Big Lots, Inc.
Q4 2021 Earnings Call Transcript

Published: 3 Mar 2022

[Operator:]

Ladies and gentlemen, good morning and welcome to Big Lots fourth quarter conference call. Currently, all lines are in listen-only mode. A question and answer session will follow the prepared remarks. If you require operator assistance, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. On the call today are Jonathan Ramsden, Executive Vice President, Chief Financial and Administrative Officer, and Jack Pestello, Executive Vice President and Chief Merchandising Officer. Before we start today’s call, the company would like to remind you that any forward-looking statements made on the call involve risks and uncertainties that are subject to the company’s Safe Harbor provisions as stated in the company’s press release and SEC filings, and that actual results can differ materially from those described in the forward-looking statements. The company would like to also point out that where applicable, commentary today is focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP adjusted results are available in today’s press release. The company’s fourth quarter earnings release and related financial information are available at biglots.com/corporate/investors. Also available on the website is the previously released January investor presentation highlighting key themes from this call. I will now turn the call over to Jonathan Ramsden, Executive Vice President, Chief Financial and Administrative Officer of Big Lots. Mr. Ramsden, please go ahead.

[Jonathan Ramsden:]

Thank you and good morning everyone. Unfortunately Bruce Thorn is not able to join the call this morning due to an urgent medical situation involving one of his parents. Our thoughts are with Bruce and his family. I’m going to read Bruce’s prepared remarks this morning and then continue with my own commentary on our financial performance. After the prepared remarks, Jack Pestello, our Chief Merchandising Officer will join me for the question and answer session. The following are Bruce’s prepared comments. I’m glad you are joining us for this morning’s call as we have a lot of exciting ground to cover. Today, I want to focus on updating you on the forward-looking opportunities that we more fulsomely introduced last quarter and discuss the excellent progress that we are making. As you know, we are fully committed to delivering tremendous shareholder value through operational staff. Our confidence continues to strengthen in our strategy, our long runway for profitable growth, and our ability to generate consistent strong cash flow and shareholder returns. All of this leverages our clear positioning as a home discount retailer, our unique assortment, rapidly developing omnichannel capabilities, and growing base of loyal customers. Perhaps most importantly, we know that value never goes out of style. The path to grow the top line of our business by several billion dollars over the coming years is clear and is driven by three key pillars

[Operator:]

Our first question today is coming from the line of Greg Badishkanian with Wolfe Research. Please proceed with your questions.

[Spencer Hanus:]

Good morning, this is Spencer Hanus on for Greg. Can you just talk about the improved sales momentum in February following the mixed results in January and how that’s impacted your inventory planning for the year, as well as just overall thoughts on the underlying demand from your consumer?

[Jonathan Ramsden:]

Good morning Spencer. I’ll be happy to jump in on that, and maybe Jack may want to add a couple comments. As we called out, we’ve seen an improvement in February. I think at this point, probably the way to look at it is on a two-year comp, so as we called out in the fourth quarter, two-year comps ran pretty strongly in November and December, then went negative in January. For February on a two-year comp basis, we were ahead of the Q4 trend, so certainly a significant recovery from the negative fall we had in January on a two-year comp basis. We’re encouraged by that, and that, by the way, is despite the fact that tax refunds have been a little bit slow and the fact that we’re still getting some of our seasonal inventory in particular processed through the supply chain, so we feel good about the start of the first quarter in that context. In terms of our full year inventory planning, we are going to be--we’re planning to be relatively heavier on seasonal and furniture. A lot of that inventory has a long shelf life and we want to make sure we have the inventory to sell. We’re seeing great traction on Broyhill, we’re seeing great traction on seasonal, and again we want to make sure we have the inventory. There was also a component playing into that, of course, of average unit costs being significantly higher, which is taking our inventory levels up to some degree, but overall as we think about inventory, we’re planning higher in furniture and seasonal, adjusting for those impacts. Most of our other categories, the lead time to react is significantly shorter so we have more flexibility there, but obviously we’re watching the trends very closely. We meet on a regular basis internally to plan that out and we feel we have the appropriate level of flexibility in those plans going forward to deal with a range of different sales scenarios. Anything to add, Jack?

