The Big-Box Store With Not-So-Big Profits

by Lawrence Meyers | March 6, 2012 8:37 am

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[1]). 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[2]) and even online company Overstock.com (NASDAQ:OSTK[3]).

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[4] did not hold a position in any of the aforementioned securities[5]. He is president of PDL Capital, Inc.[6], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com[7]. He also has written two books[8] and blogs about public policy[9], journalistic integrity[10], popular culture[11] and world affairs[12].

Source URL: https://investorplace.com/2012/03/the-big-box-store-with-not-so-big-profits/

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