Deutsche Bank Previews Big Lots Q1: Questions 'The BIG Short Thesis'

May 22, 2015

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In a report published Friday, Deutsche Bank analyst Paul Trussell previewed Big Lots, Inc. (NYSE: BIG)’s first quarter and offered mitigated factors to current concerns.

Big Lots is scheduled to report its first quarter results on May 29 before market open. The Wall Street consensus estimate is calling for an earnings per share of $1.75 on revenue of $1.590 billion.

Will Comps Slow?

According to Trussell, the top concern heading in to the quarter is a deceleration of same-store sales as Big Lots faces a tougher compare, could see softness in furniture while the company struggles to gain traction in consumables.

Trussell noted his mitigating factors include cooler benefits to continue through fiscal 2016, furniture financing should gain momentum due to discretionary spending power and operational training/support, new merchants have lifted quality, marketing shift has been “dramatic,” and the ‘editing’ drag is over.

Trussell is projecting fiscal 2015 same-store sales of 2.1 percent with upside potential.

Is Gross Processing Margin Mounting?

Investors are also worried that Big Lot’s gross processing margin (GPM) could be pressured as consumables penetration (especially frozen) increases. With over 1,200 stores now with coolers, the mix could shift unfavorably.

Trussell argued that this concern may be legitimate, the company still ended fiscal 2014 120 basis points below its prior GPM peak and will continue to see significant tailwinds from lapping heavy markdowns/editing, improving shrink and regular rate sell-through, and low freight and fuel prices.

Trussell is modeling a 29 basis point increase in GPM in fiscal 2015 followed by a 27 basis point gain in fiscal 2016, reaching 40.0 percent.

Could SG&A Deleverage?

Finally, investors are concerned that higher insurance and depreciation costs, pressure across retail to boost wages and a higher than expected cost associated with the company’s online rollout could pressure SG&A.

Trussell counted that Big Lots’ store payroll, occupancy and advertising are all growing at a lower rate versus sales and the company could benefit from closing underperforming doors. In addition, the company only needs to achieve flattish comps to leverage SG&A.

Analyst Rating And Price Target

Shares remain Buy rated with an unchanged $54 price target.