Tim Johnson - Vice President of Strategic Planning and Investor Relations
Steve Fishman - Chairman and CEO
Joe Cooper - Senior Vice President and Chief Financial Officer
Chuck Haubiel - Senior Vice President, Real Estate, Legal and General Counsel
Jeff Stein – Stein Research
David Mann – Johnson Rice
Peter Keith – Piper Jaffray
Ivy Jack – Barclays Capital
John Zolidis – Buckingham Research Group
Patrick McKeever – MKM Partners
Laura Champine – Cowen & Company
Charles Grom – JP Morgan
Big Lots, Inc. (HAS) F1Q09 Earnings Call May 28, 2009 8:00 AM ET
(Operator Instructions) Welcome to the Big Lots First Quarter 2009 conference call. At this time, I would like to introduce today’s first speaker, Vice President of Strategic Planning and Investor Relations, Tim Johnson.
Thank you everyone for joining us for our first quarter conference call. With me here in Columbus today are Steve Fishman, our Chairman and CEO, Joe Cooper, Senior Vice President and Chief Financial Officer and Chuck Haubiel, Senior Vice President, Real Estate, Legal and General Counsel.
Before we get started I’d like to remind you that any forward looking statements we make on today’s call involve risks 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.
As discussed in detail in this morning’s press release, our results include discontinued operations activity. Since we do not view discontinued operations as relevant to the ongoing operations of the business, the balance of our prepared comments will be based on results from continuing operations.
Given our annual shareholder meeting begins at 9:00am, our comments this morning will be brief to allow for Q&A to be completed by 8:45am.
With that I’d like to turn it over to Steve.
During Q1 we remained focused on our own execution and the strategy and what was within our control. We offered the customer tremendous value, new brands, and better quality which helped our top line sales to come in a little bit better then our guidance. From a merchandising perspective, consumables, hard lines and furniture led the way and posted positive comps for the quarter.
Our seasonal business was encouraging in March and April. After shopping our stores and the competition during the first quarter I continue to believe that the quality and value relationship of our seasonal offering is very compelling and the assortments get better and better each season. Our home business is still not great but some parts are starting to post positive results, namely food preparation and stationery. Again it’s all about the deal, the quality and the value.
I’m confident our assortment will improve as we move through the year but parts of our home business cannot get there fast enough for me right now.
During the quarter we managed our inventory diligently, allocating more dollars to categories that were winning, and reducing dollars in categories that were softer or where deals were not compelling. Our margins were good despite some mix pressure. Our IMU remains healthy and we’re taking markdowns to move inventory and bring in freshness behind it.
We controlled our costs and expense dollars were below last year levels. Our expense rate as a percent of sales was flat which we consider to be good performance given our slightly negative sales comp for the quarter. We expanded our operating profit rate and generated significant amounts of cash.
As positive as our financial performance for the quarter may be one of the biggest accomplishments for the business was the execution of our new bank deal. To successfully negotiate a three year deal, unsecured, with similar covenants and at the same $500 million size as our prior facility in this banking environment we believe was a big win for the business and positions us with plenty of dry powder to execute our strategies well into the future.
Incidentally we’ve been in dialogue with S&P and I’m pleased to say that last week they reaffirmed our investment grade corporate credit rating and actually upgraded their outlook from stable to positive.
In terms of the second quarter, I believe our assortments are well positioned. We’ve distorted inventory dollars to consumables, electronics, and seasonal. The deal flow in electronics continues to be good and we also introduced TracFones and accessories to our stores at the end of the first quarter. As I mentioned, I truly believe our seasonal assortment is top notch and if the customer is in the mindset to buy this category we’ll be ready for the business.
We did receive another shot of furniture closeout that was a key contributor to our Q1 results and our next home event is in the stores in time to anniversary last year’s Jennifer Farrell event. Having said that, our inventories at the end of the quarter were below last year in both furniture and home.
Sales for the first quarter were $1.142 billion compared to $1.152 billion for the first quarter of last year and comparable store sales declined 0.5%. Q1 sales comps remain very consistent across the income demographics of our store base and we’re also fairly consistent on a regional basis with the exception of the Southeastern Region which continued to trail the company average.
The key financial metric we watch to evaluate our performance is operating profit and for Q1 both the operating profit rate and dollars were above LY. Our Q1 operating profit rate increased 20 basis points to 5.3% of sales and operating profit dollars increased $2.1 million or 4% despite the lower sales I mentioned earlier.
