Is Big Lots Really Shifting Gears After Q2? Analyst Weighs In

Telsey Advisory Group analyst Joseph Feldman reiterated a Market Perform rating on Big Lots, Inc. BIG, raising the price target to $8.50 from $6.

The company recently reported second-quarter FY23 sales decline of 15.4% year-on-year to $1.14 billion, beating the consensus of $1.10 billion.

Following Q2 results, the analyst thinks Big Lots is shifting to offense after being on defense for the past several quarters related to the harsh macro environment and inflation—reflected in the guidance for 2H23. 

According to the analyst, Big Lots' Q2 results were slightly better than expected but were weak on an absolute basis. 

The decline to last year was driven by a comparable sales decrease of 14.6%.

The analyst adds that the sluggish comps reflected weakness in seasonal and big-ticket discretionary categories, such as furniture and home.

Feldman notes that the company's performance was hit by a challenging macro environment for its core consumers and the impact of the unexpected closure of United Furniture Industries (~100-bp comp headwind in 2Q23). 

However, the gross margin improved by 41 bps to 33.0%, slightly below the analyst's projection of 33.3%, as lower freight costs were partly offset by higher markdowns to clear slow-moving inventory and seasonal. 

Big Lots sees Q3 comparable sales to be down in the low-teens range, modestly improved relative to the second quarter.

The analyst thinks this change should result in the moderation of comp decreases, normalization of markdowns, margin improvement, and cost savings and productivity initiatives.

For 3Q23, the analyst lowered the EPS estimate to $(4.53) loss from $(2.55) loss vs. FS at $(2.98), reflecting a lower comp of (13.0%) vs. (9.0%) previously.

For FY23, the analyst lowered the EPS estimate to a $(10.63) loss, down from $(9.42) loss previously, vs. FS at $(10.23), based on a lower comp of (12.8%) vs. (11.7%) previously. 

In 2023, Big Lots plans to open 15 new stores and close 50 stores (lease-ending/underperforming), given the challenging macro environment, the analyst notes. 

Price Action: BIG shares are trading lower by 9.3% to $7.22 on the last check Wednesday.