If you invest in the stock market, then you have big hopes and dreams. That being the case, you might want to avoid Big Lots (BIG +0.00%). This company is a victim of increased competition in a weak macroeconomic environment which has led to nine consecutive quarters of comps declines. Let's take a look at the Big Lots situation, decide whether there is hope, and determine if another discount retailer offers a better investment opportunity.
Recent results and expectations
In the second quarter, net sales increased 0.6% year over year. On the surface, this looks like a positive. However, it's easy to grow sales when a company adds 51 net stores. On a comparable store basis (stores opened at least 15 months in this case), comps declined 2.2% in the United States.
On the other hand, comps in Canada increased 8.3%. Considering the saturation in the United States, Canada might be the land of hope for Big Lots. It has 75 Liquidation World and LW stores in Canada, and it plans on opening two stores and rebranding four more in 2013.
On the domestic side, Big Lots plans on opening 54 stores while closing 49. This decision might sound counterproductive, but it could act as a catalyst for both the top and bottom lines. It will increase Big Lots' exposure in higher growth areas and eliminate underperforming locations.
In the second quarter, Big Lots saw increased sales in the following categories: Seasonal (16.9% of sales), Furniture (16.70% of sales), Consumables (18.8% of sales). It saw declines in these categories: Food (14.1% of sales), Home (14.6% of sales), Hardlines & Toys (10.3% of sales), Electronics & Other (8.6% of sales).
To fuel growth, Big Lots is focused on expanding its coolers and freezers (partially to accommodate food stamp recipients), offering a furniture financing program, changing its loyalty reward program, and remodeling locations.
Despite these potential growth drivers, Big Lots recently lowered its fiscal year 2013 guidance for the second time. It now expects adjusted EPS of $2.80-$3.05 versus an earlier expectation of $2.87-$3.12. Big Lots now expects net sales to come in flat to up 1% versus an earlier expectation of 1%-2%.
While Big Lots has potential to turn things around thanks to its strategic initiatives, it would still be a higher risk play than two other discount retailers, especially one in particular.
Dollar stores equal big potential
With a 2% payroll tax increase in effect and the consumer hesitant, discount retailers must fight to win customers. Luckily for Dollar General (DG 1.11%) and Family Dollar (FDO +0.00%), many consumers flocked to dollar stores after the 2008 recession, hungry for bargains. Dollar General and Family Dollar have seen continued momentum since then.
Unlike Big Lots, Dollar General has performed exceptionally well when it comes to comps with 23 consecutive years of comps growth. Dollar General attributes this strong performance to low prices, remodels, and strategic locations. Unfortunately for Big Lots, Dollar General is also focused on offering more in the way of food. In the second quarter, Dollar General's net sales improved 11.3% and its earnings grew 11.3% year over year. Furthermore, Dollar General expects FY 2013 sales to increase 10%-11% and comps to grow 4%-5%.
Despite the dollar stores often being grouped together, there are differences. For instance, while Family Dollar is likely to present a better investment opportunity than Big Lots, it's not likely to offer a better investment opportunity than Dollar General.
Family Dollar's fourth quarter comps came in flat, after the company had expected a 2% comps increase. Flat traffic and average consumer transaction value were the primary reasons for the uninspiring performance. The good news is that consumable sales improved 8.3% year over year. Since consumables have become the primary focus for many discount retailers, this is a positive sign, and Family Dollar will likely attempt to build on it. However, Family Dollar's FY 2014 guidance, while impressive, isn't as motivating as Dollar General's. Family Dollar expects net sales to grow in the mid-single digits, and for comps to grow in the low-single digits.
The bottom line
Big Lots might show comps improvement in the future, but it must contend with fierce competition and a tepid consumer. Furthermore, guidance has been reduced. It would make sense to consider a discount retailer that has seen comps growth for 23 consecutive years and expects strong sales and comps growth for the year in Dollar General.
