Big Lots’ (BIG) CEO David Campisi on Q2 2014 Results – Earnings Call Transcript

For the second quarter or the second consecutive quarter our comps were positive and well within the guidance range we provided. And our earnings were above the high-end of our range. From a merchandising perspective five of our seven merchandise categories comped positive in the quarter, only two categories were down to last year, both of them were edits to amplify categories where we have downsized or exited classifications of the business.

Trends in our food business remained very strong comping high single-digits. Trey and his team have done a great job improving the consistency and breath of our offerings. We’ve improved our in store signage to make it easier for Jennifer to find all the items on her list while also providing an easy way for her to determine which of our favorite brands are never out and we always be in our stores. We are also pleased with the progress of rolling out our coolers and freezers. We’re on pace to complete this year’s roll out to approximately 600 stores. This will have us somewhere in the neighborhood of 725 stores with coolers and freezers by the all important holiday in fourth quarter selling season.

Next is consumables, the team did a great job and the category was up mid single -digits with consistent growth in HPC, home organization, chemicals, paper, pet and housekeeping, actually very similar to Q1 results. And we love consistency at Big. Another solid performance both in never out and close out products. Soft home comps were up high single digits driven by broad based strength across betting, textiles, flooring and bath. Martha and her team have done a tremendous job improving our fashion sense and executing a discipline of quality brand, fashion and value or QBFV.

We’re still very early in the evolution of this category which is why I’m so excited about the prospects. For the second quarter soft home was a leading performer for us and back-to-school which delivered in late July has provided quality with a pop of color that Jennifer has responded to very, very positively. Furniture was also up high single-digits, the strength across most departments including our upholstery, case goods, ready-to-assemble and mattresses. The business benefitted from a roll out of furniture financing which was completed in 1,300 stores at the end of June.

Second was seasonal was up low single-digits it’s not as surprised we’re not the first to say it but weather certainly wasn’t our friend in the spring. And yet despite these challenges the team put up a positive comp and we exceeded in Q2 with spring seasonal and inventory levels down nearly double-digits. And finally, electronics and hard home as we expected both of this were down mid to high-teens. Remember these categories had a majority of the added to amplify clearance activity we began back in Q4 of last year. Even though we did love the product in these categories a year ago we still had to offset or replace sales from these edits and exits.

So with that, I’m now going to turn the call over to TJ for more insight and detail on the quarter.

Tim Johnson – EVP and CFO

Thanks David and good morning everyone. Net sales for continuing operations for the second quarter of fiscal 2014 were 1.195 billion, an increase of 1.2% over the 1.181 billion we reported last year. Comparable store sales for the stores opened at least 15 months increased 1.7% which compares to our guidance range of plus 1% to plus 3%. Income from continuing operations was $17.2 million or $0.31 per diluted share, which was slightly above the high-end of our guidance, which called for $0.24 to $0.30 per diluted share. This result compares to the last year’s adjusted income from continuing U.S. operations of 21.5 million or $0.37 per diluted share.

For Q2 the operating profit rate for continuing operations was 2.3% compared to last year’s adjusted rate for continuing U.S. operations of 3%. The decline in rate was in line to slightly better than our expectations and resulted from flat gross margin rate and expense deleverage. Our gross margin rate for the quarter was 39.3%, which equaled last year’s Q2 rate. Total expense dollars were 442 million and the expense rate of 36.9% was up 60 basis points to last year.

The expense deleverage came from our investment in people, higher depreciation expense and higher bonus expense as the business outperformed our internal plans in the second quarter. Interest expense was slightly less than last year and the second quarter tax rate was 37.3% compared to last year’s adjusted rate of 38.7%.

During the second quarter we opened 4 new stores and closed 7, leaving us with 1,493 stores and total selling square footage of 32.8 million. Income from discontinued operations for the second quarter of fiscal 2014 was 2.7 million or $0.05 per diluted share compared to our guidance which calls for an immaterial net loss. The income was a result of tax benefits that were generated with the wind down of our Canadian operations.

