Big Lots, Inc.

Good morning. This is Alvin Concepcion, Vice President of Investor Relations at Big Lots. Welcome to the Big Lots third quarter conference call. Currently, all lines are in a listen-only mode. If you require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. On the call with me today are Bruce Thorne, President and Chief Executive Officer, and Jonathan Ramsden, Executive Vice President, Chief Financial and Administrative Officer. Before starting today's call, we would like to remind you that any forward-looking statements made on the 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. We would also like to point out that commentary today is focused on adjusted non-GAAP results, Reconciliations of GAAP to non-GAAP adjusted results are available in today's press release. Third quarter earnings release, presentation, and related financial information are available at biglots.com slash corporate slash investors. A question and answer session will follow the prepared remarks. I will now turn the call over to Bruce.

Good morning, everyone, and thank you for joining us. The current environment continues to be challenging for our consumers. Inflation is at a 40-year high, and consumer sentiment remains historically low. Household savings rates are below pre-pandemic levels as consumers have had to draw down on savings to fund current expenditures. Our customer is being pinched, and this pressure has been affecting discretionary purchases, especially for high-ticket items across the retail industry. In particular, low-income customers whom we serve have felt the most pain, and most are living paycheck to paycheck and racking up more debt. Our results have been affected by this pullback in demand for much of the year. And while this environment has been hard, we are responding in kind and fighting for our customers even harder. Each quarter that goes by, we are learning and adjusting our assortments and promotions to meet her where we can. We are making good progress, and we expect that to be increasingly evident as we go forward. In a challenged economic environment, it is important now more than ever to help our customers stretch their dollar even further. We see a tremendous opportunity to draw more trade-down customers, leverage our deep experience in bargains, and offer incredible value for our customers. We are taking this moment as an opportunity to strengthen our business model by creating a better shopping experience, offering even more deals, more exciting products, and making these bargains and treasures even easier to find. We have made some key hires with the new chief merchandising officer and chief marketing officer to bring these plans to life. We remain focused on growing margin, reducing expenses, improving our liquidity, and making highly disciplined investment decisions. Our intent today is to cover the results and progress we've made in Q3, provide some comments on Q4, and describe how we're tackling the current challenging environment and strengthening our business. Before going into that, I'd like to welcome Margarita Gianantonio as our new Chief Merchandising Officer and John Alpaul as our new Chief Marketing Officer. I'm very excited for the leadership that Margarita and John bring to the table. Margarita is a deeply accomplished off-price retail industry leader with more than 30 years of experience in merchandising, sales, marketing, and product development in home, housewares, and apparel categories. She's our first chief merchant in more than a decade to come from the off-price retail world. John's background includes a deep and diverse set of experiences, among them brand positioning and launch, enterprise strategy, customer insights and analytics, e-commerce, market research, and budget management. John has the strongest vision for how to message value that we've had since I've been here. They together will help us drive success in becoming our customer's go-to destination for bargains and treasures. Now on to the results. The third quarter marked another quarter in which we met the challenges of a tough environment head on and did what we said we'd do. While we can't say we're happy with the results, and we certainly need to do better, they were in line with our guidance. And importantly, inventories continued to come down materially on a year-over-year basis. We have tightly managed costs and have strengthened our balance sheet and liquidity position. I'd like to thank our team for their hard work as we punch our way through these tough economic times. Last quarter, we said we'd simplify our value offerings and communicate them better, offer more bargains, leverage our scale, and more deeply partner with our vendor partners to deliver compelling opening price points across our assortment. I'm pleased to say we made progress in all those areas. We have been reducing our opening price points to create unique deals. Through cost engineering and using our scaling relationships with suppliers, our opening price points in furniture are now at pre-COVID levels across more than 60% of SKUs. We expect nearly all of our furniture to see price revision in Q1 2023. As it relates to bargains, which are closeout items, off-price brands, and limited-time deals, it remained a good environment for procurement. As we made meaningful progress towards right-sizing our inventories, our increased open-to-buy capacity has enabled us to procure 160% more bargains at retail when compared to Q2 and about 90% more year-over-year. We procured great deals in categories such as toys, home appliances, and soft home, and we continue to see great deals. We have good bargain purchase momentum going into 2023. Over the past month, we've made great purchases in toys from Mattel and other top toy brand vendors, comforter sets from a major specialty store, and accent pieces and furniture, and Black & Decker small appliances. With regard to treasures, which are more unique, quirky, trendy, and seasonal items, we created excitement with the Disney pop-up shop within the lot section in Q3 and had success