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What Big Lots Management Wants Shareholders to Know

Asit Sharma, The Motley Fool

While it's likely too early to plunge into shares of discount retailer Big Lots (NYSE: BIG), investors in consumer staples stocks can at least keep the battered chain on their watch lists. Big Lots stock has lost 20% of its value year to date and plunged 46% cumulatively over the last 12 months.

But the company's fiscal second-quarter 2019 earnings, released on Aug. 30, revealed the potential for a turnaround. Adjusted earnings per share of $0.53 exceeded the high end of management's guidance, and the organization squeaked out a 1.2% comparable-sales increase as total sales edged up by 2.5%.

Below, let's review three comments made by CEO Bruce Thorn during Big Lots' earnings conference call that highlight initiatives to improve store revenue and operating margins.

Future growth will rely on the "Store of the Future"

Starting with Store of the Future, our results continue to be strong. We started 2019 with approximately 200 stores in the new format and through Q2, we've remodeled an additional 123. The team is on time and on budget with the remodels as we approach the final phases of work for the year, and we're on pace to finish an additional 91 stores by the end of October -- just in time for the high volume holiday selling season in Q4.

Big Lots' investment and experimentation with new store formats may finally be paying off. The refreshed "Store of the Future" concept places greater emphasis on higher-margin categories like furniture, home furnishings, and seasonal items versus legacy stores. Remodeled units generally experience a high-single-digit sales expansion in the first year and continue to outperform Big Lots' total store base two years later.  

CEO Thorn observed that Store of the Future units contributed roughly 1 percentage point to the company's comparable-store sales ("comps") advance this quarter -- that's nearly all of the 1.2% comps growth Big Lots recorded for the period. By the 2019 holiday season, Big Lots projects that it will have added 250 Stores of the Future in the current year to its previous base of 200 units.

A new service has increased online sales' effectiveness

Our e-commerce team delivered another quarter of significantly improved operating results while successfully launching and rolling out BOPUS -- that is, "buy online, pick up in stores" to all stores over the past few weeks. This is a big win for our team and we are highly encouraged by the results so far. BOPUS has nearly doubled the number of viewable SKUs [stock-keeping units] online and our customers' response has been better than expected.

Due to a comparably lower average ticket versus other types of retailers, a "buy online, pick up in store" ("BOPUS") e-commerce functionality has been approached with varying degrees of interest among discount chains. For example, while it made sense for Kohl's -- essentially a department store -- to roll out a "BOPUS" capability in October 2018, fellow discounter Dollar General is still providing the service under a limited pilot program, to understand its effect on sales and profit margins.

As CEO Thorn observes above, Big Lots is seeing a marked impact from its BOPUS launch and has extended the service to all stores in its system. The organization is garnering more orders per day (per store) than it originally estimated, and average order value is also exceeding expectations.

BOPUS orders are currently skewing toward bigger-ticket furniture and seasonal items, and customers are also adding smaller consumable items to their purchases when picking up orders in-store. So far, BOPUS capability has improved the efficiency of the company's e-commerce efforts and boosted revenue in the process.

A 3D illustration shows a series of red, floating discount price tags.

Image source: Getty Images.

Back to basics to lift sales

[O]ur traffic drivers initiative is focused on providing assortments to drive foot traffic to our stores and help our customer find more items on our list. The traffic drivers initiative arose from our customer research and includes the addition of a significant number of SKUs in brand-name, consumable, never-out products. We believe the consistent availability of these SKUs will drive increased frequency of visits to our stores, supporting sales and other higher margin categories.

In discount-chain parlance, "consumables" refers less to products to be consumed (i.e., food) and more to household items, from cleaning supplies to personal toiletries and beauty products. The company's new "traffic drivers" initiative will seek to maintain an inventory of common consumables to encourage recurring traffic from customers who live within close proximity of Big Lots locations.

Lifting sales by improving foot traffic is a basic building block of revenue expansion for discounters. Big Lots launched this experiment in August in 24 locations, transitioning a total of 80 linear feet dedicated to food to consumable item displays. CEO Thorn stated that the company is planning an extensive rollout of the initiative in the current year, which will include high-density displays and prominent placement of the chosen consumables line-up in checkout queues.

Of the programs we've discussed in this article, "traffic drivers" is perhaps the most indicative of management's willingness to focus on the hard work of improving customer engagement -- one of the first steps on the path to achieving a sustained retail turnaround.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com