Moving on the balance sheet, inventory ended the second quarter of fiscal 2014 at 799 million, compared to 914 million last year. The reduction in inventory was driven by a 6% decrease in inventory per store and our U.S. stores, a lower U.S. store count, and the strategic decisions to close our business in Canada and liquidate our wholesale operation. We ended the second quarter with 62 million of cash and cash equivalents and 57 million of borrowings under our credit facility. This compared to 64 million of cash and cash equivalents and 142 million of borrowings under our credit facility last year.

Our use of cash generated by our U.S. operations in the last 12 months was focused on returning cash to shareholders through both repurchase and dividends lowering our overall debt levels and funding closing activity of our former Canadian operations. As we announced at our inventory conference in June, our Board of Directors initiated a cash dividend program on June 25th. Yesterday as part of the program, the Board declared a quarterly dividend of $0.17 per common share payable on September 26th to shareholders of record as of the close of business on September 12th.

Additionally during Q2, you may remember we completed our March 2014 share repurchase program. For that program in total, we invested $125 million to repurchase 3.3 million shares at an average price of $38.12 or nearly 20% below yesterday’s closing price of approximately $47 or $48 per share. Also as noted in today’s press release, our Board of Directors approved a new share repurchase program providing for the repurchase of up to $125 million of our common stock.

Now turning to guidance, as many of you know Q3 is somewhat of a transitional quarter for Big Lots and many retailers as we incur costs and set up for holiday ahead of a spike in sales in Q4 for the November-December timeframe. For Q3, we are forecasting results from continuing U.S. operations to be in the range of a loss of $0.04 to $0.10 per diluted share compared to an adjusted loss from continuing operations of $0.07 per share in the third quarter of fiscal 2013.

It’s important to note this guidance reflects a sequential EPS improvement to last year from Q2. In fact, Q1 was down $0.20 below LY, Q2 $0.06 below LY and now what we are saying with our Q3 guidance we’re forecasted to be only slightly below or potentially even beat LY. This trajectory is consistent with our internal plans and our communicated expectations since the beginning of the year. This estimate is based on comparable store sales in the low single-digit, a slightly lower gross margin rate and SG&A expenses as a percent of sales slightly lower than last year. The slight reduction in the gross margin rate is a function of merchandised mix, particularly giving our expectations of a double-digit comp in food and the planned negative comps and seasonal are one of our higher margin categories.

We planned fall seasonal in Q3 below LY particularly in Halloween and early Christmas based on the last several years of a later selling season. The potential for slight expense leverage in the model demonstrates solidifying of the model and a low leverage point taking hold. For Q4, we’re forecasting income from continuing operations to be in the range of $1.70 to $1.76 per diluted share, compared to adjusted income from continuing U.S. operations of $1.45 per diluted share in the fourth quarter of fiscal 2013. This forecast assumes comps in the low single-digit range and significantly higher gross margin rate and expenses as a percent of sales slightly higher than last year.

The improvement in the gross margin rate anticipates fewer markdowns this year as we anniversary the impact of the edits and exits in last year’s Q4 results. Expenses as a percent of sales are expected to increase slightly in this model driven by potential bonus payouts this year compared to virtually no payouts in the prior year. Our updated outlook for the full year of fiscal 2014 calls for income from continuing operations to be in the range of $2.40 to $2.50 per diluted share, this compares to our previous guidance of $2.35 to $2.50 per diluted share to fiscal 2013 adjusted income from continuing operations of $2.45 per diluted share. Our updated guidance is based on a total sales increase of 1% to 2% and comparable store sales up 1% to 2%.

Based on what we know today, we expect CapEx in the range of 100 million to 105 million and have lowered our depreciation estimates to be in the range of 118 million to 120 million. We now estimate opening 24 new stores in fiscal ’14 and closing in the range of 60 to 65 stores. This compares to prior guidance of 30 new and 50 closings. We expect this level of financial performance would generate approximately $250 million of cash flow from U.S. continuing operations or $80 million above our prior estimate. This increase is principally due to lower inventory and lower cash tax payments due to the recognition of certain U.S. tax implications related to the wind down of our Canadian operations.