with kids' hoodies, hand towels, aprons, mugs, and backpacks and purses. In Q4, we are having early success in Grinch-branded apparel and accessory items, novelty family sleepwear, giant candy bars, ugly holiday sweaters and leggings, and even a guitar with amplifier. In essentials, which include category staples, we've cut about 1,700 unproductive SKUs. As an example, we carried six lines of Neosporin and will now carry one. Baking items that only sell well during certain seasons will now only be available during the peak selling season, rather than year round. We are eliminating over 240 cosmetic SKUs that are high strength items. By reducing unproductive and duplicate SKUs, we are able to offer her a more compelling and productive shopping experience. It also creates more room for more bargains, The productivity gains in Q3 will be used to fund more bargains, which will make our offer even more engaging, particularly in food and consumable categories. There will be more to come as we continue to curate our assortment in the remainder of 2022 and into 2023. We know that our customers will shop us when they see a great deal and are thrilled about our assortment. I'm pleased with the progress we've made on both fronts. Looking at specific category performance in the quarter, seasonal comps grew strongly, up 7% in Q3, fueled in part by heavy promotions. Halloween items were up about 30%, driven by items such as a 9-foot-tall witch, skeletons carrying a coffin, and an animated witch's broom. We have leveraged our insights into consumer behavior and factored them into the Q4 holiday season. For example, we saw continued strength in outdoor decor and desire from consumers to celebrate a holiday. As a result, we have placed some of our bigger buys in Christmas trees and outdoor decor, while reducing our buys on indoor decor this holiday season. Our food category was up 1%, and the consumables category was down 5% in Q3, with renewed strength in beverage, seasonal food items, and paper. Furniture, soft home, and hard home categories were down double digits as they continued to be impacted by consumers delaying or cutting back on higher ticket purchases. We have been addressing this through introducing lower opening price points, especially in furniture, and more bargains in our store, and we expect these efforts to gain more traction over the coming quarters. The lot, apparel, and electronics were down 4%. The lot and apparel items drive a lot of excitement in our stores and showcase some of our newest items and best deals. As we progress into the fourth quarter, The lower opening price points, great bargains and fund treasures, and more productive essentials will help drive sales momentum. That said, we have seen significant pressure in the market environment, particularly in higher ticket discretionary items. So we do not expect a significant change in the comp sales momentum in Q4 relative to Q3. Therefore, we expect comps to remain in the down low double digit range in the fourth quarter. With regard to gross margin, it will be sequentially higher versus Q3 in the mid-30s range, which is inclusive of additional markdowns related to accelerated store closures and efforts to clean up slow-moving inventory. And we continue to expect to end the year with a healthy inventory position, which will be flat to down year over year. I'd now like to talk about how we're navigating the current environment and creating opportunities to strengthen our business. We remain laser-focused on actions that enable us to better adapt to continuously evolving customer needs, build upon core competencies, and deliver incredible value. I'll provide a few examples of these activities. First, we will own bargains and treasures. Our company was built on providing phenomenal value, and we're leaning into it in a much bigger way. Customers come to our stores for great deals and exciting products, and we simply haven't had enough of these. So we're accelerating our efforts to optimize and differentiate our assortment with more bargains and treasures. By the end of 2023, our assortment will be two-thirds bargains and treasures, up from the high 40% range today. Bargains are expected to be one-third of the assortment, up significantly from mid-single-digit penetration in 2022. Bargains and treasures will bring more excitement to our assortment and will ultimately increase new customer growth and loyalty. Second, we will communicate unmistakable value. We've done a great job in sourcing bargains and growing our value-based private brands, such as Broyhill and Real Living, but we have not done a good job communicating and curating our incredible value offers to make it an easy and compelling shop for our customers. This means we will better communicate value and make it easier for customers to shop our stores. We don't want our customers to have to wonder if they're getting a better deal than somewhere else. So we will do this through clear value messaging that will communicate unmistakable, comparable value in everything we do. We'll do this by having ticketing and marketing that is clearer than ever before. For example, we have simplified the end caps and focused more on bargains and treasures rather than essentials. By October, nearly 90% of our end caps were focused on bargains and treasures versus 40% in July. In January, we are going to introduce comparable value pricing tags to showcase our value offers more and to make the shopping experience even better. These efforts are designed to drive customer trial, frequency, and loyalty. We're also well-positioned to provide value as a trained out destination. Our private brands, especially Broyhill, will play a key role in increasing our appeal. Both Broyhill and Real Living continue to do well, with sales growth of around 10% at each brand. Across all divisions, these brands represented 30% of our business in Q3, up from the mid-20s last year. Recall that our seasonal customer has a household income that is two times higher than our core customer. So we see that category as a year round trade