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Big Lots (NYSE:BIG) Misses Q3 Revenue Estimates, Reiterates Q4 Outlook


Full Report / November 30, 2023

Big Lots (BIG) Q3 FY2023 Highlights:

  • Revenue: $1.03 billion vs analyst estimates of $1.03 billion (small miss)
  • EPS (non-GAAP): -$4.38 vs analyst estimates of -$4.67 ($0.19 beat)
  • Positive commentary on Q4 and 2024
  • Gross Margin (GAAP): 36.4%, up from 34% in the same quarter last year (beat)
  • Same-Store Sales were down 13.2% year on year (roughly in line)
  • Store Locations: 1,420 at quarter end, decreasing by 30 over the last 12 months

Discount retail company Big Lots (NYSE:BIG) reported results in line with analysts' expectations in Q3 FY2023, with revenue down 14.7% year on year to $1.03 billion. It made a GAAP profit of $0.16 per share, improving from its loss of $3.56 per share in the same quarter last year.

Key Takeaways from Big Lots's Q3 Results

With a market capitalization of $140.1 million, Big Lots is among smaller companies, but its more than $46.59 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

Same-store sales were in line, revenue missed by a small amount, and EPS beat. The company said that Q4 adjusted operating profit will be higher than last year, marking the first quarter of year on year improvement since Q1 2021. Big Lots added that improvements will continue throughout 2024, which is a positive. Overall, we think this was a mixed but quarter with some optimism about the future. The stock is up 4.2% after reporting and currently trades at $5 per share.

Priding itself on carrying brand-name items, Big Lots (NYSE:BIG) is a discount retailer that acquires excess and overstocked inventory then sells at meaningful discounts to prices of traditional retailers

For example, if Target orders large quantities of Martha Stewart Living bath towels that don’t sell as well as expected, Target may sell those in bulk to Big Lots at pennies on the dollar rather than discount the items and try to sell them individually. This is often done to clear shelf space for new products or because of restrictions on discounting certain brands.

Big Lots’s buying approach focuses on finding excess inventory or overstocked items from other retailers, so selection can change and be varied. Shopping at Big Lots is often a treasure hunt–what the consumer loses in reliable selection is made up for with low prices. Housewares and home decor, snacks, toys and games, and furniture are key product categories at the typical Big Lots store, and brands such as Serta, Whirlpool, Kraft, Nestle, and Sony can often be found there.

The core customer is the middle class, value-conscious shopper who values a one-stop shop for most of a household’s needs but is ok with changing selection. The typical Big Lots store is mid-sized, averaging 30,000 square feet and located in suburban or urban areas shopping centers.

Discount General Merchandise Retailer

Broadline discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.

Discount retail competitors include TJX (NYSE:TJX), Ollie’s Bargain Outlet (NASDAQ:OLLI), and Ross Stores (NASDAQ:ROST).

Sales Growth

Big Lots is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's revenue has declined over the last four years, dropping 2.3% annually as it failed to grow its store footprint meaningfully and observed lower sales at existing, established stores.

Big Lots Total Revenue

This quarter, Big Lots reported a rather uninspiring 14.7% year-on-year revenue decline, missing Wall Street's expectations. Looking ahead, analysts expect revenue to decline 4.7% over the next 12 months.

Number of Stores

The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like Big Lots keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. Since last year, Big Lots's store count shrank by 30 locations, or 2.1%, to 1,420 total retail locations in the most recently reported quarter.

Big Lots Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Big Lots's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 12.4% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Big Lots Year On Year Same Store Sales Growth

In the latest quarter, Big Lots's same-store sales fell 13.2% year on year. This decrease was a further deceleration from the 11.7% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Gross Margin & Pricing Power

Big Lots's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 35.2% gross margin over the last eight quarters. This means the company makes $0.35 for every $1 in revenue before accounting for its operating expenses. Big Lots Gross Margin (GAAP)

Big Lots produced a 36.4% gross profit margin in Q3, marking a 2.4 percentage point increase from 34% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Big Lots generated an operating profit margin of 1.9%, up 11 percentage points year on year. This increase was encouraging, and we can infer Big Lots was more disciplined with its expenses or gained leverage on fixed costs because its operating margin expanded more than its gross margin.

Big Lots Operating Margin (GAAP)

Although Big Lots was profitable this quarter from an operational perspective, it's generally struggled when zooming out. Its high expenses have contributed to an average operating margin of negative 5.3% over the last two years. This performance isn't ideal as unprofitable publicly traded companies are a minority in the consumer retail sector. On top of that, Big Lots's margin has declined, on average, by 4.4 percentage points year on year. This shows the company is heading in the wrong direction, and investors were likely hoping for better results.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q3, Big Lots reported EPS at $0.16, up from negative $3.56 in the same quarter a year ago. This print easily cleared Wall Street's estimates, and shareholders should be content with the results.

Big Lots EPS (GAAP)

Over the last year, Big Lots's adjusted diluted EPS dropped 204%. We hope this changes. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 46.7% year-on-year increase in EPS.

Key Takeaways from Big Lots's Q3 Results

With a market capitalization of $140.1 million, Big Lots is among smaller companies, but its more than $46.59 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

We were impressed by how significantly Big Lots blew past analysts' EPS expectations this quarter. We were also glad its gross margin outperformed Wall Street's estimates. On the other hand, its revenue unfortunately missed analysts' expectations. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 4.2% after reporting and currently trades at $5 per share.

Is Now The Time?

Big Lots may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Big Lots, we'll be cheering from the sidelines. Its revenue growth has been weak over the last four years, and analysts expect growth to deteriorate from here. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last one years hurt its performance. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically.

While we've no doubt one can find things to like about Big Lots, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

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