March 13, 2015 Big Lots Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 03/24/2014 Current Price (03/11/15) $49.95 Target Price $52.00 52-Week High $50.96 52-Week Low $36.32 One-Year Return (%) 39.69 Beta 0.98 Average Daily Volume (sh) 1,069,256 Shares Outstanding (mil) 53 Market Capitalization ($mil) $2,696 Short Interest Ratio (days) 10.67 Institutional Ownership (%) N/A Insider Ownership (%) 4 Annual Cash Dividend $0.68 Dividend Yield (%) 1.35 5-Yr. Historical Growth Rates Sales (%) 2.1 Earnings Per Share (%) -4.8 Dividend (%) N/A using TTM EPS N/A using 2015 Estimate 17.4 using 2016 Estimate 14.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (BIG-NYSE) Big Lots strategic initiatives are paying off quite well as reflected in the company s fourth-quarter fiscal 2014 results. Both the top and bottom lines beat the Zacks Consensus Estimate and rose year over year. The company posted positive comps for the fourth straight quarter in fiscal 2014 as furniture, food and consumables categories continue to gain traction. We believe that the company s furniture financing program, merchandise initiatives and refurbishment of the food department would help in augmenting sales. However, the only threat that the company currently faces is lack of omni-channel capacities. Rise in online shopping can mar its turnaround efforts. Though the company is developing its ecommerce site, it won t be operational before 2015-end. Currently, we stay Neutral on the stock. Average, Type of Stock Mid-Blend Industry Retail-Discount Zacks Industry Rank * 83 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 1,311 A 1,226 A 1,152 A 1,572 A 5,125 A 2014 1,281 A 1,195 A 1,107 A 1,593 A 5,177 A 2015 1,285 E 1,205 E 1,117 E 1,613 E 5,227 E 2016 5,311 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $0.61 A $0.31 A -$0.16 A $1.45 A $2.45 A 2014 $0.50 A $0.31 A -$0.06 A $1.76 A $2.46 A 2015 $0.59 E $0.37 E -$0.01 E $1.95 E $2.88 E 2016 $3.44 E Only Q4 and FY figs have been changed due to recasting. Annuals may not add up to totals due to restatement. 10K awaited. Projected EPS Growth - Next 5 Years % 14% 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Columbus, OH and founded in 1967, Big Lots, Inc. (BIG) is a broad-line closeout retailer in the United States. The company offers products under various merchandising categories, which include Consumables, Home, Furniture, Hardlines, Seasonal and others. As of Mar 6, 2015, Big Lots operated 1,461 stores in the U.S. Big Lots pulled out of Canada in first-quarter fiscal 2014 and reported the operations as discontinued. In the third quarter of fiscal 2013, Big Lots announced its decision to wind up its operations in the unprofitable Canadian markets. Notably, the company had ventured into Canada in 2011 with the acquisition of Liquidation World Inc. However, after careful business evaluation, Big Lots decided to move out of Canada and focus on other areas such as e-commerce and omni-channel capabilities. REASONS TO BUY Growth Initiatives: Big Lots continues to focus on the furniture financing program as well as the food and consumables categories, as these consistently gain traction. Roll out of furniture financing has been extended to 1300 stores and the response has been impressive. The category registered double-digit growth in the quarter. Also, the company s management has been expanding assortments in this category by including lawn and garden items, such as patio furniture, gazebos and gas grills. Further, the food and consumable categories have reported strong comparable-store sales (comps) for the last few quarters, which make them other profitable avenues. In the quarter under review, food was again up in low-double digits, whereas consumables grew in the mid-single digits. Moreover, to tap the opportunities presented by these two categories, management has added more brands and also revamped its food department by giving it a fresh look for the convenience of customers. Further, the company has been actively rolling out cooler/freezer facility to expand merchandise of food-related items to target food stamp recipients. Following the holiday season, the company completed the roll out of the facility to 500 additional stores. These initiatives are likely to boost comps and revenues going forward. Positive Comps: Big Lots has registered positive comps growth for all the quarters of fiscal 2014 driven by improvement in the food, consumables and furniture categories. Comps for the quarter were up 2.9% following a 1.4%, 1.7% and a 0.9% rise in the trailing three quarters, respectively. It seems that the company s merchandising strategies and effective marketing are paying off quite well. Shareholder Wealth Maximization: Recently, the company hiked its quarterly dividend by 12% to $0.19 per share. In addition, Big Lots announced a new $200 million worth of share repurchase authorization. Big Lots completed two share repurchase programs worth $125 million each in 2014 and also initiated dividend payment last year. All these positive factors make the stock an asset for both yield and growth seeking investors. Closeout Format Provides Advantage: We believe Big Lots closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at very lower prices. The company buys brand merchandise at a lower cost from vendors who have excess inventory and offers a fire sale of their goods, or have higher sales returns or discontinued products. We believe that the initiatives undertaken such as store remodel, changes to its loyalty reward program, and Edit to Amplify merchandising strategy will help building driving growth momentum. Moreover, the company is laying emphasis on developing its e-commerce/omnichannel capabilities in line with changing trends. Equity Research BIG Page 2
