Analysts Lower Big Lots Price Targets After Q3 Print

Two Street analysts stuck with their bullish stances on Big Lots, Inc. BIG after the stock plummeted more than 20 percent Friday in reaction to a concerning third-quarter report. 

The Analysts

Raymond James analyst Dan Wewer maintains an Outperform rating on Big Lots with a price target lowered from $48 to $36.

Bank of America Merrill Lynch's Jason Haas maintains a Buy rating on Big Lots with a price target lowered from $56 to $40.

Raymond James Highlights Attractive Valuation

Big Lots' Q3 report was marked by a 15-cent EPS miss, but the retailer showed an improvement in same-store sales growth from 1 percent last year to 3.4 percent, Wewer said in a note.

Sales performance was strong in the quarter across multiple categories, but Big Lots indicated comp sales decelerated in the first month of the fourth quarter, the analyst said. 

The "Store of the Future" remodel initiative is showing signs of success based on stores recording above-average growth in their second year after the remodel, Wewer said. The roughly 200 store remodels are accretive to EBIT, he said. 

The Q3 earnings miss does mark a "speed bump" in the company's momentum and suggests the "investment thesis is beginning to appear vulnerable" due to inconsistent sales, according to Raymond James.

Nevertheless, the stock is supported by its valuation, which is among the most attractive in the hardline retail space, Wewer said. Shares are trading at an EV/EBITDA multiple of 5.5 times fiscal 2019 estimates, which is a 41-percent discount to the sector average and backed by a trailing dividend yield of 3.8 percent, which is among the highest in the space, he said. 

BofA Sees Favorable 2019

The Q3 print was disappointing, and Big Lots' Q4 guidance fell short of expectations, Haas said in a note.

Looking forward to 2019, the "Store of the Future" initiative could translate to comps in the high-single digit to low-double digit range, the analyst said. 

Higher-margin categories like furniture, soft home and seasonal continue to comp above the company average with no signs of reversal, according to BofA. 

The 2019 outlook is encouraging, as many lower-income consumers will see a notable year-over-year boost to their tax refunds, Haas said. Big Lots should benefit next year from a moderation in transportation costs and rent, he said, as a percentage of sales will normalize as old Toys 'R' Us locations the company bought open under the Big Lots banner.

BofA's bullish case for Big Lots is based on a strong outlook for its store remodels, and the research firm's revised $40 price target is calculated using a multiple of 5.5 times estimated 2019 EV/EBITDA.

This is consistent with the stock's five-year historical average and assumes a healthy U.S. consumer spending environment backed by wage growth, low unemployment and higher consumer confidence, Haas said. 

Price Action

Big Lots shares were down 4.45 percent at $29.62 at the time of publication Monday. 

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