Big Lots: Discounter offers Great Value

11/09/2016 10:00 am EST


Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

When we drop a stock from our buy list that has performed well, it’s often because we can no longer argue that it offers enough value to continue recommending it, explains growth stock expert Taesik Yoon, editor of Forbes Investor

Indeed, this was the very reason why we dropped discount retailer Big Lots (BIG) in July after it had significantly outperformed the overall market with a gain of nearly 20% in less than a year.

BIG is a non-traditional, discount retailer operating 1,445 Big Lots branded stores in 47 states. 

Its offerings generally consist of deeply discounted closeout merchandise purchased from manufacturers looking to unload inventory, but also include a variety of consistently stocked everyday products.

The stock is down nearly 21% from its August high. Some of this decline has likely been driven by the relative weakness in retail stocks.

But with most of its drop occurring after BIG reported fiscal 2016 Q2 results in late August, we believe it has been exacerbated by the slight miss on sales in the quarter and comparable store sales growth guidance for the rest of the year that some viewed as similarly soft.

We, however, are less concerned.  Indeed, BIG had previously noted that its comparable store sales performance in Q2 would likely fall below the prior period due to lower-than-planned inventories entering the quarter. 

This suggests that the low comparable growth in Q2 was more the result of not having enough merchandise available in its stores than due to any material deterioration in customer demand. 

Similarly, we believe that the conservative outlook is more a reflection of the currently choppy retail environment overall and not necessarily how the company expects to fare within it.

This isn’t to say that BIG is immune to the challenges that have plagued other brick and mortar retailers, such as the ongoing shift towards online shopping. However, the heavily discounted nature of the merchandise it sells has made it less vulnerable to such digital competition in our view. 

So have its prior strategic efforts to encourage repeat customer visits and increase its average ticket.

More importantly, we think BIG will continue to benefit from these efforts — which have contributed to eight consecutive quarters of solid year-over-year gains in earnings — as well as other ongoing initiatives. 

Thus, while the recent swoon in its stock suggests there are those who are skeptical that the company’s solid profit growth can continue, we see more than enough reasons to believe it not only will, but has the potential to do so well beyond the current year. 

This makes Big Lots worthy of strong consideration once again in our view. We are seeing great value in BIG once again.

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By Taesik Yoon, Editor of Forbes Investor

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