Hedge Funds Cashing Out of Big Lots Shares After Price Doubles

Date: Wednesday, June 27, 2007
Author: Carol Wolf, Bloomberg

June 27 (Bloomberg) -- Big Lots Inc., the largest U.S. seller of overstocked and discontinued items, has an online Wild and Wacky Find museum where customers can submit items they stumble upon while shopping at the company's stores.

There's Chick A Poo Organic plant food made from chicken droppings, Shower Buzz vibrating body soap and Woofy Pop chicken-flavored popcorn for dogs. While the goods make Big Lots fun for shoppers, the enjoyment is waning for investors, particularly hedge funds.

New management and a planned restructuring lured about 56 hedge funds to buy Big Lots beginning in June 2005, and the stock jumped 91 percent last year for the fifth-best gain in the Standard & Poor's 500 Index. A third of those funds sold shares in the first quarter, and the stock has dropped 19 percent since the end of May.

``The easy, or low-hanging fruit has been picked,'' said Dan Thelen, co-manager of the Loomis Small Cap Value Fund in Bloomfield Hills, Michigan. ``Now the shares are fairly priced.''

Loomis Sayles & Co. sold all of its 145,000 Big Lots shares this year based on the stock price relative to earnings, Thelen said.

Profit from continuing operations rose sevenfold in the year ended Feb. 3 to $112.6 million. It will increase 24 percent this year and 13 percent next, according to analysts surveyed by Bloomberg.

Big Lots' biggest seller has been Philadelphia-based Cooke & Bieler Inc., which sold 6.45 million shares this year.

Fortress, Fir Tree

Hedge funds that pared Big Lots holdings include Fortress Investment, based in New York, which sold all of its 131,700 shares; Fir Tree Partners, also of New York, which traded 43,063 shares leaving it with 58,530; and London's GSA Capital Partners, which sold 52,300, giving it 46,116 shares, according to Bloomberg-compiled data.

``Hedge funds can be opportunistic and want to pocket the short-term gains,'' said Vivienne Hsu, a San Francisco-based money manager with Schwab Investment Management's Hedged Equity Fund. ``The shares had a good move, so they run.''

Not so for the Schwab hedge fund. It bought 1 million Big Lots shares last year, and owned 1.13 million as of January. Hsu cited the anticipated per-share annual profit growth of 20 percent through 2009 as one reason for sticking with the stock.

``The company still has a lot of potential,'' Hsu said.

Shares of Big Lots, based in Columbus, Ohio, fell 32 cents to $28.90 in New York Stock Exchange composite trading yesterday.

Treasure Hunt

Big Lots buys closeout and overstocked items from retailers and manufacturers, selling them at a discount. Outdoor furniture cushions may be on the shelf one day, sell out, and be replaced with garden hoses the next. Salt and pepper shakers in the shape of hula dancers might be grouped with six-foot (1.8-meter) inflatable palm trees to create a Hawaiian party-themed section.

``The fun with Big Lots is the treasure hunt,'' Thelen said. ``You don't exactly know what you are going to get.''

Mary Beth Fanning of Medina Township, Ohio, agrees. She shops at Big Lots for discounted picture frames, flower pots and seasonal items.

``I never go in for something I have to have because there is no guarantee it will be there,'' said Fanning, 42. ``I go in to look and always end up buying a bunch of junk I don't need.''

Restructuring

Big Lots became the darling of hedge funds beginning in July 2005, when Chief Executive Office Steve Fishman, 56, took the job and began a restructuring. He closed 130 money-losing stores through December 2006, leaving 1,375 locations in 47 states and 38,000 employees. He reduced inventory with a better system for tracking sales.

``Big Lots had bloated, inefficient assets,'' said Richard Hastings, a retail analyst with Smyth-Bernard Sands LLC. ``Management locked their egos in a trunk and optimized everything.''

Fishman, who declined to comment for this story, also introduced items with higher prices, such as discontinued or overstocked flat-panel and liquid-crystal display televisions.

Profit from continuing operations for the first quarter ended May 5 doubled to $29 million, or 26 cents a share. Sales rose 3.4 percent to $1.13 billion, Big Lots said May 31. Investors were disappointed when the company projected second- quarter profit from continuing operations at 7 cents to 10 cents a share, pushing the stock down 12 percent that day, the most in almost two years.

Cash Flow Doubles

Free cash flow, the money left over after paying for expenses and investments, more than doubled to $345.6 million in the 12 months ended January from $144.5 million a year earlier.

``The turnaround is still happening,'' said Joan Storms, a Los Angeles-based analyst with Wedbush Morgan Securities, which rates the company ``hold.''

Fishman joined Big Lots after stints as CEO of Rhodes Furniture and ShopKo Stores Inc. and was also a buyer for Macy's Inc., formerly Federated Department Stores Inc., and May Department Stores Co.

``The key to Big Lots is that Steve Fishman is a merchant,'' Thelen said. ``He knows what people like.''

Still, those changes weren't enough to keep Loomis as a shareholder.

``From here forward it's going to get more difficult,'' Thelen said.

To contact the reporter on this story: Carol Wolf in Cleveland at cwolf@bloomberg.net