Is Big Lots Losing Money?

Big Lots (NYSE: BIG) recent experiences demonstrate the threat Amazon (NASDAQ: AMZN) poses to brick and mortar discounters.

Big Lots revenue started shrinking again after three quarters of modest growth in 2nd Quarter 2018. The reseller’s revenues fell by 2.08% in 2nd Quarter 2018, after growing by 3.98% in 1st Quarter 2018.

Big Lots made money in 2nd Quarter 2018, despite the revenue shrinkage. The company reported a net income of $2.124 million and an operating income of $45.34 million. Those figures were down from $104.83 million and $167.88 million in 1st Quarter 2018.

The most likely explanation for the income drop and revenue shrinkage is the middle class is not shopping at Big Lots regularly. Sales spiked during the Christmas rush, when working class people needed gifts and collapsed afterward.

How Amazon Threatens Big Lots

Big Lots sales are falling because the people with disposable income (the upper middle class) are not shopping there. The upper middle class is shopping from the couch by phone (in other words on Amazon) instead.

Big Lots is a reseller that operates in urban and suburban neighborhoods. Its usual modus operandi is to sell slightly-higher end merchandise at a discount. The merchandise is mostly goods that other retailers cannot or will not sell. A selection of basic foods, housewares, and some other items is thrown in.

Big Lots is vulnerable to Amazon because it depends on high drop-in foot traffic. The typical Big Lots customer is a 30-year-old professional woman out for a walk in the neighborhood. Increasingly, that woman is avoiding brick and mortar stores.

Instead, Big Lots is left with the working class and poor customers with less money to spend. Those people only buy from Big Lots if they find a terrific bargain there.

Another threatened to Big Lots is Amazoning which works like this. A customer goes into Big Lots sees something she wants. Then she checks her phone to see if Amazon or Alibaba or eBay or Overstock has it.

Amazoning offers the advantage of not having to lug the merchandise home. It also gives consumers an excuse to buy, which is usually fatal for spur of the moment sales. A quick glance at Amazon or Overstock will demonstrate that the great bargain is not unique.

Can Big Lots Survive Changing Consumer Behavior?

The real threat to Big Lots is not Amazon but changing consumer behavior. People are no longer willing to settle for what is available in the neighborhood.

Today’s shoppers are skeptical of all bargains, deals, and discounts. Instead of being excited when they see something offered for half price at Big Lots they ask, “what’s the problem?”

These new mentalities are fatal for a company that specializes in quick sales of unique bargains. Beyond that, Big Lots deals are not that special anymore. Anybody with internet access, (95% the population) has access to bigger retailers with better deals. To add insult to Big Lots injury many of those retailers offer free delivery.

People shop for deals on Thanksgiving morning at a Big Lots retail store in Alhambra, California, on November 24, 2016, one of the retailers to open earlier in the holiday shopping season.
AFP / Frederic J. BROWN (Photo credit should read FREDERIC J. BROWN/AFP/Getty Images)

Can Big Lots Survive

Disturbingly, Amazon and its competitors only need to steal a small percentage of Big Lots’ shoppers to hurt it gravely.

Big Lots reported revenues of just $1.268 billion and a gross profit of $511.96 million for 2nd Quarter 2018. The company recorded a free cash flow of just $31.45 million and an operating cash flow of $98.89 million for the same period.

The low cash flow figures indicate a modest retailer like Big Lots, it operates around 1,416 stores, cannot generate cash to survive in today’s market. Big Lots simply lacks the resources to survive.

It reported total assets of $1.727 billion and $64.83 million cash and short-term investments on May 5, 2018. Big Lots survival might be impossible when its direct competitor is Amazon which had $27.05 billion in cash and short-term investments on 30 June 2018.

Amazon can afford to sell everything in Big Lots’ inventory at a loss to run it out of business if Jeff Bezos wants. Frighteningly, that seems to be one of Bezos’ strategies, undersell every retailer we can.

That strategy worked wonders for Walmart (NYSE: WMT) and it is even more successful for Amazon. Customers learn the cheapest price is always at Amazon (or Walmart) so they go there first.

So how can Big Lots Survive?

The first and most likely survival strategy at Big Lots is to sell out to a larger organization that can provide enough resources to fend off Amazon. That is the strategy being followed in the supermarket business where brands are selling out to Safeway and Kroger (NYSE: KR).

Big Lots might survive by selling out to a supermarket operator or the discount department store operator TJX (NYSE: TJX). TJX survives by operating several chains such as TJ Maxx and selling huge volumes of unique merchandise at a low cost. Big Lots would be a natural fit for TJX’s stable of low-end brands.

Another strategy, which Big Lots is attempting, is to redo everything. The company is planning a “Store of the Future” in Merrillville, Indiana, RE Journal reported. The store of the future will be similar to TJX’s Home Goods offering kitchen items, houseware, and furniture at low prices.

The idea is to concentrate on items people are less likely to buy on Amazon, such as chairs. The Store of the Future is an obvious attempt to lure back the middle class women that have been avoiding Brick and Mortar retailers like the plague in recent years.

Competing with IKEA and Home Goods seems a stretch for Big Lots. My prediction is that the store of the future will be a bust. Big Lots lacks the resources to make it work.

Other efforts at Big Lots might be to combine with other retailers. IE offer a combination Big Lots and Aldi, Big Lots and Kroger, or Big Lots and Amazon Go. A combination store with a larger retailer would provide the resources needed to survive.

How safe is the Big Lots Dividend?

Experiments like the Store of the Future are necessary for a retailer’s survival, but they are bad for investors because of the cost. Big Lots could be forced to cut its dividend to finance such efforts.

Big Lots paid a 30¢ dividend on June 29, 2018. The dividend is high for a stock that was trading at $42.82 on 4 September 2018. Big Lots investors enjoyed a 2.79% dividend yield, an annualized payout of $1.20, and a payout ratio of 26.3% on September 1, 2018.

Big Lots dividend has grown significantly in recent years, it jumped from 25¢ in 2017, and 21¢ in 2016. The dividend growth has been ongoing for three years. Unfortunately, that looks as if Big Lots was jacking up the dividend to attract investors.

My prediction is that the Big Lots dividend will soon fall because this retailer is incapable of growth. Investors should stay away from Big Lots because it is incapable of significant growth in today’s retail market.

Expect to see Big Lots collapse or contract in the next few years. This retailer is simply incapable of competing with Amazon or surviving.