BIG - Big Lots: Big Yield Big Short Position

Summary

• Today, we take our first look at a somewhat controversial retail play called Big Lots, Inc.
• The stock has north of six percent dividend yield but is universally hated by analyst firms and has a large short position in its shares.
• Is this a contrarian pick or value trap? An investment analysis follows in the paragraphs below.

Knowing where the trap is-that's the first step in evading it . ? Frank Herbert, Dune

Today, we put retailer Big Lots, Inc. ( BIG ) in the spotlight for the first time. The stock is down approximately 60% over the past year and the shares now yield north of six percent as a result. There were some signs of improvement in the second quarter despite large quarterly losses. Signs of a potential turnaround at this beaten down retail play? An analysis follows below.

Company Overview

Big Lots, Inc. is a discount retailer headquartered in Columbus, Ohio. The company offers a wide assorted of products including food, apparel, home furnishing and multiple other product categories. The company operates over 1,400 stores in 47 states and other has an e-commerce operation. The stock trades just below twenty bucks a share and sports an approximate market capitalization of $560 million.

Second Quarter Results

On August 30th, Big Lots posted second quarter numbers . The company lost $2.28 a share on a non-GAAP basis. On a GAAP basis, Big Lots lost $2.91 a share and results included a $0.63 per share charge associated with store asset impairments. Revenues fell 7.6% on a year-over-year basis to $1.35 billion. Net new stores and relocations contributed approximately 160 basis points of sales growth compared to the second quarter of 2021. Management also noted that second number revenues were up 7.5% from 2Q2019, pre-pandemic for what it is worth.

Both top and bottom line numbers did beat the consensus, however. Comp store sales fell 9.2% from 2Q2021. Management believes comps will be down in the low double digits when the company reports Q3 numbers in a few weeks. Leadership also reduced its projected Cap-Ex spending in FY2022 from $175 million to $160 million.

Inventory has bedeviled the company over the past year. This is hardly unique in the industry due to a combination of the highest inflation levels in 40 years, continued global supply chain challenges and slowing economic activity in 2022. Target ( TGT ) and myriad other well-known retailers have been forced to make significant inventory ' adjustments ' over the past couple of quarters as well. Big Lots' inventory levels ended the second quarter at $1.159 billion compared to $943.8 million for the same period last year. Leadership noted this 22.8% increase encompassed significantly higher unit costs as well as a significant increase in in-transit inventory. It should be noted that inventory levels did fall $180 million from the end of the first quarter of this year and management believes inventory levels will be ' normalized ' by the fourth quarter.

Analyst Commentary & Balance Sheet

Since the company's last quarterly report, four analyst firms including JP Morgan and Bank of America have reissued Market Perform or Under Perform ratings on BIG. Price targets proffered range from $9 to $23 a share.

One insider disposed of nearly $350,000 worth of shares in March and April of this year. However, that is the only insider activity in this name so far in 2022. Just over one out of every four shares of outstanding float in BIG is currently held short.

Big Lots' balance sheet has deteriorated over the past year. The company ended the second quarter of this year with just under $50 million in cash and marketable securities against just over $250 million of long-term debt. In contrast, at the end of 2Q2021, Big Lots had nearly $295 million of cash and no long-term debt.

The company recently reached an agreement with PNC Capital Markets to arrange, on a best efforts basis, a 5-year syndicated asset-based revolving credit facility of up to $900 million, with an additional uncommitted increase option of up to $300 million. This will replace and refinance an existing $600 million 5-year unsecured credit facility. Despite the net loss in the second quarter, the company declared its regular 30 cent quarterly dividend payment which was paid on September 23rd. At current trading levels, that gives the stock a 6.2% annual dividend yield.

Verdict

The current analyst firm consensus has the company losing approximately $4.50 a share in FY2022 as sales fall some 9% to $5.6 billion. Estimates are all over the place in FY2023 from a profit of $3.45 a share to a loss of $2.75 a share as sales inched up in 2023.

The company continues to focus on efforts to rightsize inventory levels and improve gross margins. Management is also focused on delivering more bargains to customers. This looks like a good strategy given the average consumer has lost buying power against inflation for 18 straight months now. Recession also seems a likely scenario in 2023 as the Federal Reserve continues to jack up rates.

That said, despite some progress on myriad fronts, it is hard to get excited about the investment case around BIG even with an over six percent dividend yield. 2023 is looking very uncertain and while inventory levels are on their way down, the company's balance sheet has paid a heavy toll over the past year. Big Lots will post big losses this fiscal year and with next year's economic backdrop uncertain; it is hard to project what kind of turnaround Big Lots will have in the New Year despite the company's ambitious long-term goals. Therefore, I am going to side with analyst firms and avoid any investment recommendation around this potential turnaround story in retailing.

Be ready to pay the price of your dreams. Free cheese can only be found in a mousetrap . ? Paulo Coelho

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