Big Lots' (BIG) CEO David Campisi on Q1 2016 Results - Earnings Call Transcript

| About: Big Lots, (BIG)

Big Lots, Inc. (NYSE:BIG)

Q1 2016 Results Earnings Conference Call

May 27, 2016 08:00 AM ET

Executives

Andy Regrut - VP, IR

David Campisi - CEO and President

Tim Johnson - EVP, Chief Administrative Officer and CFO

Analysts

Brad Thomas - KeyBanc Capital Markets

Patrick McKeever - MKM Partners

Jeff Stein - Northcoast Research

Alvin Concepcion - Citigroup

David Mann - Johnson Rice & Company.

Matthew Boss - JPMorgan

Dan Wewer - Raymond James & Associates

Joseph Feldman - Telsey Advisory Group

Paul Trussell - Deutsche Bank

Peter Keith - Piper Jaffray & Co.

Laura Champine - Topeka Capital Markets

Operator

Ladies and gentlemen, welcome to the Big Lots First Quarter 2016 Teleconference. This call is being recorded. During this session, all lines will be muted until the question-and-answer portion of the call. [Operator Instructions].

At this time, I would like to introduce today’s first speaker, Andy Regrut, Vice President of Investor Relations. Please go ahead.

Andy Regrut

Thanks, Derek and good morning, everyone. Thank you for joining us for our first quarter conference call. With me here today in Columbus are David Campisi, our CEO and President and Tim Johnson, Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

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.

All commentary today is focused on adjusted non-GAAP results from continuing operations. For the first quarter of fiscal 2016, this excludes an after tax expense of $1.3 million or $0.03 per diluted share associated with legacy pension plans, which have been terminated. Standalone, the Q1 expense is not material, however, as previously disclosed, we expect this process to take multiple quarters and result in an after tax expense of approximately $15 million in total, with the majority of the expense occurring in Q4 2016 or fiscal 2017. Our future results and guidance will also be presented on a non-GAAP basis to be consistent in isolating pension cost. Reconciliations of GAAP and non-GAAP adjusted earnings are available in todays’ press release.

This morning David will start the call with a few opening comments, T.J. will review the financial highlights from the quarter and the outlook for fiscal 2016, and David will complete our prepared remarks before taking your questions.

With that I’ll turn the call over to David.

David Campisi

Thanks, Andy, and good morning everyone. I’m very pleased with our first quarter results and a good start to fiscal ’16. Q1 comps increased 3%, which is on top of a 1.6% increase for the same period last year, and represents the 9th consecutive quarter of same store sales growth. This result was at the high end of our guidance we provided in March, and help drive record EPS performance which exceeded the high end of our previously issued guidance.

From a merchandizing perspective, our ownable and winnable categories produced the best sales results. Soft Home was a top performer, up high single digits as Martha, Kevin and the team continued to do a great job as they transform our merchandise assortments to the disciplines of QBFV or quality, brand, fashion and value. We added footage a year ago and the team has been editing less productive areas and focusing on SKU optimization all while delivering a better, more consistent offering with colors, design styles and a value Jennifer loves.

An additional area benefiting from this discipline, table top also posted gains in the quarter. Seasonal was up mid-single digits the best result for this category in over two years. Congratulations to Michelle, Steve and their team for a job very well done. As you may recall, seasonal includes toys, which has been intentionally downsized making the overall lift in the quarter even more impressive.

The teams have been exercising the rigors of QBFV to improve assortments with notable strength in Q1 in summer and lawn and garden. And unlike the last few years, mother nature cooperated with mild weather in March and early April, particularly in the Northern and mid-western regions. Furniture was also up mid-single digits, which is on top of the low double-digit increase last year, with growth in mattresses, case goods and upholstery items. Another very good quarter for Martha, Robert and the furniture team.

Over the last two months, we finalized our expansion of our furniture departments, an SPP initiative that has been in the works for nearly a year. Our bigger, better furniture department adds 300 to 500 square feet of furniture space to most stores, broadening our offering and continuing to improve the overall shopping experience for Jennifer.

Executing this expansion was a significant undertaking for the stores organization, and I am truly appreciative of their effort, support and contribution. Consumables was up low single-digits with positive results in chemicals and pet, good job by the team as this business posted its 11th consecutive quarter of comp sales growth.

And finally, food was flattish for the quarter, up against the 4% comp last year and the ’13 comp two years ago. I have been encouraged to see how our food comp trends have improved to start the month of May in Q2. As planned, the categories of hard home, electronics and accessories were down to last year, but I’m encouraged the comp performance here was probably some of the best if not the best we’ve seen in the last couple of years.

Remember these categories have down-sized or donated footage to other categories namely furniture and soft home. The teams have been relentless in leveraging edit to amplify and SKU optimization to improve the productivity per foot and the relevance of these convenience businesses.

Moving on to marketing and our online initiatives, Q1 results reflect sales activity from our e-commerce platform, which was launched in late April. Congratulations to Andy, Stu, Carlos and the entire team. This was truly a cross-functional remarkable effort. And while it’s still very early, Jennifer has been most interested in purchasing seasonal and soft home products online.

But I want to be very clear, our mindset continues to be crawl, crawl, walk, run. We have a limited number of SKUs available online, approximately 3,000, and we are diligently testing and learning so not to disappoint Jennifer with her online experience. We are also starting to more fully market the site as we approach Memorial Day with our print advertising and reintroduce a clever YouTube video campaign Buy, Buy, Buy! which is definitely worth viewing.

Our presence in our digital channels includes e-circulars, paid search, display and social media also continues to grow and expand. We now have over 3 million Facebook followers and we’re learning how to leverage the power of Facebook for recruiting talent which features social job sharing.

From a stores perspective, Mike, Nick and the entire team in the field have an intense focus on leveraging the tools of store revolution. An important component in 2016 is arming the field with certain level of dashboard reporting. We recently invested our store operating teams, providing them new iPads to allow for more timely, key metrics, on a real time basis, presented in a robust, interactive app. Our stores and field organization have a new powerful tool to inspect what they expect.

And with that, I’ll turn the call over to T.J. for additional color on the numbers.

Tim Johnson

Thanks, David, and good morning everyone. Net sales from continuing operations for the first quarter of fiscal 2016 were 1.313 billion, an increase of 2.5% versus the 1.28 billion we reported last year. As David highlighted, comparable store sales for stores opened at least 15 months increased 3%, which is on top of the 1.6% increase in the first quarter of last year and compares to our guidance of an increase in the low single digits. This is the ninth consecutive quarter of comp store sales growth, a feat Big hasn’t accomplished in roughly a decade.

In terms of monthly cadence, all months were positive with [Marpril][ph] or the combined period of March and April, increasing approximately 4%. The early break to spring and warm weather conditions certainly helped with regional strength in the Northeast, Mid-Atlantic and Mid-western regions.

Adjusted income from continuing operations for the first quarter was 39.9 million or $0.82 per diluted share, which compares to our guidance for the $0.66 to $0.72 per diluted share. This record result represents a 34% increase over last year’s adjusted income from continuing operations of 33 million or $0.61 per diluted share.

You may remember from our discussions on the March call, these years’ results include two new significant costs, PSUs and e-commerce. The net impact of which was approximately $0.08 to the quarter. So apples-to-apples EPS from our core operations was approximately $0.90 against $0.61 last year, further demonstrating the power of our model when comps are strong and the merchandise mix is supported by strong ownable, winnable sales performance.

The gross margin rate in Q1 was 39.4%, which was flat to last years’ first quarter rate and consistent with our expectations. Total adjusted expense dollars were 453 million and the adjusted expense rate of 34.5% was approximately 70 basis points lower than last year. This result was better than our expectations with leverage coming in most areas of the business. This level of leverage highlights the opportunity when comps are at high end of 3%.

However, two areas deserve specific call out. First, the store operations. To deliver better than planned sales results, lower than planned payroll and execute the furniture expansion is just tremendous work, all done within the quarter. And second, distribution and transportation was our largest source of leverage and again is transparent to Jennifer. Now with all of our WMS implementations complete and behind us, Carlos and his team are focused on productivity and servicing our stores, both of which improved during the quarter.

Moving on to the balance sheet, inventory ended the first quarter of fiscal 2016 at 807 million, a $28 million reduction or 3.4%, compared to 835 million last year. Inventory levels per store decreased 3% combined with a lower overall store count year-over-year. Under Lisa’s leadership working with our GMMs and the entire [BPARM] [ph] organization inventory levels are on forecast, fresh and appropriately placed to support our sales growth in Q2, particularly in the ownable, winnable categories of furniture and soft home. I mentioned these two categories specifically as we believe the recently completed bigger, better furniture department expansion along with the potential attached soft home sales opportunity is a big step forward for our business and a big volume opportunity for the balance of the year.

During Q1, we closed two stores and opened one, leaving us with 1448 stores and total selling square footage of 31.7 million square feet. Capital expenditures for the first quarter of 2016 were 18.8 million compared to 39.3 million last year, and depreciation expense was 29.7 million, a decrease of 1.5 million compared to last year. The decrease in CapEx was planned and aligned with our expectations, primarily driven by POS register rollout, which was in full swing this time a year ago, and also the completion of our freezer cooler rollout, which concluded in first quarter last year.

We ended the first quarter with 64 million of cash and cash equivalents and a 154 million of borrowing under our credit facility. This compared to $67 million of cash and cash equivalents and 41 million of borrowings under our credit facility last year. Our increase in debt year-over-year is directly attributed to the timing of share repurchase activity.

In the first quarter of fiscal 2016, we invested a $138 million to repurchase 3 million shares, leaving us with a 112 million under our current share repurchase authorization at the end of the first quarter. By comparison, last year in the first quarter we invested 35 million in share repurchases.

During Q1, we also returned approximately $10 million to shareholders, with our quarterly dividend payment of $0.21 per common share. As noted in the separate press release this morning, our Board of Directors declared a quarterly cash dividend for the second quarter of fiscal 2016 also at $0.21 per common share. Our annualized dividend rate of $0.84 represents approximately a 25% to 26% payout ratio on our original guidance set forth for fiscal 2016.

Now turning to forward guidance; for Q2 we expect adjusted income from continuing operations to be in the range of $0.42 to $0.47 per diluted share, compared to last years’ $0.41 per dilute share. Our guidance assumes a 10th consecutive quarter of positive comps in the range of flattish to plus 2%, which is on top of a 2.8% increase for the same period last year.

The gross margin rate for the quarter is expected to be above last year and adjusted expenses as a percent of sales are expected to be slightly higher than the last year. Again as a reminder, the expense rate will be impacted by our two new P&L items, e-commerce and PSUs. Excluding those two items, we would expect to leverage our expense rate of our core retail operations on the flattish to plus 2% comps.

For fiscal 2016, we’ve raised our guidance for adjusted income from continuing operations to be $3.35 to $3.50 per diluted share, compared to prior guidance of $3.20 to $3.35 per diluted share. The increase is reflective of our above planned Q1 performance and the recent completion of our $250 million share repurchase program, which was sooner than anticipated. This level of earnings would represent an 11% to 16% increase over adjusted income from continuing operations of $3.01 per diluted share in 2015.

The guidance is based on a comparable store sales increase in the low single digits, and total sales up slightly to last year, as comps will be offset partially by a lower store count. We are now estimating an average diluted share count of 45 million to 46 million, and have maintained our cash flow estimate of 200 million.

So with that, I’ll turn the call back over to David.

David Campisi

Thanks T.J. Before we open the line for questions, I want to share a few thoughts in closing. Earlier this month, I celebrated my third anniversary as CEO of Big Lots and when I look back and consider our progress and accomplishments, I could not be more proud of this team.

We established mission vision values and live them every day. We significantly improved our company culture and have a team that is energized, highly engaged and passionate about our future. We developed and we’re executing the SPP focused on the three pillars; Jennifer, our associates and our shareholders.

With high levels of cross functional involvement across the entire organization, we’ve driven nine consecutive quarters of positive comps and delivered our financial guidance each and every quarter. We’ve implemented merchandised disciplines, made the tough decisions to exit and expand categories and improve the consistency and quality brand, fashion and value of our offering to Jennifer. We have invested in our people, processes and systems while maintaining prudent control of our overall cost.

We developed and launched an e-commerce platform in response to Jennifer’s desire to shop online. We returned well over 6 million of cash to shareholders through dividends and share repurchase activities. We created the Big Lots Foundation and our associates, our customers and our supplier partners have been incredibly generous supported our initial philanthropic efforts.

And finally, we made significant change to the composition of our Board of Directors and as a result of enhanced governance practices and consistent financial performance; we see support on all items presented to our shareholders during this proxy season.

I want to say a very sincere thank you to our loyal and long term shareholder base for their confidence in this team. So a tremendous amount of change and improvement has happened at Big Lots in a very short three years. But at the end of the day, none of this great work happens without the right team and the people who believe in the strategy and want to take the hill each and every day.

I want to thank our teams and our stores, our distribution centers and here in the office in Columbus. I appreciate your support and passion in executing our strategic initiatives. We are one team with one goal and Q1 is another example of how we are wining together.

Over the last few weeks, the road for retailers has been choppy with results and forward outlook reflecting a challenging retail environment for a number of different reasons. There have been a very selective posting good results and are providing an upbeat outlook. Clearly, you are hearing a lot of commentary about our industry being overstored and still searching to find the right balance between brick and mortar and online sales channels.

We believe our laser focused approach on our core customers and how to maintain relevance with her is critical. Our relentless focus on Jennifer is central to the SPP and the corner stone of our corporate culture. Our team is dialed in as to what is important to her and the shopping experience for our product assortments, messaging, in-store interactions and online presence. I don’t think it is co-incidence the first transaction recorded through e-commerce platform last month was through a customer actually named Jennifer.

Later this year, in the fall, we will host an investor analyst conference in Columbus and intend to begin to discuss the strategies for our next three year SPP and how we’ll go to market, change and stay relevant. We’re at the beginning of the beginning and I’ve never been more excited for the future of Big Lots.

And with that I’ll turn the call back over to Andy.

Andy Regrut

Thanks David. Derek, we would now like to open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from Brad Thomas of KeyBanc Capital Markets.

Brad Thomas

Good morning and congratulations on a great start to the year. I wanted to ask a couple of questions about merchandising, and I was hoping big picture David, perhaps you could talk a bit about how much the merchandise has changed since you joined and versus a year ago. You obviously like to talk about being at the beginning of the beginning, and then maybe more specific to the quarter, perhaps you could talk about the seasonal category, the strong performance there and the outlook for that category for the balance of the year?

David Campisi

As you well know, we’ve talked about this now for three years as we exited many businesses and downsized many businesses that we just couldn’t win and in fact some of them just we couldn’t compete in. And so over time and over the last year, as you’ve heard in the prepared remarks, we expanded furniture in the quarter and not necessarily adding more skews and all that.

It’s really been more about opening enough, and if you’ve been in the stores recently you’ll see some photography mounted on the walls in the furniture department. So it’s really an expansion of the department itself and implementing - there are a few additional skews in there, but it’s not significant to the assortment.

But what I would tell you is, again three years ago we talked about the home was buying so many close-outs it was very difficult for those guys to have a quality fashion brand value proposition in there. And today if you walk our soft home assortments they are phenomenal. And as we move into - we are in Q2 now, but as we move in to really I think in probably the next four weeks you’ll start to see new receipts coming in for back to campus, back to college and first apartment and assortments just continue to get better and better and evolve and what’s happening today is there’s a lot of cross functional merchandising between Martha’s world of furniture and soft home with Michelle’s world with some of the seasonal categories with colors and so on, working together.

And we’re just getting better and better and that’s why I say, we’re at the beginning of the beginning because it’s really that phrase will be there forever, because our guys have to continuously improve sharpening that saw. So that’s kind of a high level thing from the standpoint of those businesses and what’s really changed significantly in there.

And we’re resetting our cookware area this month as well, and we think the assortments there are going to continue to get better and better. Lastly, I think your last question is seasonal had a very strong quarter, they really, both patio furniture and gazebos all those out for categories were very, very strong and very exciting and interesting that the transactions that have taken place on ecommerce have primarily been out of seasonal both in the parts of - there’s a few type of gazebos and umbrellas that we’re transacting online and then the summer categories as well have been performing very well.

And we feel very good as we move into this Memorial Day weekend that those businesses are going to continue to perform. As we move into the back half of the year, how we flip that business in to Christmas trend which is huge and the work that Michelle and Martha’s teams have done together to coordinate home décor with the Christmas trend is going to just be an amazing thing for all of you guys to see and I know it’s going to really absolutely surprise and delight Jennifer for sure. Hopefully that answers your question Brad.

Brad Thomas

That is very helpful. Just to be clear, as we think about your guidance, what sort of outlook is assumed for the seasonal category for the balance of the year?

Tim Johnson

That’s a great question Brad. I’m glad you asked that, because when we look at first quarter coming in at the high end of our range of a 3% comp, clearly seasonal as David mentioned, right up front was one of the outperformers, particularly lawn and garden and outdoor furniture, but along with summer and decorative, outdoor summer, both were very strong for us in the quarter.

Clearly we benefited in certain markets with better weather, primarily in March and early April and as we said. When we think about second quarter the difference between the 3% comp in the first quarter and where we are guiding to second is largely due to seasonal. We don’t necessarily buy our seasonal assortments to comp up mid-single or high single digits quarter-after-quarter-after-quarter.

