Big Lots Follows North Star To Profits, You Should Too
It’s A New Day For Big Lots
Big Lots (NYSE:BIG) continues to impress us with its resilience in the face of the pandemic. The resilience can be fully attributed to Operation North Star, a nationwide rationalization of business that set it up nicely for the pandemic. Not only were the stores in better condition to receive, retain, and convert traffic but eCommerce channels were open as well. In the wake of the crisis, the company’s revenue growth accelerated from spotty low-single-digit YOY improvements to a sustained acceleration that is expected to continue in 2021. In our view, Big Lots’ growth story is only compounded by its value and dividend which are helping to drive share prices higher.
Big Lots Exceeds Guidance, Guides Higher
Big Lots had a great quarter indeed with 8.1% YOY growth in revenue. The figure exceeds the company’s own guidance but, unfortunately, did not exceed the analyst’s estimates. The analysts were actually expecting comps to come in a little higher than the 7.9% reported, luckily for Big Lots new and non-comp stores were able to make up the difference. Notably, eCommerce and omnichannel sales grew 130% over last year and are sustaining the robust growth seen earlier in the year.
Moving down to the bottom line, the company was able to leverage the revenue strength to great success. The company’s margins widened a little bit more than expected resulting in GAAP and adjusted EPS that was above the consensus targets. At the GAAP level, EPS of $2.59 beat by a dime while the adjusted $2.59 beat by $0.09.
The guidance is perhaps the best part of the report. Although the company refrained from giving a full-year outlook it is expecting adjusted EPS in the range of $1.30 to $1.45. This is above the consensus $1.33 and based on an expectation for low-single-digit revenue growth. That is important to note because this is the first quarter of comps against COVID-conditions and growth is expected. With another round of stimulus on the way, it is not out of line to think revenue and EPS will exceed the company’s guidance once again.
Big Lots Is A Deep-Value And Reliable Dividend Payer
Big Lots is a deep value relative to nearly every other consumer staple/stay-at-home pandemic winner. The stock is still only trading at 11X its earnings compared to a range of 20X to 32X earnings for Target, Walmart, and Costco, 24X earrings for Ollie’s Bargain Warehouse, and 15X for BJ’s Wholesale Club. In terms of the dividend, the company’s 1.95% yield is backed up by a low 22% payout ratio and a balance sheet that is taking on fortress-like qualities.
At face value, the company’s debt is very low but that is not the full story. Cash flow from operations is so good that over the past year the balance sheet has been turned on its head and in a good way. At the end of the 4th quarter, Big Lots was sitting on $36 million in debt and $560 million in cash where last year it had only $53 million in cash and $279 million in debt. The takeaway is that while Big Lots has not made a distribution increase in several years it is more than capable of doing so, the dividend is very safe, and when the next increase comes it could be very large.
The Technical Outlook: Big Lots Confirms Support
Shares of Big Lots have been moving sideways since breaking out of the previous range earlier this year. The Q4 report did not alter that but it did spark a move to retest support and it was confirmed. With price action now poised to move higher, we expect to see this stock retest the top of the range very soon. There may be some resistance in the range of $66 to $67 that could hold prices from moving higher but we don’t think it will last for long. A move above $66/$67 would be very bullish and could take this stock up to trade at a more-respectable multiple, one worthy of its growth, dividend, and cash-generating power.