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Big Lots (BIG) Q1 Earnings Beat, Comparable Sales Rise Y/Y

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Big Lots, Inc. (BIG - Free Report) reported a stellar first-quarter fiscal 2021 performance. The company’s both top and the bottom line outpaced the Zacks Consensus Estimate and grew year over year as well. Notably, the quarter delivered fifth consecutive sales and earnings beat. Results were driven by strength in the company’s underlying Operation North Star initiative and a positive customer response on the third round of stimulus distributions that started in March. Moreover, the company’s Lot and Queue Line strategies bode well.

This Columbus, OH-based company reported adjusted earnings of $2.62 per share, surpassing the Zacks Consensus Estimate of $1.87. Moreover, the bottom line improved significantly from $1.26 earned in the prior-year quarter. Earnings per share were also ahead of management’s guidance of $1.30-$1.45, driven by higher sales, a disciplined expense control and modest gains from share repurchases.

Net sales rose 13% to $1,625.6 million and also beat the Zacks Consensus Estimate of $1,578 million on robust comparable sales (comps) and higher sales from new and relocated non-comp stores. Moreover, the company’s e-commerce business surged 30% while its Rewards program achieved a record high of 21.4 million members, growing 12% year over year. More than 72% of quarterly sales came from rewards membership, reflecting growth of 800 basis points (bps) year over year.

Big Lots, Inc. Price, Consensus and EPS Surprise Big Lots, Inc. Price, Consensus and EPS Surprise

Big Lots, Inc. price-consensus-eps-surprise-chart | Big Lots, Inc. Quote

More Q1 Facts

Impressively, comps climbed 11.3% in the reported quarter. The company witnessed a double-digit increase at all merchandise categories except for Food and Consumables. It also experienced strength in its Seasonal assortment, especially lawn & garden. The Broyhill brand that was launched last year generated $225 million sales across the Furniture and Home assortments. Hence, the brand is on track to become a $1-billion brand. Robust basket size and sell-through in all categories, particularly lawn & garden drove results. Also, Seasonal assortment, Furniture and Soft Home categories were strong, registering comps growth of 51%, 14% and 21%, respectively.

Gross profit jumped 14.6% year over year to $653.9 million and gross margin expanded 50 bps to 40.2%. Gross margin was boosted by significant lower markdowns, offsetting higher freight costs.

In the reported quarter, selling and administrative expenses came in at $497.4 million, up 8.5% year over year. However, the metric (as a percentage of net sales) declined 130 bps from the prior-year quarter’s tally of 30.6%. Furthermore, operating profit came in at $122.6 million, up 64.8% from $74.4 million recorded in the prior-year quarter. Moreover, operating margin came in at 7.5%, up from 5.2% seen in the year-ago quarter.

Other Financial Details

This currently Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $613.3 million. Long-term debt totaled $32 million compared with $437 million in the prior-year quarter. Total shareholders’ equity was $1,268.5 million.

Inventories increased 11.8% to $901.5 million in the fiscal first quarter, driven by an elevated in-transit inventory. At the end of the reported quarter excluding in-transit, on-hand inventory inched up nearly 3% year over year.

As of May 1, 2021, the company generated net cash of $204.3 million from operating activities. Capital expenditures totaled $32 million in the reported quarter. For fiscal 2021, capital expenditures are anticipated between $200 million and $210 million.

Furthermore, management bought back 1.1 million shares worth $78 million in the quarter under its earlier-announced $500-million share repurchase program. Through the end of the reported quarter, the company had utilized $250 million to buy back 4.9 million shares.

In the reported quarter, Big Lots opened 13 outlets and shuttered eight, increasing the total store count to 1,413. For fiscal 2021, management projects opening about 50-60 stores, of which 20 will be relocations. Simultaneously, it anticipates nearly 15 outright closures in the fiscal year.

Outlook

As the company moves through the fiscal second quarter, it sees strength in its core underlying business, driven by the Operation North Star strategic initiatives. Also, impacts from the third round of stimulus distributions beginning the second week of March remains tailwinds.

However, for the fiscal second quarter, comps are likely to decline in low double digits from the year-ago quarter’s reported figure on tough comparisons, offset by a sales gain of about 150 bps from net new and remodeled stores. Moreover, the gross margin rate is likely to contract nearly 200 bps from last year’s reported number on macro headwinds in freight and certain mix impact from pantry optimization. The gross margin rate is anticipated to be nearly flat with the level registered for the same quarter in fiscal 2019. Adverse freight effects and supply-chain disruptions are likely to linger throughout the fiscal year.

Based on the expected sales levels, the company estimates SG&A deleverage in the fiscal second quarter with expenses estimated to be slightly down on lower sales from the prior-year quarter’s reported number. Higher expenses are induced by the sale and leaseback of the company’s distribution centers, investments in the new forward deployment centers, other elevated strategic investments and increased equity compensation expense. These costs are offset by above $30 million of structural expense savings.

As a result, management envisions earnings per share in the band of $1-$1.15 for the fiscal second quarter, indicating a decline from adjusted earnings of $2.75 delivered in the comparable quarter of last fiscal. Overall, the performance for the fiscal second quarter is likely to imply difficult comparisons from the previous fiscal’s actuals and an improved show from the same period in fiscal 2019.

For fiscal 2021, management forecasts the gross margin rate to be approximately 125-135 bps. The company is focused on promo-pricing optimization and shrink reduction, which are favorable margin levers going forward. Big Lots anticipates SG&A expense to slightly grow in fiscal 2021 from the last fiscal year’s finals. Also, it expects inventory to meaningfully increase from the fiscal 2020 reading.

Nonetheless, Big Lots anticipates accomplishing more than $130 million of run-rate structural cost reductions by the end of fiscal 2021 from the level recorded at the start of fiscal 2019. For the rest of fiscal 2021, the company is committed toward expanding its wings from store capabilities to eight additional locations, thus augmenting the total to 55 in time for holiday. Additionally, it looks to widen the payment-type choices on sites including Apple and GooglePay.

Zacks Investment ResearchImage Source: Zacks Investment Research

Notably, shares of the company have increased 42% year to date, outperforming the industry’ 5.4% growth.

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