This is a summary of the second quarter fiscal 2008 earnings call conducted by Big Lots, Inc. (BIG) on August 26, 2008.
Management:
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Chairman and CEO: Steve Fishman
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Senior VP and CFO: Joe Cooper
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Senior VP, Legal & Real Estate and General Council: Chuck Haubiel
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VP of Strategic Planning and IR: Tim Johnson
Key Investor Issues:
- In the second quarter, profit rose 11% to $26 million, or 32 cents per share, from $23.4 million, or 22 cents per share, a year earlier.
- Retail sales increased 1.9% to $1.1 billion in the quarter, helped by stronger demand for food, seasonal goods and furniture.
- Big Lots expects third-quarter EPS from continuing operations of 15 cents to 19 cents, and fourth-quarter EPS of $1.02 to $1.09 a share.
- The retailer expects third-quarter and fourth-quarter same-store sales to rise between 1% and 2%.
Second Quarter Highlights:
Second quarter EPS of $0.32 was a record for this business and represents the seventh consecutive quarter of record EPS results. The team generated record productivity of a 2% increase in sales at record sales per foot, a 3% increase in gross margin dollars at record gross margin dollars per foot. All of that on less than a 1% increase in total expenses. When all is added up it’s a 30% increase in operating profits.
Sales for the second quarter were $1.105 billion compared to $1.085 billion for the second quarter last year.
- Comparable store sales increased 2.8% against a 5.2% comp increase last year driven by an increase in the value of the average basket as a result of the ‘raise the ring’ strategy.
- Second quarter gross margin rate of 39.3% was 50 basis points higher than last years rate of 38.8%. The improvement was principally due to improve initial markup as the company experienced a better buying environment for closeouts than a year ago and its global sourcing efforts have had a positive impact on imported merchandise as well.
From an expense perspective total dollars increased slightly less than 1% and the second quarter rate was 30 basis points lower than last year.
Leverage for the quarter was achieved through improved operational efficiencies and store payroll and distribution and transportation. Depreciation expense was $1 million lower than a year ago, with these efficiencies partially offset by higher utilities.
Additionally, higher bonus and stock compensation expense this year were essentially offset by the amortization of a gain on the early termination buyout of one of the company’s stores. In total the 2.8% comp improved gross margin rate and SG&A leverage, drove second quarter 2008 operating profit dollars to $43.5 million versus $33.4 million last year, an increase of 30% for the quarter.
Second quarter operating profit rate at 3.9% of sales was up 80 basis points compared to an operating profit rate of 3.1% of sales last year.
Net interest expense was $1.1 million for the quarter compared to net interest income of $1.5 million last year. This change is directly related to the repurchase of $750 million of company stock during March 2007 through February 2008.
Tax rate for the second quarter fiscal 2008 was 38.3% compared to 36.6% last year.
For the second quarter fiscal 2008 the company reported income from continuing operations of $26.1 million or $0.32 per diluted share compared to income from continuing operations of $22.1 million or $0.21 per diluted share a year ago.
Second quarter result of $0.32 per share was above the high end of guidance which called for earnings of $0.21 to $0.25 per share.
The second quarter sales comp of 2.8% compared to the guidance of 1% to 2% comp accounted for approximately $0.02 of favorability. The next source of favorability came from a 50 basis point improvement in the gross margin rate which exceeded expectations. Continued improvement in IMU better than forecast freight costs and lower markdowns particularly in seasonal were more than enough to offset some mix pressure. The better than expected gross margin rate resulted in approximately $0.04 of the favorability to the company’s prior guidance.
Expense management was very disciplined during the quarter.
The company experienced a very low level of flex on expenses associated with its upside sales, this accounted for the other $0.01.
Total inventory ended the quarter at $698 million that’s down $15 million or 2% compared to last year.
