Big Lots' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug.25.11 | About: Big Lots, (BIG)

Big Lots (NYSE:BIG)

Q2 2011 Earnings Call

August 25, 2011 8:00 am ET

Executives

Joe Cooper - Chief Financial officer, Executive Vice President, Principal Accounting officer, Treasurer, Interim Treasurer and President of Big Lots Canada

Charles Haubiel - Executive Vice President of Legal & Real Estate, General Counsel, Corporate Secretary and Member of Executive Committee

Timothy Johnson - Senior Vice President of Finance and Vice President of Strategic Planning & Investor Relations

Steven Fishman - Chairman, Chief Executive Officer and President

Analysts

David Mann - Johnson Rice & Company, L.L.C.

Daniel Wewer - Raymond James & Associates, Inc.

Meredith Adler - Barclays Capital

Mark Mandel - ThinkEquity LLC

Peter Keith

John Zolidis - Buckingham Research Group, Inc.

Anthony Chukumba - BB&T Capital Markets

Joseph Feldman - Telsey Advisory Group LLC

Jeffrey Stein - Ticonderoga Securities LLC

Laura Champine - Cowen and Company, LLC

Operator

Ladies and gentlemen, welcome to the Big Lots Second Quarter 2011 Teleconference. This call is being recorded. [Operator Instructions] At this time, I'd like to introduce today's first speaker, Senior Vice President of Finance, Tim Johnson. Please go ahead.

Timothy Johnson

Thanks, Jake, and thank you, everyone for joining us for our second quarter conference call. With me here in Columbus today are Steve Fishman, our Chairman, CEO and President; Chuck Haubiel, Executive Vice President, Real Estate, Legal and General Counsel; and Joe Cooper, Executive Vice President and Chief Financial Officer and President of Big Lots Canada.

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 provision as stated in our press release and our SEC filings, and actual results can differ materially from those described during our forward-looking statements.

As many of you know, this is our first communication of financial results containing our recently acquired Canadian business. In today's press release, we have provided summary levels segment reporting to facilitate a better understanding of these results. Our consolidated financials include results of our Canadian business since acquisition on July 19. We do not anticipate providing pro forma or historical information as it is not required and in our view, is not indicative of our business going forward.

We will be speaking in detail to our results from U.S. operations and Joe will provide commentary on our plans and expectations for our Canadian business. All of our comments this morning are focused on continuing operations, as any discontinued operations activity is not material to overall results. With that, I'll turn it over to Steve.

Steven Fishman

Thanks, T.J., and good morning, everyone. From a top line perspective, I was encouraged to see our business trends improve as the second quarter progressed. After a tough month in May when comps were down in mid-singles, our sales trends improved as weather improved and the combined period of June and July were relatively flat. The level of improvement in June and July was apparent in most major categories, particularly in seasonal, Consumables, Furniture and Home.

From a merchandise perspective, Consumables' trends accelerated from Q1 to Q2 and comps were up in the mid-single digits. We placed a tremendous amount of effort and focus on this category and the results over the last 6 months demonstrate how quickly our trend can change. Our assortments have become broader to offer the customer more selection at extreme value and savings.

From an execution standpoint, we know the marketing and presentation of the product in the store has improved. And in Q3, you will see new initiatives such as our fresh find captive label, expansion and more prevalent signage of extreme value compared to pricing. We believe these efforts will help us to maintain the trends we are seeing in Consumables.

Seasonal merchandise comps finished up mid-single digits as well. When the temperature started to rise in June and July so did our comps, as customers had a need and did respond favorably to our promotional strategy. We're confident this category drives customer traffic and helps provide a lift to other categories in our stores as well. Seasonal's a very clear differentiator in our strategy and I feel bullish about our plans for fall, particularly in the holiday season in Q4.

Furniture comps were down mid-singles, up against double-digit positive comps last year. In this category, we were up against some unique closeout activity last year, namely the Galleria liquidation and the Cape furniture deal. Comps accelerated as the quarter went along and the last year deals were no longer a factor and over the last few weeks, comps have been relatively flat to slightly positive. We've strategized to grow this business in the back half of the year on how high is high testing results from last year. I'm comfortable with our position and continue to believe that Furniture is one of our biggest growth categories over the next several quarters and years.

Our Home business comped down against a double-digit positive comp last year and also experienced improving trends in Q2. I told you on the last call that Doug and his team were strategically making changes for the fall and I believe we're already starting to see some of the benefits of their work. It's early, but we absolutely believe our Home business and the assortments will improve over the next several quarters.

From an inventory standpoint, I'm comfortable with our overall levels and feel confident that the growth is in the right areas. Consumables, which has been strong; Home, where we're funding new ideas and in Electronics where some deals helped performance of our early August adds. Inventory levels and the balance of our categories are down to last year and appropriately so. Overall, the content and quality of the inventory is pretty good in most areas, but there are pockets where I think you'll see us take some markdowns to clear goods because we have better ideas coming. But that's our business; we have to stay fresh and changing to the customer. In an environment that's still fragile with the customer who is challenged and concerned, we stayed focused on our business and generated a record second quarter EPS result and we continue to be good stewards of our capital. With the volatility in the market, we were able to opportunistically repurchase over $300 million of stock or 13% of our outstanding shares. We believe this is a good long-term investment and hopefully demonstrates to our shareholders that we're confident in this model and our prospects for the future.

