A Big Opportunity in Big Lots

 | Jun 27, 2013 | 12:00 PM EDT
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Over the past year, operational mishaps caused discount retailer to separate itself from its peers - in a bad way. While names such as Family Dollar (FDO) and Dollar Tree (DLTR) were climbing higher, shares in Big Lots (BIG) were getting hammered. Since that time, as the economy has started to show signs of improvement, these discount "any economy" retailers have all seen their shares slide back.

But the Big Lots share discount could perhaps be as good as the discounted products its sells, if not better. Trading at $31 and change, the company is being valued at $1.8 billion or 11x trailing earnings. With a modest amount of net debt, or an enterprise value of $1.9 billion, Big Lots is currently being valued at 5x enterprise value/earnings before interest, taxes, depreciation and amortization. The similar multiple for Family Dollar is 8.3; for Dollar Tree, it's 9.7.

Adding to the opportunity is the company's new CEO, a change you always want to see when a company has been struggling to grow its business. Big Lots has hired David Campsi, who brings along 30 years of merchandising experience to the table. A fresh approach to marketing and merchandising is just what this company needs.

An improving economy doesn't reduce the number of bargain seeking shoppers. Just look at the continued performance of names like the TJX Companies (TJX) and Stein Mart (SMRT). To be sure, TJX and SMRT focus on discounted fashion apparel which appeals to a broader audience. Nonetheless, Big Lots has plenty of customers so the task will be to get them to visit more as well as get new customers in the door. This is certainly no easy task as we've seen with JCPenny (JCP) but Big Lots is not the same turnaround as JCP is.

Unlike JCP, Big Lots is making money -- good money. The decline in profits to $177 million in fiscal 2013 from $222 million in fiscal 2011 is what has sent shareholders for the exits. But with a clean balance sheet -- I've learned that too much debt, especially in retailing, makes any turnaround nearly insurmountable -- and solid cash flow, the path to operational improvement is that much easier.

The multiples that Big Lots now commands will likely expand meaningfully if sales and profits start heading in the right direction. Analysts are currently forecasting that earnings per share will climb to $3.30 in the next fiscal year, up from estimates of $2.95 this fiscal year. The takeaway: Big Lots is a viable turnaround opportunity with depressed multiples and currently trading at discount to its true value.

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