down opportunity. We have 38,000 associates who are value creators and will bring these efforts to life. Our associates play to win and maintain an obsession with the customer, which has led to a very positive customer feedback. We've achieved a net promoter score in the 80% range in Q3, which is top tier in the industry, and over 20 million customers have rewarded us with their loyalty. We will continue to focus on earning their business each and every day. Third, we will increasingly focus on rural and small-town markets, where we know we outperform with our strong assortment of furniture and home goods, while taking a prudent near-term approach to opening stores. Overall, new stores continue to perform with strong performance in rural and small-town markets. In these markets, we face less direct competition in our home categories and have a lower cost structure. Therefore, these typically generate more cash and profitability than urban stores. As we think about our real estate strategy and store openings and closings in the future, we see an opportunity to reshape our store portfolio more towards these rural and small-town markets with an emphasis on furniture and home goods. Fourth, we will win with Omnichannel. We've made tremendous progress in our e-commerce capabilities that have helped strengthen our lead in omnichannel against other off-price retailers. In the last three years, we have enabled multiple same-day and next-day delivery options and ship-from-store capabilities. We've also expanded our extended aisle assortment and our shipping channels and greatly improved the customer experience. We've added new pay options such as PayPal, Apple Pay, reducing friction at checkout, and we've improved our inventory accuracy and have made it easier for our customers to find available nearby store inventory. These efforts have enabled strong sales growth. Year-to-date e-commerce sales growth has been strong at 12%, and it now represents 7% of our business compared to 2% three years ago. While we're proud of our achievements, we still have more work to do in order to keep our lead. There remains friction in the customer shopping experience, and our value offerings haven't been as easy to find as we'd like. Therefore, we are removing friction with improved site navigation, access to deals, streamlined cart and checkout to improve our conversion rate. In October, we entered phase two of a multi-year order management system for a single view of the inventory to improve the omnichannel experience. And fifth, we will drive productivity. We've remained focused on growing margin, reducing expenses, and making strong investment decisions. We're navigating the current environment and creating opportunities to strengthen our business. For example, we'll be sharper and more productive on pricing and promotions, aided by new tools to improve our efficiency. We have described a regional pricing model in California, which will grow to other markets. That allows us to flex pricing to improve competitive position and optimize margin profiles. We also talked about our work in food and consumables, which indicates a $20 million annualized gross margin opportunity that we are already actioning, expect to see continued benefits from in the fourth quarter and beyond. This work has been rolled to hard home with other divisions to follow. We're going to be targeting higher sell-throughs by more significantly editing our assortment across stores. This will lead to inventory being placed in more productive stores. We'll also lower the amount of inventory built for display purposes. We've achieved significant structural SG&A reductions over the past several years, but continue to see more opportunities going forward. To sum it up, we have made meaningful progress in the face of a challenging environment in the third quarter, and we expect to continue to gain traction in the fourth quarter. We are determined to be the best destination for bargain and treasure hunters, and in doing so, greatly improve our operating results. I'll now pass it over to Jonathan, and I'll return in a few moments to make some closing comments before taking your questions.

Thanks, Bruce, and good morning, everyone. I would also like to thank the entire Big Lots team for their unstinting efforts through these challenging times. I'm going to start this morning by going into more detail on our Q3 results, which I will discuss on an adjusted basis, excluding store asset impairment charges, and will then address our outlook for the fourth quarter. A summary of our financial results for the third quarter can be found on page nine of our quarterly results presentation. Q3 net sales were 1.204 billion, a 9.8% decrease compared to 1.336 billion a year ago. The decline versus 2021 was driven by a comparable sales decrease of 11.7%, which was within our guidance range. As you will recall, our third quarter sales started off down in the low double-digit range in August, and as expected, that trend continued through the quarter. High inflation and the macro uncertainty is continuing to cause consumers to delay or cut back on discretionary purchases, especially of high ticket items. Importantly, we continued to successfully drive inventory levels lower and were able to reduce promotional activity as the quarter progressed. Our third quarter adjusted net loss was $87 million compared to a $4 million net loss in Q3 of 2021. The adjusted diluted loss per share for the quarter was $2.99 versus a diluted loss per share of 14 cents last year. The gross margin rate for the third quarter was 34%, down 490 basis points from last year's rate and in line with our guidance. This included significant impacts from higher markdowns on freight, although as we will discuss in a moment, we expect to see both of these headwinds turn. Turning to adjusted SG&A, total expenses for the quarter, including depreciation, were 518.5 million, below the 523.3 million last year, and better than our guidance of up below single digits year over year. Store payroll costs, general office, and equity compensation