So we did sell through at a faster rate in several of our key styles or styles within lawn and garden in particular. So our expectations for second quarter would be that seasonal would not comp to the same level as first quarter. Not because we don’t’ believe in the product, not because we don’t believe that its trend right, color right and all of those things that have worked in first quarter. But primarily because we sold through more early than we thought we were going to.

So that’s a real important piece for everybody on the call to understand. The difference between the 3% comp in the first quarter flattish to plus 2 in the second quarter, there’s a number different pluses and minuses, but the biggest one kind of level set your expectations is that seasonal will comp at a slower rate in second than first, primarily because of higher sell through in first quarter.

Operator

Our next question comes from Patrick McKeever of MKM Partners

Patrick McKeever

So a lot of my questions were already answered with that very first question and answer. But another, my two would be or my first and my follow-up, you talked about food comping flat and how it has picked up more recently. What’s the impact from frozen and refrigerated on your food comp or what was it in the quarter? You’ve talked about still comping the comp in that business. Has that continued or are you still comping the comp in frozen and refrigerated? And the same basic question for the easy leasing program, are you still comping the comp in that area as well?

David Campisi

Want to take that or you want me to take the first part of it.

Tim Johnson

Yeah.

David Campisi

Patrick, its David. We continue to show year-over-year improvement with freezer coolers. I would tell you that the team is razor focused on improving the distribution of that product. As you well know that’s a DSD program operated across the country by several different companies and we still have a lot of opportunity to improve that supply chain pipeline. And so, there may have been a couple of hiccups a week here or two, but we really feel really good about that business. And as I said in the prepared remarks, May’s off to a much stronger start than first quarter in food and we believe we’ve looked at some of the opportunities in there and we think we’re going to continue to show a nice comp increase and comping the comp.

It’s certainly still very early and that’s one of those areas candidly that is a little bit of a test and learn. We know what the items are and the number one item no surprise is milk and more milk and milk and may be some eggs and frozen pizzas, so the team continues to work hard at editing the assortments and amplifying the products that Jennifer is buying out of there. So hopefully that answers that part of the question, and then T.J. will take your second question.

Tim Johnson

Yeah Patrick those are both real important to the strategy. As you know we’ve invested heavily both in coolers and freezers and in furniture and furniture financing. I would just tag on to what David said and comment that all areas within the DSD part of our business comped in the first quarter and comped above the rate that food that we called it out as flat. So it’s outperforming the area within the store. Our focus is how do we make it better to the extent where there is almost the entirety of a KRA team supporting that business going forward, and that’s new, with the new strategic plan that we’ll talk more about later this year.

So still a very important part of our business, it out-comped food and actually out-comped the rest of the store when we look at each of those categories within DSD. It’s a big focus area going forward, so much so that we’re dedicating resources and KRA team to it.

The second part of your question, furniture financing, is it comping the comp? Absolutely it’s comping the comp. But as I do every quarter, I want to take a step back and say, first it starts with product and having the right product is more important obviously than having all the different financing programs that we now have in place.

So Martha, Robert and the entire [BPARM] [ph] team do a tremendous job of making sure that we’re in stock with the right product, constantly changing styles, introducing new, moving on what’s not working, taking timely mark-downs, keeping our inventory clean. It’s very interesting in that part of the business one of the key learnings is, it is possible to do more volume with less inventory or less SKUs. That’s really what SKU optimization was all about, and that furniture KRA team was one of the first to really demonstrate that for the whole company.

So it starts with product, progressive and furniture financing is absolutely comping the comp. We still continue to see growth. The stores and Nick’s team are very focused on it, they have goals by store and they understand how important it is to driving their business and making sure that candidly the store team leaders, the district team leaders have a running shot at achieving their bonus each and every quarter.

Additionally, during the quarter, I’m sure you saw this but for the benefit of everyone, we formally launched the Big Lots credit card late last week. So that is the second arm of financing so to speak that we will have available to Jennifer in stores. We’re very excited about it, we’ve tested the program, we have an expectation on what we should see when that happens. Shortly the store teams will have goals on credit cards applications, just like they have on furniture financing to be progressive. It’s a very cohesive program, the stores are excited about it, the furniture team is excited about it, and we think that’s a potential upside to the balance of the year when we think about furniture.

So a number of different levers to try to make sure that ownable category continues to lead. But as I said, it all starts with product and teams’ doing a great job of making sure we’ve got the best possible value in our assortment each and every day.

Operator

And moving on we’ll next hear from Jeff Stein with Northcoast Research.

Jeff Stein

Good morning, guys, and again great quarter. So T.J. just to follow-up on your last comment, have you baked anything into your forecast for the private label credit card, or is that all incremental to the guidance you’ve provided? And then my follow-up would be, given the fact that we had a late start to the tax refund season, any thoughts in terms of how much volume was shifted from January into February as a result of the late start?

Tim Johnson

Yes we did assume that we would rollout the private label credit card here in the second quarter, so I wouldn’t want you to think that it’s a new incremental program that wasn’t originally contemplated. I think the opportunity there for us though is really looking at our test results, taking our learnings, making sure its fully embedded in the furniture sales training initiative, and making sure that we expect with Nick’s team to ensure that we’re getting consistent participation across all stores, districts and regions.

So it is part of our guidances, it is quick answer. And I guess, the tax refund piece, Jeff I wouldn’t want people to think that a later tax refund start is what help drive the 3% comp in the quarter. Furniture as David said was up mid-single digits in the quarter, and as it turns out, I think there was probably a little less tax refund activity in total when the IRS was all done compared to the prior year.

So actually we saw some of our best performance in furniture and in really the (inaudible) in that market in the April timeframe, which is clearly well outside of the dislocation and tax refund activity. So it’s very important tax refunds as we said in the last call, we watch it by day, we’ve got multiple years’ worth of history and we understand it, and it’s probably most beneficial from the standpoint of we do understand it so that when there’s difference we don’t over react one way or the other.

