Big Lots Inc.
/ (BIG-NYSE)Big Lots continues to reinstate itself on the growth trajectory after a dismal run. The company is focused on growth avenues (Furniture financing and Food consumables category) and has exited the unprofitable Canadian market, which prompted us to upgrade our long-term recommendation on the stock to Neutral. Moreover, to regain momentum the company has undertaken several initiatives such as store remodel, “Edit to Amplify” merchandising strategy and developing its e-Commerce capabilities to cater to the changing trends. However, Big Lots continues to disappoint on the earnings front as fourth-quarter fiscal 2013 earnings came in much below the Zacks Consensus Estimate. The company also provided a tepid outlook for fiscal 2014, triggering a downtrend in the Estimate. Also, waning comps, sluggish sales of discretionary items and competitive backdrop keep us on tenterhooks.
/ Equity Research / BIG | Page 6
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 03/24/2014
Current Price (03/21/14) / $38.02
Target Price / $40.00
SUMMARY
/ Equity Research / BIG | Page 6SUMMARY DATA
52-Week High / $38.9652-Week Low / $25.71
One-Year Return (%) / 6.77
Beta / 1.27
Average Daily Volume (sh) / 2,177,593
Shares Outstanding (mil) / 58
Market Capitalization ($mil) / $2,220
Short Interest Ratio (days) / 8.57
Institutional Ownership (%) / 98
Insider Ownership (%) / 4
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 3.9
Earnings Per Share (%) / 5.9
Dividend (%) / N/A
P/E using TTM EPS / 21.9
P/E using 2014 Estimate / 15.7
P/E using 2015 Estimate / 13.3
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Mid-Blend
Industry / Retail-Discount
Zacks Industry Rank * / 222 out of 267
OVERVIEW
Based in Columbus, Ohio and founded in 1967, Big Lots, Inc. (BIG) is a broad-line closeout retailer in the United States. The company offers products under various merchandising categories, which include Consumables, Home, Furniture, Hardlines, Seasonal and Other. As of March 7, 2014, Big Lots operated 1,495 stores in the U.S.
· Consumables Category: These include food, health and beauty, plastics, paper, chemical, and pet departments.
· Home category: These include domestics, stationery and home decorative departments.
· Furniture Category: These include the upholstery, mattresses, ready-to-assemble and case goods departments (consist of bedroom, dining room and occasional furniture).
· Hardlines Category: These include electronics, appliances, tools and home maintenance departments.
· Seasonal Category: These include lawn and garden, Christmas, summer and other holiday departments.
· Other Category: These include the toy, jewelry, infant accessories and apparel departments.
In Dec 2013, Big Lots declared its exit from the unprofitable Canadian market. The company is likely to shut down all primary operations and stores and report these as “discontinued” by first-quarter fiscal 2014. Notably, it had entered Canada in 2011 after acquiring Liquidation holdings Inc.
REASONS TO BUY
· Growth Initiatives Undertaken: Big Lots is focusing on furniture financing program as well as the food and consumables category as both continue to gain traction. The furniture business is likely to be extended to most of the stores (1,300 stores or 85%) as the business has experienced high single to low double-digit increases in the last six months making it a profitable option. Further, food and consumable category has displayed strong same-store sales (up in mid single-digits) for the past two quarters, making it another profitable avenue. Therefore, the company has actively been rolling out cooler/freezer to expand merchandises of food-related items and target food stamp recipients. It intends to cover 600 stores in 2014, bringing the total number of stores with cooler/freezer capacity to 700.
· Exit from Canada: By first-quarter fiscal 2014, the company expects to shut down all primary operations and stores and report these as “discontinued.” In the third quarter of fiscal 2013, Big Lots had announced its decision to wind up its operations in the unprofitable Canadian markets. Notably, the company had ventured into Canada in 2011 with the acquisition of Liquidation World Inc. However, after careful business evaluation, Big Lots decided to move out of Canada and focus on other areas such as e-Commerce and omnichannel capabilities. We believe the company’s exit from Canada to be favorable, which will likely drive its future performance.
· Closeout Format Provides Advantage: We believe Big Lots’ closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at very lower prices. The company buys brand merchandise at lower costs from vendors who have excess inventory and resorts to a fire sale of their goods, or have higher sales returns or discontinued products. We believe that the initiatives undertaken such as store remodel, changes to its loyalty reward program, and “Edit to Amplify” merchandising strategy will help building driving growth momentum. Moreover, the company is laying emphasis on developing its e-Commerce/omnichannel capabilities in line with changing trends. The company is likely to invest nearly $15 million of capital towards e-Commerce development and it is likely to be operational sometime in fiscal 2015.
· New Share Repurchase Program: Big Lots’ board recently approved a share buyback program of $125 million, which will cushion the bottom line going forward and enhance shareholders’ value. Notably, the company has not repurchased shares since 2012.