Now T.J. is going to give you some details on the quarter.

Timothy Johnson

Thanks, Steve. I'm going to focus my comments on U.S. operations and Joe will touch on Canada results at a high level in just a moment. Sales for our U.S. operations for the second quarter were $1.163 billion, an increase of 1.8% compared to the $1.142 billion we reported for the second quarter of last year.

Comparable store sales decreased 1.5%. For Q2, operating profit dollars were $60.1 million, a decrease of $3 million compared to last year. As anticipated, the operating profit decline was a result of lower comps and a lower gross margin rate, partially offset by expense leverage. Gross margin dollars declined 1% in Q2 compared to a year ago. As expected, our rate of 39.5% was down 100 basis points to last year with the decline resulting from higher seasonal markdowns, higher domestic freight cost due to fuel prices and the unfavorable merchandise mix resulting from the strength of our Consumables business.

Total expense dollars were $398.9 million, which was slightly lower than last year. The second quarter SG&A rate was 34.3%, or down 60 basis points to last year. Expense leverage came from store payroll, lower bonus expense, lower utilities driven by our energy management investment and lower insurance costs. Offsetting this leverage was higher transportation costs due to fuel and deleverage and depreciation and occupancy-related expenses.

Net interest expense was $0.5 million for the quarter compared to $0.3 million last year and our tax rate for the second quarter was 38.2% compared to 38.3% last year. For the second quarter of fiscal 2011, our U.S.-based retail operations reported income from continuing operations of $36.9 million or $0.52 per diluted share. This result was better than our previously communicated guidance of $0.38 to $0.48 largely due to incremental expense leverage, lower interest costs and share repo activity, which we estimate added about $0.03 to our results for Q2.

From a consolidated point of view, including a net loss of $1.2 million or $0.02 per diluted share from our recently acquired Canadian retail business, we reported consolidated income from continuing operations of $35.7 million or $0.50 per diluted share. This compares to income from continuing operations of $38.8 million or $0.48 per diluted share a year ago. Our average diluted share count for the quarter was 71 million shares and we ended Q2 with 67.1 million shares outstanding.

Turning to the balance sheet, inventory ended the second quarter of 2011 at $780 million versus $734 million last year. The increase of 6% represents the Canadian acquisition, growth in the number of U.S. stores and approximately 2% per store growth in our U.S. stores. Growth which, as Steve just mentioned, was to fund certain initiatives or trends to better position us for Q3.

For the second quarter, CapEx totaled $28.3 million compared to $31.1 million last year, with the decrease primarily related to last year's incremental investment in energy management systems. Depreciation expense for the quarter was $21.4 million, an increase of $2.6 million to the prior year. We ended the quarter with $58 million of cash and cash equivalents and $60 million of borrowings under our credit facility. This compares to $171 million of cash and cash equivalents last year and no borrowings under our credit facility. Our use of cash and debt over the last 12 months was the result of our share repurchase activity and our investment to date in Big Lots Canada, partially offset by the cash generated by operations over the last year.

On the topic of liquidity, during the second quarter of fiscal 2011, we did announce a new $700 million 5-year unsecured revolving credit facility, which includes a CAD $200 million sub-facility, allowing us to efficiently support the growth of our newly acquired Canadian operations. The new facility replaced our prior $500 million credit facility, which was set to expire in April 2012.

We have been investing cash and utilizing our financial strength and balance sheet to repurchase stock over the last several weeks. In Q2, we invested $236 million to purchase 7.2 million shares at a weighted average price per share of $32.68. Subsequent to the end of the second quarter, we continued to invest in our repurchase plan and through yesterday, August 24, 2011, we have invested $77 million in the third quarter of 2011 to repurchase 2.5 million shares at an average price of $31.11 per share. On a year-to-date basis, we have invested $313 million to repurchase 9.7 million shares at an average price of $32.28 per share. This represents approximately 13% of our outstanding shares as of the beginning of fiscal 2011. We have $145 million remaining under our current authorization to repurchase shares opportunistically in the open market.

Now I'll turn it over to Chuck for an update on Real Estate.

Charles Haubiel

Thanks, T.J. During the second quarter we opened 15 stores and closed 5, leaving us with 1,415 stores and total selling square footage of 30.6 million. On a year-to-date basis, we've opened 24 new stores and closed 7 locations. We remain on course to open 90 stores this year, of which I anticipate 25 or so to be what we consider to be our A-type locations.

We're in a much better position this year to open new stores earlier than last year, but still have some opportunity to improve. Of the 66 stores remaining to be opened, the large majority of the stores, 45 or so, should open in Q3, leaving the balance for early November or Q4. Currently, we still expect to close approximately 45 stores, leaving us with net U.S. store growth of 45 stores or approximately 3% for fiscal 2011.

Generally speaking, we're very pleased with our progress this year and how our new store openings have performed to date. The Real Estate market remains pretty decent for us and we continue to make an effort to expand our landlord base. So when our merchandise change creates opportunity, so as the retail landscape and the players in it continue to change, we believe there'll also continue to be ample space available to support our plans for future growth both here in the U.S. as well as in Canada.

With that, I'll turn it over to Joe.

