Big Lots — 3 Pros, 3 Cons

In a volatile year, the deep-discount retailers have been solid performers. In
fact, these companies have attracted big-time investors like Berkshire
Hathaway's (NYSE: BRKA ) Warren Buffett and Pershing Square's Bill Ackman.
Yet one stock in the group has been a laggard – Big Lots (NYSE: BIG ). So far
this year, its shares are up only about 6%. Can the company get some more
momentum, or is it better to focus on the rivals? Let's take a look at the
pros and cons: Pros Business model. Big Lots sells mostly closeout merchandise,
such as apparel, furniture, toys, consumables and electronics. As a result, the
company can offer substantial discounts. Canada. Big Lots recently purchased
Liquidation World, which is now called Big Lots Canada. This is a chain of 90
stores that focus primarily on closeout and liquidation products. But it has
struggled over the years, so Big Lots is in the early stages of a turnaround.
The company is changing the merchandise, store format and marketing strategies.
If successful, it could provide a nice boost to growth over the next couple
years. Expense management. Big Lots continues to make inroads in finding cost
savings. The main categories include store payroll, better energy management,
lower insurance rates and smaller bonuses. Big Lots is also doing well with
keeping its inventory at reasonable levels. Cons Commodities. Raw materials
costs continue to be a drag on Big Lots. However, the biggest item – fuel –
may be getting cheaper. But again, the prices can be volatile. Markdowns. While
Big Lots has a top-notch purchasing team, there are still risks. By relying on
bulk purchases, there could be situations when Big Lots gets stuck with
unsellable inventory. Keep in mind that there are long lead times on purchases
because of its reliance on imports. Competition. The deep-discount market is
crowded. Some of the direct competitors include Dollar General (NYSE: DG ) and
99 Cents Only. But there is also pressure from the big-box companies like
Wal-Mart (NYSE: WMT ), Target (NYSE: TGT ) and Costco (NASDAQ: COST ). Verdict
Big Lots has many advantages, including strong relationships with brand vendors,
a compelling low-cost business model and a growing web site (a big help has been
the Buzz Club Rewards program). There should also be growth from the new
Canadian operation. But the big drivers include the continued stagnation in the
U.S. economy. In other words, consumers are likely to flock to operators like
Big Lots. Big Lots also has been aggressive with share buybacks. In fact, there
have been $313 million in repurchases for 2011, which represent 13% of the
outstanding stock. When looking at all these factors, the pros outweigh the cons
on the stock. Tom Taulli is the author of various books, including " All About
Commodities ." He does not own a position in any of the stocks named here.