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On Sep 9, we upgraded our recommendation on Big Lots, Inc. (BIG - Analyst Report), the broad-line closeout retailer in the United States, to Neutral from Underperform, following better-than-expected second-quarter fiscal 2013 bottom-line results. The company currently carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Big Lots reported second-quarter consolidated adjusted earnings of 31 cents a share that comfortably surpassed the Zacks Consensus Estimate of 25 cents and came above management’s earlier guidance of 17 cents to 27 cents.

We believe Big Lots’ closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at very lower prices. The company buys brand merchandise at lower costs from vendors who have excess inventory and resort to a fire sale of their goods, or have higher sales returns or discontinued products.

However, the year-over-year decline of 13.9% in the quarterly earnings paints a dull picture despite stronger-than-anticipated results. Moreover, net sales portrayed an unimpressive growth of 0.6% and fell short of the Zacks Consensus Estimate.

Consequently, for the second time management took a conservative stance and lowered the sales and earnings outlook.

On a consolidated basis, Big Lots expects adjusted earnings in the range of $2.80 to $3.05 per share for fiscal 2013, down from its earlier guidance of $2.87 to $3.12 per share. Net sales are expected to remain flat or increase by 1%. Previously, the company forecasted net sales to increase in the range of 1% to 2%.

The key concerns for the company remain waning domestic comparable-store sales, sluggish sales of discretionary items in a low income consumer environment, and soft sales of the higher margin seasonal products.

However, we believe that the company could witness improving trends in the second half of fiscal 2013, given the initiatives undertaken by management such as store remodels, changes to its loyalty reward program, bringing in coolers and freezers to expand merchandises of food-related items and target food stamp recipients, “Edit to Amplify” merchandising strategy and furniture financing program. Moreover, Canadian operations could prove a catalyst in driving future results.

Thus, the pros and cons exhibited in the stock fairly support our unbiased view on the stock.

Other Stocks to Consider

Until any further upward revision in the Zacks Rank of Big Lots,  the other stocks worth considering in the retail sector include Citi Trends, Inc. (CTRN - Analyst Report), Fortune Brands Home & Security, Inc. (FBHS - Snapshot Report) and Lumber Liquidators Holdings, Inc. (LL - Snapshot Report), all sporting a Zacks Rank #1 (Strong Buy).

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