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Big Lots Near Bargain Pricing
Broadline closeout retailer Big Lots (NYSE:BIG) scored an earnings and revenue increase for its second quarter and raised its outlook for the rest of fiscal year 2010. The market drove shares down, however, as it focused on concerns over inventory buildup and a weaker third-quarter outlook.
IN PICTURES: 5 Tips To Reading The Balance Sheet
The Quarter's Performance
Big Lots increased its operating profits from $47.7 million in last year's second quarter to $63.2 million in this year's quarter. Revenue increased from $1.0866 billion to $1.142 billion, a 5.1% increase on a same-store sales increase of 3.8%. Net income was $38.9 million, or 48 cents per diluted share, up from last year's $28.4 million, 34 cents per diluted share in the comparable quarter last year. Gross margin rates increased 50 basis points over last year's. The improvement was attributed to better pricing and improved sales in home and seasonal merchandise. Higher freight costs kept the margins from increasing more.
Cost and Inventory Concerns
The stock market bypassed the positives on the earnings and revenue side and focused on Big Lots' inventory increase, which rose 10% to $734 million of merchandise. The accumulation of what the Street reads as excess inventory makes investors nervous. Analyst Patrick McKeever of MKM Securities indicated that the concerns may be overdone, as the inventory represents opportunistic buying in categories which have been doing very well.
The higher freight costs were cited by Chief Executive Steven Fishman as he gave an outlook of 25 to 29 cents a share for third-quarter earnings, six cents under analyst consensus. Fourth quarter profit projection, however, was raised to the $1.41 to $1.45 per share range, which is six cents higher than previous estimates. Outlook for fiscal 2010 was raised from $2.75 to $2.85 per share to an EPS of $2.82 to $2.90 per diluted share. Same-store sales for the fiscal year 2010 should be in the 3.5 percent to 4.5 percent range.
Are Discounters' Days Over?
Big Lots, whose earnings and stock price had been rising this year, is facing what Sham Gad detailed in his recent Investopedia article on Dollar Tree (Nasdaq:DLTR) and other discounters: the market's continually higher expectations. Dollar Tree had another good quarter, its stock price is still high Gad rightly points out the market will ratchet the bar higher, as it does.TJX Companies (NYSE:TJX), with its TJ Maxx apparel stores, is another discounter that has racked up great numbers but whose stock is now well off its highs.While the market hasn't taken down Family Dollar Stores (NYSE:FDO) or Dollar General (NYSE:DG) stock yet, it's reasonable to assume both companies would have to post outsize results to have the market react positively.
Big Lots and the Big Picture
While earnings beats or misses along with parsing the daily twitches of companies and stocks is the necessary province of traders, longer-term investors should step back. The inventory issues can be a concern, though the nature of the closeout business makes the bump up there more explicable. More to the point, beyond the slow third quarter, Big Lots' management sees the fourth quarter and the year's business increasing. Chief Executive Fishman also made a fascinating comment, that "discretionary categories and higher-ticket goods seemed to be most appealing during the second quarter." This may be more evidence of the growing change in the frugal buying habits of consumers, at the risk of invoking the oxymoron "luxury discount goods." The move toward frugality, toward Big Lots and the other discounters finding a more permanent place, is happening. We expect to see more of this shift.
Big Lots' Stock
The stock has had the air let out of it and now trades at $30.96, 11.5 times earnings, 9.67 times forward earnings. It's heading into bargain range with its overall earnings and still decent growth prospects. Investors need to be vigilant, not blasé, in any market, certainly this one. But if the market keeps going down, Big Lots stock is going to be that much bigger a bargain.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 5 Tips To Reading The Balance Sheet
The Quarter's Performance
Big Lots increased its operating profits from $47.7 million in last year's second quarter to $63.2 million in this year's quarter. Revenue increased from $1.0866 billion to $1.142 billion, a 5.1% increase on a same-store sales increase of 3.8%. Net income was $38.9 million, or 48 cents per diluted share, up from last year's $28.4 million, 34 cents per diluted share in the comparable quarter last year. Gross margin rates increased 50 basis points over last year's. The improvement was attributed to better pricing and improved sales in home and seasonal merchandise. Higher freight costs kept the margins from increasing more.
Cost and Inventory Concerns
The stock market bypassed the positives on the earnings and revenue side and focused on Big Lots' inventory increase, which rose 10% to $734 million of merchandise. The accumulation of what the Street reads as excess inventory makes investors nervous. Analyst Patrick McKeever of MKM Securities indicated that the concerns may be overdone, as the inventory represents opportunistic buying in categories which have been doing very well.
The higher freight costs were cited by Chief Executive Steven Fishman as he gave an outlook of 25 to 29 cents a share for third-quarter earnings, six cents under analyst consensus. Fourth quarter profit projection, however, was raised to the $1.41 to $1.45 per share range, which is six cents higher than previous estimates. Outlook for fiscal 2010 was raised from $2.75 to $2.85 per share to an EPS of $2.82 to $2.90 per diluted share. Same-store sales for the fiscal year 2010 should be in the 3.5 percent to 4.5 percent range.
Big Lots, whose earnings and stock price had been rising this year, is facing what Sham Gad detailed in his recent Investopedia article on Dollar Tree (Nasdaq:DLTR) and other discounters: the market's continually higher expectations. Dollar Tree had another good quarter, its stock price is still high Gad rightly points out the market will ratchet the bar higher, as it does.TJX Companies (NYSE:TJX), with its TJ Maxx apparel stores, is another discounter that has racked up great numbers but whose stock is now well off its highs.While the market hasn't taken down Family Dollar Stores (NYSE:FDO) or Dollar General (NYSE:DG) stock yet, it's reasonable to assume both companies would have to post outsize results to have the market react positively.
Big Lots and the Big Picture
While earnings beats or misses along with parsing the daily twitches of companies and stocks is the necessary province of traders, longer-term investors should step back. The inventory issues can be a concern, though the nature of the closeout business makes the bump up there more explicable. More to the point, beyond the slow third quarter, Big Lots' management sees the fourth quarter and the year's business increasing. Chief Executive Fishman also made a fascinating comment, that "discretionary categories and higher-ticket goods seemed to be most appealing during the second quarter." This may be more evidence of the growing change in the frugal buying habits of consumers, at the risk of invoking the oxymoron "luxury discount goods." The move toward frugality, toward Big Lots and the other discounters finding a more permanent place, is happening. We expect to see more of this shift.
Big Lots' Stock
The stock has had the air let out of it and now trades at $30.96, 11.5 times earnings, 9.67 times forward earnings. It's heading into bargain range with its overall earnings and still decent growth prospects. Investors need to be vigilant, not blasé, in any market, certainly this one. But if the market keeps going down, Big Lots stock is going to be that much bigger a bargain.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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