Big Lots, Inc.

Ladies and gentlemen, good morning and welcome to the Big Lots third quarter conference call. Currently, all lines are in listen-only mode. The 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 Bruce Thorne, President and CEO, and Jonathan Ramston, Executive Vice President, Chief Financial and Administrative Officer. Before starting today's call, the company would like to remind you that any forward-looking statements made on this call involve risk 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 third quarter earnings release and related financial information are available at BigLots.com forward slash corporate forward slash investor relations. Also on the website is an investor presentation highlighting the key themes from this call. I will now turn the call over to Bruce Thorne, President and CEO of BigLots. Mr. Thorne, please go ahead.

Good morning, everyone, and thank you for joining us. Jonathan and I will briefly cover our Q3 performance and Q4 outlook this morning. But I want to spend most of our time talking about the huge opportunities we see ahead for the Big Lots business in 22 and beyond. Simply put, we have growing confidence that our strategies across merchandising productivity, real estate growth, and e-commerce put us at a transformational moment for the company. We see a clear path to growing our business by several billion dollars over the coming years. Our Board of Directors echoes this confidence and yesterday authorized an incremental $250 million share repurchase program, underscoring our collective belief in Big Lots' positive growth story and our continued commitment to returning value to our shareholders. Turning now to our third quarter, we were pleased to deliver results in line with guidance, despite incremental supply chain disruptions compared to our beginning of quarter view. As ever, this was only made possible by the unstinting efforts of our 35,000 plus associates. And I want to start by thanking them all for giving their big every day. In discussing our results and outlook, we will continue to reference comparisons to 2019 as generally being the most relevant given the abnormal impacts of COVID-19 on our business in 2020. On a two year basis, Q3 comparable sales increased 12% while declining 5% to 2020. Total sales increased over 14% versus 2019, with 210 basis points of favorability from our net new and relocated stores. The two-year growth in sales reflects the strength and resonance of our Operation North Star strategies, as stimulus has faded as a factor in our results. Our loss per share of 14 cents was within our guidance range. And while we were subject to the continuing macro pressures of which I am certain you are all aware, including supply chain disruption, inflation, and labor constraints, we were able to contain these for the quarter. Sales for the quarter benefited from growth in basket, driven by AUR expansion across each category and positive mix effects as we penetrated deeper into furniture and seasonal. We saw strong positive two-year comps in furniture, seasonal, soft home, hard home, and apparel, electronics, and other. As expected, consumables experienced single-digit two-year growth and food was down mid-single digits due largely to a strategic reduction in square footage in conjunction with our pantry optimization reset last fall. Furniture delivered another very strong quarter with two-year comps up low double digits. Seasonal, though, was the quarter highlight with comps over 30% on a two-year basis with lawn and garden and Halloween and harvest all doing very well. We feel very good about the fourth quarter, and even with some delayed receipts, we anticipate high sell-through of our holiday merchandise that will translate to a strong seasonal comp for the quarter. Turning to marketing, we are thrilled with the continued rollout of our Be a Bigionaire brand campaign that started in spring. As a reminder, this campaign is grounded in extensive consumer insights around why customers love to shop us. She sees us as the home of the hunt for exceptional bargains and surprising treasures. As we turn to the fourth quarter for our Holiday Big in Air campaign featuring Eric Stonestreet and Molly Shannon, we are receiving excellent feedback that the ads are attention-grabbing, likable, and driving attention to shop. You can look forward to great things from this campaign, featuring not only superstars, but more importantly, unique gifts and decor and always incredible value. The campaign, coupled with our rewards program, is resonating. Rewards active members were up over 9% versus Q3 last year, now with 22.1 million members still boasting a five-year CAGR of 10%. In Q3, rewards members accounted for 64% of transactions and 76% of sales, both up 400 basis points to same quarter last year. Before turning to our discussion of our strategic opportunities, I would like to provide a few brief comments on Q4. First and foremost, our absolute focus for Q4 has been to position ourselves appropriately with inventory to drive sales and deliver an excellent holiday for our customers. And the quarter has started off strongly with positive 10% two-year comps for fiscal November. Last week, we had the best Thanksgiving and Black Friday week in the company's history. While manufacturing and supply chain pressures will impact both our top and bottom lines in Q4, we are aggressively managing through them as we continue to grow the business. This includes partnering closely with our manufacturing and transportation partners, strategically