Big Lots: The Run Continues

Prepared by Stephanie, analyst at team BAD BEAT Investing

Big Lots, Inc.‘s (BIG) stock has been on a run off the doldrums of the March lows in the stock market. Keep in mind that this run continued after it recently reported a decent Q1 earnings on many fronts which resulted in the Street pushing the name higher. The stock saw profit-taking in recent weeks, as expected, but has gotten a recent boost after pre-releasing some information regarding Q2 performance. That said, Big Lots’ stock was under pressure for a while and was decimated during the COVID-19 crisis. Despite lackluster share performance, it has long been a good trading stock. Right now, the run has started to ramp up, but like the last run, expect some profit-taking soon.

Shares are pushing new 52-week highs. It has been an incredible rally in the last few days. Amid the great performance of the company and our belief that Big Lots has been a COVID-19 winner, shares are pricey here. The bigger concern is whether this performance can continue going forward. What we mean is that we have some concerns over performance dipping once the economy is fully reopened. Big Lots discount pricing has worked. Lack of small business competition has helped.

Overall, we believe that Big Lots continues to be one of the best discount retailers out there. This retailer successfully competes with both the big-box stores and lower end dollar stores. Big Lots fits somewhere in between a big box store and dollar store. It is certainly not a dollar store, but it’s not really a big-box store either. That stated, it has proven itself a winner in the COVID-19 crisis. Q1 was strong, let us touch on the highlights, as well as what we learned regarding Q2.

A strong Q1 leads into a strong Q2

The company had been struggling the last two years and the market really did not have faith in its operations as the pandemic selloff landed, destroying shares. As the market corrected itself, it bid up Big Lots. Further, COVID-19 drove extra business. Big Lots worked diligently on inventory clearing, being very promotional, and getting aggressive with property management.

But this only had some impact. The shift in consumer spending habits the last few months was the biggest boost for the company. Being open in most areas unlike a lot of small businesses, this discount retailer proved it was a survivor, though we question if the momentum can continue as economies reopen. More choice could lead to another shift in consumer spending. This led to the company’s much-better-than expected Q1. It saw record Q1 income of $49.3 million or $1.26 per share. This result compares to net income a year ago of $37 million, or $0.92 per share. This was a massive beat of $0.86 versus consensus.

This was driven by much better-than-expected sales, and these sales spiked from a year ago. This was also compounded by the fact that the company has been working hard on controlling spending. Sales in Q1 registered $1.44 billion and crushed consensus estimates. Net sales actually rose 11.1% year over year. We had been seeing sales fall due to the closing of underperforming stores as well as a decline in same-store sales in many recent quarters over the years, so these results are stellar. So, what about the all-important comparable store sales figure? These were up massively, rising an incredible 10.3%. We must point out the e-commerce channel perked up a solid 45% from a year ago. We learned this strength continued into Q2.

Q2 numbers going to be strong

So the strength in Q1 carried over into Q2. We learned that its expected results for the second quarter of fiscal 2020 will be strong because the company has seen a continuation of the strong demand that began in mid-April, with quarter-to-date comparable sales through fiscal June increasing well ahead of expectations.

Just how strong? Well, for the second quarter, the company now expects comparable sales to be up by a mid-to-high twenties percentage, which reflects anticipated moderation from quarter-to-date trends. That is incredible. The company expects adjusted diluted EPS, which excludes a gain of approximately $11.00 per share on the sale of its four distribution centers as part of the previously announced sale/leaseback transactions, to be in the range of $2.50 to $2.75, compared to $0.53 of adjusted diluted EPS for the second quarter of fiscal 2019. That is a massive turn-around.

A few other points

Big Lots still has a strong balance sheet, though has recently begun borrowing to invest in strategic growth initiatives. Big Lots ended Q1 with $312 million of cash and cash equivalents and $437 million of borrowings under its credit facility. Now, this figure represents a significant improvement in net debt compared to the end of the first quarter of fiscal 2019 when the company had $64 million of cash and $470 million of long-term debt. During the quarter, out of an abundance of caution, the company chose to draw down additional amounts on its revolving credit facility to provide protection against the unknown potential impacts of the crisis. With the positive business trends, and the recent closure of the sale/leaseback transactions, the company is in a very strong liquidity position, with current cash and short-term investments having ballooned in recent weeks to approximately $890 million, and no amounts drawn on its $700 million revolving credit facility. We should point out that the company’s cash position does not yet reflect expected tax payments of approximately $170 million related to the sale/leaseback transactions.

From a valuation standpoint, shares are yielding under 3% now, but the dividend is secure, and likely to see increases. While the outlook for the year is unclear due to COVID, shares are still not drastically expensive, trading at a little under 10 times forward earnings. That is attractive, but the question the Street is weighing is whether this represents a peak in performance. There are real questions on whether this high level of performance can be sustained. That is why shares have not skyrocketed even higher. A lid has been kept on the name. We think you will see shares get bid up to the mid-$40 range and then some profit-taking is likely. You may wish to take some profit, but hold a core position.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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