Middle of the Peloton

Yesterday was not a good day for Big Lots (NYSE: BLI). In a press release, CEO Michael Potter reported a 2.4% decrease in same-store sales, a 2.8% decrease in customer transactions, and he said he expects losses through the third quarter. All of this prompted an analyst downgrade -- nothing like kicking a man while he's down. Investors seem to share Fool Steven Mallas' zeal for same-store sales and, accordingly, knocked the shares down 10.2% to $12.52.

Fellow discount/closeout retailer Retail Ventures (NYSE: RVI), which owns Value City Department Stores as well as Filene's Basement, also reported a drop in same-store sales to the tune of 4.4% for June. Investors didn't take the news as hard as the stock was only down 1.6% to $6.84. But that's likely because the stock has already lost 30% since June 24, 2004.

These businesses can blame high gas prices or bad weather, but I think there is a systemic problem. And to explain my thoughts, I would like to use the Tour de France, the epitome of competition, as an analogy.

The Tour de France is the most grueling cycling race. One feature of the race is the peloton, the group of competitors that rides together in a huge pack. During the race, smaller groups try to break away from the pack in order to gain an advantage. Sometimes the peloton can track the attackers down, sometimes it can't.

In cycling, just as in business, you do not want to be stuck in the middle of the peloton. You can't try different tactics to attack because you're surrounded. If you sit in the pack the whole time, you will stagnate and never have a chance to win. However, if you try to break out from the middle, you risk causing a huge accident that can knock you and possibly others out of the race.

In my opinion, the problem with Big Lots and Retail Ventures is they are poorly positioned competitively (i.e., in the middle of the peloton). They don't have a niche and can't make up for it by being stronger -- in retailing terms, by turning their inventory. In their most recent quarters, it took them 133 and 109 days, respectively, to sell their inventories. Ninety days would turn it once, so that's a lot of stuff sitting around and stagnating.

Compare them to Wal-Mart (NYSE: WMT), who conjures up images of cyclists Jan Ullrich or Miguel Indurain. All three are big, strong, and fast. Between Jan and Miguel, they have won six Tour titles and five second-place finishes. Wal-Mart turned $28.3 billion of inventory in 51 days last quarter! Both feats are very impressive.

On the other hand, I would compare riders like Tyler Hamilton and Iban Mayo (who lost his chance to win the race after getting caught up in a crash in the peleton) to companies like Tuesday Morning (Nasdaq: TUES), recently written up by James Early, and Overstock.com (Nasdaq: OSTK). They are trying to break away from the pack by exploiting a niche (furniture for Tuesday Morning) and building a stronger business model (last quarter, Overstock.com took 40 days to sell its inventory).

I can't go without mentioning Lance Armstrong. Like eBay (Nasdaq: EBAY), which can compete business to business, business to consumer, and consumer to consumer, Lance can compete anywhere. He's not known as a climber, but he rules the mountain stages. He's not known as a sprinter, yet few can beat him in a time trial. Both eBay, which may have the best business model ever, and Lance, the best all-around cyclist ever, are champions that are tough to beat.

That said, I implore investors to stay away from companies like Big Lots and Retail Ventures that are poorly positioned within their industries. But I encourage you to look outside the peloton for companies that can generate excess by taking a free trial of Motley Fool Hidden Gems.

Fool contributor David Meier is glued to the Tour right now. His wife is a fan of Big Lots and eBay, and he is afraid for her wallet to tell her about Overstock.com. He doesn't own shares of any of the companies mentioned.