Big Lots, Inc. (BIG)
Q1 2009 Earnings Call Transcript
May 28, 2009 8:00 a.m. ET

Executives

Tim Johnson - Vice President of Strategic Planning and Investor Relations
Steve Fishman - Chairman and Chief Executive Officer
Joe Cooper - Senior Vice President and Chief Financial Officer
Chuck Haubiel - Senior Vice President, Real Estate, Legal and General Counsel

Analysts

Jeff Stein – Keybanc Capital Markets
David Mann – Johnson Rice & Co
Peter Keith for Mitchell Kaiser – Piper Jaffray
Ivy Jack – Barclays Capital
John Zolidis – Buckingham Research Group
Patrick McKeever – MKM Partners
Laura Champine – Cowen & Company
Charles Grom – JP Morgan

Presentation

Operator

Gentlemen welcome to the Big Lots First Quarter 2009 conference call. At this time, I would like to introduce today’s first speaker, Vice President of Strategic Planning and Investor Relations, Tim Johnson.

Tim Johnson – Vice President of Investor Relations

Thanks Lashanda (ph) and thank you everyone for joining us for our first quarter conference call. With me here in Columbus today are Steve Fishman, our Chairman and CEO, Joe Cooper, Senior Vice President and Chief Financial Officer and Chuck Haubiel, Senior Vice President, Real Estate, Legal and General Counsel. 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. As discussed in detail in this morning’s press release, our results include discontinued operations activity. Since we do not view discontinued operations as relevant to the ongoing operations of the business, the balance of our prepared comments will be based on results from continuing operations. Given our annual shareholder meeting begins at 9:00am, our comments this morning will be brief to allow for Q&A to be completed by 8:45.

With that I’d like to turn it over to Steve.

Steve Fishman – Chief Executive Officer

Thanks T.J and good morning everyone. During Q1 we remained focused on our own execution and the strategy and what was within our control. We offered the customer tremendous value, new brands, and better quality which helped our top line sales to come in a little bit better than our guidance. From a merchandising perspective, consumables, hard lines and furniture led the way and posted positive comps for the quarter. Our seasonal business was encouraging in March and April. After shopping our stores and the competition during the first quarter I continue to believe that the quality and value relationship of our seasonal offering is very compelling and the assortments get better and better each season. Our home business is still not great but some parts are starting to post positive results, namely food preparation and stationery. Again it’s all about the deal, the quality and the value. I’m confident our assortment will improve as we move through the year but parts of our home business cannot get there fast enough for me right now.

During the quarter we managed our inventory diligently, allocating more dollars to categories that were winning, and reducing dollars in categories that were softer or where deals were not compelling. Our margins were good despite some mix pressure. Our IMU remains healthy and we’re taking markdowns to move inventory and bring in freshness behind it. We controlled our costs and expense dollars were below last year levels. Our expense rate as a percent of sales was flat which we consider to be good performance given our slightly negative sales comp for the quarter. And we expanded our operating profit rate and generated significant amounts of cash.

As positive as our financial performance for the quarter may be one of the biggest accomplishments for the business was the execution of our new bank deal. To successfully negotiate a three year deal, unsecured, with similar covenants and at the same $500 million size as our prior facility in this banking environment we believe was a big win for the business and positions us with plenty of dry powder to execute our strategies well into the future. Incidentally we’ve been in dialogue with S&P and I’m pleased to say that last week they reaffirmed our investment grade corporate credit rating and actually upgraded their outlook from stable to positive.

In terms of the second quarter, I believe our assortments are well positioned. We’ve distorted inventory dollars to consumables, electronics, and seasonal. The deal flow in electronics continues to be good and we also introduced TracFones and accessories to our stores at the end of the first quarter. As I mentioned, I truly believe our seasonal assortment is top notch and if the customer is in the mindset to buy this category we’ll be ready for the business. We did receive another shot of furniture closeout that was a key contributor to our Q1 results and our next home event is in the stores in time to anniversary last year’s Jennifer Farrell event. Having said that, our inventories at the end of the quarter were below last year in both furniture and home. Joe.

Joe Cooper – Chief Financial Officer

Thanks Steve and good morning everyone. Sales for the first quarter were $1.142 billion compared to $1.152 billion for the first quarter of last year and comparable store sales declined 0.5%. Q1 sales comps remain very consistent across the income demographics of our store base and we’re also fairly consistent on a regional basis with the exception of the Southeastern Region which continued to trail the company average. The key financial metric we watch to evaluate our performance is operating profit and for Q1 both the operating profit rate and dollars were above LY. Our Q1 operating profit rate increased 20 basis points to 5.3% of sales and operating profit dollars increased $2.1 million or 4% despite the lower sales I mentioned earlier. Walking down the P&L our Q1 gross margin rate of 40.5% was 20 basis points above last year’s rate of 40.3%. The increase to last year was due to higher IMU and lower freight costs due to transportation initiatives and lower fuel prices. These improvements were partially offset by merchandising pressure due to out performance of certain lower margin categories namely consumables and hard lines.

Total SG&A dollars were $401.9 million or down 1% to last year. The first quarter SG&A rate of 35.2% was flat to last year on a slightly negative sales comp. We continue to experience significant leverage from our distribution and transportation initiatives and the store operations team did a nice job managing payroll and leveraged on a slightly negative comp. Offsetting these areas was de-leverage created by higher bonus expense given our record quarter, rent, and higher new store pre-opening expenses and higher insurance and equity related costs.

Net interest expense was $0.3 million for the quarter compared to $1.4 million last year, with the $1.1 million improvement a direct result of the cash generated by the business over the last 12 months. Our tax rate for the first quarter of fiscal 2009 was 39.5% compared to 39.2% last year. When you add it all up, for the first quarter of fiscal 2009 we reported income from continuing operations of $36.3 million or $0.44 per diluted share compared to income from continuing operations of $34.5 million or $0.42 per diluted share a year ago. Our result of $0.44 per share was better than our guidance which called for earnings of $0.34 to $0.40 per share. The favorability to our guidance related to up-siding gross margin dollars as $0.03 of favorability related to better than expected sales and $0.03 was the result of a better gross margin rate than was originally anticipated. And particularly on the gross margin rate favorability we were very pleased with our final physical inventory result which saw our shrink rate actually decline year over year.