Big Lots faced substantial challenges in Q1 2025, largely due to reduced consumer spending on high-ticket items, influenced by inflation, unemployment, and rising interest rates. Despite these hurdles, the company achieved operational success by focusing on cost-cutting, productivity, and offering extreme bargains. Although sales targets were missed, the gross marginGross margin is a critical financial metric that plays a pivotal role in evaluating a company's financial health and profitability. It is a percentage that indicates how efficientl... More rate improved year-over-year. The company introduced a $200 million term loan facility and outlined five key actions to drive sales growth and improve margins. These include increasing bargain penetration, enhancing marketing, making stores more attractive, leveraging omnichannel efforts, and boosting productivity. Project SpringBoard was implemented to address underperforming stores, resulting in significant operational improvements. Seasonal and furniture categories underperformed, but other areas like pet and hard home categories showed positive trends. Big Lots also launched Asia-based buying offices to enhance bargain sourcing and improve competitiveness.

Economic Environment and Consumer Behavior

Consumer Spending Challenges

The core customer base of Big Lots experienced heightened financial pressure, leading to reduced spending on high-ticket items, notably in the home furnishing categories. This behavior was indicative of a broader trend where consumers were managing strained budgets, resulting in a pullback from discretionary spending.

Operational Initiatives

Despite the sales pressure, Big Lots achieved operational success by offering a variety of new and exciting extreme bargains, cutting costs, and increasing productivity. These efforts led to improved consumer perceptions of the brand and value, contributing to a year-over-year improvement in gross margin rate and operating expenses.

Financial Performance and Strategic Actions

Q1 Financial Highlights

Big Lots reported a significant improvement in gross margin rate and managed to preserve and enhance liquidity through aggressive efforts in managing operational expenditures, capital expenditures, and inventory. The company also executed a new $200 million term loan facility, providing additional financial flexibility.

Five Key Actions

The company outlined five key actions aimed at driving positive comparable sales growth and improving the gross margin rate through the end of the year:

1. Own Bargains: Increasing the penetration of bargain and extreme bargain items.
2. Communicate Unmistakable Value: Enhancing marketing efforts to highlight value.
3. Increase Store Relevance: Making stores more attractive to consumers.
4. Win Customers for Life with Omnichannel Efforts: Leveraging online and offline platforms to retain customers.
5. Drive Productivity: Enhancing operational efficiency and reducing costs.

Extreme Bargain Strategy

Big Lots focused on increasing bargain penetration to 75% and extreme bargain penetration to 50% by year-end. This strategy showed favorable sales trends in several categories and improved gross margins. The company also improved signage, ads, store layouts, and digital campaigns to highlight these deals.

Addressing Underperforming Stores

Project SpringBoard

The company implemented Project SpringBoard to address underperforming stores, realizing significant bottom-line opportunities. By enhancing store operations and investing in talent, operational excellence, and customer experience, Big Lots aimed to drive better store performance and overall profitability.

Q1 Results

Big Lots’ Q1 comparable sales trends were down 9.9%, missing the guidance of mid-single digits. The gross margin rate improved by 190 basis points year-over-year due to reduced markdowns and Project SpringBoard benefits. However, adjusted SG&A was down 4% compared to the previous year.

Future Outlook

Expected Improvements

Big Lots anticipates continued quarterly year-over-year gross margin improvements in 2024, driven by the five key actions. The company expects to achieve most of the $200 million in bottom-line opportunities through Project SpringBoard and grow bargain and extreme bargain penetration.

Enhancing Bargain Sourcing

The company launched Asia-based buying offices in April to enhance competitiveness in sourcing extreme bargains and reduce costs. This move is expected to solidify Big Lots’ position as America’s discount home store.

Liquidity Management

Big Lots successfully managed costs, inventory, and capital expenditures, increasing liquidity through additional borrowing capacity. At the end of Q1, net liquidity stood at $289 million, up from $254 million in Q4.

Category Performance

Seasonal and Furniture Categories

Seasonal comps decelerated relative to Q4 due to consumer pullback on high-ticket items like patio furniture. However, decor items such as planters and gardening accessories performed well. Furniture and soft home categories also saw a sequential decline, but improvements were noted in Q2 driven by upholstery and case goods.

Hard Home and Food Categories

Hard home categories accelerated relative to Q4, with significant improvements in toy sales and new category introductions. Food and consumables faced fierce competition, but the company increased extreme bargain SKU counts, showing promising results for future growth.

Pet Category

The pet category continued to be a standout performer with positive comp growth for six out of the past seven quarters, supported by an expanded assortment.

Marketing and Customer Engagement

Communicating Value

Big Lots improved customer value perception scores through better marketing and promotions. The company launched various campaigns and partnered with social media influencers to highlight monthly bargains, leading to higher engagement rates.

Store Operations and Omnichannel Efforts

Efforts to increase store relevance included featuring extreme bargains prominently and flexing assortments based on customer demand. The company also focused on enhancing the online shopping experience and introduced new features like pre-order options for big-ticket items.

