Revenue growth of more than 31% in the second fiscal quarter looked much better than the comparable number in the first period of the year, which in turn had already been robust. As sales increased, margin expanded, primarily the result of gains of scale. Adjusted EPS of $2.75, about five times higher YOY, made the summer months at Big Lots look like the end-of-year holiday shopping season.
Credit: Home Textiles Today
On the results of the quarter
Driving the strong P&L results across the board were comps of 31% that had not been seen before in Big Lots’ history. A number of factors seem to be at play here, from luck to competence. First, the retailer’s heavier assortment mix of home products (indoor and patio furniture, mattresses, home decoration) and household essentials at lower price points has aligned perfectly with the current stay-at-home, recessionary environment.
But, also, I believe that the management team has done a great job at positioning Big Lots to benefit from the shopping trends this year. Contrary to other off-price chains, the Columbus, Ohio-based retailer seems to have figured out the omnichannel experience, offering its customers options like same-day delivery through Instacart and store pickup.
It was also encouraging to see the intra-quarter trends. To be clear, sales suffered from (1) a depletion of inventory in July, (2) the cancellation of the family and friends event, and probably (3) some uncertainty around further fiscal stimulus to consumers. Yet, the management team reported “an acceleration of comps from July into August”, suggesting that the third quarter has already started on the right foot.
On the stock
As I explained in my most recent BIG article, I now admit that this company and stock might deserve more attention than I had previously given them credit for. Big Lots did not appeal to me at first due to its peer group-lagging ability to generate cash flow and outsized debt position.
However, things have changed in 2020. As the company rides the strong tailwinds of the stay-at-home economy, large quantities of cash have found their way into Big Lots’ balance sheet, and financial results have shown no sign of easing back to the “old normal”.
I do have concerns, however, over valuation. First, share price had climbed 90% YTD by late August 2020, before the stock finally corrected in post-earnings action. Also, current-year P/E of 7.1x may look overly de-risked on the surface (see graph above), but the multiple could be heavily distorted by projected 2020 EPS of nearly $7 that is almost twice as high as last year’s number. Whether substantially higher earnings are here to stay over a long-term horizon is still a big question mark in my mind.
Were Big Lots a dominant force in its industry or the beneficiary of a wide moat in the off-price retail space, I would feel a bit more comfortable giving it and its stock a vote of confidence. But since I don’t believe this to be the case, I prefer not to play with fire, especially without having much conviction about what the company’s financial performance might look like in a post-coronavirus economy. It is worth noting that, in the pre-pandemic environment, Big Lots’ comps averaged a meager 1%, and hardly ever exceeded the 3% mark.
I am certainly not a BIG bear per se, following strong second quarter results. However, I choose to remain on the sidelines.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.