Walking down the P&L our Q1 gross margin rate of 40.5% was 20 basis points above last year’s rate of 40.3%. The increase to last year was due to higher IMU and lower freight costs due to transportation initiatives and lower fuel prices. These improvements were partially offset by merchandising pressure due to out performance of certain lower margin categories namely consumables and hard lines.
Total SG&A dollars were $401.9 million or down 1% to last year. The first quarter SG&A rate of 35.2% was flat to last year on a slightly negative sales comp. We continue to experience significant leverage from our distribution and transportation initiatives and the store operations team did a nice job managing payroll and leveraged on a slightly negative comp. Offsetting these areas was de-leverage created by higher bonus expense given our record quarter, rent, and higher new store pre-opening expenses and higher insurance and equity related costs.
Net interest expense was $0.3 million for the quarter compared to $1.4 million last year, with the $1.1 million improvement a direct result of the cash generated by the business over the last 12 months. Our tax rate for the first quarter of fiscal 2009 was 39.5% compared to 39.2% last year. When you add it all up, for the first quarter of fiscal 2009 we reported income from continuing operations of $36.3 million or $0.44 per diluted share compared to income from continuing operations of $34.5 million or $0.42 per diluted share a year ago.
Our result of $0.44 per share was better then our guidance which called for earnings of $0.34 to $0.40 per share. The favorability to our guidance related to up-siding gross margin dollars as $0.03 of favorability related to better than expected sales and $0.03 was the result of a better gross margin rate then was originally anticipated.
Particularly on the gross margin rate favorability we were very pleased with our final physical inventory result which saw our shrink rate actually decline year over year. I know there’s been some chatter of concerns out there about the full time/part time mix we’ve migrated towards and how that will impact operations. The fact is our shrink rate improved as the rate finished below 1.9% of sales.
Turning to the balance sheet, inventory ended the first quarter of fiscal 2009 at $718 million compared to $725 million last year. The decrease of 1% resulted from nine fewer stores then last year as average store inventory was flat year over year. Cash flow, which we define as cash provided by operating activities less cash used in investing activities, was $85 million for the first quarter fiscal 2009 which represents a $44 million increase compared to last year. This is directly attributable to disciplined inventory management and higher IP leverage then year end.
You’ll recall that at the end of Q4 we experienced lower then expected account payable leverage. At that time we indicated to you that it was timing related based on our decision to reallocate open to buy and receipt dollars towards categories like consumables and other closeout opportunities where vendor terms are shorter and cash discounts are offered. As expected, we saw that timing reverse in Q1.
Cash flow also benefited from lower year over year tax payments which was timing related as well as lower CapEx for the quarter this year which I’ll touch on in a moment. We ended the quarter with no debt and $8 million of cash invested in money market securities compared to debt of $165 million last year. This change of $173 million is directly attributable to our cash generated over the last year and no share repurchase activity since early March 2008.
For the first quarter, capital expenditures totaled $12.9 million down $5.4 million compared to the first quarter of last year. The decrease in CapEx in Q1 is primarily related to lower IT spending partially offset by more new store openings in Q1 this year versus last year. Depreciation expense for the quarter was $19.2 million or $0.4 million higher then last year.
During the first quarter we opened eight new stores which is the largest number for a first quarter since 2005. We also closed two stores, leaving us with 1,345 stores and total selling square footage of 28.8 million at the end of the quarter.
Moving on to guidance, after a slightly negative comp in the first quarter and essentially flattish comps for the combined period of March and April, early Q2 sales results have been inconsistent by week. Month to date for May, comps are down in the low single digits. In analyzing these results we believe several factors have been influencing our sales ranging from the impact of the stimulus checks from a year ago to unfavorable weather patterns early in the month and in certain markets over the Memorial Day Weekend.
At this point, based on the sales trends for the first three and a half weeks of May, we expect a sales comp decline in the range of 1% to 3% for the second quarter. We expect that our Q2 gross margin rate will be flat to slightly up to LY as higher IMU and lower freight costs are expected to be partially offset by merchandising mix pressure.
From an expense standpoint we’re forecasting slight de-leverage based on our -1% to -3% comp assumption. Overall expense dollars are expected to be flattish compared to last year as distribution and transportation efficiencies and lower bonus expense are expected to be offset by occupancy and insurance related expenses and increase in new store opening costs and last year’s gain on a early lease termination buyout on one of our stores.
