Big Lots, Inc. (BIG): Is This Discount Retailer a BIG Winner?

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Big Lots, Inc. (NYSE:BIG) has become a big mystery. Analysts are on both sides of the fence about the company, confusing investors. While nobody has a crystal ball, we can still form an opinion on Big Lots based on logic. And in this case, there are one or two important facts that you’re not likely to find elsewhere.

Big Lots, Inc.

The discount retailer arena

Big Lots, Inc. (NYSE:BIG) is a discount retailer with 1,574 stores throughout the United States and Canada. The United States stores have been performing better than the Canadian stores, which shouldn’t come as a surprise, since Canadian consumers are currently stronger than those in the U.S., compared to historical norms.

Big Lots sells everything from food to health & beauty products to apparel. Think of it this way: If you can find it in a Wal-Mart Stores, Inc. (NYSE:WMT), you can probably find it in a Big Lots, Inc. (NYSE:BIG). And that’s part of the problem.

Wal-Mart has a history of destroying, or at least weakening, all its foes. Savvy investors have been wise to side with Wal-Mart rather than against it. Wal-Mart’s strategy has been to offer lower prices than its peers, at all costs. Currently, it’s offering a price match guarantee.

This has presented a steep challenge for Big Lots in areas where the two stores overlap. It also means that Big Lots isn’t likely to tread on Wal-Mart Stores, Inc. (NYSE:WMT) territory. Why enter a neighborhood if you’re going to suffer a beating from the local bully? But this reluctance limits Big Lots, Inc. (NYSE:BIG)’ growth potential. And if Big Lots opts to challenge Wal-Mart in these areas, it will lose.

To make matters worse, Big Lots, Inc. (NYSE:BIG) can’t stop Wal-Mart Stores, Inc. (NYSE:WMT) from invading areas where it currently exists. Therefore, it’s likely that Wal-Mart will steal market share from Big Lots in the future.

All discount retailers operate on low margins. That’s why location is so important. The better a location, the more traffic the store will receive. To that point, think about a few nearby Big Lots, Wal-Mart Stores, Inc. (NYSE:WMT), and Target Corporation (NYSE:TGT) stores.

Have you noticed that Big Lots, Inc. (NYSE:BIG) is usually located in a strip mall? Strip malls aren’t what they used to be. Big discount retailers are now occupying property that is as large, or larger, than most strip malls, giving them massive exposure. If your area is like most, then Wal-Mart and Target Corporation (NYSE:TGT) are landmarks. Big Lots likely isn’t.

Profit margin is the best way to measure efficiency. The chart below paints an interesting picture of the current situation for Big Lots, Wal-Mart Stores, Inc. (NYSE:WMT), and Target:

BIG Profit Margin TTM data by YCharts

Not only is Big Lots, Inc. (NYSE:BIG) the lowest on the totem pole, but it’s heading in the wrong direction. Increased markdowns and higher marketing expenses played big roles in declining profit margin  last quarter.

The new CEO

Companies often hire a new CEO when stock performance is poor. While former Big Lots CEO Steve Fishman apparently left to retire, investors had been getting frustrated with the stock. The chart below tells the story:

Big Lots, Inc. (BIG): Is This Discount Retailer a BIG Winner?BIG data by YCharts

During one of the biggest bull runs in history, Big Lots, Inc. (NYSE:BIG) declined. If that’s the case, then how will the stock perform when the market drops? Can a new CEO help?

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