The Street Is Missing The Big Picture On Big Lots, Analyst Upgrades

Deutsche Bank upgraded shares of Big Lots, Inc. BIG Tuesday, as it sees upside to its earnings per share estimate.

Analysts Paul Trussell and Tiffany Kanaga expect the upside to come from a host of factors, including a return to mid- and high-single-digit comps in furniture and soft home, an improvement in trends in food and consumables, further gross profit margin/IMU expansion, SG&A leverage and buyback support.

Initiatives To Drive Top-line Growth

Deutsche Bank feels the company has enough initiatives in place to drive comps in furniture and soft home. The initiatives outlined by the company included expanded assortments, easy lending and the company's private label credit card. The firm also sees the U.S. Census Bureau data for May and June, suggesting 4.8 percent growth in furniture and home furnishing sales as boding well for Big Lots.

The firm also expects trends in food and consumables to improve, thanks to a new team in place, expansion of over-the-counter medications and nutritional supplements.

Margin Expansion Opportunity

Additionally, the firm sees margin expansion opportunity from higher IMUs, reduced shrink, cleaner inventories, better store operations and rolling off of training and system expenses.

"For FY17, we are conservatively modeling 26 bps of GPM expansion (which assumes flattish GPM for the remainder of the year) and 11 bps of SG&A leverage," the firm indicated.

Watch Out For This Catalyst

Deutsche Bank sees Big Lot's Analyst Day in September as a potential catalyst, given its expectations that the company would be out with an update to long-term targets along with details around the "store of the future."

Upgrading To Buy

As such, Deutsche Bank upgraded shares of Big Lots from Hold to Buy and raised its price target from $55 to $56.

The firm termed the valuation as compelling for this sustainable margin expansion story, given that the company's shares trade below their three-year average of 13.1 times and well below its peers Dollar General Corp. DG and Dollar Tree, Inc. DLTR.

At the time of writing, Big Lot shares were surging up 4.16 percent to $49.56.