Big Lots (NYSE:BIG) has made waves recently, shocking the investor community as its stock price surged by a staggering 27% after its quarterly result. This significant jump came on the heels of the company's announcement of a narrower-than-expected quarterly loss. As the economic landscape continues to shift, this retail giant has managed to weather some challenges, but not without acknowledging the ongoing pressures on its core customer base. The roller-coaster journey of Big Lots is chronicled, from its staggering decline after reaching an all-time high in 2021 to its current status, down 45% year to date, despite the recent surge. Let us have a closer look at the company's performance and find out whether the stock price reversal is here to stay.

What Does Big Lots Do?

Big Lots is an Ohio-based home discount retailer in the United States and functions through its subsidiary divisions. It has developed into a prominent player in the retail industry, providing a wide array of products to customers seeking discounts and value-driven options for their home and lifestyle needs. The company's diverse range of products falls under various merchandising categories, encompassing furniture which spans upholstery, mattresses, ready-to-assemble departments, and case goods; seasonal items including patio furniture, gazebos, holiday trimmings like Christmas decorations, and other festive departments; soft home products comprising home décor, frames, utility bedding, fashion bedding, window treatments, area rugs, and bath-related items; as well as a food section catering to beverages, groceries, specialty foods, and pet-related merchandise. Additionally, Big Lots offers goods in consumables, covering health, beauty, cosmetics, plastics, paper, and chemicals, along with a hard home section encompassing small appliances, food preparation items, tabletop products, home maintenance, organization goods, and toys. The company also ventures into apparel, electronics, and other categories, featuring clothing, electronics, jewelry, hosiery, and confectionery, as well as snacks.

Recent Challenges

Despite a turbulent environment that saw a 14.6% dip in comp sales and a loss of $3.24 per adjusted EPS in Q2, Big Lots' management remains resolute. However, their primary concern centers on the financial stress faced by their core lower-income consumer base, limiting discretionary spending on high-ticket items. The backdrop of the past year and a half has been characterized by defensive strategies due to a rapidly deteriorating consumer environment. Another fact is that high inflation has disproportionately impacted their core demographic, deterring them from indulging in discretionary purchases, particularly in high-ticket categories. Notably, the abrupt closure of a key supplier last year led to a furniture shortage issue that further hampered the company's performance.

We saw a visible silver lining - an upward trajectory within the quarter. The company managed to outpace or meet its initial guidance across key metrics, reflecting a positive response to the five-point action plan shared earlier. These actions encompass owning bargains, ensuring value communication, enhancing store relevance, pursuing omni-channel success, and driving productivity. The management's optimism hinges on the gradual improvement of the macroeconomic environment and the efficacy of their strategic maneuvers. Furthermore, bolstered by the recent completion of a $300 million sale leaseback and ongoing cost-saving initiatives, Big Lots' financial footing appears secure, lending credence to their turnaround efforts.

Addressing these challenges, Big Lots now eyes a shift from defense to offense. Despite anticipating continued negative comp sales in the latter half of the year, they are determined to regain momentum. The management's confidence stems from the unwavering dedication of their associates, the engagement of outstanding vendor partners, and the execution of a strategic game plan.

Big Lots has managed to enhance value perception by increasing the penetration of bargains and emphasizing comparable value pricing. This shift is reinforced by a growing assortment, introducing modern furniture styles, and curating a more engaging customer journey online. Furthermore, the company has strategically focused on categories where they can emerge victorious, placing emphasis on private brands, such as Broyhill and Real Living, which have seen a rise in penetration. A proactive approach to reinvigorating key categories, such as accents and modern styles, demonstrates their readiness to adapt to evolving consumer preferences. As they tread the path from defense to offense, the company aims to turn the tide and reignite investor confidence in a landscape marked by challenges and opportunities.

Final Thoughts – Is Big Lots Worth The Risk?

Source: Yahoo Finance

Despite the visible spike in the stock price post its recent earnings, Big Lots continues to be risky as an investment. The cautious spending behavior of its primary low-income clientele is a major concern with respect to the company especially against the backdrop of customers veering towards experiences over goods and with the specter of inflation looming large. In an environment characterized by uncertainties, Big Lots has refrained from offering full-year guidance, a stance that might raise further concerns. From a valuation standpoint, Big Lots is trading at an Enterprise Value/ Sales of 0.50x which is cheap but the macro concerns cannot be ignored. Overall, we believe that it is best for small-cap investors to avoid the Big Lots stock amidst the current economic headwinds and shifting consumer preferences.