Big Lots Earnings Call NUGGETS: Problem Areas, Merchandising Organization

On Thursday, Big Lots, Inc. (NYSE:BIG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Problem Areas

Meredith Adler – Barclays Capital: You didn’t actually mention anything about addressing the areas of the store that are weakest, which is more the discretionary categories, and I was wondering if you could start by saying whether you think this is a reflection of what’s going on in the environment. You guys don’t usually don’t blame external factors, but clearly, things have been difficult. What can you do in the context of a weak environment if you think that’s part of the problem?

A Closer Look: Big Lots Earnings Cheat Sheet>>

Steven S. Fishman – Chairman, CEO and President: Meredith, I’ll address three specific areas that probably have been the weakest. Yes, I think we don’t traditionally talk about the environment, but I think in a couple of the issues there may be a piece of what has challenged us. First was seasonal. I think seasonal was a piece of two things. Number one, you’ve heard not only us, but other people talk about the seasonal business being particularly stressed this spring and summer season. The weather was hotter than normal. We had very little rain and moisture and the lawn and garden piece of the business was particularly challenged. You’ve heard other retailers say the same thing. So from that piece, I would say part of it is the economics. The second piece where we were most challenged in the second quarter, besides the weather related goods was in the business. We sold very well early, really good quality patio sets. We did not sell and had some issues with our opening price point goods. They were quality issues. They were our issues and they’ll be addressed for next spring. The good news about addressing that piece of the business into the fall is there’s not really a direct relationship in our minds between what happens with (trimitry) and what happens with lawn and garden in the spring and summer seasons. The (trimitry) program has been developed and is much further along and we’ve had consistency of success in that program, and I think what you’re going to see is even a heightened quality and value awareness going into the fall of this year, but unfortunately, it doesn’t really take hold until the fourth quarter and it’s one of the things that we’ve always had a nemesis in the third quarter of the business. So we feel good about (trimitry) in the fourth quarter. The second piece of the business is furniture. I think there’s two issues there. I think the customer continues to be stressed. Even the good businesses in the first quarter, particularly the mattress business and the upholstery business softened in the second quarter, although was up slightly not as strong as it was in the first quarter. So I think the consumer continues to be slightly stressed and we’re seeing the same kind of performance right now into the early third quarter. On the other hand, the RTA business and the case goods business has been particularly challenged, mostly in the dining classification and some back-to-school classifications we’ve done quite well, but in surrounding areas we haven’t done as well, but we’re addressing that and turning the inventory, and I think part of that is all about change and newness, and we’ve already addressed by taking markdowns on the floor and furniture. We are already seeing a lift in the last 10 days because of that and there will be more change going into the tax time of the year which is the most important time of the year, the end of the fourth quarter and the beginning of the first quarter next year. The third piece of the business and challenge was home. I think that was more self-inflicted than anything. We have made major changes and major commitment to inventory and floor space to that program that got executed mid-to-late second quarter. Parts of that program work particularly top of (bed and bedding). That’s doing well. Other parts of it from an execution standpoint, we have not done as well with particularly the housewares and the decorative areas but we believe that we will be up and running at a better rate going into the end of third quarter and in the fourth quarter, we believe we have a very solid program we’re already seeing receipts of that inventory.

Meredith Adler – Barclays Capital: So I would just sort of follow with that that you certainly have pretty conservative guidance for the second half, is it that you expect the external factors to remain difficult? Are you being very conservative about the categories that have already been weak? Or are you generally concerned about even things like consumables that performed reasonably well in the second quarter?

Timothy A. Johnson – SVP and CFO: Meredith, this is T.J. I think from a guidance perspective, we have to look at most recent trends as we always do and coming out of the latter parts of July and looking at the first three weeks of August is really what drove our decision to put third quarter guidance at negative mid-single digits. So before we get the question, I’ll go out and make the statement that August to date we are in the range of negative mid single digits and that was a – obviously heavily contributing factor to where do we set our sales expectations for third quarter. As Steve just mentioned in some of the discretionary categories, we do believe as the fall season goes on, but more likely as you start to see the nine weeks of Christmas strategies, we do believe that there is an opportunity for some of those businesses to get better, but again that’s very late in the third quarter and on into the fourth. So we’re not expecting any level of change in discretionary businesses through the third quarter. When we look at the fourth quarter, we set guidance at a negative low single-digit comp as you know. Two factors to consider there, I guess first off we do have the benefit of two extra shopping days between Thanksgiving and Christmas, but additionally we are cautious about the early part of November and candidly the latter part of October around the National General Election, we’ve seen historically – go back to ’08, go back to ’02 or any time there is a significant focus on the election that people start to have a different focus in retail or certainly breaking through in retail and print or on TV heaven forbid, is very, very difficult. So we do have a cautious point of view on late October and early November as a result of that as well. To your point, we do feel good about, as we mentioned, starting to see some improvement in our single largest business which is consumables, but again recognize that that’s 30% of our business compared to some other retailers where it’s much higher and the 70% of our business which is discretionary is where we really need to see some improvement in trend before we would get more optimistic in our guidance.

