Big Lots Inc. (BIG) reported second quarter results on Tuesday morning that were better than consensus analysts estimates.  Sales come in at $1.09 billion, which is about 2% less than a year ago but slightly exceeded estimates.  Comparable store sales were off by about 2.4% in the quarter.  Thanks to cost cutting measures, Big Lots was able to beat expectations for earnings in the quarter ended in August.  Quarterly earnings rose to $28.4 million or 34 cents per share, which compares favorably to $26 million or 32 cents per share a year ago.  A consensus of 15 analysts anticipated Big Lots would earn about 30 cents per share.

The better than expected quarterly performance is propelling the stock higher today, but even more importantly, Big Lots has raised full year net income for continuing operations guidance for the second quarter in a row.  Management is now expecting $1.92 to $2.02 per share, which is better than the $1.89 the company made last year.  Analysts had were expected $1.93 for the full year profit, but we expect a number of those estimates to edge up.  While sales are falling some, the company believes it is more than made up for through improved margins.  Aided by reduced freight costs and higher initial mark-ups, gross margin was 40%, an improvement of 70 basis points.

We are reiterating our Undervalued rating on the strength of these results.  The stock is trading higher by about 9% on Tuesday morning to $26.30, and we are never a fan of buying into a huge one-day rally because often a better price will be available after said rally.  There is a good chance that if the stock stays at this level we will likely downgrade to Fairly Valued on next week’s report.  That being said, if this stock pulls back below $25 there is pretty compelling value.

“Start with Big Lots, huge profits up. And also the company gave strong guidance and this is interesting, up almost 10% and there’s a 15% short position. The shorts are probably going to watch out for that one.”–Fox Business Network 8/25/2009