Big Lots Is Too Cheap to Ignore

The discount retailer had a tough 1st quarter, but looks to be undervalued

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May 29, 2022
Summary
  • Big Lots operates 1,438 discount and general merchandise stores in North America.
  • The company shocked investors with a 17% comparable sales decline in the first quarter.
  • Big Lots is selling at extremely low valuations across all metrics.
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If you have not been to a Big Lots Inc. (

BIG, Financial) store, it is somewhat hard to describe. It s a unique home discount retailer with 1,438 stores in 47 states. The company offers products under various merchandising categories such as furniture that includes upholstery, mattresses, case goods and ready-to-assemble departments. There is also seasonal goods that fit into Christmas and Halloween seasons. Soft home categories include bedding, bath, window, decorative textile, home organization, area rugs and other home décor. The company covers the whole gamut of consumer products, including beverages, grocery, candy, snacks, specialty foods and pet supplies. In addition, it provides merchandise under the consumables category, such as health, beauty and cosmetics, plastics and paper. In true department store fashion, it also offers small appliances, tabletops, food preparation, stationery products, home maintenance, organization products and toys.

Currently, furniture-related products is the largest category and accounts for about 29% of total revenue. Big Lots was founded in 1967 and is headquartered in Columbus, Ohio. The company currently has a market capitalization of $769 million and generated revenue of $6.1 billion in its last fiscal year.

Financial review

On Friday, the company reported very difficult first-quarter financial results with sales declining 15.4%. The company faced a difficult comp with the prior year as results showed a strong increase of 11.3%. In addition, the company noted a slowdown in consumer spending, driven by higher gas prices and other inflationary pressures.

Gross margins decreased to 36.7% from 40.2% in the prior period. The company reported a rare operating loss for the quarter at -$13.5 million and a net loss per share of 39 cents. Big Lots reported a stunning burn rate of well over $200 million in the quarter. Management said that should reverse in the second quarter with a positive free cash flow of approximately $100 million.

The company ended the first quarter with $61.7 million of cash and equivalents and $270.8 million in long-term debt, compared to $613.3 million of cash and equivalents and $32.1 million in long-term debt as of the end of the first quarter of fiscal 2021. The company said it expects both inventory levels and total borrowings to be reduced significantly during the second quarter of this fiscal year.

Valuation

The company is trading at very low valuation multiples. After the surprising loss in the most recent quarter, earnings per share estimates are all over the place ranging from a loss of over $3.00 per share to positive EPS of over $3.00 per share.. Looking to next years estimates, the company is still in the single-digit price-earnings club that seems to be gaining new members every week.

The company’s enterprise value-EBITDA ratio is 3.5 times based on $275 million in estimated 2022 EBITDA. However, that number does not reflect the fact that Big Lots will generate $100 million in free cash flow this current quarter and EBITDA is unusually depressed because of a difficult sales environment and inflationary pressures.

The GuruFocus discounted cash flow calculator creates a value of approximately $47 using earnings of $3.40 per share as the starting point with a 5% 10-year growth rate.

The current dividend yield is 4.45%, or almost three times the S&P 500 dividend yield. The annualized dividend payment is $1.20, which is approximately a 33% payout ratio.

Guru trades

Gurus who have recently purchased Big Lots stock include

John Hussman (Trades, Portfolio) and Robert Olstein (Trades, Portfolio). Gurus have reduced their positions include Chuck Royce (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

Conclusion

Big Lots faces a lot of competition in the discount and general merchandise retail category, particularly among low-income consumers. However, the company has done a good job with its omni-channel presence, which includes in-store pickup, curbside pickup, same-day delivery and two-day shipping.

Despite wage and cost inflation, the company appears to be significantly undervalued. The dividend appears to be safe and should be able to provide some level of stability in a volatile market.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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