Big Lots, Inc. (NYSE:BIG), the home discount retailer, has faced significant challenges in recent years, with net losses and declining cash flows. In 2023, the company reported an annual net loss of $481.9 million on revenue of $4.72 billion, while operating cash flow and free cash flow stood at -$252.0 million and -$315.1 million, respectively. However, the company is taking aggressive actions to transform its business and enhance its financial flexibility.

Business Overview

Big Lots is a home discount retailer operating 1,392 stores across 48 U.S. states as of the first quarter of 2024. The company's merchandise categories include Furniture, Consumables, Seasonal, Soft Home, Food, and Hard Home. Big Lots' strategy is focused on five key actions: owning bargains, communicating unmistakable value, increasing store relevance, winning customers for life through omnichannel efforts, and driving productivity.

Financials

In the first quarter of 2024, Big Lots reported a net loss of $205.0 million, with revenue declining 10.2% year-over-year to $1.01 billion. Comparable sales decreased 9.9% during the quarter, driven by a pullback in consumer spending, particularly on high-ticket discretionary items. However, the company's gross margin rate improved by 190 basis points to 36.8%, primarily due to lower markdowns and benefits from the company's cost reduction initiatives.

Liquidity

To enhance its financial flexibility, Big Lots entered into a new $200 million term loan facility in April 2024, in addition to its existing $900 million asset-based revolving credit facility. As of the end of the first quarter of 2024, the company had $324.9 million of aggregate available borrowings under these facilities, subject to certain borrowing base limitations. Despite the company's net losses and use of cash in operating activities, management is taking aggressive actions to manage costs, inventory, and capital expenditures to preserve and grow liquidity.

Bargains and Extreme Bargains

A key focus for Big Lots is increasing its penetration of bargains and extreme bargains, which the company defines as closeout items, opportunistic buys, and other sourced products where it believes it has a significant price advantage. In the first quarter of 2024, bargains and extreme bargains accounted for nearly two-thirds of the company's sales, with extreme bargains representing 28% of total sales. The company is aiming to grow extreme bargain penetration to 50% of sales by the end of 2024.

The company's efforts to expand its extreme bargain offerings have already shown promising results, with categories like toys, grocery, and upholstery furniture seeing significant improvements in sales and margins. For example, the introduction of an extreme bargain deal from Hearthsong in the toy department drove a 5% year-to-date sales increase and a 900-basis-point improvement in gross margin compared to the fourth quarter of 2023.

Productivity Initiatives

In addition to its focus on bargains and extreme bargains, Big Lots is also driving productivity through its "Project Springboard" cost reduction and efficiency initiative. The company exceeded its first-quarter targets for Project Springboard, realizing $25 million in benefits across gross margin and SG&A. As a result, Big Lots has increased its target for cumulative savings from Project Springboard to $185 million by the end of 2024, up from the previous target of $175 million.

Outlook

For the second quarter of 2024, Big Lots expects sequential improvement in comparable sales, with a decline in the mid-to-high single-digit range. The company also anticipates a year-over-year gross margin rate improvement of at least 300 basis points, driven by reduced markdown activity and benefits from Project Springboard. SG&A expenses are expected to decline in the low-to-mid single-digit range compared to the second quarter of 2023.

Risks and Challenges

Big Lots faces several risks and challenges, including the continued impact of macroeconomic factors on its core customer base, the ability to successfully execute its transformation initiatives, and the potential for further operating losses and liquidity constraints. The company has acknowledged "substantial doubt" about its ability to continue as a going concern, highlighting the need for successful implementation of its plans to enhance liquidity and improve business performance.

Conclusion

Big Lots is navigating a challenging environment, but the company's focus on bargains, extreme bargains, and productivity initiatives shows promise. The company's ability to execute its transformation plan and maintain financial flexibility will be critical in determining its long-term success. Investors should closely monitor Big Lots' progress in driving sales growth, improving profitability, and strengthening its balance sheet in the quarters ahead.