prioritizing receipts, creating new capacity with our forward distribution centers and our DC bypass program, and ensuring we are competitive in recruiting and retaining DC associates. In addition, we have taken pricing actions and will continue to do so in response to volatile supply chain costs while continuing to deliver great value for our customers. And we have line of sight to ending the fourth quarter with a strong inventory position to meet spring demand and deliver strong Q1 sales. And we know that we left sales on the table in each of the past two years. Looking a bit further out, it is too soon to give specific guidance for 2022 as a whole. But while we face a big hurdle with the lapping of stimulus in Q1 and Q2 of this year, which we estimate was worth about five points of comp on a full year basis and will result in negative comps in Q1 of 22, we expect to deliver overall sales growth in 22 on top of two years that greatly exceeded any prior sales level we achieved as a company. That growth in 22 and beyond will be achieved through the three key Operation North Star drivers we have referenced on prior calls, specifically growth in same-store sales driven by our many successful merchandising initiatives, accelerated growth in our store footprint, and growth driven by our rapidly scaling e-commerce and omnichannel operations. I would like to take a moment on each of these to talk about the opportunity we see ahead of us. Strategically building our merchandise assortment to maximize productivity will be a key driver of our growth in the coming year and beyond. This will be driven by discrete in-store programs, new tools, and by leveraging our rapidly growing own brands. Starting with our next generation furniture sales team, this initiative is rolling out presently and is making a strong positive sales and margin impact, driving close to a 15% lift to the furniture business in stores where it has rolled out. This program is currently in 100 stores and will initially scale to around 500 stores in 22, driving at least a point of comp on an annualized basis for the entire company. Turning to seasonal, Big Lots has been known for winning at holiday and in lawn and garden in the spring and summer with our outdoor seasonal patio sets, gazebos, and pools. However, we have a major white space opportunity for elevating our seasonal assortment, increasing our newness, and transitioning between seasonal moments with greater efficiency and effectiveness. We will show up big for not just holiday, but for Valentine's Day, St. Patrick's Day, 4th of July, and other seasonally relevant moments, winning the seasons throughout the year. Additionally, as I will discuss in more detail shortly, furniture and seasonal volume will both be supported by the expanded DC network capacity that we are developing to more efficiently flow bulky merchandise to our stores. Moving to our own brands, in particular, Broyhill and Real Living, we see major upside both with furniture and beyond. Most importantly, we have proven that they resonate well with our customer. Broyhill and Real Living each have the potential to achieve $1 billion in annual sales across all home categories and are well on their way towards that, both north of a half a billion in sales on a year-to-date basis through Q3. Roy Hill accounted for over 160 million in Q3 sales, up close to 50% over the same quarter in 2020. Approximately 40% of sales came through our home decor, seasonal, and hard lines. Similarly, Real Living continues on its strong trajectory, almost doubling versus Q3 of last year and delivering over $60 million of growth during the quarter across multiple product categories. As we referenced last quarter, our increased investment in apparel has helped us bring in new customers and is well on its way to making apparel a significant category for us. As the first graduate category from the lot, we have built apparel in a scrappy way to be over a $200 million program this year with a clear opportunity for more than doubling sales in the years to come. Customers are giving us credit for our expanded offering as we better organize our offering in-store around casual loungewear. Additionally, while we will not become an apparel store, we have recruited seasoned leadership to bring focus to this productivity-enhancing opportunity. Additional space productivity enhancements have been made through our lot and queue line strategies. These two strategies, now in over 1,300 stores, have maintained their accretive sales impact and we plan to complete our rollout in 2022. In addition to these strategies, new initiatives such as lots under $5 offering represents a further opportunity to drive higher productivity. The lots under $5, which will roll out in the middle of 2022, will create a value destination for our customers anchored on surprise and delight treasure hunt products priced at $1, $3, and $5. The assortment will be seasonally relevant and have impulse items to create excitement for newness as she increases visit frequency. This is just an example of the ongoing category innovation that will be an integral part of our business going forward. Supported by new tools and processes and an outstanding team, we are confident that our merchandise-related strategies will deliver tremendous growth in productivity. On our last few calls, we have discussed our white space opportunity for net new stores. In 2021, we are reversing the historical trend of relatively stagnant store count and will increase our net new store count by over 20 