Big Lots Earnings Call Insights: Test Markets and Top Line Trends

Big Lots, Inc. (NYSE:BIG) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Test Markets

Patrick McKeever – MKM Partners: I was actually having some telephone problems earlier. Just going back to the cooler – the frozen and refrigerated food test, can you just talk through some of the numbers there? How many stores are now on the test and maybe give us a little additional color on the traffic and ticket impact and whatnot?

Timothy A. Johnson – SVP and CFO: Patrick, it’s T.J. I’ll start and then if David wants to chime in from a merchandising perspective, but at a real high level, we’ve got 75 stores identified in the test markets, five markets as you know across the country. So we had pretty representative sample. In those test markets, we’re seeing a lift in comps and that lift in comps is coming solely from transactions, which was the goal of the test you’ll recall. So we feel very good about that outcome. The basket size in a traditional, I guess, cooler or SNAP basket is slightly lower than our company average, but still in – I’ll call it, in the low 20s. So we’re encouraged by that as well. We like what it’s doing for, again taking down that barrier to entry in the store. In round numbers, the cost was about $30,000 to $35,000 per store in terms of CapEx, and more comfortable given the sales lift that we’re seeing that that is certainly going to pay for itself over the longer term. We won’t go into details of comps versus margin rates versus, et cetera, et cetera on this call. That’s something we’ll talk about potentially at later date. Again, the good news here is, we had a pro forma in place when we put the test in place that says if we hit this, we’ll call that success and we’ll move forward. We reviewed that with the Board this week and they were as encouraged as we were. So, what we’re communicating today is the Group internal is working on a rollout plan for the next couple of years understanding what our resource needs are and how we balance that against other initiatives in the business to make sure we’re prioritizing the right thing for the customer.

Top Line Trends

Matthew Boss – JPMorgan: So could you elaborate on top line trends as the quarter progressed and particularly performance in August versus the 3Q guidance so far?

Timothy A. Johnson – SVP and CFO: Sure, Matt. Q2, the trends or the trajectory in Q2 was as expected. If you’ll recall from the last call, we were concerned about the early trends in May and particularly the Memorial Day weekend, or as you’ll recall, in most markets it could have been 15 or 20 degrees cooler than the prior year. Memorial Day weekend is typically a big, big kickoff for us for summer and lawn and garden merchandise and that business did not happen in May. June business got incrementally better. In July, the comps for the month of July were actually essentially flat. So May comps were below the quarter. June comps were in line with the quarter. July comps were essentially flat or better than the quarter number, which was very encouraging to us. So we’re sitting here at the end of July saying, we’re right on trajectory to go into the back half of the year. Candidly, the first two weeks of August were not as encouraging for us and comps were down to last year. Now, the last week to 10 days, comps are back closer to that flat range. So what you see reflected in our Q3 guidance, Matt and for others, because I know this is probably a common question out there, what you see reflected in our Q2 guidance is us acknowledging that we’ve got two different trend results here in August as we start the quarter. We do understand that as the quarter goes on, obviously, our business got more and more challenged last year. So we understand that there is a little bit lower bar out there, but coming out of second quarter, we felt pretty confident going into third and then again the first two weeks of August gave us a little bit of – hopefully what plays out to be a (hand fake), but we are really not sure just yet. So, again 90 days ago, we would have been talking about slightly positive comps in the third quarter. We thought it was prudent to adjust our expectations for third quarter and acknowledged that the early start to August and for some back-to-school was not as robust as we would have liked.