Is This Discount Retailer a BIG Winner?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Big Lots (NYSE: BIG) has become a big mystery. Analysts are on both sides of the fence about the company, confusing investors. While nobody has a crystal ball, we can still form an opinion on Big Lots based on logic. And in this case, there are one or two important facts that you’re not likely to find elsewhere. 

The discount retailer arena

Big Lots is a discount retailer with 1,574 stores throughout the United States and Canada. The United States stores have been performing better than the Canadian stores, which shouldn’t come as a surprise, since Canadian consumers are currently stronger than those in the U.S., compared to historical norms.

Big Lots sells everything from food to health & beauty products to apparel. Think of it this way: If you can find it in a Wal-Mart (NYSE: WMT), you can probably find it in a Big Lots. And that’s part of the problem.

Wal-Mart has a history of destroying, or at least weakening, all its foes. Savvy investors have been wise to side with Wal-Mart rather than against it. Wal-Mart’s strategy has been to offer lower prices than its peers, at all costs. Currently, it’s offering a price match guarantee.

This has presented a steep challenge for Big Lots in areas where the two stores overlap. It also means that Big Lots isn’t likely to tread on Wal-Mart territory. Why enter a neighborhood if you’re going to suffer a beating from the local bully? But this reluctance limits Big Lots’ growth potential. And if Big Lots opts to challenge Wal-Mart in these areas, it will lose.

To make matters worse, Big Lots can’t stop Wal-Mart from invading areas where it currently exists. Therefore, it’s likely that Wal-Mart will steal market share from Big Lots in the future.

All discount retailers operate on low margins. That’s why location is so important. The better a location, the more traffic the store will receive. To that point, think about a few nearby Big Lots, Wal-Mart, and Target (NYSE: TGT) stores.

Have you noticed that Big Lots is usually located in a strip mall? Strip malls aren’t what they used to be. Big discount retailers are now occupying property that is as large, or larger, than most strip malls, giving them massive exposure. If your area is like most, then Wal-Mart and Target are landmarks. Big Lots likely isn't.

Profit margin is the best way to measure efficiency. The chart below paints an interesting picture of the current situation for Big Lots, Wal-Mart, and Target:

<img alt="" src="http://media.ycharts.com/charts/93d31780be78e371cda3b511b6bc3b5a.png" />

BIG Profit Margin TTM data by YCharts

Not only is Big Lots the lowest on the totem pole, but it's heading in the wrong direction. Increased markdowns and higher marketing expenses played big roles in declining profit margin  last quarter. 

The new CEO

Companies often hire a new CEO when stock performance is poor. While former Big Lots CEO Steve Fishman apparently left to retire, investors had been getting frustrated with the stock. The chart below tells the story: 

<img alt="" src="http://media.ycharts.com/charts/48749216a442dc02f86011c76d4201e9.png" />

BIG data by YCharts

During one of the biggest bull runs in history, Big Lots declined. If that’s the case, then how will the stock perform when the market drops? Can a new CEO help? 

Big Lots' new CEO, David Campisi, has a strong history of climbing his way up the corporate ladder, but there is one interesting note about Campisi that won’t inspire confidence

Campisi's CEO tenure at Respect Your Universe, a martial arts apparel company, ran from August 2012 through May 2013. During that time, the company's stock dropped from $0.90 to $0.30. If Campisi was unable to improve a company with a market cap of $21.58 million and fewer than 50 employees, how is he going to turn around a massive discount retail operation with a $1.58 billion market cap and more than 13,000 employees? That said, he didn't have much time to make a difference, and it's possible that whatever moves he made at Respect Your Universe have yet to pay off. 

Conclusion

If you’re looking to invest in a discount retail store, then there would be no sense in choosing Big Lots when Wal-Mart and Target are available options. 

If you’re trying to choose between Wal-Mart and Target, then Wal-Mart is likely to be your best option. With the stock market hanging by a thread, you want a company that offers safety. During the financial crisis of 2008/2009, Wal-Mart shares dropped approximately 20% (almost like a win at the time), whereas Target dropped approximately 45%. For the record, Big Lots dropped approximately 60%.  

With a weak consumer and fierce competition that's likely to increase, Big Lots doesn't look to be a good investment at this time. 


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Big Lots. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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