Big Lots BIG
June 23, 2009 - 1:15pm EST by
SpocksBrainX
2009 2010
Price: 20.00 EPS $1.85 $1.95
Shares Out. (in M): 81 P/E 10.8x 10.3x
Market Cap (in $M): 1,628 P/FCF 7.4x 6.9x
Net Debt (in $M): -50 EBIT 254 265
TEV ($): 1,578 TEV/EBIT 6.2x 5.9x

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Description

Summary:  A simple idea, Big Lots is an asset play that should generate more than 700m in gross cash flow in the next three years with much of that free on a current enterprise value of 1578.  If successful with a modest expansion plan, gross cash flow generation should be even higher.  The market is currently focused on tepid comp performance and bleak near-term employment picture.  

Business.  Big Lots operates 1,345 retail variety stores catering to middle to low income customers.  Big Lots is known for deep discounted closeout merchandise in toys, consumables, furniture, electronics, office products, seasonal and other areas excluding apparel.  Average store size is 30k sqft.  Over the past few years a new CEO has led a renewed focus on the business (merchandise and inventory, real estate, and cost structure), with a halt to expansion, headquarters rationalization, elimination of certain SKUs (primarily apparel and frozen and chilled foods), higher inventory turnover, and generation of cash flow.  Store counts have remained in a tight 100 store range though the company has pruned real estate and is now looking at growing by 3 to 4% a year for the foreseeable future, helped by a better real estate market across the country.  The average store does about 3.4m in sales and about 158-160 per sq flt. 

Here's why I like the stock:

*solid balance sheet.  Q4 BS ended with 35m in cash and 62m in debt, with the Q1 BS showing 51m in net cash. 

*high free cash flow yield.  BIG generates 229m in trailing cash flow with an expected CapEx budget for 2009 of 85m (40m maintenance, 20m for 45 new stores, 20-25m for IT projects), or a 8.9% free cash flow yield (d/a is 70 to 75m) 

*active buyback plan (in the past).  In the past 5 years BIG has purchased 978m in stock, taking the share count from 116.7m in 2003 to 81.4m currently.  As have most companies, BIG suspended the buyback plan so free cash flow is currently accumulating on the balance sheet and one would suppose buybacks remain a logical option for the excess.  Options have been reasonable (about 1.5% issued per year though cancellations are very significant) and management compensation, excluding the CEO, is very reasonable. 

*a clear niche.  There are a ton of places to shop in this world but BIG distinguishes itself as the only truly multi-price point close-out centric public store chain that I'm aware of.  While the company considers mid to lower income as their target area, the true customer base is more lower income than most chains, and close-out merchandise has particular appeal to this group.  Plus, the company's rather unique store presentation - with furniture on one side of the the floor along with toothpaste and electronics and everything else in various locales besides creates a strong "treasure hunt" aspect to the shopping experience which encourages repeat visits. 

*low leverage point on SGA.  BIG has stated several times that they can lever a flat to slightly negative comp.

*modest expansion possibilities.  The company has stated that current infrastructure can support 1800 stores which one presumes means that the current DC network will not need significant expansion for several years. 

Here are some concerns:

*near-term stimulus comparisons.  Last years stimulus checks clearly had a favorable impact on business (comp +2.8% measured on a 2 year basis) so near term compares are tough, though if you fast forward six months from now the Q4 compare (-3.2%) is far more favorable.  Note that with BIG consumables, which have done so well for DLTR and FDO, only represent 30% of sales so there hasn't been as big an impact from this area.

*stock price volatility.  The stock price has undergone some extreme volatility in the past three years with regular $12 to upper 20s mid 30s trips as investors react to the fate of same store sales.  Earnings performance, however, has been steady and investors can catch this stock for an even cheaper valuation if the past is any indication.  I simply feel that the current price is a logical entry point for a full position in a diversified portfolio.

