Big Lots Inc. BIG plans to boost its financial outlook through a store remodeling and expansion program.
The retailer of home furnishings, storage and decor is seeking to enhance the customer experience, both in-store and online, by rolling out a variety of changes aimed at increasing differentiation versus peers.
Although the company faces an uncertain future due, in part, to the prospect of higher tariffs, its plan to deliver refocused product ranges and cost reductions is expected to boost earnings.
Having fallen 32% over the last year, the stock now appears to offer good value.
Improving the customer experience
The company plans to open 50 new stores this year, which is part of an ongoing program to remodel over 200 stores. The remodeled and new stores are focused on improving the accessibility of Big Lots’ brands, while increasing the proportion of home furnishing products that are on sale. The performance of new and remodeled stores has been strong, with sales growth being near or above the highest levels ever recorded by the business.
Investments are being made in the company’s online offering. In the most recent quarter, for example, it updated its e-commerce platform to include a faster checkout process and simpler navigation features. In addition, it launched a pilot buy online, pickup in store service with the goal of aligning the business more closely with changing consumer tastes. With the share of total U.S. retail sales from e-commerce expected to rise from 11% to 14% over the next two years, investments in its online offering could have a high marginal benefit.
Evolving customer offering
Big Lots is in the process of pivoting toward faster-growing categories, while reducing its exposure to segments that have experienced weaker sales growth in recent quarters. For example, it plans to downsize and exit greeting cards and redeploy the space to youth fashion and home furnishings. It is also planning to test a new in-store concept that aims to fulfill demand for life occasions like the upcoming school year. This could resonate with customers and lead to cross-selling opportunities.
Improvements are being made to a number of the company’s products in order to elevate customer perceptions of quality. For example, in the most recent quarter, it announced an agreement to change the supplier of its in-store mattresses. This will provide more frequent updates of style and other product features in order to strengthen differentiation versus competitors.
Threats
The performance of the company’s food segment in the last quarter was disappointing. It has faced a high level of industry-wide competition that is expected to remain in place over the medium term. Likewise, segments such as toys and accessories and electronics posted sales declines last quarter. This trend could continue and may hurt investor sentiment toward the stock at a time when retail sales growth is weak. Big Lots may also be required to pass on higher prices to consumers should additional tariffs be placed on imports from China.
In order to improve the prospects of underperforming segments, the business is changing its product mix. For example, within the food segment it is adding more sweet and salty snacks that have recorded relatively strong performance over the last couple of quarters. It will also seek to streamline its operations to reduce costs. As part of this initiative, it is renegotiating relationships to create lower costs in its indirect spend. This is expected to lead to a $40 million reduction in costs in the current year.
Outlook
Big Lots is forecasted to record an 8% increase in earnings per share this year, followed by 4% growth next year. Since the stock trades with a price-earnings ratio of 8.2, it appears to offer a wide margin of safety.
While the wider retail sector may have an uncertain future, changes that are being made to the company’s business model could improve its long-term financial prospects.
Investments in its store estate and digital opportunities may enhance Big Lots' competitive position, while new products are expected to lead to an increasingly differentiated offering versus peers.
With a relatively low valuation following its stock price decline over the last year, the company has investment appeal.
Disclosure: The author has no positions in any stocks mentioned.
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