Over the last year, Big Lots’ financial performance and some operational decisions signaled to analysts and industry observers that the discount retailer might be in trouble.
The company said in a June 13 filing with the U.S. Securities and Exchange Commission that it plans to close between 35 to 40 stores this year and disclosed that it incurred net losses and used cash for operations in 2022, 2023 and Q1 of this year.
As a result of the strain on liquidity, Big Lots said it may not meet all of its credit and term loan obligations in the next 12 months. The company ended 2023 with net sales that fell nearly 14% to $4.72 billion, down from $5.47 billion a year earlier. In the first quarter, the retailer reported a year over year net sales drop of 10.2% and a net loss of $205 million.
Although the company’s liquidity improved in Q1, rising to $289 million, up from $254 million the previous quarter, the retailer’s debt grew too. It rose to nearly $574 million from $502 million a year earlier.
Then, days after reporting Q1 results, another red flag: Big Lots issued a going concern notice.
Despite those apparent setbacks, Big Lots’ corporate leaders say their actions are generating results, and better performance is on the horizon as the company pursues a multifaceted turnaround strategy through the second half of this year.
Key elements of that strategy include seeking lease concessions and deferrals, entering a letter of credit facility, raising additional capital and possibly further monetizing assets like owned real estate through sales or sale-leasebacks.
Big lots started taking cost cutting actions last summer. In August 2023, the company completed a sale-leaseback of 22 stores and a California distribution center. Then,to improve its liquidity, the company in April took out another $200 million term loan backed by a mortgage on the company’s corporate headquarters and liens on most of the company’s working capital assets, including inventory, fixtures, machinery and personal property.
The retailer’s turnaround plan, which the company has dubbed Project Springboard, “is entirely contingent on getting the value prop of what we call the extreme bargain initiative,” said Seth Marks, Big Lots’ senior vice president of extreme value sourcing. “If our pricing isn't competitive and the lowest price on the street, that project is compromised from being optimized.”
“We had a great run when we dialed back on the regular goods and dialed back up on the extreme value closeouts, liquidations, overstocks — the stuff we're doing now.”
Seth Marks
Senior vice president of extreme value sourcing, Big Lots
During Marks’ first leadership stint at the company as vice president of merchandising from 2004 through 2007, “we had a great run when we dialed back on the regular goods and dialed back up on the extreme value closeouts, liquidations, overstocks — the stuff we're doing now,” Marks said in an interview with Retail Dive.
Marks rejoined the company in late 2023. He’s confident the retailer will be able to end the going concern notice because Big Lots “can show the transformation work and the change in results.”
During Big Lots’ Q1 earnings call, CEO Bruce Thorn said the company expects that bargains, closeout items and items sourced with a comparable price advantage, should represent 75% of the company’s sales by the end of 2024 and that its extreme bargain penetration should reach 50% also by the end of the year. Marks said in an interview with Retail Dive he anticipates that number will eventually rise to 100% of the business.
Although a going concern notice is a warning from the company, “this doesn’t necessarily mean Big Lots is headed for bankruptcy,” Ragini Bhalla, head of brand and spokesperson at Creditsafe, said in emailed comments. The retailer could still find a resolution by cutting costs, negotiating with lenders to extend the maturities on their debts or securing financing,” Bhalla said.
Big Lots’ identity crisis
Established in 1967, the company currently known as Big Lots operated under several banners for decades, including Odd Lots. In 2001, the retailer consolidated its store banners under the Big Lots brand name and banner.
Big Lots touts its extreme bargains, closeout prices, a broad category mix and a treasure hunt vibe. Yet those things may leave some consumers unsure exactly what the retailer stands for, which could slow turnaround progress, according to business professor Kirthi Kalyanam, executive director of the Retail Management Institute at Santa Clara University.
In short, he said, the company has an identity problem — its value proposition isn’t crystal clear. Kalyanam said looking at one data point in particular — sales per square foot — shows that the company’s performance is likely weaker compared to many retail rivals.
