Buy to open the January 20, 2017 put on BIG with a strike price of $42.5 at $1.85 or lower. Symbol (BIG170120P42.5)

Big Lots has had an impressive turn-around over the past two years but is running out of room to grow. Food sales, once a bright spot to lure customers in for regular store visits, are fading.

Sales of furniture and soft home goods (pillow, sheets, towels) have been boosted by in-store Easy to Lease programs. The bulk of the growth in these categories has come from customers borrowing to pay for them.

Estimates for the third quarter (due early December) may be in line but revenue and earnings numbers for the fourth quarter, (ends in January 2017, announced early March 2017), appear too high. Hopefully the company will give investors an update on holiday sales before the January expiration.

Subscribers may wait for a bounce in the stock to get a better price on the puts but fellow dollar store stocks Dollar General (NYSE: DG) and Dollar Tree (NSDQ: DLTR) continue to drag the group down on weak food sales due to government funded SNAP (supplemental nutrition assistance programs, aka food stamps) cutbacks.

DETAILS

1. Lower food sales are dragging down customer traffic and sales of other merchandise.

New coolers to hold perishable foods were installed in stores in 2014 to allow the company to accept government sponsored food assistance (SNAP, otherwise known as food stamps).

While this plan led to an early burst of customer traffic and food sales, recent restrictions in SNAP payments have begun to hurt food sales which were down unexpectedly in the first half of this year. Although food sales are a less profitable sale, they generate reliable foot traffic from customers who typically purchase other goods as well. A drop in food sales will spill over into lower sales of other merchandise.

2. Revenue growth for Furniture and Soft Goods (pillows, sheets) has been inflated due to the company’s  lease-to-own program.

Growth in furniture sales, which was as high as 17% when the program first initiated, has slowed to mid-single digits. Programs incentivizing sales teams for lease transactions and allowing customers to lease pillows and sheets when purchased with a couch or mattress have increased growth above normal rates.

3. Revenue growth for soft goods is particularly important to Big Lots as it carries some of the highest profit margins for the company. The company began including soft goods on leasing transactions in the fourth quarter of 2015. It will be difficult for the company to grow soft good sales on top of that bump from last year.

4. The company has shifted 500,000 square feet of selling space from other products to furniture and mattresses. This category now represents 24% of total sales and leaves the company vulnerable to soft demand from lower income customers.