I would say the team did a great job of staying the course and knowing that that volume was going to come and it came in a big way. We feel very good about the furniture business heading in to the second quarter and in the balance of the year, with all the different initiatives that are in place.

Operator

Our next question comes from Alvin Concepcion with Citi.

Alvin Concepcion

I'm wondering if you could give us any color on same-store sales in May, and just sort of where that falls within the range of the zero to 2% guidance, and you alluded to seasonal being a driver for the slowdown relative to the comp you saw in the first quarter, I am sure tougher prior-year comparisons also impacted. But how should we think about other things impacting the quarter and what are your expectations in furniture for example?

Tim Johnson

Alvin, I think first off when we think about the month of May, being totally transparent, we had planned the month of May below our guidance, for the sole fact that Memorial Day comes a week later. And all of our marketing efforts focused on Memorial Day are shifted or are year-over-year because of that timing. So the month of May and where it sits is not necessarily indicative of how we think the quarter is going to play out.

When we think about the second quarter though in furniture, we would continue to expect that it’s a leading category and up in the high single digit range could reach a little bit higher, but definitely high single digits would be our expectations coming in. Again, taking in to account that we have multiple programs in place to drive business, we’ve got a completed furniture expansion. We’re just introducing in the last three or four days to Jennifer that we’ve completed a bigger, better furniture department expansion with all the marketing collateral behind it including the launch of the credit card etcetera.

So there are a lot of different initiatives in place to help drive second quarter and the balance of the year and multiple years ahead. From a seasonal perspective, I appreciate you giving us the opportunity to use prior year comps as a reason, but we know we need the comp on the comping season. It’s a notable category, and we’re going to have to grow on top of growth. So when we think about second quarter, it isn’t necessarily about the more difficult comparison from last year. It truly is about better sell-through in first quarter, primarily in lawn and garden, we knew coming in to the second quarter was going to present a little more of a challenge. And then if we’re all being transparent here, we know when the weather is good, our business in seasonal will be very good.

We know that, we’ve seen it. Just like we experienced our business being very good, when tax refunds are out there in our funds. So, we are confident in the assortments that’s why there are ownable, winnable categories because we know we can differentiate there, we know we’ve got teams focused in our stores to make it happen. So we feel very good about both of those categories going in to the second quarter.

Operator

And next question comes from David Mann of Johnson Rice.

David Mann

My question probably if for T.J., you talked about with your second quarter guidance about gross margin being up, albeit on these lower comp expectations. So can you give us a little more detail on why you would expect that and also any comments on what you are seeing in shrink?

Tim Johnson

So from a margin perspective in second quarter again, not to repeat myself, but I’ll go ahead with a higher sell-through in season in the first quarter. Clearly we think we’ve got an opportunity potentially in mark-down levels in the second quarter, would be one aspect of the margin expansion. And the second piece would be, we are experiencing better IMU year-over-year. So all merchant teams are very focused on making sure we’re getting the best possible cost, which is always the case.

However, given such a challenging environment from a retails perspective, we think there’s a little more opportunity to do better on the cost side, and better on the margin side. And then the third piece I would point to is, we know we’re experiencing better inbound freight rates year-over-year, both on an import and a domestic basis, so different ways to look at. High margins should be a little bit better in second quarter than they were this time a year ago.

From a shrink perspective, I would tell you our shrink rates depending on the category are actually flat to slightly up year-over-year. From our perspective, we think we have a pretty good understanding of where that’s coming from. We’re still looking at a shrink rate that’s weighted about 2%, so it’s not that it’s any major concern at all, but as we do a better job of bringing in better product etcetera, we are seeing our shrink rate go up a little bit year-over-year.

Our intel out there in the industry is that, many other people are supported by NRF surveys are seeing this slightly a higher shrink rate year-over-year too. So Nick’s team are asset protection team, distribution, transportation, the entire supply chain network is focused on talking that shrink rate lower. We believe it will happen, there’s a lot of work being done right now to really to David’s phrase, inspect what we expect and use the technology. But we still think it’s very early on in terms of working with the stores team to take that rate lower.

So you’ll notice, we did not call it out on our prepared remarks, so it’s not anything of concern from a material standpoint in our margin assumption. But we do expect it to go lower in the future.

David Mann

Great, and then to follow up, you’ve talked a little bit about weather and some benefit there. Can you parse out a little bit regional performance, maybe to give a sense on how much weather maybe did help you in some of the northern markets? And also maybe on the regional performance, can you talk about what you are seeing in Texas and the South Central region with the energy markets influx?

Tim Johnson

From a regional standpoint, that is one of the reasons why we called out the northern and mid-western regions of the country. Certainly it’s a little bit better year-over-year in seasonal than the balance of company, and that was very clear to us in the numbers. Another reason why those areas of the country outperformed a little bit in the first quarter also relates to our furniture - as you know from following us for a long, long time that we have a more concentrated in a number of stores a larger furniture presence in some of our northern mid-western market than we might in some of the southern markets and certainly much, much more concentrated than we have in California as an example.

So whether year-over-year and clearly the furniture strength can help some of our more mature markets in the north and the Mid-western parts of the country. Specifically on the second part of your question, thinking about the, I think your phrase was energy market or the Texas market, my recollection we comp positive in those markets or certainly in that region for the quarter, as we did in all regions, and they are not to the extent of the northern or weather impacted markets. But we comped in those areas of the country that are seeing some challenges from an energy perspective.

We’ve got a very good team in the southeast and southwestern markets. Again, same opportunities from an inventory value strategy standpoint. So every expectation is that those markets will continue to perform.

Operator

And Matthew Boss of JPMorgan. Your line has been opened.

Matthew Boss

As we think larger picture about market share opportunities, David who do you follow in your competitive set on the home and furniture side? How should we think about your niche there, and just market share opportunities? And larger picture, what’s the best way to think about the pricing and promotional landscape you are seeing out there, any thoughts would be great?

