$BIG reported today, August 27th and it was a miss. Guidance was also worse than expected.
EPS was $1.09 vs. $1.12 consensus
Comps were -13.2% vs. -11.4% consensus (but they were lapping a +31% Q)
’21 EPS guide was $5.90-6.05 vs $6.66 consensus, with the company calling out freight and supply-chain challenges.
This is a common theme among retailers to-date. Another favorite of mine, Dollar General, reported some similar issues.
That said, it is hard for me to call this quarter “ugly.”
On a 2-year stack basis, sales comp’d +14%. They said so far in the next Q, they’re ahead of that.
As I noted in my original post, $BIG now has no debt, but is flush with cash. This is tremendous option value and they still have $293MM left in cash (they typically might carry just $50MM).
They bought back ~$400MM of stock, I expect that to continue, and isn’t too shabby for a company showing $1.67BN market cap at the time of writing. Share count is down ~12% since their FYE.
They announced they’re using some cash to “refresh” 800 stores (a bit more than half their stores), but it’s a modest $100k per store refreshes. I imagine this is high-return investments.
They’re adding new stores in ’21, about 20, but noted they will 2-3x that pace in the future. Gaining scale is important for their relatively small footprint. As a reminder, they’ve been a net store decliner over the past 5 years, but now they’re positioned for growth.
They’re rolling out 2 forward DCs to help with supply chain and delivery. These are the first in the co’s history.
Furniture continues to comp well and this is what they’ve centered their stores on. I like that exposure.
Broyhill continues to chug along to being $1bn brand. They also noted, “Real Living” brand is set to be $1bn brand too.
They are adding sales staff specifically focused on helping folks buy furniture. In test markets, it resulted in a 15 point increase in sales. As they roll this out to more stores, they expect a 1 point increase to comps in 2022. Next imagine it rolled out to 1,400 stores…
On the call, they also stated, “Moving into Q3, our inventory situation has improved, and we have seen a resurgence in sales with early strength from our Halloween and Harvest assortment. Although supply chain pressures related to Asian port and manufacturing disruption will continue to create challenges, we are much better prepared to win at the all-important holiday season.”
So where I am sitting, I still like the story. Again, at the time of writing, the market cap is $1.67BN. However, they do have $293MM of cash which it seems like they can reinvest in the business.
Even with the guide down, the stock is trading at 6.6x EPS ex-cash. That seems too cheap to me. If the market wants to price $BIG as the same story as what it was 2,3, 5 years ago, I think that is incorrect. Supply chain woes will be temporary in my mind as well.
Big Lots reported a monster quarter. It’s been awhile since I wrote about it back in December, and the stock is up nicely, so I wanted to quickly review the quarter and talk about the thing I think is most important for Big Lots going forward.
Comps were +11.3% vs. consensus +6.7%, margins beat on both gross margins and operating margins… and EPS beat coming in at $2.62 vs. consensus at $1.72. Q2 guidance was also ahead of consensus.
So, not much to be upset about. Here are some other tidbits from the press release:
Furniture business, which I highlighted as a killer move (almost prescient coming into COVID), is “continuing its rapid progress toward becoming an established $1 billion brand”
Broyhill brand drove $225MM in sales alone this Q – not bad for an asset they paid $15.8MM for!
Seasonal category also comped +51%, driven by outdoor furniture
Food & consumables comped down hard, at -15%, but that’s expected as we lap the COVID stock-piling bump from last year
They now have 21 million rewards members, adding 2 million in Q1.
This goes back to my point when I wrote up BIG – the market is implying BIG will give back all of its gained customers, but at the time was saying software was going to retain all of its customers and not slow down in growth.
Is that really fair? Sure, retail isn’t that sticky, but all of the customers gone?
