Photo by Vanessa Bucceri on Unsplash
February 29, 2024
Big Lots Snags Hearthsong’s Toys, But Is It Too Late?
Big Lots, the discount home retailer, has made a significant move by acquiring the entire inventory of Hearthsong, a renowned children’s toy brand. This strategic decision aims to reinforce Big Lots’ commitment to offering extreme bargains to consumers.
The acquisition injects over 500 new products and SKUs from Hearthsong into Big Lots stores across the nation. These products encompass a wide range of indoor and outdoor toys, including inflatables, playscapes, games, arts & crafts items, STEM toys, nature and science toys, and kids’ décor. They will be sold at heavily discounted prices, ranging from 50% to 70% less than their original retail prices.
“We’re reclaiming our bargain heritage, and with this impressive acquisition from Hearthsong, our extreme value sourcing team of closeout buyers is delivering on our promise to own closeouts and bring dynamic, innovative products at unmatched prices to our customers. It also signals our very real commitment and unique ability to directly source the best deals for our customers in ways that keep them coming back to our stores to uncover bargains, treasures, and extreme values.”
Bruce Thorn, president and CEO of Big Lots
This acquisition aligns with Big Lots’ recent efforts to revitalize its leadership in off-price and closeout sourcing. Seth Marks, who rejoined the organization in November 2023 as senior vice president of extreme value sourcing, is spearheading this initiative. Marks and his team are dedicated to delivering rapid “end-user” recoveries, extending their services to various stakeholders in the retail ecosystem.
Marks expressed his satisfaction with the Hearthsong acquisition, stating, “We’re pleased to bring this strategic acquisition of Hearthsong toys at never-before-seen closeout prices to our customers and their families this season. Our team’s approach to innovative sourcing and the trust of our partners has been a winning combination. Like our price-savvy customers, we’re continually on the hunt for new deals and bargains.”
The availability of Hearthsong toys at Big Lots stores will commence in April, strategically timed to coincide with the peak of the lawn and garden season, and will continue throughout early summer.
Big Lots’ Struggles
Big Lots has faced a tumultuous journey in recent years, with its stock plummeting from highs of $70 per share to recent lows of $3 per share. Despite these drastic fluctuations, questions linger about whether investors have overreacted and if the stock is now undervalued.
The discount retailer has a history of volatile price movements, experiencing both surges and declines in the market. From rallying from $16 to $30 a share in 2007, only to fall back to $16 by year-end, to dropping from $60 to $15 a share between 2017 and 2019 before rallying again to $63 per share during the pandemic, Big Lots’ trajectory has been erratic.
Analysts’ concerns about Big Lots’ long-term prospects are evident, with Loop Capital downgrading the stock from a hold to a sell and setting a price target of $1 per share. The company’s weak financial performance, exacerbated by high inflation impacting customer spending, has led to a significant decline in stock value.
Efforts to implement a turnaround plan, including reducing freight costs and cutting expenses, have yet to yield substantial results. The company’s liquidity issues, with liabilities totaling over $3.33 billion, further compound its challenges.
Despite initiatives to enhance inventory management and cost-cutting measures, Big Lots continues to face stiff competition from rivals like TJX Companies, Dollar Tree, and Walmart. Additionally, the post-pandemic landscape has dampened consumer spending on discretionary items, affecting Big Lots’ revenue.
Moreover, consumers have taken to social media and shared their thoughts on how Big Lots has become too expensive. This goes against how the company started as a liquidator with a variety of inventory, where shoppers might find brand-name products at incredible deals. They criticize how the retailer only offers the lowest pricing through coupons and financing plans. Overall, they feel that Big Lots’ competitors are better at offering lower prices.
Ultimately, Big Lots’ acquisition of Hearthsong’s inventory signifies a deliberate effort to provide high-quality toys at reduced prices, but will it actually help the retailer?
Discussion Questions
How does Big Lots’ acquisition of Hearthsong’s inventory reflect its strategic positioning within the competitive retail landscape, particularly in terms of capturing market share and enhancing its appeal to value-conscious consumers?
In light of consumer feedback indicating dissatisfaction with Big Lots’ pricing strategies and perceived lack of competitiveness compared to other retailers, how can the company address these concerns while maintaining its commitment to offering extreme bargains and closeout deals?
What adjustments might be necessary to align its pricing approach more closely with consumer expectations and regain market relevance in an increasingly competitive retail landscape?