David Campisi

Yeah, sure Matt. The first piece of that I would say, we look at -- the furniture business is highly fragmented is the word I would use outside of the national player Ashley Furniture, which we do business with is really the only our guy out there on a national basis besides us.

So we look at all of the different regional players by market. But we - and we talked about this many times, if you look at our assortment in upholstery furniture, and mattresses and all of those mattresses are part of what we call SM users, special makeups that are built for us exclusively by Serta. And we have an incredible value prop there. Our opening price points are our sweet spot both in mattresses, cased goods, which we primarily for the most price outside of some product we buy from Ashley is all product that’s built for us primarily in Vietnam.

So very competitive opening price point strategy versus some of your traditional furniture regional as well as Ashley. I think we really play in the opening price point with them as well versus their higher end assortments. So again, that really is a big differentiator, and the reason we talk about ownable is when you think about the discount space and the two big guys out there. They don’t transact in brick and mortar in those businesses. So we really a nice ability to continue to grow and take share away from.

Like here in Columbus you got Valley City as an example, Meyer out of Michigan does some roadshow business, or you look at Costco, very, very high end furniture assortment. So, we’re really a value proposition, great quality and great fashion. And again as I said before, this team is incredibly highly energize the BPARM teams and they are not afraid to test and learn under Martha’s leadership expanding the offering, where appropriate and taking the fashion level up to a higher level, again also of testing higher price points in both mattresses and in furniture as well.

And we just had great partnerships with our suppliers from the United in upholstery. I’m actually going to be down in their factory next week. So again it’s a business that our vendors are tremendously supportive of and that’s really the strategy there. And the reason why we talk about ownables is that’s exactly why, because there is not a lot of competition in the discount space and certainly of the dollars trying to turn in the furniture business. So hopefully that answers your question Matt.

Matthew Boss

And then just a follow-up probably for Tim; on the SG&A front, should we think about your fixed cost hurdle as flat here? Should we think about that as sustainable multi-year? And just how are you thinking about rising wages with the minimum wage and any overtime impact that we should think about?

Tim Johnson

Yeah, Matt, we’ve been fairly consistent through this SPP process so ’14, ’15, and ’16. ’16 the year we’re in so third year, sort of flat to slightly positive comp would be necessary in order to leverage expenses. So I see no reason why based on first quarter results or outlook for the balance of ’16, why we should come off of that. It’s happening in our business today and clearly with the upside on comp in the first quarter up to a three, you can see the power of the leverage.

Looking forward, we’ll have more to say, as David mentioned in his prepared comments, we’re going to have our second investor conference under David’s leadership, it will happen later this fall, and we’ll be able to speak more intelligently about ’17, ’18 and ’19, and what our key initiatives are going to be in the business, what investments we might want to make, what our expectations are from a category standpoint, marketing the whole strategy like we articulated a couple of years back.

So, premature to talk about ’17, ’18 and ’19, but that’s where we will spend some of our time when we are together later this year.

Operator

And next we’ll hear from Dan Wewer with Raymond James.

Dan Wewer

David, it looks to me like this would be an ideal time to begin growing the store base again. First, the company's fundamentals haven't been this strong in probably a decade. And then second, we are beginning to see another generational opportunity in real estate with some of the other retailers beginning to shutter stores. So just wanted to get your thoughts if you think now is the time to begin looking to grow the store base.

David Campisi

I’ll take that question Dan thank you. It’s a good question and we’ve spend a little time yesterday actually with our Board of Directors talking about that, and we certainly are well aware of all the store closing out there, there are going to be liquidations that are taking place now and probably a lot of that real estate won’t open up until next year as the dust settles and the guys who are in some of that space will take those high rents.

What I would tell you is that, we’re still looking at the store base saying, we want to improve the current existing lead that we have of the 1448 stores that we have today. We know as T.J. used the word full transparency that we have a lot of work to do to update those stores, whether it’s just that sign on the outside of store, the interiors. And we feel that’s a better place for us, because as I said in our prepared remarks, honestly our country as we all know is way over stored.

I recognize that there are some folks out there that are continuing to grow their store base, but it can fully be different strategy than ours. So we will look at that real estate when it comes available and when the rents are reasonable. And we would probably look at it more as a re-load opportunity where we have some stores that we would like to improve the size so that we can, for example, southern California, some of our stores don’t have the rooms for furniture being stacked. But I’m not real bullish on growing the store base at this moment in time.

But again, we are always opportunistic and T.J. can add a little color because real estate reports to him, and his team is razor focused on looking at these opportunities market by market is what we really today, as we just did Phoenix a few weeks ago. So T.J. can you add some more color.

Tim Johnson

Dan I really do appreciate and I appreciate the kind words that you mentioned and suggesting that we are ready for growth again. I think that from our perspective we had a significant amount of dialog yesterday with the entire Board on this very topic. And from our perspective, we in the right situation with the right rents filling end markets because we are in most major markets. If those opportunities just fell in our lap, I think we would be very, very interested in doing that. Last time we went through a cycle like this, you probably remember in ’08-’09 when we had two very large retailers go out at the same time. We did benefit from that. Although it took a little bit of time before those stores made it all the way through the process back through the bankruptcy core of land lords and came to a certain [rent] that were something we could work with at our current level of productivity.

So I think we’re on top of, we understand where the locations are, we understand which ones we would be most interested in. Most of those as David mentioned will help us, not just relocate stores and increase productivity, but also move the brand forward, because in many of those markets, it would allow us to increase our financial penetration etcetera, etcetera. So there’s a lot of good reasons to look at what’s going on right now in the real estate market and adding or relocating stores.

We’re not ready to commit to that as an opportunity just yet. We think it’s still a little bit early not because we don’t to, but because we just need to make sure they come back to us and in the right locations at a rapid weekend forward, given our current productivity. I say current productivity, because that’s the single biggest opportunity I think we all believe that we have.

