1. Daily Letter | 1
17 April 2012
Big Lots
Laura Champine, CFA 212.389.8056
BUY lchampine@canaccordgenuity.com
BIG : NYSE : US$45.32
Target: US$58.00 Jason Smith 212.389.8059
jsmith@canaccordgenuity.com
COMPANY STATISTICS:
52-week Range: 28.89 - 47.22
Consumer & Retail -- Specialty Retail
Market Cap (M): US$2,963.8
Shares Out (M): 65 DEEP DIVE: WE EXPECT PRODUCT
EARNINGS SUMMARY:
FYE Jan 2011A 2012E 2013E
INITIATIVES TO DRIVE SALES
P/Sales (x):
Revenue (M):
0.6x
5,202.3
0.5x
5,617.5
0.5x
5,846.8
MOMENTUM AT BIG
EPS: 2.99 3.50 3.90
P/E (x): 15.2x 13.0x 11.6x Investment recommendation
We believe BIG’s improving product assortment will drive traffic
Revenue (M): Q1 1,227.3 1,337.5 1,396.6
Q2 1,167.1 1,263.4 1,317.7 and support the company’s SSS momentum. The company
Q3 1,138.3 1,226.3 1,289.3 should benefit from efforts to shift sales mix to higher-demand
Q4 1,669.6 1,790.3 1,843.2
Total 5,202.3 5,617.5 5,846.8 categories, broadening its selection of consumables and
EPS: Q1 0.70 0.81 0.90 underpenetrated discretionary segments. At 13x our FY12 EPS
Q2 0.50 0.56 0.65
Q3 0.06 0.14 0.21 estimate and 6x FY12E EV/EBITDA, we don’t believe shares fully
Q4 1.75 1.99 2.15 reflect the SSS growth we are projecting in FY12 and beyond. We
Total 2.99 3.50 3.90
believe BIG would only need to generate SSS growth in the LSD
SHARE PRICE PERFORMANCE: range to achieve the significant upside potential we project.
Investment highlights
• We estimate BIG will generate FY12 SSS growth of 2.9% on
top of +0.1%, which would be the company’s highest full-year
increase since FY06.
• We forecast double-digit bottom-line growth in FY12 and
expect EPS to increase at a five-year CAGR of 12%.
• Shares trade at only 13x our FY12 EPS estimate and 6x
Source: Interactive Data Corporation
FY12E EV/EBITDA. BIG trades at lower multiples than its
COMPANY DESCRIPTION: discounter retail peers despite above-average FY12 growth
BIG is the nation's largest broadline closeout retailer,
operating approximately 1,450 stores in the U.S. and 82 prospects.
in Canada. BIG offers brand-name closeouts from over
3,000 manufacturers. The product assortment includes
consumables, furniture, home furnishings, seasonal, and
electronics.
All amounts in US$ unless otherwise noted.
Canaccord Genuity is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF. : AIM)
The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal,
independent
independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important
information, please see the Important Disclosures section in the appendix of this document or visit Canaccord Genuity’s Online Disclosure
Database.
2. Daily Letter | 2
17 April 2012
WE BELIEVE AN IMPROVED ASSORTMENT WILL DRIVE
TRAFFIC AND SUPPORT SSS MOMENTUM
In May 2011 BIG bolstered its merchandising team by hiring Doug Wurl to serve
as EVP of merchandising. Wurl brought a wealth of merchandising experience,
having served as general merchandise manager of Sears’ home division for over
four years and in leadership positions at Shopko and Macy’s in the years prior.
Wurl’s impact on the company’s merchandising strategies and product
assortment can already be seen in his short time as GMM. Since his arrival, BIG
has taken a more aggressive approach to its closeout strategy, which has enabled
it to broaden its product assortment, specifically in consumables. According to
management, Wurl has been able to garner better deals from vendors on a more-
consistent basis than the company had in the past. BIG has also added more
upscale vendors to its roster and has expanded the breadth of its global sourcing.
BIG has become more competitive in its pricing strategy, which we believe will
continue to drive traffic as budget-conscious shoppers seek out values. Additional
changes include a narrower focus on the merchandising schedule, with planning
throughout the year now completed in nine-week increments, similar to how the
company had previously planned for its Christmas assortment.
