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Big Problems for Big Lots, Inc. (BIG)

Shares of Big Lots, Inc. (NYSE:BIG) have been under pressure following the company’s lackluster earnings announcement on May 30. The company reported earnings of $0.36 per share, missing analyst estimates by $0.05. More importantly, management offered a disappointing outlook for the rest of the year.
Considering the negative guidance and the increasing uncertainty for this company, investors should sell their shares of Big Lots, Inc. (NYSE:BIG) and look for better opportunities in the retail arena.
Big Lots, Inc. (NYSE:BIG) operates in a fiercely competitive niche. The latest quarterly report indicates that the company is falling behind the competition, which is bad news for shareholders. Conservative investors should liquidate their positions, and more aggressive investors should consider buying puts on this troubled stock.
Big Lots, Inc.
A tepid forward outlook
As part of the Q1 earnings press release, Big Lots, Inc. (NYSE:BIG) issued forward guidance for the second quarter, in addition to an updated outlook for 2013.
The most important statistic that caught investors off-guard was the same-store sales figure. For the second quarter, Big Lots expects same-store sales to decline between 2% and 4%. And for the full year, management expects same-store sales to be flat to down 1%.
A decline in same-store sales indicates that the company is losing market share to other discount retailers. This is particularly troubling, given the number of potential competitors who are scaling their product offering and pricing to better compete with discount retailers like Big Lots.
Deep-discount retailers, such as Big Lots, Inc. (NYSE:BIG), typically operate with very thin profit margins. Therefore, a continued decline in revenue could dramatically affect long-term profitability, as the company will likely have to drop prices or increase its marketing budget to hold on to its current market share.
Analysts have been quick to adjust their models to the new information. The average estimate is now for earnings of $2.97 per share this year – which is actually $0.02 lower than last year’s earnings. In 2014, expectations are for 10% earnings growth, but there is a tremendous amount of uncertainty surrounding this figure.
Competition increasing

Not only does Big Lots, Inc. (NYSE:BIG) have to compete against other deep-discount retailers, but a number of big-box retailers are also adjusting prices to compete directly for the dollars of budget-conscious shoppers.
Last week, Dollar General Corp. (NYSE:DG) lowered guidance for 2013 as sales growth and profit margins came under pressure. The company focuses on low-priced consumable household products and strives to offer them at the lowest possible price.
Analysts have also lowered estimates for Dollar General Corp. (NYSE:DG). The stock is currently trading at a premium valuation of 16 times expected earnings this year. If the company is not able to sustain profit growth, that multiple will surely contract.