Big Lots, Inc. (NYSE: BIG) is one of the best discount retailers out there. The company offers products under various merchandising categories, such as food category that includes beverage and grocery, candy and snacks, and specialty foods departments; consumables category, which comprises health and beauty, plastics, paper, chemical, and pet departments. It also offers a soft home category that consists of fashion bedding, utility bedding, bath, window, decorative textile, and flooring departments. The company sells small appliances, table tops, food preparation, stationery, greeting cards, tools, paint, and home maintenance departments as well as furniture and home décor.
Sales are strong under the seasonal category that includes lawn and garden, summer, Christmas, toys, books, sporting goods, and other holiday departments; and electronics and accessories category that includes electronics, jewelry, apparel, hosiery, and infant accessories departments. The stock has been range bound in the last two years, oscillating between $30 and $40 per share. However, the stock is now setting up to break out thanks to a strong quarter and solid guidance.
The company recently reported income from continuing operations of $28.6 million, or $0.50 per diluted share, for the first-quarter of fiscal 2014 ended May 3, 2014. This result exceeded its guidance of $0.40 to $0.45 per diluted share issued on March 7, 2014 and compares to adjusted income from continuing United States operations of $40.3 million, or $0.70 per diluted share (non-GAAP), for the first-quarter of fiscal 2013. Net sales for continuing operations for the first-quarter of fiscal 2014 increased 1.1 percent to $1.28 billion, compared to net sales from continuing U.S. operations of $1,26 billion for the same period of fiscal 2013. Comparable store sales for stores open at least fifteen months increased 0.9 percent for the quarter, compared to its guidance of slightly negative to slightly positive
Net loss from its discontinued Canadian operations for the first-quarter was less-than-expected. Losses totaled $25.2 million, or $0.44 per diluted share, compared to its guidance of a net loss of $37 to $41 million, or $0.64 to $0.71 per diluted share. The lower-than-expected loss resulted from incremental deferred tax benefits and favorable settlements on lease terminations associated with store and distribution center operating leases.
Inventory ended the first-quarter of fiscal 2014 at $835 million, compared to $885 million for the first-quarter of fiscal 2013. The reduction in inventory was driven by the closure of the Canadian operations and wholesale operations, and a lower United States store count. Inventory per store increased slightly compared to last year.
The company has a strong balance sheet. Big Lots ended the first-quarter of fiscal 2014 with $67 million of cash and cash equivalents and $54 million of borrowings under its credit facility compared to $72 million of cash and cash equivalents and $137 million of borrowings under its credit facility as of the end of the first-quarter of fiscal 2013. Big Lots use of cash generated by the company’s United States operations was focused on repaying debt, funding the closure of its Canadian operations, and investing in share repurchase activity.
In March 2014, the Board of Directors authorized a share repurchase providing for the repurchase of up to $125 million of Big Lots common shares. Through the first-quarter of fiscal 2014, the company invested $82.5 million to purchase 2.2 million shares, or approximately 3.8 percent of its outstanding shares, at an average price of $37.99 leaving $42.5 million of authorization remaining at the end of the first-quarter. Subsequent to the end of its first-quarter of fiscal 2014, the company completed its March 2014 share repurchase program during May 2014. In total, Big Lots invested $125 million to repurchase 3.3 million shares at an average price of $38.12. Common shares acquired through the program will be available to meet obligations under equity compensation plans and for general corporate purposes.
All in all, it was a fantastic quarter. Looking ahead to the second-quarter of fiscal 2014, income from continuing operations will be in the range of $0.24 to $0.30 per diluted share, compared to adjusted income from continuing U.S. operations of $0.37 per diluted share (non-GAAP) for the second quarter of fiscal 2013. This guidance is based on estimated comparable store sales in the range of +1 percent to +3 percent. The company stated:
Based on the actual results for the first-quarter, the guidance provided above for the second-quarter, and the completion of our March 2014 Share Repurchase Program, we are updating our guidance for the full year of fiscal 2014. We estimate fiscal 2014 income from continuing operations will be in the range of $2.35 to $2.50 per diluted share compared to adjusted income from continuing U.S. operations of $2.45 per diluted share for fiscal 2013 (non-GAAP.) This outlook is based on estimated net sales in the range of flat to slightly up and comparable store sales in the range of +1 percent to +2 percent. We estimate this financial performance will result in cash-flow (defined as cash provided by operating activities less cash used in investing activities) of approximately $170 million from continuing U.S. operations and consolidated cash-flow of approximately $145 million after the impact of the wind down of our discontinued Canadian operations.
Given the solid quarter, the updated guidance, growing same-store sales, and the dissolution of the failing Canadian operations, Big Lots is in a strong position. The stock should break out if its range bound trading given these results. As such, I rate the stock as a buy with a $49 price target.
Disclosure: Christopher F. Davis hold no position in Big Lots and has no plans to initiate a position in the next 72 hours.