Big Problems for Big Lots, Inc. (BIG)

Target Corporation (NYSE:TGT) also has a price-matching guarantee. The company has already invested significant capital to improve the quality of their stores. The more pleasant shopping experience has led to increased loyalty from the company’s customers.

Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) also have an advantage over deep-discount retailers in that they can match prices of advertised items and then make up the difference through higher-margin products. Companies like Big Lots and Dollar General typically do not have a wide assortment of high-margin products to help boost profits.

In today’s retail market, it is very hard to compete simply on price. But it is also costly to employ and train staff to be able to compete through superior customer service. And spending capital to renovate stores can also be a waste of money if there is not a reasonable expectation for increased profits from each renovated location.

Long-term price erosion

For Big Lots, analysts are expecting earnings to be flat this year and to potentially grow 10% in 2014. Unfortunately, investors aren’t likely to place much faith in the 2014 estimates until they can see real evidence of increased profits.

Shares of Big Lots, Inc. (NYSE:BIG) are currently priced at about 10 times 2014 estimates. This would be a reasonable price if the company exhibited stable growth. But with so much uncertainty for this company specifically, as well as in the discount retail industry, investors will likely discount any growth expectations.

Over the next 12 months, I would expect Big Lots, Inc. (NYSE:BIG) to trade much lower. The stock could easily trade into the low $20’s which would represent seven to eight times current earnings.

If you own shares in this troubled retailer, it’s time to throw in the towel. There are plenty of other healthy growth stock opportunities, and it doesn’t pay to tie up capital in a company that is struggling just to tread water in an ultra-competitive market.

The article Big Problems for Big Lots originally appeared on Fool.com and is written by Zachary Scheidt.

Zachary Scheidt has no position in any stocks mentioned. The Motley Fool owns shares of Big Lots. Zachary is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Big Problems for Big Lots, Inc. (BIG)

Published on June 17, 2013 at 11:03 am by The Motley Fool in News

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