Accumulate Ollie’s as Big Lots Goes Bankrupt: A Profitability Comparison for Investors
Summary
Ollie’s Outpaces Big Lots in Profitability: Ollie's boasts a gross margin of 40.8%, significantly outperforming Big Lots’ 32.5%, demonstrating stronger cost control.
Operational Efficiency Matters: Ollie’s operating margin stands at 10.2%, more than double Big Lots’ 4.1%, signaling greater profitability from core operations.
Net Income Disparity: While Ollie’s delivers an 8.5% net income margin, Big Lots faces challenges with a negative -2.5%, reflecting its financial struggles.
Strong ROE vs. Losses: Ollie’s 15.3% return on equity indicates a solid ability to generate profits, whereas Big Lots’ -5.7% ROE reveals significant losses for shareholders.
Big Lots (BIG) has recently filed for Chapter 11 bankruptcy as a result of prolonged financial challenges that began during the COVID-19 pandemic and were further impacted by rising inflation and interest rates. The company’s sales have taken a substantial hit, with a 10% decline in the last quarter, bringing total revenue to approximately $1 billion. This downturn has necessitated significant store closures, with plans to shut down as many as 315 locations. Big Lots' liabilities are reported to be in the range of $1 billion to $10 billion, and the company is navigating its bankruptcy process while a potential sale to Nexus is being explored.
Big Lots’ decision to close hundreds of stores highlights the extent of its operational challenges. Investors need to consider whether this reduction in retail presence will help cut costs or if it will weaken the company’s competitive positioning, especially as rivals like Ollie's continue to expand.
Big Lots shares dropped 39% following the announcement that Nexus Capital Management has agreed to acquire its assets and operations. The discount retailer, along with its subsidiaries, has entered voluntary Chapter 11 bankruptcy proceedings. As part of this process, the company is reviewing its operations, which could result in further store closures. Throughout the restructuring, Big Lots will remain open for business both in-store and online. The company has secured $707.5 million in financing to facilitate the restructuring process. Big Lots reported assets and liabilities ranging between $1 billion and $10 billion, with between 5,001 and 10,000 creditors. Despite these challenges, President and CEO Bruce Thorn emphasized that the company saw notable improvement in Q3, including better comp sales and gross margins, and expects to maintain positive momentum through the remainder of the year.
Comparison With Ollie’s
In contrast, Ollie's Bargain Outlet (OLLI) is experiencing strong growth, bolstered by its focus on discounted and closeout merchandise. In the most recent quarter, Ollie’s reported an 11% increase in sales, reaching $509 million, while its net income saw a 50% year-over-year surge. While Big Lots is closing stores, Ollie’s is expanding, with plans to open 50 new locations in 2024. The company’s loyalty program, "Ollie’s Army," has been instrumental in its success, accounting for 80% of sales from its 14.2 million members.
Ollie’s share price began increasing strongly in early June 2024 (Chart 1) after the company raised its FY24 guidance, with projected sales now expected to range between $2.257 billion and $2.277 billion, up from the initial forecast of $2.248 billion to $2.273 billion. This compares to the consensus estimate of $2.27 billion. Adjusted EPS is now anticipated to be between $3.18 and $3.28, aligning with the consensus estimate of $3.22 and an increase from the previous guidance of $3.10 to $3.20.
Chart 1
Ollie's stock has been relatively flat or slightly down over the past month for a few reasons: