JPMorgan says Big Lots’ struggles could benefit this closeout-retail rival

JPMorgan says Big Lots’ struggles could benefit this closeout-retail rival

Last week, discount retailer Big Lots Inc. raised bigger concerns about its ability to stay afloat, as losses pile up and its lower-income shoppers struggle under a two-year inflation spike. This week, JPMorgan analysts said those difficulties could mean bigger gains for rival Ollie’s Bargain Outlet Holdings.

Analysts there upgraded shares of Ollie’s Bargain Outlet to their version of a buy from hold. They also gave the stock a price target of $105.

Ollie’s stock jumped 9.4% on Monday. Shares of the chain — which, like Big Lots, sells food and home supplies for much less than many other retailers — are up 26.5% so far this year.

The upgrade for Ollie’s came after Big Lots in a filing on Thursday, said that its shakier cash and credit situation “raises substantial doubt about the company’s ability to continue as a going concern.” And it said the likely inability to comply with the terms of a 2022 credit agreement “would result in an event of default which could result in an acceleration of our obligations.”

The JPMorgan analysts said a possible Big Lots bankruptcy could mean a bigger shopper exodus toward Ollie’s Bargain Outlet stores, most of which are located within less than five miles of a Big Lots store. And they said roughly 965 Big Lots locations represented “potential real-estate opportunities” for Ollie’s.

UBS analysts have said some 45,000 stores could close over the next five years, amid the rise of Chinese discount-shopping site Temu and Singapore-based fast-fashion giant Shein. The JPMorgan analysts on Monday said that 11 major brick-and-mortar retailers have declared bankruptcy since the start of last year, amounting to around 4,700 empty locations that could be gobbled up by retailers who are faring better.

They noted that bargain clothing and home-goods chain Burlington Stores Inc. had snapped up old Bed Bath & Beyond locations. Ollie’s and Dollar Tree Inc. meanwhile, had done the same for 99 Cents Only Stores.

Big Lots’ stock took a hit earlier this month after it reported a larger-than-expected first-quarter loss. Big Lots Chief Executive Bruce Thorn, during the company’s earnings call this month, said that shoppers had shied away from big-ticket spending, and that sentiment had gotten worse.

“The consumer environment softened in the first quarter as both consumer confidence and sentiment has declined since January, due in part to concerns about inflation, unemployment and interest rates,” he said.

“Also, personal saving rates have been declining, while credit-card balances have grown, indicating the pressure our core consumer is under as they try to manage their strained budgets,” he continued.

Still, the company said its aggressive bargains helped lift consumer perceptions, and it said it expected second-quarter same-store sales to be better than those in the first quarter.

The company has been trying to cut costs and bolster liquidity. During the call, management said it needed to take bigger steps to ”communicate unmistakable value” and push its online and in-store services.

Big Lots ended the first quarter with cash and equivalents of $43.9 million. In April, Big Lots said it had boosted its borrowing capacity by up to $200 million with a new loan arrangement.

Shares of Big Lots declined 1.7% on Monday, and have fallen 74% year to date.