Joe Cooper

Thanks, Chuck, and good morning, everyone. I'm going to focus my comments on 2 key topics this morning. First, Big Lots Canada and an update on our assessment and expectations and then how we're looking at our forward guidance. As many of you know, our acquisition of Liquidation World closed on July 18 or less than 40 days ago. Liquidation World, now known as Big Lots Canada, was a chain of approximately 90 stores throughout Canada. It was a business with a long heritage of closeout or liquidation retailing and likely the most similar type retailer to Big Lots in the Canadian marketplace.

However, the business has been challenged over the last several years, the losses were mounting, resulting in significant liquidation issues. We saw this as an excellent opportunity to cost-effectively enter the retail landscape in Canada and to introduce a Canadian version of the Big Lots win strategy. In that light, we've spent the last several weeks in the very early stages of our discovery phase, bringing in expertise principally from our Big Lots team in Columbus to assess the current state of the business and organization in order to help us focus and prioritize the most important issues now. While the needs are many across the business, 3 critical immediate needs are very clear, merchandise.

We need to fill empty store shelves with great quality and extreme value merchandise. Today, inventory levels are down over 70% or so compared to prior year levels. Lots of empty shelves and a fair amount of inventory that's in stores has aged and we're moving swiftly to liquidate. We need to recruit and hire great talent. The organization has lost a lot of talent over the last year and as a result, we're looking to hire somewhere in the neighborhood of 15 associates in the general office with particular focus in the merchandising area which as a retailer, we all know is the lifeblood of any business. Simply put, we need more resources to go after the merchandising opportunities and to effectively plan and control inventories.

We need to clean up our stores and implement basic processes. While we are looking for talent in stores as well, the most immediate need is to clean up the stores, repair assets which had not been maintained and better support and direct our dedicated team of store associates by implementing some basic processes like our own ready-for-business standards.

We're developing a 180-day transition plan, which is comprehensive of all functional areas; merchandising, planning, sourcing, distribution and logistics, stores, real estate, HR and IT. With this roadmap, we're aiming to stabilize the business, start to put some processes and controls in place and identify areas of investment needed for the long-term success of the business. We have experience in our organization on tackling this type of project.

Similar to our own Big Lots repositioning when Steve joined us, to execute real change takes time. As I will detail in a moment, we know financial results will be challenging in the back half of 2011. We expect we'll make progress in fiscal '12, however, our forecast suggest fiscal 2013 will be the first profitable year this business has seen since 2006. While we initially reviewed the potential of this concept, our analysis suggests that the financial returns in Canada over the next 5 to 7 years would be as strong, if not stronger, than the returns we expect when we decide to open stores in the U.S. Based on everything we've learned to date, we still believe the opportunity is as good as advertised.

There's been a significant amount of work completed in a very short period of time, more work than I want to go into detail on this call, but I'd be happy to take questions on this topic in Q&A.

Now moving on to guidance, we're forecasting Q3 retail sales in the range of $1.1 billion to $1.115 billion for our U.S. stores, which is based on flat to slightly positive comps. We expect our Q3 gross margin rate will be down to last year due to higher domestic freight costs and an unfavorable merchandise mix. Additionally, we are prepared to be more promotional, if the macro environment remains difficult. From an expense standpoint, we expect to generate leverage on our flat to slightly positive comps.

Based on these assumptions, Q3 EPS from continuing operations for U.S. operations is estimated to be in the range of $0.18 to $0.24 per diluted share compared to $0.23 per diluted share last year.

In terms of Canada, given our position in the early stages of the turnaround and the investment needed in the business, we're forecasting estimated sales in the range of $14 million to $17 million and an operating and net loss in the range of $10 million to 12 million. On a consolidated basis, Q3 EPS from continuing operations is expected to be in the range of $0.03 to $0.08 per diluted share.

I think it's important to note that given the extensive loss history of the Canadian business, accounting standards do not allow for us to recognize a tax benefit on our losses until such time as we prove consistency of performance in making money.

Turning to the fourth quarter for U.S. operations, we're forecasting comp sales to be slightly positive. We expect to benefit from one additional shopping day between Thanksgiving and Christmas. We expect our Q4 gross margin rate will be below LY and we anticipate expense leverage on a slightly positive comp. Based on these assumptions, Q4 EPS from continuing operations for U.S. operations is estimated to be in the range of $1.70 to $1.75 per diluted share, compared to $1.46 per diluted share last year.

In terms of Canada, we're forecasting estimated sales in the range of $20 million to $23 million and an operating and net loss in the range of $8 million to $10 million. On a consolidated basis, Q4 EPS from continuing operations is expected to be in the range of $1.57 to a $1.62 per diluted share.

For the full year, our revised guidance for U.S. operations calls for income from continuing operations for fiscal 2011 to be in the range of $3.10 to $3.20 per diluted share, compared to our previous guidance of $2.75 to $2.90 per diluted share. The change or increase reflects Q2 outperformance and known share repurchase activity. Our EPS guidance is based on a weighted average diluted share count of approximately 69 million shares and does not assume any share repurchase activity past close of business yesterday.

For the full year of fiscal 2011, we now expect comparable store sales from U.S. operations in the range of flat to slightly negative. In terms of Canada, we're forecasting estimated sales in the range of $38 million to $44 million with a net loss in the range of $19 million to $23 million. On a consolidated basis, fiscal 2011 EPS from continuing operations is expected to be in the range of $2.80 to $2.90 per diluted share. From a cash flow perspective, in order to include our Canadian operations in our estimates, we updated our estimated cash flow to be approximately $145 million versus our prior guidance of $185 million for fiscal 2011.