stores. In 2022, we expect that figure to be over 50. While sales volumes will range depending on square footage and market demographics, we expect at least $120 million of annualized impact from next year's net new stores and that they will deliver four-wall EBITDA margins of 10% or greater. Turning to e-commerce, our year-to-date sales growth is around 300% versus 2019, and we have a clear line of sight to e-commerce becoming a billion-dollar business over the next few years. Our approach to date has been to replicate the friendliness of our in-store interactions online by removing friction points and allowing our customer to purchase where she wants, how she wants, with what tender she wishes, and to have that product fulfilled through the channel that she prefers. Since the initial rollout of Bopas in 2019, we now provide curbside pickup, ship-from-store capabilities, and same-day delivery via Instacart and pickup. To support holiday, we increased the number of stores providing ship-from-store fulfillment to 65. We continue to see over 60% of our demand fulfilled through these new capabilities. Additionally, joining our lineup of Apple and Google Pay, we expanded our mobile wallet capabilities this past quarter with both PayPal and PayPal Pay in 4. our first buy now, pay later solution. In the coming year, we expect to unveil further capabilities and additional buy now, pay later choices. Mobile payment now represents 35% of our total online transactions. As I mentioned, even though our e-commerce channel has grown from close to nothing in 2017 to well over $350 million expected in 2021, huge opportunity remains to further upgrade user experience and drive conversion where we have already made great strides. Enhanced user search and checkout experience, enhanced inventory visibility and access, further extending our aisle, and accelerating supplier direct fulfillment will all fuel this growth. Perhaps more importantly, over the past few years, we have worked to expand our online choices to better reflect our in-store assortment selections. What was less than 20% of our assortment a few years ago is now approximately two-thirds of our over 30,000 choices. I would now like to pivot to some of the key enablers of our future success. Earlier this year, and specifically during last quarter's call, we discussed our need to invest in our supply chain through the rollout of our Ford Bulk Product and Furniture Distribution Centers, or FDCs, and our transportation management system. Our legacy distribution center network was designed for a $5 billion pick-and-pack brick-and-mortar business model. As we have grown substantially over the past two years, leaned further into bulk furniture and seasonal businesses, and significantly grown our e-commerce business, we have outgrown our capacity. We are addressing this by distorting processing and logistics for bulk goods out of our five legacy distribution centers into our new FDC network, enabling us to better leverage the capacity of our original regional DCs that were designed for cart and flow. In addition, our transportation management system that launched last year and completed rollout this year will optimize how our more complex and higher capacity network functions. In 2022, we plan to launch two additional FDCs, further relieving pressure on our regional DCs and enhancing our ability to process bulk product. Additionally, through our strong relationships, we have the ability to open pop-up bypass DCs to further assist regional DCs in handling seasonal receipt peaks. Finally, in 2022, we will begin work on our centralized repack facility at our Columbus distribution center to handle individual unit pick products, further enhancing our regional distribution center throughput. As we optimize our store footprint and enhance inventory availability, we need to ensure consistent customer experience across our stores. Another key enabler, as we referenced on the prior quarter's call, is our project refresh program to upgrade approximately 800 stores, which were not included in the 2017 to 2020 Store the Future program. Completing this project will create a more consistent consumer experience. While better representing the Big Lots brand, it will harmonize internal processes as we are currently catering to too many differently formatted or conditioned stores. At an average cost of a little over $100,000 per store, far below our store of the future conversions, these stores are getting new exterior signage, interior repainting, and floor repair, a new vestibule experience, remodeled bathrooms, and interior wall graphics. Project Refresh is underway with around 50 stores being completed in the fourth quarter, and we are in the process of finalizing our plans for a more extensive rollout in 2022. To summarize, I'm greatly enthused about not just where we can be in a few years, but in what we are achieving every day to make that reality occur. Our growth drivers, led by an ambitious, driven, and highly talented team, will continue to materially scale our business in the coming years. Our mission at Big Lots is to help her live big and save lots. And we'll do that by being her best destination home discount store, chock full of exceptional value and surprising and fun products, all wrapped in a delightful and easy shopping experience. As I turn the discussion over to Jonathan, I do wish all of you a wonderful and meaningful holiday season. Be safe, stay healthy, and stop into your local Big Lots for your gifts, decorations, special treats, and supplies. Jonathan?