were all below last year as we proactively cut costs. These cuts were offset in part by cost increases on some other lines, particularly in distribution and outbound transportation expense. As Bruce noted, as part of our ongoing productivity and efficiency initiatives, we expect to continue to drive structural savings. Adjusted operating margin for the quarter was negative 9.1% compared to a loss of 0.3% in 2021. Interest expense for the quarter was 6.3 million, up from 2.3 million in the third quarter last year due to higher amounts drawn on our credit facility versus last year. The adjusted income tax rate in the quarter was 24.8% compared to last year's rate of 29.3%, with the rate change primarily driven by lower non-deductible executive compensation, partially offset by the effect of employment-related tax credits and audit settlements. The effect of income tax rate comparison was also significantly impacted by the increased loss before income taxes in Q3. Total ending inventory cost was up 5.3% last year at 1.345 billion, in line with our guidance and driven by higher average unit cost of on-hand inventory. This represents a significant sequential improvement versus earlier quarters in the year, and we are pleased with the strong progress we have made on inventory normalizations. During the third quarter, we opened 20 new stores and closed three stores. We ended Q3 with 1,457 stores and total selling square footage of 33.4 million. Capital expenditures for the quarter were 38 million compared to 46 million last year, and depreciation expense in the quarter was 37 million, up 1 million to the same period last year. We ended the third quarter with 62 million of cash and cash equivalents and 460 million of long-term debt. At the end of Q3 2021, we had 71 million of cash and cash equivalents and no long-term debt. We did not execute any share of purchase during Q3, but have $159 million available remaining under our December 2021 authorization. On September 21st, we completed the refinancing and replacement of our existing $600 million senior unsecured credit facility with a new $900 million five-year revolving asset-based loan facility. In addition, we expect to further strengthen our balance sheet through asset monetization. This includes the outright sale of approximately 25 owned stores we expect to complete by the end of the year or early 2023. In addition, we are continuing to evaluate sale leaseback proposals on our remaining owned stores and other owned assets. On November 29th, our board of directors declared a quarterly cash dividend for the third quarter of fiscal 2022 of 30 cents per common share. This dividend is payable on December 28th, 2022 to shareholders of record as of the close of business on December 14th, 2022. Turning to the fourth quarter outlook, we expect the sales environment to remain challenging We therefore now expect comms to remain in the down low double-digit range. New stores will add about 170 basis points of growth versus 2021. With regard to gross margin, we expect the rate in the fourth quarter will improve sequentially versus Q3, but remain in the mid-30s range, which is inclusive of a drag from additional markdowns related to accelerated store closures and efforts to clean up slow-moving inventory. Sequential gross margin rate improvement will be driven by the factors we laid out on our last call, including easing of inbound freight costs, other cost of goods reductions, more targeted and efficient pricing and promotions, and an expected shrink benefit as we lap the cumulative shrink accrual adjustment we recorded in the fourth quarter of last year. We expect SG&A dollars to be roughly flat versus 2021 due primarily to increased accelerated depreciation from fourth quarter store closures, higher occupancy costs from new stores, higher outbound transportation costs, and costs related to two incremental forward distribution centers. These will be offset by cost savings, including lower store payroll and general office costs. We now expect to deliver over $100 million in SG&A reductions this year versus our original plan, of which approximately $70 million is structural. This will be partially offset by outbound transportation expense, including the impact of higher fuel rates. As a reminder, the $70 million in structural savings will come from store payroll, supplies, and other goods not for resale and headquarters costs. The balance of expense reductions is driven by expense flex on lower sales and lower bonus accruals. we expect to continue to drive savings in 2023 and beyond, as you heard Bruce discuss. With regard to CapEx, we now expect approximately 170 million versus 160 million previously, with the increase due to higher than expected new store opening costs and some projects being pulled forward from 2023. We continue to expect over 50 store openings in 2022 with a similar or slightly higher level of closures. The latter included an outright sale of approximately 25 owned stores I referenced earlier. Overall, we have seen outperformance in rural and small town markets. As Bruce mentioned, these stores face less direct competition and have lower cost structures. Therefore, they generate more cash and profitability than urban stores. As we evaluate store openings and closings, we are focused on optimizing the fleet towards these small town and rural markets. We expect full year depreciation of around $156 million, including approximately $43 million in Q4. We expect a share count of approximately $29 million for Q4. We continue to expect Q4 inventory to be flat to down compared with the prior year. As Bruce mentioned, this increases our ability to go after bargains and closeouts in the future as we will have more open to buy. Last, all of our commentary on Q4 excludes the expected gain on sale of own store properties, as well as any potential further impairment charges. Beyond this year, we remain confident that Operation North Star will enhance our ability to drive significant long-term growth and value creation. I will now turn the call back over to Bruce.