The $40 million change is related to forecasted Canadian operating losses, investment in new fresh inventory for our Canadian stores and expected CapEx needs. Our total investment in Canada for fiscal 2011 will be approximately $60 million to $40 million I just mentioned, plus our $20 million initial investment.

Other items of note in our forecast, our guidance for interest expense for the year remains unchanged, our guidance for the tax rate is a little more involved now with Big Lots Canada. In terms of our U.S. operations, we expect the tax rate to be in the range of 38% to 39%. Given that we will have net losses in Canada with no benefit, our consolidated income tax rate will likely be in the range of 40% to 41%.

Now back to Steve for some closing remarks.

Steven Fishman

We've given some pretty detailed information today about our forecast for the second half of 2011, as well as our initial thoughts and near-term action steps for Big Lots Canada business. Before we go to Q&A, I think if you take away a few keynotes from this call and our results today, let it be this: The first half of 2011 proved to be more challenging than originally anticipated for different reasons. However, we have an experienced and tested management team at Big Lots who did not waver, but instead remained confident and focused on long-term plans and the potential of this business. The result was 2 record quarters of EPS and improving trends heading into the fall season.

Second, we're bullish about the long-term potential of Big Lots Canada. Joe detailed our efforts to date and it's likely that the financial picture will be difficult for the next several quarters as we reposition, test and learn and execute Big Lots strategy in Canada. Over the next 12 months or so, we estimate cash investments of $75 million to $80 million, $60 million of which will be in this current year. However, we view this investment of less than $1.50 per share in cash outlay as a low-cost option to effectively enter a new market where strategically we want to be for the long-term success of this business.

The last point and then we'll move to Q&A. Our financial disciplines, strong balance sheet and a high-cash flow model afford us the flexibility to execute on multiple opportunities simultaneously. We have cash to invest in initiatives, grow our store base and make acquisitions with a longer-term view and we have the liquidity and financial strength to go out in the market and opportunistically repurchase stock.

With that, I'll turn it back over to T.J.

Timothy Johnson

Thanks, Steve. Jake, go ahead and open up the lines for Q&A at this time.

Question-and-Answer Session

Operator

[Operator Instructions] And we will move to our first question, Meredith Adler with Barclays Capital.

Meredith Adler - Barclays Capital

I guess I'll stick with Canada. You're presenting the customer up there with -- or I should say the old Liquidation World presented the customer with a pretty unattractive value proposition with empty shelves, and you're going to fix that. The question is, are you going to be able to -- how do you go about convincing people that these stores and these locations are now a decent place to shop, otherwise it's a big risk, you see?

Joe Cooper

Meredith, it's Joe. I would tell you even with inventories significantly down, the stores and the condition that they're in, there's customers in those stores. We continue to be very encouraged by the traffic in the stores and our research that we performed prior to entering that market tells us our merchandise mix that we bring to the table will be very compelling and there's a lot of excitement. Because of the location of the LW and Liquidation World stores very close obviously to the U.S. border, it's also been very encouraging the number of customers that know Big Lots and are very excited about the fact that we are now operating those stores. So we're actually more optimistic today than we were 60 days ago that as we fill those stores with compelling merchandise, the customer will respond. I can tell you that we haven't been able to get a lot of merchandise up there yet, but the merchandise that were flowing into those stores is turning very, very fast. So again, very early indications say that we will be able to be successful turning those stores around.

Steven Fishman

Yes I'll add to that, too, Meredith, if I can. We're really excited and confident that, that consumer in Canada is looking for great extreme value and they don't find it up there right now. As Joe mentioned before and I'll reiterate to this, we've had so many of our customers that indicate their excitement about the fact that Big Lots is coming up there because we're recognized. So I think we have an advantage for our brand name and what we stand for here in the United States. Up there, there's a lot of initial excitement. He's not sharing with you some of the stuff, but I will tell you that some of the early goods that we were able to flow out of here in our distribution centers up there are selling in a very large percentage to total quantities and investments compared to what we're doing here in the United States just by putting goods on the floor. Our business has always been about the treasure hunt and the excitement of what we have in the stores. Along with that, I think you're going to find we're working diligently to understand so that when we are ready to introduce the actual Big Lots brand name to Canada, we'll have a real intelligent understandable marketing program to go along with it.

Operator

And now we'll move to a question from Dan Wewer with Raymond James.

Daniel Wewer - Raymond James & Associates, Inc.

Steve, I was curious about the timing of Canada. The U.S. business has been struggling to generate positive same-store sales in the last 4 quarters, you've had to preposition your Consumables strategy. Are you not concerned that this may dilute management's focus that should be given to the U.S. market to rejuvenate the domestic business instead of focusing on a business that may not turn profitable for at least 2 years?

Steven Fishman

We question ourselves on that very issue, too, and I will you the answer is absolutely not. We're focused on the long-term success of this business. This is a business and a management team that's been tested over time and has produced comp store increases year after year after year. I agree with you that the last 4 quarters have been challenged. We're the first ones to say we're not happy about it, but we're also capable of reversing those trends as quickly as they go against us. And we have a team that is more than capable of handling additional responsibility and that's the team that we built up over years. I would tell you I would question that decision if it was 2 or 3 or 4 years ago, but absolutely not today.