Based on these assumptions Q2 EPS from continuing operations is estimated to be in the range of $0.26 to $0.32 per diluted share compared to $0.32 per diluted share last year. For the full year we’ve increased our guidance and now expect income from continuing operations for fiscal 2009 to be in the range of $1.85 to $1.95 per diluted share compared to our original guidance of $1.75 to $1.90 per diluted share.
The high end of our range has increased by $0.05 principally as the result of beating the high end of our Q1 guidance. Additionally, the inconsistency of early Q2 sales trends has left us a bit more cautious on sales for the second quarter; the earnings impact of which we anticipate will be more than offset by additional known SG&A favorability in the back half of ’09 related to certain new distribution and transportation initiatives.
For the full year of fiscal 2009 we now expect comparable store sales in the range of flat to a decline of 1%. We expect the gross margin rate to be slightly up compared to last year and we believe we will leverage expenses at essentially a flat or slightly negative comp.
That’s our view of the near term but those of you who have followed for any stretch of time you know that we’re always looking strategically longer term. In terms of merchandising strategy it’s all about better brands, better quality, and better value. Our experience is that there are plenty of excess goods out there in the marketplace. Our job as merchant is to understand what great value is and to ensure we have the relationships with the best brands in each category of business. We have a constant flow of deals from some of the healthiest and manufacturers where we have deep longstanding relationships.
These trying economic times have also presented us opportunities with new vendors or vendors where we were not as meaningful as we’d like to be. New relationships are being established, situations where in the past we were not able to break through but we keep working at it and now there’s a better understanding of our strategy and the potential as a customer.
Recently we’ve also experienced situations where existing vendors who were selling smaller amounts of merchandise were looking to grow their business with us. We believe each of these scenarios presents promise for the future. As CEO of this company I have a very good idea of what my counterparts on the manufacturing side must be experiencing. They likely have a customer base of retailers that is shrinking due to the amount of retail store closings over the last few quarters.
They’re potentially facing large amounts of write downs or write offs as bankruptcies occur and they have a Board of Directors and Shareholders who are constantly asking how are you going to grow? Who are you not doing business with today that you should be? Where are you new customers coming from who are financially sound and are going to be around for years to come?
That’s where Big Lots comes into the picture. Whether it’s our vendor summits or our merchants constantly working trade shows or making phone calls we’re building relationships that are helping our business now and should help us well into the future. That’s how we continue to get better brands, better quality and better values.
The second key element you’ve heard me talk about is real estate and stores. We’re on track to open 45 new stores for this year and believe that number will increase in the out years. Where store operation initiatives are progress as planned, ready for business standards were introduced to the team last quarter and the expectations have been set. District managers will begin grading stores in Q2 and I’m expecting to see a noticeable difference in our stores by holiday.
Already we are receiving more customer compliments and fewer complaints phoned into our store help desk. Our food refresh program which is another key initiative has begun. Again, this initiative is designed to elevate the standards in the food department which is one of the largest volume areas of our store. The program includes cleanliness, presentation, training of associates, and the new marketing of freshness guaranteed.
Finally, we’ll begin our store layout testing during the second quarter. We’ve already retrofitted the entire Columbus market and are closely monitoring the results to better understand how to best execute a broader store test. The final element of this strategy is the cost structure. Clearly we put up another good quarter in Q1 on expenses but again we’re looking much further out then just the current quarter or even the current year.
We’re challenging ourselves in asking how do we get more efficient and more productive. In the last 90 days alone we’ve receive a positive outcome and negotiated lower carrier rates on our dedicated fleet contracts beginning in the back half of 2009 and carrying on into 2010. We made a decision not to renew the lease on our California furniture distribution facility which will positively impact expenses in 2010. We will begin testing a new label scheduling software package in our stores during the second quarter.
In marketing we began a testing program to understand the opportunities of leveraging our existing Buzz Club membership versus print media. Test and learn, test and learn, it’s engrained in our culture and helps us to continue to push to see how high is high.
To summarize and then we’ll go to a brief Q&A. Up against some very challenging comparisons from last year we generated our 10th consecutive record quarter of EPS from continuing operations. We happen to believe that great value will never go out of style. Customers shopping patterns have likely changed and discounts and saving money are likely hear to stay.
We’re a financially strong company and our new bank deal affords us the significant flexibility to chase deals and opportunities as they become available. We’re uniquely positioned to benefit in this environment in terms of both merchandise and real estate. Our merchandise mix is highly discretionary which should position us to be a beneficiary when the consumer stabilizes and the economy recovers.
