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We are maintaining our long-term ‘Underperform’ recommendation on Columbus, Ohio-based retailer Big Lots Inc. (BIG - Analyst Report) based on the company’s lower-than-expected second quarter 2012 results and reduced outlook for fiscal 2012.

Big Lots second-quarter 2012 earnings of 36 cents per share missed the Zacks Consensus Estimate of 41 cents and plunged 28% from 50 cents earned in the comparable year-ago quarter. Moreover, total revenue of $1,218 million fell short of the Zacks Consensus Estimate of $1,240 million. Margins also remained under pressure, reflecting a contraction of 30 basis points (bps) in gross margin, along with a decline of 190 bps in operating margin.

The disappointing results compelled management to lower its fiscal 2012 earnings guidance to a range of $2.80–$2.95 per share from $3.25–$3.40 forecasted earlier. For fiscal 2012, the company expects U.S. comparable-store sales to decline in the low single digit range, while total U.S. sales are expected to ascend by 3%–4%. The company had earlier forecasted comparable-store sales to remain flat or increase by 1%, while total U.S. sales were expected to augment by 5.5% to 6.5%.

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. In fact, we see little reason for investors to own the stock.

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