North America's Largest Closeout Retailer Posts Negative Earnings


Big Lots , represented by the blue line in the chart below, was on a volatile yet upward trend in both EPS and stock price, but something happened in 2012.

BIG Chart
BIG Chart

BIG data by YCharts

Big Lots, North America's largest closeout retailer

The 1,603 Big Lots stores are almost as big, in square feet, as stores owned by Target . The items on Big Lots' shelves, however, are more like what you would see at Family Dollar Stores or Dollar General , and you won't find a Starbucks ready to serve up your favorite latte either.

This last quarter Big Lots posted earnings of ($0.17) per share. This loss may have something to do with slower transaction volume, but investors can't know that for sure because Big Lots doesn't like to talk about sales transactions.

There's virtually no discussion about transactions, units, or customer traffic in the most recent 10-Q -- the company used the phrase "net sales volume" once and only in a general sense. It also provided information about category growth, but that's not the same as a discussion on unit volume, customer visits, or units per transaction. These are common discussion areas for other retailers in their earnings releases, especially when their earnings are negative.

What you will find at Big Lots are discounts and mark-downs on everything that Target sells, including furniture. Furniture was the fastest growing segment in the most recent quarter, which sets Big Lots apart from Family Dollar Stores, Dollar General, and Target. Each retailer has to find a niche in this market, and Big Lots has picked furniture.

In addition to a number of brand name close-outs in the beginning of the year, Big Lots has also allocated additional square footage to the pet department, which is now the fastest growing segment within consumables.

Gaining focus: category changes, wholesale shut-down, and Canada closings

The good news is that Big Lots appears to be making some very real changes. Like many retailers, the company has reorganized the category offering. As a result, "food" is now its own category and it is no longer included with "consumables." The company also plans to close the wholesale business and the entire Canadian segment. It believes the Canadian segment is misaligned with its strategic long range plans, and added, "our customers did not favorably respond to our overall mix of product offerings." Keep in mind that all of these changes produce one-time costs that will show up in 2014.

Ironically, as Big Lots plans to close 78 stores, Target is putting the finishing touches on the 124 stores it just opened in Canada. These stores proved a $0.29 drag on Target's earnings in the most recent quarter due to "efforts to clear excess inventory following lower than anticipated year-to-date sales and supply chain start-up challenges." Dollar General and Family Dollar Stores don't have any stores in Canada, but the earnings of both companies are climbing. Maybe retailers should stay out of Canada.

BIG EPS Diluted (TTM) Chart
BIG EPS Diluted (TTM) Chart

BIG EPS Diluted (TTM) data by YChart

The good news and the bad news

Change is good and Big Lots needs to do something to deflect questions away from its stock price and earnings per share. The new inventory management system implemented in 2012 is slowly helping to improve gross margin, but not by much. Another concern is the increase in SG&A from 31% of sales to 37% of sales. When margins are thin, 6 percentage points is an issue, especially when the company has a negative profit margin in the third quarter of 2013. The company attributes the increase to the opening of 43 stores -- something doesn't smell right.

The glaring issue at Big Lots is a lack of discussion about transactions or unit volume. There's no discussion about inventory turnover and improved inventory measures. Additionally, every quarter there's a new one-time charge.

The good news is that management appears to be refocusing itself. The bad news is that you may not see any improvement until the end of 2014. If the company can increase traffic through the furniture and pet segments that would be marvelous, but these are not regular consumable items like food and toilet paper. A focus on them may decrease the number of customer visits -- it probably already has.

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Originally published