Operator

And now I'll move to a question from Joe Feldman with Telsey Advisory Group.

Joseph Feldman - Telsey Advisory Group LLC

I wanted to ask about Canada, the closeout opportunities that you're seeing lately. Just are you seeing any change in the type of closeouts that are being offered? Are you seeing like one category there's more opportunities than there used to be a year ago? Or maybe the quality of the closeout, just kind of any color you can give around what you're seeing from your buying opportunities?

Steven Fishman

I would say that the nature of the closeout business hasn't changed dramatically, although the quality and the content of the vendor base continues to get better and better. I think that's two-fold. Number one, people continue to understand our strategy and number two, Doug, since he's been here and I know it's only been about 120 days at this particular point, is reaching out to a lot of vendors he had relationships with in his previous life, number one. And number two, we've opened up the coffers to take a good hard look at the vendor base that we did business with in the past but haven't done business with in the near term, and we're aggressively pursuing all of them. I will tell you as business continues to get good and it's the nature of the business, Consumables continues to see really good closeouts available, particularly in the Food business and the HBC part of the business, electronics, but I think that's a function of the fact that the business is really challenged right now overall from a national basis, particularly in the television part of the business and some of the other electronic parts of the deal, the DVD parts of the deal, parts of our deal business, the studios are opening up bigger to us. We have gotten more aggressive on some of the hardlines parts of the business, so we're seeing quite a bit. And one of the parts of the business that I didn't mention that has been really doing well is the automotive part of our business. Home continues to open up more vibrantly and the team just literally is getting back from an overseas trip, predominantly Asia and of course Pakistan and India, because of the textiles part of the business. And we're getting more aggressive not only in developing and creating our own merchandise content, but all of a sudden, there is raw material and goods available for us to make into closeouts that haven't been before. So I'm feeling pretty good going into the third and the fourth quarter and quite honestly what that does is it extends into the first quarter of next year.

Operator

And now we'll move to a question from Laura Champine with Cowen and Company.

Laura Champine - Cowen and Company, LLC

I appreciate all the detail on the guidance. Obviously, we're learning a lot about the Canadian business. Can you comment on when you think it will stop being a drag on your gross margins? Because I understand the investments you may need to make there, but I know that they are having probably a wholesale revamp in their inventories. When does it stop being a gross margin drag?

Joe Cooper

Are you talking about the Canadian business, Laura?

Laura Champine - Cowen and Company, LLC

I am, I am.

Joe Cooper

Well certainly, we would expect some drag in 2011 and principally, that's because we are peeling off limited amounts of Big Lots merchandise and moving it up north because inventories are so sparse. Well what does that do? That adds obviously some distribution costs to it and we're also moving up some free-ticketed merchandise so you have a little foreign exchange there. And that's in the near term. But 2012, we're certainly looking longer term to be able to at least level these gross margins out. We're making very good contact with a lot of the closeout vendors up in Canada, most of which particularly the consumer products companies have separate groups in Canada from the U.S., so we have to establish those relationships, re-establish many of them that have been broken over the last year. And we absolutely see opportunity up there. But I wouldn't see anything until 2012. However, look at the volume; I wouldn't particularly say that the Canadian business is materially dragging down the gross margin because the sales are so insignificant compared to the U.S.

Steven Fishman

Their margins, Laura, were lower than ours in the way that they operated the business. So longer term, we see opportunities. And I think, when you take a business that hasn't made money in over 5 years and we're really looking about 1.5 years down the road, that's pretty quick as far as we're concerned. And we want to do it the right way. I mean we've done things, I believe, we've demonstrated we've done things intelligently in the past. We'd love for it to be immediate and overnight, but the reality is what we do in our business and how we run our business and how we go after opportunities means that it's going to take a little bit of time for us to correct past problems.

Laura Champine - Cowen and Company, LLC

Okay. And I know that you're basically -- it seems like you're having to restock those stores almost all together, so does that change where you expect the year-end inventory balance to be and should we see a little heavier inventory growth for the next couple of quarters?

Charles Haubiel

Well I guess, Laura, from the U.S. standpoint, I think we still feel pretty comfortable around that slightly positive to flat inventory per store ending the year somewhere in that range. Again, deals will come up and we'll take advantage of those if necessary. So if it's a little higher than that, just understand that's our business. From a Canadian standpoint, we would absolutely expect inventories to grow from here, as Joe mentioned. So if you're looking at overall dollars, yes, it might be a little higher than the 6% that we're at today. But from our standpoint, that's a good thing.

Joe Cooper

Yes. And to give you a little color, we've got a little over $7 of gross square foot of inventory in the store. That tells you -- if any of you go in the stores, I'd certainly appreciate a call afterwards, just give me your insights. But clearly a lot of empty shells in it, as T.J. said it's a very positive thing to build those inventories and set ourselves up for some vast improvement in 2012.

Operator

And Anthony Chukumba with BB&T Capital Markets will have the next question.

Anthony Chukumba - BB&T Capital Markets

My question was related to the recent or the ongoing of liquidation of the Border bookstore and Borders chain, I was just wondering if that gives you any opportunity from either a, a buying perspective or b, a real estate perspective particularly as you're starting to rollout these A locations?

