Big Lots Downgraded to Underperform

We have downgraded our long-term recommendation on Columbus, Ohio-based retailer Big Lots Inc. ( BIG - Analyst Report ) to Underperform from Neutral, based on the company’s lower-than-expected first quarter 2012 results and soft outlook for fiscal 2012.

Big Lots’ first-quarter 2012 earnings of 68 cents per share missed the Zacks Consensus Estimate by a penny and dropped 2.9% from the year-ago quarter. Although total revenue increased 5.5% to $1.29 billion, it fell short of the Zacks Consensus Estimate of $1.31 billion. Margins also remained under pressure, with gross margin shriveling 30 basis points; and operating margin contracting 130 basis points.

Based on the results, management now expects fiscal 2012 earnings to be in the range of $3.25 to $3.40 per share, down from $3.40 to $3.50 forecasted earlier. Big Lots sees comparable store sales for the year to remain flat or increase 1%, while total U.S. sales are projected to rise by 5.5% to 6.5%. The company had earlier forecasted comparable store sales to increase in the range of 2% to 3%, and total U.S. sales to rise by 8% to 9%.

Big Lots, which operates in a highly competitive discount retail business, faces stiff competition from other general merchandise, discount, food, arts and crafts, and dollar store retailers such as Target Corporation ( TGT - Analyst Report ) and Wal-Mart Stores Inc. ( WMT - Analyst Report ) . This may result in a loss of market share, deterioration in sales and operating margins. The competitors having larger number of stores, greater market presence, and financial resources will continue to weigh on the company’s results.

Amid a sluggish economic recovery, Big Lots’ customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their disposable income, and in turn the company’s growth and profitability.

Given these concerns, we expect Big Lots to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock.