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What happened

Shares of discount retailer Big Lots (NYSE: BIG) tumbled 12.8% on Wednesday, giving back about half the gains won from Tuesday’s big post-earnings stock price rally. And you can probably blame Wall Street analysts for that.

So what

Not that their intentions weren’t good. Yesterday, if you recall, Big Lots reported a $3.24 per share net loss on a 15% decline in sales to $1.14 billion for its second fiscal quarter of 2023. Bad numbers, to be sure, but it’s still better than the $4.12 per share loss and $1.1 billion in sales that Wall Street analysts had predicted.

This morning, two separate investment banks — Telsey Advisory and Loop Capital — rewarded this performance by issuing price target upgrades for Big Lots. Loop raised its price target on the retailer by $1 to $7 a share. Telsey went even further, hiking Big Lots from $6 to $8 a share. But that’s where the good news ends.

Despite raising its price target, Telsey criticized Big Lots’ quarterly numbers as “weak on an absolute basis,” reports, and warned that the business has yet to stabilize — even if Telsey hopes to see improvements going forward. For its part, Loop highlighted “macroeconomic headwinds” buffeting Big Lots and called the company’s new business plan “largely unproven.”

Now what

I’d go even further than that. The fact is, Big Lots’ ability even to remain a viable business seems unproven to me. Beyond the Q2 loss, the company’s problems include:

A net debt load of $2.1 billion — 10 times the size of Big Lots’ own market capitalization — that will become increasingly difficult to service as interest rates continue to rise.
A reversal of sales growth trends and, likely, the second straight year of declining sales in 2023.
Analyst projections for two more years of declining sales ahead.
And continued generally accepted accounting principles (GAAP) losses as far out as analysts are making predictions.

Certainly, Big Lots’ numbers yesterday were less terrible than feared. They were still pretty terrible, however. With at least two more lean years ahead and a balance sheet heavy on debt and light on cash, I fear Big Lots shareholders can expect to see more declining days than gaining days ahead.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Big Lots. The Motley Fool has a disclosure policy.

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