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Not Your Traditional Growth Story, Yet Big
Lots Is Well Positioned To Produce 20% Earnings Growth Over The Next Few
Years Through Extracting Efficiencies Out Of Its SG&A Operating Line
Analyst Interview covering:
Big Lots, Inc. (BIG)
Joan Storms, CFA
Wedbush Morgan Securities
Interview conducted by:
Lynn Fosse, Senior Editor
Published – April 4, 2008
Ms. Storms has been a sell-side equity analyst for fifteen years primarily
covering hardline retail companies. She has been at Wedbush Morgan
Securities in Los Angeles for almost ten years. Previously, Ms. Storms spent
four years at Needham & Company in New York where she was an analyst on the
consumer/retail team following hardline retailers. Prior to Needham, she
worked as an analyst following restaurant stocks for two years at Moran &
Associates in Connecticut. Ms. Storms holds an MBA from the University of
Notre Dame Graduate School of Business and a Bachelor’s degree in Economics
and Business Administration from Eckerd College.
Big Lots, Inc., headquartered in
Columbus, Ohio, is the largest closeout retailer in the U.S. The company
operates 1,353 stores mostly located in strip malls in 47 states, with
approximately 37% of its stores located in California, Ohio, Texas and
Ms. Storms please tell us about the universe you cover and why Big Lots is
part of that?
“I follow hardlines retail and part of one of the sectors in hardlines is
the dollar store/discounter sector. Of those companies, we follow Big Lots,
Dollar Tree; 99 Cents Only, and Fred’s. Big Lots fits nicely into the
discount category because it is the largest closeout retailer in the United
States. Their core customer is not necessarily the dollar store customer
because they can and do charge higher prices as long as it represents a good
value to the customer.”
You’ve recently raised your recommendation; what are your feelings on Big
Ms. Storms: “Big Lots is not a
traditional growth story, but we have a pretty good road map and visibility
for a 20% earnings growth rate over the next few years that is primarily
being driven by the company being able to extract efficiencies out of its SG&A
operating line. We are actually forecasting flattish gross margin although
if they are up that would be great, but it’s really mostly being driven by
SG&A. The company has a number of initiatives in place starting in the last
couple of years since their current CEO came on board and we have visibility
for benefits from those initiatives through 2010.”
Tell me what else you like about the current management team?
“The new CEO, Steve Fishman,
officially came on board a little over two years ago, but not much of the
rest of the management team has changed. He has brought a vision and a
passion to the company and a merchandising perspective that the company did
not have before. The closeout business is a little bit different from
traditional retail because your whole buying process has to be financially
engineered from your initial bid on the business, all the way through
shipping the merchandise et cetera. It is more complicated than the
How do you see the general economy affecting Big Lots?
“During the back half of
last year, we clearly saw that there was real resistance in consumer
spending by the customer. However, Big Lots management also feels that they
missed on some merchandising opportunities that were self-inflicted, in
particular in the home area, which has been weak across the board. But they
have made some merchandising management changes and now are expecting some
better business out of that category. Another thing that hurt heading into
the holiday was the toy business. As we are now out of the holiday period,
and toys represent a smaller percentage of the business, we don’t have that
drag and a lot of that has to do with the issues related to China that we
saw with the major toy manufacturers last year.”
When does the new SAP implementation take place?
“They are going to start to
implement that this year and that is their core merchandising system and it
also will impact the financial and the wholesale systems which should go
live in 20O9. Therefore, they’ve got enough planning time to be able to
manage that pretty effectively.”
Could you tell us a little more about the SG&A initiatives which are so
important to the future success of the company?
Ms. Storms: “In the back half of
last year, the company began a re-engineering process of its inbound and
outbound freight. So we should continue to see those efficiencies through
the first half of this year. In addition, they are also getting benefits
from the roll out of the new POS system. It is in about half the chain right
now and it is being rolled out to the remaining half of the chain during the
first half of 2008. This should result in efficiencies in customer service
at the store level. It will also allow them to test different marketing and
pricing alternatives, which should give them a nice advantage from a gross
As we head into the back half of this year, the
company will be implementing a new furniture supply chain initiative. The
company has been very strong in inventory management. It has significantly
reduced inventory levels at the main closeout DCs, which has allowed them to
transfer furniture from the furniture DCs to the main closeout DCs. This
should result in the stores receiving just one shipment as opposed to two.
That means a lot less touches on the merchandise, lower transportation costs
and less payroll expense associated with receiving at the store level et
cetera. Finally, the SAP initiative is scheduled to begin to show
efficiencies in the ‘O9 and ‘010 timeframe.
Address potential investors; why is this the time to be looking at Big Lots?
“The stock in my mind is a very
good value trading at probably one of the cheapest valuation in the group or
in hardlines overall at a P/E of around 11-12x. That is a pretty significant
discount to what we are forecasting be a 20% growth rate for the next couple
of years. Therefore, traditionally, if you think it’s a good company with a
good management team, which we do, trading at that sort of a valuation, we
think it’s an attractive time to buy the name. In addition, as I said
before, we believe that we have pretty good visibility on both low single
digit comps as well as 20% plus earnings growth in the next couple of years.
That should give people more confidence in the current management team and
their ability to execute."
In closing, what is your recommendation and your price target?
We have strong buy rating on the
stock. We had upgraded it recently, actually on the 24th of March
and we have a $28 price target.”
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