 Big Lots is the third largest off-price retailer in the U.S. The company runs about 1400 stores in 47 states and focuses on obtaining "closeout" inventory from suppliers, which include products resulting from production overruns, discontinuations, packaging changes and returns; [1] this unique purchasing strategy also makes relationships with suppliers especially important.[2] A focus on closeout inventory coupled with the economy of scale from its large operations allows Big Lots to offer heavy discounts to its customers. From 2004 to 2006, the company has focused on squeezing efficiency out of its operations. Big Lots closed over 170 stores while still growing profits and sales.
The company's low-income consumer base is generally more sensitive to the rising oil prices, falling real estate values, and the subprime lending crisis. On top of being highly elastic to macroeconomic conditions, the company also plays in an intensely competitive and saturated market, against big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as more comparable companies Family Dollar Stores (FDO), Dollar General (DG), Dollar Tree Stores (DLTR) and 99 Cents Only Stores (NDN).
[edit] Financial and Store Metrics
Below are relevant operating data for BIG. Note that the company's store count has declined and operating profit has increased as unprofitable stores have been closed and lower-margin items have been eliminated.
[3]
[edit] Trends and Business Drivers
 Rising oil prices translates to lower sales for discount retailers, which depend on lower-income demographics - Low-income customers are more sensitive to macroeconomic changes. A discount retailer, BIG’s draws its customer base largely from the low-income demographic. Low-income families are generally more sensitive to rising energy prices and rising interest rates, which can negatively affect BIG’s sales as customers attempt to save and cut back on non-essential spending. While many of BIG’s products are considered essentials, low-income households often shift their spending to products that are lower priced/lower margin for the company during periods of high energy prices and high interest rates; the company's stock price dipped nearly 30% from September 2007 to November of the same year during the the mortgage crisis.[4]
- Discounters experience difficulty passing on cost increases to customers. Because the company’s low-income customer base is so price sensitive and because the company competes largely on price, input cost increases (such as inventory, overhead, and marketing) are difficult to pass on to consumers. Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation may lead to large margin decreases that cannot be offset by price increases.
- The company operates in a mature and saturated market, with stiff competition and low competitive advantages. BIG competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Big Lots store operating within a few miles of a nearby Wal-Mart, for instance, will struggle to compete on price and selection, and may depend instead gain customers via convenience and location. It also faces competition faces other “dollar stores,” that have similar or identical value propositions, such as Family Dollar Stores (FDO), Dollar Tree Stores (DLTR), Dollar General (DG), and 99 CENTS ONLY STORES (NDN). With low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores.
- Dependence on business in four states. Big Lots stores are concentrated heavily in California, Texas, Florida, and Ohio, with 37% of the company's stores located in these states.[5] The local economies of these states plays an important factor in the sales of the company. For example, if there are substantial demographic shifts in income levels in one or more of these states (say if the number of low-income households decreases significantly), the consumer base of the stores can change and sales may fall.
- Continued store closings and product focus. Big Lots has been closing unprofitable stores and exiting some lower-margin product lines such as frozen foods.[6] This allows the company to earn higher returns on capital and operate at higher margins, but further concentrates store base in profitable regions and reduces market share in others. The company has successfully boosted sales through the process, but will depend upon gaining local market share in profitable regions.
- Dependence upon supplier relationships to procure closeout inventory. The company's closeout retail strategy depends upon its ability to leverage its relationships with suppliers to get favorable access and pricing to discounted goods in volume. Big Lots' top ten suppliers account for 12% of purchases.[7]
[edit] Competition and Market Share
Discount variety retailers nationwide account for approximately $420 billion annually in sales combined, and operate approximately 40,000 stores in the U.S.[8] The market is highly fragmented, nearly saturated, and characterized by price competition, low barriers to entry, and low costumer switching costs.
As a discount retailer, BIG faces significant competition from big-box sellers, in particular Wal-Mart Stores (WMT) and Target (TGT), whose enormous scale allows each to extract value in their inventory purchases and pass these savings on to consumers. With an average square footage per store of 21,400 sq. ft., Big Lots stores are smaller than Wal-Mart's or Target's, but larger than comparable dollar discount retailers. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale (though, as the largest closeout discount retailer, it has some).
Below are sales, store, and market share metrics for comparable companies.[9]
2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
[edit] Footnotes
- ↑ Big Lots 2006 Annual Report, "Business," pg 3
- ↑ Big Lots 2006 Annual Report, "Risk Factors," pg 7
- ↑ Compiled from 2006 Annual Report, "Selected Financial Data," pg 16
- ↑ BIG 2007 Annual Report, "Risk Factors," pg 8
- ↑ BIG 2006 Annual Report, "Risk Factors," pg 8
- ↑ BIG 2006 Annual Report, "Business Development," pg 17
- ↑ BIG 2006 Annual Report, "Business," pg 5
- ↑ First Research, Inc. (D&B) Discount Retail and Department Store Industry Report, Oct. 2007. These estimated figures exclude approximate sale of groceries and revenue of department stores, which compete very loosely with BIG
- ↑ All figures compiled from most recent companies' respective annual reports
- ↑ Market Share calculated as Company Sales/Total Industry Segment Sales nationwide as provided by 2007 First Research Report
- ↑ 11.0 11.1 NDN,2007,10-K,Item-6,Page-24
- ↑ BIG,2007,10-K,Item-7,Page-17
- ↑ BIG,2007,10-K,Item-6,Page-16
- ↑ 14.0 14.1 DLTR,2007,10-K,Item-6,Page-17
- ↑ FDO,2007,10-K,Item-7,Page-19
- ↑ FDO,2007,10-K,Item-6,Page-16
- ↑ morningstar
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