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Big Lots and Ollie's: It’s a Matter of Compares & Customer Composition

Thomas Paulson
Sep 2, 2022
Big Lots and Ollie's: It’s a Matter of Compares & Customer Composition

Similar to Ross Stores, Burlington, and Family Dollar, Big Lots and Ollie's Bargain Outlet feel the need to offer its shoppers better value and lower opening price points and are adjusting their merchandise to deliver that. Big Lots’ CEO Bruce Thorn stated, "These are not going to be baby steps in opening price points, we're going big." (Federal Reserve Chair Powell likely smiled if he heard that, though it’s unlikely that he did; however, we will be carefully reading the Fed’s Beige Book for such signals in the release next week.) For Ollie’s, it communicated that high-quality liquidation and close-out deals will hit the shelves through the end of the year, allowing for a positive turn in traffic, conversion, and margin. Big Lots is further behind in getting inventory clear to bring in those deals. Category and demographic differences also mattered a lot with Big Lots, over-exposed to the decline in the furniture category, and both Ollie's and Big Lots have a far less affluent customer than say HomeGoods. At the end of the day, Big Lot’s and Ollie’s core lower income "treasure hunt" customer’s discretionary spending power is declining due to inflation and compounding that, the consumer is being inundated with products and promotions across categories by other retailers who are flush with goods be it Walmart, Target, Old Navy, and many more.

Key Big Lots Metrics

  • Big Lots comparable-store sales declined -9.2% and 3Q22 guidance reflected weaker trend and are likely to be down low-double-digits. Category trends are shown in the figure below. One factor hampering Big Lots is that it still has too much inventory of "unwanted stuff" which has limited its ability to shift its mix to the "wanted stuff" and better close-out/ treasure hunt/bargains etc.

  • Trailing-twelve-month (TTM) TTM sales per square foot declined $3 QoQ to $121 and is likely to down low-to mid-single-digits over the next year. The pressure on its sales is really due to high exposure to home and furniture (52% of sales).
  • Placer.ai data, below, shows large declines at both Big Lots and Value City Furniture (102 locations). Ollie’s sales mix in home, by contrast, is only roughly one-third of sales (2021) with a substantially smaller amount being furniture.

  • Big Lots posted profit losses this quarter due to lower gross margins and expense deleverage due to the lower sales. The lower margins were the result of higher transport/ freight expense and markdowns.
  • TTM EBITDA and free cash flow of $96M and -$245M are meaningfully below their 2Q19 levels ($390M and -$71M) and will remain challenged over the next year.
  • The company's liquidity position was enhanced by the outright sale of approximately 25 owned stores. Big Lots is evaluating sale-leaseback proposals on its remaining 25 owned stores and its headquarters.
  • Big Lots ended 2Q22 with 1,442 stores, with 11 new stores opened in the quarter. Given the current business trends, the company is now looking at exiting more underperforming locations (at least 50 for the year).

Key Ollie's Bargain Outlet Metrics

  • Ollie's Bargain Outlet comparable-store sales increased +1.2% with CEO John Swygert noting in the earnings release, "During the quarter we emphasized our extreme value proposition and reinvested back into price and experienced a slight change in mix, which impacted our merchandise margin. We expect to see the gross margin impact reverse during the third quarter [due to lower average unit costs (AUCs) resulting from better liquidation and close-out deals in the market]."
  • Swygert called out "strong sales in lawn and garden, health and beauty aids, hardware, automotive, and food...Once you get them in the store and they see what we have on the discretionary front, that's where we win...The consumer is definitely shying away from the bigger ticket items. And that's something we don't normally play in...We don't think that's worth it at this point in time." Average ticket was up mid-single-digits and transactions were down nearly as much.
  • On deal flow, Swygert shared, "We're seeing a lot of deal flow in almost every category other than clothing. I would tell you there is a ton of deals out there in the HBA housewares, hardware automotive, bed and bath, we're actually seeing deal flow in the pets. Toys is huge right now."
  • Ollie’s better sales trend versus Big Lots is apparent in the 3Q22 guidance, with Ollie’s expecting +4% comps and Big Lots calling for negative-double-digits. It's also worth noting that Ollie’s comparison period is easier than Big Lots. As such, when looked at versus 2019, as shown in the table below, one sees the two running similarly (and well behind HomeGoods).

  • TTM sales per square foot was flat at $118 and is likely to be flattish, give or take, over the next year.
  • Ollie's profitability declined substantially, but operating margins at 3.7% are healthier than at Big Lots. Like Big Lots, taxing margins were increased transport, labor, and clearance. However, as Ollie’s grew sales, there was not the deleverage on fixed, rent, and payroll expenses. The strong profit outlook for Ollie’s versus Big Lots stems from its better inventory position which allows for more "wanted stuff" to hit the shelves and management stated, "We have made significant improvements to our supply chain over the past year. Distribution throughput and our transportation infrastructure are positioned well to service our business through the peak holiday season." In our view, given that HomeGoods has also turned its inventory well, it too could have strong 2H22 merchandise margins.

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Thomas Paulson

Director of Research and Business Development, Placer.ai

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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