Big Lots, Inc. (BIG) recently posted lower-than-expected third-quarter 2010 results. The quarterly earnings of 23 cents a share missed the Zacks Consensus Estimate by a penny, and dropped 14.8% from 27 cents earned in the prior-year quarter.

Consequently, management lowered its projections, thereby sending the stock down 5.1% or $1.59 cents to $29.50 in pre-market trading.

The Zacks Consensus Estimate tumbled by 3 cents prior to the earnings announcement with 12 out of 13 analysts covering the stock lowering their estimates in the last 30 days.

Management hinted that increase in expenditure related to the opening of new stores, refreshing of existing stores and preparation for the holiday season more than offset the low-single digit growth in the top-line, which led to the decline in the bottom-line.  

Big Lots operates as a broad line closeout retailer in the United States. The company offers food, health, beauty, plastic, paper, chemical, and pet products as well as home decorative products, besides other product lines.

Behind the Headline

The company's closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at very low prices. Total revenue for the quarter rose 2% to $1,055.8 million from the prior-year quarter but fell short of the Zacks Consensus Revenue Estimate of $1,071 million.

Comparable-store sales rose marginally by 0.7% as against the growth of 2% to 4% forecasted by management. The company hinted that sales remain robust for the first half of the quarter but it started experiencing volatility in sales trends in late September, which continued through October. This is the second consecutive quarter in which the company has missed its own projection.

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.

The operator of 1,389 stores, Big Lots, said that operating profit for the quarter plunged 22.3% to $26.9 million, whereas operating margin shriveled 80 basis points to 2.5%. Management expects fiscal 2010 operating margin in the range of 7.1% to 7.3%.

Other Financial Details

Big Lots is actively managing its capital, and expects to generate cash flow of approximately $200 million during fiscal 2010.

Big Lots is returning much of its free cash to shareholders via share repurchases. After authorizing a share repurchase of $150 million in December 2009, Big Lots in March 2010 authorized an additional $250 million, bringing the currently available total to $400 million. The company had already utilized its $150 million authorization, which lowered the number of outstanding shares by 3.6 million.

During the quarter under review, Big Lots repurchased 3.5 million shares at a price of $31.15 each, aggregating $108 million, resulting in total number of shares bought back to 6 million shares at a price of $32.16 each. The company still has $58 million at its disposal under its $400 million March 2010 share buyback program.

The Columbus, Ohio based company, Big Lots, ended the quarter with cash and cash equivalents of $50.8 million and shareholders' equity of $829.9 million. The company at the end of the quarter had $129 million of borrowings under its credit facility.

Truncated Outlook

Management now expects fourth-quarter 2010 earnings between $1.36 and $1.42 per share, reflecting total sales growth of 4% to 6% and comparable-store sales in the range of flat to up 2%. Earlier, the company had forecasted fourth-quarter earnings between $1.41 and $1.45 per share.

For fiscal 2010, Big Lots forecasted earnings in the range of $2.75 to $2.81 per share, down from its previous guidance range of $2.82 to $2.90, reflecting a 16% to 19% growth over $2.37 earned in fiscal 2009.

The current Zacks Consensus Estimate for the fourth quarter is $1.37, down 7 cents, and for fiscal 2010 the Estimate is $2.77, down 10 cents in the last 30 days, with 12 analysts lowering their estimates.

Currently, we have an Underperform rating on the stock. Moreover, Big Lots, which competes with Target Corporation (TGT), holds a Zacks #5 Rank, translating into a short-term ‘Strong Sell' rating, correlating with our long-term recommendation.