Our cost structure work over the last several years has left us in the inenviable position. We can begin to generate SG&A leverage on a flat to slightly negative comp. As I’ve just articulated, we are already looking at opportunities beyond this year. We generate lots of cash and invest it wisely.
With that I’ll turn it back to T.J.
We’d like to go ahead and open up the lines for questions at this time.
(Operator Instructions) Your first question comes from Jeff Stein – Stein Research
Jeff Stein – Stein Research
I’m wondering if you could talk a little bit out the distribution center on the West Coast and how you plan to handle your shipments to stores.
The furniture distribution facility that we discussed is very similar to what we did in Columbus last year that actually we’re almost anniversarying. Frankly we’ve been moving pallet ready replenishable type box sized goods through the RC/DC our basic closeout distribution center in California to the West Coast probably for the last six months. It’s going to be very, very similar. It will be an expense saving.
It clearly won’t be the kind of expense saving that we are going through at this particular point because the Columbus distribution facility handled many more stores then California did. Its going to be very easy, very simple, the lease is up in September, we’ve already starting flowing furniture through the closeout distribution facility and it’ll be exactly the same as what we did with Columbus it’ll only be handling about 275 to 300 stores though versus the other distribution facility that handled the balance of the chain.
We’re experienced in that, it’s going to be really easy. We’ve offered the majority of the people in the furniture distribution facility jobs if they so choose to want to do so and come over. It’s a win, win for everybody.
Jeff Stein – Stein Research
I’m wondering if you could just amplify a little bit on your tests that you’re doing in marketing with respect to the Buzz Club.
It’s kind of early but what we’re clearly doing is as you know the Buzz Club is something we’ve been really focused on and we believe very strongly in it and we’ve got some things going on in the last half of the year that I’ll speak to when we get to it at that particular point. We have over four million Buzz Club members today and we found that communication and recognition through those Buzz Club members is to a dedicated, committed customer number one who likes us an awful lot and number two, the cost associated with that is pretty significant.
What we’re actually testing at this particular point is where we have a high concentration of Buzz Club memberships and we know this by store location actually, we’re dropping off TMCs or pre-prints and finding out if we can eventually start working our way from costs associated with actually hard core pre-prints and communicating online. Its way too early to even discuss it too much. Again, it offers some real exciting flexibility in years out as we move forward communicating with those customers and saving money at the same time.
I think it a real key here to remember that this is part of a long range plan for the business that we have been focused on now and covers ’09, ’10 and ’11, so it’s a very long range view of how to best maximize our advertising dollar and how to best maximize those four plus million customers that we have in the Buzz Club now. Its very interesting to us, we’ve got over four million customers out there and we have a very high readership when we send out those emails.
We know we’re getting click through as they call it and a lot of readership on those emails because as Steve mentioned that’s a core customer versus when you drop something a TMC people may or may not know who Big Lots is. The sales impact of that is what we’re very closely monitoring. Clearly we know that we do not want to do anything or change anything from an advertising standpoint that’s going to jeopardize the top line, that’s why we’re testing it in a group of stores.
Your next question comes from David Mann – Johnson Rice
David Mann – Johnson Rice
In terms of the deal flow that you’re seeing you mentioned new relationships coming on. Could you at least give us a sense on what some of those brands were if not the specific brands, what categories? Also, as you’re coming up against some deals in the second quarter sort of the strategy to offset that this year?
You know that we value the relationships with people who we do business with. To answer the questions directly in a public form on a conference call I won’t do and wouldn’t do. All you have to do is go into the stores to see it. It’s a cross section across the board in the electronics area, in consumables area, and toys. The toy relationships have really gotten exciting for us. I think I alluded to that in the last call.
I think if you go into the stores we’re more branded today then we’ve ever been before. We look decent; I’m pretty excited about that. If the customer wants to respond to it we’ve got product and we absolutely know we’ve got the greatest value.
As far as responding to the deal flows of what we’re up against, we did have a home event last year that we kind of introduced in the second quarter and we’re up against that. Not only did we have some of the first quarter home event that was a new event flow into the second quarter we also are anniversarying that event and hopefully its going to better values and look an awful lot better this year then last year and Jennifer Farrell is basically in the stores today that is something that an anniversary versus last year.
The content mix is different then last year because we tested and learned an awful lot from last year, it’s a lot more decorative this year, it’s a lot more table top this year, there’s a lot of accessory pieces this year and there’s a lot less furniture pieces this year then last year. That’s number one.
