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Why Is Big Lots (BIG) Up 20.5% Since Last Earnings Report?

Zacks Equity Research
Snap-On (SNA) delivered earnings and revenue surprises of 0.31% and -0.74%, respectively, for the quarter ended June 2019. Do the numbers hold clues to what lies ahead for the stock?

It has been about a month since the last earnings report for Big Lots (BIG). Shares have added about 20.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Big Lots due for a pullback? 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 Q4 Earnings Beat Estimates, Rise Y/Y

Big Lots reported fourth-quarter fiscal 2018 results, wherein earnings exceeded the Zacks Consensus Estimate and grew year over year. Following a flattish start in November, sales accelerated in December and January that contributed to the quarterly results.

Results also gained from robust holiday season sales on the back of solid performance in merchandise categories. Additionally, the company’s store remodeling efforts in sync with its store of the future initiative along with increased focus on the Rewards loyalty program bodes well.

Let’s Delve Deeper

This Columbus, OH-based company posted adjusted earnings of $2.68 a share compared with earnings of $2.57 registered in the prior-year quarter. Further, the bottom line surpassed the Zacks Consensus Estimate of $2.30 and clearly came above the company’s earlier guidance range of $2.20-$2.40.
Net sales decreased 2.6% to $1,598.6 million and also lagged the Zacks Consensus Estimate of $1,601 million. The dismal top-line performance can be attributed to reduced store count year over year that offset comparable store sales growth. Comps improved 3.1% driven by high-single-digit growth in soft home and furniture categories. The figure has surpassed the company’s prior guidance of flat to 2% increase. This marked the third consecutive quarter of positive comps.

The company’s gross profit decreased 3.3% year over year to $659.3 million, while gross margin contracted 40 basis points to 41.2%. This was due to high seasonal markdown rate and elevated costs on higher tariff. In the reported quarter, SG&A expenses came in at $476.9 million, down 1.6% year over year.

Operating income came in at $148.4 million compared with $167.8 million registered in the prior-year quarter. Meanwhile, operating margin contracted 90 bps to 9.3%.

Other Financial Details

Big Lots ended the quarter with cash and cash equivalents of $46 million. Inventories were up 11.1% to $969.6 million. Total shareholders’ equity was $693 million. Long-term obligations under the bank credit facility totaled $374.1 million. In fiscal 2018, Big Lots’ capital expenditures were $232 million compared with $143 million in the prior-year period. Moving ahead, the company expects capital expenditures to be nearly $260-$270 million for fiscal 2019.

In fiscal 2018, the company has returned about $151 million to its shareholders with $51 million in the form of dividends and $100 million as share repurchases. Big Lots has announced a cash dividend of 30 cents per share on Mar 8, payable Apr 5, 2019.

Store Updates

While Big Lots opened 12 outlets and shut 26 in the fiscal fourth quarter, it opened 32 stores and closed 47 in fiscal 2018. The company ended the quarter with a total number of 1,401 stores with 115 stores remodeled as part of its Store of the Future initiative. This remodeling effort is likely to be accretive to sales especially in Furniture, Seasonal and Soft Home categories. For fiscal 2019, it intends to open 50 new or relocated stores and shut down 45 stores.

Guidance

Big Lots issued bleak earnings guidance for the first quarter of fiscal 2019. Management expects adjusted earnings to be in the range of 65-75 cents per share compared with 95 cents reported in the year-ago period.

For fiscal 2019, adjusted earnings per share are projected to be $3.55-$3.75, below the prior-year period’s reported figure of $4.04. Further, the company anticipates gross profit to rise in the low to mid-single digits backed by sales growth.

Big Lots expects comps and sales to witness low-single-digit growth in fiscal 2019. Moreover, the company expects cash flow generation of nearly $95-$105 million. Also, it expects to return roughly $100 million to its shareholders in the form of dividends and share repurchases.

Moreover, management revealed its plans to launch a three-year cost reduction program worth $100 million, wherein it expects to realize $40 million in fiscal 2019 along with $30 million each in fiscal 2020 and 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -21.29% 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 C. 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 downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Big Lots has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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