Big Lots Up for Sale?

Filed in Gather Money Essential by on February 8, 2011 0 Comments

According to Bloomberg, Big Lots Inc. (BIG - Stock Market News), the largest broad-line closeout retailer, is looking for strategic choices which might include the sale of the company.

Big Lots, which competes with Target Corporation (TGT - Stock Analysis) and Wal-Mart Stores Inc. (WMT - Financial Headlines), has hired Goldman Sachs to guide on the evaluation process.

However, the company has not made any statements in terms of explicit actions regarding the sale of the company or in any other possibilities.

The buzz is that Thomas H. Lee Partners LP and Bain Capital LLC would be interested in the acquisition.

For the bidders, Big Lots offers a striking prospect for acquisition, as it has a healthy balance sheet with almost no debt. Further, the company’s closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at cheaper rates.

The company procures branded merchandise at lower costs from vendors, who have excess inventory and resort to a fire sale of their goods, or have higher sales returns or discontinued products.

Based in Columbus, Ohio, Big Lots has a strong management team and is actively managing its capital. The company expects to generate cash flow of approximately $200 million in fiscal 2010. The company is also returning much of its free cash to shareholders via share repurchase.

However, Big Lots operates in extremely aggressive money off retail business, faces sturdy competition from other general merchandise, discount, food, arts and crafts, and dollar store retailers. This may result in loss of market share and fall in sales and operating margins. Further, the competitors having larger number of stores, greater market presence, and financial resources will continue to weigh on the company’s results.

Moreover, the company’s consumers remain susceptible to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their disposable income, and in turn, affecting the company’s growth and profitability.

After a broad evaluation, we prefer to maintain a long-term Neutral recommendation on the stock. Big Lots also holds a Zacks #3 Rank, which translates into a short-term Hold rating.

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