Insights

1. Consumer financial pressure led to decreased high-ticket item spending.
2. Operational efficiency and cost-cutting improved gross margins.
3. Strategic focus on bargains and marketing enhanced value perception.
4. Project SpringBoard significantly improved store operations.
5. New buying offices aimed at better bargain sourcing and cost reduction.

The Essence (80/20)The Origins and Evolution of the 80/20 Principle The Discovery by Vilfredo Pareto In 1897, Italian economist Vilfredo Pareto uncovered a striking pattern in his study of wealth and... More

• Core Topics:
  • Consumer Spending: Financial pressures reduced spending on high-ticket items.
  • Operational Efficiency: Cost-cutting and productivity improvements boosted gross margins.
  • Strategic Actions: Five key initiatives to drive sales and margin growth.
  • Project SpringBoard: Addressing underperforming stores and improving operations.
  • Category Performance: Mixed results with some categories underperforming and others showing positive trends.

The Action Plan – What Big Lots Should Do

1. Increase Bargain Penetration: Focus on sourcing and marketing bargain items to attract budget-conscious consumers.
2. Enhance Marketing: Highlight value through targeted campaigns and influencer partnerships.
3. Boost Store Appeal: Improve store layouts and relevance to increase foot traffic.
4. Leverage Omnichannel: Enhance online shopping experience and integrate it with in-store offerings.
5. Operational Excellence: Continue cost-cutting and productivity improvements to maintain margin growth.

Blind Spot

Potential over-reliance on bargain strategies may undermine brand perception in the long-term, affecting the ability to attract higher-spending customers.

Big Lots (BIG) Technical Analysis

The chart of Big Lots (BIG) shows a clear downward trend. The stock has been consistently declining since December, with the price moving below both the 50-day and 200-day moving averages, which are currently at 3.80 and 5.13 respectively. The recent price is 2.88, indicating a significant bearish trend.

Volume analysis indicates a spike to 7.19 million, suggesting strong selling pressure, particularly notable in the last few trading sessions.

The Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI) is at 36.10, which is below the neutral 50 level, indicating the stock is approaching oversold territory but not yet extremely oversold.

The On Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV) is showing a downward trend, indicating that the volume on down days is higher than the volume on up days, confirming the selling pressure.

The Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More is at 0, indicating that the stock is extremely oversold and might be due for a short-term bounce.

The Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX) is at 22.53, which suggests that the current trend is weak, but given the downward price movement, it confirms a weak bearish trend.

The Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More is at -1.62 million, showing significant outflows of money from the stock, which aligns with the bearish trend.

In summary, Big Lots (BIG) is in a strong bearish trend with increasing selling pressure and negative momentum. The stock is approaching oversold conditions, which might lead to a short-term bounce but overall, the indicators suggest a continued downtrend.

Time-frame Signals:

• For a 3-month horizon: Sell. The stock is in a strong downtrend with no immediate signs of reversal.
• For a 6-month horizon: Sell. The continued negative momentum and selling pressure suggest further declines.
• For a 12-month horizon: Hold. If the stock reaches extremely oversold conditions, there may be potential for a recovery or a consolidation phase.

Overall, Big Lots (BIG) appears to be a high-risk stock with a bearish outlook in the short to medium term.

Looking Ahead

Despite a challenging consumer environment, Big Lots made significant progress on its five key actions. The company remains committed to improving comp sales and gross margin rates, driving productivity, and enhancing customer value perception. By focusing on strategic initiatives and operational excellence, Big Lots aims to create a stronger and healthier business model for the future.

Big Lots Q1 2025 Conference Call FAQs

Book Recommendations:

“The Omnichannel Retail Handbook” by Tim Mason and Miya Knights:

• Relevance: Big Lots is focusing on leveraging online and offline platforms to retain customers. This book provides insights into how businesses can effectively integrate their omnichannel strategies to improve customer experience and sales performance, aligning with Big Lots’ efforts to enhance their omnichannel presence.

“Retail’s Seismic Shift: How to Shift Faster, Respond Better, and Win Customer Loyalty” by Michael Dart and Robin Lewis:

• Relevance: Big Lots is undergoing significant operational changes and focusing on winning customers for life through various strategies. This book discusses the major shifts in retail, how companies can adapt quickly to market changes, and strategies for building customer loyalty, directly relating to Big Lots’ need to respond to economic challenges and changing consumer behaviors.

“Delivering Great Customer Experiences: Why Gamification and Customer Engagement Go Hand-in-Hand” by Bill Roberts and Mike Macpherson:

• Relevance: Enhancing customer engagement and improving value perception are key aspects of Big Lots’ strategy. This book explores how gamification and engagement techniques can be used to enhance customer experiences, which can be applied to Big Lots’ marketing and customer engagement efforts to boost brand loyalty and drive sales.

These books provide deeper understanding and practical strategies that can support Big Lots’ goals of improving operations, enhancing customer value, and adapting to market challenges, as discussed in the article.