*Peak Margins.  BIG did achieve the highest net margin of its past 10 years last year, though I believe that the changes current management has made to this business model will allow current margins to stick rather than revert to previous levels. 

*Furniture.  Ready to assemble and mattress make up 15% of sales and this area is uniquely exposed as a discretionary category, though note that at least in Q1 furniture sales were favorable and there is a market for this type of merchandise.

 

Bottom line:  I think BIG is being valued far cheaply for a retailer with a clear niche and tremendous cash flow generating ability.  Even if cash flow remains flat, this should be a successful investment.

 

 

Catalyst

1 - resumption of buyback plan

2- any improvement in comps

3 - end of recession mindset that solid companies should be valued at 10x

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    Description

    Summary:  A simple idea, Big Lots is an asset play that should generate more than 700m in gross cash flow in the next three years with much of that free on a current enterprise value of 1578.  If successful with a modest expansion plan, gross cash flow generation should be even higher.  The market is currently focused on tepid comp performance and bleak near-term employment picture.  

    Business.  Big Lots operates 1,345 retail variety stores catering to middle to low income customers.  Big Lots is known for deep discounted closeout merchandise in toys, consumables, furniture, electronics, office products, seasonal and other areas excluding apparel.  Average store size is 30k sqft.  Over the past few years a new CEO has led a renewed focus on the business (merchandise and inventory, real estate, and cost structure), with a halt to expansion, headquarters rationalization, elimination of certain SKUs (primarily apparel and frozen and chilled foods), higher inventory turnover, and generation of cash flow.  Store counts have remained in a tight 100 store range though the company has pruned real estate and is now looking at growing by 3 to 4% a year for the foreseeable future, helped by a better real estate market across the country.  The average store does about 3.4m in sales and about 158-160 per sq flt. 

    Here's why I like the stock:

    *solid balance sheet.  Q4 BS ended with 35m in cash and 62m in debt, with the Q1 BS showing 51m in net cash. 

    *high free cash flow yield.  BIG generates 229m in trailing cash flow with an expected CapEx budget for 2009 of 85m (40m maintenance, 20m for 45 new stores, 20-25m for IT projects), or a 8.9% free cash flow yield (d/a is 70 to 75m) 

    *active buyback plan (in the past).  In the past 5 years BIG has purchased 978m in stock, taking the share count from 116.7m in 2003 to 81.4m currently.  As have most companies, BIG suspended the buyback plan so free cash flow is currently accumulating on the balance sheet and one would suppose buybacks remain a logical option for the excess.  Options have been reasonable (about 1.5% issued per year though cancellations are very significant) and management compensation, excluding the CEO, is very reasonable. 

    *a clear niche.  There are a ton of places to shop in this world but BIG distinguishes itself as the only truly multi-price point close-out centric public store chain that I'm aware of.  While the company considers mid to lower income as their target area, the true customer base is more lower income than most chains, and close-out merchandise has particular appeal to this group.  Plus, the company's rather unique store presentation - with furniture on one side of the the floor along with toothpaste and electronics and everything else in various locales besides creates a strong "treasure hunt" aspect to the shopping experience which encourages repeat visits. 

    *low leverage point on SGA.  BIG has stated several times that they can lever a flat to slightly negative comp.

    *modest expansion possibilities.  The company has stated that current infrastructure can support 1800 stores which one presumes means that the current DC network will not need significant expansion for several years. 

    Here are some concerns:

    *near-term stimulus comparisons.  Last years stimulus checks clearly had a favorable impact on business (comp +2.8% measured on a 2 year basis) so near term compares are tough, though if you fast forward six months from now the Q4 compare (-3.2%) is far more favorable.  Note that with BIG consumables, which have done so well for DLTR and FDO, only represent 30% of sales so there hasn't been as big an impact from this area.