Meredith Adler – Barclays Capital: I’m sorry I’d be selfish and ask one more question. The inventory per store was up about I think you said 6%. Can you just tell us how you feel about the inventory that is there at the stores and are you sitting on meaningful amount of potential markdowns right now or have you cleared what you should have cleared?

Steven S. Fishman – Chairman, CEO and President: First off, Meredith, we always address the inventory. We never sit on anything and we address our problems all the time. In fact, we have already started to address our problems. It’s one of the reasons why I think guidance for third quarter and fourth quarter shows margins challenged. We’ve always confronted those. The majority the inventory by store actually is in two specific areas. In fact, when you take a look at it the other areas are actually flat to comp down. It’s all concentrated in consumables, which a primary piece of it is the national branded closeout that you may have seen in our stores, if you were in there in the last six to eight weeks and that carries into the third quarter. Of course, plans that we have in food for the fourth quarter. So overall, we feel good. If there is an issue there, we’ve already addressed it with markdowns. The second piece of it is in furniture. A piece of it is early receipts of Fireplace, which again, does not relate to the first or the second or even early third quarter parts of the business. That is a business that three years ago was nothing and last year was a significant piece of our business and we have a major increase planned this year. The balance of it is issues in case goods and upholsteries. We have already taken markdowns on that and the balance that we haven’t we have saved and have planned for markdowns right after Labor Day weekend, because the majority of those items are on Labor Day promotion and Labor Day promotion is a very large four, five day event for us. We can’t react to taking additional markdowns until the week after. So, we have addressed our issues.

Timothy A. Johnson – SVP and CFO: Meredith, this is T.J. again. I guess, in the third quarter specifically, if you go back and remember our commentary at the beginning of the year, we talked about the potential of gross margins improving year-over-year, clearly we’re talking about a much different scenario today, and we’re forecasting a margin rate down. The single biggest variable in that change is markdowns to address inventory that coming out of second quarter or elements of the back-to-school sets or elements of different road show events that have not done well, we’re doing our best to make sure that they’re marked on provisions in our third quarter guidance to address those very same issues.

Merchandising Organization

Joseph Feldmen – Tesley Advisory Group: Question about the – if you could talk about the cadence. I know you mentioned August to-date is running down mid singles. But I guess, we’re kind of hoping to hear that trends may be improved through the quarter as you started to fix things with consumables, but is that the – like when did things softened up? Because I thought that the quarter started off a little better than it ended in the first.

Timothy A. Johnson – SVP and CFO: Joe, it’s T.J. Actually the first quarter is where the softness started. So the first quarter you’ll recall we did get off to a pretty good start and it really wasn’t to the latter part of the first quarter that our business started to get more challenged in total. Speaking to the quarter, the month of May was – from a comp perspective, was a decent month for us because we did have one extra ad circular. Ex that extra ad circular, comps were down. The month of June was probably where we had more challenges of the three months, as Steve mentioned, particularly in some of the seasonal businesses and weather challenges and where it started to become apparent to us that some of the product, the opening price points in patio or gazebos were not going to happen the way we thought. The month of July – 4th of July in particular, we had lot of activity in the store from an advertising standpoint and the early back-to-school sets as Steve mentioned, some of the product did sell through well. It was really the latter part of July and then on into early August where it became apparent to us in some of the early back-to-school sets that we did not have the depth of inventory of some of the good items that we would’ve liked and some of the recent events, i.e., the furniture road show or some of the home events, we’re not performing up to our expectations. So, again, those events for inventory (live on into the first) quarter, we’re not anticipating they get any better as much as we’d like to believe they will, we are not seeing it. So that’s what really led us to where we are. I do want to point out that from a seasonal perspective, as Steve mentioned, we pay very close attention and have very strict disciplines to our glide paths on seasonal product. So if you are to look at our lawn and garden in summer inventories or seasonal inventories in total, they are on a glide path and we are taking our markdowns as needed and have every intention of those categories being out of the store, so to speak, on time, so that it’s the new fall season on good start to set. They have their prominent place in the stores. So I do think it’s important to keep that in mind.

Joseph Feldmen – Tesley Advisory Group: I had one more question for you guys. With some of the – and congratulations by the way, T.J. But with some of the changes in promotions today, with regard to the merchandising organization, I know in the past you guys have spoken about doing more direct buying and having your buyer specialized more by category. Is that part of this evolution and what you’re hoping to accomplish with some of the changes today?

Steven S. Fishman – Chairman, CEO and President: Joe, the changes today are very simple. When I joined the Company in 2005, this team put together what I consider to be a really strong commitment in program to develop the model to where it’s gotten to today, and John Martin and I were team members together in building that model and I thought it was probably in the best interest of the team, and the team supported it and I think the merchandising organization will agree to ask John to step back in, and the two of us work on solidifying the model and being successful. The Board of Directors was extremely supportive of it and we have the utmost confidence that the Group that knows each other and knows each other extremely well and has worked together for seven years will be capable of overcoming this (blurry) blip in our top line sales.