Big Lots, Inc. (NYSE: BIG ) beat fourth quarter earnings estimates on Friday and raised its quarterly dividend by 20%. But considering the instant 10% drop in BIG stock, investors seemed to ignore those positives.
Instead, Wall Street zeroed in on a surprise decline in same-store sales at the discount retailer. Though total revenue improved 3.8% from the previous year, same-store sales declined slightly (-0.1%), trailing consensus analyst estimates (+1.3%) by a fairly wide margin. It was enough for Big Lots stock to immediately tumble from $53 to $48, its lowest point since last July.
BIG Stock Pullback Seemed Inevitable
On the surface, that seems harsh, and perhaps a classic case of investor overreaction and over-punishment in the wake of bad news. In the coming days, I fully expect more than a few bargain buyers to swoop in and snatch up BIG stock at eight-month lows.
Looking at the bigger picture, however, a selloff in BIG seemed inevitable. Disappointing same-store sales were merely an excuse for investors anxious to get out of the stock.
For starters, the store's sales (not just same-store sales) have been on steady decline for years. In 2011 and 2012, Big Lots increased sales by more than 4% each year. Since then, the retailer hasn't topped 1% growth in any year, capped by 0.5% top-line growth in 2017.
And while profits have improved greatly in the last three years, EPS growth is expected to slow in 2018 and 2019.
Then there's the matter of the current retail climate. Big-box stores are going the way of the dodo thanks to Amazon, Inc. (NASDAQ: AMZN ), eBay Inc (NASDAQ: EBAY ) and other online retailers. Even Walmart Inc (NYSE: WMT ) and Target Corporation (NYSE: TGT ) have experienced sharp sales declines.
And though deep-discounters are surviving better than department stores and other mid-priced retailers, Big Lots has been losing ground to companies such as Five Below Inc (NASDAQ: FIVE ), Dollar Tree, Inc. (NASDAQ: DLTR ), both of which are achieving much higher sales growth.
On top of all that, BIG stock is coming off a pretty substantial rally, jumping 33% from September to late January. Friday's selloff was a return to the mean, as BIG is now trading just below where it was in September.
Short-Term Value, Long-Term Churn
The value isn't a problem, which is why bargain hunters are sure to pounce on the stock's big down move. With a price-to-earnings ratio of 12, it's much cheaper than FIVE (P/E of 44) or DLTR (22).
The difference is those stocks are up 76% and 22%, respectively, in the past year (though DLTR just took a huge dive), while BIG stock is actually down 6.5%. In fact, BIG trades slightly lower than it did on this date three years ago, thanks to Friday's fall.
As a sector, old-fashioned brick-and-mortar retail stocks have struggled of late, so this isn't just a problem with Big Lots stock. But some deep-discount retailers, including Burlington Stores Inc (NYSE: BURL ), which is up 36% in the last year, have bucked the trend by cutting costs and catering to a niche consumer base.
While Big Lots has managed to grow profits and keep its head above water from a sales standpoint, its performance has lagged behind those other three companies, and BIG stock has become overlooked.
If you're looking for a quick profit in a potential rebound stock over the next few weeks, BIG is probably a good bet after its post-earnings drop. Long term, however, there's not a lot to be encouraged about. Chances are that Big Lots stock will continue to churn for another three years.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
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