    *stock price volatility.  The stock price has undergone some extreme volatility in the past three years with regular $12 to upper 20s mid 30s trips as investors react to the fate of same store sales.  Earnings performance, however, has been steady and investors can catch this stock for an even cheaper valuation if the past is any indication.  I simply feel that the current price is a logical entry point for a full position in a diversified portfolio.

    *Peak Margins.  BIG did achieve the highest net margin of its past 10 years last year, though I believe that the changes current management has made to this business model will allow current margins to stick rather than revert to previous levels. 

    *Furniture.  Ready to assemble and mattress make up 15% of sales and this area is uniquely exposed as a discretionary category, though note that at least in Q1 furniture sales were favorable and there is a market for this type of merchandise.

     

    Bottom line:  I think BIG is being valued far cheaply for a retailer with a clear niche and tremendous cash flow generating ability.  Even if cash flow remains flat, this should be a successful investment.

     

     

    Catalyst

    1 - resumption of buyback plan

    2- any improvement in comps

    3 - end of recession mindset that solid companies should be valued at 10x

    Messages


    Subjecttypo
    Entry06/23/2009 04:03 PM
    MemberSpocksBrainX

    P/FCF figures above is actually p/CF - I misread it.

    P/FCF based on 2009 figures is about 145/1478 (assuming flat working capital and no buybacks and 100m further increase in cash) or 10.1x. 


    SubjectQ2 Review
    Entry08/27/2009 01:12 PM
    MemberSpocksBrainX

    Not the most exciting quarter but here goes:

    *sales down 2% with comps down 2.8%.  July was the best month but still negative.  Despite this, GM was improved due to lower freight and improved markups and SGA was almost slightly worse.

    *The BS reflects the lack of a buyback - 98m cash and no debt compared to 43m in cash and 148m in debt a year ago.  Inventory was a net contributor of 30m to cash flow and down 4% on a store basis.

    *Store openings have stepped up to 50 so with 40 closings expected 10 net new.  Expansion is set to accelerate next year. 

    *forecast for Q3 and Q4 is for 14 to 19c (15c ly) and 99 to 1.04 (1.00) with assumed comps of flat to -2 and flat to up in last quarter

    *company expects something on the cash levels end of year - one assumes a buyback, but I think a dividend makes sense at this point.

    *furniture was a challenge in Q2 and home was weak.  They did have strength in seasonal and hardlines

    Overall, not a lot of change in my thesis.  BIG continues to be a huge cash flow generator and while expectations are modest for the 2H that continues to be a lot better performance predicted than most retailers.  The price of the stock has moved up nicely and while I am not as interested in the stock at this price I don't think an exit is logical at this time either. 


    SubjectQ3 review
    Entry12/07/2009 01:58 PM
    MemberSpocksBrainX

    An ok quarter with little changing in the story except some net positives:

    *sales up 1% with comps down 0.2%.  Strength in home, electronics, and toys with weakness in auto, mattress sales, and Halloween.

    *comps picked up in Sep and Oct and Nov appears to be above 2.5% with early start to Dec solid. 

    *despite the flat comp, leveraged by SGA and GM due to lower freight (goes away in Q4), lower advertising, and lower d/a.  The operating gain was outsized caused they went from a 2.0% operating margin to 3.3%. 

    *the BS looks nice, with 45m net cash which compares to 230m net debt 12 months previous.  As noted, BIG generates a ton of cash flow, especially with inventory levels down 4% and turnover up. 

    *Store openings at 50ish with 30 closures now, less than before.  New stores are doing well, with some acceleration of store growth seen next year.

    *forecast for Q4 is 1.08-1.14 which is up from last time (and they beat in Q3).  I think chances of EPS beats lessen with freight costs up and some one-time issues with SGA expenses in Q4 (pension, restricted stock, pre-opening costs), though maybe comps surprise on the 2% midpoint forecast. 

