Big Lots: The Short Thesis, According To Deutsche Bank

Late last week, Deutsche Bank analysts maintained their Buy rating and price target of $54 on Big Lots, Inc. BIG.

"BIG has unquestionably turned a corner with impressive & consistent top- and bottom-line results over the past year; however, with the multiple well above historical levels & the company cycling the launch of many sales initiatives, we believe many investors have begun to look at BIG as a source of funds," the analysts said.

The analysts expressed their concerns regarding decelerating same store sales, as the company face tougher comps, potential softness in the furniture segment and challenges to gaining traction in consumables, given the poor presentation and "uncompetitive pricing."

However, the analyst also believe that there could be some mitigating factors, including cooler benefits continuing in FY16, increased momentum in furniture financing, driven by discretionary spending power and operational support and training, better quality from new merchants, Big Lots' marketing shift, and an end to the "editing drag."

According to the Deutsche Bank report, "Mix Investors are worried that GPM could be pressured as consumables penetration, particularly frozen, increases. With over 1,200 stores now with coolers, mix may shift unfavorably, especially if discretionary falters."

The analysts expect Big Lots to see a 29bps increase in GPM in FY15, with another 27bos increase in FY16.

The analysts also believe that the company could face risks related to "higher insurance & depreciation costs, pressure across retail to raise wages, and higher than expected online rollout costs ahead of the early 2016 launch."

These risks could be offset by growth in advertising, occupancy and store payroll below the sales, as well as the closure of underperforming stores. According to the analysts, "improving trends are sustainable with strong double-digit EPS growth ahead."