Big Lots, Inc.

Good morning, this is Alvin Concepcion, Vice President of Investor Relations at Big Lots. Welcome to the Big Lots first 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. The first quarter earnings release presentation and related financial information are available at biglots.com slash corporate slash investors. The 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. I will talk more about our Q1 results and full-year outlook in a moment, but I want to start by being very clear on how we see our current situation. First, macroeconomic headwinds have created significant challenges for us, which are reflected in our results and outlook. But we are confident that these headwinds will abate, and that when they do, we will see a major boost to our business. Specifically, our lower income consumer has been hurt by inflation and by lower tax refunds and higher interest rates, and their confidence has been shaken by banking failures. Further, we continue to cycle the pull forward of higher ticket purchases during the pandemic. We fully expect those effects to soften or reverse over time, and that furniture and seasonal in particular will return to being the strong growth drivers for our businesses that they have been in the past, especially as we continue to bring newness and incredible value to our assortment. Second, while we navigate through this difficult environment, we are being very aggressive in how we are managing our business. We have internally identified over $100 million of structural SG&A savings that are now incorporated into our forecast for 2023. These include the impact of our decision to close all four of our forward distribution centers to reduce costs and remove excess capacity. Importantly, however, these savings do not include any benefit from work we have recently done with an external partner. That project has identified a clear path to over $200 million of additional bottom line opportunities across gross margin and SG&A. We expect most of this to be realized in 2024, but there will be meaningful benefit in 2023. Specific areas of opportunity include both national and private brand sourcing, transportation including accessorial charges, store and field operations, general administrative expense, pricing and promotions, inventory allocation, and omni-channel optimization. All of the above opportunities are in addition to the significant reduction in inbound freight rates we are realizing. In addition, we are also managing inventory and capex much lower. That brings me to the third point, which is that we are also highly focused on ensuring we have plenty of liquidity to get through this period of macroeconomic challenges. In addition to cost and inventory reduction efforts, these actions include an expected further asset monetization and a decision made by our board of directors this week to suspend our dividend. Fourth and most importantly, we are highly encouraged by green shoots we are seeing as we work to turn the business. Notably, these reflect progress in both merchandising and marketing as we seek to get customers back into our stores and have them rediscover a refreshed and exciting assortment, incredible value, and great service. The key to all of the above is continued laser focus on the five key actions you've heard us describe over the past several quarters. As a reminder, the five key actions center around accelerating the mix of bargains and treasures that our customers want and need, making them easier to find with clearer signage and marketing, easier to take home with a leading omnichannel platform, and bringing them to more customers who are currently underserved, particularly in rural and small town markets where we know we outperformed. Combined with a focus on improving productivity, making disciplined investment decisions, and seizing opportunities from distressed competitors, I am confident that as we pass through this challenging period, we will emerge a significantly stronger company. Turning back to some of the things we're excited about and that are driving our optimism. As it relates to assortment, we are finding significant opportunities to enhance the newness and value of our assortment by procuring from over-inventoried mass retailers, distressed retailers and vendors, and through new sourcing partners overseas. For example, we are unlocking elevated quality and freshness at a great value from India, which should hit stores this fall. We also procured Broyhill merchandise at a significant discount out of the bankruptcy of our former vendor and will pass these savings on to our customers. We have also been working with our vendors to lower prices through product engineering and cost reductions aided by lower freight costs. Our efforts to provide more bargains are starting to be recognized by our customers. The proportion of bargain items featured on our lead end caps being rated as excellent value has doubled since the beginning of the year. Further, our customer net price perception score in April increased by a couple hundred basis points from March and several hundred basis points from the start of the year. Seasonal items such as lawn and garden contributed to nearly a quarter of our comp sales decline in the quarter, but we have taken aggressive actions to cycle through them by the end of Q2, including canceling orders. We are also very encouraged that we have begun to see stabilization in our furniture business. This month, we started phasing in new Brohill collections from our new suppliers and have received positive customer feedback about the quality. In August, more new Brohill products will be phased in, along with a robust marketing campaign, so we're thrilled about that. Our test deflects assortment by increasing food and consumables inventory in stores where the demand is stronger in those categories has shown encouraging early results. We also continue to optimize pricing in food and consumables, which is delivering incremental