Number two; there are some early receipts of another drug store deal in the stores today. Although we had it predominantly in the first quarter last year, it looks as if we’re going to have inventory in the second quarter and probably even a little bit more into the third quarter. It’s not quite an anniversary but its newer, fresher businesses, we’re pretty excited about.
I also alluded to a major furniture deal that of course everybody knows that we did last year and we did this year in the first quarter and anniversaryied it fairly well in the first quarter. There seems to be some found second shot of inventory that we have in the stores today that’ll carry into the second quarter. We’re pretty well positioned to anniversary anything that happened last year and in fact there’s probably some new and different things out there that we didn’t have before.
Then there’s some other new and exciting things that I clearly can’t give away that you’re going to start seeing in the stores in the home areas probably in the next 30 days. We think we’ve positioned it pretty well.
David Mann – Johnson Rice
In terms of IMU you continue to see some good trends there. Can you comment in little more detail on that? One area I’d like you to comment on is you’ve lost some competition in terms of people bidding deals with National Wholesale Liquidators and Value City going away. Are you seeing that helping you out in terms of some of these new relationships or also on the IMU.
I guess only the manufacturers who we do business with can answer that. Clearly the deals, I indicated this in the first quarter last also on the conference call, are bigger in volume and stature then they’ve ever been before. Whether that’s because we have less competition or not, I’d like to think that’s part of it. I also like to think that just continue building and growing relationship and comfort levels that the people who we’re doing business with like to have with a very strong financially sound business. I think that’s really playing very heavy.
The conversations that I have with my counterparts in the business when I sit down, people like to do business with people who pay their bills. Not only are they manufacturers but frankly with conversations that I have and relationships that we’ve established with people on the credit side of the business who may be in jeopardy and have some potential problems are coming to us to alleviate their problems and put cash in their pockets. Asset based lenders as an example; we’re seeing some of that happening now more then ever before.
I think if we just continue to build a strong company and we give confidence to people who are out there they’re going to want to do business with us.
Your next question comes from Peter Keith – Piper Jaffray
Peter Keith – Piper Jaffray
Impressed with the gross margin increased 20 basis points which I believe was on the toughest compare for the year. You called out the major drivers but what was the biggest surprise on the gross margin for the quarter and how should we think about that going forward?
I think we gave you guidance going forward. I apologize because David intimated that as part of the question too and I don’t know that I really answered it directly. I think there are a couple of components that we continue to work on that’s making us feel pretty good about where we’re at right now. We’re being very cautious and intelligent about the deals that we’re doing and we understand value which means what we need to buy things for. I think we’re buying goods and hopefully selling them at the right prices so that’s helping IMU.
Clearly the initiative that we started two and a half almost three years ago as far as global sourcing is really helping also too. The goods are of better quality, of better value, and frankly we’re making a little bit more money there too. I think most retailers would tell you that a year ago a lot of us were challenged from the orient as far as costs go. Clearly things have come back to the retailers in the last six months in particular. Not only do we feel okay about the first and the second quarter but think things should even get better into the third and fourth quarters.
We were really pressured as retailers, I’m speaking, I guess I shouldn’t be for the entire retail segment but there was a lot of pressure from the orient a year ago on goods coming in. That’s turned in the retailers favor; costs are down particularly in the third and fourth quarter of this year. There’s a lot of favorability. Commodity prices are down; cost structures are down, those kinds of things. We’re actually feeling good.
Then the last piece of it is although we love all of our businesses as some of these businesses get a little bit better like seasonal and we’re certainly encouraged by that performance, those are higher margin businesses and it certainly would help the mix. Even in the second quarter we’re forecasting down slightly on a comp basis when we gave you that guidance. This mix is favorable to the overall margin of the business, where the business is happening.
The shrink results, we take our physical inventories January through April as we noted in the call the results from the PIs February through April were very encouraging. That added some favorability. Then of course the ongoing freight, the fuel cost favorability that we’ve been experiencing since the later part of ’08 has been very favorable to the gross margin also.
And controlling inventories, that’s a real consistent message that we can never expect to not continue to talk to you about as we continue to control our inventories and that reduces markdowns.
Your next question comes from Ivy Jack – Barclays Capital
Ivy Jack – Barclays Capital
Joe mentioned that you saw some sales inconsistency in May. Is it possible to provide any more color? The reason I ask is we’ve heard from other value oriented retailers that sales trends were pretty strong in May, at least seasonal sales, particularly with Memorial Day. I’m not sure you can, but if you could I’d be great to kind of hear maybe your thoughts on exactly what’s happening.
