Big Lots Inc. Extends Its Growth Streak as Sales Gains Slow

By Markets Fool.com

Image source: Big Lots.

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Discount retailer Big Lots (NYSE: BIG) posted mixed second-quarter earnings results on Friday, Aug. 26, 2016. Sales ticked lower, but profits jumped as the company attracted steady customer traffic in an overall soft industry.

Here's how the headline results stacked up against the prior-year period:

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$1.2 billion

$1.2 billion

N/A

Net income

$22.7 million

$17.6 million

27%

Earnings per share

$0.51

$0.35

46%

Data source: Big Lots' financial filings. YOY = year over year.

What happened this quarter?

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Sales growth slowed from the prior quarter's 3% boost (which was a four-year high) to just barely meet the low end of management's May forecast. Comps rose by 0.3%, extending the retailer's growth streak to 10 consecutive quarters -- but only by the smallest of margins.

Here are the other key highlights of the quarter:

  • Gross profit margin improved by a percentage point to reach 40% of sales.
  • Operating profit jumped to $39 million, pushing profitability by that metric up to 3.2% of sales from 2.5% in the year-ago quarter.
  • The $0.51 per share of profit significantly outpaced management's target that forecast $0.44 per share at the midpoint of guidance.
  • Operating cash flow rose to $33 million from $29 million.
  • Big Lots ended the quarter in a solid inventory position, with inventories closely tracking sales growth.

What management had to say

"We are pleased to report comps increased for the 10th consecutive quarter and our earnings were above the high end of our guidance range, increasing 27% over Q2 last year," CEO David Campisi said. Speaking of its core customer, which executives refer to as "Jennifer," Campisi noted that Big Lots' marketing and merchandising initiatives resonated with shoppers this quarter.

"Jennifer is responding positively to our strategic focus on ownable and winnable merchandise categories, improved merchandise presentations and more consistent in-store execution," he said. By "ownable" categories, Big Lots means retailing segments like furniture, where its market share is significantly higher than other areas of the store like food and electronics.

Looking forward

Campisi and his executive team forecast no real change in sales growth trends over the next two quarters as comps should increase by just a small margin. The key fourth quarter will have "flattish" comps, they said, which leaves the door open for a slight decline. Big Lots hasn't posted negative comps since its last two-year slump ended in Q4 of 2013.

Image source: Big Lots.

Meanwhile, management narrowed their overall 2016 projection to between 1% and 2% gains, compared to the "low single digits" growth that was their last official forecast.Big Lots expects to produce slightly higher cash flow than originally thought, and earnings are now seen rising by as much as 18% to mark a boost over last quarter's 16% target.

Longer term, the company's biggest strategic initiative involves ramping up its e-commerce presence now that its website is taking orders but carries just a limited portion of its selection. Online sales are worth between 3% and 5% of total revenue for many national retailers, and so Big Lots has its work cut out for it to raise its e-commerce contribution up from zero right now.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Big Lots. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.