Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Is Big Lots Doomed?

There’s another bad sign for brick and mortar retail; Big Lots (NYSE: BIG) reported a slight drop in revenues. This is potentially worrisome news because the closeout store had reported some modest gains in recent months.

Big Lots reported revenues of $5.191 billion in July 2015 that rose to $5.223 billion in April 2016 and fell slightly to $5.216 billion July 2016. Okay the revenue drop is not much but it is interesting. In particular it flies in the face of the breakneck growth at Dollar Tree Stores (NASDAQ: DLTR); and Dollar General (NYSE: DG), in recent years.

My guess is that Big Lots is being hit by a drop in discretionary spending by middle class consumers. Those who have shopped at Big Lots know it stocks an eclectic assortment of overstock and other goods; closer to Target’s (NYSE: TGT) inventory than Walmart (NYSE: WMT).

This might indicate an ongoing retail trend, because Target reported a significant drop in revenue in April 2016; $920 million to be exact. Target ended fourth quarter 2015 with revenues of $73.78 billion that fell to $72.86 billion by April 2016.

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Is Amazon Killing Big Lots

Since it is an urban-focused brand with a middle class clientele; much like Target and Bed Bath and Beyond (NASDAQ: BBBY), Big Lots is a little more vulnerable to Amazon and to some other e-tailers such as (NASDAQ: OSTK). Big Lots also sells a variety of items that other dollar stores avoid: including furniture and electronics.

Overstock’s revenue has been growing significantly recently. The online consignment store reported that its revenues grew by $94 million over the past year rising from $1.61 billion in June 2015 to $1.704 billion in June 2016. One has to wonder if it is beginning to take business away from brick and mortar bargain outlets like Big Lots.

The Furniture section in the new Big Lots prototype store in Reynoldsburg on August 20, 2014.  The new store is bigger and has a different layout along with an expanded food section.  (Dispatch photo by Kyle Robertson)
The Furniture section in the new Big Lots prototype store in Reynoldsburg on August 20, 2014. The new store is bigger and has a different layout along with an expanded food section. (Dispatch photo by Kyle Robertson)

One problem affecting Big Lots might be that consumers are spooked by the media hype surrounding the election. They’re putting off larger purchases because of scare stories, particularly those about the effects of a Trump victory. This also encourages more bargain hunting which benefits Walmart; its new subsidiary, Costco Wholesale (NASDAQ: COST), Amazon and Overstock, at the expense of retailers that rely on discretionary spending such as Big Lots.

Still one has to wonder if this is the start of retail recession; or simply a sign that Big Lots is starting to succumb to the Amazon (NASDAQ: AMZN) contagion. Amazon has been hitting a wide variety of retailers; including sporting goods stores, hard in recent years. It effectively drove Sports Authority out of business, and is killing Macy’s.

That makes Big Lots a little more risky that more traditional dollar stores like Dollar General. Dollar General is partially Amazon proof; because it serves a working-class clientele that is less likely to shop online. Another benefit is that Dollar General specializes in the kind of items people are less likely to buy online such as paper towels.

Is Big Lots Making Money?

Now for the big question from a value investors’ perspective is Big Lots making money? The answer is not much it had reported a net income of $154.4 million; and a free cash flow of $51.74 million on June 30, 2016. That was compounded by $337.19 million in cash from operations; and $58.37 million in cash and short-term investments.


That leads me to reiterate an opinion I’ve expressed about Big Lots before, this company is simply not generating enough cash to survive. My prediction is that this chain will either collapse or merge with another retailer, unless it can greatly increase its cash flow.

Since that’s unlikely to happen I would say Big Lots is doomed so stay away. This is one chain that can collapse suddenly.

Big Lots is Doomed

All that means Big Lots is terribly overvalued at the $48.89 a share it was trading at on September 3, 2016. That price seems way too high for company with assets of just $1.62 billion and liabilities of $1.081 billion. The only value Big Lots might have for investors is for a candidate to short.

Big Lots’ revenue fall should be worrying because it might be a sign that the retail apocalypse is about to heat up; and start taking down lesser retailers with limited cash flows. A major problem here is that such companies can be pitched into the death spiral by any sudden change in sales.

One has to wonder if Big Lots is really a discounter; or just another niche retailer struggling to survive in marketplace dominated by Amazon. If Big Lots is a niche retailer; then it is doomed because Amazon and company own the niche.