Friday, June 10, 2011

Move Over Costco

As a follow-up to my last post about the retailers - I failed to mention that I also closely follow Costco (COST) as they are one of North America's best retailers. Jim Senegal is one of the best CEO's out there. It's a company I'd love to have in my portfolio, but it never seems to get cheap enough for me to pull the trigger and buy. My wife is personally responsible for the steady same store sales increases at select stores throughout Ontario - she loves a deal.

The retailers continue to be under pressure. I have taken an opening position in Big Lots (BIG) earlier this week with an average cost of $32/share. This is not a deep value asset play, but a discount to earnings power play. BIG is a good business with a good future and good management - worthy of hitching my wagon to. BIG has sold off over the past 3 months as several potential private equity buyers failed to offer enough to take BIG private and worries about a softer economy ahead. CEO, Steven Fishman is well aligned with shareholders and has made the right decision by staying public - for now. It's nice to see a CEO who is so focused and will publicly speak about areas of the business that need improvement, (see page 5 of the 2010 AR) not just tell shareholders about what has gone well. The crew at BIG are very good capital allocators. Just look at some of these statistics:

EPS growth 10 yr:           11%
Cash flow Growth 10 yr:   8%
Long-Term Debt: NIL
Share buybacks: bought back 1/3 of the company in the last 5 years.
ROE: consistently >20% - even more impressive as they have no debt.
Rising op. margins over the last 5 years. 5.7% ------> 8.8%
Free cash flow: a little over $200 million, for a FCF yield of 10%

BIG recently lowered guidance for the year - which for me doesn't matter - but the "street" has become a little pessimistic. I'm looking out a few years - if Fishman and his team just continue to do what they have done in the past BIG shareholders will do well. On a conservative ( little or no growth) basis, the company is worth somewhere around $45/share and maybe as much as $55 if they just grow at modest rates going forward. If another buyer does emerge - and is willing to pay $55 - I'll tender.

I will continue to add to BIG over the next few months if the market moves lower.

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