3 Reasons Why Big Lots Is Off Oppenheimer's Shopping List

Shares of Big Lots, Inc. BIG have gained more than 20 percent over the past six months, which led to a downgrade from Oppenheimer on Wednesday. 

The Analyst

Oppenheimer's Brian Nagel downgraded Big Lots from Outperform to Perform with a no assigned price target. 

The Thesis

The case for owning Big Lots' stock since 2016 was based on the belief that the market was underappreciating the company's potential for "significantly improved" merchandising and a turnaround under a new leadership team, Nagel said in the downgrade note. (See the analyst's track record here.) 

Investors who bought into this belief realized a profitable trade, especially with the stock trading near the analyst's $60 price target, he said. 

The analyst identified three factors he said are reasons why investors should no longer be aggressive on the stock. They are: 

• The furniture category represents around 25 percent of Big Lots' annual sales and is showing signs of "waning." Specifically, comp trends have slowed from an upper single-digit rate to just 2.2 percent year-to-date through the October-ending quarter.
• The stock is now trading at a forward four-quarter P/E multiple of around 12.6x on the Street's consensus estimate, the analyst said. By comparison, during the summer months of 2017, Big Lots was trading at a 10x valuation. The uptick reflects the company's "steady progress in its turnaround efforts," Nagel said. 
• Big Lots' reputation as a low-cost provider in areas like consumables could come under pressure from giants like Wal-Mart Stores Inc WMT that have the flexibility to "undermine the value image" of Big Lots.

"Our now more cautious stance on BIG is more of a relative call within the group, as we prefer shares of better-positioned names," Nagel said. 

Price Action

Shares of Big Lots were trading slightly higher at $57.10 in the Wednesday morning session. 

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