It is official. Big lots has filed for bankruptcy last week three months after they noted substantial doubt about the company’s ability to continue in US. For a long time reader, you should know that this news (big lot is a close competitor of Olli) should benefit my long time favorite : Ollie Bargain Outlet.
Recently, I have been studying the US retail industry due to blood on the street for companies like Dollar General, Dollar Tree and Five Below. Most of them are trading near 52 weeks low. I have the intention to follow the industry closely and do expect me to post more update about them. (I know I am up against giants like Alex Morris, he is the expert in the retail industry. Sorry Alex!)
Although the industry is known for being tough, there is still plenty of outstanding companies within the industry such as TJX, Ross stores, Costco, etc. However, I think the best way to learn about them is to study why a retail company failed? I picked Big lots specifically because it is a shadow to my favorite : Ollie Bargain Outlet.
Short seller has been comparing Olli to Big lots and I am here to bust the myths between them under the Olli Vs Big section. For reference, my readers can click here to read their short thesis in VIC to see for yourself. Sometime, an “expert” can be as ignorant as a non-expert.
The rise of big lots
Sol A.Shenk is arguably the founder of the closeout industry. He built a single surplus outlet in Columbus, Ohio, into the Consolidated Stores Corporation, an empire with more than 700 stores and annual sales of $1.1 billion. He was best known for his purchase of the remains of DeLorean Motors, the automobile company founded by the former General Motors executive John Z. DeLorean.
When DeLorean Motors filed for bankruptcy in 1982, Mr. Shenk bought the remaining stocks of the exotic-looking cars with the stainless steel exterior and as many spare parts as he could find.
"We bought about 2,500 cars and 150 trailer loads of parts and sold every one of the cars," Mr. Churches said. "We sold about half of them to car dealers and retailed the other half." Extracted from an article in New York Times.
The company was known as one of the top 10 most profitable discount retailer in the US during his time with the company. Stock price almost 10x under the founder care.
However, good time don’t last after the founder pass away. His successor took over and change their strategy. They decided to aggressively grow its presence by consolidating the closeout industry through acquisitions like Mac Frugal, Pic N save, etc.
The store count growth is exciting but eventually reached its peak in 2005. The company has outgrew itself. Yup, there is only so much opportunistic buying. The company is also bloated and becomes a victim of rapid growth.
The turnaround
Then, in 2005, Steven Fishman came and help repositioned Big lots to focus on its roots : providing extreme value on great merchandise, slow the expansion, driving store productivity and cut cost. The company regained its health and starting to become more profitable on a per store basis. What is more impressive is his strategy to buy back stocks a great valuation. The stock counts dropped by 30% under his care.
Hi, Jenifer !!!
When you see this title, you should knows what happened. After Steve announced his retirement, David Campisi took over. His first strategy is to offer a more “consistent” product offerings and focus on customer first. He name the project : Jenifer because the most frequent shoppers are typically named Jenifer.
What a way to screw the closeout model. The beauty of a closeout model is to offer the treasure hunt experience. Then, he decided to change that by being Walmart. How to compete with the mighty Walmart, Mr. CEO? I have no idea how he last for a solid 7 years in the company.
Operation North star
Then, here come Bruce K. Thorn to the “rescue” in 2020. Yup, he is the guy that run Big Lots to the ground. To be fair, the company is already in bad shape when he took over but he still has something up his sleeves with the operation North Star.
Financial engineering
If there is any tell tale sign of it going bankrupt, the sales and lease back arrangement will be the most obvious red flag. For those who has no idea what it is, it is a quick way to show profit by selling their prized assets (distribution centers) and rent it back. Big lots did broke all time high during 2021 but it is kind of obvious that good time wouldn’t last for them.
The irony is that when the top management is the one that screw over the shareholders, the company still approved an one-time retention bonuses over $5mil to avoid them from jumping ship during the restructuring. Stop rewarding for failure.
The inevitable
Retail is hard and Buffett has been right all along.
Retail is a Tough Business in his 1977 letters:
“Several years ago, for example, Berkshire Hathaway lost half of a $6 million investment in Vornado Inc., a discount retailing concern based in New Jersey. ‘The stock looked undervalued when I bought it, but I proved to be incredibly wrong about the discount department-store business,’ Mr. Buffett says. ‘It turned out that the industry was over-stored, and Vornado and the rest of the discounters were getting killed by competition from K mart stores.’”
Big Lots is just joining a long list of retail companies that has filed for bankruptcy. I am pretty sure more will join the list. However, I still believe that there are some outstanding companies within the sectors and I hope to write about them in the future.
Olli vs Big
Below is my thoughts on the difference between Olli and Big. I believe Olli possess the kind of quality to continue to do well for the foreseeable future. (Of course, I can be biased and I am happy to discuss with anyone who think otherwise)
1.Olli sticks to its root by slowly growing its closeout business organically. It pursed sustainable growth and not growing at all cost because it understands the closeout landscape. You need time to build a strong deal flows and reputation to attract great deals. You can’t rushed for deals.
Big on the other hand is craving for growth by rapidly open more stores and making multiple acquisitions. Without a strong pipeline of closeout deal, the company has outgrown itself and have to create an artificial supply (work with the vendors to create their own product)
2.Olli management is highly prudent and maintain a pristine balance sheet. Big management has been spending money to do fancy marketing, e-commerce, building new concept stores, etc. It forgot about their value proposition : That is to provide the best quality products at the cheapest price.
3.Olli has been doing prudent share buyback at reasonable valuation but Big is borrowing to buyback just to show increase in earning per share. Buyback only works if your business model work. You can’t buy you way to growth.
Conclusion
If there is any lessons that I learned from this article, it is that management really matters in tough industry. Mark Butler, the founder of Olli who has unfortunately past away has built a strong culture to be prudent and constantly look for good deals. It is easy to sell cheap products but good quality products at value price is what matters.
If you made it to here, thank you for spending your precious time. A like or share will help to motivate me to write more in the future.
Disclaimer: I have position in the company mentioned and receive no fees for writing the post. I am not affiliated or have any role with the company. This post is just for educational purpose and it is not an advice to buy or sell the stocks. Invest at your own discretion.
Thank you for the kind words - although "expert" may be the wrong term given how my retail ideas have performed as of late! Like yourself, I think the OLLI / BIG comparison is far from reality (and that should be apparent to anybody who has shopped in their stores - a very different value proposition).
- Alex
Dont't be too harsh on yourself as investing can be tough and only times will tell if we are doing well. 1 year is too short to know if your ideas worked. Too bad I can't visit Olli. Would like to go to US sometime and visit some retail stores