Thank you, Bruce, and good morning, everyone. As Bruce referenced, our third quarter performance was in line with our guidance. To have sustained double-digit two-year comps despite supply chain challenges and the exploration of stimulus benefits reflects a tremendous effort across our entire team, and I would like to thank every single one of them for what they bring to Big Lots every day. The summary of our financial results for the third quarter can be found on page eight of our investor presentation. Net sales for the quarter were 1.336 billion, a 3.1% decrease compared to 1.378 billion a year ago, but up 14.4% to the third quarter of 2019. The decline versus 2020 was driven by a comparable sales decrease of 4.7%, in line with our negative mid-single-digit com guidance. Two-year coms were 12.3% and were strongest in August, but remained healthy throughout the quarter, driven by basket size. Our third quarter net loss was 4.3 million compared to 29.9 million net income in Q3 of 2020 and a loss of 7 million in 2019. EPS for the quarter was a loss of 14 cents in the middle of our guidance range. As a reminder, we reported diluted EPS of 76 cents last year. Supply chain impacts across gross margin and SG&A accounted for around 60 cents of the year-over-year reduction in EPS. The gross margin rate for Q3 was 38.9%, down 160 basis points from last year's third quarter rate, and 80 basis points below 2019, slightly outperforming our guidance. The 38.9% rate reflects the freight headwinds that we have discussed, partially offset by pricing increases. Total expenses for the quarter, including depreciation, were $523 million, up from $515 million last year. This was also in line with our expectations coming into the quarter and driven by incremental expense investments in labour and in our forward distribution centres. While expenses deleveraged versus last year, they leveraged 90 basis points to Q3 2019, driven primarily by efficiencies in store expenses, partially offset by supply chain expense, including the costs of our new forward distribution centers and expense from the June 2020 sale and lease pack of our regional DCs. Operating margin for the quarter was a loss of 0.3% compared to a profit of 3.1% in 2020 and a loss of 0.4% in 2019. Interest expense for the quarter was $2.3 million, down from $2.5 million in the third quarter last year and down from $5.4 million in Q3 2019. In September, we announced the successful amendment and extension of our unsecured revolving credit facility. The amendment provides more favorable pricing and covenants. With this new facility, we anticipate saving a minimum of $850,000 in interest and fees on an annualized basis and substantially more if we draw on the revolver. The income tax rate in the third quarter was a benefit of 29.3% compared to last year's expense rate of 24.1%, with the rate change primarily driven by the impact of the disallowed deduction for executive compensation and the favorable impact of a discrete item in the prior year. On a full year basis, we expect our tax rate to be slightly favorable to 2020. Total ending inventory was up 17% to last year at 1.277 billion and up 14% to 2019, somewhat ahead of our beginning of quarter guidance. The increase versus prior years was a purposeful heavy up of inventory to support holiday, to right-set furniture depth, and to support incremental inventory for the lot and apparel. The increase versus guidance reflects our successful efforts to get more inventory receipts into the supply chain ahead of holiday, as well as increased unit costs due to inbound freight. During the third quarter, we opened nine new stores and closed three stores. We ended Q3 with 1,424 stores and total selling square footage of 32.5 million. Capital expenditures for the quarter were 46 million compared to 34 million last year. Depreciation expense in the third quarter was 35.9 million, up 3 million to the same period last year. We ended the quarter with 70.6 million of cash and cash equivalents and no long-term debt. As a reminder, at the end of Q3 2020, we had 548 million of cash and cash equivalents and 39 million of long-term debt. The year-over-year reduction in cash levels reflects our deployment of proceeds from the sale and leaseback of our distribution centers towards share repurchases and the payment of taxes on the gain on the sale and leaseback. We repurchased 2 million shares during the quarter for $97 million at an average cost per share of $47.43, completing our August 2020 $500 million authorization. Under that authorization, we have repurchased 9.35 million shares in total at an average cost of $53.49 per share, including commission. We announced today that our board of directors has approved a new share repurchase authorization, providing for the repurchase of up to $250 million of our common shares. The authorization is effective December 8th and is open-ended. Also, our board of directors declared a quarterly cash dividend for the third quarter of fiscal 2021 of 30 cents per common share. This dividend is payable on