The consumables segment is BIG’s largest product category, accounting for 31%
of total sales. BIG continued to improve its product assortment throughout FY11,
specifically adding a more consistent mix of consumables. BIG has expanded its
consumables assortment to include more gourmet and specialty items. BIG has
also heightened its focused on improving marketing and in-store execution,
including more prevalent signage and the addition of the “Wall of Values” which
highlights deals within consumables. Closeout remains the focus within
consumables, making up about 70%-80% on average of the total assortment. BIG
has broadened its SKU base, which we believe will add some stability in the
category. Management commented that an expanded selection of gourmet
products and European imports have been well received by consumers. The
Fresh Finds captive label program was expanded in Q3, and it continues to
resonate with customers. BIG’s captive label brands are developed jointly with
various domestic and overseas manufacturers, using a well-respected third party
to help develop the line. BIG has been able to generate brand identity and as a
result pricing power with some of its captive label products. Sales trends
improved in the consumables category in FY11, with comparable sales up in the
mid- to high-single-digit range in the final three quarters of the year. We believe
an improved consumables assortment was largely responsible for BIG’s SSS
recovery in H2/11. We expect a broader mix of basics and the addition of
specialty items and more captive label brands to drive traffic into stores in 2012.
3. Daily Letter | 3
17 April 2012
Figure 1: An improved consumables assortment helped generate SSS momentum in FY11
Q1:11 Q2:11 Q3:11 Q4:11
Consumables yr./yr. growth 3.7% 8.2% 11.4% 9.5%
SSS -3.6% -1.5% 1.7% 3.4%
Source: Company reports
BIG should benefit from an improved product mix within its discretionary
assortment as well. The company has shifted its product mix away from apparel
and its traditional toy business, increasing inventory and allocating more floor
space to better-performing categories. BIG offered a larger seasonal assortment in
Q4, adding square footage to display trees and trim. This resulted in a
comparable sales increase in the low double digits for the category. We believe
the seasonal business sustained momentum in Q1, boosted by warmer weather
and a high-quality product assortment that will resonate with shoppers. The
seasonal business faces an easy Q1 comparison as difficult weather resulted in DD
comparable sales declines in northern regions of the country in FY11.
The company is in the process of completing the expansion of its home business,
specifically adding floor space for merchandise such as bedding and table top
items to better leverage the strength of its furniture business. Management
expects sales growth within the category to accelerate as FY12 progresses. Our
recent store checks revealed an attractive assortment of seasonal and home
inventory. It is notable the company’s new GMM has a wealth of experience in
home, and we believe he has brought in buyers with whom he has worked in the
past.
Electronics is a category BIG believes can excel beyond a seasonal business and
be a full-year growth driver. Electronics turned in a strong performance in Q4
with comparable sales up nearly 20%, and management commented on the latest
conference call that sales momentum has continued in Q1. We believe BIG will
benefit from an increased inventory of popular products such as tablets, chargers,
headphones and ear-buds, flash drives and memory cards, MP3 players, phone
and tablet covers as well as other accessories for mobile devices. The focus here
will be on low-end and discount models that will likely appeal to BIG shoppers.
The company has not significantly expanded floor space for electronics, but the
merchandise is receiving greater exposure in stores. As small items are taking the
place of TVs, the company can significantly improve SKU range without needing
to take square footage from other categories.
4. Daily Letter | 4
17 April 2012
Figure 2: FY11 sales mix by product category
Play 'n Wear
Consumables
15%
31%
Seasonal
13%
Hardlines & Other
8% Home
16%
Furniture
17%
Category Products
Consumables Food, health, beauty, plastics, paper, and pet
Furniture Upholstery, mattresses, ready-to-assemble and case goods
Home Domestics, stationary, and home decorative
Play n' Wear Electronics, toys, jewelery, infant, and apparel
Seasonal Lawn and garden, Christmas, and summer assortments
Hardlines & Other Appliances, tools, and home maintenance
Source: Company reports, Canaccord Genuity
We expect BIG will generate more-consistent SSS growth in FY12. Our Q1
estimate calls for SSS growth of 4% on top of -3.6%. Management guided for Q1
SSS to be up 2%-4%, and the consensus estimate is 2.7%. For FY12, we forecast a
SSS increase of 2.9% on top of +0.1%, which is a 40bps improvement in the two-
year stacked SSS trend. This is at the high end of management’s guidance range
of +2% to +3% and would represent BIG’s largest full-year SSS gain since FY06.
