Is Big Lots Relevant in a Digital World?

By Nicholas Rossolillo Markets Fool.com

Big Lots (NYSE: BIG) is traditionally an off-price retailer and has not been a big player in the online shopping space. Amid stagnating sales, the company has been making a push to play catch-up. It's an uphill battle, but Big Lots has been making headway this year.

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The Big Lots value proposition

The company's roots draw on a retail closeout model that got started in the '70s, and the steep price reductions offered helped the company grow into the national discount chain it is today, with about 1,450 stores.

Image source: Big Lots.

Big Lots offers a wide array of products including non-perishable food, home decor and furniture, and seasonal items in a big-box store format. The company touts discounts up to 70% off of full-price retailers and as much as 40% off of other discount retailers. The "cheap prices" marquee has served the company well over the years in a competitive fight over consumers, especially in the wake of the financial crisis in 2008.

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Data by YCharts.

The catch at Big Lots, though, is the chain's self-described "treasure-hunt atmosphere." Visitors to a store never can be absolutely certain what they'll find perusing the aisles. In times past, this hasn't been a detriment to the company, as a certain demographic is just after a good bargain rather than a specific item.

But encroaching on the turf of traditional merchandisers are internet retailers, offering consumers more variety and the ability to shop multiple sources for the best deal on any specific item. This competition has helped contribute to Big Lots' stagnating sales in the last few years.

The progress report

Big Lots has gone to work updating its business model for the modern digital age. The company has given increased focus to its online presence and to bringing its seasonal and rotational discounted items to an electronic format. That can be a real challenge for a company like Big Lots that doesn't have a set lineup of offerings. Management has said that this year can, therefore, be chalked up as a transitional phase.

The digital team used a two-phased approach to ramp up the holiday campaign this season, relying on digital communications like email, online advertising, and social media. However, it is important to remember it is still early in the game for Big Lots' online store, with the last reported quarter being only the second full quarter with the online store up and running.

In the quarterly conference call on Dec. 2, CEO David Campisi had this to say about the online initiative thus far:"It is still very early in our journey and we're still crawling, but we're getting to know more about what Jennifer [the company's fictional ideal customer] loves every day. She is most interested in our seasonal, soft home and furniture assortments, which is interesting given the furniture transactions are predominately available and in-store only."

This would indicate that Big Lots' online efforts are helping drive foot traffic to physical locations. Customers can now research what the company has in stock before making a trip, a tool that wasn't available before. That isn't to say the digital shopping cart is merely an expensive investment in customer research, though.

Third-quarter online sales increased sequentially over the last quarter, and the average transaction was two to three times larger than in-store, executives said. The company reported sales continuing to ramp up in November, but the real test will come when the company reports on the whole holiday shopping season early next year.

What the future holds for Big Lots

It is impressive that Big Lots has fared so well to date without any help from an internet selling presence, so it is exciting for shareholders to see how the new efforts will unfold. Sales may have been stagnant over the last few years, but management sees that picture beginning to change in 2017.

Data by YCharts.

It is worth noting, however, that management of costs has helped the bottom line increase. In today's digital world, the company has proven it is still relevant. Still early into its foray in the online sales game, with a possible return to sales growth in the cards, and enjoying rising profitability, Big Lots is worth keeping tabs on.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool recommends Big Lots. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.