December 29th, 2021 to shareholders of record as of the close of business on December 15th, 2021. As Bruce commented earlier, we see ongoing capital return as a key component of long-term shareholder value creation. Turning to guidance, key highlights can be found on pages 18 and 19 of our investor presentations. For the fourth quarter, we expect diluted earnings per share in the range of $2.05 to $2.20 compared to $2.59 of earnings per diluted share for the fourth quarter of 2020 and $2.39 in Q4 2019. For the full year, we now expect diluted earnings per share in the range of $5.70 to $5.85. The $0.20 reduction from our prior guidance range is entirely accounted for by additional supply chain SG&A expense, which I will come back to in a moment. The guidance does not incorporate any share repurchases we may complete in the quarter. The fourth quarter guidance is based on slightly positive comparable sales, better than what we previously expected due to stronger underlying trends and improved inventory availability. In addition, Q4 sales will see a benefit of approximately 180 basis points from net new and relocated stores. On a two-year basis, we expect comps to be up high single digits. For the full year, we expect a negative low single-digit comp versus 2020, which will again equate to double-digit comps on a two-year basis. We expect the fourth quarter gross margin rate to be down around 150 basis points to last year and also Q4 2019. This is somewhat more erosion than estimated in our prior guidance, impacted by higher freight as we have successfully worked to move inventory through the supply chain to drive sales. For the full year, we expect gross margin rate to be down approximately 70 basis points versus 2019 and approximately 120 basis points versus 2020. At this point, we are not counting on any early abatement of freight pressures, but we do expect this over time. In the meantime, without factoring in any freight-driven tailwind, we expect to see 2022 margin improvement driven by taking additional price increases where appropriate and reflecting a benefit from new pricing and promotion capabilities, as well as from the deployment of new planning tools. We expect Q4 expense dollars to be up by a mid single digit percentage to last year, driven by incremental expense investments in store and DC labor, our forward distribution centers and depreciation expense. Relative to our prior full-year guidance, fourth quarter distribution and transportation expenses have increased by around $14 million. This includes $4 million related to additional receipt volume during the quarter, in addition to the $6 million we called out on our last earnings call. It further includes $4 million of higher initial costs related to our new FDCs, $2 million related to fuel and domestic carrier rates, and $2 million related to additional actions we have taken on DC labor rates. We expect most of these expenses to be transitory or timing related. For the full year, SG&E expense dollars will be up around 3% to 2020, driven by the full year impact of the sale and leaseback of our distribution centers, additional supply chain expenses, including investments in our new FTCs, other strategic investments, and higher equity compensation expense. We now expect inventory to end Q4 up approximately 20% to 2019. This reflects strong progress in rebuilding our inventories to support spring sales, and as noted above, will result in some additional receipt processing expense in Q4. As a reminder, we began both 2020 and 2021 with depleted inventories. In addition, we have intentionally pulled forward seasonal inventory receipts. We now expect 2021 capital expenditures to be between $170 and $180 million. including around 55 store openings, of which around 20 will be relocations. The reduction from prior quarters guidance in CapEx is driven by timing shifts, including the move of our new centralized repack spend out of 2021. Our capital projection includes approximately 50 project refresh stores in 2021. On a net basis, we expect total store count to grow by around 20 stores in 2021, we expect to further accelerate store count in 2022 and beyond. As Bruce described, we are increasingly confident in our long-term top line opportunity, and we expect to achieve a record new sales year in 2022, driven by our net new store openings. In addition, as noted a moment ago, we expect to turn the corner on gross margin rate for 2022. We will have some additional growth-related expenses in 2022 related to new stores, our FDC rollout and other strategic investments. And we will also face inflationary wage and other pressures. To help fund these investments, we will maintain our focus on achieving structural reductions in our expenses, building on the excellent progress we have already made under Operation North Star. We are excited by the opportunities ahead of us in 2022 and beyond, and we look forward to providing more colour on this as we enter 2022. I'll now turn the call back over to our moderator so that we can begin to address your questions. Thank you.