miniseries
Company Overview
Big Lots (NYSE:BIG), through its subsidiaries, operates as a home discount retailer in the United States. The Company offers products under various merchandising categories, such as the furniture category that includes upholstery, mattresses, case goods, and ready-to-assemble departments; seasonal category, which comprises patio furniture, gazebos, Christmas trim, and other holiday departments; soft home category that consists of home décor, frames, fashion and utility bedding, bath, window, decorative textile, and area rugs departments; and food category that includes beverage and grocery, specialty foods, and pet departments. Big Lots, Inc. was founded in 1967 and is headquartered in Columbus, Ohio.
As a result of stabilizing inflation, strengthening retail sales, improving U.S. consumer financial well-being, and cost-cutting measures at Big Lots, we believe BIG offers an attractive investment opportunity.
Investment Thesis
According to the U.S. Census Bureau, retail sales for September were $704.9 billion, up 0.7% sequentially and 3.8% from September 2022. Total sales from July 2023 through September 2023 were 3.1% from the same period one year ago.
Deloitte’s Financial Wellbeing Index improved to 98.3 in August from 95.9 in July. For 2023, the index has been in a tight range but well above the levels seen in 2022 at the height of inflation. Deloitte’s index is measured across six dimensions of financial health: (1) confidence in the ability to meet current financial obligations, (2) comfort with level of savings, (3) income relative to spending, (4) delays in making large purchases, (5) assessment of current personal financial situation compared to prior year, and (6) expectations of personal financial situation for the year ahead. Higher index values represent strong financial well-being and vice versa.
Deloitte
According to a McKinsey October report, “Stable and spending: An update on the state of the US consumer,” nominal and real credit spending is trending up from the previous year as inflation continues to cool.
Affinity Solutions credit and debit card spend data, Stackline Amazon spend data, McKinsey analysis
BIG has a game plan to increase sales while reducing costs. The Company has increased its proportion of bargains as seen in their recent promotion, where every Friday from October through December 22nd will be considered a “Black Friday” with up to 50% off deals. Furthermore, the Company is in the process of cutting $100 million in SG&A costs by 2023 and $200 million in SG&A and COGS by 2024 which should further drive profitability. Finally, BIG has overcome recent supply chain disruptions and now has 99 new different styles of furniture, which has added new freshness to their product lineup.
In their Q2 earnings report, BIG faced headwinds but is seeing signs of improvement. Comparable store sales were down 15%, and the Company had an adjusted EPS loss of $3.24. BIG saw sequential improvement in all the five metrics they provided guidance for at the beginning of the quarter. They also closed a $300 million sale-leaseback deal, which has helped strengthen their balance sheet as BIG now has $46 million of cash and equivalents and $493 million of long-term debt.
Risks
- Inflation does not cool off, leading to less retail spending.
- The United States falls into a recession, and the demand for retail spending declines.
Valuation
We have provided an analysis of BIG’s common stock to show how it is undervalued relative to its peers, as seen in the table below, which compares the Company to its peer average P/B and P/S ratios. The peer group includes Dollar Tree (DLTR), Dollar General (DG), Five Below (FIVE), Best Buy (BBY), Target (TGT), Costco (COST), and Abercrombie & Fitch (ANF).
Singular Research
Over the next twelve months, it is reasonable to assume (barring any sudden shocks to the economy) that consumer spending will continue to strengthen as inflation subsides and interest rates eventually level off and/or decline, thus increasing BIG’s valuation multiples. If we assume BIG’s Price-to-Book ratio expands to just 12.5 percent of its peer group average, we forecast a price of $5.96, and if we assume BIG’s Price-to-Sales ratio expands to just 12.5 percent of its peer group average, we forecast a price of $18.76. The average of these two price targets is $12.36, which we round down to $12.35, 187% higher than BIG’s closing price of $4.30 on October 27, 2023.