margin benefits. Our recent marketing efforts are also beginning to bear fruit. Our campaign to draw in dislocated Bed Bath & Beyond customers by accepting the expired 20% off coupons increased brand awareness with over 90 million TV and radio impressions. It also drove new loyalty membership signups with around 20% of redemptions from the net new customers to big lots. Our April marketing campaigns to existing customers have been more efficient. with our best-performing campaigns featuring a closeout from a trendy over-inventoried retailer, which drove increased visits and a low single-digit lift in store sales to date, as well as our budget booster event. We are also doing work to better refine our customer segmentation and messaging, and by focusing on our best customers with our most attractive offering, we have found ways to improve the effectiveness of marketing with a lower cost to acquire a customer. and we have been improving the customer experience. Our associates continue to go above and beyond the call of duty for our customers, which has led to very positive customer feedback. We have achieved a Net Promoter Score in the mid 80s range in Q1, which is up from the prior year and top tier in the industry. Our online Net Promoter Score has also improved significantly in April, up several hundred basis points from both March and the beginning of the year, as we continue to improve the customer journey through a more curated experience, better site navigation, and eliminating friction. As a result of our efforts to introduce more bargains and treasures, market them better, and serve our customers well, the reactivation of lapsed customers was strong in Q1, up 9%. While there's still a lot of work to do, we are encouraged about what we're seeing so far. I would now like to make a few comments about Q1, which was clearly a disappointing quarter. In addition to the macroeconomic factors I referenced a moment ago, our furniture sales, especially Broyhill upholstery, continued to be adversely impacted by product shortages related to the abrupt closure of our largest vendor, United Furniture Industries, in November, while seasonal lawn and garden was affected by unfavorable weather. As a result, comp sales in Q1 were softer than we expected, particularly in March. Trends improved slightly in April, more in line with what we saw in February, but we had higher levels of late quarter promotions that targeted seasonal and furniture divisions than we would have liked, and mix was unfavorable. Therefore, gross margins also came in lower than we expected. By addressing these sales challenges quickly and head-on with increased markdown and promo activity, and also through canceling orders in light of the soft environment, we were able to end the quarter with inventory that was down and in line with sales decline this quarter. While Q2 will remain challenging, we expect a more significant improvement in the back half of the year. This is when our efforts to strengthen our business model will gain more momentum, which I'll go into more in a bit. Also, we should see more pronounced benefits to our cost structure, as well as a more normalized level of markdowns. As I mentioned, with the help of an external partner, we have also identified significant bottom line opportunities both in gross margin and SG&A that we will be pursuing over the next 18 months. Jonathan will discuss this more in a moment. Another helpful factor for the back half is that we will fully mitigate the impact of the United Furniture supply disruption by the end of Q2. We are sourcing a more compelling assortment of Broyhill and Real Living products to our vendors which we are confident will improve the quality and value impression in the category, particularly online where the shopping journey for the furniture often begins. Turning back to the first quarter, you heard me discuss the sales and margin challenges and how we acted quickly to clean up slow-moving inventory. We tightly managed costs with SG&A that came in better than our guidance. We remain focused on strengthening our balance sheet and liquidity position and reduced our CapEx outlook. Many thanks to our team for managing through a difficult period. Again, Jonathan will add more color in a moment. Looking at specific category performance in the quarter, seasonal comps declined 25% in Q1 due in part to unfavorable weather, which affected lawn and garden sales, as well as customers generally pulling back on higher ticket outdoor furniture, which typically sells well this time of year due to concerns about the economy. As a result, we have offered targeted coupons and promotions in the category and are selling through it, with inventory in the category better than last year. Given seasonal is one of our highest margin categories, the sales decline unfavorably impacted our mix, and combined with the promotional activity, it unfavorably impacted our overall gross margin. In Q2, gazebos and our patio dining sets are off to a great start, and we are just starting to hit peak season in our largest markets in the Midwest and Northeast. This illustrates the opportunity to own key categories or segments, particularly in the back half of the year as our fresh assortment begins to flow through our stores towards the end of summer. Our furniture soft home and hard home categories were down double digits. Consumers were hesitant to make higher ticket purchases in this economic environment, and this caution was exacerbated by soft tax refunds, which traditionally drive Q1 sales. Also, the furniture product shortages I mentioned earlier unfavorably impacted our comp sales in furniture by about 1,200 basis points. It also indirectly affected demand in other home categories due to the halo impact that furniture has on soft home textiles and houseware assortments. We are mitigating our sales and inventory exposure by sourcing through other vendors, which will fill the majority of the gap by the end of