Furniture made up the majority of its Q1 sales at 29%, followed by consumables at 17%, seasonal merchandise at 16%, soft home goods at 15% and food at 14%. Hard home goods was the smallest sales category, representing 9% of the mix.
The company’s assortment mix is also a contributing factor in Big Lots’ recent performance, Thorn told investors and analysts in June. The retailer has held share in the home furniture category but consumers continue to pull back their spending on big ticket items, especially furniture.
Big Lots generates about $126 in sales per square foot. In its 2024 proxy statement said it decreased its net store count by 33 stores in 2023. The decrease in the net store count was in response to when data and circumstances supported the closure of underperforming locations.
In late July, reports began to surface that Big Lots had started going out of business sales at about 140 stores nationwide. The store closing information is posted on the websites of individual stores. In early July, Big Lots said it had over 1,300 stores in 48 states.
In response to an inquiry from Retail Dive, a Big Lots spokesperson declined to confirm the number of stores closing. The retailer also declined to comment on reports that it’s tapped Guggenheim Partners to help the company explore strategic alternatives to remain in compliance with financial covenants. A Guggenheim spokesperson also declined to comment.
However, although the year over year store count decreased, Big Lots said the average size of stores that opened or relocated during the past several years slightly exceeds the averages in prior years. As a result, the company said its overall average selling square footage has grown since 2019.
Big Lots’ relatively low sales per square foot likely limits the financial headroom the company has, Kalyanam said. Additionally, furniture, the company’s largest category, is a sector where the major players are entering the final stretch “of living off the pandemic high” when people spent heavily to outfit their homes during stay at home orders.
Trip frequency at Big Lots is a concern too, Kalyanam said.
Data from Placer.ai provided to Retail Dive indicates that year over year foot traffic was down for the first five months of this year, except for March, when traffic ticked up 1.1%. January saw the largest drop, according to Placer.ai’s data, with a nearly 12% decline. When trip frequency is low “that makes it even harder to be top of mind for the customer,” Kalyanam said.
Marks said Big Lots’ value proposition is transforming after the height of the pandemic crisis.
At that time, “we had a lot of consumables and grocery items that we just needed to fill the shelf and get that line moving and serve the public in the communities we were in as an essentials player.” But now that all retailers are open and operating in a more normalized environment, Marks said the company is moving back to its classic value proposition.
Analysts with Telsey Advisory Group, led by Joe Feldman, see positive change on the horizon. They said in a June note that the retailer expects continued improvement in the comparable sales trend each quarter. And that momentum, along with an enhanced assortment that features bargains and better in-stocks, should enable the retailer to return to positive comps by the end of the year.
“Big Lots remains in a precarious financial position as it is still making huge losses and is burning through cash.”
Neil Saunders
Managing director, GlobalData
Still, the company’s ability to deliver on its turnaround initiatives will likely determine its future, Neil Saunders, managing director of GlobalData, said in emailed comments to Retail Dive.
“Big Lots remains in a precarious financial position as it is still making huge losses and is burning through cash,” Saunders said. “That said, the company has secured liquidity via a new loan, so this and its current cash generation should tide it over in the near term. But it remains in the danger zone.”
Marks, though, is optimistic. He said recent deal flows give him confidence Big Lots remains solidly positioned to turn other retailers' supply chain or inventory missteps into growth opportunities.
But Saunders said Big Lots has to stop the sales slides and start producing growth, which in turn, will generate more cash that should help stem any losses. That strategy will be even more effective if the company keeps costs under control. “The problem is that it’s far from certain Big Lots can engineer this improvement and, if it can’t, then it will eventually be forced into bankruptcy.”
Should that occur, Saunders said a Big Lots bankruptcy would likely involve a restructuring of finances, store closures, or a possible sale. “While I think some of the stores could easily be re-leased to other retailers, I am not sure people will be lining up to buy the brand. Big Lots has a weak proposition, and it remains very reliant on stores to drive sales, so it’s not like someone could buy the digital IP and run it as an online only retailer,” Saunders said.
via https://www.aiupnow.com
Nate Delesline III, Khareem Sudlow
