Big Lots, Inc. (BIG): Is This Name a BIG Idea or A Bad One?

The company reported strong Q1 results on May 23 with an expansion of 20 basis points in gross margin, now at 35.20%, an 18% increase to EPS, and the opening of 94 new stores. The company also announced it had repurchased 1.5 million shares. This followed Q4 results of their first $2 billion quarter, one dollar at a time. CEO Bob Sasser announced plans to expand frozen and refrigerated food offerings to 475 more stores and Canadian expansion ambitions from 140 stores currently to a possible 1,000 stores. Look out Canadian Big Lots.

The company is tweaking the dollar per item concept with Deal$ stores which offer items at a discount but at more than a dollar. Sasser said its early days, but Deal$ stores are doing well so far.

Of the dollar stores I would pick Dollar Tree with its better shopping experience for higher income shoppers. Dollar Tree is able to outperform its competitors with cleaner and more strategically sited stores to attract more affluent shoppers.

Only on a pullback idea

Costco is a membership warehouse concept which charges under $100 a year for the chance to take advantage of deals which range from the most mundane, like tissues and milk, to the sublime, authenticated fine art and diamond jewelry. It is the smallest of the big box stores with 622 warehouses worldwide and expanding in Asia-Pacific this year.

Costco is more pricey on valuation at a trailing P/E of 25.53 than both of these but has a 1.10% yield. Costco has hit the median analyst target of $116 and the RW Baird price target of $117 given on May 9 with an Outperform citing domestic growth, stronger membership numbers, and increasing traffic. It was just initiated on July 24 by Williams Capital Group at a Buy.

As much as I admire the company, valuation is stretched with a price/book at 4.86 and a PEG at 1.90. This would be a buy on a serious pullback, however.

Turnaround takeaway

Big Lots CEO has only been around for two months and the Canadian expansion will probably take many quarters to be accretive. After its last earnings release caution is advised.

Dollar Tree is still a good idea as everything is working there and their latest numbers prove it. Costco is only a buy on a pullback…great company but expensive here.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Big Lots and Costco Wholesale.

The article Is This Name a BIG Idea or A Bad One? originally appeared on Fool.com and is written by AnnaLisa Kraft.

AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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