Big Lots (BIG) Q2 2012 Earnings Call August 23, 2012 8:00 am ET Executives Andrew Regrut Timothy A. Johnson - Senior Vice President of Finance Joe R. Cooper - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and President of Big Lots Canada Steven S. Fishman - Chairman, Chief Executive Officer and President Analysts Meredith Adler - Barclays Capital, Research Division Joseph I. Feldman - Telsey Advisory Group LLC David M. Mann - Johnson Rice & Company, L.L.C., Research Division Laura A. Champine - Canaccord Genuity, Research Division Jeffrey S. Stein - Northcoast Research Charles X. Grom - Deutsche Bank AG, Research Division Daniel R. Wewer - Raymond James & Associates, Inc., Research Division Peter J. Keith - Piper Jaffray Companies, Research Division John Zolidis - The Buckingham Research Group Incorporated Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division Patrick McKeever - MKM Partners LLC, Research Division Anthony C. Chukumba - BB&T Capital Markets, Research Division Matthew R. Boss - JP Morgan Chase & Co, Research Division Presentation Operator
Before we get started, I'd like to remind you that any forward-looking statements we make on today's call involve risk and uncertainties and are subject to our Safe Harbor provisions, as stated in our press release and our SEC filings, and that actual results can differ materially from those described in our forward-looking statements.Our consolidated financials include results from our U.S. operations and from our Canadian business that was acquired on July 18, 2011. Our statements also include immaterial amounts of discontinued operations activity. All commentary today is focused on adjusted non-GAAP results from continuing operations, specifically our Q1 and year-to-date results, along with our annual guidance that excludes the nonrecurring, noncash, after tax charge of $3.4 million or $0.05 per diluted share in Q1. As a reminder, this charge relates to a change in accounting principle relating to inventory valuation and was the direct result of our successful go live of a new merchandising system at the beginning of the fiscal year. A reconciliation of GAAP to non-GAAP adjusted earnings on a year-to-date basis and for our annual guidance is available in today's press release. With that, I'll turn it over to T.J. Timothy A. Johnson Thanks, Andy, and good morning, everyone. I'm going to briefly cover Q2 results and then turn it over to Joe to talk about our progress in Canada. I'll then come back and talk to you about forward guidance, and Steve's going to give you some perspective on results and our merchandising efforts going forward. Sales for U.S. operations were $1.183 billion, an increase of 1.7% compared to $1.163 billion we reported for the second quarter of last year. Comparable store sales for stores open at least 15 months decreased 1.9% compared to our guidance of slightly positive to slightly negative. From a merchandise perspective, our better-performing areas included: electronics, which comped up low double digits; hardlines, which was up mid-single digits; and consumables, where comps were flat for the quarter. As you may recall, electronics and consumables were challenged in Q1, so we were encouraged to see those businesses' trends actually improve in the second quarter. The balance of our discretionary categories experienced some challenges in Q2, namely: furniture and home were down low singles; seasonal is down mid-singles; and play n' wear, which comped down low double digits.
For the second quarter of fiscal 2012, operating profit dollars from continuing operations for our U.S. business were $42.6 million as our operating rate declined to 3.6% compared to 5.2% last year. Our gross margin rate of 39.3% was down 20 basis points to last year due to merchandise mix pressures. As I just mentioned, our lower-margin categories, namely consumables, hardlines and electronics, were our better performers, while our higher-margin discretionary categories underperformed.Our overall markdown rate was similar to last year but above our forecast, with the majority of the variance due to the softness in seasonal sales of lawn and garden and summer. The higher markdowns were necessary in order to manage our inventory levels to our glide path as we exited Q2. Total expense dollars were $423 million, and the second quarter expense rate was 35.7%, up 140 basis points to last year. Expense deleverage came from higher depreciation and occupancy costs, an increase in advertising spend, higher health care costs and the deleveraging impact of a negative 1.9% comp. Interest expense of U.S. operations was slightly higher than last year, and our U.S. tax rate was 39.1%, which was above last year's rate of 38.2%. In total, our U.S. business reported income from continuing operations of $25.4 million or $0.42 per diluted share for the second quarter of fiscal 2012 compared to last year's $0.52 per diluted share. From a real estate perspective, we opened 18 new stores and closed 9 in the second quarter, leaving us with 1,463 stores and total selling square footage of 31.8 million. Joe will touch on Canada in a moment. But in terms of the P&L, our net loss of $3.3 million or $0.05 per diluted share was better than our guidance, which called for a net loss of $4 million to $6 million or $0.07 to $0.10 per diluted share. So in total, from a consolidated point of view, we reported adjusted income from continuing operations of $22.1 million or $0.36 per diluted share. This compares to $35.7 million or $0.50 per diluted share a year ago.
Moving on to the balance sheet. Inventory on a consolidated basis ended the quarter at $881 million compared to $780 million last year. The increase was driven by growth and improvement of inventory content related to our Canadian operations, a 3% increase in U.S. store count and a 6% increase in per-store inventory in our U.S. stores. The inventory per store increase in U.S. stores was isolated to 2 key merchandise categories, consumables and furniture.Consumables' growth was focused in certain departments or strategies where we believed our assortment was not broad enough or deep enough in Q1. For example, growth was intentional in food, captive label food and specialty food classifications, as we attempt to become more consistent in these businesses. Additionally, as many of you know, we also delivered a large famous maker branded closeout deal near the end of second quarter, which has influenced inventory level and is expected to provide sales well into Q3. Our inventory levels in furniture are above last year as well, partly due to slower Q2 sales but also due to our build-up for back-to-school and back-to-campus events, Labor Day weekend and expectations for a larger holiday fireplace business this year. Read the rest of this transcript for free on seekingalpha.com