[Jack Pestello:]

No, I think you answered it well, Jonathan. I guess yes, I would add one piece, that part of the inventory planning is also just getting back in stock, and as you mentioned, Broyhill, Real Living getting back in stock and then catching up with the seasonal inventory that has been delayed, really have both been good adds to the February sales.

[Spencer Hanus:]

Got it, that’s helpful. Then how much of the 1Q SG&A dollar growth is driven by structural changes in costs or just some of these more transitory issues like freight, and then you called out the 50 basis point headwind in gross margins in 1Q but flat for the year, so what drives the improvement as you move through 2022? Is it just eliminating some of this shrink that you guys have seen?

[Jonathan Ramsden:]

Yes, certainly on your last point, Spencer, we now have to accrue at the higher rate that we saw at the end of Q4 until--you know, our next round of physical inventories demonstrated that we brought it down, and we’re obviously--we don’t want to wait all the way until January of next year to learn that, so we’re going to be implementing some steps along the way to be able to get a better read on that, and that should enable us hopefully to bring the accrual rate down as we go through the year, but that in Q1 will be accruing at the higher rate. Then I guess other than that, there were some mix impacts in there that play out over the course of the year. From a freight standpoint, we don’t--it certainly got worse from what we thought in December. We think we have that pretty well baked in now for the full year, but it’s really then just more about the quarterly cadence and what we’re up against year over year. But all those effects are baked in, including much higher freight to what we’re seeing and the shrink rate cadence we expect to see over the course of the year.

[Spencer Hanus:]

Great, thank you, and sending our best to Bruce and his family.

[Jonathan Ramsden:]

Thank you Spencer.

[Operator:]

Thank you. Our next question is from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your questions.

[Joe Feldman:]

Hey guys, good morning, and thanks for taking the question. Wanted to ask you about the inventory again and the shrink situation. Can you explain again what happened? I guess I’m wondering how it got out of whack, and if I heard you guys correctly, it sounded like you’re implementing maybe a new inventory system to monitor the inventory better. Just had a few more questions about what happened, like why apparel was heavy, why was the west coast more of a problem, all those kinds of things. Thanks, Jonathan.

[Jonathan Ramsden:]

Yes Joe, let me try to break that down a bit. Our annual physical inventory cycle starts in January and runs through the summer, and then there’s kind of a pause before we start the next year’s cycle, although we did do some inventory work in as late as September and it didn’t really demonstrate the significant spike we saw when we started to take our full annual physical inventories in January. The things that we think are at play, clearly in California there’s a major crime epidemic going on. Enforcement of penalties with shoplifting have been largely abandoned there, and certainly you’ve heard of other retailers essentially even closing stores because they can’t operate them viably, so we saw California spike pretty significantly, and relative to what we were seeing as late as June or July in our last round of physical inventories, there was a significant step-up there. Obviously as AURs have gone up, the value of what’s being stolen has also gone up with that, and there’s also a mix component in there. We saw a very high shrink rate in apparel, particularly among more expensive items, and that’s one of the things that we’re already well on our way to addressing. We would have addressed it earlier but it took us a while to get all the needle tags through, given the well documented supply chain constraints that even affected things like that, but this is now or will very soon be completed, so we’ll have needle tagging on all of our apparel items. Then we saw lots of instances of these push-outs, where people just come into stores and with impunity attempt to walk out of the store with stolen merchandise. We’ve rolled out wheel locking system at a number of stores, which essentially prevents the carts from being pushed out, and we’re going to be accelerating that now in light of what we’re seeing. We’re also doubling down on retraining our store teams to mitigate shrink and modifying how we incent our store level and asset protection field teams in terms of managing shrink, so we think we’ve got a strong battery of things we’re doing to respond to it, but the underlying causes would be general across retail increases in shrink and well documented crime issues, particularly in California but also some issues that are a little more specific to us in terms of our product mix evolution, including towards apparel, and then we did have an issue which we think contributed a little bit related to a point of sale issue that got fixed in--that we’ve now fixed, that probably contributed to some of the shrink in Q4. We feel good about all the things we’re doing, but it’s a combination of, I would say, external factors and some things that are more specific to us, but either way we’re confident we’re going to be able to address them going forward.

