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Big Lots vs Five Below: Which Retail Stock Has More Upside Potential?

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support@smarteranalyst.com (Ben Mahaney)
·6 min read
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Several retailers are gradually recovering after being crushed by the impact of the temporary closure of stores amid the lockdowns. Some of the retailers like Big Lots and Target were at an advantage during the lockdowns as their stores continued to operate due to their exposure to essential categories aside from discretionary items. As per the most recent data provided by the US Department of Commerce, retail and food service sales in September increased 1.9% month-over-month and were up 5.4% year-over-year.

In the wake of the modest improvement in the retail environment, we will use the TipRanks Stock Comparison tool to compare Big Lots and Five Below and see which retail stock offers a better investment opportunity.

This image has an empty alt attribute; its file name is Big-vs-Five.png
This image has an empty alt attribute; its file name is Big-vs-Five.png

Big Lots (BIG)

Big Lots is a discount retailer that sells a very extensive mix of merchandise, including food, furniture, electronics and toys, in its 1,407 stores. Furniture is the company’s largest revenue-generating category and accounted for 26.8% of fiscal 2019 net sales, followed by soft home and consumables which contributed 16% and 15.1% of the top-line respectively.

The company’s sales growth has been quite lackluster over recent years—1.6% growth in fiscal 2019 and a 0.5% decline in fiscal 2018. But the pandemic spruced up the demand for Big Lots' merchandise and led to a 21% spike in sales in the first half of FY20 (ended Aug. 1).

Notably, Big Lots’ 2Q FY20 sales grew 31.3% to $1.64 billion with comparable sales rising 31.3% as well and marking the highest comps growth in the company’s history. Shelter-at-home mandates drove higher sales for furniture, soft home merchandise, and seasonal business among other categories. Moreover, adjusted EPS jumped to $2.75 in 2Q FY20 from $0.53 in 2Q FY19.

Under its Operation North Star strategy, the company has been taking several initiatives, including strengthening its home offerings and growing its e-commerce sales. Big Lots has experienced a 70% surge in its e-commerce traffic and conversion rate has increased three times Y/Y. E-commerce penetration has increased to 4.6% of overall sales and the company sees substantial growth potential ahead.

Also, Big Lots is repositioning its assortment by moving footage from food staples to food, entertainment and consumables, including a 20-foot expansion in chemicals as well as health and beauty.

And the company has strong expectations from its Broyhill furniture brand, which it acquired in 2019 and started offering in its stores in the first quarter this year. Big Lots expects Broyhill to generate over $250 million in sales in its first year and believes that it has the potential to be a $1 billion brand.

Last month, Big Lots stated that it expects its comparable sales to grow in the mid-teens range in 3Q FY20 and EPS between $0.50 and $0.70 compared to an adjusted loss per share of $0.18 in 3Q FY19. (See BIG stock analysis on TipRanks)

On Oct. 16, Loop Capital analyst Anthony Chukumba increased the price target for Big Lots to $65 from $60 and reiterated a Buy rating as he is positive about the company's improving fundamentals and strong balance sheet.

Chukumba also stated that Big Lots' current valuation could attract the attention of private equity names, adding that a leveraged buyout at a "significant premium" to current levels would generate returns "comfortably above financial sponsors' targeted levels".

Shares have risen by an impressive 83.6% year-to-date (as of Oct. 19) and the average analyst price target of $60.33 indicates further upside potential of 14.4% in the months ahead. Currently, the Street is cautiously optimistic about Big Lots. A Moderate Buy consensus for the stock is based on 3 Buys and 3 Holds.

This image has an empty alt attribute; its file name is BIG-1.png
This image has an empty alt attribute; its file name is BIG-1.png

Five Below (FIVE)

Five Below is a value retailer offering trendy merchandise primarily targeting tweens and teens. Most of its merchandise offerings in its 982 stores are below $5. However, over recent times the company has started offering offers items that are priced more than $5 in the Five Beyond section in its stores.

The pandemic-induced store closures impacted Five Below’s performance and caused a 45% decline in its 1Q FY20 sales. But with the reopening of stores, the company bounced back well and posted a 2.1% Y/Y rise in its 2Q FY20 (ended Aug. 1) sales to $426.1 million. Comparable sales in 2Q fell 12.2% reflecting the impact of the temporary closure of stores.

Overall, the company’s EPS grew 4% to $0.53 in 2Q FY20. The company ended 2Q with $202 million in cash and cash equivalents and short-term investments and zero debt.

To improve its business amid the pandemic, Five Below enhanced its merchandise by offering new home and personal care essentials (including kitchen and bath products) and snacks.

While several retailers are permanently shutting down some stores amid the current crisis, Five Below opened 63 new stores in 2Q mostly in the new prototype, which includes the Five Beyond section. The company aims to open 110 to 120 net new stores in FY20. It also plans to remodel 45 stores. Over the long-term, Five Below sees an opportunity to grow its store network to 2,500 stores.

Also, Five Below is focusing on its e-commerce growth. The company recently launched its mobile app and opened its second e-commerce fulfillment center to support the spike in online sales.

On Sept. 29, Loop Capital analyst Anthony Chukumba increased his price target for Five Below to $140 from $135 and maintained a Buy rating. The analyst stated that his recent visits to the company's new Five Beyond prototype stores offering items in the $6-$10 range were "impressive" as they offer customers a larger selection of "wow" items.

Chukumba also believes that Five Below offers a "compelling" value relative to other retailers, providing an additional comparable sales growth driver as the Beyond concept is rolled out to additional stores. (See FIVE stock analysis on TipRanks)

The Street mirrors Chukumba’s bullish stance and has a Strong Buy consensus based on 13 Buys, 3 Holds and no Sells. Shares have advanced 6.5% year-to-date and the average analyst price target of $137.81 indicates that an upside potential of just 1% lies ahead.

This image has an empty alt attribute; its file name is five.png
This image has an empty alt attribute; its file name is five.png

Bottom line

The Street’s Strong Buy consensus for Five Below indicates the confidence in the company’s strategic efforts to drive future growth. However, Five Below stock has underperformed Big Lots so far in 2020 and the average analyst price target does not indicate a notable upside ahead. Moreover, Five Below is trading at a steep valuation compared to Big Lots. In the current scenario, Big Lots appears to be a better pick than Five Below.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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