Big Lots (BIG) Stock Up 21% In 3 Months, Can It Gain Further?

Shares of Big Lots, Inc. (NYSE:BIG) have surged nearly 22.7% in the past three months, outperforming the industry’s growth of 15.4%. Reasons behind the stock’s bullish run can be attributed to positive earnings surprise streak in the eight consecutive quarters along with strategic endeavors undertaken to combat stiff competition and alleviate margin pressure.

Hidden catalyst

Big Lots’ furniture financing programs has been consistently gaining traction. Furniture, which has been the leading performer in the last few quarters, increased in low-single digits in the third quarter. The company is very optimistic about the performance of furniture in fiscal 2017. Soft home has also been doing well in the past few quarters. In the reported quarter, soft home was up by mid-single digits.

The company delivered adjusted earnings of 6 cents a share that came a penny ahead of the Zacks Consensus Estimate and increased a couple of cents from the year-ago period. Further, earnings surpassed the company’s guided range of 1-5 cents per share.

Following better-than-expected earnings, management raised fiscal 2017 projections. Management now envisions fiscal 2017 adjusted earnings per share in the band of $4.23-$4.28, up from the earlier guidance of $4.15-$4.25. This represents growth of 16-18% from $3.64 per share recorded in fiscal 2016.

The Zacks Consensus Estimate of $4.25 and $4.49 for fiscal 2017 and 2018 has increased by 1 and 2 cents, respectively.

Concerns

During the third quarter, the company not only reported lower-than-expected sales but also trimmed guidance for fiscal 2017. Sales growth for the full year is now predicted to be up approximately 2%, compared with earlier guided range of 2-2.5%. Comps are anticipated to increase by 1%, down from the previous estimate of 1-5%. Moreover, sluggishness in electronics, toys and accessories remains a concern.

Gross margin, a key financial metric determining a company’s basic financial health, has declined in both the third and second quarter of 2017. In the third quarter, gross margin fell 10 basis points (bps) to 39.9% following a slump of 10 bps to 40.3% in the preceding quarter. Further, the company expects gross margin in the fourth quarter decline year over year.

Zacks rank & Stocks to Consider

Big Lots currently carries a Zacks Rank #3 (Hold). Better-ranked stocks which warrant a look in the retail sector includes Burlington Stores, Inc. (NYSE:BURL) , Dollar General Corporation (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores has reported better-than-expected earnings in the trailing four quarters, with an average beat of 15.2%.

Dollar General has an impressive long-term earnings growth rate of 11.3%. It has also surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average earnings beat of 1.8%.

Dollar Tree has delivered earnings beat in the trailing four quarters, with an average of 7.4%.

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