Why Is Big Lots (BIG) Down 42.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Big Lots (NYSE:BIG). Shares have lost about 42.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Big Lots due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Big Lots’ Q4 Earnings Miss, Coronavirus-Hit View

Big Lots, Inc. reported fourth-quarter fiscal 2019 results, wherein both earnings and revenues missed the consensus mark after beating the same in the trailing three quarters. The company also cautioned about the impact of coronavirus outbreak on its first-quarter fiscal 2020 performance. Supply chain disturbance owing to the outbreak and slow start to the first quarter remain major concerns. The company’s first-quarter fiscal 2020 will also be impacted by upfront investments and growth efforts, which will primarily benefit the company in the second quarter and beyond.

Q4 in Details

The company reported adjusted earnings of $2.39 a share, missing the Zacks Consensus Estimate of $2.53. The bottom line came below management’s guidance of $2.40 to $2.55. Moreover, the company’s adjusted earnings declined 10.8% year over year.

Net sales inched up 0.5% to $1,607 million but lagged the Zacks Consensus Estimate of $1,626 million. The upside can be attributed to sales growth in high volume new stores and relocated non-comp stores, and increased store count. The gain was marginally offset by comparable sales decline. Notably, furniture was the top performing category that registered a low-double digits comps growth in the quarter with notable strength in mattresses, upholstery and case goods. Hard home, electronics toys and accessories were down, reflecting the strategic decision to move space to other categories.

Comps declined 0.9% against the company’s expectations of marginally positive comps. While sales were above the company’s expectation in November, it declined significantly in December. In January, sales were in line with expectations.

Gross profit decreased 3.8% year over year to $634 million, while gross margin contracted 170 basis points (bps) to 39.5%. The downside can be attributed to higher markdown from promotional selling and rise in shrink expense.

The company expects gross margin for the fiscal first quarter to be under pressure due to higher promotion expenses and adverse impact of tariffs. For fiscal 2020, the company expects gross margin to be flattish. It expects Fund the Journey savings and favorable mix to be offset by higher promotion expenses and adverse impact of tariffs on the margin.

In the reported quarter, S&A expenses came in at $471.1 million, down 1.2% year over year. Moreover, the metric (as a percentage of net sales) declined 50 bps from the prior-year quarter to 29.3%. Big Lots expects deleverage in S&A expenses in the first quarter and fiscal 2020 on account of upfront expenses and additional marketing support, as well as higher depreciation and occupancy expense and the impact of wage pressures in fiscal 2020. Operating profit came in at $125.5 million, down 15.4% year over year.

Other Details

The company ended the quarter with cash and cash equivalents of $52.7 million. Inventories decreased 5% to $921.3 million. Management stated that inventory levels were up at the end of fiscal 2018 due to tariff mitigation activities. Long-term debt totaled $279.5 million, down from $374.1 million in the prior-year quarter. Total shareholders’ equity was $845.5 million.

Big Lots incurred capital expenditures of approximately $265 million and generated free cash flow of roughly $74 million in fiscal 2019.

Management envisions capital expenditures between $160 million and $270 million in fiscal 2020, lower than what the company had earlier projected. This is due to lower number of store conversions from 205 remodels in fiscal 2019 to 80 in fiscal 2020.

In fiscal 2019, the company has returned about $98 million to its shareholders in the form of share repurchases and dividends. During the quarter, the company opened four stores and closed 18.

Guidance

Big Lots’ projects comps to decline in the range of low to mid-single digit range in first-quarter fiscal 2020, which comprises of effect of supply chain disruption on account of the coronavirus outbreak. Based on comps expectations, the company envisions first-quarter earnings per share in the range of 30-45 cents, which suggests a decline from 92 cents reported in the year-ago quarter.

For fiscal 2020, the company expects adjusted earnings in the range of $3.20-$3.40 per share. However, the guidance indicates a decline from the prior-year reported figure of $3.67. Management expects comparable sales to be flat to up low single digit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -61.11% due to these changes.

VGM Scores

At this time, Big Lots has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Big Lots has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.