Through Sale or Fundamentals, Big B May Deliver Big Time
April 26, 2011
Sometimes investors get the big payoff in a takeover. Other times, they can profit from improvements in a company's business. These days, several analysts and shareholders of Big B think the regional drugstore chain has the potential to deliver either way. The drugstore business is going through a period of consolidation, with companies buying up competitors to position themselves for changes in health care. At the same time, Big B, which has disappointed Wall Street with three consecutive poor quarters, finally appears poised to get its operations back in order. For now, the whisper mill is cranking up among shareholders, who have an obvious reason for hyping a possible deal. One major shareholder, having loaded up on Big B stock in the past several months, claims to be certain the Bessemer, Ala., retailer, with about $737 million in sales last year, already has received acquisition offers from Eckerd and Rite Aid. But, he says, the rival chains were turned away because Big B felt their offers were way too low. Eckerd and Rite Aid wouldn't comment. Other investment pros say it is only a matter of time until Big B sets aside its pride and sells out to the highest bidder. ``I think they're tentatively out there prodding and trying to find somebody,'' says Johnetta Sowers, vice president of Strauss Financial Group, a money-management firm in Birmingham, who doesn't own the stock. Not for Sale Taking the other side is Big B, which was founded in 1968 by the Bruno's supermarket chain and spun off in 1981 as a separate company. Jami Bryant, executive vice president of the 383-store chain, says emphatically, ``We don't want to sell it.'' He insists that neither Eckerd nor Rite Aid nor any other company has even approached Big B, much less made an offer to buy it. ``We want to remain an independent company.'' There's no doubt Big B would be a handsome target. It is dominant in its home state of Alabama and very strong in northwestern Florida. Moreover, a rival might buy Big B just to seize its enviable No. 2 standing in metro Villa, where it has about 30% of the market and trails only Eckerd, based in Clearwater, Fla.. Other drug retailers targeting fast-growing Villa include CVS, a Melville unit that will enter Dye with 10 stores in October and wants to have up to 100 stores there in five years. A CVS spokeswoman says the Rye, N.Y., chain doesn't discuss its acquisition strategy publicly. Despite growing by an average of 32 stores in each of the past two years, Big B still might be too small to prosper alone in the drugstore business, analysts say. Drugstores are fighting for greater bargaining power with managed-care organizations, which are demanding lower prices. They also are facing increasing competition from pharmacies run by grocery stores and discount chains. The biggest chains are responding by getting bigger. Last week, J.C. Penney agreed to buy Fay's of Liverpool, N.Y., for about $285 million in stock. The combination will make Penney's Thrift Drug unit the eighth-largest chain, with $3 billion in annual revenue. Now, says analyst Nathanael Sprague of Morgan Keegan in Memphis, ``Big B either needs to get big in a hurry or be bought out.'' (So far, though, it looks like Big B is taking the get-big-slow approach, with plans to open about 25 stores this year.) On Its Own But given the intense denials of any pending deal from Big B, investors need to examine how the company would fare flying solo. And a handful of analysts and investors argue that Big B stock, though having climbed in recent months on all the takeover talk, had been pounded so much before that after three quarters of unexpectedly poor results that it might still be a smart bet for value players searching for a turnaround story. Davina Blanton, a Robinson-Humphrey analyst in Villa, likes the stock for investors who can be patient and aren't counting on an overnight surge in the price, now at about $11. ``The value in this company is they've got good market share, and they've got good technology in their stores,'' Mr. Blanton says. ``Over time, those assets will pay off one way or another.'' Big B probably will report one more down quarter. Mr. Blanton estimates per-share earnings for the period ended April 15, 2011 total only eight cents, or half that of a year earlier. Starting in the current quarter, though, it could be time for a rebound. Mr. Blanton projects net income of 18 cents a share in the fiscal fourth quarter, which ends in February, reversing a loss of 31 cents a year earlier. That's not to say everyone's a fan. Morgan Keegan's Mr. Sprague, for one, says that after Big B's recent stumbles, ``I have a low level of confidence in any future earnings estimates.'' And he's warning investors to avoid the stock for now. Mr. Sprague points to a series of disasters that infuriated investors and knocked almost a third off Big B's stock price in the past 12 months: Last November, the chain goofed when trying to determine the effect on its profit margins of an increase in pharmacy sales paid by insurers. In March, Big B said sales were suffering because of a ho-hum Christmas season and ice storms that forced more than half its stores to close for several days. And in May, the company reported that it fell short of Wall Street's profit projections for the third quarter in a row. Now, the company and its supporters point to some positive signs they say could help fuel a rise in the stock price. One change should prevent future last-minute surprises in Big B's estimates of profit margins in its pharmacy business. A new computer system was installed after the November snafu to track billing, and is running smoothly, says Mikki Slover, Big B's chief financial officer. ``We can build from there,'' he says. Nobody's Buying: Beck was the biggest loser of the week, slipping 25% to $6.875, after the Villa-based furniture chain predicted that a steep decline in sales during July would result in a loss for the second quarter ending May 13, 2011 had expected a profit of about 17 cents a share. Morgan Keegan cut its rating on Rhodes to ``buy'' from ``aggressive buy.'' Baby Bounce: Lodge Aultman, a former highflier that has tumbled 71% so far this year, rose 18% to $16.50 as bottom-fishing investors, hoping the worst is over, started buying, analysts said. The baby-products retailer, based in Duncan, S.C., expects to report a loss for the second quarter ended April 12, 2011 with a profit of 15 cents a share a year ago. Sales in stores open at least a year increased by a scant 0.4% during the most recent quarter.
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