After strong 2020, can Big Lots continue leveraging ‘essential retailer’ tag?

For Big Lots Inc. (NYSE: BIG), 2020 was a very successful year as the discount store operator benefited from the virus-induced shift in customers’ shopping behavior. The company managed to beat the inventory and supply chain issues during the pandemic while leveraging its revamped e-commerce platform and omnichannel practices.

---

Read management/analysts’ comments on Big Lot’s Q4 earnings

---

After slipping to a ten-year low early last year, shares of the Ohio-based community retailer bounced back pretty quickly and reached a record high last month. Meanwhile, market watchers are a bit skeptical about the sustainability of the current trend and predict a double-digit fall this year. Also, the stock looks overvalued, which calls for cautions while making investment decisions. It might not be the right time to sell either, given the company’s strong fundamentals.

Essential Retail

Last year’s impressive performance can mainly be attributed to the company’s essential retailer’ status during the COVID days, thanks to the prudent selection of food and other everyday items that drove traffic to the stores. Non-food categories like home improvement, kitchenware, furniture, and cleaning supplies were also in high demand. It needs to be noted that typically, customers prefer discount retails stores during times of crisis due to the need to preserve cash.

---

Walmart sees fresh wave of panic buying as COVID curbs return

---

Meanwhile, continued investments in operations, the expansive store network, and the re-configuration of key retail categories are creating the right backdrop for growth. That, combined with the management’s continued focus on customer experience, rollout of new programs, and expansion of e-commerce capabilities under the Operation North Star initiative, should help the company repeat last year’s success.

Pros and Cons

Plans are afoot to make fresh investments in the supply chain this year to boost throughput, meet the high omnichannel demand and increase overall efficiency. Meanwhile, COVID-related costs, mainly linked to safety and employee compensation, will remain a drag on margins in the coming months. Comparable sales might drop below last year’s levels due to the tough comparison. The volatility in people’s shopping behavior and macroeconomic factors also are a cause for concern.

Big Lots’ earnings topped estimates in every quarter of 2020, underscoring its resilience to the market turmoil. In the final three months of the year, earnings rose to $2.59 per share from $2.39 per share and exceeded analysts’ forecast. At $1.7 billion, fourth-quarter net sales were up 8% year-over-year and above the estimates. Comparable sales grew at a record rate of 8%.

We’ve launched pantry optimization in the third quarter of 2020. As a reminder, this involves repositioning footage from food staples to food entertainment as well as expanded space for consumables, including cleaning products and health and beauty, combining competitively priced national brands with an expanding assortment of close-outs. This creates a significant value differentiation from the competition. With the increased intensity of the pandemic during the colder winter months, this strategy outperformed our expectations.

Bruce Thorn, president and chief executive officer of Big Lots

Peer Performance

A similar pattern was visible in the performance of rival retailer Dollar General (DG), which posted strong growth in fourth-quarter earnings and revenues, reflecting double-digit sales growth across all business segments. Comparable store sales remained elevated amid stable demand for affordable goods.

---

Infographic: Dollar Tree’s (DLTR) performance in Q4

---

Big lots’ stock rose about 47% so far in 2021, after maintaining a steady uptrend throughout last year. Though the momentum waned since the stock peaked in mid-Februady, it regained strength after last week’s earnings report. It closed the last session higher and continued to gain in the early hours of Monday.