We reiterate our long-term Neutral recommendation on Big Lots Inc. (BIG) with a price target of $34.00 per share. The company operates as a broad line closeout retailer in the United States.
Big Lots' closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at very low prices. The company buys brand merchandise at lower costs from vendors who have excess inventory and resort to a fire sale of goods, or have higher sales returns or discontinued products.
Columbus, Ohio-based Big Lots, recently posted second-quarter 2011 results. The quarterly earnings of 50 cents a share increased 4.2% from 48 cents earned in the prior-year quarter. However, excluding, the impact of its new Canadian operations, earnings for the quarter came in at 52 cents a share.
The quarterly earnings also beat the Zacks Consensus Estimate of 45 cents. The earnings also surpassed management’s previously provided guidance range of 38 cents to 48 cents a share. Management now expects fiscal 2011 earnings between $2.80 and $2.90 per share compared with its earlier guidance range of $2.75 and $2.90.
Total revenue for the quarter inched up 2.2% to $1,167.1 million, which also came ahead of the Zacks Consensus Estimate of $1,158 million. However, comparable-store sales inched down 1.5% compared with the prior-year quarter.
Big Lots has been exploring numerous options to enter the Canadian turf, which ended with the acquisition of Liquidation World Inc. that operates approximately 89 stores and offers a broad assortment of closeout merchandise.
Management believes the acquisition to be accretive to its topline in the coming years, while generating long-term growth prospects for the company. The company also remains focused on enhancing its store operations capacity.
Big Lots is also returning much of its free cash to shareholders via share repurchases. After authorizing a share repurchase of $400 million in March 2010, Big Lots in May 2011 authorized an additional $400 million, subject to the completion of the March 2010 program. The company had $58 million left under its previous program.
However, during the second quarter, Big Lots completed its March 2010 program and began its new share repurchase program by spending $236 million to repurchase 7.2 million shares at an average price of $32.67. Year-to-date, it has incurred $313 million for repurchasing 9.7 million shares at an average price of $32.28. The company currently has $145 million left under its newly announced $400 million program.
Big Lots operates in a highly competitive discount retail business, which might result in loss of market share, fall in sales and operating margins. Competitors having more stores, greater market presence, and financial resources will continue to weigh on the company’s results.
Moreover, the company’s 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.
Big Lots, which competes with Target Corporation (TGT), holds a Zacks #3 Rank, which translates into a short-term Hold rating.
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