Can Big Lots Survive?

Big Lots (NYSE: BIG) is one of the more interesting retailers out there because it has resources that present some fascinating opportunities.

First, like TJX Companies (NYSE: TJX) Big Lots is in the reselling business. That is it resells a lot of merchandise that other retailers cannot get rid of. Since TJX is the only department store with seriously growing revenue and income these days that’s interesting. TJX is also the only department store that’s meaningfully expanding its footprint right now.

Second Big Lots is a small-box discounter like Aldi, Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG). Small boxes or dollar stores are one of the few areas of brick and mortar retail that has experienced serious growth in recent years. Aldi and Dollar General have been spreading and growing like weeds in recent years.

Is Big Lots the Future of Retail?

Third, Big Lots footprint and standard store size look a great deal like the new operations some retailers are experimenting with. Big Lots, which sells a combination of food, cleaning supplies, dry goods, furniture, and home furnishings looks a lot like TJX’s Home Sense and Home Goods stores.

It is also similar in size, but not the concept to Nordstrom Local. Nordstrom’s (NYSE: JWN) new concept is only 3,000 square feet in size and has no merchandise racks.

Like Home Sense and Home Goods, Big Lots offers a combination of eclectic furnishings and furniture at bargain basement prices. It is also usually found in strip-mall locations; just like Nordstrom Local, Home Goods, and Home Sense.

All this makes Big Lots very interesting because it operates 1,449 stores in 47 states. Big Lots has a footprint that would be of very useful to a big retailer trying to diversify its operations. It looks as if Big Lots is already where other retailers are trying to go.

Is Big Lots Making Money?

Such speculations raise the question is Big Lots making enough money to justify other retailers’ attempts to imitate its business model. The answer to that is maybe.

Big Lots revenues have fallen in the past year. It reported $5.126 billion in revenues in July 2016 that fell to $5.203 billion in July 2017.

Yet the income is growing, rising from $154 million in July 2016 to $172.09 million in July 2017. That might be why TJX and Nordstrom are so interested in smaller-format stores, they see that Big Lots can make more money with fewer revenues. A reason for this might be lower labor and operating costs.

Big Lots has some struggles it reported a negative free cash flow of -$16.61 million on July 31, 2017. There’s also very little float, Big Lots had assets of just $1.591 billion and cash and short-term investments of only $56.01 million on July 31, 2017. All that made for a $2.29 billion market capitalization and an enterprise value of $2.380 billion on 20 October 2017.

Is Big Lots an Acquisition Target?

The cash figures show that companies like Nordstrom and TJX are going to face some real challenges as they go small box. Big Lots faces a real struggle for survival, because of its limited cash flow.

All this indicates that Big Lots has a promising business model, but lacks the cash to exploit it. That might make it an acquisition target; an obvious suitor would be TJX, which reported $2.952 billion cash and short-term investments on July 31, 2017. TJX has a similar business and it is expanding its smaller format footprint.

Other potential buyers might be department store operators that are trying to diversify and private-equity firms. A few private equity firms are bargain hunting in the retail apocalypse. An interesting speculation here; is that one reason why the Nordstrom family wants to take their store private is so they can start acquiring promising companies like Big Lots.

Is Big Lots a Good Investment?

Not surprisingly a lot of people will wonder if Big Lots is a value investment. The answer is somewhat, the stock is risky but investors are making money with it.

They received a return on equity of 28.89% on July 31, 2017, and collected a dividend of 25¢ on June 7, 2017. That dividend increased by 5¢ in 2016, it was 20¢ in December 2016. This makes Big Lots a value stock because it was trading at just $52.51 a share on 20 October 2017.

If you are looking for a good value investment in retail check out Big Lots, it is cheap but makes money. More importantly, Big Lots already has many of the attributes that other brands are trying to achieve.