Discount store Dollar General (DG 0.30%) has dominated its sliver of the retail arena in recent years. Savvy growth initiatives have helped pump up its footprint to more than 16,000 stores, nearly doubling the number of locations in place as of a decade ago. Its mix of the right staples at the right price in the right place has turned the company into a player that not even Walmart (WMT 1.32%) can afford to ignore.
No name goes un-targeted in a free market, though, which is why Dollar General and its investors may want to look over their shoulders and take a closer look at what Big Lots (BIG -0.58%) has been doing of late. It's not an existential threat to Dollar General, but the up-and-comer could certainly cause some turbulence for the category leader.
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Bigger isn't always better
They're miles apart in terms of size. Big Lots only operates a little more than 1,400 stores, which only produced a collective top line of around $5.3 billion in 2019. For perspective, Dollar General did around $27.8 billion worth of business last year. The latter, a bigger company, can leverage its size to do things its smaller rival just can't.
Don't let its small size fool you, though. Big Lots can use its smaller size to do some things Dollar General can't.
Case in point: With fewer stores to train, Big Lots was one of the very first retailers to implement new curbside pickup service for online orders. The company put that into place by late March, just days after COVID-19 made landfall in the United States. Some Dollar General stores now offer in-store pickup of online orders, but none offer curbside pickups.
It's a seemingly small matter that led to a surprisingly big difference between the two organizations' recently completed quarters. While investors were cheering Dollar General's year-over-year top-line growth of 24.4% for the three-month stretch ending in July, they were overlooking Big Lots' sales growth of 31.3% for the same quarter. Big Lots also quintupled its per-share earnings, year over year, leaving Dollar General's profit growth rate in the dust.
Operation North Star
It would be easy to chalk up most of Big Lots' superior growth to circumstances...namely the pandemic. It would be shortsighted, however, to not point out that Big Lots entered the pandemic period well-equipped and well-grounded thanks to a mostly unsung initiative called Operation North Star put into action in early 2019.
Simply put, Operation North Star is a codified effort to make Big Lots more competitive in the tough retailing environment of 2020. The plan includes the typical rhetoric about driving long-term growth and building shareholder value that one would typically expect to find in such initiatives. But North Star is more than just slogans and wishes. It also includes merchandise-based specifics such as growing the reach of its owned home brands like Broyhill, a value-oriented branding message specifically through mobile media, and paint colors selected to create a warmer in-store environment, just to name a few.
More importantly, some of Operation North Star's key tenets translated into greater readiness once the unexpected pandemic took hold in March. For instance, one of the overhaul's goals was the growth of e-commerce, including the cultivation of a buy-online/pickup-in-store, or BOPIS, offer. That's how Big Lots was able to build a companywide curbside pickup operation just days after the coronavirus started shutting the country down. Many of its components were already in place. The company's inventory-management system needed to support this BOPIS initiative also assists in the collection of consumer purchasing data supplied by participation in the company's new BIG Rewards Program that currently boasts 19 million members. Operation North Star explicitly seeks "opportunities to understand and leverage customer behavior through segmentation."
The company's improved BOPIS/inventory platform even set the stage for a surprising move the retailer made in June when it announced a partnership with Instacart that facilitates same-day delivery from some Big Lots stores.
Get used to the new and improved Big Lots
These are developments that have largely gone unnoticed, in part because Big Lots sports a relatively modest market cap of $2 billion, and partly because the coronavirus pandemic and political tensions have dominated headlines of late. They're also not the sort of initiatives the Big Lots of yesteryear seemed interested in taking.
The company is quite serious about Operation North Star and everything that goes with it to support the effort, though, which explicitly calls for (among other things) profitable sales growth, a second consecutive year of increased store counts, and cost cutting that allows Big Lots to "fund the journey" rather than borrow to expand. The plan's been regularly updated every quarter since it was established, and more than that, seems to be working. Investors would be wise to at least put the company on their radars, as would rival retailers Dollar General and Dollar Tree (DLTR -0.14%).
