Discounter Big Lots (click ticker for report: ) issued disappointing fiscal year guidance to go along with its mixed second quarter results Thursday morning. Revenue grew 4.3% year-over-year to $1.2 billion, which was in-line with consensus expectations. Earnings from operations, on the other hand, declined 28% year-over-year to $0.36 per share, worse than consensus expectations. Still, second quarter results were overshadowed by the firm’s revised fiscal year earnings outlook, which was slashed to $2.80 – $2.95 per share from $3.25 – $3.40 per share. That’s also significantly lower than the $3.29 consensus expectation heading into the release.
Same-store sales fell 1.2% during the second quarter in the US, which the company cited was the result of weak discretionary spending. Though the firm intends to introduce new products, namely freezers and cooler space, we think the firm could continue to struggle for the remainder of 2012. We like the company’s initiative to start accepting SNAP benefits (food stamps), but again, we’re not sure if that initiative is a game changer in 2012. The firm worked to bring in a new chief merchandise officer, but, yet again, that’s a wait and see proposition.
Nevertheless, following some meaningful weakness, shares of the discounter trade below our fair value range. Though near-term profitability is clearly going to be weaker than expected, the firm’s balance sheet is in great shape and we are confident it will eventually work out its issues and bring its struggling Canadian business to profitability. It also reduced its share float by 6% during the second quarter. We may become interested in its shares for our Best Ideas Newsletter portfolio, but only if technicals improve.
Competitor Fred’s (click ticker for report: ) reported mixed results earlier this week, too, and its outlook was also less-than-stellar. Revenue grew 4% year-over-year to $471 million, better than consensus expectations. Earnings grew 31% during the second quarter to $0.18 per share, a penny shy of consensus estimates. Most importantly, the firm reduced its full-year earnings guidance to the range of $0.97-$1.04 per share–-it was previously a penny higher.
Still, with the consensus full-year estimate at $1.02 per share, we’re a bit surprised that the market has reacted so harshly. Same-store sales are still expected to increase 2-4% during the back half of the year, and we think management may be underestimating gross margin strength going forward. Big Lots mentioned the need for larger-than-usual discounts, so we suspect its southeastern competitor could follow suit.
Shares of Fred’s trade above our fair value range, so we’re not at all interested in the general store and pharmacy at this time. The stock scores a 1 on our Valuentum Buying Index (our stock-selection methodology), but the shares are relatively illiquid, making fair value convergence less predictable than in the case of larger companies.