[Beginning of Cramer's verbatim comments for this segment...]

Jim:          You know I'm hunting around for the discount king all week... the best cheap retailer... not the one with the best stores... not necessarily even the best company... but the best stock... and that's an important difference as you will see tonight...

Jim:                   Even though the trade-down play may be starting to unwind... has consumers feeling wealthier... courtesy of the bottom in the housing market... and of course the robust stock market since March... I still think there's opportunity in this space...especially since a lot of high-end retailers and department stores... and the discounters... have started to lag behind.

All week I've been focused on this exercise in comparative stock picking... I like to call it Mad Max Beyond Thunder Billing... 5 discounters enter... 1 discounter leaves... it's my effort to show you how to evaluate stocks like a professional... my goal is to make you a better investor... by showing you how I used to compare my hedge fund... how I pit household names... that you're all familiar with... against each other... to try and arrive at the stock with the best-risk reward... so far we've looked at TJX (TJX)... which I'm now calling the discount pawn... or maybe knight... as it deserves a more senior appellation given its history of good execution... we've gone over the warehouse stores... Costco (COST) and BJ's Wholesale Club Inc. (BJ)... BJ's could maybe be a contender for the discount crown... despite as I said the stores don't matter... despite my personal love of shopping at Costco... especially with the free food samples... that I always try to make a meal of... how do you think I got rich in the first place?... I always fast before going to a Costco...

Today I want to come back to another big name in the off-price retail space... Big Lots Inc. (BIG) for all you homegamers... this one hasn't been one of my favorite retail stocks... but yesterday... it reported a monster blowout... that's right earnings per share coming in at $.35... 5 cents more than what the Street was expecting... and it raised its guidance for 2009... that's the double play we're looking for... and only Apple Inc. (AAPL) and Salesforce.com (CRM) have given us that combination in any meaningful way...

You may not know these guys... they operate though out of 1,350 stores in 47 different states... the highest concentration in California, Florida, Texas, and Ohio... those first 2 especially are big beneficiaries of the recovery I'm seeing.. especially the recovering in housing... which BIG has some exposure to... something we wanted to see after that fantastic new home sale's number today... no more denying that housing bottom... About 30.4% of BIG products is consumables... I'm sure you've had some of these fabulous Cinnamon Toasters... that's food, health, beauty and pet products... we got all that stuff man... cranberry juice, good for your urinary tract... another 15% is home products... try to be helpful for heaven's sake... home products with 15% is furniture... that's your housing exposure... it also gets 14% of sales from hard mines, electronics, and appliances... 13% from seasonal and garden products... probably the stuff other retailers were stocking last Christmas... and the last 13% is toys, jewelry, and apparel...

BIG, like TJX, sells closeout and overstock merchandise... it buys brand-name products from vendors that have too much inventory... and are willing to firesale there goods... sell, sell, sell... although it does some direct purchasing... where BIG buys in bulk... a la BJS or Costco (COST)... with 27% of its merchandise coming directly from overseas vendors... I said TJX has to be worried earlier this week... because its model gives it a sourcing problem... in an environment where other retailers are flushed with cash... and have leaning inventories... they'll have to pay much higher prices for the goods... because the closeout deals just aren't there... everybody's inventory's too lean... I think that's why TJX (TJX) delivered such downbeat guidance...

So then what makes BIG different than TJX?... Why am I less worried about it having a sourcing problem the second half of the year?... Mainly it's because BIG was much more confident about the second half on its conference call than TJX had been... BIG has seen major improvements in earnings and in same-store sales... from the third quarter to the fourth quarter... while TJX had a much more negative outlook... the other difference is that TJX sells mostly apparel... while BIG has a more diverse product mix... so they're not buying closeout merchandise from the same companies...

On its conference call recently... Big Lots Inc. (BIG) mentioned recently landing some big new closeout deals... as a reason that they are positive about the second half... so they are clearly not in the same boat as TJX...

How about the key metrics for BIG?... Same-store sales, inventories, margins... remember we're comparing all those... in the last quarter same-store sales declined 2.4%... but management was more optimistic about the second half of the year... predicting same-store sales would be down 2% to flat in the third quarter... and slightly positive in the fourth quarter... that's the one we care about... but its up against an easy compare... the fourth quarter of last year its same store sales were down 3.2%... and that should be easy to improve on...

Inventories?... Here's some good news... BIG finished the quarter with inventories down 4%... compared to last year at this time... that's fabulous... just fabulous... you know why?... no further discounting because they are lean... and don't need to dump anything... Company also had a gross margin... how much money it makes after sales... at 40%... TJX is much smaller at 25.5%... and that's probably going to come under pressure I believe because of sourcing problems... Alright, why am I just not standing on the table saying you should be buying BIG?...

My big main complain about BIG... why I consider it the Notorious B-I-G lots... has been purely anecdotal... but its still a powerful one for me... I had a bad experience at my BIG... Once I visited a BIG that's on Route 22... it was incredibly disorganized... this is a company that doesn't score high on the Danny Meyer Hospitality scale... remember he's the restauranteur, his book Setting the Table introduced us to the hospitality quotient... in that big department...BIG is a big zero... that said, BIG at least has acknowledged that its store haven't been run very well... and it's been rolling some new initiatives to make it a more appealing place to shop... its Food Refresh program which includes new and refinished fixtures in half of its stores... to emphasize cleanliness and better presentation... its now on track to be done by the end of this quarter... I don't know about you, but I prefer my food clean... While I'm at it... I hate the cellophane bags of crackers and chips... obviously left there by patrons and shoppers who didn't want to buy them... and they simply aren't restocked... and get this... I also waited in the longest store line I have ever been in because I wanted to buy picture hooks for half price... in keep with my Costco (COST) free sample style of living...

Thanks to lower advertising and real estate costs...Big Lots Inc. (BIG) has been able to advertise more aggressively on television for the same amount of money... it's been able to open 50 new stores... rather than the 40 it had planned... I love that... BIG is a big huge beneficiary of the demise of Linens N' Things and Circuit City... because its cheaper to convert their former stores into BIG stores rather than say, a supermarket... How about this stock? Will I name it the discount stock king?... You will have to wait until tomorrow.

Since the March 6th lows... BIG has had a huge run... its up 50%... now normally that alone would disqualify it form the running... but wait a second... TJX (TJX) is up 70% since then... so while I'm not happy that we missed this BIG move... although Dan Fitzpatrick our chartist from Off the Charts did catch it... I can't boot the darn stock though from the competition just because it's run a lot... and even though BIG growth rate at just under 10%... is in line with other retail, home goods, and other warehouse companies... it trades at only 12.5 times expected 2010 earnings... 2 multiple points below TJX and Ross Stores Inc. (ROST)... and well below Costco... which trades at 18.7 times 2010 earnings... BIG is in closer in valuation to BJS... another reason why I like them.

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Bottom Line:     Even though Big Lots Inc. (BIG) sells cheap merchandise... a lot of its discretionary is tied to housing... which is why it's in the running to being discount king... at the very least it's discount bishop... or discount rook.

 

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