Big Lots cuts forecast again as high-margin product push fails

Thu Aug 23, 2012 11:52am EDT

(Reuters) - Close-out retailer Big Lots Inc (BIG.N) cut its full-year adjusted earnings forecast for the second time this year after its push to boost higher-margin products failed as frugal customers scale back discretionary spending, sending its shares down 22 percent.

Big Lots, which recently expanded its consumables, home and furniture segments, said sales of more profitable but discretionary products such as mattresses and upholstery fell in the second quarter.

These sales continue to be soft in the current quarter, prompting Big Lots to offer markdowns and forecast a loss for the period.

"Seventy percent of our business which is discretionary is where we really need to see some improvement in trend before we get more optimistic in our guidance," a company executive said on a conference call.

Shares of the company, which stocks products that have been overproduced, discontinued, or rejected by other retailers, fell 22 percent to $30.06 -- their lowest in a year -- on Thursday morning. The stock was the biggest percentage loser on the New York Stock Exchange.

Big Lots' performance is in contrast to other off-price retailers such as TJX Cos Inc (TJX.N) and DSW Inc (DSW.N), who reported strong quarters as more shoppers seek inexpensive products.

The company, which named John Martin its chief merchandising officer on Thursday, plans to drive traffic by testing new products including coolers and freezers as well as remodeling its stores. It also appointed Timothy Johnson as its new chief financial officer earlier in the day.

Analysts at J.P. Morgan Securities, however, said the management shakeup poses risks to the company's near-term performance. The brokerage reiterated its "underweight" rating on the stock.

Big Lots now expects fiscal 2012 adjusted earnings of between $2.80 and $2.95 per share, lower than its previous forecast of between $3.25 and $3.40 per share.

Analysts on average were expecting a profit of $3.29 per share, according to Thomson Reuters I/B/E/S.

For the third quarter, the company expects to report a loss of 20 to 30 cents per share, while analysts were expecting a profit of 13 cents per share.

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Markdowns pushed down gross margins to 39.2 percent from 39.5 percent in the second quarter. Selling and administrative costs as a percentage of sales rose to 33.8 percent from 32.5 percent a year earlier.

Columbus, Ohio-based Big Lots acquired Liquidation World Inc, a Canadian close-out retailer, last May but the business has been losing money so far.

On an adjusted basis loss at the company's Canadian operations widened to 5 cents per share in the second quarter, from 2 cents per share, a year earlier.

The company's second-quarter profit from continuing operations fell to $22.1 million, or 36 cents per share, from $35.7 million, or 50 cents per share, a year earlier.

Revenue rose 4 percent to $1.22 billion.

Analysts on average had expected earnings of 41 cents per share on revenue of $1.24 billion.

(Reporting by Ranjita Ganesan; Editing by Sriraj Kalluvila and Supriya Kurane)

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