Poll
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Brian Delp
CEO, New Sega Home
Dave Wendland
Vice President, Strategic RelationsHamacher Resource Group
Richard Hernandez
Merchant Director
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So far this fiscal year, Big Lots’ performance has been little short of a disaster. Operating losses have amounted to $343.8 million; in the latest quarter, sales plunged by 14.7% – with all categories in decline. This isn’t simply a reset after strong pandemic trading, or because customers are cutting back a bit. This represents a massive erosion of customer and market share. Big Lots has scrambled to shore up its finances, including engaging in store sales and leasebacks. But this isn’t enough, it needs to quickly rebuild the sales line. The hope is that Hearthsong toys will enable Big Lots to pull in more family shoppers and to drive some additional revenue. I am skeptical it will work. Toys is already a very competitive part of the market and I don’t think this resolves Big Lots underlying issues of relevance, visibility, and being seen as a true price leader in competitive value segment.
One of the challenges of a business model where you’re known for (low) price – or something related like selling overstocks or odd lots – is that it precludes a more tradtional approach (we sell BrandX, we sell quality). Some people here on RW have argued this isn’t necessarily a bad thing, as it can give birth to a “treasure hunt” approach, but it’s a narrow path; and trying to introduce brands – even quality ones – is likely to produce more confusion than anything else. OTOH this seems like it might have made a lot of sense for macy*s or JCP or Kohls or… any of a number of other struggling retailers that have traditionally offered brand name merchandise, presumably at a discount.
I assume Hearthsong, too, is having huge cash flow issues. Selling their “entire inventory” does not bode well for a future direction. Selling it to one retailer at a cost that the retailer can price it 70% off what other retailers might price it at will make Hearthsong a pariah with regular price retailers. They are signaling that it may not matter. The obituaries for Hearthsong have been written. Big Lots may not be far behind.
Lots of questions about strategy and math here. Did Big Lots outbid other contenders in a move to drive renewed customer acquisition? Being the high bidder in order to offer 50% – 70% savings doesn’t sound margin enhancing. And even if it is, it will take a series of this kind of action to regain their footing. This all sounds a lot like winning the race to the bottom. And therefore losing.
Toys may be a tough bet to compete on. With Target’s alignment with FAO, Macy’s alignment with Toys-R-Us, this is a bit of a me too strategy. TJX has even reduced its kids offering, minimizing kids bedding. Mattel also, despite the success of Barbie, is facing challenges. Fundamentally Big Lots has a perception issue and adding cheap/inexpensive toys into the mix isn’t going to solve that.
Big Lots has had their share of challenges and the acquisition of Hearthsong’s inventory in hopes of driving more store traffic may help, but it isn’t a silver bullet. Big Lots is in one of the hottest retail segments (off-price retail), however, it appears that they haven’t stayed true to their vision of “delivering unmatched value through surprise and delight.” When customers don’t perceive they are getting a great value, they will shop at your competitors’ stores. It seems like Big Lots needs to reevaluate its merchandise mix to align with its customer promise.
This one-time purchase of Hearthsong’s inventory won’t make much difference for Big Lots’, but getting back to extreme value is where they need to go. If your market position is to offer great deals, then you must deliver, and Big Lots’ hasn’t done that consistently. With some 1,400 stores this is still a big operation, and the off-price market only gets stronger during inflationary times, so conditions for a successful reset exist. The question is, can they execute on their ‘extreme value’ proposition?
Competition, pricing perceptions and a less than stellar shopping experience are going to lead to the demise of Big Lots.
Put a fork in it.
Some will undoubtedly argue that this is a Hail Mary approach for Big Lots. Despite their ongoing financial and operational challenges, I’m more optimistic about their integration of the Hearthsong inventory into their stores.
It could create a differentiator and draw for consumers in a category that has had its rise and fall and rise again. If (and that’s a relatively big “if”) Big Lots can execute this well and put a spotlight on value, promote the category well, and merchandise it in a compelling manner, there is a possibility that shoppers will be reintroduced to the retailer and set the stage for recovery.
This one offering isn’t going to correct consumer perceptions that Big Lots is missing the mark on extreme value. Righting that perception is a far bigger issue to address.
In my opinion, the immediate issue is- how do I communicate that I have this exclusive line in my stores? There are other issues like what do I want to be to the customer base among other internal issues it is trying to solve. You never want to be in the race to the bottom – there are seldom any true winner in the group.