REASONS TO SELL
· Dismal Results, Estimates Lowered: Big Lots’ dismal quarterly performance and a tepid earnings outlook for fiscal 2014 made analysts less constructive on the stock’s future performance, thereby triggering a downtrend in the Zacks Consensus Estimate for fiscal 2014 over the last 30 days. For the fourth quarter of fiscal 2013, the company delivered earnings of $0.98 per share that was way below from the Zacks Consensus Estimate as well as the prior-year quarter figure.
· Competitive Pressure: Big Lots, which operates in a highly competitive discount retail business, faces stiff competition from other general merchandise, discount, food, and dollar store retailers. This may result in loss of market share as well as fall in sales and operating margins. The competitors that have a larger number of stores, greater market presence and more financial resources will continue to weigh on the company’s results.
· Economic Threat in Major Operating Markets: The company’s operating performance is directly correlates to the health of the economy where it operates. The economies of four states, Ohio, Texas, California and Florida is important for the company as it has approximately 33% of its stores base located in these states, which together contribute a major portion of revenues. The deterioration in the economy of the major markets may adversely impact the company’s revenue generating capabilities.
· Lower Discretionary Spending May Hamper Results: The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their disposable income, and in turn the company’s growth and profitability. The company’s 70% of products are discretionary in nature.
RECENT NEWS
Big Lots Q4 Earnings Miss– March 7, 2014
Big Lots Inc. reported adjusted earnings of $0.98 per share, way below the Zacks Consensus Estimate of $1.39 per share and down 53% year over year.
The company’s U.S operations contributed $1.45 per share while its Canadian operations reported a loss of $0.47 in the quarter.
Including certain one-time items and discontinued operations, Big Lots’ earnings from operations was $1.39 for the fourth quarter, down 33.2% from the prior-year quarter.
For the full year, adjusted earnings came in at $1.75 per share, lagging the Zacks Consensus Estimate of $2.20 and down 41.3% year over year.
Further, Big Lots, provided outlook for first-quarter fiscal 2014 and declared that its exit from the unprofitable Canadian Markets is on schedule and costs associated with the same have been lower than expected.
Adjusted consolidated net sales decreased 6.2% year over year to $1,636.3 million but was ahead of the Zacks Consensus Estimate of $1,606 million. For the full year, adjusted consolidated net sales came in at $5,301.9 million, which beat the Zacks Consensus Estimate of $5,253 million but was down 1.2% year over year.
Net sales for its continuing U.S. operations fell 7.3% to $1,571.9 million in the quarter. However, U.S. comparable-store sales (comps) declined 3%.
The company’s gross profit fell 9.8% to $625.7 million while gross margin decreased 150 basis points (bps) to 38.2%. Operating loss was $108.2 million, down 45% from the prior-year period.
Update on Exit from Canada
By first-quarter fiscal 2014, the company expects to shut down all primary operations and stores, and report these as “discontinued.” In the third quarter of fiscal 2013, Big Lots had announced its decision to wind up its operations in the unprofitable Canadian markets. Notably, the company had ventured into Canada in 2011 with the acquisition of Liquidation World Inc.
However, after careful business evaluation, Big Lots decided to move out of Canada and focus on other areas such as e-Commerce and omnichannel capabilities.
For the first quarter of fiscal 2014, Big Lots anticipates loss from Canadian operations to be around $37–$41 million or $0.64–$0.71 per share.
Guidance
Big Lots expects adjusted earnings per share from continuing operations to be $0.40–$0.45 for first-quarter fiscal 2014 while comps are expected to be in the range of slightly positive to slightly negative.
For fiscal 2014, Big Lots expects adjusted earnings from continuing operations in the range of $2.25–$2.45 per share. Comps are expected to range from flat to a rise of 2%. Net sales are expected to remain flat to fall slightly.
Share Repurchase
On March 4, 2014, Big Lots’ board of directors approved a share repurchase program worth $125 million, which will commence from March 11, 2014.
Store Update
During the quarter, Big Lots opened 3 stores in the U.S and shuttered 35 stores. At the end of the year, the company operated 1,493 stores in the U.S. For fiscal 2014, the company expects to open 30 outlets and close 50 stores.
Other Financial Details
The company ended the quarter with cash and cash equivalents of $68.6 million, inventories of $915.0 million and shareholders’ equity of $901.4 million. The company, at the end of the quarter, had $77.0 million in its long-term obligations under the bank credit facility. The company expects to generate $165 million in consolidated cash flow in fiscal 2014 whereas $140 million after removing the impact of closure of Canadian operations.
VALUATION
Big Lots’ current trailing 12-month earnings multiple is 21.9X, compared with 20.4X industry average and 18.3X for the S&P 500. Over the last five years, Big Lots’ shares have traded in a range of 10.4X to 15.4X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward earnings estimates. Our target price of $40.00, 16.5X 2014 EPS, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of BIG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1068 companies covered: Outperform - 17.8%, Neutral - 74.3%, Underperform – 7.3%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
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