Q2. As we roll out more on-trend assortments at a great value throughout the summer, we expect our results in the back half to benefit. Food and consumables held up relatively well given the traffic challenges we experienced. I'd now like to recap the five key actions I mentioned earlier and that we have discussed over the past several quarters. We believe these actions will put us on the path to achieving the long runway of profitable growth that we see. First, as it relates to bargains, which are close-out items, off-price brands, and limited-time deals, we continue to source great deals across the categories from bankrupt competitors as well as mass retailers and vendors with excess inventory. Recently, we made great purchases in the consumables, home, and furniture categories. Our penetration rate of bargains is now nearly 20%, so we're making good progress towards our goal to grow our penetration to one-third of our assortment. This is the highest level I've seen since being CEO. We're continuing to lower prices through working with our vendors on product engineering and realizing cost reductions aided by lower freight costs. With all the great bargains flowing into our stores, our second key action is to communicate unmistakable value with a clearer and more effective marketing strategy. We think there's a long-term opportunity to bring these better bargains and deals to more customers who are currently underserved. This leads to our third action, which is to increase store relevance by leveraging our strengths, particularly in rural and small town markets where we know we outperform. Next, we will win with Omnichannel by providing a better customer experience in a more profitable way. Last but not least, our fifth key action is to drive productivity across cost of goods, SG&A inventory, and CapEx. We are making great strides in all of these areas. We remain highly confident that these five key actions will position us to emerge better and stronger than ever as we emerge from this challenging period. As I mentioned earlier, given the difficult environment and our current financial performance, the board this week made the decision to suspend our dividend. That was, of course, not a decision the board took lightly, but in the near term, we believe protecting and enhancing liquidity should be our highest priority. On that note, tough times don't last. Tough companies do. And Big Lots is damn tough. I will now pass it over to Jonathan, and I will return in a few moments to make some closing comments before taking your questions.

Thanks, Bruce, and good morning. A special thank you goes out to the broader Big Lots team for all of their hard work and for remaining focused in a tough environment. Like Bruce, I'm confident that those efforts are putting us on track to emerge a better, stronger, and more dynamic company. I will go through details on our Q1 results in a moment. but I want to start by addressing two points that Bruce referenced in his comments. First, as Bruce noted, we are aggressively going after cost savings and productivity gains across our business. Our internal efforts have now identified over $100 million of structural OPEX savings, up from the $70 million we referenced on our last earnings call. The increase is driven in part by our decision to accelerate the closure of our four forward distribution centers, which ceased operations this month. This will reduce cost and remove excess capacity. We will also realize significant inbound freight savings in 2023, which benefits our gross margin. In addition, we have now reduced 2023 CapEx to around $80 million from over $100 million previously. Beyond those efforts, we have identified an additional $200 million or more of bottom line opportunities across OpEx and gross margin some of which we expect to realize in 2023, with most of the balance in 2024. These savings have been identified in partnership with an external firm we engaged during the past quarter and reflect opportunities across multiple areas, as Bruce referenced a moment ago. Second, we are intently focused on managing our liquidity to ensure we are prepared and positioned to navigate through the current economic challenges. As well as benefiting from the cost reductions referenced above, our liquidity position will also be strengthened by aggressive inventory management. We are working towards a step change in how we manage inventory turns, targeting an improvement of at least 15% over the next year and at least double that over time. In terms of overall liquidity, we have and expect to maintain excess availability under our asset-based lending facility. However, we are also pursuing other measures to further bolster our liquidity. These include being in the advanced stages of a further asset monetization opportunity and the suspension of our dividend, which Bruce just referenced. Regarding asset monetization, this week we entered into a letter of intent for a sale and leaseback of our Apple Valley California Distribution Center, our corporate headquarters building in Columbus, Ohio, and most of our remaining owned stores. The value of the transaction is expected to be around $340 million dollars equating to $240 million in net proceeds after considering the $100 million balance remaining on the synthetic lease on our California DC. We plan to use the net proceeds to pay down debt under our asset-based lending facility. Due to available NOLs, we expect taxes on the gain on the sale of the assets to be minimal. We are targeting closing in late Q2 or early Q3. transaction is subject to customary due diligence and execution of a definitive purchase and sale agreement with standard closing conditions. With that, I would like to go into more detail on our Q1 results, which I will discuss on an adjusted basis, excluding synthetic lease exit costs, forward distribution center contract termination costs, store asset impairment charges, and again on the sale of owned stores, and will then