As good as the business has been the last nine quarters at a real high level, we’re in the mid-160s in terms of productivity and that’s low compared to our competitive set and really speaks to where the single biggest opportunity is, not just in cost, but when that productivity goes up, obviously it will be much easier for us to think about new stores.

Operator

Our next question comes from Joseph Feldman with Telsey Advisory Group

Joseph Feldman

Wanted to ask about - you mentioned the supply sourcing and transportation cost as a big driver. Can you share some more color on that. And I apologize if I did miss, but was some of that driven by fuel just costs being lower or was it other efficiencies that you guys were gaining there?

Tim Johnson

Joe, its T.J. It’s multiple items, fuel would be one, productivity in our buildings would be two, skew optimization, carton flow, more consistent flow, a tight relationship between the entire supply chain would be a third. So it’s not any one item, and candidly the fourth is the warehouse management systems or WMS systems that are now live in four of the five buildings. We’ve got time under our belt now in learning a new system, learning potentially new processes all with a design of making us more productive as the buildings. So there’s multiple different reasons for the leverage.

Having said that, leverage and distribution, transportation was our expectation all along coming in to this year. I think we’re doing very well in that space, as the business continues to evolve. So multiple different reasons Joe for the leverage.

Joseph Feldman

The other follow-up I wanted to ask was, Walmart talked a lot about price investment really helping to drive their sales this past quarter. I'm just curious from a competitive standpoint, and I know you addressed it a little before, Dave but did you see any pressure from the Walmart price investments or from others out there and did that have any kind of an impact later in the quarter as that went into effect?

David Campisi

Not at all Joe, and I would tell you that we - someone asked the question earlier about the overtime thing. We did the math on that and its very small impact. We actually pay in really decent wage out there when you talk about our full time store team leaders. And then when you look at the hourly associates in the stores, we actually have a fairly generous package out there that’s very competitive and we’re not having difficulty at all.

And I would tell you that what’s happening right now that really hasn’t been talked about a lot, and obviously a lot of focus on while aware and know who they are in with the sports authority bankruptcy you’re going to have thousands and thousands of people out there both in distribution center as well as part time and full time hourly workers available.

So again, its’ we’re not seeing and a lot of that talk about price investment, when we walk that competitive set date you’re referring to, we certainly don’t see the upgrade in quality of people. We’re the energy that seems to be talked about. So I believe that when you walk our stores and you talk to our associates are highly engaged and highly energized.

Operator

And next we have Paul Trussell with Deutsche Bank

Paul Trussell

Just on the comp, wanted to go through the composition maybe a little bit. Tim, you’ve been collecting more data on traffic. Any color that you can give us on what you’ve seen from a transaction count standpoint, versus conversion and ticket and UPT and how your low-single digit guidance, what the thought process is for each of those metrics as we go through the balance of the year? And then second, just on the cadence you spoke to a 4% comp in the Marpril period, but discussed that May was planned below your 2Q guidance. Is that change solely due to the Memorial Day shift and the lack of inventory within seasonal? If you can just clarify that. Thanks.

Tim Johnson

Sure. I’ll start with the second part first, there is plenty of inventory in the stores for Jennifer to shop in the seasonal space. Memorial Day is a very important part of our business, so I just want to make sure everyone, if you’re still needing seasonal product, come on out, we’ve got plenty for you. However as the second quarter goes on, we do anticipate, given the higher sell-through in first quarter, we don’t anticipate lawn and garden and summer will comp in second quarter the way it comped in first quarter. That is one of the primary reasons for the guidance being slightly different than what we just experienced in the first quarter.

I think that probably makes sense to everybody, and as it correlates to the margin question is one of the benefits we’ll see in terms of rate. Again from our perspective to answer the second part of that question Paul, we did plan in the month of May below our guidance for the quarter, because we know Memorial Day shifts out. Really the heavy traffic will shift out in to really where we are right now in first part of the next week, which for us falls in the month of June.

So commenting on May comps today really doesn’t help you understand the quarter so much because of that shift. By coming up bigger picture, when weather is good, our seasonal business obviously is very, very good. But even when weather is a challenge, the good news for our business is, the other parts of the business, furniture, soft home, food, consumables, the convenience businesses and hard home and electronics all are performing quite well and relative to the plan in pretty good shape.

So when weather is good it’s even an added benefit for us. So that’s really - the strength in our core business or the non-weather categories is what really gives us the confidence that we’re going to drive that 10th consecutive quarter positive comps in second quarter.

The first part of your question Paul, I think we’ve said at at least the last couple of calls that we know, we believe we do not need positive traffic or positive transactions to drive our comp this year. The basket will continue to drive the comp, clearly the categories from an ownable, winnable standpoint primarily furniture, seasonal and even to an extent soft home. Those are our higher ticket categories. Clearly they are working for us and Jennifer likes what we’re doing. So we continue to expect that the basket will be the driver of the comp for 2016.

From a traffic standpoint, we’re not fully anneversaried on traffic yet and in all stores, but we’re getting closer. We understand how our traffic looks year-over-year in most stores and looks in most regions of the country year-over-year. We also have the benefit of understanding how our traffic compares to others in I’ll say the national average which is available through shopper track as well. So what I would say in that regard is, traffic challenges which are broad out there in retail and are commented on probably every week are real. We see it in the numbers that are reported to us. And in most given weeks, our traffic results are actually a little bit better than the national average encouraging to us.

So, there’s still a lot to learn there Paul, but I think that one of the big opportunities as we move into the back-half of the year is really leveraging that information with our stores team and start to have goals and accountability measurements based on some form of sales or conversion or sales per shopper type metrics that will be new for us. And we found that when we provide good inspect what you expect reporting when we provide good goals by store to Nick and his team. They rallied behind it and really get focused on it and do our great jobs.

So it’s still very early and it’s probably more relevant to maybe not even the back half of the year, but as we go in to the next strategic plan and understanding how do we start to improve upon conversion, how do we start to expand our customer base. It’s something that we’ll spend more time talking about at the next investor conference.

