 million, up from adjusted operating profit of $32.6 million recorded in the prior-year quarter. Moreover, adjusted operating margin came in at 9.1%, up 650 bps from the year-ago quarter’s adjusted tally.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $898.6 million. Inventories decreased 18% to $713.5 million, due to robust sales performance. Long-term debt totaled $43.1 million compared with $467.8 million in the prior-year quarter. Total shareholders’ equity was $1,328.2 million.

As of Aug 1, 2020, the company provided net cash of $322.3 million from operating activities. Capital expenditures were $40.5 million in the reported quarter.

Concurrently, the company’s board has authorized repurchasing of nearly $500 million outstanding shares. The authorization is effective Sep 1. Also, management announced a third-quarter cash dividend of 30 cents a share. The company will pay dividends of roughly $12 million on Sep 25, 2020, to shareholders of record as on Sep 11.

In the reported quarter, Big Lots opened and shuttered five stores each, with the total store count remaining 1,404. For fiscal 2020, management projects store count to remain flat versus the prior year including 25 store openings and 25 closings.

Outlook

On Mar 30, 2020, management withdrew fiscal 2020 view. It expects to issue business updates at the end of September with greater visibility. However, the company projects less gross-margin rate benefit from seasonal and mix in fiscal third quarter. As a result, gross margin is expected to remain similar year over year. Moreover, management anticipates continued pandemic-related incremental expense in the second half of the fiscal, however, lower than that experienced in the first and second quarters. Consequently, the overall SG&A growth is likely to moderate in the third and fourth quarters than in fiscal second quarter. Further, the year-over-year inventory decline is expected to moderate during fiscal third quarter.

For fiscal 2020, management now estimates capital expenditures of about $150 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 17.78% due to these changes.

VGM Scores

Currently, Big Lots has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Big Lots has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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