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Big Lots (NYSE:BIG) Q2 Sales Beat Estimates, Stock Jumps 16.3%

StockStory - Tue Aug 29, 6:51AM CDT

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Discount retail company Big Lots (NYSE:BIG) reported results ahead of analysts' expectations in Q2 FY2023, with revenue down 15.4% year on year to $1.14 billion. Big Lots made a GAAP loss of $249.8 million, down from its loss of $84.2 million in the same quarter last year.

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Big Lots (BIG) Q2 FY2023 Highlights:

  • Revenue: $1.14 billion vs analyst estimates of $1.1 billion (3.49% beat)
  • EPS: -$8.56 vs analyst estimates of -$4.05 (excluding a number of one-time charges totaling $5.32, results beat)
  • Free Cash Flow of $18.3 million, up 20.6% from the same quarter last year
  • Gross Margin (GAAP): 33%, up from 32.6% in the same quarter last year
  • Same-Store Sales were down 14.6% year on year (beat vs. expectations of down roughly 18% year on year)
  • Store Locations: 1,420 at quarter end, decreasing by 20 over the last 12 months

Commenting on today's results announcement, Bruce Thorn, President and CEO of Big Lots stated, "Our results for Q2 illustrate that we remain in a very challenging environment, in which our core lower-income customer remains under significant pressure and has limited capacity for higher-ticket discretionary purchases. However, we did see some sequential improvement in the quarter, and were pleased to come in ahead of or in line with our guidance on all key metrics. We believe this improvement was driven by the five key actions we have taken, which are to own bargains, communicate unmistakable value, increase store relevance, win with omnichannel, and drive productivity."

Priding itself on carrying brand-name items, Big Lots (NYSE:BIG) is a discount retailer that acquires excess and overstocked inventory then sells at meaningful discounts to prices of traditional retailers

Broadline discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.

Sales Growth

Big Lots is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's revenue has declined over the last four years, dropping 1.38% annually as it failed to grow its store footprint meaningfully and observed lower sales at existing, established stores.

Big Lots Total Revenue

This quarter, Big Lots's revenue fell 15.4% year on year to $1.14 billion but beat Wall Street's estimates by 3.49%. Looking ahead, Wall Street expects revenue to decline 4.87% over the next 12 months.

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Number of Stores

A retailer's store count often determines on how much revenue it can generate.

When a retailer like Big Lots keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. Since last year, Big Lots's store count shrank by 20 locations, or 1.39%, to 1,420 total retail locations in the most recently reported quarter.

Big Lots Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Big Lots's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 11.3% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Big Lots Year On Year Same Store Sales Growth

In the latest quarter, Big Lots's same-store sales fell 14.6% year on year. This decrease was a further deceleration from the 9.2% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Key Takeaways from Big Lots's Q2 Results

With a market capitalization of $183.2 million, Big Lots is among smaller companies, but its more than $46 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

This was a solid quarter for Big Lots on the back of weak peer earnings and likely low expectations. Same-store sales, revenue, and EPS (when excluding a number of one-time charges), all beat Wall Street analysts' expectations. Additionally, forward commentary was encouraging. Management stated that "we are now in a position to get back to playing offense. This will be supported by the incredible efforts of our associates, and our outstanding vendor partners, who remain aligned with our efforts to offer great quality products and amazing value. As we make further progress on our five key actions, we are optimistic that trends will continue to improve, albeit slowly, through the remainder of this year, aided by a higher penetration of bargains, more newness in our assortment, freight reductions, ongoing cost reduction and productivity efforts, more effective promotions, and a more normalized level of markdowns." Lastly, the company recently executed on sale leaseback transactions that have resulted in $300 million of proceeds, which is strengthening Big Lots's liquidity position. The stock is up 13.9% after reporting and currently trades at $7.14 per share.

So should you invest in Big Lots right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.