Coming out of Marpil, March and April combined where comps were essentially flat or flattish we came into the first couple weeks of May and sales trends were different. The first couple weeks of May were not the best for us. In week three when weather got better our business got better. It’s interesting when you look at it by category we are seeing that our seasonal business is actually leading the pack right now in early parts of second quarter which as Steve mentioned we’re very encouraged by. That is higher margin business for us, it’s a category were known for with our core customers, they like it, it a reason they come in.
Then on the flip side we’re actually seeing that what was a leading category in consumables is a little bit softer here to start the second quarter then it was in the first quarter. We’ve not really changed our mix coming out of April into May but we think that might be pointing toward where customers were stocking up on goods last year i.e. stimulus checks and having a little extra money. The mix of the business is a little different coming into the second quarter; the weekly trends have been a little bit different. We’re trying to give you the best guidance that we have as of what we know right now.
I think what we all feel good about though is that we continue to execute better brands, better value, across the store and we’re hopeful that in the end that wins out. From an execution standpoint we’re not really doing anything different to start the second quarter, we’ve just seen some inconsistencies. Quite frankly, inconsistencies by market which again where weather has been better our business has been a little bit better, where it hasn’t been it’s a little bit more challenging.
Ivy Jack – Barclays Capital
Can you talk about some of the things that Chris has been able to accomplish over the last couple of months with respect to in store standards and the impact of the two new regional managers that you’ve recently brought on, the impact they’ll have in the latter part of the year?
I think its way to early to talk about that. I’ll give them props when its time to give them props as far as the new Regional Vice Presidents. We do have two new Regional Vice Presidents one in the Southeast that joined us about 90 days ago and we have very high expectations for her potential performance and we have a new Regional Vice President on the East Coast a very important region to us that has been performing well but has great growth opportunity, particularly in, we’ll let you know at Christmas time how well they’ve come.
Chris’ impact to the business is his excitement and exuberance and his accountability not only to his Regional Vice Presidents but the entire field organization. They’re level of standards and expectations have risen dramatically. We’re seeing some very encouraging signs in the stores that we have spent time being dedicated and ready for business and they’ve executed their program. There’s a long, long way to go between now and when this programs needs to be initiated in the entire chain. My expectations are that by the Christmas season we’ll see some real differences in stores.
You guys can tell us even better because you’re traveling the stores as much as we are and you’re seeing different parts of the country. I would tell you for the first time since I’ve been here though I’ve had more positive telephone calls about what our stores look like today, how they are servicing the customer, and how they’re executing and the cleanliness of each one of those stores then I’ve had since the day that I walked in here in July of 2005. It’s only the beginning. In your vernacular terms we’re only in the first inning.
Your next question comes from John Zolidis – Buckingham Research Group
John Zolidis – Buckingham Research Group
I was wondering if you can talk about how the closeout environment may have benefited or is benefiting the gross margin. With Big Lots being the buyer of last resort in a lot of cases for these deals and retailers being under pressure one would think that you’d be able to negotiate better purchase prices for a lot of products. Can you talk about how that may have benefited your gross margin and whether you expect that?
We’ve always said that closeouts are better margins then traditional day in and day out type never out goods or must have goods so that’s very clear. Our percent of business has been shifted really dramatically so in the quarter I wouldn’t tell you we did more closeout business then we did non-closeout business. I kind of alluded before too that the deal environment is what it is and we understand what value and the consumer wants to pay for something.
We’re going to negotiate as hard as we possibly can at the same time try to be fair with the manufacturers we’re doing business with because we’re going to be here for a long time and we don’t like doing deals one time with anybody. It’s very clear that the deal environment is probably in our favor at this particular point. People are looking for cash, that’s pretty obvious.
It extends beyond that because as you know we’ve got an import business just about 25% to 30% of our mix and as Steve mentioned, the margins are pretty healthy as well. I wouldn’t want investors to walk away thinking that our gross margin performance in the first quarter was all about a deal environment that’s in our favor, its all about our merchants working very, very hard to get the best costs and provide great value to the customer and really manage their inventories day in and day out and turn the goods.
John Zolidis – Buckingham Research Group
Do you think that you’d have to give up any gross margin in an environment where inventories are tighter and sales are better at your normal place that you go to pick up the merchandise?