5. Daily Letter | 5
17 April 2012
Figure 3: We estimate BIG will generate consistent SSS growth in FY12
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Q1:07 Q1:08 Q1:09 Q1:10 Q1:11 Q1:12E
Yr./yr. SSS growth
Source: Company reports, Canaccord Genuity
WE FORECAST A GROSS MARGIN RECOVERY IN H2/12
BIG’s gross margin contracted 85bps in FY11, largely the result of more
competitive pricing and the shift in sales mix to lower-margin consumable
products. We believe consumables are in higher demand and turn faster in stores,
which should translate to increased levels of store traffic as the assortment
improves. The shift in mix within the discretionary businesses should help boost
profit given the higher-margin nature of the home and furniture businesses.
Lower markdown activity should also help drive margin expansion. Warmer
weather should result in improved pricing yr./yr. within seasonal in H1, while
BIG plans to lessen its reliance on the segment in Q3, given the high level of
markdowns that were necessary in the October quarter in FY11. We forecast
gross margin expansion of 60bps in H2/12 as an improved product assortment
supports SSS gains and BIG begins to lap a period of higher markdown activity.
We estimate BIG’s gross margin will expand 10bps in FY12 and increase 10bps-
15bps annually in FY13-FY16.
WE ESTIMATE DOUBLE-DIGIT EPS GROWTH IN FY12 AND
BEYOND
Our Q1 forecast calls for operating EPS of $0.81, at the high end of management’s
guidance range of $0.75-$0.81 and $0.02 above consensus. We project gross
margin contraction of 55bps in Q1 as a result of the continued shift in mix to
lower-margin consumables and more-competitive pricing. We forecast a flat
SG&A expense rate with leverage on 4% SSS growth offset by higher depreciation
6. Daily Letter | 6
17 April 2012
and incentive costs. For FY12, we estimate EPS of $3.50. FY12 guidance is $3.40-
$3.50, and the consensus estimate is $3.50 with a lower implied share count
versus our model adding $0.04. We are projecting EPS to increase at a five-year
CAGR of 12%.
CANADA APPEARS TO BE IMPROVING, BUT IT IS STILL IN
THE EARLY STAGES OF ITS TURNAROUND
In mid-2011 BIG completed the $20MM acquisition of Liquidation World, an 89-
store closeout franchise in Canada. Our initial visit to three LW locations in
Calgary shortly after the acquisition revealed obscure locations, dated buildings,
and sparse inventory excluding a solid furniture assortment. BIG closed seven
locations and invested $46MM in the Canadian business over H2:11 to build
inventory, staff operations, and refurbish store locations. Q4 sales of $37MM
came in $7MM above the high end of guidance, which management credited to a
strong initial response to the introduction of new products and categories within
stores. We view this as a positive sign given the limited assortment available
through much of the quarter. Inventory ended FY11 at $22MM, and management
plans to sustain levels in the $25MM to $30MM range. BIG expects to reach this
level by Q2, but adjustments to product assortment will continue through Q3.
Similar to the U.S., we expect BIG to shift its product mix to more in-demand
items. This translates to a broader assortment of consumables, which we believe
will be a healthy traffic driver. The Canadian operations will not likely see
significant marketing support in FY12 as BIG is focused on testing store execution
once shelves are fully stocked before launching any sizable marketing agenda.
For FY12 BIG guided for sales in Canada of $140MM-$150MM, up from $60MM
over seven months in FY11. Guidance calls for the Canadian operations to be a
drag on EPS of $0.21-$0.26 as BIG continues to build up inventory, recruit talent,
and refurbish stores. Management indicated it was close to hiring a head
merchant, which would largely complete the initial phase of its staffing efforts.
Sales dollars are expected to increase and operating losses to decline sequentially
throughout FY12 as inventory levels improve. BIG is targeting a breakeven
bottom line by FY13.
BIG TRADES AT ATTRACTIVE MULTIPLES COMPARED WITH
ITS DISCOUNT RETAIL PEERS
We believe shares of BIG are currently undervalued, trading at approximately a
20% discount to peers. We think this discount is based on BIG’s inconsistent sales
trends and expect the gap to close as the company reports improved SSS growth
in 2012. Based on our FY12 EPS estimates, shares trade at 13x EPS and 6x
EV/EBITDA, below the peer averages of 16x and 8x, respectively. We don’t
believe the discount is warranted given our forecast for above-average growth in
EPS.