The merchant and planning teams or BPARM teams as we call then have managed inventory very well and made progress sooner than we would have planned correspondingly we now expect inventory turns of approximately 3.5 times and to end fiscal ’14 with inventory levels well below LY.

So with that I’ll turn the call back over to David.

David Campisi – President and CEO

Thanks TJ. Before we take your questions this morning I want to share a few closing thoughts. In Q2, we continue to make transformative changes to our company and in the quarter we had a number of significant accomplishments that are worth highlighting. First, we successfully completed the sell through of the edits and exits that were part of our edit to amplify merchandising strategy. The sell through was completed as planned in both terms of timing and the financial impact. With this activity behind us, we’re now focusing intensely on our assortment planning for the amplification of our categories. We continue to rollout coolers and freezers. We now have them in approximately 650 stores and remaining on track to be SNAP and EBT eligible for approximately 725 stores by October 1st.

We completed the rollout of furniture financing ahead of schedule to 1,300 stores across the country. The program continues to deliver incremental sales of 9% to 10% in furniture and has been expanded beyond just the furniture category to higher ticket items in seasonal and hard home. And with the completed rollout we are now able to use broader, more national channels of advertising to raise customer awareness. We delivered excess cash to shareholders by completing the March 2014 share repurchase authorization and announcing a quarterly dividend program, the first in our company’s history and paid our Q2 dividend into the end of July. We hosted our first investor conference in over a decade. It was here in Columbus and it included an opportunity for you to meet and interact with many members of the Big Lot team.

We also walked our Polaris store which has a merchandise layout that is more representative of where we want to be in the future. In short, we did what we said we were going to do and more and delivered results. Based on this list and I assure you there are many more accomplishments that I did not mention it is clearly not business as usual here at Big Lots. None of this could have happened and been achieved without the complete team effort and a working cross functional team. I could not be any more proud of this team and their commitment to Jennifer we are one team with one goal and Mike and his team and Human Resources have done a wonderful job making sure we are focused on our single biggest asset our people.

I want to thank all of our associates in the field and in the distribution centers and in our corporate office for their hard work, dedication, willingness to change and uncompromising drive for improvement. As I look forward to Q3 and beyond, we continue to focus on Jennifer and one is most important to here when shopping at Big Lots. The improvements in our product assortments that you can see today in our stores for back to school and our recent food expansion are real time examples of how we are staying relevant and top of mind with here. And I believe she will notice a difference in our holiday offerings and Christmas Trim, soft home and giftable products across the store.

I have been working along with Rich and the merchant teams on our holiday plans, and I think the preparations this year are better than ever. The components of quality, brand, fashion and value are evident across the store. From a marketing perspective Andy and his team have new holiday strategies for the 360 consumer engagement ranging from print to digital and TV to our relatively new entry into social media. And I believe our advertising plans have never been better, so what lies ahead of us store execution. Lisa described it at our conference in June as revolutionary for the stores. We have a new focus on Jennifer shopping experience and the team is early in the process of implementing our standards that will help us deliver on our vision of providing an outstanding shopping experience for Jennifer.

The Christmas holiday is critical to our success and we know we have teams in our stores and the distribution centers that we can count on to deliver a great holiday. My final closing thought for the day is in regards to our strategic planning process. And specifically this cross-functional team involvement that was described at the investor conference. Our KRA involve well over 100 people who in addition to their day jobs remain laser focused on the longer term strategies and process improvements embedded in the plan. We know where we want to be this quarter, next quarter, next year and the year after that. And these team are ensuring we stay on pace towards reaching our goals. We have covered a lot of ground over the last 16 months. We’re truly at the beginning of the beginning.

Andy Regrut – Director, IR

Laurie, we would now like to open the lines for question at this time.

Question–and–Answer Session

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