We recently downgraded our recommendation on Big Lots Inc. (BIG), a broad-line closeout retailer in the United States, to Underperform with a price target of $28.00. Earlier, we had a Neutral recommendation on the stock.

Big Lots delivered disappointing preliminary third-quarter 2010 comparable-store sales results, rising marginally by 0.7% as against the growth of 2% to 4% forecasted by management. This is the second consecutive quarter in which the company has missed its own projection. The company stated that sales remained robust for the first half of the quarter but started faltering in late September and continued through October.

Surprisingly, Big Lots saw a high demand for discretionary products, such as such as furniture, home furnishings, seasonal and toys, which were offset by sluggish demand for consumables merchandise, the category in which the company has no competitive edge.

The company did not even have much time to adjust its expenses to counter the volatility in sales, which occurred late in the quarter. Consequently, the soft sales might have adversely affected the bottom-line.

Big Lots' operating performance directly correlates with the health of the state's economy where it operates. The economies of four states -- Ohio, Texas, California and Florida -- remain significant as the company has approximately 36% of its stores base located in these states, which together contribute a major portion of the revenue.

Consequently, we have an Underperform rating on Big Lots. The Zacks #5 Rank, which translates into a short-term Strong Sell recommendation, also correlates with our long-term view.