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Big Lots (BIG) Up 10% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Big Lots (BIG - Free Report) . Shares have added about 10% 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 the most recent earnings report in order to get a better handle on the important drivers.

Big Lots Beats on Q1 Earnings, Updates FY19 View

Big Lots reported better-than-expected first-quarter fiscal results. The company commenced fiscal 2019 on a strong note, with sales growth and comparable store sales coming in line with expectations, and the bottom line surpassing management’s guided range, driven by better expense management.

The company is making meaningful progress on the front of Store of the Future initiative along with increased focus on Rewards loyalty program and e-commerce business. Quarterly results and strategic endeavors prompted it to raise fiscal 2019 earnings view.

Let’s Delve Deeper

The company posted adjusted earnings of 92 cents a share that surpassed the Zacks Consensus Estimate of 69 cents and also came above its earlier guidance of 65-75 cents. However, the bottom line was below 95 cents reported in the prior-year quarter.

Net sales grew 2.2% to $1,295.8 million and marginally surpassed the Zacks Consensus Estimate of $1,289.3 million. The top line increased on comparable store sales and sales growth in high-volume new stores, partly offset by reduced store count year over year. Furniture, Soft Home, Seasonal and Consumables drove sales higher.

Comparable store sales improved 1.5% and were in line with the company’s prior guidance of low-single-digit increase. This marked the fourth successive quarter of comparable store sales growth.

With respect to merchandising categories, Furniture, Seasonal and Soft Home were up in mid-single digits. We note that the consumables category was up in a low-single digit while Hard Home and Electronics, Toys & Accessories, and Food were down.

Adjusted gross profit increased 2.6% year over year to $525.1 million while gross margin expanded 10 basis points to 40.5%. In the reported quarter, adjusted SG&A expenses were $438 million, up 2.4% year over year, while as a percentage of net sales, the same deleveraged 10 basis points to 33.8%.

Adjusted operating income was $54.3 million, down 2.8% from the prior-year quarter. Meanwhile, operating margin contracted 20 basis points to 4.2% in the quarter.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $63.6 million. Inventories were up 9.1% to $927 million. Total shareholders’ equity was $648.3 million.

Management informed that increases in inventory were due to “general impact of tariffs on higher first cost of merchandise, our intentional decision to move forward inventory commitments in key categories of Furniture and Soft Home to support earlier resets of fresh, new product, and the slower than anticipated sell-through of seasonally sensitive product in Q1 largely due to weather.”

Long-term obligations under the bank credit facility totaled $470.4 million, up from $174 million in the prior-year period. This was due to the timing of share buyback activity, higher strategic investments and the timing of increased inventory levels. Big Lots incurred capital expenditure of roughly $77 million during the quarter.

During the quarter under review, the company returned about $61 million to shareholders, with $13 million as dividends and $48 million in the form of share repurchases. We note that Big Lots exhausted $50 million share repurchase authorization approved in March 2019. Management anticipates adjusted cash flow of approximately $100 million for fiscal 2019.

Store Updates

In the quarter, Big Lots opened nine outlets and shuttered six, taking the total to 1,404 stores. Going ahead, it intends to open 50 new or relocated stores, and remodel more than 200 stores in fiscal 2019.

Guidance

Big Lots now expects fiscal second-quarter adjusted earnings to be 35-45 cents a share compared with 59 cents reported in the year-ago period.

The company projects low to mid-single-digit growth in sales, and low-single-digit increase in comparable store sales. Gross margin is likely to be marginally down during the fiscal second quarter, owing to higher markdown.

For fiscal 2019, management now expects adjusted earnings per share to be $3.70-$3.85, up from the earlier view of $3.55-$3.75. However, the updated range is still below the prior-year period’s reported figure of $4.04. The company projects a low-single-digit increase in both sales and comparable store sales for fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Big Lots has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, 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 these revisions 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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