Big Lots, Inc. (NYSE:BIG) offers great value right now. The recent broader market sell-off has opened up a lot of exciting new opportunities in stocks that were a little too pricey, and Big Lots stock is one of them.
BIG is a discount retailer with a big presence. Big Lots operates 1,430 discount stores. One third of them are based in California, Texas, Florida and Ohio.
And the name fits the company. It has a very large variety of products to fill its stores. BIG breaks down its merchandise sold into seven categories: Furniture (upholstery, mattress, ready-to-assemble items), Food (beverage and grocery, candy and snacks), Consumables (health and beauty, paper and plastics, pet items), Soft Home (home décor, frames and bedding), Seasonal (lawn and garden, summer and Christmas items), Hard Home (small appliances and food preparation) and Electronics, Toys and Accessories.
Turnaround for Big Lots and Big Lots Stock
Big Lots has had a relatively flat store base and low-single-digit comparable store sales growth. Its operating income has gradually improved after CEO David Campisi took over in May 2013, however.
He closed BIG’s Canadian division, which came about from an unsuccessful merger in 2011. He also initiated an “edit and amplify” strategy, which involved reducing products in categories that weren’t very popular and adding choices in categories that were.
In addition, throughout fiscal 2018, Big Lots has tried to reduce its dependency on close-out channels for sourcing merchandise. In the past, this led to inconsistent selection for consumers. BIG also reduced its dependency on close-outs by implementing a merchandise strategy that uses a ratings system to measure quality, brand, fashion and value. This helps management better meet customer expectations.
Given these adjustments and a strong economy, the company’s earnings have improved each year since 2014. After bottoming out in the January 2014 fiscal year at $1.98 a share, Big Lots stock earnings reached $3.64 a share in fiscal 2017.
While sales were flat to down through most of this period, gross profit and operating expenses rose. In addition, management used the significant cash flow to aggressively buy back shares. The share count down went more than 20% over that time.
Results have been strong through the first nine months of fiscal 2018. Even though sales remain relatively flat at $3.62 billion, gross margins continue to expand and cost initiatives are driving down expenses. Furthermore, management is forecasting good results in the seasonally-critical fourth quarter.
Potential Takeover Target
The future looks good for Big Lots. Continued operational improvements and the lower tax rates could boost earnings to $5 a share in fiscal 2019.
In addition, with net debt of only $60 million versus shareholder equity of $650 million and minimal interest expenses, Big Lots stock could take on significant debt — perhaps as much as $500 million — which would allow the company to retire an additional 20% of its shares.
Its low leverage also makes it a potential takeover target of a private equity or leverage buyout firm.
Given these factors, I think BIG is a great buy any time it’s below $60. Even if it’s not bought out, the stock could easily run to $67 over the next 12 months.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.