Is Big Lots a Good Value?

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Image source: Big Lots.

Big Lots (NYSE: BIG) exceeded profit expectations when they reported earnings at the end of August, but the stock is down since then anyway. Why are shares down, and does the pullback make for a good bargain?

BIG data by YCharts.

The year so far in review

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Retail sales at general merchandise stores have been suffering in 2016 as they struggle to keep up with online competition like Amazon (NASDAQ: AMZN). Big Lots has been no exception to the rule as sales have started to slow.

During the last quarter, revenue decreased 0.8% to $1.20 billion from $1.21 billion last year. So far year to date, sales have increased 1.2% from 2015. While this is a better turnout than the run-of-the-mill store (the average general merchandiser has seen sales slump 0.1% this year), investors were hoping for more from the discount chain. Revenue has been on the rise for the last two years.

Even though sales came in below expectations, profitability continued to increase, coming in at $0.50 a share last quarter. That figure was above the previous guidance of $0.42 to $0.47 a share company management issued. The beat was attributed to better management of product costs.

On the quarterly report conference call, a few factors contributing to lower expenses were given: better seasonal item management, which led to less discounting compared with last year; lower costs from suppliers; and better supply chain management. In total, those factors led to quarterly earnings per share increasing 47% over the same period last year.

While the profitability picture was a nice surprise, a jump over last year's numbers was expected by investors after the guidance given earlier in the year. The beat on management's estimates was not enough, though, to counteract the slow-down in overall sales growth, thus the decline in share prices in the last month. Is the stagnating sales trend expected to continue?

The Big Lots' road map going forward

Big Lots sees the slowdown in sales persisting through the end of the year. Guidance for the third and fourth quarters indicated that revenue is expected to maintain its 1% gain over last year, led primarily by small same-store sales gains.

While those figures may appear underwhelming, the picture changes again when factoring in the big profitability gains. Again, the company anticipates those double-digit advances over 2015 to hold through the fall and holiday shopping seasons.

Big Lots has been able to eke out those gains through cost-cutting, and those efforts will persist on the back half of 2016. Longer term, some of the initiatives the company has put in place stand to help overall sales improve further down the road. The company has seen sales expand in recent years with very little help from an online store format. That is impressive as other traditional retail chains have struggled from the onslaught of Amazon and other digital-only stores.

This year, though, Big Lots has given increased focus to its online presence and to bringing its seasonal rotation of discounted items to an electronic format. This year can, therefore, be chalked up to a transition phase for the company. Management sees growth resuming as the new website and supporting supply chain initiatives are completed.

What investors should consider

It has been a mixed year for Big Lots investors. Sales are slowing, but profitability continues its strong advance. With that outlook remaining intact for what remains of 2016, the recent pullback in share prices makes the company look like a good value.

BIG Revenue (TTM) data by YCharts.

Business plans put into place this year should also pay off in the not-so-distant future. The new online store and cost-cutting measures will help both the top and bottom lines as they take hold. For investors looking for a slow and steadily growing retailer that pays a decent dividend, currently at 1.7% a year, Big Lots looks like a good value.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.