Steven Fishman

Well, the liquidation is going on and it's being liquidated by liquidators, so we have no control over that situation. As far as inventory going forward, our hope is always when major specialty retailers or category killers go out of business, it usually is pretty impactful to the manufacturers. So I think our people are pretty aggressive with publishers when it comes to the actual paper that's being published and I'm sure there's going to be things that are going to be showing up. From a Real Estate perspective, I think Chuck's probably a little bit better to speak to that. There's clearly Real Estate out there, the question is does it fit our size and location?

Charles Haubiel

Sure. I think Steve actually hit the nail on the head with that. Obviously we're very close to the real estate. It's interesting because their box size kind of vary significantly more than some of the other A-type concepts, if you will, that have gone out. But yes, we work closely with it. I think as I said earlier, it's just like merchandise when concepts kind of come and go, it presents opportunities for us. There are some landlords that may need to go through a humblization process because Borders was paying some pretty significant rents, but it is something that we've got our eye on and I would expect in the future to have some of those boxes rebranded into Big Lots.

Operator

We'll now move to a question from John Zolidis with Buckingham Research.

John Zolidis - Buckingham Research Group, Inc.

I was going to ask on the U.S. business. As we look into the second half, what are the sales drivers that you expect to help comps turn into, I guess, positive territory relative to the first half? And within that, could you discuss whether there are any unusual or large closeouts that are expected to come in and aid the results?

Steven Fishman

Okay, I'll take that, John. I'll answer the second question first, which is we definitely have closeouts but I absolutely, in the tradition of the anonymity of our business will not discuss those. You'll have to go into the store and see them. But they very clearly are there and we're aggressively pursuing them. As far as the drivers of the business, it's pretty consistent with what's been going on, except for some real interesting initiatives that we have going on. I think you're going to see Consumables continue to drive business and there's a lot of really good things happening there and particularly in the Food end of the business with fresh finds, you're going to see an expanded captive label fresh finds program probably early to mid-September. The international Food part of our business which is also something we've been working on, you're going to see at the end of September into early October and then closeouts that I will not talk about, but you'll see in the stores and I think that is really going to be terrific. From a Home standpoint, we've put some real inventory initiatives and investments in floor space and inventory, particularly in the top of the bed arena of our business. So comforter, sheet sets, blankets, throws, pillows. I think you're going to see some really exciting things there. I also think that quite honestly, we know of but we won't speak to, a lot of things in tabletop, house wares that are closeouts that we did not have in the first and second quarter and that had become available to us going into the third quarter. The small Appliance business is really generating some activity and some excitement right now. We've got a lot of really good things going on there and I think you'll see some really visible brand names that are very recognizable, midline and higher end at sensational values going into the third and fourth quarter. In the Furniture area, there's a lot of exciting things happening in the RTA area, particularly in the juvenile end of the business that we've got some real initiatives going on. And in Case goods, although it's not specifically Case goods, the fireplace part of our business has been an initiative that's going to be many millions of dollars and that assortment is being set up on the stores' floors right now as we speak. And as you go into September, I think you're going to see a very dominant presentation of quality and value and price lines. Then Seasonal, I mean, I'm very bullish on Seasonal and have been. I think the team executes as well as anybody and I think we're recognized really well for it. We have early sets in fall harvest and in Halloween and we're very excited about the assortments that we've put together there. And we expanded and have a major initiative and investment in trim-a-tree this year. That's been a business that's been very, very good for us and relates to very high margins, so we like that contribution to total. And I think you're going to see a major expanded assortment in trees and lights and accessories. So I mean those are just some of the initiatives that we have that makes us feel really good about the third and particularly the fourth quarter of this year. And look, John, we know the comps that we're up against in the third and fourth quarter are relatively flat.

Operator

Jeff Stein with Ticonderoga.

Jeffrey Stein - Ticonderoga Securities LLC

Two questions, real quick. One, on the expected contribution, Joe, from Canada. When you said fiscal '13, do you mean calendar '13 you expect to profit? Or does that translate into calendar '12?

Joe Cooper

No. Calendar '13, year after next.

Jeffrey Stein - Ticonderoga Securities LLC

Okay, calendar '13. Okay.

Joe Cooper

Yes.

Jeffrey Stein - Ticonderoga Securities LLC

Can you explain the difference between the $36 million that you kind of guesstimated early on that you'd have to put into the business compared to, I guess, the number is now $75 million to $80 million and I don't know if that's a fair comparison. But maybe you can just kind of explain the delta and I guess is this undertaking just may be a little bit more challenging than you thought initially?

Joe Cooper

Yes, the initial $36 million was about $20 million of initial investment which was the equity, which was pretty nominal, and retirement of the bank debt and the notes. The incremental $16 million, there was some assumption around normalizing working capital. In other words, there was crude expenses and accounts payable in the books, what would we have to pay when we walk in the door. You'll notice on the closing P&L, I mean the closing release when we actually closed on the business, we really focused on the known dollars out and we pulled an estimate of working capital adjustment because frankly, until we got in and really understood the nature of those payables and vendor payables, the accrued expenses, et cetera, we weren't sure exactly how quickly and to what extent we would satisfy those obligations. So there is no difference today with what we believe 30 days and 60 days ago as far as cash out. As a matter of fact, our forecast for net loss this year is right on top of what we thought at the board meeting when we presented the opportunity to the board 90 days ago. The real difference is after doing significant due diligence and starting our discovery phase, we're more encouraged about the longer-term opportunity than we were before. We see a customer base that's small but excited about Big Lots coming. We see a real estate landscape that isn't expansive, but we believe that we can launch our Big Lots brand name up there and be successful across the country. And also, we feel very good after initial due diligence about our assortment bringing Seasonal, bringing our Furniture assortment, some of our import product and also we did hold a vendor summit a couple of weeks ago up in Toronto with a number of consumer products companies out of Canada that are very encouraged about our acquisition, who want to do business, do business with Big Lots in the U.S. and want to establish a strong relationship with us up in Canada. So I think the difference in the investment is just the composition. We're clarifying the composition. Again going back to that, we didn't give a 2011 cash outlay estimate in our initial release. What we talked about was what it would cost at closing. Now what we're doing is giving you an idea of what it will cost to start to normalize the inventory, do some initial CapEx, fund the losses, plus the initial investment and that's where the numbers that we're giving you this morning come from.

