Big Lots, Inc. (BIG)
Q4 2008 Earnings Call Transcript
March 4, 2009 8:00 a.m. ET

Executives

Tim Johnson – VP, Strategic Planning & Investor Relations
Steve Fishman – Chairman, President and Chief Executive Officer
Joe Cooper – Senior VP & Chief Financial Officer
Chuck Haubiel – Senior VP, Legal & Real Estate, General Counsel and Secretary

Analysts

Jeffrey Stein – Stein Research
David Mann – Johnson Rice & Co
Paul Trussell – JP Morgan
Peter Keith – Piper Jaffray
Joseph Feldmen – Tesley Advisory Group
John Zolidis – Buckingham Research Group
Patrick McKeever – MKM Partners
Ronald Bookbinder – Global Hunter Securities
Stacy Widlitz – Pali Capital
Ivy Jack [ph]

Presentation

Operator

Ladies and gentlemen, welcome to the Big Lots fourth quarter 2008 teleconference. (Operator instructions) During this session all lines will be muted until the question-and-answer portion of the call. If you need audios then please press “*0” and an operator will assist you. 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, Lashonda (ph) and thank you everyone for joining us for our fourth 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 2008 results include discontinued operations. Our 2007 results include discontinued operations as well as items including and continuing operations that are not directly related to the company''s ongoing operations. Therefore, we have provided supplement on non-GAAP fourth quarter and full year financial statements for fiscal 2007 that exclude these items.

A presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation between the GAAP financial measures and the non-GAAP financial measures are also included in our press release from this morning which is posted on our website at www.biglots.com. We believe that these non-GAAP financial measures should facilitate analysis by investors and others who follow our financial performance. The discontinued operations activity in the fourth quarter and full year fiscal 2008 results reflect these indemnification obligations related to KB Toys, a former division of the company.

In the fourth quarter fiscal 2008, we reported a loss from discontinued operations of $3 million compared to income from discontinued operations of $6.4 million in the fourth quarter of fiscal year 2007. The loss from discontinued operations for the fourth quarter of 2008 of $3 million net of tax relates to 31 KB store leases, where we believe we may have liability as a result of KB again filing for bankruptcy protection in December 2008. The income from discontinued operations for the fourth quarter of fiscal 2007 is principally comprised of $5.3 million net of tax due to the release of KB bankruptcy related indemnification reserves and a KB bankruptcy trust settlement of $1.1 million net of tax, each of which were related to KB''s 2004 bankruptcy filings. The items excluded from continuing operations in the supplemental non-GAAP disclosures represent net income of $3.1 million or $0.04 per diluted share for the fourth quarter of fiscal 2007 and net income of $6.1 million or $0.06 per diluted share for the full year fiscal 2007. The nature of these non-recurring items is detailed in our press release.

So, since we do not view discontinued operations or non-recurring KB and hurricane proceeds as relevant to ongoing operations to the business, the balance of our prepared comments this morning will be based on results of continuing operations for 2008 and related to continuing operations on a non-GAAP basis as adjusted in the supplemental schedules when we refer to or compare to 2007 results.

With that, I would like to turn it over to Steve.

Steve Fishman – Chief Executive Officer

Thanks, T.J and good morning everyone. Since launching our win strategy in late 2005, we''ve accomplished what we set out to achieve and more. We''ve taken a business that was marginally profitable to new heights with record income and record EPS performance. We''ve executed improved merchandise offerings, better brands and values, a leaner and more productive real estate portfolio and today, we are more efficient operator with a lower overall cost structure, both in dollars and as a percent of sales. I couldn''t be any more proud of this organization and all that''s been accomplished to position our business alongside some of the more successful retailers in the marketplace. Like most businesses, the global economic crisis over the last several months kept us from performing as well as we could have in 2008.

However, we''ve always believed that if we improved on merchandise offerings, made good real estate decisions and relentlessly attacked our cost structure, good things could happen for our business. Pure and simple we remain focused on our strategy and what was within our control. We offer the customer tremendous value, new brands and better quality. We managed our inventory wisely, and generated record turnover. We controlled our cost to the lowest expense rate in our history. We opened 21 new stores. We invested for the future of the business by completing our point-of-sale register system rollout, and we began the process of designing and installing a new core IT infrastructure through SAP. Bottom line, 2008 was a record year for operating profit dollars and EPS.

Speaking briefly to Q4, our sales comps were down in the 3% range which was right in the middle of our guidance. This was a continuation of the trends we first experienced in the latter part of September and October. Consistently across discount retail, you are hearing that the customer is focused on need-based product right now and is holding off until the last possible moment on bigger discretionary purchases. We are experiencing that in our business as well. For Q4, consumables in hard lines, particularly electronics, were the best performers. Consumables, which is roughly 30% of our business has been our most steady category and comped up mid single digits in Q4 and for the year, need-based product, great branded closeouts and unbelievable value. Electronics is not necessarily need-based, but is an area where customers are still spending money. The environment for deals in electronics is better than I''ve seen in my time here at Big Lots and we see these opportunities continuing as we head into the New Year.

On the flip side, in the more discretionary categories like seasonal, home, toys and even furniture in Q4, business was much more challenged. When I evaluate our merchant performance, I look at category level performance. Did we execute against the strategy? Are we offering better quality and better value than last year, or last quarter? How are we performing relative to the competition? My assessment on Q4 is that our merchants did execute fairly well. Better in some areas than others, but overall, we offered better quality and better value than this time a year ago. In fact, when you look at comps by merchandise category, you''ll find that our results were every bit as good if not better than our competitive set. If you look only at total comps and do not understand the categories, you''re missing this very key element. This is important to understand for comparative purposes because if you look at other retailers, who have anywhere between 45% and 65% of their mix in consumables and then compare their total comp to ours, is like apples and oranges in this environment.

Our merchants manage inventories effectively by shifting receipts from slower moving categories to winning categories or to fund special deals. I feel very good about our inventory levels and content, as we begin this spring season. Now, Joe will give you some of the financial details and I''ll be back to talk about ''09 and provide some commentary on longer-term opportunities.