REASONS TO SELL Competitive Pressure: Big Lots, which operates in a highly competitive discount retail business, faces stiff competition from other general merchandise, discount, food, dollar store and online retailers. This may result in loss of market share as well as fall in sales and operating margins. Competitors with larger number of stores, greater market presence and better financial resources will continue to weigh on the company s results. Additionally, recent trends point toward greater digital sales, which is another pressing concern for Big Lots whose omni-channel capacities is at the nascent stage. Big Lots digital portal is not likely to be operational before 2015-end. Economic Threat in Major Operating Markets: The company s operating performance is directly correlated to the economic health of the region where it operates. The economies of the four states, Ohio, Texas, California and Florida is important for the company as it has approximately 33% of its stores located in these states, which together contribute to a major portion of revenues. The deterioration in economy of the major markets may adversely impact the company s revenue generating capabilities. Lower Discretionary Spending May Hamper Results: The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their disposable income, and in turn the company s growth and profitability. 70% of the company s products are discretionary in nature. RECENT NEWS Big Lots' Q4 Earnings Beat by a Penny, Rise Y/Y Mar 6, 2015 Big Lots reported fourth-quarter fiscal 2014 adjusted earnings from continuing operations of $1.76 per share came in a penny ahead of the Zacks Consensus Estimate while rising 21.4% year over year. Revenues of $1,593.3 million for the quarter increased 1.4% year over year and beat the Zacks Consensus Estimate of $1,590 million. For fiscal 2014, adjusted earnings per share came in at $2.46, a penny below the Zacks Consensus Estimate but up from $2.45 earned in the prior fiscal. Revenues of $5177.1 million easily beat the Zacks Consensus Estimate of $5,173 million while rising 1% year over year. Big Lots merchandising strategies and effective marketing and inventory management are paying off quite well as evident from its unabated comparable-sales (comps) growth. Comps increased 2.9% in the quarter, representing the fourth straight quarter of comps growth. Furniture, food and consumables remain the key categories. Management also stated that it is likely to unveil the company s e-commerce website over the holidays or in first quarter of fiscal 2016. The company s gross profit was up 6.6% year over year to $649.9 million, while gross margin increased 200 bps to 40.8%. Operating profit came in at $153.4, up 13.6% from the year-ago quarter, while operating margin grew 100 bps to 9.6%. Equity Research BIG Page 3
Other Financial Details Big Lots ended the quarter with cash and cash equivalents of $52.3 million, down 23.8% year over year, while inventories were down 6.9% to $851.7 million. Inventories shrunk on account of ceased wholesale and Canadian operations, reduced outlets and a 4% fall in inventory per store (U.S. stores). The company has closed 57 outlets in the year of which 36 were shut in the fourth quarter. It also opened 24 new outlets during the year. The company, had $62.1 million in its long-term obligations at the end of the quarter, reducing significantly from $77 million in the prior-year quarter, under the credit facility. Guidance For fiscal 2015, Big Lots expects earnings from continuing operations in the range of $2.75 $2.90 per share, up 12% 18% year over year. Comps are expected to increase in the low single-digit range, while total sales are expected to remain almost unchanged year over year. Also, the company expects $175 million of cash flow generation for fiscal 2015 as against $254 million in fiscal 2014. For the first quarter of fiscal 2015, earnings per share from continuing operations are now expected to be in the range of $0.55 to $0.60 per share as against $0.50 earned in the prior-year quarter. Comps are predicted to grow in the band of 1% 2%. Share Repurchase For fiscal 2014, Big Lots bought back 6.1 million shares worth $250 million and paid $28 million in dividends. In addition, Big Lots announced a new $200 million worth of share repurchase authorization. Dividend Update Apart from better-than-expected results, the company gave investors another reason to cheer by hiking its quarterly dividend by 12% to $0.19 per share. The increased dividend will be paid on Apr 3, 2015, to shareholders as of Mar 20, 2015. The company had initiated dividend payment last year. Equity Research BIG Page 4
VALUATION Over the last five years, Big Lots shares have traded in a range of 10.4X to 23.7X trailing 12-month earnings. The stock is also trading at a discount to the industry average, based on forward earnings estimates. Our target price of $52.00, 18.1X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Big Lots Inc. (BIG) 17.4 14.5 14.0 10.4 N/A 23.7 10.4 Industry Average 25.2 20.7 13.5 25.1 31.0 187.8 15.2 S&P 500 16.2 15.1 10.7 14.6 17.8 18.4 12.0 Dollar Tree, Inc. (DLTR) 22.6 19.5 13.3 19.0 25.2 25.5 15.5 Family Dollar Stores Inc. (FDO) 28.7 26.9 8.4 15.0 27.9 28.1 15.1 Burlington Stores, Inc. (BURL) 25.2 22.0 32.8 17.4 40.0 38.9 25.2 PriceSmart Inc. (PSMT) 23.1 21.5 15.0 19.0 25.1 44.1 15.0 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. Big Lots Inc. (BIG) 3.7 4.0 1.7 15.1 0.1 1.4 10.3 EV/EBITDA Industry Average 6.6 6.6 6.6 6.7 1.2 0.7 48.1 S&P 500 6.2 9.8 3.2 25.4 N/A 2.0 N/A Equity Research BIG Page 5
Earnings Surprise and Estimate Revision History Equity Research BIG Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of BIG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 15.4%, Neutral - 74.9%, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research BIG Page 7