|Shares Out. (in M):||60||P/E||9.2x||7.8x|
|Market Cap (in $M):||1,820||P/FCF||9.0x||7.8x|
|Net Debt (in $M):||128||EBIT||345||0|
This write-up is not intended as a standalone analysis. BIG has been written-up on VIC three times. The intent here is to provide color on the recent BIG fundamental underperformance and make a case that despite recent disappointments (and because of significant stock decline) BIG is an attractive investment.
Two significant differences vs dollar stores:
These two difference are responsible for the higher volatility of BIG's same store sales. At the same time closeouts make BIG a unique retailer with no direct competitors. About 15% of BIG's sales is seasonal merchandise which is bought directly from factories (not closeouts). BIG buys it once for the season. (In Q2 it seasonal merchandising was subpar, all good stuff sold out fast and the rest, less 3.good merchandise, had to be discounted). Seasonal business could be a very good business but offers plenty of same store sales risk - weather impacts that business significantly, also merchandising screw ups (as happened in Q2 2012) make this business more volatile.
In 2011 BIG bought a closeout retailer, Liquidators, out of bankruptcy, the idea was it is a cheap way to get into Canada at scale. It is a significant turnaround, this Canadian business lost money for six years, the goal is for Canadian stores to reach break-even by Q3 2012 (so far it appears that it will achieve that goal). In Q2 2012 BIG increased inventory and assortment in Canadian business, increase was intentional because stores lacked inventory.
Inventories are up 13% for several reasons:
Q2 2012 screw up
There are several ways to improve merchandising:
Coolers and freezers
Steve Fishman mentioned that BIG will be experimenting with bringing coolers and freezers into its stores. BIG needs to bring coolers and freezers so it can sell perishable items which will hurt its margins, but will help them on two fronts: first, will increase frequency of store visits and second will allow BIG to take food stamps (which are now called SNAP transactions). Steve Fishman was against this for a long time, but things have changed. Now a significantly larger portion of the population uses food stamps and company's registers are now able to take food stamps. However, this is an experiment, BIG will try it out in five areas at first. We don't know what capex will be if it decides to go with it.
Historically BIG was fairly debt averse, but this quarter its debt has increased to $240mm with around $50mm of cash. BIG bought back $149mm stock in the quarter. Company expects to exit the year with $140-150mm of debt on the credit line (did not indicate cash position). Its cash flows for the year will be about $70mm lower than it expected going into second quarter.
BIG has two methods of buying back stock, normal purchase which gives BIG roughly two week window during the quarter and 10 B5-1 plan – BIG tells broker to buy so many shares at certain price and there is nothing it can do afterwards. So even as business deteriorated it could not put a stop on share repurchases. Even though it has $50mm share buyback I suspect BIG will stop buying back stock for at least a few quarters until it pays off its line of credit (S&P possible downgrade is another motivator why BIG will do that).
Guidance for 2012
|Entry||09/11/2012 03:18 PM|
How do you get comfortable with how little control they have over their inventory? What makes you comfortable with 4% square footage growth? Why is it worth $45 today when PE wouldn't buy it there and then BIG horribly missed guidance, mainly because they don't control inventory and have little way to predict sales?
|Entry||09/11/2012 07:24 PM|
They have control over direct purchases, however, and you are right, they don't have control over closeouts. Customers that come to their store don't expect consistency of merchandise but they do expect value. Their same store sales will not have consistency of DG or FDO, but if well managed same store sales should go up. BIG generates significant cash flows and plans and can afford to open 4% new stores a year.
|Entry||09/12/2012 01:31 PM|
pls read thru them = wish this place had an edit feature
|Subject||exactly what is the recommendation here?|
|Entry||10/01/2012 11:09 AM|
You say the write-up is not intended as a standalone analysis. Are you suggesting a pair trade where you go long Big and short DG and FDO (or some other name)? If so, would you mind commenting on the short side of this trade? Thanks.
|Subject||RE: Big LOTs print|
|Entry||05/30/2013 08:52 AM|
I'm not sure how BIG is going to turn this around. They are rolling out consumables... but the whole BIG strategy is to take really crappy real estate cheap and drive traffic with the unique business model. So how are they going to drive consumables traffic to lousy locations when there is a dollar store, discount store, or grocery store every 35 feet in America? Second, what exactly is that upsell model? Come for the frozen pizza, but get a grill and portable DVD player as well?
Trouble is it is "cheap"...
|Subject||RE: RE: Big LOTs print|
|Entry||06/17/2013 02:05 PM|
I am struggling a little with how to conceptualize the opportunity right now (or lack of opportunity). It certainly looks "cheap" at ~7x LTM EBIT with a reasonable FCF yield - if you don't believe the business gets any worse, which seems to be the issue.
What are people's thoughts on relative valuation for this business - i.e. what multiple should a close out retailer without much control of their non-consumable merchandise and what seems like muted long term unit growth (relative to dollar store competitors, etc) trade at relative to higher multiple off price and dollar store comparables?
The visibility to SSS seems to be an issue here - the business is highly sensitive to merchandising mix given the implied volatility which presumably is an issue in pricing a PE LBO case as well. Lastly on this, as CNM3D commented, driving traffic via consumables to drive bigger ticket furniture/seasonal/home purchases doesn't hang together for me but I'm happy to hear where I am wrong on that.
If its true that most of the cost structure rationalization at the unit level is now complete and remaining leverage comes from SSS growth that is interesting in the sense that EBIT margins (on a full year basis) are now back to around 2008 levels. Given the growth in revenues and degradation in EBIT margins, you'd think there were costs, whether at the corporate or store level that could be rationalized.
Lastly, the unit economics, just from scanning and adjusting the system level numbers seem ok - there seems to be a reason for this business to exist I just struggle with how you price the volatility in SSS given what seems like quarter by quarter pressure to ensure you have your merchandise mix right. I can buy into the more consumables and freezer space to provide base revenue stability but with all of the competition out there are there true 'revenue synergies'?
It is enticing to normalize EBIT margins at 6.5% and assume nominal growth which drives >$40/share without the benefit of additional share repurchases in the interim, don't know if this is realistic though....
A lot of questions for discussion, I don't really have an answer but it seems like there is something to do here though I can convince myself to stay away until they miss another quarter or revise guidance downward.
Any thoughts would be appreciated.