It was only a month ago I summed up Big Lots Inc (NYSE:BIG) FQ2 earnings report. The report was fantastic by all metrics, there was really nothing wrong to be found within it, and yet shares entered a deep sell-off that shaved more than 25% off of the stock price. My take then was that Big Lots was a deep-value for dividend-growth investors and today that stance has paid off. The company just raised its guidance confirming that trends within the consumer are still strong and Big Lots is well-positioned to take advantage of them.
Big Lots Raises Guidance
Big Lots raised guidance and not by a little. Management is now expecting comps to run in the mid-teens with EPS in the range of $0.50 to $0.70 versus the consensus of $0.21. The company issued a favorable outlook with the last report so the margin of difference is no small matter. Business is strong, much stronger than management thought, and it appears to be accelerating. Looking at this from the bigger picture, Big Lots posted a loss in the comparable quarter last year. This is a sign that Operation North Star is working. Another aspect that makes this guidance so good is that it includes buyback activity. Sure, buyback activity is artificially boosting EPS but so what. The company is buying back shares. That means capital is good, cash flow is good, earnings are good and the outlook for business is good. That’s good.
Big Lots Is A Deep Value
Big Lots is trading at only 7X its earnings and offering a deep value. The broader market is still trading about 21X its forward earnings while most of the comparable stocks within the retail group are trading at least that high. The lowest valued comparable stocks are BJ’s Wholesale Club (NYSE:BJ) and Dollar Tree (NASDAQ:DLTR) trading at 15X and 17X earnings. The highest valued are Walmart (NYSE:WMT) and Costco (NASDAQ:COST) at 25X and 36X. I’m not saying Big Lots is going to trade with the same value as Costco but it is definitely worth a BJ’s or a Dollar Tree any way you slice it. The bottom line here is that Big Lots is a turn-around story accelerated by the pandemic and supported by consumer trends. It is trading at a too-low a valuation and is set up for a substantial multiple-expansion.
Big Lots Pays A Nice Dividend
Big Lots is not ranked as a dividend-grower because there have been no distribution increases for the last couple of years. That aside, the company has been paying a dividend since 2014 and increased the yield four times with no reductions. The payout ratio is super low at 17% which leaves more than ample room for future increases. The balance sheet is a fortress and well-capitalized, free cash flow is high and unhindered, so with earnings on the rise, there is no reason not to think another increase is at least possible. The yield is near 2.5% which by itself is nice, better than average for sure, but add in the outlook for increases and it looks even better.
A Reversal, Fueled By Results and Short-Covering
One of the reasons Big Lots entered into correction after 2Q earnings is short selling. The short interest on the stock was running near 20% a quarter ago and that hasn’t changed, not until today I think. The Q3 update has share prices up more than 6.5% and confirming a double-bottom reversal I have seen building in other stocks in recent days.
Today’s move has the price above the short-term moving average and showing bullish crossovers in both indicators so I am confident it will continue higher. In the immediate near-term there may be a small pullback, possibly to the $48/$49 levels, so investors should be ready with some cash if it does. Until then, it’s time to start nibbling on this stock, it’s going to hit new all-time highs in the next few quarters.
Big Lots Stock Chart