TEXT-S&P revises Big Lots outlook to stable from negative

Wed Jul 11, 2012 2:31pm EDT

Overview
     -- We believe U.S. close-out retailer Big Lots' performance will remain 
stable and we anticipate that the company will maintain its moderate financial 
policy. 
     -- We are revising the outlook from negative to stable and affirming our 
'BBB' corporate credit rating on the company.
     -- The stable outlook reflects our opinion that Big Lots should continue 
to perform resiliently in a weak economy, and maintain credit metrics at 
around current levels. 

Rating Action
On July 11, 2012, Standard & Poor's Ratings Services revised its outlook on 
U.S. close-out retailer Big Lots Inc. to stable from negative. At the
same time, we affirmed our 'BBB' corporate credit rating on the company. 

Rationale
The outlook revision reflects our opinion that Big Lots will perform 
resiliently and will maintain its moderate financial policy in the future, 
which should lead to credit metrics remaining close to current levels.

Our 'BBB' rating on Big Lots continues to reflect our view of its 
"satisfactory" business risk profile and "intermediate" financial risk 
profile. 

The business risk profile encompasses our opinion that Big Lots will continue 
to perform resiliently despite a weak economy and high unemployment rates due 
to the strong value proposition of its product offerings as the leading 
close-out retailer in the U.S. We expect that profitability will likely 
improve as management turns around the operations at Liquidation World, the 
Canadian close-out retailers Big Lots bought in July 2011. But the business 
risk profile also reflects our anticipation that competition will remain 
intense in the U.S. value retail segment, with Big Lots' significantly bigger 
competitors (particularly the discounters) keeping prices low and opening 
smaller stores in the generally more dense urban areas to attract low- to 
moderate-income customers. 

Our forecast for fiscal 2012 (year-end January 2013) and fiscal 2013 include 
the following assumptions:
     -- 3%-5% revenue growth. We believe the growth will mostly reflect new 
store openings as we anticipate flat comparables in fiscal 2012 (taking into 
account Big Lots' negative 0.8% comparables posted in the first quarter of 
fiscal 2012) and low- to mid-single-digit comparables thereafter as customers' 
disposable income remains under pressure and the economy recovers only 
gradually. 
     -- Limited improvement in profitability. We project an increasing 
contribution from the company's less discretionary but lower margin 
Consumables division, and we do not anticipate Liquidation World to be 
break-even before fiscal 2013. But we believe that administrative and 
marketing expenses (SG&A) leverage will slightly improve as a percentage of 
sales as sales increase. 
     -- Capital expenditures similar to fiscal 2011 levels of around $130 
million-$135 million, to account for new stores opening of around 50 a year 
(net store openings).
     -- Limited share repurchase activity. We anticipate in our base-case 
scenario that Big Lots will likely largely complete its new $200 million share 
repurchase program in fiscal 2012, with free cash flow and some borrowings 
under its revolving credit facility. This is in addition to the $99 million 
already repurchased in the first quarter. Since we believe the company's 
annual free cash flow generation capacity is about $200 million, we project 
that part of the share repurchase activity this year will be debt-financed. We 
have assumed that share buyback activity will moderate from fiscal 2013 
onwards and will be mostly funded by internally generated cash flow, in line 
with the group's track record of maintaining a moderate financial policy.  

Under this scenario, we calculate that by the end of fiscal 2012, Big Lots' 
leverage will not increase materially from the 1.6x we calculate at April 28, 
2012, and should remain around 1.5x by the end of fiscal 2013. We continue to 
characterize the company's financial risk profile as intermediate (which, 
among other things, typically reflect an adjusted leverage of 2x-3x), 
reflecting the group's moderate free cash flow capacity of around $200 million 
a year, and because we believe that Big Lots' short average store lease tenure 
overstates the strength of its credit measures. After adjusting the company's 
short average lease tenor to a longer tenure more typical of retailers, we 
calculate that Big Lots' leverage stood at about 2.7x at April 28, 2012.  

Liquidity
We view Big Lots' liquidity as "adequate," considering its cash and revolving 
credit facility availability, free cash flow generation, absence of debt 
maturities, and ample cushion under its financial covenants. Relevant aspects 
of the company's liquidity profile, based on our criteria and assumptions, are 
as follows:
     -- We expect the company's sources of liquidity over the next 12-24 
months to exceed uses by more than 1.2x, and believe net sources would be 
positive, even if EBITDA fell 20%.
     -- The company currently has no on-balance-sheet debt or debt maturities. 
     -- As at April 28, 2012, there was $643 million available under the 
group's $700 million revolving credit facility, which matures in July 2016. We 
believe revolver borrowings could occur during the year due to second-half 
seasonal inventory growth, and to partially fund the group's share repurchases 
activity (within the limit of the $200 million program until the end of fiscal 
2012). 
     -- We expect cushion under financial covenants to remain above 30%.
     -- We believe capital expenditures will not materially deviate from the 
$131 million reported in fiscal 2011, and forecast around $200 million of 
annual reported free cash flow.
     -- Big Lots appears to have satisfactory relations with its banks.

As of April 28, 2012, the company had close to $83 million of cash on balance 
sheet.  

Outlook
The outlook is stable. It reflects our view that Big Lots will likely maintain 
a resilient operating performance and its moderate financial policy over the 
next 18-24 months, maintaining credit metrics close to current levels, 
including adjusted debt leverage of around 1.6x.  

We could lower the ratings if Big Lots' performance was to deteriorate 
materially from current levels, with sustained negative comparables and a 
decline in profitability. This could occur if the U.S. economy doesn't 
improve. In particular, persistently high unemployment would put pressure on 
customers' disposable income and therefore reduce traffic at Big Lots, whose 
products are more discretionary in nature than those of discounters that 
typically offer more essential items. 

A downgrade of the company could also result from a more aggressive financial 
policy, which could take the form of Big Lots increasing its share repurchase 
activity significantly above its free cash flow generation capacity, which we 
estimate at about $200 million annually. 

A possible upgrade appears limited at this point because we believe that Big 
Lots' business risk profile is constrained by the intense competition in the 
U.S. retail value market, and by the country's macroeconomic outlook, which we 
project will only improve slowly and gradually over the next two years, 
Therefore we believe that over the next two years, there is limited potential 
for a strong improvement in operating performance for Big Lots, which offers 
fewer consumables than its significantly larger competitors (i.e., 
discounters). However, we could raise the rating if, absent changes in the 
company's moderate financial policy, its business risk was to improve, with 
the company acquiring more scale, improving its profitability in the mid-teens 
area (from current adjusted EBITDA margins of around 10%), and reducing the 
volatility of its inventory sourcing. 

Related Criteria And Research
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings List

Ratings Affirmed; Outlook Action
                                        To                 From
Big Lots Inc.
 Corporate Credit Rating                BBB/Stable/--      BBB/Negative/--

Ratings Affirmed

Liquidation World Inc.
 Senior Unsecured                       BBB                

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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