Headwinds Cut Into Big Lots Outlook
Shares of Big Lots (NYSE: BIG) are down nearly 40% from their post-COVID highs and might be heading lower. The reason is not because of insider selling but, more to the point, mounting headwinds that threaten to curb growth, among other things. As far as the insiders go, Insidertrades.com shows there has been some selling over the past few quarters but nothing to worry about. The bulk of the selling coincided with the peak in share prices set earlier this year and has since slacked off. In terms of market cap and shares outstanding, the selling is worth less than 1.3% of the company’s value and 0.85% of the shares.
No, it is more likely that institutional selling is why shares of Big Lots is down as much as it is,. While institutions have been rotating into and out of the stock for the last 6 quarters or so the balance of activity has been bearish. Once again, however, the selling is in tandem with share price peaks and there is something else to consider. The institutions and big shareholders control nearly 100% of the stock for the simple fact it is a deep-value/high-yield combination that comes with a healthy outlook for payment reliability and even a chance for distribution increases.
Big Lots Outlook Disappoints, Upside Risk Is Present
Big Lots had a good quarter with only one thing to mar the results and that is rising freight costs. The company reported $1.33 billion in net revenue which is down -3.6% from last year but beat the consensus by 75 basis points. While we would like to see YOY growth the decline is against a very solid comp and the two-year stack of +12.3% is favorable. The company reports strength in all categories except food which is the only to post a decline.
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Moving down, the margins were also favorable despite gross margin falling on a YOY and 2-year basis. The company’s gross margin fell 90 basis points versus 2019 while the operating margin improved by a tenth and this is noteworthy because inventory is up substantially as well. On the bottom line, the company reported a loss of $0.14 that beat the consensus by $0.02. The loss was expected due to seasonal inventory building. Inventory is up 17% on a YOY basis and has the company set up for a strong holiday season.
Looking forward is where things get a little sticky. The company is forecasting Q4 and FY results below the previous forecast and the consensus estimates due to freight challenges. The $5.75 to $5.85 in FY EPS is shy of the $6.00 analysts consensus but we see upside risk in the figures. Not only do we see a strong holiday season unfolding but the company says comps were up 10% in November. Assuming this trend continues, the company will easily outpace the guidance for high-single-digit comps this quarter.
The Technical Outlook: Big Lots Sits On Major Support Line
Shares of Big Lots are sitting on a major support line that, if broken, would confirm a Head & Shoulders reversal pattern that has formed on the chart. The caveat is that a confirmation of the pattern may not result in a deep decline in share prices for two reasons. The first is the yield/value combination. At only 7.5X earnings and yielding 2.75% the stock is very attractive for income investors. And it’s a safe payout at only 20% of earnings with a fortress balance sheet to back it up.
In our view, Big Lots is a very buyable stock at these levels and would become even more attractive at lower prices. The outlook for next year is an expectation for record results and widening margins, that is no recipe for a stock implosion. At worst, we expect to see the reversal results in a change from up to sideways and for price action to begin retracing back to the highs set earlier this year. Final thought, the short interest in Big Lots is phenomenally high at 20%. That’s a lot of fuel to help drive share prices higher once they do bottom.
Companies in This Article:
| Company | Current Price | Price Change | Dividend Yield | P/E Ratio | Consensus Rating | Consensus Price Target |
|---|
| Big Lots (BIG) | $3.58 | -0.3% | N/A | -0.22 | Strong Sell | $5.25 |
Experience
Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.
Areas of Expertise
Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies
Education
Associate of Arts in Culinary Technology
Past Experience
Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights.