Next Q, they think Y/Y comps will be down low double-digits, but that’s +20% on a two-year stack
Share count is down 8% Y/Y as the Big Lots has been buying back stock
BIG now has $613MM in cash and $32MM in debt
So here’s what I still like about Big Lots: That cash opens significant optionality. If the reason why you didn’t own retail before is that they couldn’t keep up with Amazon, does this huge cash influx not help narrow the gap? Do you ignore that they are clearly pivoting the stores to be anchored by things like branded furniture, which historically customers want to touch and feel? Do you ignore that they are expanded same-day delivery or buy online, pick up in store?
On that note, management said on the call: “Our recent omnichannel initiatives to remove purchase and fulfillment friction such as buy online, pick up in store, curbside pickup, ship from store and same-day delivery with Instacart and pickup have been very successful and drove around 60% of our demand fulfillment.”
They have 27% of their market cap in cash, almost no debt, and as a reminder from my original post, a lot of store leases expirations coming up which can allow them to pivot locations if they wanted.
As a reminder, BIG typically has $50MM of cash on hand, so they now have over 10x that amount…
With BIG trading around ~$65/share, you’re buying the company for 7.6x earnings, ex-cash. Not bad for one that actually earns a decent return on capital / equity.
What if I told you there was a company with an average ROE > 22% over the past 10 years… It also earns a double-digit ROIC… What if I told you that this company was a beneficiary of COVID, and the cash flow greatly increased its future optionality for years to come? What if I told you this company also has been a consumer of its own shares – especially in market volatility (i.e. when you want it to be buying shares). The title gives it away, but I am talking about Big Lots stock.
Yes, I’m sorry readers. This is a value stock (vs. some SaaS-y growth stock). Brick and mortar retail, no less.
The stock is now down ~14% after posting Q3’20 results. While the company posted 17.8% SSS comp (a record), they noted some deceleration (perhaps too much pull forward of Holiday shopping into Black Friday + they closed early on Thanksgiving). Even so, the deceleration meant Q4 was looking like a +Double-digit Q, and their gross margin guidance seemed conservative, so I thought I’d take a deeper look.
There are several reasons why I think there is significant upside to the stock with reasonable downside protection — including some things to assuage the B&M concerns.
The quick and dirty background on Big Lots is its a discount retailer with its foundation in the south and south west, mainly opening up in strip malls (typically an “anchor” tenant). They have ~1,400 locations today, but if you haven’t heard of them it’s because you aren’t in a location they target (more suburban and rural and where the ~30% discounts to other retail they offer are appealing to the price conscious).
There’s a debate over whether companies that have strongly benefitted from COVID will give back all of the gains they’ve seen this year. In some cases, like in SaaS, investors see a sticky business with low attrition. So it appears investors are saying SaaS will give no sales back post-COVID. In fact, the street is saying they’ll continue to grow. I’m not saying that is wrong, but for retailers, they are saying the opposite.
For example, people are stuck at home. They aren’t traveling, not going to restaurants, so they’re spending on making the home better. Dollars have shifted from some sectors and into other sectors. As COVID ends, people travel more and go to restaurants, there will be less dollars to go around and they’ll cut back on the beneficiary-of-COVID sectors.
I agree with this generally. Clearly Big Lots is making more sales than ever. These comps it is posting are unsustainable and it will likely post sales declines comps next year.
However, this also didn’t come for free. On BIG’s Q1 call, they noted they canceled their annual Friends & Family event, gave their employees Easter off (which is typically a big sales event), gave a temporary $2-hr wage increase, provided an additional 30% employee discount, and additional bonus pay. So looking forward, its not just so easy to say the sales comps will reverse.
I really like the option value of Big Lots. The boost from COVID has done 3 things. And if the term wasn’t overused, I’d say it’s a flywheel – each of the factors reinforces the others:
Improved comps, therefore operating leverage, allowing them to generate a ton of cash flow
Big lots YTD has produced about 3x as much FCF as it did last year ($267MM vs. $80MM PY). It also did a sale & leaseback transaction in Q2 to generate $587MM of cash.
