I thought I’d pretty much covered all the big-box retailers, until one of them reported last week. That’s when I realized — to my utter horror — that I’d let one slip through the cracks. In fact, it’s so big that it didn’t just slip through the cracks — it slammed through. How did I miss this? I’m all about big things!
I’m talking about Big Lots (NYSE:BIG). And just to show how clueless I am, I wasn’t even aware that the company is a closeout retailer, a la Ross Stores (NASDAQ:ROST) and even online company Overstock.com (NASDAQ:OSTK).
These are the kinds of stores I love, because you usually can find fantastic bargains. Big Lots sells everything — from consumables up to entire furniture sets. It has 1,450 stores in the U.S., all over the place, yet somehow I’ve never set foot in one. It also acquired a Canadian chain of 84 stores this past year.
The first thing I did was check on Big Lots’ recent earnings report to see if the company is doing well in the present economic environment. On the surface, it looks good. Fourth-quarter revenue increased 10% on a 3.4% increase in comps. This propelled a 20% increase in earnings. Digging deeper, however, margins were impacted by discounting and management said that could continue in Q1. The new Canadian operation was expected to lose $6 million to $8 million in the first quarter alone.
Big Lots is using its cash flow wisely, but it also should tip investors off about net income growth. It generated $318 million in cash flow and used all of it and more to repurchase 11 million shares (15% of the outstanding shares) for $359 million. And when you look at the full year’s net income, it actually declined $15 million, or about 7% — and that includes the repurchases. That’s not so good after all.
The good news is that analysts see a recovery this year and next to about 15% net income growth. The balance sheet is fine, with $69 million in cash and $66 million in debt. Big Lots has the cash flow necessary to get along just fine even if things don’t work out perfectly.
But does this make BIG shares a buy? I think the squeeze on margins and the decline in net income this past year are red flags. The market thinks so, too — it has a P/E of 13 on Big Lots, which pretty much puts it on the upper end of my own rough valuation.
I think, given the circumstances, that I would not buy here. Instead, wait to see if management executes. I suggest holders of the stock hold on for the time being.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.