We haven’t made that decision in the past and we certainly are not in the business of not making money. It doesn’t really matter to us if the deal environment is active or non-active although I would tell you that I’ve never seen it where it’s not active to some degree. Frankly the only difference in the environment right now from my perspective is that the deals are bigger then they’ve been in the past.
I still think that that’s the work that we’ve done over the last four years and the comfort level manufacturers have and banks have and creditors committees have in wanting to do business with us because we do business in a very fair, intelligent way. We pay them cash and we don’t influence them in a negative way and really harm their product out there in the marketplace.
I think its good but I think a lot of people would tell you that markups and the way they’re buying right now whether they’re in a closeout business or the non-closeout business they’re buying better right now then they’ve been buying probably in a while.
John Zolidis – Buckingham Research Group
On the comp guidance we’re looking at four consecutive quarters of negative comps and guidance for the full year implies an inflection to positive comps in the back half. At this point I think its pretty clear unemployment is not going to be better three months from now. Why wouldn’t we expect that pressure on the discretionary categories to continue into the third and fourth quarters?
Steve alluded to it, its all about the deal and its all about value. Quite frankly in some of our discretionary categories I don’t think employment is any better here in the first quarter or second quarter then it was a year ago and we just alluded to several times our seasonal business which arguably could be the most discretionary part of our business is our healthiest business right now.
We’re seeing signs in parts of our home classifications which can’t be viewed as discretionary that the business is improving there and we’ve got some new programs through the back half of the year that I know we feel good about. Our furniture business is pretty healthy in the first quarter and quite frankly our toy business which again can be viewed as highly discretionary and has been disappointing the last couple years in the back half of the year was one of our better businesses in the first quarter. We’re very aware of the discretionary nature of our product.
At some point we believe that that turns into a big, big asset for the company in terms of not only healthier margins but top line performance. We’ve got, we think, some pretty good plans for the back half of the year. The customer will have the final vote. From our standpoint we are executing against the strategy in providing better brands, better value, better quality, across the store. We think that’s important to the customer.
Your next question comes from Patrick McKeever – MKM Partners
Patrick McKeever – MKM Partners
Just wondering if you might provide some color on the recent store opening in Columbus in the Polaris Town Center which is in a somewhat different format then the typical store, and talk about that market in particular, the Columbus market, which I think where all of your stores have been refreshed? Go through the key differences between that store and your core store.
I know there’s been a lot of chatter about Polaris. We probably have given everybody reason to chatter about it. I would encourage you and anybody else who’s interested in taking a look at it to come to Columbus to understand it. It is a test facility for us and probably offers us more opportunity in one store location that we could test in the next couple of years.
One, its in an economic area we don’t traditionally trade in so we’re going to find out if not only do we hold our core customer because we closed the store that was less than a mile way, so hopefully those customers will continue to come. Two, we’re in an area with traffic that we don’t traditionally experience because it’s a real “A” mall location. Three, will there be economic opportunities because there’s a customer base we just haven’t been trading to for one reason or another.
Traditionally no matter how much we really like, at every retailer will tell you 80% of their customer base comes from a three to five mile radius of around a store, its as simple as that. Then more importantly to get inside the store which is really important to us, we worked over a year on this prototype to understand communications and execution and there are so many different tests going on inside of this store that I can’t even enumerate on.
We have 20% more inventory on the floor because of the fixtures and the presentation then we do on a traditional store. Is the shelving right? Do we have the businesses positioned correctly? We have the seasonal business which our core customers told us is the one of the most important businesses we have, front and forward in the store we’ve never done anything like that before.
We have the furniture business displayed although it may seem like it in a larger area in a traditional area and a traditional size like we never have before. Home looks completely different then it ever does before. The entire marketing inside the store of how we communicate to the customer is different.
There’s a lot of potential applications to that and I know those of you who have followed me have heard me say the inside of the marketing of the store could be the single most important part of marketing that we do, because of the fact that our customer comes to us with very limited if nothing in mind to buy, spends over 30 to 35 minutes in our store and those kinds of things. How we market to them inside the store and the communication, the message is really important.
Saying all that, the stores been open for two weeks at this particular point. It would be almost ridiculous for me to give you what we think is going to happen there. I will only tell you that in the short period of time that it’s been open we’re certainly encouraged by the early performance of almost everything that we’ve talked about and we’re trying to achieve.
We’ve got three more stores that are going to be basically in a 20,000 square foot round about prototype that are going to be opening between August and September and they’ll be many of the things that we’ve done in this Polaris prototype there that we really want to test and see if it’s the right thing for us to do.
