Big Lots (BIG 30.98, -9.32, -23.13%) is selling off aggressively today, reaching
multi-year lows, after the company reported Q3 (Oct) earnings this morning.
Since hitting all-time highs above $64 in late January of this year, the retailer’s shares have shed significant territory. In August 2018, the company hired a new CEO in an effort to turn things around: Bruce Thorn. Mr. Thorn was most recently COO of Tailored Brands (TLRD), a retailer of men's tailored clothing and men's formalwear. Prior to joining Tailored Brands, Mr. Thorn had held various enterprise level roles with PetSmart since 2007. BIG’s previous CEO, David Campisi, had retired in April following a medical leave of absence.
Turning to the OctQ results, BIG reported a loss of ($0.16) per share, well below prior guidance of ($0.06)-0.04. Revenue rose 3.6% year/year to $1.15 bln, which was roughly in-line with market expectations. The guidance for Q4 (Jan) was perhaps even more disappointing than the OctQ results; BIG expects JanQ adjusted EPS of $2.20-2.40, which is a good bit below market expectations.
Same store sales are always critical for retailers, as this metric filters out any impact of newly added stores and is thus a better indicator than total sales of the underlying health of a business. BIG posted OctQ comps of +3.4%, which were up from JulQ comps of +1.6% and at the higher end of prior guidance for +2-4%. Guidance for Q4 (Jan) comps was lowered slightly to flat to +2% vs prior guidance of up "low single digits."
As you can see by the revenue results and comp data, the top line was not the problem this quarter. In fact, this was BIG's best quarterly comp in nearly seven years. However, the bottom line EPS result fell well short of expectations, and it does not look like the JanQ will be much more promising. BIG says that it expects "near-term results to be challenging this holiday season."
On the call, management said that Furniture was its best-performing category, comping up in the low-teens. All four Furniture departments (upholstery, mattresses, case goods, and ready-to-assemble) were strong in Q3. Equally impressive, said the company, was Seasonal, which achieved results up high-single digits on top of the +9.6% increase last year. Soft Home was also up high-single digits again this quarter on top of a +5% increase last year, with strength noted in home, decor, decorative textile, flooring, and bath products.
On the cost side, Q3 is very much a transition quarter for BIG and its most challenged from a P&L perspective. During this quarter, the company prepares for the peak selling period of the holidays and incurs higher levels of cost at its distribution centers and stores ahead of a significant ramp in sales in Q4 for November and December. BIG was hurt by the beginnings of higher tariff-related costs in peak season surcharges. BIG also made investments in its Store of the Future concept (renovations).
While not happy with the quarter's mixed results, the company’s new CEO nevertheless identifies several key opportunities. For example, he acknowledges that BIG needs to continue to grow its Furniture, Seasonal, and Soft Home categories. Multiple years of sales growth in these categories, alongside customer insights, suggest continued upside opportunities. BIG has gained market share, and recent store closures for its competitors’ suggest that BIG still has room to grow. BIG concedes that it has work to do in other categories of the store, mainly Food and Consumables. These categories have been hurt by competitive pressures.
In terms of store renovations, BIG intends to move swiftly here, accelerating the number of remodels in 2019 with the goal of getting through the majority of the fleet in the in next three years. This timeline is quicker than that originally planned. The new store formats better position BIG for merchandise resets or category shifts going forward. BIG also expects to open new locations as dislocation in the real estate market influenced by competitor closings has presented excellent opportunities for Big Lots, enabling it to enter some new markets and relocate dozens of locations. BIG also says that it must do a better job improving brand awareness and equity. Furthermore, it wants to boost its omnichannel capabilities in order to better compete with online rivals. “Buy Online, Pick up In the Store” is a key growth opportunity.
In sum, this was a rough quarter for Big Lots. Fortunately, top line sales and comps were quite good. However, EPS really took a hit from those higher costs. The large EPS miss really surprised and disappointed investors. From a broader perspective, BIG is in turnaround mode. The new CEO is making a number of changes, and they sound like the right steps, but it will take some time, and an accelerated renovation plan is likely to keep pressuring the EPS line in the coming quarters. So do not expect immediate results. However, there is potential here down the road.
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