BIG - Big Lots Q3 Earnings: Shares Attractive On Improved Margin Outlook

2023-11-30 11:08:20 ET

Summary

• Furniture and home-décor chain, Big Lots, just reported Q3 results that came in better than expected.
• Heading into the release, shares were bid up about 20% on investor enthusiasm surrounding positive retail trends seen elsewhere.
• Q3 results provided further fuel to the rally, as an improved margin outlook and overall operating environment provided much to cheer.
• Despite the recent rally, shares still trade at significantly depressed trading levels.
• I maintain a bullish view following Q3 results.

Heading into its Q3 release, shares in discount retailer Big Lots ( BIG ) were on a tear over the past five days. Just prior to the print, the stock was up 20% over this period.

Most of this enthusiasm arose in the day prior following the release of Dollar Tree’s ( DLTR ) own results, which disappointed initially but was met with optimism after DLTR CEO Rick Dreiling provided positive commentary and reiterated his vision for $10/share in earnings for 2026, a significant gain from the current mid-single-digit range.

Investors bid up BIG accordingly due to its past trading correlation with DLTR on their respective earnings' days. In my view, this may have been misguided. But at any rate, the rally did in fact continue following stronger than expected Q3 results.

In prior coverage on BIG after its Q2 results, I reiterated my bullish view and cited an expected acceleration in margin recovery and its improved liquidity position as two catalysts serving to support the notion that the stock’s YTD selloff had been overdone.

Following Q3 results, my views on the margin outlook appear to have been confirmed. The sales and operating environment also appears more conducive to BIG in the months ahead. While some may feel the rally has gone too far, I believe it still has further to run.

BIG Q3 Results Recap

BIG reported a 14.7% decrease in net sales for the third quarter, driven by a 13.2% decline in comparable store sales. This is in line with the guidance provided last quarter for a decline in the comps in the low-teen range. It also represents a sequential improvement from the 14.6% comparable decrease reported last quarter.

The results come after a busy earnings season where retailers have reported mixed results. Those with greater value-proposition in terms of product offerings, such as The TJX Companies ( TJX ), Walmart ( WMT ), and Dollar Tree, to name a few, have reported solid sales. Whereas those with higher-priced discretionary offerings, such as Target ( TGT ), have continued reporting declining comparables.

BIG fits the bill of the latter camp, with a higher percentage offering of larger discretionary offerings. Their base of customers also skews towards the lower end of the income spectrum. This has caused a continuing headwind on the topline numbers.

Despite the weaker sales, which is resulting in a more promotional selling environment, BIG is making positive strides on improving gross margins. In Q3, BIG reported a gross margin rate of 36.4%. This is 240 basis points improved from last year and above expectations put forth previously.

BIG also reported lower SG&A dollars relative to last year, in-line with prior expectations. The overall rate, however, did tick higher to an adjusted rate of 44.3%, up from 40% last year and the 39.8% rate reported last quarter.

Coinciding with the earnings release was the announcement of the appointment of two new leaders to fill roles on BIG’s senior leadership team. The appointments were made in an effort to keep pace with their multi-year strategic plan, which includes improving store relevance.

Market Reaction To BIG’s Q3 Results

The hype in BIG shares continued following the pre-market release of results, which came in ahead of expectations. The beat provided shares an upper-single-digit percentage increase during the pre-market trading hours.

Investors perhaps were optimistic on BIG’s better than expected sales figures, as well as the improving gross margin outlook.

The broader markets also gained in the pre-market hours, with the Dow ( DJIA ) up nearly 200 points. The S&P ( SPY ) and Nasdaq, meanwhile, traded flat. Long-term yields, too, hovered around the flatline, with yields on the 10-YR at about 4.3%.

Similarly, DLTR also traded flat. This follows a turn higher in extended trading yesterday, a turn of events that contributed to BIG’s uptick in advance of today’s release.

Future Outlook For Big Lots

Big Lots’ President and CEO, Bruce Thorn provided positive commentary following the Q3 release, pointing to current progress in their continued turnaround efforts.

The efforts consequently enabled BIG to guide for a Q4 which would see operating results ahead of last year. If this were to come to fruition, it would mark the first quarter of YOY improvement in nearly three years, according to Thorn’s post-release commentary.

More specifically, BIG expects fourth quarter comp sales to be sequentially improved and to track in the high-single-digit negative range. Additionally, BIG is expecting gross margins to improve to 38%, supported in part by reduced markdown activity, as well as a more favorable freight environment.

Consistent with quarters prior, BIG refrained from providing specific EPS guidance for the quarter, other than to guide for an improved operating result from the prior year.

Is BIG Stock A Buy, Sell, Or Hold?

BIG rallied higher yesterday along with Dollar Tree, which saw investor interest following positive earnings commentary. While past correlation in the trading patterns of each could have been a factor in the move, I would view any further grouping or relation between the two as misguided.

For one, BIG’s key revenue drivers are larger discretionary offerings. DLTR, meanwhile, generates a more balanced split between the discretionary and consumables categories. And it is this greater reliance on the discretionary categories that has been the key headwind for BIG, a headwind that is compounded by the core income demographic served by the retailer.

The earnings picture is also vastly different between BIG and DLTR. On the one hand, BIG is sitting in a state of continued losses and has held back forward earnings guidance. And on the opposite end of the spectrum, DLTR has their sights on $10/share in EPS by 2026. BIG does operate on a stronger gross margin profile, but this is mostly due to their product mix.

Despite the differing overall outlook for each of these retailers, investors maintained the rally in BIG shares following the release of its Q3 results. And in my view, it’s justified. While topline sales are still very much in the negative, the margin outlook has steadily improved.

In Q3, gross margins rose 240 basis points from last year. And in Q4, BIG is expecting to end the year at a 38% rate, representing a 160 basis point sequential improvement. The higher margins come in the wake of an improved inventory position, one that is leading to a more favorable promotional environment.

At current pricing levels, BIG is still trading at multi-year lows with a high degree of short interest. While it’s true the company has much to do on the sales front, the company has exhibited competency in navigating through a challenging environment by cutting costs, improving their liquidity positioning, and increasing gross margins, a key metric in which others are struggling. With this in mind, I still view shares in BIG as attractive with most of the downside risk already priced in.

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