Friday, 4 December 2015

Big Lots - 'beginning of the beginnings' (apparently)

Yesterday I reviewed prospects at Dollar General (and indirectly Wal-Mart) following earnings.  Today I review opportunities post earnings at a name I have never published on before: Big Lots.

So - first - who are Big Lots?

Well the company describes themselves as a company which: 

'...offers brand-name closeouts and bargains that create a unique, exciting shopping experience for millions of customers. We offer a broad assortment of merchandise, including consumables, seasonal products, furniture, housewares, toys and gifts...Big Lots the nation's largest broadline closeout retailer with annual revenues approaching $5 billion. Big Lots operates more than 1,400 retail stores serving 48 states. Brand-name products from 3,000 manufacturers are supplied to stores through five regional distribution centers with more than 9 million square feet of distribution capacity'.

Yes we are back in the more bargain/austerity friendly part of the retail pool...

Before we dive into the numbers a touch of history as shown by the five year chart, note the big share price spikes down around the end of the year over the last few years reflecting poor Q4/Christmas trading.  It has almost become a trend...

...and hence investors are sceptical and I read about a big shorting base etc.

Despite apparently describing the numbers as 'solidly inline' and also citing a strong 'harvest and Halloween' sales period the Q3 numbers released earlier showed a small loss:

$0.01 per share...which compares to our guidance in the range of a loss of $0.04 per share to income of $0.01 per diluted share. This result compares to a loss from continuing operations of $0.06 per share for the third quarter of fiscal 2014. 

Thoughts on this?  Well the transitional nature of the back end of the Q3 period can be difficult for such a retailer...but clearly this is not the best.  However at least comparable sales were up:

'comparable-store sales gained 2.6% in Q3.The ownable and winnable merchandise categories showed "notable" strength in the quarter.The company's inventory level per store was level with last year's mark.Guidance: The company expects FY15 EPS of $2.95 to $3.00 vs. $2.96 consensus'

The latter point is an important one as there was a slight tightening of the bottom end of FY15 expectations.  Looking ahead the company noted that "our inventory levels were lean and on forecast to end Q3 and we are well-positioned by merchandise category for the all-important Q4 selling season...'encouraged by some of the sell-through on some of our higher margin categories"

This is all about the future.  There was a good discussion in the conference call about what was needed to get to a 6% margin (a 3-4% comparable sales hike) and how they were not there yet.
'embrace our online capabilities in the first half of 2016'.  Oh yes...they are currently running without an up-to-speed online presence (and 3 years until this initiative goes beyond break-even!!).  That reminds me of Bed, Bath & Beyond!  How did they do again this year?

Ah, yes.  Hmm. 

So some good comments and better metrics but the most insightful aspect was this comment from the CEO (since May 2013!) that 'i believe we are at the beginning of the beginnings...' . The stock is not headline expensive (indicative single digit EV/ebit around x9s) BUT you are taking such a pure punt on the Christmas trading period.  

For me I am going to wait.  When a stock is at 'the beginning of the beginnings' you can afford to miss the first x% as that uplift trend - if it occurs - is going to potentially be multi-year. If it happens...of course.  

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