Jeffrey Stein - Ticonderoga Securities LLC

Got it. And are you changing the name of the stores to Big Lots up in Canada? And if not, why not, just to kind of make a break from the past since the name is known pretty well up there?

Joe Cooper

Yes. What we're doing, we certainly changed the company name to Big Lots Canada. We are looking across the store fleet to, and are currently making an assessment of what stores we will consider rebranding to Big Lots, possibly beginning later next year. But we're going to be careful. We want to protect our brand name, and there is some pretty, for lack of a better word, some remote locations and some real estate that's not in great condition. That doesn't mean they can't generate four-wall cash. But we'll probably continue to operate those under LW or Liquidation World brands. The stores that we'll rebrand to Big Lots will be the better locations and certainly start to open stores in better locations. So in the near term, we'll run dual brands.

Operator

And now, David Mann with Johnson Rice has the next question.

David Mann - Johnson Rice & Company, L.L.C.

Just following up on that last question, can you give me your latest assessment on Canada about the different stores sizes, how that may be either an opportunity or a limiting factor?

Joe Cooper

I should let the President do that. We've had some pretty extensive conversations on that. The larger-sized stores and where we think the larger urban and suburban areas clearly make a lot of sense and can take the Big Lots strategy in the 22,000 to 30,000 square-foot range. We actually are assessing some of the smaller stores that actually have made money in the past and are trying to understand what's the best assortments for us to operate in Canada on. We look at it as presenting us an opportunity, David. Just because we don't run small stores here in the United States, it doesn't mean that we can't understand and efficiently put the best parts of our assortments in those smaller stores that are generating a lot of profitability or potential profitability up there. And I think that's part of the ongoing assessment and I think the reality is, is what are the best categories of merchandise in a 10,000 or 12,000 square-foot store that we do the best job at. So I think it's right now likely that we're going to try to figure out how to keep most of those stores, if possible.

Steven Fishman

We're actually in the process of drawing proposed assortments in every store, a little over 1/3 of the stores are less than 20,000 square feet. So certainly they run from 11,000 to over 50,000. So there's a wide variety of store sizes and what we want to be able to do is give specific directions to each Store Manager of, in general, where to put the merchandise because they don't have any merchandise on the shelves and they're going to be getting some merchandise they've never seen, some of the seasonal for Christmas and a more consistent assortment. And we want to make sure they're presenting that as compelling as possible. So we're in the process of making those choices in those smaller stores, what are we going to carry and what are we not going to carry and we'll do some testing. It gives us a great opportunity to test and learn over the next year and see what really is compelling to the Canadian customer.

David Mann - Johnson Rice & Company, L.L.C.

If I could ask a question or 2 about gross margin in terms of your comments on the third quarter. I think you talked about the potential for more markdowns, if needed. Are there any signs that, yet, that you feel like you're going to need to go more aggressively in terms of markdowns in the quarter?

Timothy Johnson

David, it's T.J. I think one of the things we're very focused on, particularly in the Home area as Steve mentioned where we've got a lot of new ideas, better ideas coming soon in some of the category expansions where we've reallocated footage within the Home area in order to make room for some of these new ideas. We've got product in those locations today we may need to move on, maybe quicker than we would have anticipated. So we just want to make sure that in areas where we've got new fresh ideas where things are working that we're giving it the space and if there's inventory there today, we need to move on it. Because that inventory is being replaced for a reason. So that's really what we're focused on in Home. But throughout the store, where Doug and his team are really looking hard at some footage reallocation opportunities making sure that we can move through the goods that are there and bring in the new ideas that we feel better about.

David Mann - Johnson Rice & Company, L.L.C.

So it sounds like that those markdowns are more related to your own moves rather than in response to sales trends created by the macro?

Timothy Johnson

Oh, yes.

Steven Fishman

Yes.

David Mann - Johnson Rice & Company, L.L.C.

Okay. And then in terms of the comment on current trend, can you give us a sense, given your guidance that you're number one, running in line with that guidance for the quarter, quarter-to-date, and then secondly, maybe compare it to the June, July trend that it's similar to that?

Timothy Johnson

I would suggest that August is in line with the June-July trend. I think we're in a similar boat with everybody else. The last week of July, first couple of days of August, we're pretty inconsistent and there was a lot of noise coming out of Washington and a lot of things going on. We saw the customer kind of take a little bit of a pause. But as August has got into full gear here, we saw those June, July trends return for us. Additionally, as you'll recall, September and October were more challenging for us last year than August. So we are up against the more -- we are up against the better part of the quarter last year.

