End of Stimulus, Ocean Freight Costs Cited for Downgrade of Big Lots Stock

Mandatory Credit: Photo by Pavlo Gonchar/SOPA Images/Shutterstock (11781442m)In this photo illustration the Big Lots logo of a US retail company is seen on a smartphone and a pc screen.
Pavlo Gonchar/SOPA Images/Shutterstock / Pavlo Gonchar/SOPA Images/Shutterstock

The shares of Big Lots took a hit yesterday, following Piper Sandler’s downgrading of the company to “neutral” from “overweight,” citing macro headwinds, notably the end of the fiscal stimulus and higher ocean freight costs.

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The company’s shares recovered slightly today and were up 2.55% this morning.

Piper Sandler analyst Peter Keith also lowered his share-price target to $50 from $60, according to The Street.

“We see a trifecta of macro headwinds impacting fundamentals through the first half of 2022,” Keith wrote, according to The Street.

These include the end of two years of “stimulus check tailwinds” in next year’s first half; ocean freight rates continue to intensify to all-time highs, and are likely a gross-margin drag through the first half of 2022; and retail industry wage pressure seems unlikely to materially abate any time soon, Keith added.

“While we believe BIG has several emerging sales/margin drivers that should benefit fundamentals longer-term, near-term macro headwinds are likely to overshadow underlying improvement,” Keith said.

Piper Sandler also lowered its 2022 earnings per share estimates to $5.52 from $6.01, compared to a consensus of $6.13, The Street reports.

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Last month, Big Lots missed economists’ estimates on fiscal second-quarter profit and revenue — results that “were tempered by continued supply chain and freight headwinds, as well as other inflationary pressures,” CEO Bruce Thorn said in the earnings release.

“We know that the supply chain headwinds will continue into Fall and Holiday, and the situation remains fluid,” Thorn added.

For the quarter ended July 31, the company reported earnings of $37.7 million, compared to $452 million in the year-earlier quarter, according to the earnings release. Revenue declined to $1.45 billion, compared to $1.64 billion reported a year earlier.

In an earnings call, CEO Bruce Thorn said the company was “navigating the dynamic and ever-changing complexities of the supply chain,” according to a Seeking Alpha transcript of the call.

However, in a research note sent to GOBankingRates, CFRA Research said it kept a Buy on Aug. 27, following the earnings results.

“Just like the broader industry, BIG is facing supply chain and transportation challenges, which we expect to pressure earnings over the next few quarters.”

CFRA also noted that the company’s downside risks include supply chain bottlenecks; accelerating ocean freight expenses; labor challenges; the ending of enhanced unemployment benefits; and competition in food/consumables, such as Aldi.

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But the research firm also added, however, that it expects these issues to be transitory, “meaning these headwinds should turn into tailwinds with time.”

“We view BG shares as a deep value play as opposed to a value trap and therefore see more upside than downside at current valuation. We are pleased with BG’s e-commerce investments, store growth runway, and product innovation,” according to the note.

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About the Author

Yaël Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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