The theme for Mad Money this week has been Cramer’s quest to crown the discount king. He believes, even though he is bullish on the stock market, there must be a discount retailer stock that stands out above the rest. Thus far he has disqualified both TJX Companies (TJX) and Costco (COST), but BJ’s Wholesale Club (BJ) is still in the running. Last night, he delved into Big Lots (BIG), which recently reported a very good quarter and raised guidance for the second straight quarter. As Cramer mentioned, only Apple (AAPL) and Salesforce.com (CRM) have beaten the street’s view and raised guidance in any “meaningful way”.
At Ockham, we wrote a blog commentary on the outstanding report from Big Lots on Tuesday in which we reiterated our Undervalued stance on the stock (Big Lots Raises Guidance for the Second Straight Qtr). Below are the most important parts of Cramer’s monologue as it relates to his search for the discount king.
“I want to come back with another retail name in the low-price retail spats, Big Lots. B-I-G for all of you home gamers. This hasn’t been one of my favorite retail stocks but yesterday it reported a monster, that’s right. Earnings per share coming in at 35 cents, 5 cents more than what the street was expecting. And it raised its guidance for the year… you know what that is, that is the double play we’re looking for and only Apple and Salesforce.com have given us that combination in any meaningful way…
Big Lots, like TJX, sells closeout merchandise. It buys brand name products from vendors who have too much inventory and are ready to fire-sale their goods, sell, sell, sell. Where Big Lots buys in bulk, a la BJ’s and Costco…It’s because Big Lots was much more confident about the second half on its conference call that TJX has been. Management sees major improvements in earnings and same-store sales in the fourth quarter. While TJX had a much more negative outlook.
…On its conference call, Big Lots mentioned recently landing big new closeout deals as a reason they’re positive about the future, so they’re clearly not in the same boat as TJX. How about the key metrics for Big Lots, same store sales, margins, we’re comparing all of those. But management was more optimistic in the second half of the year, predicting same-store sales would be down to 2% to flat in the third quarter and slightly positive in the fourth quarter. That’s the one we care about, but it is up against something easy to compare, the fourth quarter of last year. It same-store sales were down 3.2% last year. That could be easy to improve upon.
Inventories, here’s something big, Big Lots finished inventories down 4%, compared to last year at this time. That’s fabulous. You know why? No further discounting because they’re lean and don’t need to dump anything. The company also had gross margin, how much money it makes after sales, up to 40%. That is a profitable discounter. TJX’s is much smaller, it’s 25.5%. And that’s probably going to come under pressure, I believe, because of sourcing problems.
Then why am I not just standing on the table saying you should be buying Big Lots? My big, main complaint about Big Lots, why I consider it the notorious B.I.G. Lots, it has been purely anecdotal but it’s still a powerful one for me. I had a bad experience at my Big Lots one time I visited the Big Lots off route 22. It was incredibly disorganized, this is not a company that scores very high on the Danny Meyer hospitality scale. Remember, he’s the restaurateur with his books setting the table, introduce us to the hospitality quotient. In that — in that big department, Big Lots is a big zero.
That said, as least Big Lots has acknowledged that its stores haven’t been run well, and it’s been rolling some new initiatives to make them more appealing places to shop. Its Food Refresh program, which includes a new or refinished fixtures in half of its stores to emphasize cleanliness and better presentation for food offerings, it’s now on track to be done by the end of this quarter…
It’s been able to open a lot of stores, it will open 50 this year, versus 45 it planned. I love that. Big Lots, huge beneficiaries of the demise of Linens and Things and Circuit City, because it’s cheaper to convert their former stores to Big Lots stores…
How about the stock, how about will I name it to discount stock king? You’ll have to wait until tomorrow. From the March 6th lows, Big Lots had a huge run. It’s up 50%. Normally that alone would disqualify it from the running. But wait a second, TJX is up 70% so while I’m not happy that we missed as much of this Big Lots move, although Dan Fitzpatrick, our chartist from off the charts, did catch it. I can’t boot the darn stock from it’s run. And even though Big Lots’ growth rate is just under 10% is in line with other retailers, home goods and retail companies, it trades at only 12.5 times expected earnings, two points below TJX Companies and well below Costco, which trades at 18.7 times…Big Lots is in the running for discount king, and at the very least, it’s discount bishop …” — CNBC’s Mad Money 8/26/2009
There you have it, Big Lots is still in contention for the coronation for discount king. From a valuation standpoint, we have to agree that Big Lots is attractive, and we always like to hear confidence from management on a conference call. We are a believer in the growth potential of discount retail, as the trend of consumers to spend money more carefully is not going away anytime soon. If Big Lots can better manage their stores and make a more user-friendly and organized shopping experience, then we think that could go a long way to helping the public perception of the stores. This improvement in time, could invigorate sales because shopping experience surely matters.
Love him or hate him, Cramer is as powerful a stock pundit as exists today. We do a thorough recap of his show each night for those who are interested in knowing what he talked about but weren’t able to tune in. The chart to the right has a list of the stocks that he mentioned on Wednesday.
