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Here's Why Big Lots (BIG) Stock is Worth Holding on to Now

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Zacks Equity Research
·4 min read
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Big Lots, Inc. BIG appears to be worth retaining in your portfolio, given its impressive strategic initiatives, including the Operation North Star plan. The company is banking upon this initiative to drive top-line growth, control cost, and enhance systems and infrastructure. Its constant omni-channel efforts to boost customers’ experience also bode well.

Going forward, Big Lots is poised to maneuver the COVID-19 related challenges through its robust customer service coupled with everyday essentials and stay-at-home products. We believe that these endeavors will continue aiding this Zacks Rank #3 (Hold) stock.

Let’s Dive Deeper

Big Lots is gaining from the Operation North Star initiative, which focuses on streamlining the cost structure and core enablers with significant capabilities and tools in several areas of business. Management remains focused on improving performance by enhancing digital capabilities and expansion of the Broyhill brand. The company has been updating Broyhill fall and holiday assortments to house products including area rugs, bed sheets and decorative pillows. It is also encouraged about the brand’s extension into housewares and kitchen textiles. The brand is projected to generate around $400 million sales in its first year, with potential to become a $1-billion brand in the future.

Big Lots also completed the rollout of its pantry-optimization initiative. The company is also focused on enhancing the omni-channel experience, removing friction and increasing customer base. It has launched same-day delivery through Instacart. It has also integrated web and store capabilities to drive enhanced returns, pricing, consistency and order visibility.

During third-quarter fiscal 2020, the overall e-commerce and omni-channel demand surged 70% year over year, contributing nearly 170 basis points to total comparable sales (comps). Convenient delivery options, coupled with new digital customer acquisition, are fueling growth. Coming to the Rewards program, the net promoter scores, active membership and new customer acquisition have been robust. The Rewards enrollment has been increasing with active membership reaching 21 million. Notably, rewards customers spent 28% more in comparison to the year-ago period.

During these tough times, Big Lots remain committed to boosting its shareholders’ returns. In fact, it looks well placed on the dividend payout front. We note that the company has a current annualized dividend rate of $1.20 a share, flat year over year. It has a dividend payout of 16.8%, dividend yield of 2.6% and free cash flow yield of 19.4%. With an annual free cash flow return on investment of 37.6%, the dividend payment is likely to be sustainable. In fiscal third quarter, management bought back 2.2 million shares worth $100 million under its earlier announced $500 million share repurchase program. It will also pay fourth-quarter dividends of roughly $11 million on Dec 30, 2020.
 
The aforesaid efforts aided the company to deliver a stellar third-quarter fiscal 2020 results. While increased sales fueled the bottom line, higher comparable sales and sales from new and relocated non-comp stores drove the top line. Comps grew 17.8% in the reported quarter on a slight rise in store traffic, e-commerce traffic growth of more than 50% and robust increase in basket at both channels.

Challenges

Big Lots is grappling with selling and administrative expenses for a while. Last quarter, it witnessed additional expense from the sale and leaseback of distribution centers, additional store and corporate bonus cost and increased non-cash stock compensation expense, and pandemic-related costs, which raised the overall expenses. These factors are likely to persist in the fiscal fourth quarter.



Nonetheless, Big Lots is progressing with cost-reduction effort. Impressively, shares of the Columbus, OH-based company have surged 73.1% in the past year and outperformed the industry’s 23.4% rally. Meanwhile, the Zacks Retail-Wholesale sector and S&P 500 Index have grown 40.7% and 18.3%, respectively.

Key Picks in Retail

Tapestry TPR has a long-term earnings-growth rate of 10% and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

L Brands LB, also a Zacks Rank #1 stock, has a long-term earnings-growth rate of 13%.

Target TGT has an expected long-term earnings growth rate of 8.5% and currently has a Zacks Rank #2.

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