[Joe Feldman:]

Got it, that’s helpful, thank you. Yes, at first I thought you said there was a system issue, but no, it sounds like it’s much more external than that. The other follow-up question, I know you said that freight and supply chain pressure may be a little bit worse than you’ve taken into account at this point. How should we think about it as the balance of the year goes, though? Should it--like, as we lap it in the second quarter, does it get better or are you assuming it will still be a higher rate than even last year for the second half?

[Jonathan Ramsden:]

Yes Joe, so what we’re seeing is that the contracted rate--we’re in our annual negotiation cycle now and typically, I guess, wrapped up in May, and what we’re seeing is those contractual rates are well above where they’ve been historically, and that’s obviously not unique to us. We typically are obviously looking to push most of our needs through those contracted rates, and those rates are just coming in much higher than I think we, or probably most others anticipated, so those rates will be in effect for most of 2022 until the next round of negotiations takes place, and there’s always, obviously, the spot market where you’re typically buying some capacity. We have that baked in. We don’t necessarily expect it to get worse, but we also don’t necessarily expect it to get better during 2022.

[Joe Feldman:]

Got it, okay. That’s helpful, thanks. Good luck and wish Bruce our best, thanks.

[Jonathan Ramsden:]

Will do, thank you Joe.

[Operator:]

The next question comes from the line of Brad Thomas with Keybanc. Please proceed with your questions.

[Andrew:]

Hi, good morning. This is Andrew on for Brad. Thanks for taking our questions, and of course I’d like to add my best wishes to Bruce and his family as well. First question I wanted to go over was your close-out strategy. I just wanted to ask if you could provide an update on that and specifically what percentage of sales are close-outs currently tracking, and what are you seeing from an availability standpoint for close-out deals?

[Jack Pestello:]

Yes, thanks Andrew, it’s Jack. I’ll take that one. We have talked about creating that limited time deal treasure hunt, so close-outs is part of buying, and historically we’ve said we have been about 55% never-outs in the store and the other 45% that’s seasonal, trend, limited time deals, and close-outs is part of that. We continue to face challenges finding close-outs in food and consumable areas, but quite honestly we’re finding really good close-out deals, really good limited time buys in food and--sorry, in soft home and in hard home. We’ve expanded that into some opportunistic buys in furniture and we even actively looked at some deals on lower supply, slow serving product that came through--sorry, slow delivery product that came through with the seasonal. Overall, it’s becoming a bigger part of our business. Our customers are responding well. We’re getting access to good brands and we’re going to continue to push that part of our business.

[Andrew:]

Got it, thank you. I wanted to shift towards your furniture category and what you’re seeing there. I know you’ve done a great job at utilizing the Broyhill brand and bringing in new product, but from a broader industry perspective, we’ve heard that trends have seen some weakness more recently. Was wondering if you could talk about some of the demand trends you’re seeing in your furniture category, especially now that we’re in the first quarter and we’ve lapped that January stimulus, and then how you expect this category to evolve for you in the quarters ahead.

[Jack Pestello:]

Yes, I’ll jump in, and Jonathan, if you want to add anything to it. We saw really strong furniture sales across the business in the fall, into the fourth quarter. We really constrained ourselves with not being able to get some of the inventory, specifically the Broyhill product, and the Broyhill product has responded--the customer is responding really well to it. Then what we’re seeing is we build back our Broyhill inventories, we started to get better through the end of the quarter, and at the same time omicron hit, people weren’t getting out to stores, the weather hit, and we had some outside factors that kind of slowed things down. In February we’ve seen where it picks back up, we’re confident that we’re getting the right product, we’re getting back in stock in Broyhill and we’re getting new styles and different versions, so the furniture team is getting some great product and we’re feeling really good about where it’s going. From a customer traffic point of view, obviously with inflationary pressures, people are deciding where they’re spending money, and our view will be that we’ll have a good offering and continue to go after market share. Anything you want to add, Jonathan?

[Jonathan Ramsden:]

No, I think you’ve covered it, Jack.