Operator

And now we'll take a question from Peter Keith with Piper Jaffray.

Peter Keith

So one thing, I think you sort of indirectly answered this question but I wanted to ask, place it on the table more directly. Your outlook for the U.S. business for the rest of the year on an operating basis, so that would be excluding the share repurchase activity, has that operating outlook changed in any capacity?

Timothy Johnson

Excluding share repurchase, it's pretty similar for the back half of the year, if that's what you're referring to. So third and fourth quarter, back half very similar. And again, the geography of some of the items might have changed but in total, our expectations for the combined Q3 and Q4, excluding the repurchase, are essentially the same as what we would have been communicated or what would have been embedded in our guidance 3 months ago.

Peter Keith

Okay, perfect. And then I'm just trying to think about how we model the Big Lots Canada results in, would it be correct in thinking the most variability from your historic results would be around SG&A rate? And if so, I know you've been helpful in the past about guiding to particular comps that you need in order to get some leverage on SG&A, would you happen to have redone that calculation now factoring in Big Lots Canada?

Timothy Johnson

No. The intention going forward, Peter, would be to try to give you guys enough information on a segment basis like you see attached in today's release, that you can model U.S. and then we'll try to give you some high-level views on Canada going forward by quarter recognizing, as Joe mentioned, sales are where they are right now and inventory is where it is and that's the challenge. At the same time, we know we need to make some investments in people primarily, but also in some other areas that are going to cost SG&A. So looking at a leverage point for Canada right now is way, way too premature. So I wouldn't want to try to do some kind of math on a consolidated. I'd rather, I think, from what I've heard from investors and analysts is the best way for us to help you guys understand is to try to present real clean segments and that's what we're doing today.

Steven Fishman

And I'd just add, the comp for Canada is meaningless in the near term. So a combined comp, trying to talk about a leverage point for a combined comp isn't a meaningful statistic, that's to T.J.'s point. We'll just segregate and because we're really looking at productivity, sales productivity in those stores, inventory per square foot, inventory assortment, compelling, all those types of meaningful measurements as far as getting inventory that the customer will respond to because comps are clearly going to be positive up there. So we'll stay away from that combined stat.

Operator

And looks like we have time for one final question. That question will come from Mark Mandel with ThinkEquity.

Mark Mandel - ThinkEquity LLC

What do you see as the ultimate store potential for Liquidation World, is this potentially a 200-store business down the road?

Charles Haubiel

Mark, it's Chuck. Actually we talked last time on the call and I think our view's the same. When you look at the size of our concept here, we think there's probably a potential for around 150 or so of those type sized Liquidation World/Big Lots Canada, if you will, stores without going into Québec. And then as Steve kind of alluded to earlier, Liquidation World's had some pretty profitable smaller store concepts and that's something we continue to kind of focus on as to how to refine that and what those numbers could look like if we can kind of unlock that combination as well.

Mark Mandel - ThinkEquity LLC

Okay. And then I have a question on your SG&A, Joe. I think last quarter you said that the bonus accruals were down $8.5 million year-over-year for the first quarter. Can you give us some idea what happened in the second quarter?

Timothy Johnson

Mark, it's T.J. Second quarter impact will probably be fairly similar. We'll detail that, I believe it's in the draft of the Q like we did in first quarter. I would suggest to you, though, that embedded in the back half of the year is not that same kind of favorability. If you'll recall kind of how the business trended last year, we really outperformed in the first half of the year, so we had much more incremental bonus accrued during the first half of the year last year than the back half of the year. So the favorability was experienced in both first and second quarter in comparison to last year, that kind of moderates as we go through the balance of the year.

David Mann - Johnson Rice & Company, L.L.C.

All right, that was my next question. In terms of the balance sheet, are you thinking any differently in terms of your balance sheet management and overall optimum capital structure, given that you've made a decision to really accelerate your share repurchases and actually take on some debt, whereas and going in you had almost $4 a share in cash? And should we assume the stock price sits somewhere near where it is today? Can we expect further, more aggressive action on your part with respect to the balance sheet?

Steven Fishman

Well, I'd say we're very pleased with how we've utilized our cash to this point, investment up in Canada we clearly feel good about and the $313 million for share repurchase we feel good about. With the capital investments that we're forecasting for 2011, given the share repurchase and the investment in Canada, our debt position is ballpark, this is just ballpark, $50 million at the end of the year. So that's a pretty good place to be given the extent of investments that we're committing for 2011. We have about $145 million left on the share repurchase that we'll look at that. We're certainly not -- don't feel compelled to complete that share repurchase program in 2011. But if we did, just hypothetically, we'd have $200 million of debt on a $700 million facility. We've always said that we are receptive to using our balance sheet for the right investments. We're not a company that historically has leveraged heavily. Our investment-grade credit rating is important to us, however, we believe with $50 million to $200 million of debt at the end of the year, pretty comfortable place to be.

Timothy Johnson

Thank you, everyone, for joining us for the call today. We look forward to talking to you at the end of third quarter.

Operator

Ladies and gentlemen, a replay of this call will be available to you within the hour and will end at 11:59 p.m. on September 8, 2011. You can access a replay by dialing (888) 203-1112, toll-free for U.S. and Canada, or (719) 457-0820 for international callers and entering the passcode 9515945. This concludes today's presentation. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!