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Big Lots (BIG) Research Report: Q1 CY2024 Update


Full Report / June 06, 2024

Discount retail company Big Lots (NYSE:BIG) fell short of analysts' expectations in Q1 CY2024, with revenue down 10.2% year on year to $1.01 billion. It made a non-GAAP loss of $4.51 per share, down from its loss of $3.40 per share in the same quarter last year.

Big Lots (BIG) Q1 CY2024 Highlights:

  • Revenue: $1.01 billion vs analyst estimates of $1.04 billion (3% miss)
  • EPS (non-GAAP): -$4.51 vs analyst estimates of -$3.92
  • Gross Margin (GAAP): 36.8%, up from 34.9% in the same quarter last year
  • Locations: 1,300 at quarter end, down from 1,427 in the same quarter last year
  • Same-Store Sales fell 9.9% year on year
  • (-18.2% in the same quarter last year)
  • Market Capitalization: $103.9 million

Priding itself on carrying brand-name items, Big Lots (NYSE:BIG) is a discount retailer that acquires excess inventory and then sells at meaningful discounts to the prices of traditional retailers.

For example, if Target orders large quantities of Martha Stewart Living bath towels that don’t sell as well as expected, Target may sell those in bulk to Big Lots at pennies on the dollar rather than discount the items and try to sell them individually. This is often done to clear shelf space for new products or because of restrictions on discounting certain brands.

Big Lots’s buying approach focuses on finding excess inventory or overstocked items from other retailers, so selection can change and be varied. Shopping at Big Lots is often a treasure hunt–what the consumer loses in reliable selection is made up for with low prices. Housewares and home decor, snacks, toys and games, and furniture are key product categories at the typical Big Lots store, and brands such as Serta, Whirlpool, Kraft, Nestle, and Sony can often be found there.

The core customer is the middle class, value-conscious shopper who values a one-stop shop for most of a household’s needs but is ok with changing selection. The typical Big Lots store is mid-sized, averaging 30,000 square feet and located in suburban or urban areas shopping centers.

Discount Retailer

Discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, clothes, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.

Discount retail competitors include TJX (NYSE:TJX), Ollie’s Bargain Outlet (NASDAQ:OLLI), and Ross Stores (NASDAQ:ROST).

Sales Growth

Big Lots is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's revenue has declined over the last four years, dropping 2.6% annually as its store count and sales at existing, established stores have both shrunk.

Big Lots Total Revenue

This quarter, Big Lots missed Wall Street's estimates and reported a rather uninspiring 10.2% year-on-year revenue decline, generating $1.01 billion in revenue. Looking ahead, Wall Street expects revenue to decline 2.5% over the next 12 months.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Big Lots's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 12.3% year on year. The company has been reducing its store count as fewer locations sometimes lead to higher same-store sales, but that hasn't been the case here.

Big Lots Year On Year Same Store Sales Growth

In the latest quarter, Big Lots's same-store sales fell 9.9% year on year. This decrease was a further deceleration from the 18.2% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Number of Stores

A retailer's store count often determines on how much revenue it can generate.

When a retailer like Big Lots is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Big Lots's store count shrank by 127 locations, or 8.9%, over the last 12 months to 1,300 total retail locations in the most recently reported quarter.

Big Lots Operating Retail Locations

Taking a step back, the company has generally closed its stores over the last two years, averaging a 1.4% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.

Big Lots's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 35.3% gross margin over the last eight quarters. This means the company makes $0.35 for every $1 in revenue before accounting for its operating expenses.

Big Lots Gross Margin (GAAP)

Big Lots produced a 36.8% gross profit margin in Q1, marking a 1.9 percentage point increase from 34.9% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Big Lots generated an operating profit margin of negative 19.1%, up 4.1 percentage points year on year. This increase was encouraging, and we can infer Big Lots was more disciplined with its expenses or gained leverage on fixed costs because its operating margin expanded more than its gross margin.

Big Lots Operating Margin (GAAP)

Unprofitable publicly traded companies are few and far between in the consumer retail sector, and over the last two years, Big Lots has been one of them. Its high expenses have contributed to an average operating margin of negative 8.4%. However, Big Lots's margin has improved, on average, by 2.8 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Sadly for Big Lots, its EPS declined more than its revenue over the last five years, dropping by 38.4% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to its shrinking demand.

Big Lots EPS (Adjusted)

We can delve even further into Big Lots's earnings performance. While we mentioned earlier that Big Lots's operating margin improved this quarter, a five-year view shows its margin has declined 21.1 percentage points. This was the most relevant factor (aside from revenue) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Big Lots reported EPS at negative $4.51, down from negative $3.40 in the same quarter last year. This print missed analysts' estimates. Over the next 12 months, Wall Street expects Big Lots to improve its earnings losses. Analysts are projecting its EPS of negative $12.39 in the last year to advance to negative $9.24.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Big Lots's five-year average ROIC was 2.8%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Big Lots's ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Big Lots, which has $43.99 million of cash and $2.38 billion of debt on its balance sheet, was unprofitable over the last 12 months. It posted negative $285.1 million of EBITDA, and as investors in high-quality companies, we seek to avoid indebted loss-making companies.

We implore our readers to do the same because credit agencies could downgrade Big Lots if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Big Lots can improve its profitability and remain cautious until then.

Key Takeaways from Big Lots's Q1 Results

We struggled to find many strong positives in these results. Its revenue and EPS unfortunately missed analysts' expectations as its same-store sales underperformed. On top of that, its full-year same-store sales forecast fell short of Wall Street's estimates, implying a weak operating environment. The company did not share an earnings outlook, a yellow flag for investors. Overall, this was a bad quarter for Big Lots. The stock is down 16% after reporting and currently trades at $2.96 per share.

Is Now The Time?

Big Lots may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Big Lots, we'll be cheering from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last five years makes it hard to trust over the long term. On top of that, its relatively low ROIC suggests it has historically struggled to find profitable business opportunities.

While we've no doubt one can find things to like about Big Lots, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $4 per share right before these results (compared to the current share price of $3.56).

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