Big Lots has faced a difficult last twelve months, including having to navigate secular (increased competition from Walmart, Wayfair, HomeGoods, At Home, and others) and cyclical (furniture in decline) headwinds, the loss of their largest supplier, and shortening liquidity. Q2 2023 brought a reprieve as sales were better-than-feared and expenses lower-than-expected.
Big Lots’ earnings press release quotes CEO Bruce Thorn saying, “While the consumer environment will likely remain challenging and result in negative comp sales in the back half of the year, we are now in a position to get back to playing offense. This will be supported by the incredible efforts of our associates, and our outstanding vendor partners, who remain aligned with our efforts to offer great quality products and amazing value. As we make further progress on our five key actions, we are optimistic that trends will continue to improve, albeit slowly, through the remainder of this year, aided by a higher penetration of bargains, more newness in our assortment, freight reductions, ongoing cost reduction and productivity efforts, more effective promotions, and a more normalized level of markdowns...Turning to liquidity, we are very comfortable with our position coming into the second half of the year. We significantly strengthened our balance sheet by closing the $294M sale/leaseback deal on Aug. 25, the proceeds from which were not included in our quarter-end liquidity of $258 million. Combined with our efforts to aggressively manage costs, inventory, and capital expenditures, we are prepared and positioned to navigate through the current economic challenges." (Big Lots key strategies are included below.)
Source: Big Lots Q2 2023 Quarterly Results Presentation
For the quarter, Big Lots' business was roughly breakeven in free cash flow. Based upon the improvement in trend and liquidity, the stock price responded as the risk of bankruptcy receded. Lastly, they said, “We do not plan to restart store openings until our business performance has stabilized.”
Source: Big Lots Q2 2023 Quarterly Results Presentation
Big Lots and Ollie’s Bargain Outlet, like Grocery Outlet, are buying off-price manufactured food and consumables items. These categories still down comped down -6% for Big Lots, demonstrating the pressure that the retailer faces from a competitive point of view. On the home category, Big Lots' Thorn shared, “We achieved this by procuring products from over-inventoried mass retailers, distressed retailers and vendors and through new factory direct sourcing partners, domestic and overseas. These changes are resonating with our customers as our value perception scores increased more than 10% since the beginning of the year.” (Recall that Target’s home business was down -16% and our commentary about liquidation sales from third-party sellers on marketplaces like Amazon and Walmart.com were impacting the category. On Bed Bath & Beyond, Thorn said, “We're also capitalizing on distressed inventory coming out of that closure. We're looking to play a bigger role and back to school, back to campus.” (Those comments line up with our commentary about liquidations as well.)
On the consumables category, Thorn shared, “We're pushing forward and resetting our consumables assortment to optimize productivity and make room for new assortments and will flex our assortments to stores where the demand is stronger in certain categories. Pet was a standout performer with positive comp growth, and we're only getting started. Pet now represents 12% of our food and consumables business, and we plan to expand our assortment in the fall. Baby is also back, and we began rolling out new branded items in August with an approach focused on creating great value for consumers.” As many retailers are flexing up their consumables mix--see our comments on Dollar Tree and Family Dollar--how long until that increased supply leads to a supply/demand imbalance resulting in increased promotions, price cuts, and deflation in packaged food? Should that happen, the Fed will finally declare victory in its fight against high inflation. By year-end seems more likely.
In contrast to Big Lots' year, Ollie’s Bargain Outlet continues to shine, more in the vein of Grocery Outlet. Q2 2023’s comp-store sales on a 1-year basis and vs. 2019, substantially accelerated, as did store traffic. Our data indicates that traffic per venue increased +5.5% while reported comparable transactions increased +6.7%, implying an improvement in conversion rate (i.e., Ollie’s shoppers liked the value of what was in the store and bought).
CEO John Swygert said of the performance, “On top of the strong deal flow, changes to our marketing program and investments in our people and supply chain are driving better execution and an even more exciting shopping experience for our customers...Our sales strength...was broad-based, with almost 70% of our categories comping positive. Our best performing categories included food, summer furniture, candy, lawn & garden, and housewares”, which is partly due to Bed Bath & Beyond exiting the market. (See our article contrasting Big Lot’s and Ollie’s businesses.) Swygert continued, “Ollie's has been in the business of saving people money for more than 40 years. We sell brand-name products at drastically reduced prices, with savings between 20%-70% compared to traditional retailers.” Gross margin was +100 basis points above 2019’s level which also confirms that Ollie’s, and its customers, are enjoying “strong deal flow.” Inventory turns improved suggesting that its merchants are getting into “chase mode” like HomeGoods, which Ollie’s is closely pacing based on our visitation data (below). By contrast, Big Lots has lagged during August.
On Ollie’s real estate program, COO Eric van Der Valk shared, “We opened 6 stores during the quarter, ending with 482 stores in 29 states...We are tracking to our 45 new store target this year despite the continued challenges in real estate and construction. We are also making progress in our remodel program, completing 7 stores during the quarter...are on pace to achieve our plan of completing 30-40 remodels this year. Our customers deserve an updated shopping experience, which showcases our tremendous value, and we are committed to the remodel program going forward...Running a closeout business is unlike any other traditional retail business. This model is full of inconveniences and challenges, and we are built for it...We recently completed the expansion of our Pennsylvania distribution center, which enables us to service an additional 50-75 stores. We are also in the process of building our fourth distribution center in Illinois, which is expected to open in fiscal 2024. This will provide us the capacity to service an additional 150-175 stores, supporting the next leg of our new store growth in the Midwest. These investments will enable us to service between 700-750 stores from our distribution network in support of our long-term target of 1,050 stores or more.”
