Big-box retail continues to take its battering with just a few well-capitalized companies leading the pack as the bulk of the group languishes in despair. These companies have their work cut out for them and foes are aplenty. This leaves little room for error in any department. For Big Lots (BIG -5.77%), a closeout retail specialist with weakened sales, the last thing the company needed was an investigation from the SEC and the FBI regarding a $10 million sale of company stock by the CEO, Steven Fishman. Fishman is heading out the door soon, with a tail of lawyers following closely on his heels, but what is he leaving behind? Is the retailer, backed by a hedge fund mogul, in turnaround territory?
Slumped-over sales
In the 13-week period ending in mid-October, Big Lots saw year-over-year sales declining while cost of goods sold ticked up. This resulted in an operating profit loss that ticked down through the income statement into a bottom-line loss of roughly $6 million, compared to a profit of about $4.2 million the year before.
A month before the report was released, Fishman sold off $10 million of his stock holdings, which for some reason made someone at the SEC a little nervous. In this age of surveillance, I can't see how this was even for a moment considered to be a reasonable idea on Fishman's part.
Given how ridiculous the action was, the company has handled it calmly and with grace. In the press release that announced third-quarter results and included a transcript of the conference call with Fishman and the rest of the management team, there was a third portion that announced the departure of the CEO as part of an orderly and soon-to-be-court-ordered leadership transition.
Forgive me for taking some cheap shots at Mr. Fishman for his insanely irresponsible decision, given that, as the press release highlights, Fishman did preside over the company during some respectable accomplishments.
Good job, except for that last part
Though same-store sales have declined recently and are expected to again in the coming quarter, Fishman did some good work at Big Lots. Among his accomplishments:
- Company record sales per square foot
- Operating profits in 2005 of $27 million to 2011's $358 million
- $2.2 billion in cash flow
- An expansion into Canada
Pretty impressive, really. The stock price, minus a few crashes, followed suit and climbed from under $11 per share to a high of more than $45 in May of this year. The aforementioned poor results and, now, Fishman's "whoopsie" have the stock trading at a little less than $29.
We can't dwell on Fishman too much, though, because it doesn't make sense to judge a new restaurant based on a prior chef. What does the future look like for Big Lots? Should investors be interested in the near-52-week low?
Outlook
The immediate future does not look too shiny for the retailer. The company issued guidance forecasting lower comps (the most sensitive figure in the retail analyst world) with only a slight uptick in sales. The company is opening new stores at a decent rate, with 27 new stores opened in the third quarter alone. Unless the stores flop and can't meet their cost of capital, this should give the company a needed boost in the coming years. What is and has been most interesting for value investors interested in the company is its low valuation relative to its free cash flow. The company expects to bring in $125 million in free cash for the fourth quarter of 2012. Big Lots has a EV/EBITDA ratio of 5.17 on a trailing basis. Compare that to other closeout retailers, such as Costco (COST 1.01%), which sells at an EV/EBITDA of 10.73.
For those interested in value picks, Big Lots remains an interesting buy after a major retreat in stock price from the first part of the year. Investors may want to wait until the new year to take a position, as the price is likely to fall after the company releases its fourth-quarter earnings. The search for the new executive could have a positive or negative impact on stock price in the coming weeks or months, depending on who is chosen.
