Skeptics abound but Big Lots CEO sees growth

NEW YORK (Reuters) - When a retailer like Wal-Mart Stores Inc (WMT.N) tells vendors to cut the size of the cereal boxes they sell in its stores, it brings a smile to the face of Steve Fishman, chief executive of Big Lots Inc (BIG.N).

"There is nothing better for us then when we hear change," Fishman said in an interview on Thursday. "The word change ... to us is opportunity."

Big Lots is a close-out retailer that sells what others cannot. When manufacturers, like cereal makers, are left with extra inventory due to a discontinued line or a change in packaging requirements, they call Big Lots, which will then buy the merchandise and sell it in its stores -- at a discount.

Big Lots is fielding more phone calls these days as retailers, faced with weak consumer demand, cancel orders and manufacturers find themselves stuck with excess goods.

The model has paid off this year. Its stock has risen 96 percent during 2008 through Thursday, and it was the best performing stock in the Standard & Poor's 500 index .SPX through the first five months of the year.

With a high percentage of short interest in its stock, many investors are now betting Big Lots will stumble. But Fishman is firm in his belief that the retailer has nowhere to go but up.

"In 2005, we earned 14 cents a share. This year, we said we're going to earn in the $1.80 to $1.90 a share (range)," he said. "In 2005, our operating profit was $26 million. This year it's going to be around $260 million. That's pretty strong performance and pretty strong execution."

SNATCHING UP THE EXCESS

Fishman took over as CEO of Big Lots in mid-2005, and has worked to return the retailer to its close-out roots. Big Lots alienated shoppers who were seeking cut-price, name-brand goods after venturing into other areas, like selling frozen food.

"Our customer doesn't come to us expecting a Nordstrom's level of in-store shopping experience. They want value, treasures, merchandise on the floor and clean restrooms, and we need to meet those expectations," Fishman said in 2005.

Big Lots has stopped carrying frozen food, freeing up space for more popular items like pet food or furniture. It has closed underperforming locations and tried to get shoppers to spend more in its stores, a strategy called "raise the ring."

Fishman is pushing to add more brand-name items, like Serta mattresses or Cuisinart appliances. A recent ad shows a Eureka vacuum for $70, down from a retail price of $149.99; and a Remington shaver for $20, half off its $39.99 retail price.

Fishman has also tried to explain the company's business to analysts, and differentiate it from dollar stores, which tend to sell items for under $10 and cater to lower-income customers.

"We're an enigma," he said at an investor conference this month. "It's been a real challenge for the marketplace."

UPS AND DOWNS

Fishman's tenure as CEO has seen it share of bumps.

Big Lots' stock fell 66 percent between the end of May 2007 and early January 2008, from $36 to below $13, as U.S. consumer spending slowed, and it struggled with weaker-than-expected comparable-store sales -- or sales at its stores open at least two years.

In its third quarter, comparable store sales fell 0.5 percent, while they fell 0.6 percent in the fourth-quarter. But its first-quarter comparable-store sales rose 3.4 percent -- beating an initial forecast for a 1 to 2 percent gain.

But skeptics abound. Roughly 44 percent of its total shares outstanding were held short as of June 13 as investors bet its stock will fall.

Fishman said contrarians believe Big Lots' comparable-store sales growth will not continue, it has reached the end of its ability to cut costs or "we're adverse to opening new stores."

But Fishman said Big Lots still has room to lower costs by improving the productivity in its distribution centers and cutting transportation costs.

It is also looking for ways to possibly sell merchandise on its website. Right now, it uses the site to reach its Buzz Club members, customers who get notified early of its latest deals.

And the retailer is certainly not adverse to opening new stores: "We have always wanted a larger store base -- at the right price," Fishman said.

Those right prices could be opening up as the real estate market weakens, and Big Lots may consider putting stores outside of its typical strip-mall or stand-alone locations.

"If someone came to us with 25,000 square feet in a mall that was an A-based mall at a price that we could afford to do, it would certainly be an interesting test," Fishman said.

After years of shrinking its store count, from 1,502 in 2004 to its current 1,353 stores, to improve results at existing stores, Big Lots can now look to open new stores.

Although it could take years, Fishman said Big Lots has the infrastructure in place to support 1,800 stores.

"It's kind of interesting that most retailers today are talking about pulling back on new store opening, pulling back on capital expenditures or stopping new store growth," he said. "We did that, we think we're prepared for new store growth and as long as we can open a new store profitably, we're prepared to do that."

(Editing by Dave Zimmerman)