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Big Lots' Big Day

Posted: Dec 08, 2009 08:35 AM by Sham Gad

Tickers in this Article: BIG, DLTR, FDO, NDN

It shouldn't come as a surprise that a deep discount retail chain would do well in this economy. Strapped consumers have become more frugal than ever as they've seen their wealth crushed by the housing market and, to a lesser extent, stock prices. Businesses with names like Dollar Tree (Nasdaq:DLTR), 99 Cents Only (NYSE:NDN), and Family Dollar (NYSE:FDO) have all found themselves in sweet spots in this new economic landscape.

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No Surprises
It should come as no surprise that deep discounter Big Lots (NYSE:BIG) would also benefit from this economy. The big question was exactly how well the retailer would do. That question was answered when the company announced its third quarter results. The company's net income from continuing operations came in at 27 cents a share, nearly 100% above the year-over-year quarter figure of 15 cents a share. This is the company's 12th consecutive quarter of record earnings from continuing operations. Shares jumped by over 15% on the news.

Not Done Yet
Going forward, Big Lots likely has many more quarters of strong results ahead of it. The frugality with which many Americans have adopted over the past year will likely remain for some time to come, despite what the economy does. People have lost a tremendous amount of wealth, and it will take years for that pain to go away. Further, increased joblessness likely drives store traffic at places like Big Lots, as folks do what they can to stretch out their resources. (For further reading, check out Downshift To Simplify Your Life.)

In addition to the solid quarter, the market is very pleased with positive future outlook the company gave. The company now expects to earn $2.15-2.20 a share for the year. At $28 a share, that implies a 14 multiple, an incredibly attractive valuation for this company in this environment. Add in the fact that the company also announced a $150 million share buyback, which represents over 5% of shares outstanding, and the outlook is even better.

The Bottom Line: A Very Simple Thesis
It doesn't get any simpler than selling ultra cheap merchandise in a world defined by more and more thrift. Expect names like Big Lots to do very well in today's world. (For related reading, check out Save Money The Scottish Way.)

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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