7. Daily Letter | 7
17 April 2012
Figure 4: Shares trade below the peer group’s average
CY12E CY12E CY12 Sales CY12 EPS
Discount retailers P/E EV/EBITDA Growth Growth
Big Lots 13x 6.1x 8% 17%
Dollar General* 17x 9.1x 8% 16%
Dollar Tree 20x 10.4x 12% 21%
Family Dollar 17x 8.3x 9% 18%
Fred's* 15x 5.6x 5% 15%
Ross Stores 18x 9.1x 8% 16%
Target* 14x 7.4x 5% 0%
TJX Companies 18x 9.2x 7% 17%
Wal-Mart* 13x 7.2x 6% 8%
Average 16x 8.1x 8% 14%
*Based on consensus estimates
Source: Canaccord Genuity, Thomson Reuters
OUR DCF ANALYSIS INDICATES POTENTIAL FOR FURTHER
SHARE-PRICE GAINS
On our FY12 estimates, BIG shares currently trade at 11x FY12 EV/NOPAT, but
our model suggests the stock should trade at a 14x multiple. This suggests BIG
holds potential upside of over 25% in the next 12 months.
8. Daily Letter | 8
17 April 2012
Figure 5: Our discounted NOPAT model implies potential upside of over 25%
Discount rate 10%
Annual NOPAT Growth 4%
Year 1 2 3 4 5 6 7 8 9 10 11
NOPAT 267 293 322 350 379 394 410 426 443 461 461
Y/Y growth 10% 10% 9% 8% 4% 4% 4% 4% 4% 0%
PV of NOPAT 242 240 239 236 231 217 205 193 182 171 171
Sum of PVs 2,156
Terminal multiple 10 (Implies no growth beyond terminal year)
Terminal value (PV) 1,647
Enterprise value 3,803
Implied multiple 14x
Actual multiple 11x
Potential
Actual Implied Upside
FY11E NOPAT 267 267
Multiple 11x 14x
Enterprise value 2,961 3,803
Plus: cash 69 69
Less: debt (66) (66)
Equity value 2,964 3,806
Shares o/s 65 65
Value per share $45.32 $58.19 28%
Source: Canaccord Genuity
10. Daily Letter | 10
17 April 2012
Valuation
Our PT of $58 is based on our discounted NOPAT model. Shares currently trade at
a FY12E EV/NOPAT multiple of 11x. Our model suggests BIG should trade at a
multiple of 14x. Assuming shares approach their intrinsic value over the next 12
months, BIG offers potential upside of over 25% over its current price. Based on
our FY12 estimates, shares currently trade at 13x EPS and 6x EV/EBITDA. Our
PT implies multiples of 17x and 8x, respectively.
Investment risks
A slowdown in sales stemming from a product assortment that does not resonate
with shoppers would pose a risk to our projections. Macroeconomic factors and
extreme weather could also impact sales trends. Rising cost pressures could
impact margins. The LW acquisition could require a greater capital investment to
refurbish stores and replenish inventories than management anticipates.
11. Daily Letter | 11
17 April 2012
APPENDIX: IMPORTANT DISCLOSURES
Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this investment
research hereby certifies that (i) the recommendations and opinions expressed in this investment research
accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the
designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage
universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed by the authoring analyst in the investment
research.
Site Visit: An analyst has visited the issuer's material operations in Columbus, Ohio. No payment or reimbursement was
received from the issuer for the related travel costs.
Price Chart:*
Distribution of Ratings: Coverage Universe
Global Stock Ratings IB Clients
(as of 2 April 2012) Rating # % %
Buy 503 59.3% 31.0%
Speculative Buy 91 10.7% 73.6%
Hold 232 27.4% 18.5%
Sell 22 2.6% 9.1%
848 100%
Canaccord Ratings BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
System: HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.
“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the
designated investment or the relevant issuer.
Risk Qualifier: SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental
criteria. Investments in the stock may result in material loss.
12. Daily Letter | 12
17 April 2012
Canaccord Research Disclosures as of 17 April 2012
Company Disclosure
Big Lots 5, 7
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13. Daily Letter | 13
17 April 2012
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