A Big Opportunity In Big Lots (NYSE:BIG)

Big Lots Suffers From High-Expectation Syndrome

Looking at Big Lots (NYSE:BIG) second-quarter report I can find absolutely no reason why the stock tanked 10% after its release. Looking into the company’s expectations and taking note of an incredibly high short-interest (above 20% even today) it all comes crystal clear. While Big Lots performed spectacularly, beating consensus on every metric, by this stage of the reporting cycle nothing was a surprise. The company was expected to do well and even to beat consensus and it did, nothing to see hear folks time to sell the news.

But, coming back to the report itself, the sell-off is great news for those who want to buy into this story. Big Lot’s shares have shaved 10% off their recently set high and providing another entry into this two-pronged rebound story. You see, Big Lots was deep into a massive restructuring effort called Operation North Start that was paying off before the pandemic hit. After the pandemic hit, Big Lots found itself well-positioned to benefit from the stay-at-home and home-improvement trends that have been driving the market all summer.

Big Lots Blows Away The Consensus

With results from other retailers coming in so strong over the summer it is no surprise the Big Lots analysts had high expectations. On the top line, revenue came in at $1.64 billion or up 31.2% from the previous year. Over the course of the last quarter, 100% of the analyst’s community raised their earnings targets and the company was still able to best the consensus by nearly 200 basis points. That’s how strong business is. Revenue gains were driven primarily by a 31.3% increase in comp sales that also topped consensus.

The bottom-line results were equally impressive, if not more so, but there are two stories to be aware of here. The headline story is that adjusted EPS topped the consensus by a nickel. That’s good because business is good. The second story is with GAAP earnings. The adjustment includes an $8.54 per share impact from a sale-leaseback arrangement. That deal puts GAAP EPS above $11.25 and, more importantly, the balance sheet in even better shape than before.

The strength was driven by both in-store traffic and eCommerce. The company reported a record-level of new customers, double-digit increases in traffic and ticket averages, and a 500 basis point impact from eCommerce to the top-line growth. Looking forward, the company says 3rd quarter results are off to a good start.

"Looking forward, the third quarter is off to a strong start and I am confident that our Operation North Star strategies will continue to drive top-line growth, increase customer engagement, and deliver tremendous leverage in our business … we are well-positioned for what appears to be a new normal... Our operating results under Operation North Star, along with our commitment to disciplined capital management, position us to continue driving significant shareholder value,” said CEO Bruce Thorn.

Big Lots Dividend Is Another Big Opportunity

Big Lots is no Dividend Aristocrat by any means but it is an interesting dividend play. The company yields over 2.0% with shares trading near $50.00 and there is an expectation for growth. The company hasn’t increased its dividend in the last couple of years but that’s because of its longer-term goals and restructuring plans to include Operation North Star. Now, with the turnaround well underway and business booming the company is in a position to begin increasing the payment again. The payout ratio is only 19% of earnings, debt is low and coverage high which suggests the payment is safe at least.

The Technical Outlook: Big Lots Is A Cheap Stock, Buy On Weakness

Before I get into the technical aspect I want to point out just how cheap Big Lots is. This stock is trading only 8X its forward earnings compared to an S&P 500 average above 22X. Looking at other pandemic winners in the retail space Tractor Supply Company (NASDAQ:TSCO) and Home Depot (NYSE:HD) are both trading about 23X earnings. Big Lots may be in for some more downside but its a bargain at any price right now.

So, looking at the chart it is possible that Big Lots shares will continue to fall in the near-term. The $48 looks like it could offer solid support, if it doesn’t price action may fall as far as $44 but I don’t see that happening. This stock is a screaming buy.