Since a brand spanking new Big Lots, Inc. (NYSE:BIG) just opened three days ago I had to see if it was better than the one I used to visit, which was at best cluttered, dirty, and dark.
This new version was slightly smaller than the old one, but definitely cleaner with wider aisles and slightly brighter. The furniture section was laid out better. Basically, the concept was the same, discounts on household items, shelf-stable food, limited electronics, gift items, seasonal decor, with the addition of furniture and mattresses. That still perplexes me… like seeing a table for eight for sale at a dollar store.
Business was brisk and cashiers helpful unlike the other Big Lots, Inc. (NYSE:BIG). Overall, a decided improvement and it carried more brand names like Procter & Gamble than its dollar store cohorts. More expensive, but definitely cheaper than CVS, big box, or supermarket prices.
It sells some of the same items as a Dollar Tree, Inc. (NASDAQ:DLTR) or Family Dollar and a few of the same items as a TJ Maxx store, but the furniture thing… don’t get me started. It also resembles Costco Wholesale Corporation (NASDAQ:COST) without the membership fee or the fresh food. and yes, tasty samples. All these names also compete with Wal-Mart and Target.
Big Idea
Big Lots, Inc. (NYSE:BIG) has a trailing P/E of 12.53 with a forward P/E of 10.94 and a PEG of 1.23. The stock is down 11.13% over 52 weeks. Barron’s went bullish on the name in mid-June, citing faith in a new CEO and since then Big Lots has risen 10%. But years of merchandising mismanagement have taken their toll with the stock still not touching pre-2000 highs of $48.00.
Big Lots, Inc. (NYSE:BIG) had suffered under a CEO suspected of insider trading, thankfully gone now, and has wiped the slate clean with a proven retail CEO David Campisi, formerly CEO at Sports Authority, now at the helm. This has also helped decrease the short interest to 9.10%.
DLTR Total Return Price data by YCharts
Big Lots, Inc. (NYSE:BIG) is moving into Canada with its acquisition of Liquidation World and opened its first Big Lots branded store there in Q1. The company also opened 14 US stores in the quarter. Q1 was mostly disappointing with comp same store sales down 2.5% and guiding for lower Q2 consolidated income from continuing operations down to $0.17-0.27 per share from $0.36 in Q2 2012. Free cash of $72 million is mostly earmarked for share repurchases and supporting the Canadian expansion.
So far the Canadian stores aren’t accretive although the company believes they will be long-term. Billionaire retail investor Eddie Lampert dumped his stake in Big Lots which he had held since 2011.
COST Gross Profit Margin Quarterly data by YCharts
Best Idea
Meanwhile Dollar Tree, Inc. (NASDAQ:DLTR) has outperformed Costco Wholesale Corporation (NASDAQ:COST), Big Lots, and Dividend Aristocrat Family Dollar. Its one dollar per item concept is attractive to customers and the stores are a half to two thirds the size of a Big Lots and significantly smaller than a Costco.
Gross margins are higher than Costco’s but slightly lower than Big Lots’, however, as you can see on the chart above, margin is dropping for Big Lots and rising for Dollar Tree.
Although it doesn’t pay a dividend like rival Family Dollar, its growth is worth it as analysts expect 18.33% five year EPS growth. However, Standpoint Research downgraded it from Buy to Hold on July 2. This may reflect valuation concerns with the stock having run from $37.12 in November to a high of $57.00 on July 5.
Hard to believe but employees like the nice older lady who always calls everyone sweetie at the one I visit bring in $490,033.00 revenue per worker for the company. The company is trading at a trailing P/E of 19.20.
The company reported strong Q1 results on May 23 with an expansion of 20 basis points in gross margin, now at 35.20%, an 18% increase to EPS, and the opening of 94 new stores. The company also announced it had repurchased 1.5 million shares. This followed Q4 results of their first $2 billion quarter, one dollar at a time. CEO Bob Sasser announced plans to expand frozen and refrigerated food offerings to 475 more stores and Canadian expansion ambitions from 140 stores currently to a possible 1,000 stores. Look out Canadian Big Lots.
The company is tweaking the dollar per item concept with Deal$ stores which offer items at a discount but at more than a dollar. Sasser said its early days, but Deal$ stores are doing well so far.
Of the dollar stores I would pick Dollar Tree with its better shopping experience for higher income shoppers. Dollar Tree is able to outperform its competitors with cleaner and more strategically sited stores to attract more affluent shoppers.
Only on a pullback idea
Costco is a membership warehouse concept which charges under $100 a year for the chance to take advantage of deals which range from the most mundane, like tissues and milk, to the sublime, authenticated fine art and diamond jewelry. It is the smallest of the big box stores with 622 warehouses worldwide and expanding in Asia-Pacific this year.
Costco is more pricey on valuation at a trailing P/E of 25.53 than both of these but has a 1.10% yield. Costco has hit the median analyst target of $116 and the RW Baird price target of $117 given on May 9 with an Outperform citing domestic growth, stronger membership numbers, and increasing traffic. It was just initiated on July 24 by Williams Capital Group at a Buy.
As much as I admire the company, valuation is stretched with a price/book at 4.86 and a PEG at 1.90. This would be a buy on a serious pullback, however.
Turnaround takeaway
Big Lots CEO has only been around for two months and the Canadian expansion will probably take many quarters to be accretive. After its last earnings release caution is advised.
Dollar Tree is still a good idea as everything is working there and their latest numbers prove it. Costco is only a buy on a pullback…great company but expensive here.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Big Lots and Costco Wholesale.
The article Is This Name a BIG Idea or A Bad One? originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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