|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|
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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
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