Big Lots (NYSE:BIG) has stores that are roughly the same size in square feet as Target (NYSE:TGT), but that would be the end of the similarities between the two retailers. As Target opens 124 stores in Canada, marking the first year of international retail sales, Big Lots is patting itself on the back for a successful exit from the market.
In look and feel, Big Lots is more comparable to the dollar stores than Target. There is one other primary difference between Target and Big Lots: the latter sells furniture. Target sells some furniture, things like desks and foot stools, but Big Lots sells living room and bedroom sets. The CEO recently announced the rollout of a financing program, with preliminary tests showing that the program has the potential to increase sales in the high single- to low double-digit growth range for stores.
Eight quarters of same store sales declines
Yes, there are signs of life at Big Lots, but let's take a few steps back to look at the fourth quarter of 2013. Sales declined 7.3% compared to 2012. Net income dropped from $120.1 million in 2012 to $81 million in 2013. The main reason for the drop is a 3% decline in same store sales growth, which is to say regular customers are going elsewhere. This is a trend that's been going on at Big Lots for the past eight quarters, and the company isn't alone.
Large-box retailers in general have been experiencing a decline in same store sales (SSS) growth. Target's SSS growth declined from 3% in 2011, to 2.7% in 2012, to -.4% in 2013. Wal-Mart Stores (NYSE:WMT) has had similar issues. 2012 was a decent year of growth ending the year up 2.1%, followed by a 0.4% decline in 2013.
While Target is working through data breach issues, Wal-Mart is adjusting its strategy to include small store formats as a way to combat SSS declines. Here's an excerpt from Wal-Mart U.S. CEO, Bill Simon, on the company's most recent fourth quarter earnings release:
Neighborhood Markets continued to deliver consistent solid comp sales growth, and customers appreciate the convenience of our small stores. They are a proven model. We're also pleased with how well the 20 Express stores are doing, and we're expanding our pilot beyond the initial three markets. These small formats are digitally connected and provide customers convenient access to a broad assortment, including fresh, pharmacy and fuel. We will now open between 270 and 300 small format units this year, which will nearly double our fleet and fuel growth as we enter the next generation of retail.
Indeed, Simon is turning the small-store format into his legacy at Wal-Mart.
Big Lots' SSS solution
While Big Lots isn't planning to open any "Little" Lots, it is changing its focus in fundamental ways that could have the same effect on SSS.
In addition to the furniture financing program, the company is riding the success of its food segment and rolling out a cooler/freezer program. David Campisi, the CEO and President, had this to say on the last earnings call:
Specifically I am encouraged by food and consumables for the second quarter, consecutive quarter we saw our strongest comps in two of our biggest businesses as both food and consumables [comped] up mid single-digits. Along this same category line, we are actively rolling out our cooler/freezer program and intend to hit approximately 600 additional stores in full year '14 which will leave us with a little over 700 stores by the end of the year. Over the last several months in our test stores which had cooler/freezers and SNAP eligible, we experienced an incremental sales lift in low single-digit range to the total store.
The company is also focusing on more productive inventory. It is replacing kitchen faucets, TV's, and paint with food, consumables, and affordable financing on furniture.
Big Lots isn't alone in its struggles; the retail marketplace is more demanding as consumers have more options at their disposal. The challenge for large-box stores is the creation of constant traffic flow and high inventory turnover. This is one reason why many discount retailers are focusing on food and consumables, as these items have low margins but get customers in the door.
Big Lots has three strategies it's employing to get customers in the door and improve SSS:
- Rolling out a cooler/freezer program
- Getting rid of slower-moving or "unproductive" inventory lines
- Implementing a furniture financing program to help customers purchase higher-margin items
While Wal-Mart is expanding its small-store base and Target is growing in China, Big Lots is focusing on consumables, food, and furniture. We'll have to wait until the end of 2015 to see which company had the better strategy.
C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.