S&P Upgrades Big Lots (BIG) to 'BBB'; Follows Wind-Down of Canadian Operations

Standard & Poor's Ratings Services raised its corporate credit rating on Big Lots (NYSE: BIG) to 'BBB' from 'BBB-'. The outlook is stable. We also raised our issue-level rating on the company's unsecured credit facility to 'BBB' from 'BBB-'.

"The upgrade reflects stronger profitability as Big Lots has completed its initiative to wind down its Canadian operations and focused its efforts on improving its domestic stores in the past year," said credit analyst Diya Iyer. "It has also boosted its leasing program through a third-party vendor to help drive ticket levels and reduced markdowns to fuel EBITDA gains."

The stable outlook reflects our expectation that continued improvements in operating results will drive credit metric enhancement in the coming year. We believe the company's primary competitive advantage is its sourcing capabilities for closeout merchandise, with traffic improving and benefiting from the completed cooler and freezer rollout.

Although unlikely, we could raise the rating if sales increase in the 20% range and gross margin improves more than 100 basis points (bps) in the coming year amid continued merchandising improvements, resulting in leverage in the low-1.0x area and coverage in the 15.0x area. The company would also need to demonstrate more conservative financial policies, including a commitment to preserve cash flow and revolver borrowings for business reinvestment rather than shareholder initiatives.

We could lower the rating in the next year if Big Lots sees negative sales in the high-single digits and accompanying gross margin erosion of 100 bps from markdowns, resulting in a high-single-digit percent EBITDA decline and leverage in the mid-2x range, perhaps because of poor results from the cooler and freezer rollout. We could also lower the rating if the company's financial policy becomes more aggressive than we currently expect, with share repurchases beyond our projections funded with revolver borrowings.

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