address our outlook. The first quarter summary can be found on page nine of our quarterly results presentation. Q1 net sales were 1.12 billion, an 18.3% decrease compared to 1.37 billion a year ago. The decline versus 2022 was driven by a comparable sales decrease of 18.2%, which was below our guidance range. Going into the quarter, as Bruce mentioned, we expected weakness in the sales environment due to high inflation, weak overall demand for high ticket items, and lower tax refunds. We also knew that product shortages related to United Furniture Industries would impact sales, with an estimated adverse impact to our overall comps of approximately 300 basis points, excluding attachment impacts in soft home and other categories. However, fears of a banking crisis increased the level of caution, and unfavorable weather impacted seasonal lawn and garden. As a result, comp sales in Q1 were softer than we anticipated. Importantly, we acted quickly to clear inventory, which was down in line with our sales decline. Our first quarter adjusted net loss was $98.7 million, and the adjusted diluted loss per share for the quarter was $3.40. The gross margin rate for the first quarter was 34.9%, down 180 basis points from last year's rate, which was softer due primarily to higher levels of late quarter promotions that targeted the seasonal and furniture categories. Turning to adjusted SG&A, total expenses for the quarter, including depreciation, were 510.5 million, better than the 518.1 million last year, and better than our guidance of up slightly versus 2022. We saw favorability across multiple line items as we continued to manage expenses aggressively. Adjusted operating margin for the quarter was negative 10.5%. Interest expense for the quarter was $9.1 million, up from $2.8 million in the first quarter of last year due to higher amounts drawn on our credit facility and higher interest rates year over year. The adjusted income tax rate in the quarter was 22.3%. Total ending inventory cost was down 18.8% to last year at $1.09 billion. During the first quarter, we opened three new stores and closed one store. We ended Q1 with 1,427 stores and total selling square footage of 33 million. Capital expenditures for the quarter were $16.9 million compared to $43.7 million last year. Adjusted depreciation expense in the quarter was $35.6 million, down $1.8 million to the same period last year. We ended the first quarter with $51.3 million of cash and cash equivalents and $501.6 million of long-term debt. At the end of Q1 2022, we had $61.7 million of cash and cash equivalents and long-term debt of $270.8 million. We did not execute any share of purchases during Q1, but have $159 million remaining available under our December 2021 authorization. Turning to the outlook, we are not providing formal full-year guidance in light of significant uncertainties. Sales comps should improve sequentially in the back half of the year as our key merchandising and marketing actions gain traction, we lap easier comparisons, especially in Q4, and as we move past the effects of the United Furniture shutdown. Gross margins should also improve over the prior year, driven by less markdown activity and lower costs, particularly in freight. Turning to more specifics on Q2, we are continuing to see significant pressure in the market environment, particularly in higher ticket and more discretionary items. Further, we expect a continued adverse impact to our comps from product shortages in furniture of around 100 basis points. As a result, we expect comps in Q2 to be similar to Q1 and to be down in the high teams range. Net new stores will add about 30 basis points of growth versus 2022. With regard to gross margin, we expect the rate in the second quarter to slightly improve versus the prior year, but remain in the low 30s due to significant markdowns on slow-moving seasonal inventory. Despite buying down significantly for this spring, seasonal sales have lagged our plan and caused us to be over-inventoried again, as Bruce noted earlier. In Q2, we expect SG&A dollars to be down slightly versus 2022 due to the cost-saving efforts I mentioned earlier, primarily in our supply chain, including the closure of our forward distribution centers, payroll, and headcount reductions. This will be offset largely by inflationary impacts across wages and other line items. With regard to CapEx, as I mentioned earlier, we now expect a lower level of around $80 million for the year and continue to look for opportunities to reduce this further. We expect around 15 to 17 store openings in 2023, with closures expected to be above that number, but concentrated at the end of the year. Most of the capex for new stores has already been spent or incurred, as we paused all new commitments a while back. We do not plan to restart store openings until our business performance has stabilized. In the meantime, we are continuing to evaluate underperforming stores to determine if we can improve their performance or otherwise if we can affect an early closure. We expect full year depreciation of around $147 million, including approximately $36 million in Q2. We expect a share count of approximately $29.3 million for Q2. We expect total Q2 inventory to be down in line with sales again and are being aggressive in managing inventory levels through the balance of the year. All of our commentary on Q2 excludes the potential impact of impairment charges on one-time expenses, including FTC exit costs and external partner fees related to our cost reduction work, as well as gains on asset sales. Overall, as Bruce referenced, Driving improved productivity and efficiency across our operations is one of our five key areas of focus in 2023 and beyond. We remain focused on significantly improving inventory returns, reducing structural costs, and finding ways to make our CapEx dollars go further. This is key to returning the company to growth and profitability. I will now turn the call back over to Bruce.