    *company announced a 150m buyback authorization, now that the stock is near 52 week high.  I think management judgement here really has to be questioned, and would rather the company commit to 50 or 100m each and every year instead of ramping up the buybacks apparently when they feel business gets better (my opinion).  Definitely a negative with this company though on the other hand as the valuation gets higher they need the buyback to make EPS go.

    *furniture was better in Q3 (except mattress) but is small part of sales in Q4.  Home has, like with many other retailers, turned significantly into a positive.  Toys and electronics seem to have started really well in Q4. 

    Overall, a better trend in business has been awarded a higher valuation.  BIG continues to generate significant cash flow and while much of the gain has likely been made in the stock the valuation is not expensive (13.7x earnings, about 10x cash flow) and with modest store expansion next year I see the company keeping its current multiple and moving with earnings increases.  Thus, if anybody cares while I have alternatively pared and added back as the stock fluctuates (and it always fluctuates), I do not think an exit at this time is logical either.   

     

     


    Subjectq4 review
    Entry03/10/2010 09:56 AM
    MemberSpocksBrainX

     Short-Term

    Sales up 7% with operating up 27%.  Both GM and SGA was improved.  Sans charges, the company did $1.31 with $2.37 adjusted for the year.  The BS looks great with 284m in cash and inventory down modestly.   The company did authorize a 400m buyback with 150m accelerated.  The forecast is for Q1 at 60-65c vs. 44c last year on a 4 to 6% comp, though Feb was above this number.  For the year, the company sees $2.65-2.75 (PE ratio of 13.3x based on $36 stock price) with GM flat but leverage on SGA (as noted in original write-up, company can lever a flat comp).  BIG finished with 1361 stores and plans for 80 openings, 40 closings next year for sqft growth of 3%.  There are 30 "A" locations in the new store growth totals.  CapEx is estimated at 115m with d/a of 80 to 85m (35-40 for new stores).  On the downside, most GM has apparently been achieved, esp. with higher equity compensation and rises in domest fuel and ocean freight costs.

    Conclusion

    Well, this was a lot better quarter than I expected.  The forecast is also for good things, and momentum continues into Q1.  On the downside, margins are at peak levels, and management's timing on the buyback leaves much to be desired (they like it at $36, didn't apparently like it below $20; I really wonder at times if there ought to be a "Chief Buyback Officer" accountable for such things, as capital allocation for buybacks is clearly just as important as store growth, site selection, and CapEx budgets).  BIG also felt compelled to lay out some long-term goals which seems achievable but if there is one thing I've learned in retail it is that surprises can and do happen and one does oneself no favors with long-term forecasts when most people are only interested in the last quarter.   I have trimmed this position further but still maintain slightly less than half of what I originally had.  I think BIG can eventually work its way above $40 if the good news persists, and you can make a case for a higher valuation if comps continue this strong.  


    SubjectRE: q4 review
    Entry03/10/2010 04:45 PM
    Membergocanucks97

    great call. simple and great idea, just like your other ideas.


    SubjectRE: RE: q4 review
    Entry03/11/2010 08:16 AM
    MemberSpocksBrainX

    regarding simple ideas, you should know by now that I'm not capable of anything else.  Kinda limits one's options, but that's ok.  

    Course, I'm happy with this performance, but it ain't no KIRK....which is clearly, IMO my limited opinion, one of the best ideas ever posted on VIC.  The fact that it was posted twice  - in short order no less! - is even more stunning.  

     

     


    SubjectRE: RE: RE: q4 review
    Entry03/11/2010 08:18 AM
    MemberSpocksBrainX

    one other observation - you could have thrown a dart at virtually any retailer in 6/09 and made 50% to 500% on your investment, so....


    SubjectRE: Author Exit Recommendation
    Entry01/11/2011 04:32 PM
    MemberSpocksBrainX
    should have hit the exit button here and have been gradually reducing but decided to take it down significantly today due to results from Family Dollar and Dollar General and associated tougher compares and higher freight costs.  I still like the company and would hope to enter again in size in the near-future.
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