Source: Seeking Alpha
Big Lots, Inc. (NYSE:BIG)
Q2 2014 Earnings Conference Call
August 29, 2014 8:00 AM ET
Andy Regrut – Director, IR
David Campisi – President and CEO
Tim Johnson – EVP and CFO
Brad Thomas – KeyBanc Capital Markets
Peter Keith – Piper Jaffray
Paul Trussell – Deutsche Bank
Matthew Boss – JPMorgan
Patrick McKeever – MKM Partners
Meredith Adler – Barclays Capital
Joe Feldman – Telsey Advisory Group
David Mann – Johnson Rice
Jeff Stein – Northcoast Research
Dan Wewer – Raymond James
Ladies and gentlemen, welcome to the Big Lots Second Quarter 2014 Teleconference. This call is being recorded. During this session all lines will be muted until the question-and-answer portion of the call. (Operator Instructions) At this time, I would like to introduce today’s first speaker, Andy Regrut, Director of Investor Relations.
Andy Regrut – Director, IR
Thanks, Laurie and thank you everyone, for joining us for our second quarter conference call. With me here today in Columbus are David Campisi, our CEO and President and Tim Johnson, Executive Vice President, Chief Financial Officer.
Before we get started, I’d like to remind you that any forward-looking statements we make on today’s call involve risks and uncertainties and are subject to our Safe Harbor Provisions as stated in our press release and our SEC filings, and that actual results can differ materially from those described in our forward-looking statements.
All commentary today is focused on adjusted non-GAAP results from continuing operations. Reconciliations of GAAP to non-GAAP adjusted earnings are available in today’s press release. This morning, David, will start the call with a few opening comments, TJ, will review the financial highlights for the quarter and update the outlook for 2014 and David will complete our prepared remarks before taking your questions.
So, with that, I’ll now turn it over to David.
David Campisi – President and CEO
Thanks, Andy and good morning, everyone. I am very pleased with the results we reported this morning. 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.