Another Big Opportunity In Deep-Value Big Lots (NYSE:BIG)

Big Lots Is Still One Of My Favorite Stocks

Big Lots (NYSE:BIG) has been one of my favorites stocks for the last 18 months to two years. The company began a system-wide change in the year before the pandemic struck that set it up nicely for the post-pandemic consumer world. My take on the company is that it’s a deep-value dividend-growth stock in a strong rebound with a positive outlook.

Before I move on to the results let me blow you away with the value. This stock is trading at only 6X this year’s earnings and 5X next year’s and continually outperforming the consensus targets. The next cheapest comparable retailer is BJ’s Wholesale Club (NYSE:BJ) and it trades at 13X earnings. Moving on to the big boys, Target (NYSE:TGT), Walmart (NYSE:WMT) and Costco (NASDAQ:COST) are trading at 20X, 27X, and 40X their earnings.

There is nothing not to like in this investment which is why I find it hard to believe it’s still trading at such a low multiple and now, following a stunning report, down 7.0% in premarket trading. For some reason, the shorts have it out for this company but that’s good news to me. They’re opening another opportunity for longer-term minded investors to buy more shares.

Big Lots Beats The Consensus, Shares Fall

Big Lots beat the consensus and that is saying something because the consensus more than doubled over the past 6 months. That said, the beat is only worth 2.2% and not altogether exciting when others like Zumiez beat by double-digits. Regardless, the revenue is worth an 18% improvement over last year and strength carried through all the way to the bottom line. On a comp basis, sales rose 17.8% versus the 15.4% expected by the analyst and was boosted by new and non-comp stores.

Moving down the report, the company’s gross margins increased by 80 bps while SG&A expenses shrank 240. This helped drive operating margins of 3.1% or 40 bps better than expected. A reduction in inventory also aided earnings but the -2.5% reported is less than what I would have expected. On the bottom line, GAAP and adjusted EPS both came in at $0.76 to beat the consensus by a dime.

The company declined to give guidance for the 4th quarter but said an update would come in January. Based on the Q3 results YOY growth moderated from the fiscal 2nd but is still quite strong. In hindsight, this seems to be a cautious and unassuming move. The company issued guidance for the last quarter and beat it’s own estimates. Regardless, investors should expect comps to run in the high-teens to low-twenty percent range through the holiday quarter driving additional gains in revenue, earnings, and liquidity.

Big Lots Pays A Very Safe Dividend

Big Lots pays a very safe dividend any way you look at it. The $1.20 annual payout is worth about 2.35% in yield backed and in no danger of getting cut. The payout ratio is only 13% of earnings with earnings growth in the cards and the balance sheet is a fortress. A modest amount of debt is countered by an enormous cash position, high coverage, and a ridiculously low 0.05X leverage ratio. This company is not hurting for cash, cash flow, or liquidity, far from it.

The company just issued the latest declaration along with the 3Q earnings report. The payout is in-line with the previous with some expectations for increases. The company has not made a distribution increase for a couple of years but has only ever increased it in the 6 years it’s been paid. With the balance sheet and cash flow the way it is, Big Lots is more than capable of increasing the distribution.

The Technical Outlook: Big Lots Is Back At Support, Buy Buy Buy

Shares of Big Lots opened with a loss of 9.0% to start the day below the $49 support target. Near-term action may carry the stock lower but there is only so far it can go. The $45 level has been strong support since mid-summer and will likely be so again assuming price action fall that far. Longer-term, Big Lots is still stuck in its trading range with really no reason to be moving lower. Looking forward, I expect to see buyers step back in at this level if not before. Regardless, this stock is still a screaming buy at any price in this range.