Big Lots Stock Up 31%, Expects Earnings Growth in 2020

Big Lots (BIG) stock soared 31% today. Investors were pleased as the company stated that it expects to return to earnings (EBIT and EPS) growth in 2020 despite concerns over tariffs. The discount retailer’s turnaround efforts helped deliver a lower-than-expected loss in the third quarter. Big Lots’ third-quarter adjusted earnings per share of -$0.18 was better than analysts’ forecast of its adjusted EPS of -$0.20.

Big Lots’ Q3 earnings

However, the company’s losses increased YoY (year-over-year) compared to its adjusted earnings per share of -$0.16 in Q3 2018. A rise in interest expenses associated with higher average debt and an increased average interest rate impacted the bottom line.

Big Lots’ gross margin fell 20 basis points YoY to 39.7% due to higher markdowns and promotional selling. These unfavorable factors more than offset the impact of favorable merchandise mix and lower shrink. The adjusted operating margin improved to -0.4% in Q3 2019 compared to -0.8% in Q3 2018. Lower store payroll and reduced corporate headquarters expenses helped improve the operating margin.

Big Lots’ sales grew 1.6% YoY to $1.17 billion ahead of Wall Street’s forecast of $1.16 billion. New and relocated non-comparable stores drove its third-quarter sales growth. However, same-store sales declined 0.1% YoY. Soft sales trends in August impacted same-store sales.

Fiscal 2019 outlook

Big Lots reiterated its fiscal 2019 earnings outlook. It expects EPS of $3.70–$3.85 in fiscal 2019 compared to $4.04 in fiscal 2018. Unlike Big Lots, discount retailer Dollar Tree (DLTR) lowered its fiscal 2019 earnings guidance, citing the impact of tariffs. Moreover, Dollar Tree’s third-quarter adjusted EPS declined 8.5% YoY to $1.08 due to weak margins.

Meanwhile, Dollar General’s (DG) EPS grew 12.7% YoY to $1.42 in the third quarter. Dollar General also raised its fiscal 2019 earnings outlook following strong third-quarter results.

Big Lots and several other retailers are trying to mitigate the impact of tariffs and the US-China trade war by negotiating with vendors and increasing prices on certain items. Big Lots is also diversifying its global sourcing and reducing its exposure to China.

The company is optimistic that its initiatives under its Operation North Star strategic transformation plan could improve its prospects in the coming years. Under this plan, the company has been revamping its stores by rolling out the Store of the Future format. At the end of the third quarter, 32% of 1,421 Big Lots stores were in the Store of the Future format. These revamped stores carry higher merchandise categories like furniture, seasonal items, and soft home goods in front of the store.

Under its Traffic Drivers program, the company aims to increase customer traffic by rebalancing its product mix. It is reducing space for food staples and increasing the assortment of other items like cleaning supplies and beauty products. Big Lots’ strategic initiatives, along with its cost discipline, could help advance its goal of improving profitability.