Big Lots Is Gearing Up For a Blow-out Year
Big Lots is based in Ohio. And as a resident of Ohio, it's been difficult watching the company's fundamental measures of performance slide quarter after quarter.
The fourth quarter marked the eighth consecutive quarter of declining same-store sales, a measure of year-over-year growth. But that's all about to change when Big Lots starts offering its customers a way to finance furniture. This strategy helped Conn's grow earnings by 37% last year.
It's a bold prediction, but I'm confident Big Lots will break its negative same-store sales streak this year. Financing furniture may not seem like much of a strategy, but it has the potential to revolutionize Big Lots' business model. David Campisi, the CEO, had this to say about the program on the last earnings call:
As we look to 2014, the business will be engaged in rolling out [a] furniture financing program to a majority of our stores. We have tested this concept for [more than] six months now and have consistently experienced high single to low double-digit increases in furniture sales at the store level.
The financing program is much like the one offered at Rent-A-Center or Aaron's. Customers are extended credit to buy furniture; if their credit is too low, they can opt for a rent-to-own plan. Make no mistake about it: this is a form of sub-prime lending, and the company is offering it at a time when credit is tight, which will only increase the program's rate of adoption. The speed at which investors will start to see an increase in same-store sales growth and earnings is only a function of how fast the financing program is rolled out.
Let's talk a little about where all my confidence in this program is coming from. The name of the company is Conn's, and it had same-store sales growth of 35% last year along with bottom-line growth of 37%. There's nothing really all that special about Conn's from a business perspective. It sells furniture and consumer electronics at market prices; so where is all this growth coming from?
Conn's is one of the only "retailers" that also has a rent-to-own financing program. Rent-A-Center and Aaron's are known primarily for renting furniture, whereas Conn's is a retailer with a subprime financing program. According to Conn's 2013 10-K filing:
Our credit offering provides financing solutions to a large, under-served population of credit constrained consumers who typically have credit scores between 550 and 650.
We believe our large, attractively merchandised stores and credit solutions offer a distinctive shopping experience compared to other retailers that target our core customer demographic.
This is exactly why the program is going to be so successful at Big Lots.
Big Lots deserves some success. Management has been throwing whatever it can find at the walls hoping something will stick, and it finally found a winner. Not only is furniture already a growth area for the company, but it has high margins. Offering credit to the subprime market has the ability to add tremendous value to Big Lots in the long term, and it may even help the company to report positive same-store sales for the first time in two years.
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