To make room in the portfolio for Tilly’s, I decided to sell off my position in Big Lots.
Looking For The Survivors
The modern economy has never dealt with a complete and total shutdown like we are seeing now. Parking lots are vacant. City streets normally crammed with rush hour traffic are deserted. Layoffs have started and the unemployment rate could be set to explode higher.
Looking through the portfolio, I’ve been having to look at my companies in a whole new light. Who is best equipped to survive this crisis? Who has the financial strength or the business model to best wait out a severe drop in economic activity? Valuations are better than they’ve been in years but to reap the benefits of that, these companies have to make it through to the other side.
Given Tilly’s balance sheet strength, I’m hoping it will be one of the survivors. But the purchase of Tilly’s gave me room to get rid of something that looked like it might be on shakier ground. After much internal debate, I chose Big Lots. Partly because I like the symmetry of replacing one retailer with another, but more because I’ve been concerned about how long Big Lots could weather a severe drop in customer traffic. Like many retailers, they have high fixed costs. And while their debt is reasonably modest, certainly compared to many companies out there, they nonetheless do have existing debt that needs to be serviced and may limit their ability to take on more.
I was very reluctant to make this sale, but I’m erring on the side of caution these days. If Big Lots makes it through the next 2 months relatively unscathed then I hope I might have the chance to add it back into the portfolio. The price is very attractive and if the after-effects of this crisis drag on for a year or two, Big Lots could benefit from consumers moving down market.
But first they have to get through the next 6-8 weeks. I’ll be staying tuned.
Full Disclosure: I do not own shares in Big Lots.