[Andrew:]

Understood, thank you. That’s all from me.

[Jack Pestello:]

Great, thanks for the questions, Andrew.

[Operator:]

Our next question is from the line of Karen Short with Barclays. Please proceed with your questions.

[Zane Brock:]

Hi, this is Zane Brock on for Karen Short. I have two questions. Your preliminary 2022 outlook called for positive comps, which I think you called out on the Q3 call. What are some of the factors over the past few months that you’ve seen that are driving that outlook lower, and if you can maybe comment on your expectations around the cadence of sales in Q1 given you’ll be lapping the big March stimulus, so where are you running now versus your expectations through the remainder of the quarter? I have a follow-up.

[Jonathan Ramsden:]

Yes, thanks Zane. Let me take a pass at that. What we said on the December earnings call was that we expected positive overall sales growth in 2022, and we expect to get at least a couple percentage points of growth from net new stores, so the implication was better than a down 2 negative comp. What we’re talking about today is that we’re targeting a flat comp, so we think that is consistent with what we said back in December, so again it’s the distinction between total sales and comp sales, but that was what we said back in December. Clearly the implication of what we’re saying today is that we’re going to have top line growth with a flat comp and net new stores adding on top of that to create growth overall. Sorry, the second part of your question was about the cadence, I think within the first quarter, and obviously it’s really complicated because of the references you’re alluding to. February was a pretty clean comparison because that was pre-COVID two years ago we really hadn’t seen any impact of stimulus or anything else, so that’s why we think that two-year comp in February, which accelerated ahead of where we were in Q4, is meaningful, and that was despite the fact again that we saw some slower tax refunds and still had some inventory headwinds, particularly in seasonal, to a lesser degree in furniture although getting better, as Jack spoke to. As we look out through the balance of the quarter, when we hit March on a one-year basis, we’re up against the American Rescue Plan Act stimulus of last year, and then that hit very hard in March and was still there in April, although it had a less significant impact. But what we’re saying there, as we said in the prepared remarks, is that there was a 12 comp point impact of stimulus positively in 2021 that we’re lapping, so when we talk about being down 10 in Q1 of this year in total, if you adjusted out the stimulus impact of that, that would imply up around 2 on an underlying basis in 2022, and that is consistent with what we think we’re seeing in the business today, although I would certainly agree that, as implied in your question, there’s a lot of complexity and a lot of moving parts in there. But that’s how we’re looking at it.

[Zane Brock:]

Thank you for the clarification, that’s very helpful. Can you talk a little bit about your expectations around traffic and ticket and AUR and UPTs within ticket in 2022?

[Jonathan Ramsden:]

Yes, I’ll be happy to kick off there, Jack, and then if there’s anything you want to add. Generally speaking, what we’ve seen is that we’ve been driving sales through higher basket, higher AUR, including mix shift, and that traffic has been relatively challenging. However, within our traffic when you look at us compared to general bricks and mortar retail traffic and you normalize for stimulus and everything, it’s actually pretty reasonable. The other key consideration for us is the mix of our business is shifting over time away from higher frequency items to towards higher ticket items, which are not inherently shopped as frequently, so we would expect to some degree that trend to continue of basket offsetting traffic challenges and basket certainly driving most of our comp growth on a forward-looking basis over the coming years. Jack, anything to add on that?

[Jack Pestello:]

Yes, thanks for the question, Zane. One of the things we’re really excited about is the way we’re pricing and using some pricing models and making it more of a muscle in the business. As we manage our AURs, we’re getting much more thoughtful about the way we’re protecting opening price points, ensuring that we’ve got some more customer come in, but also making sure that as we get the right flow-throughs, we stay competitive in the marketplace. We’ll see some inflationary pressure on AUR and it going up, but we’re getting much more structured and sophisticated the way we’re thinking about that from a customer’s lens across the whole store. The early results are positive for us, both in a sales point of view and a margin point of view.

[Zane Brock:]

Thanks for that. Actually, if I can ask one more, why is there a limited outlook on FY22, especially given your confidence on the long term sales and margins?

