There Is Still Big Value In Big Lots For Dividend Investors

Big Lots Is A Shockingly Good Value For Income Investors

We are going to come right out and say it, Big Lots NYSE: BIG is such a deep value we are shocked that it is still trading at only 11 times its earnings. Big Lots is no Costco and shouldn't be trading at 38 times earnings but it's at least worth the 17 times earnings and 18 times earnings being paid for shares of BJ's Wholesale and Target. Big Lots, like BJ's, Target, Walmart, and Costco, is a high-quality retailer supported by stay-at-home trends, home improvement trends, and the company's multi-year turnaround plan. Begun a year or so before the pandemic set in, Operation Northstar is a driving force of the company's success that we see delivering value for investors long into the future.

Big Lots Follows Operation Northstar To Great Success

Operation Northstar is a nationwide rationalization of the business that includes reformatting store layouts, refocusing on merchandise, improving the customer experience, and building out eCommerce and all helped perfectly positioned the company for the pandemic.  Now more than a year after the pandemic began, the company is still growing and on track to sustain growth over the next few years. 

The  $1.63 billion in reported net revenue is up an impressive 13.2% from last year. And that is on top of last year's 11% YoY gain and it beat the consensus by 580 basis points. The revenue strength was driven by an 11.3% increase in comp-store sales that more than doubled the consensus estimate and were underpinned by eCommerce. eCommerce, a pillar of operation Northstar, saw its business grow 30%. Execs report there was double-digit growth across all merchandise verticals other than food and consumables and that is not surprising. Fiscal Q1  saw the heaviest pantry loading of any time during the pandemic. Noteworthy segments include seasonal items and the Broyhill line which was added last year. The Broyhill line brought in $225 million this quarter and is expected to be worth upwards of 1 billion dollars in annual sales very soon.

Moving down to the earnings portion of the report, both the gross margins and operating margin widened over the past year. The gross margin rate improved 50 basis points to 40.2% while the operating margin rate improved 230 basis points to 7.2%. And the operating margin and gross margin came in above consensus to drive a substantial Improvement in bottom-line results as well. On the bottom line, the GAAP EPS of $2.62 beat the consensus by nearly a dollar And is up more than 100% from last year. 

Big Lots Gives Weak Guidance

Shares of Big Lots fell more than 5% following the Q1 report and may fall further. The move was driven more by the guidance than anything else but we think the market got it wrong. the company refrained from providing a full-year outlook but says it is expecting second-quarter EPs in a range of $1 to $1.15 which is above the consensus estimate. The guidance assumes a low double-digit decline in comparable sales due to last year's very tough comparison that we think spooked the market. Last year's Q2 period saw revenue surge 30% year-over-year to set a company record that has sent been beaten. A 10% decline in revenue in the second quarter would put net revenue in the range of $1.48 billion which is still a historically large amount for this company. Better yet, in the two-year comparison, a 10% year-over-year decline in second-quarter revenue is still worth a 25% increase over the two-year time frame.

The Technical Outlook: Big Lots Pulls Back Into Another Buying Opportunity

Shares of Big Lots fell more than 5% following the release of the Q1 earnings report and we view this as a buying opportunity. not only is the company's Revenue growing but its profitability is improving and its dividend is getting safer than ever. At current prices, the stock yields about 1.85%, has a payout ratio below 20%, and a fortress balance sheet. There's nothing not to like about this stock. As for share prices, we expect to see support form a nice base in the region of  $61.50 before regrouping to move higher again. And one last thing, the company just approved a $500 share repurchase program that will definitely help keep price action moving higher over the next few quarters.