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Robust omni-channel efforts and gains from transformation initiative, including the Operation North Star, have been working in favor of Big Lots, Inc. BIG. Via the Operation North Star strategy, the company has been focusing on driving its top line, cost containment, and enhancing systems and infrastructure. Management is also committed to improving performance by enhancing digital capabilities and expanding Broyhill brand. Going forward, Big Lots is poised to maneuver the current environment on strength in its customer service coupled with everyday essentials and stay-at-home products. Impressively, shares of the Columbus, OH-based company have surged 62% in the past year and outperformed the industry’s 25% rally.
Let’s Closely Analyze
Big Lots is gaining from the Operation North Star initiative, which focuses on streamlining the cost structure and core enablers with significant capabilities and tools in several areas of business. The company has been updating Broyhill fall assortments by including products like area rugs, bed sheets and decorative pillows. It is also encouraged by the brand’s extension into housewares and kitchen textiles. The brand is projected to generate around $400 million sales in its first year, with the potential to become a $1-billion brand in the future. Big Lots also completed the rollout of its pantry-optimization initiative.
Meanwhile, Big Lots is leaving no stone unturned to tap the best in the market, as clear from its efforts to leverage marketing strategies, with loyalty databases and e-commerce enhancement. The company is experiencing strong e-commerce growth, buoyed by the success of the “Buy Online Pick-up In Store” functionality. The company is focused on enhancing the omni-channel experience, removing friction and expanding customer base. It has also launched same-day delivery through Instacart. Moreover, it has integrated web and store capabilities to drive enhanced returns, pricing, consistency and order visibility.
Encouragingly, overall e-commerce and omni-channel demand surged 70% year over year during third-quarter fiscal 2020. This contributed nearly 170 basis points to total comparable sales (comps). Convenient delivery options coupled with new digital customer acquisition are fueling growth. In addition, its Rewards program is impressive, with robust net promoter scores, active membership and new customer acquisition.
Despite these strengths, impacts of the coronavirus pandemic cannot be ruled out. The company is witnessing higher selling and administrative expenses due to additional expense from the sale and leaseback of distribution centers, additional store and corporate bonus cost and increased non-cash stock compensation expense. Also, the ongoing pandemic-related cleaning costs and supplies have been adding up to expenses. These factors are likely to persist in the fiscal fourth quarter. Nonetheless, the company’s solid cost-containment efforts are likely to keep the cost issues in check going ahead.
Encouragingly, Big Lots is also committed to boost shareholders’ value and looks well placed on the dividend payout front. We note that the company has a current annualized dividend rate of $1.20 a share, flat year over year. It has a dividend payout of 16.7%, dividend yield of 2.8% and free cash flow yield of 18%. With an annual free cash flow return on investment of 37%, the dividend payment is likely to be sustainable. In the fiscal third quarter, management bought back 2.2 million shares worth $100 million under its earlier-announced $500 million share repurchase program. Big Lots currently has a Zacks Rank #3 (Hold).
Key Picks in Retail
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Target TGT has an expected long-term earnings growth rate of 8.5% and currently has a Zacks Rank #2.
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