The consumer retail landscape in recent decades has continued to evolve at a rapid and interesting pace. Do consumers need discount stores like Dollar General (DG, Financial) or does Wamart Inc. (WMT, Financial) suit their needs? Target (TGT, Financial) is always an option for middle-class consumers, but RH (RH, Financial) is also an option for aspiring families that need a specialty retail experience for the home. One popular retailer that often challenges traditional retail concepts is Big Lots Inc. (BIG, Financial).
Big Lots is a unique home discount retailer with 1,425 stores in 48 states. The company offers products under various merchandising categories such as furniture that includes upholstery, mattresses, case goods and ready-to-assemble departments. The company covers the whole range of consumer products, including beverages, grocery, candy, snacks, specialty foods and pet supplies. There is also seasonal goods such as Christmas and Halloween decorations. Soft home categories include bed, bath, window, decorative textile, home organization, area rugs and other home décor. Similar to traditional department stores, it also sells small appliances, tabletops, food preparation, stationery products, home maintenance, organization products and toys.
However, furniture-related products are the largest category and that segment created headwinds in 2022.
Founded in 1967, Big Lots is headquartered in Columbus, Ohio. The company currently has a market capitalization of $293 million and had revenue of $5.5 billion in its last fiscal year ending January 2023.
Financial review
In March, the company reported a difficult fourth-quarter and full-year 2022. Net sales for the quarter totaled $1.5 billion, which was a 10.9% decrease from $1.7 billion in the same period last year. The decline was driven by a 13% comparable sales decrease. Comparable sales were negatively affected by product shortages in furniture, which was due to the unexpected closure of the company’s largest vendor in November 2022. Net sales for the full year were $5.5 billion, an 11.1% decrease compared to $6.2 billion in 2021.
For the fiscal year ending Jan. 31, the company reported a net loss of $210.7 million, or $7.30 per share. The adjusted net loss, which excludes the net charge for asset impairments and a gain on the sale of real estate and related expenses, was $171.9 million, or $5.96 per share.
Inventory at the end of the fourth quarter was $1.1 billion, compared to $1.2 billion for the same period last year, which was driven by a 7.3% decrease in lower in-transit inventory and on-hand units.
For the same period, cash and equivalents stood at $44.7 million, while total long-term debt was $301.4 million. This compares to $53.7 million of cash and $3.5 million of long-term debt in the prior-year quarter. The increase in debt was caused by a major cash burn of approximately $315 million during the year.
In a statement, President and CEO Bruce Thorn said, "Despite the extremely difficult consumer environment throughout 2022, we've taken action to strengthen and transform our business model. Against that backdrop, we made sequential progress to improve our margins, tightly manage expenses, and right-size our inventories over the last few quarters."
Valuation
Big Lots is not expected to be profitable in fiscal 2024 and 2025 with consensus loss per share estimates of $4.55 and $2.31.
The company sells at an enterprise value/sales ratio of 0.45, which is less than half of the industry average of approximately 1.
Nonetheless, the retailer is targeting improvement in its financial results in 2023 versus 2022, with earnings momentum being weighted toward the back half of the year. Strategic actions are being taken to improve business results and freight cost reductions continue to be realized.
Big Lots pays an annualized dividend of $1.20, which equates to a high yield of 11.86%. The dividend will almost certainly be reduced this year in order to improve the company's liquidity position.
Guru trades
Gurus who have recently purchased Big Lots stock include Paul Tudor Jones (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio). Investors that have reduced or sold out of their positions are Steven Cohen (Trades, Portfolio) and John Hussman (Trades, Portfolio).
Final thoughts
As Thorn noted in the earnings release:
"As we enter 2023, we remain excited about the opportunity to provide more value to our customers, while improving our sales and earnings momentum as the year progresses. We continue to accelerate the transformation of our business through key action points. These include offering even more compelling opening price points and better bargains and treasures, which are easier to find and more convenient to shop. In addition, we will continue to take strides to meet our customer's needs, grow our relevance, and be more efficient across our fleet. We remain focused on growing margin, reducing expenses, and making highly disciplined investment decisions."
However, the company may face liquidity issues if these strategic actions do not take hold in the near term. Plus, Big Lots faces stiff competition in the discount and general merchandise retail category, particularly among low-income consumers.
As such, investors may benefit from taking a wait-and-see approach before investing in Big Lots.
