Unfortunately, for those of us that missed this opportunity, at around $2.5b market cap, the questions we have to answer are a lot different. At a $600m market cap, it was trading under 4x normalized FCF and paying out a 10% dividend yield. Analysisīig Lots has gone from a pure value play in March/April, where it needed to survive operational pressures on its supply chain (25 percent of BIG’s products are purchased from overseas) and generate close to their historical normalized FCF to be a great investment. They also sold their remaining distribution centers, in June 2020, for $725m ($590m net of taxes) and paid down a significant amount of debt. In April, Big Lots and the activists came to a compromise and appointed two new members to the board, whilst nominating a third to be confirmed at the annual shareholder meeting. They also wanted BIG to sell their distribution centers to generate additional cash and unlock value for investors.
The funds, Macellum and Ancora, were disappointed with the capital allocation strategy and believed BIG had missed out on a positive secular shift for the discount retail industry. In March 2020, two activist funds disclosed a stake of more than 10% in Big Lots and nominated nine directors to the board (which would have replaced all incumbent board members). The Company has consistently bought in shares, reducing the share count from 58m in 2013 to 38.4m in Q3 2020 and pays an annual dividend of approximately $50m ($1.25 per share). The strategy has required significant capital investment over the past three years and produced promising results, with same store comps typically rising mid to high single digits the year the format rolls out. The format focuses on higher-margin businesses such as Furniture, Soft Home, and Seasonal categories by giving them prominent position in stores and within eyesight as customers enter. The Company has undergone a strategic shift, launching the Store of the Future in late 2017 under previous CEO David Campisi and continuing the rollout with current CEO Bruce Thorn. Source: Tables created by author with data from 10-K The tables below show the P&L and revenue breakdown over the past 7 years. The Company sells items from furniture to food and focuses on providing value to Jennifer (what BIG calls their target customer). Source: Big Lots Company background and recent developmentsīig Lots is a discount retailer that operates 1,400 stores in 47 states throughout the U.S. However, the current price assumes a rosy future for Big Lots and an investment requires a strong conviction the pandemic has kickstarted consistent growth (after years of stagnating sales). They have reduced debt to under $50m (from $300m) and built up a cash balance of $550m from sales of their distribution centers. The emphasis on these higher-margin categories should help increase FCF over the long term as capex investment slows after the remodel.
The stock is up more than 500 percent from its March 2020 lows and looks set up for growth with the new Store of the Future format which focuses on the Furniture, Soft Goods, and Seasonal categories.
They’ve used their advantage as an essential retailer to acquire new customers and deliver $400m of operating cash flow (not including the sale of distribution centers). ( NYSE: BIG) has produced a spectacular turnaround since the onset of the pandemic.
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