Big Lots’ (BIG) Q2 Earnings Miss, Comparable Sales Decline Y/Y


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This story originally appeared on Zacks

Shares of Big Lots, Inc. BIG dropped nearly 5% in the trading hours on Aug 27 following the company’s dismal second-quarter fiscal 2021 results, and a weak outlook for the third quarter and the full fiscal. Both the top and the bottom line lagged the Zacks Consensus Estimate and fell year over year. Comparable sales declined 13.2% year over year and mainly hurt the top line.

This Columbus, OH-based company reported earnings of $1.09 per share, missing the Zacks Consensus Estimate of $1.13. Moreover, the bottom line decreased significantly from $2.75 earned in the prior-year quarter. Management had guided earnings per share of $1.00-$1.15 for the fiscal second quarter.

Net sales dropped 11.4% to $1,457.4 million and lagged the Zacks Consensus Estimate of $1,472 million on soft comparable sales. Nonetheless, net new stores and relocations contributed roughly 180 basis points to sales growth. The metric grew 16.4% from second-quarter fiscal 2019 level.

We note that shares of this currently Zacks Rank #4 (Sell) company have decreased 15.3% over the past three months against the industry’s 10% growth.

More Q2 Facts

On a two-year basis, comparable sales rose 14%. The company witnessed two-year comp sales growth at all its merchandise categories except Food with a robust double digit two-year increase in Furniture, Soft Home, Hard Home, and Apparel, Electronics & Other. In fact, furniture sales were impressive and surged more than 30% from the fiscal 2019 reading owing to continued acceleration in Broyhill.

Big Lots continues to experience strength in the Operation North Star strategy and is focused on its key drivers including customer growth, merchandise productivity, ecommerce and store count. We note that the company added 1.7 million new Rewards customers in the quarter. Also, The LOT! and Queue Line strategies are now being rolled out to 1,225 stores, and are contributing to its sales.

Speaking of e-commerce, demand grew 10% year over year and soared more than 400% to second-quarter fiscal 2019. Demand for seasonal lawn and garden assortment, and furniture was strong.

E-commerce growth is driven by efforts to improve search, purchase and fulfillment capabilities coupled with buy online pickup in store, curbside pickup, ship from store and same-day delivery with Instacart and Pickup. All these proved to be successful and met nearly 60% of the company’s demand fulfillment.

Gross profit tumbled 15.5% year over year to $577.8 million with gross margin contracting 200 bps to 39.6%. Gross margin was driven by significant freight headwinds.

In the reported quarter, selling and administrative expenses came in at $488.7 million, down 3% year over year. However, the metric (as a percentage of net sales) expanded 280 bps from the prior-year quarter’s tally of 33.5%. It recorded an operating profit of $53.9 million, down from $608.6 million recorded in the prior-year quarter. Moreover, the operating margin came in at 3.7%, sharply plunging from 37% seen in the year-ago quarter.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $293.3 million with no long-term debt. Total shareholders’ equity was $1,153.4 million. Inventories increased 32% to $943.8 million in the fiscal second quarter.

In the first six months of fiscal 2021, the company generated net cash worth $142.2 million from operating activities. Capital expenditures totaled $45 million in the reported quarter. For fiscal 2021, capital expenditures are anticipated between $200 million and $210 million.

Management bought back 2.4 million shares worth $153 million in the quarter under its earlier-announced $500-million share repurchase program. Through the end of the reported quarter, the company utilized $403 million to buy back 7.3 million shares. Its board announced a quarterly cash dividend of 30 cents a share, payable Sep 24, 2021 to its shareholders of record as of Sep 10.

In the reported quarter, Big Lots opened 12 outlets and shuttered seven, increasing the total store count to 1,418. For fiscal 2021, management projects opening about 55 stores, of which 20 will be relocations.

Outlook

The company is persistently facing significant sales and margin challenges due to the Asian manufacturing and supply-chain disruption in relation to the pandemic. For the third quarter of fiscal 2021, management expects a mid-single digit comparable sales decline, offset by a sales gain of about 150 bps from net new and remodeled stores. It estimates the gross margin to decline nearly 175 bps year over year due to freight headwinds. These headwinds will also affect the fiscal fourth quarter inducing a full-year gross margin decrease of roughly 100 bps year over year. Management envisions a loss per share of 10-20 cents. The year-earlier quarter witnessed earnings of 76 cents per share .

Overall, management expects the fiscal third quarter to be fraught with challenges due to supply-chain headwinds stemming from sales impacts and higher costs.

For fiscal 2021, Big Lots forecasts a low single-digit comp decline, reflecting an unfavorable sales impact from supply-chain disruption. Gross margin is likely to fall 100 bps year over year due to a 150-bps adverse impact of freight. Consequently, the company envisions fiscal 2021 earnings in the bracket of $5.90-$6.05 a share, indicating a decrease from the adjusted earnings of $7.35 reported last fiscal.

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