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Bear of the Day: Big Lots (BIG)

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Discount retailer Big Lots (BIG - Free Report) recently released Q4 earnings and the results were…well…a BIG disappointment. During what is usually the best quarter of the year, the company posted profits of $2.39/share, missing the Zacks Consensus Estimate of $2.53/share and nearly 11% below the year-ago quarter

Big Lots shares tumbled more than 25% after the release and haven’t recovered since.

In addition to the earnings miss, Big Lots management explained that they, “expect a challenging first quarter of 2020, due in part to upfront investments in higher-return growth initiatives, combined with a slow start to the quarter and the sales impact of supply chain disruption related to the Coronavirus.”

At this point nobody knows for sure how long the Coronavirus outbreak will last or how severe it will get, but the worst-case economic scenario involves significant layoffs as American consumers curtail discretionary purchases and hunker down in their homes. In that situation, lower income consumers are likely to be hit first and hardest by any protracted slowdown – and that’s Big Lots’ bread-and-butter customer.

Many companies have issued warnings and revised or rescinded guidance based on the uncertainty that the spread of the virus is causing to Q1 results, but in many cases, analysts have tempered their reactions on the premise that if the disruption is temporary, lost sales will be made up fairly quickly once the outbreak is safely under control.

In the case of Big Lots however, the combination of sales that were already slowing with fresh virus-related warnings have the investment community slashing estimates well out into the future. All those downward revisions earn Big Lots a Zacks Rank #5 (Strong Sell).

It’s not just the number of downward revisions for Big Lots that’s alarming, but also the magnitude of those revisions.

Take a look at the changes in consensus estimates just over the past 7 days:

The Zacks Consensus Estimate for net earnings for the full year are down 21% and have dropped more than 27% for next year. They’re even worse in the short term. Estimates for the current quarter are down 58% and next quarter has been slashed by 65%. Those are huge cuts.

Some investors might see a juicy 7% annual dividend yield and decide that it might be worth the risk to pick up Big Lots shares on the cheap and collect dividends until the economic picture improves. Be careful. In general, stocks that pay an attractive dividend yield because the dividend is increasing often see the share price rise until the yield matches market rates.

On the other hand, a big yield in a stock who’s share price has been falling is often a red flag.

Over the past three years, the S&P 500 has added 34%, while Big lots shares have lost 67%. Suddenly those quarterly dividend checks start to look awfully puny.

With all the recent volatility, it’s more important than ever to make careful investment choices. Owning shares in an underperforming company that has the potential to get squeezed even harder by external events could be a disastrous mistake.

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