Dive Brief:

• S&P Global downgraded Big Lots to BB+ this week and issued a negative outlook that indicates another potential downgrade in the future.
• Analysts with the ratings firm said in an emailed press release that the discount retailer “is struggling to grow sales and profitability in an increasingly difficult retail and economic environment.”
• In noting their negative outlook, the analysts cited “intensifying competitive and executional challenges at the store level​” in addition to potential store traffic loss from the outbreak of the coronavirus in the U.S.

Dive Insight:

Big Lots is coming off a fourth quarter during which comparable sales fell by almost 1% and profits declined.

Sales during the “hard-fought” quarter rose somewhat year over year but came in below expectations as consumers turned more to online holiday shopping and dealt with a shortened season, according to CEO Bruce Thorn.  

“Our usual brick-and-mortar rally the last 10 days leading into Christmas didn’t materialize, even with strong price cuts and promotional support and caused us to be more promotional for the balance of the quarter,” Thorn told analysts in February, according to a Seeking Alpha transcript. 

More bad news: The retailer had seen softness in sales at locations with its Store of the Future layout, which has prompted management to slow the roll-out of the new format. Thorn emphasized that the format still outperforms Big Lots traditional stores, but the company had gained better visibility into their performance and would focus on markets where they may have the biggest returns. 

And yet more bad news: Q1 got off to a slow start as the retailer was already grappling with disruption to its supply chain from COVID-19, a disease caused by a member of the coronavirus family. 

All that said, Thorn said the retailer is working on its turnaround strategy, which focuses on sales growth, cost cuts, and talent and infrastructure. Included in its growth strategy is the Broyhill brand, which it acquired after Home Heritage Group went bankrupt. 

“Broyhill positions nicely into our strategy to grow all things home, with special emphasis on our better and best offerings and indoor and outdoor furniture and soft and hard home,” Thorn told analysts in February, adding that the brand was outpacing expectations. 

But S&P analysts pointed to deepening competitive issues at Big Lots.

“We believe the company’s value proposition has diminished particularly in recent quarters, due to a function of changing merchandising strategies, inconsistent execution, and fiercer competition,” S&P analysts Declan Gargan and Diya Iyer said in a press release. “Operating performance has lagged our expectations and we believe results will remain under pressure from an increasingly difficult retail environment amid coronavirus and other macro challenges.”