Market Mad House

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

Crazy Stocks

Will Big Lots Survive?

How does a bottom-feeding discounter survive in today’s brutal retail environment? Well there are several models, including Dollar Tree (NASDAQ: DLTR) and Dollar General’s (NYSE: DG) strategy of getting as big as possible as fast as possible.

Then there’s Big Lots (NYSE: BIG) which tries to distinguish itself by selling weird or funky stuff at great prices. Big Lots tries to achieve this by buying unique items at close out prices and selling them at low prices. So which model is the best for investors and consumers?

Well from a revenue standpoint Dollar Tree and Dollar General are right. Dollar Tree reported revenues of $20.72 billion on January 31, 2017 and Dollar General reported $21.26 billion on October 31, 2016. That certainly sounds a lot better than the $5.2 billion in revenue that Big Lots offered on January 31, 2017.

Yet Big Lots profit margin of 5.7% was just one point lower than Dollar Tree’s  5.71% but better than Dollar General’s 4.42% profit margin. So it sounds if Big Lots is a little more profitable than Dollar General, yet does it make money.

Does Big Lots Make Money?

The problem with that profit margin is that Big Lots is not making that much money. It reported a net income of $152.83 million and a free cash flow of $340.49 million on January 31, 2017.

That was on top of a cash from operations figure of $311.92 million and $51.16 million in cash and short-term investments. These low numbers did not give Big Lots much float, it reported $1.608 billion in assets on January 31, 2017.

This demonstrates that Big Lots far smaller footprint is not necessarily a good business model. It is taking on a lot more risk than Dollar Tree and Dollar but making a lot less money.

A greater threat to Big Lots future is that its revenues are stagnant, it reported $5.191 billion in revenues in January 2016 and $5.2 billion a year later. Revenues grew slightly compared to Dollar Tree which added $5.22 billion in revenues in 2016.

The danger at Big Lots is that it is not capable of the kind of massive revenue growth both Dollar Tree and Dollar General have shown. Its revenues seem to grow slightly but not at a high level.

That might be a threat because a high rate of growth might be necessary to generate the amount of money a discounter needs to survive. One problem is that Big Lots may have reached the limits of its growth.

Why Isn’t Big Lots Growing?

Many observers will wonder why Big Lots is not growing that fast? After all it is a funky, urban chain in a country that’s urbanizing fast and filling up with hipsters.

It also offers lots of great bargains in a nation that is suffering from a high rate of income inequality and growing wage stagnation. Yet, Big Lots has not been able to generate significant revenue growth.

I can think of one big and obvious cause for this the internet. Online outlet like Amazon (NASDAQ: AMZN), (NASDAQ: OSTK) and eBay (NASDAQ: EBAY) provide a bigger and potentially far more lucrative market for a lot of the merchandise Big Lots used to get. That might be limiting its stock and its appeal to customers.

An even worse problem might be that customers no longer need to go to Big Lots to find those bargains because they can access them from any computer or smartphone. Bargain hunters; especially young hipsters who have apartments to furnish might be staying away, from Big Lots because a bigger variety of better bargains might be available online.

This is already hurting Dollar General which has had to lower prices on many items simply to compete with Amazon and other online retailers. The only way it can get customers in the door is to offer incredibly low prices. One has to wonder when dollar stores will start selling items at a loss to compete and how long that can last.

What’s Better Big Lots or TJX?

A related problem is the bargain department stores like the TJX Companies (NYSE: TJX) which have been growing fast. TJX; which operates TJ Maxx and other low-end department stores, has a similar business model to Big Lots, buying select items from close out and operating in urban or suburban areas.

Yet it has demonstrated healthy growth in recent years. TJX’s revenues grew by $2.24 billion in 2016; rising from $30.94 billion in January 2016 to $33.18 billion in January 2017. One has to wonder if TJX has been taking market share from competitors like Big Lots or profiting from the decline of department store brands like Sears, JC Penney, Kohl’s and Macys.

TJX might be picking up their customers or simply benefiting from more merchandise scavenged from dying rivals. Obviously, we have to wonder what happens to companies like TJX and Big Lots, when major department stores finally die off. Where will they get inventory without large retailers to buy unsold merchandise from?

A related problem is that competitors can simply sell the stuff directly online through their websites or platforms like Overstock, and Amazon. That creates competition and deprives resellers of stock.

One thing is for certain, Big Lots was definitely overvalued at the $49.16 a share it was fetching on March 30, 2017. Nothing in its earnings report or holdings warrants that. Not even the 25¢ dividend which shareholders received on March 15, 2017. Stay away from Big Lots, it is overpriced and exposed to dangerous competitors that will soon destroy its business.