Big Lots (BIG) — a recommendation in our "Buy Low Opportunities" portfolio — is a discount general merchandise retailer based in Columbus, Ohio, with 1,431 stores across 47 states, notes Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.
Its stores offer an assortment of furniture, hard and soft home goods, apparel, electronics, food and consumables as well as seasonal merchandise. The company has a large and loyal customer base of 22 million Rewards program members, which has growth steadily over the past decade. Also, as the economy shifts into a slower, higher-inflation gear, Big Lots’ lower-cost merchandise offerings are likely to benefit.
While cash operating profit margins are generally low, at about 5.5%, they appear to be stable, even with growing cost inflation and other pressures. We acknowledge that the first quarter will likely be weak, as management guided, and that investor expectations for the full year may be incrementally too high.
On conservative fiscal 2022 (ending in January 2023) estimates, the shares currently trade at 3.1x EV/EBITDA and 7.3x per-share earnings. These multiples imply a dour recessionary future for the company. The EV/EBITDA multiple, in particular, is sharply below an average of perhaps 11x for its peers. Even adjusting for scale and quality, a 70% discount for BIG is unwarranted.
From a historical perspective, Big Lots’ shares trade unchanged from their 2007 price level and are down 50% from their stimulus-boosted peak at over $70 last year.
Big Lots’ balance sheet carries only $4 million of debt compared to $54 million in cash. While the balance sheet ebbs and flows with its inventory needs, the company is operated primarily as a debt-free business. This provides BigLots with considerable endurance and flexibility. We would rate the management and board quality as “good enough.”
Big Lots generates positive free cash flow that is strong enough to provide a reasonably sustainable $0.30/share quarterly dividend. This dividend generates an attractive 3.4% dividend yield. The company also has been a repurchaser of its own shares.
The presence of investor Mill Road Capital (with a 5.1% stake) is interesting. We doubt whether Mill Road has the financial firepower to execute a buy-out on its own and are also skeptical of its proposal for Big Lots to lever up to do a share buyback. Nevertheless, Mill Road has publicly highlighted the company’s deeply discounted shares — a positive without a doubt.
All-in, while BIG shares carry higher risk, the risk/return trade-off appears compelling. We are intrigued enough by the shares’ remarkably low valuation to make this stock a "Buy". We are setting an initial $45 price target on the shares.