I have personally shied away from discount retail chain Big Lots
But that was then, and this is now. The stock market isn't so much concerned with the past as it is with the future, and from the looks of Big Lots' fourth-quarter report, things are going to be just fine.
Big discounts = big profits
For the fourth quarter, Big Lots reported a 10% rise in revenue to $1.67 billion and a profit of $1.75 per share, up from $1.46 per share in the year-ago period. Both figures barely squeaked by Wall Street's consensus estimates.
The strength in Big Lots' results derives from the same trend that is hurting some mall-based middle-to-high-end retailers like Abercrombie & Fitch -- consumers are looking for a good deal. I know this sounds brutally cliche (and it is), but consumer wage growth simply isn't outpacing inflation and people are being considerably more cautious with their spending. Big Lots, which purchases overstocked items in bulk andthen resells them at a discount, perfectly fits into this environment as a one-stop shop for the price-conscious consumer.
This is the same reason that Wal-Mart
For Big Lots, 2011 marked its fifth consecutive year of record operating profit in the United States. In fact, the primary reason its business is as strong as it has been is strength from its U.S. operations. The company anticipates that U.S. same-store sales will increase by 2% to 3% in 2012, with cash flow generation around $200 million.
If there was one glitch in Big Lots' results, it was in the company's Canadian operations. Big Lots purchased Liquidation World in mid-2011 to get its foot in the door of Canada's market, and Canadians responded by issuing this segment a $5.1 million loss in the fourth quarter. The likely reason Big Lots shares dropped on Friday was due to its guidance regarding Canada. In 2012, losses from Canadian operations are expected to range between $0.21 and $0.26 per share.
But don't feel too bad -- everyone is going bonkers over expanding into Canada, and no one seems to be having overwhelming success. Sears Holdings
It also wouldn't be the end of the world if Big Lots considered paying even a small dividend to its shareholders. The company is aggressively using its cash flow to open new stores -- 90 are planned in 2012 -- and repurchase shares. Big Lots repurchased 11 million, or 15%, of its outstanding shares in 2011. There's really no reason that Big Lots shouldn't be sharing some of that wealth with its shareholders, and I'd be shocked if the company didn't implement a dividend soon.
Given its forecast for $3.40 to $3.50 in EPS in 2012, Big Lots is trading at just 12 times forward earnings, which puts it more or less in line with Wal-Mart and Target, which trade at 11 and 12 times forward earnings, respectively. However, Big Lots boasts a slightly higher five-year projected growth rate of 11.6% versus Target's 11.1% and Wal-Mart's 9.1%. It's for that reason that I'm making a CAPScall of outperform on Big Lots, as I feel it will outperform its peers over the next five to 10 years.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can always count on him to haggle for the best possible price on anything. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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