Big Lots Takes a Step in the Right Direction

Big Lots (NYSE: BIG  ) has run into some trouble on both the top and bottom lines, which primarily stems from increased competition. For a while, it seemed as though Big Lots was falsely confident in its future potential, assuming that circumstances would change despite using the same strategy in a highly competitive environment with a hesitant consumer. However, Big Lots recently made a difficult yet strategic move. More important is what Big Lots plans going forward.

Closing existing wholesale operations
The first point might not seem important, but it matters. If you read the company's press release about the closing of its wholesale operations, you can tell that upper management made this necessary move with a heavy heart. It's evident that Big Lots cares about its employees. Employees know when their employers care about their well-being, which leads to a positive working environment and more production. That said, many Big Lots employees will now be out of work. Big Lots did state that they will move some employees to retail if possible.

Big Lots is closing all existing wholesale operations: Big Lots Wholesale, Consolidate International, and Wisconsin Toy. Big Lots was seeing subpar sales and margin growth opportunities, and the company realized it had to focus more on opportunities with greater growth potential.

New initiatives

Furniture

The first initiative is for Big Lots to expand its cooler and freezer program. This is a logical move, especially since other discount retailers such as Dollar General (NYSE: DG  ) and Target (NYSE: TGT  )  are seeing success in this space.

Big Lots will also introduce furniture financing. This should help drive demand. In the current economic environment, many consumers are strapped for cash, yet they still want to own furniture. Therefore, this initiative has potential to fill that gap.

Additionally, Big Lots aims to enter the digital, social, and omnichannel space, which would make sense considering industry trends. Currently, looking simply at the company's online exposure, it's not so hot.

According to Alexa.com (global leader in website analytics), biglots.com sports a global traffic rank of 10,397 and a domestic traffic rank of 1,803. That's much more impressive than Dollar General's online exposure. Dollargeneral.com sports a global traffic rank of 21,022 and a domestic traffic rank of 4,188. Target.com sports a global traffic rank of 339 and a domestic traffic rank of 78. This should be expected given Target's size. However, this doesn't mean that Target presents a better investment opportunity than Big Lots or Dollar General when it comes to discount variety stores that have similar initiatives and product offerings.

Growth vs. maturity
Let's first take a look at the top-line performances for Big Lots, Dollar General, and Target over the past year:

DG Revenue (TTM) Chart

DG Revenue (TTM) data by YCharts

Dollar General is the clear leader, which should come as no surprise since it's still in a growth stage. Big Lots and Target have seen limited top-line growth over the past year. Therefore, investors need to look at what else these companies can offer. First let's take a look at bottom-line performance comparisons over the past year:

TGT EPS Diluted (TTM) Chart

TGT EPS Diluted (TTM) data by YCharts

Once again, Dollar General is the top performer. Therefore, we must now look for dividend yield and valuation accompanied by solid profit margins and quality debt management:

 

Trailing P/E

Profit Margin

Dividend Yield

Debt-to-Equity Ratio

Big Lots

13

3.04%

N/A

0.17

Dollar General

19

5.90%

N/A

0.55

Target

16

3.69%

2.70%

0.91

Dollar General is the most expensive on a valuation basis, but that's justifiable considering its growth. It also offers the highest profit margin, which many investors might not expect. That said, only Target pays a dividend, yielding a generous 2.70%. This is in combination with an a fair multiple. As far as Big Lots goes, it's the most appealing on a valuation basis, its profit margin is respectable, and its debt management is excellent. The problem is the top line. Hopefully, recent initiatives can drive the top line, which would then lead to increased shareholder rewards.

The bottom line
Big Lots looks to be heading in the right direction. However, until its new initiatives prove to have traction, you might be better off considering Dollar General (if you desire growth) or Target (if you desire generous and safe dividend payments). All three names are worthy of being watched closely by Foolish investors going forward.

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