Q3 is a working capital investment Q ahead of the holidays, but I could see them ending the year with >$700MM of cash
Big Lots is also coming off of a capex spend, so future cash flow should also look better
Accelerated competitiveness of Big Lots and its strategic plan
Without COVID, I wonder if Big Lots would have accelerated as quickly with Buy Online, Pickup in Store… or E-Commerce (which is probably small, but up 50% in the Q)
They also now have >20MM people on their rewards database
Sure, a lot of retailers have had to adapt, but there could be something to the theory that struggling retailers (both big and small) will close some locations and post-COVID, the playing field may be altered
Introduced new buyers to the concept
With COIVD impacting so many businesses, and a lot of them shutting down, there’s no question that Big Lots benefitted from increased traffic. The question is – can they convert some of those new buyers into repeat buyers?
As of right now, the market doesn’t appear to be giving Big Lots much credit for this. In fact, it seems to be getting the least credit out of the few comps I looked at
However, as I noted, Big Lots actually does have really good deals. And they are focusing on a market with tailwinds (furniture, home decor, which I speak about later). Couple this will more rewards customers and I think its unfair to say they can’t retain much business
These are intertwined. But the issue with Big Lots, and why its multiple has been halved over the past few years, is that people view the company as being in secular decline.
The WHOLE POINT of this post is to say, I think that may be too pessimistic
But take a look at what mgmt is saying it is investing in and able to do right now. I ask myself, “is this company getting better or worse in the future?” and “is my downside well protected?”
In fact, I can’t think of a better strategy to adopt pre-COVID – mgmt’s strategy has been focused on increased home furnishings. Mgmt is probably thinking “I’d rather be lucky than good” — targeting the home was a good idea.
Furniture is a high margin category and they purchased Broyhill, which allows them to offer indoor and outdoor discount furniture (note: Broyhill is on track to do $400MM of sales this year – this is an asset they acquired at the end of 2018 for $15.8MM). Food is fiercely competitive, so they are deprioritizing that.
The issue with this original plan is how they will inform buyers they offer / are expanding in core categories – it is clear traffic was up this year, so perhaps that will help going forward.
The other factor is that we clearly had a major recession. Big Lots is a discount retailer, typically trying to offer goods at a sizeable discount. These sort of end markets tend to have tailwinds after a recession (see my AZO post), albeit this recession may be brief.
If you’re thinking, “ok this is good. I just hate the legacy brick and mortar exposure.”
The good news is 684 leases expire through 2022. That is almost half of their locations. In my view, BIG is in a much stronger negotiating position since the strip malls they tend to sit in may have been hit hard (i.e. anchor tenant leverage).
Second, if they need to “right size” their footprint, BIG can walk away, liquidate inventory, and invest elsewhere…. Including locations it thinks may be more profitable.
I don’t think Big Lots is in a bad position and I think the stock is cheap. There are upside to my numbers here below, yet the stock trades at just 5.8x 2022 EPS. For context, Dollar General trades at 22x, AZO trades at 13x, Home Depot at 20x, Ross Stores at 22x. Maybe the best comp is Bed, Bath and Beyond trading at 10x ’22 EPS and they’ve had much worse performance than BIG… the list goes on.
Ok – so some of those comps have performed better and earn a higher ROIC than Big Lots. But BIG also has the lowest expectations priced against the lowest multiple. And I view the downside risk as pretty limited.
For example, based on my estimates, the company trades at just 5.8x EPS. If it were to trade at 10x EPS, you’d have a $78 stock, or ~65% upside from today’s levels.
You can also tell the company gobbles up its shares and I expect that to continue. The company repurchased $100MM of stock and has $400MM of remaining authorization (that’s around 25% of its market cap – which it could do given the cash). That eventually will grind EPS back up to the peak we may have seen this year, especially if the stock price doesn’t react.