Then of course clearly if we can perform in an area like this it changes the landscape of the kind of real estate that Chuck can continue to look at as we go forward. Saying that, Polaris is very early, just open, certainly encouraging, performing very early absolutely exceeding our expectations and even more importantly the mix of the business is very, very encouraging.
It was a former Linens ‘n Things, we’ve got a number of either Circuit City’s or Linens ‘n Things with similar demographics and as Steve said there’s some new fixturing that’s inside as you can imagine. Out in Vegas last week every Tom, Brad and Sally were trying to bring in similar type stores in similar type strips that we’ve been working on pretty diligently to see what the demographics versus fixturing versus mix of the product.
As far as Columbus goes, part of the whole refresh program that Chris Chapin and his team have been working on we finished all of Columbus last week and in fact the executive team toured after the grand opening a couple weeks ago Polaris about half of the locations in and around Columbus. The stores look terrific. They’re certainly operating really, really well and we’re encouraged by the early performance in the entire marketplace.
What it’s really going to do is help us take a look at where we need to go to next. I think we had mentioned before we wanted to test up to 60 locations. We still plan on doing something of that sort but we want to make a decision where we can get the biggest bang for our buck. I think we’re running those numbers and trying to figure out where we want to go to next. We’ll start working on those in the second quarter and try to be ready in the third quarter with those stores. We’re encouraged by all of it but it’s early.
Your next question comes from Laura Champine – Cowen & Company
Laura Champine – Cowen & Company
I wanted to ask about your long term SG&A rate. You’ve obviously made a ton of progress on that so far and you mentioned closing the DC in California that’ll be a little less of a savings then the one you did in Ohio. Going forward can you reduce SG&A rate from cost cuts or do you really just need to grow the top line from here on out.
We don’t speak to a long term SG&A rate target. Of course we’ve got a long range plan internally and we do have a number of initiatives in place that Steve mentioned on the call. Just a couple, certainly the initiatives in distribution, transportation will continue. We just finished our dedicated fleet contract negotiation, should see some favorability out of that over the next year. As we mentioned, the moving of the furniture distribution in California into our main DC we’ll see some savings principally in 2010.
As we’ve said in the past, we are testing a labor scheduling package through our stores, again that’s in the test phase but it’s something that we hope will generate some savings there. There’s a continuously there’s initiatives in play out into the future, its part of our culture now. Each year we’re consistently challenged. We hear SG&A rate, what are you going to have on tap to keep driving it down. What we do is tell you what initiatives we have in play, what’s coming up. We don’t go out multiple years.
I hope we’ve established the credibility at this point that it is an obsession here to keep driving our cost structure down. You should, I think, feel comfortable with the initiatives that we communicate and the savings that we speak to in the near term that we should be able to generate those in the business.
Your last question comes from Charles Grom – JP Morgan
Charles Grom – JP Morgan
On gross profit in the quarter, can you quantify how much the Columbus DC helped you? On the second quarter guidance the 1% to 3% can you remind us how the second quarter progress last year was May to April compared to the year or did June and July get more difficult with the stimulus?
The Columbus distribution center rolls through SG&A not gross margin. In terms of operating profit clearly that was a big part of the leverage that we experienced in the first quarter. In round numbers again these numbers will be in the 10-Q that’ll be filed here shortly. Our distribution and transportation costs which are in outbound costs in SG&A were down roughly $9 to $9.5 million year over year.
Furniture and the DC consolidation was a key part of that as was some of the transportation initiatives that we’ve had around carriers as was lower overall fuel costs quite frankly. We kind of hit on all cylinders in the first quarter and we’re very encouraged about that. Some of the work that’s been done to really keep us going into the back half of the year with negotiating new carrier rates on our dedicated fleet and the California furniture DC which really is more about 2010. Still a lot of work to do and a lot of work that can positively impact SG&A well into the future.
In terms of the second part of the question, in terms of comps for the second quarter, last year in our, the way our business trended May was towards the better end of the comp for the quarter so it has been definitely one of our more difficult months to compare up against. May and July were a little bit better then the company average last year. June was probably the softer of the three months. At least that’s what we experienced in our business.
Pretty close. Certainly all positive and pretty close.
At this point we’d like to thank everyone for joining us. We do need to move on to our annual meeting. I am in the office today and can take questions if people have follow up. We look forward to talking to you in August.
(Operator Instructions) This concludes today’s presentation. Thank you for your participation. You may now disconnect.
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