[Jonathan Ramsden:]

I think we’ve given some pretty good guardrails for 2022. I think there is uncertainty about how the consumer is going to behave over the coming quarters, how quickly the supply chain will get back to normal, and while we think we have the freight piece of it relatively well covered, there’s still uncertainty about does that normalize, how does that affect inventory levels, so there’s still some, I think, more than typical uncertainty, how does the consumer react to inflation more generally, whether specific to our product or the general environment, and there’s obviously geopolitical uncertainty today, so all those things put us in a position where we think we’re in somewhat uncharted territory, and we just think it’s appropriate to be a little bit more cautious. We do hope to resume giving full year guidance fairly soon, but at this point in the cycle, we felt giving Q1 guidance and then some higher level guardrails for the full year was the most appropriate path to take.

[Zane Brock:]

Understood, thank you very much. Best wishes to Bruce, and best of luck this quarter.

[Jonathan Ramsden:]

Thank you Zane.

[Operator:]

Our final question today comes from the line of Jason Haas with Bank of America. Please proceed with your questions.

[Jason Haas:]

Hey, good morning, and thanks for taking my questions. The first is just on--we’ve heard a lot about the lower income customer getting into worse financial position after the roll-off of stimulus and government support programs, so I’m curious just with that out there as something going on in the macro environment, if you’re seeing any evidence of that in the business, maybe that customer is trading down from best products to good products, or--I don’t know to what extent, if at all, you expect to see or you’re starting to see a customer trade down that maybe wasn’t shopping at Big Lots before is now starting to, or you expect that also. Just kind of curious if you’re seeing any of that in the business at all.

[Jonathan Ramsden:]

Yes, I guess I would say, Jason, that we think our underlying business trends have been strong. There were some specific factors that hurt us in January, some external, some internal in terms of inventory availability, but bracketing all that, we think our underlying business is strong, and I would say at this point we haven’t seen clearly yet, at least, and we’re certainly looking very closely at it, but we haven’t seen those factors playing out. Jack, anything to add on that?

[Jack Pestello:]

Yes, thanks for the question, Jason. I would add if you think about--and Bruce talked about this with our private brands, we’ve got done over $700 million in Broyhill, Real Living is fast growing, over $600 million - those are both on their way to being billion dollar brands for us. As the customer makes different choices in categories, we’re really well positioned to have both a Broyhill price offer and a Real Living middle to opening price point offer, and we’re seeing in that great success across the business from categories.

[Jason Haas:]

Got it, that’s helpful. Then maybe for Jonathan on the gross margin improvement through the year, it sounds like you’re hopeful to do some more inventory counts and improve the shrink issue. Curious if you could talk about the other drivers there in terms of freight--sorry, the other expectations there in terms of freight, what the expectation would be for the shrink headwind just to get to your gross margin outlook.

[Jonathan Ramsden:]

Yes, so the freight again, Jason, is a bigger headwind than we thought three months ago. Those contractual rates are coming in fairly significantly higher than we thought, and we’re able to pass some of that through but not all of it, so that’s been an incremental headwind. As you recall, on the last call in December, we said we expect the gross margin rate to be up in ’22, and we’re now guiding to flat and that reflects building in some incremental freight pressure and some incremental shrink expense, although again we do expect to show some improvement in shrink later in the year, not get all the way back to 2020 levels this year but certainly make significant progress on that.

[Jason Haas:]

Got it, thank you. That’s helpful.

[Operator:]

Thank you. We have reached the end of our question and answer session. I will now turn the call back to Jonathan Ramsden for some closing comments.

[Jonathan Ramsden:]

Thank you everyone for joining us on today’s call. Once again, our thoughts are with Bruce and his family, but I can certainly say that Bruce and all of us are excited to update you on our progress on the next quarterly call and investor events we’ll be holding in the meantime, and continue to reaffirm our confidence that our strategies are putting us on the right track. Again, look forward to having the opportunity to share more with you in coming calls. Thank you for joining us today.

[Operator:]

Ladies and gentlemen, that does conclude today’s teleconference and webcast. A replay of this call will be available to you by 12 noon Eastern time this afternoon, March 3. The replay will end at 11