April 2008 Analyst Interview with: Joan Storms, CFA, Wedbush Morgan Securities - covering Big Lots, Inc. (BIG).

Big Lots, Inc. (BIG)

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Not Your Traditional Growth Story, Yet Big Lots Is Well Positioned To Produce 20% Earnings Growth Over The Next Few Years Through Extracting Efficiencies Out Of Its SG&A Operating Line

Consumer Goods
Analyst Interview covering:
Big Lots, Inc. (BIG)

Joan Storms, CFA
Wedbush Morgan Securities
Phone: 213-688-4537

Interview conducted by:
Lynn Fosse, Senior Editor
Published – April 4, 2008

Ms. Storms has been a sell-side equity analyst for fifteen years primarily covering hardline retail companies. She has been at Wedbush Morgan Securities in Los Angeles for almost ten years. Previously, Ms. Storms spent four years at Needham & Company in New York where she was an analyst on the consumer/retail team following hardline retailers. Prior to Needham, she worked as an analyst following restaurant stocks for two years at Moran & Associates in Connecticut. Ms. Storms holds an MBA from the University of Notre Dame Graduate School of Business and a Bachelor’s degree in Economics and Business Administration from Eckerd College.

Company Profile:
Big Lots, Inc., headquartered in Columbus, Ohio, is the largest closeout retailer in the U.S. The company operates 1,353 stores mostly located in strip malls in 47 states, with approximately 37% of its stores located in California, Ohio, Texas and Florida. 

Ms. Storms please tell us about the universe you cover and why Big Lots is part of that?
Ms. Storms:  “I follow hardlines retail and part of one of the sectors in hardlines is the dollar store/discounter sector. Of those companies, we follow Big Lots, Dollar Tree; 99 Cents Only, and Fred’s. Big Lots fits nicely into the discount category because it is the largest closeout retailer in the United States. Their core customer is not necessarily the dollar store customer because they can and do charge higher prices as long as it represents a good value to the customer.” 

CEOCFO: You’ve recently raised your recommendation; what are your feelings on Big Lots?
Ms. Storms: “Big Lots is not a traditional growth story, but we have a pretty good road map and visibility for a 20% earnings growth rate over the next few years that is primarily being driven by the company being able to extract efficiencies out of its SG&A operating line. We are actually forecasting flattish gross margin although if they are up that would be great, but it’s really mostly being driven by SG&A. The company has a number of initiatives in place starting in the last couple of years since their current CEO came on board and we have visibility for benefits from those initiatives through 2010.” 

CEOCFO: Tell me what else you like about the current management team?
Ms. Storms:The new CEO, Steve Fishman, officially came on board a little over two years ago, but not much of the rest of the management team has changed.  He has brought a vision and a passion to the company and a merchandising perspective that the company did not have before. The closeout business is a little bit different from traditional retail because your whole buying process has to be financially engineered from your initial bid on the business, all the way through shipping the merchandise et cetera. It is more complicated than the traditional buy.”

CEOCFO: How do you see the general economy affecting Big Lots?
Ms. Storms:During the back half of last year, we clearly saw that there was real resistance in consumer spending by the customer. However, Big Lots management also feels that they missed on some merchandising opportunities that were self-inflicted, in particular in the home area, which has been weak across the board. But they have made some merchandising management changes and now are expecting some better business out of that category. Another thing that hurt heading into the holiday was the toy business. As we are now out of the holiday period, and toys represent a smaller percentage of the business, we don’t have that drag and a lot of that has to do with the issues related to China that we saw with the major toy manufacturers last year.” 

CEOCFO: When does the new SAP implementation take place?
Ms. Storms:They are going to start to implement that this year and that is their core merchandising system and it also will impact the financial and the wholesale systems which should go live in 20O9. Therefore, they’ve got enough planning time to be able to manage that pretty effectively.”

CEOCFO: Could you tell us a little more about the SG&A initiatives which are so important to the future success of the company?
Ms. Storms:In the back half of last year, the company began a re-engineering process of its inbound and outbound freight. So we should continue to see those efficiencies through the first half of this year. In addition, they are also getting benefits from the roll out of the new POS system. It is in about half the chain right now and it is being rolled out to the remaining half of the chain during the first half of 2008. This should result in efficiencies in customer service at the store level. It will also allow them to test different marketing and pricing alternatives, which should give them a nice advantage from a gross margin standpoint. 

As we head into the back half of this year, the company will be implementing a new furniture supply chain initiative. The company has been very strong in inventory management. It has significantly reduced inventory levels at the main closeout DCs, which has allowed them to transfer furniture from the furniture DCs to the main closeout DCs. This should result in the stores receiving just one shipment as opposed to two. That means a lot less touches on the merchandise, lower transportation costs and less payroll expense associated with receiving at the store level et cetera. Finally, the SAP initiative is scheduled to begin to show efficiencies in the ‘O9 and ‘010 timeframe. 

CEOCFO: Address potential investors; why is this the time to be looking at Big Lots?
Ms. Storms: “The stock in my mind is a very good value trading at probably one of the cheapest valuation in the group or in hardlines overall at a P/E of around 11-12x. That is a pretty significant discount to what we are forecasting be a 20% growth rate for the next couple of years. Therefore, traditionally, if you think it’s a good company with a good management team, which we do, trading at that sort of a valuation, we think it’s an attractive time to buy the name. In addition, as I said before, we believe that we have pretty good visibility on both low single digit comps as well as 20% plus earnings growth in the next couple of years. That should give people more confidence in the current management team and their ability to execute." 

CEOCFO: In closing, what is your recommendation and your price target?
Ms. Storms: We have strong buy rating on the stock. We had upgraded it recently, actually on the 24th of March and we have a $28 price target.”


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“Big Lots fits nicely into the discount category because it is the largest closeout retailer in the United States. Their core customer is not necessarily the dollar store customer because they can and do charge higher prices as long as it represents a good value to the customer.” - Joan Storms, CFA

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