Paul Trussell

Thanks for that color and just very quick follow-up to David, on the e-commerce rollout, you spoke briefly earlier in the call about some of those first few transactions. Maybe you can just give us a little bit, more details on what you’ve seen the customer focused on and that initial feedback?

David Campisi

Paul, obviously we transacted for about two weeks in the quarter, and it was a very slow opening process. So not a lot of activity relative to the first quarter, but the month of May obviously was in full operation. And as I said earlier, the performance is really the big of its’ coming out of the seasonal areas with some gazebo, some umbrella type of categories within seasonal but also in some summer categories we’re selling.

I was just over there with the Board Wednesday walking the fulfillment center here in our back, distribution center. And you’ve seen a lot of product that she’s buying like fashion, dinnerware that our buyers buy in the summer area for outdoor entertaining has been a big seller in there. There’s been a few limited assortment of patio furniture been on there that’s performed very well, and secondly the other area that’s performed very well has been part soft home, whether it’s been in bath area, towels on top of it and sheets and so on.

So it’s really fun to watch that happening, because obviously seasonal is an ownable category for us and then soft homes winnable. So that’s really been the focus. What we have learnt is that we put some convenience businesses on there and we’ve learned that when we talk about our mission’s statement it surprises in every aisle every day. Some of the surprises that happen and the teams’ done an outstanding job this year, and as T.J. said getting or beating your forecast needs convenience businesses. One of them I’ll give you an example is, we put sandals on the website and it’s a size business, but its’ also my top of mind. So when we merchandise and if you’ve been in our stores this season, you’ll see those sandals in the isle with a fixture that the customer has to navigate around.

So I look at that transaction as totally a surprise. In other words, she didn’t get in the morning and say, I’m going to go to Big Lots to buy sandals, that’s typically not what that customer does, and that’s why they ended up being edited. So that product is not performing, but in the brick and mortar its running up double digits. So, again that’s just a lessons learnt for our team saying, you know what, we just need to make sure that we put the ownable winnable categories on there that she’s totals clearly, that she wants to buy online.

And as we move in to the back half, obviously we’ll be putting on a more seasonable product and that product’s built and on its way and assorted and that’s the Christmas trim part of the business, and we feel very good about that as far as we move in to the back half. And that’s really candidly fourth quarter is where we’ll see much higher level of transactions.

So very cautious about how we roll this out and test and learn and the team’s really on it and we got a great person whose merchandized that website and she all over with the merchants and we feel very good about it. I don’t Paul if you had time to look at it, but it’s a pretty robust website considering where we came from versus three years ago.

Tim Johnson

Yeah, I want to stress here Paul and for everybody, just how early some of these results are. As David mentioned, really, you had two weeks that had any significant or measurable volume in the quarter, and even in terms of communication and letting the public know that we’re online we’ve moved very slowly in order to make sure that we can handle the traffic and service the customer well.

And I think we’ve been successful on each of those items. I think one of the stats that was mentioned on the e-com DC tour 99.9 or 99.8% accuracy. And in terms of getting the right product to the right on time and within the shipping windows and things like that. So I think from an execution standpoint, we’re up to a real good start in making sure it’s a good experience for Jennifer. But it’s only this past weekend in our add where we actually featured in print for the first time saying, hey you can shop these times on BigLots.com with a neat little buggy and the whole thing to tell them what items are available and which items are not.

So it’s very, very early and understanding how she’s going to respond and what drives the most traffic to the site. Additionally if you’ve been paying close attention, we’ve actually tested a couple of different shipping offers and there’s many, many more tests to come I’m sure. So it’s very, very early in understanding and no different than our retail operation. Clearly as its gotten warm out in the last 10 full days in most regions of the country, we see our seasonal business online get better and then the week before or the week before that.

So a lot of learning still occurring, but hopefully the key takeaway is we are moving forward in a very measured and diligent way so that we can really understand and test our way through this in 2016. I guess that’s all.

Operator

And moving on we have Peter Keith with Piper Jaffray.

Peter Keith

So just two quick modeling questions for you guys; on the e-commerce launch first off, curious if you’re still planning on 22 million in revenue this year? And then talking to Andy earlier in the quarter, it sounds like you guys are going to put that e-com revenue in the comp calculation. So as that builds towards the back half of the year, should we expect that to be as much as 50 to 100 basis point comp driver by the time we get to Q4?

Tim Johnson

I don’t believe you should expect it to be 50 to 100 basis points by the time I get to Q4. That would suggest we would do almost large majority if not all the year in Q4. And from our perspective Peter, we are putting it in the comp. I would say it’s’ still immaterial to the comp in most quarters. We do expect it to build quarter-to-quarter through the year. So obviously second quarter will be bigger than first since we’ll be online the entire quarter, and third should be bigger than second. Fourth obviously will be hopefully much, much bigger than second or third.

So from our perspective, it’s a pretty measured cadence, it should flow with website traffic and we expect our conversion to improve as the year goes on also. We had a learning so far, and I think may be one of the encouraging learnings is really how much in each transaction she is purchasing.

The average order value is probably a little higher than we anticipated. So that’s a good step for us. I think our challenge as we move through the year, we have website traffic every week, we have website traffic before we had an e-commerce business. How do we convert more and more Jennifer’s once they get to the site and how do we reach the Jennifer’s that may not be in our buzz club or may not read the ad circulars. How do we let her know that we’re now transacting online.

So still a lot of work to do, still a lot to learn as we move forward this year.

Peter Keith

Okay one separate question then, so nice to see the share repurchase activity you guys being opportunistic. Could you give us share count for Q2 as there’s been a lot of movement the last couple of months?

Tim Johnson

Sure Peter. I would - diluted share count for second quarter I would estimate between 44 million and 45 million for the quarter.

Operator

And our final question for today comes from Laura Champine with Topeka Capital Markets

Laura Champine

We are also excited about the e-commerce revenue growth over the next few years. But I'm wondering, T.J. if you can quantify the drag on your EBIT margin that you expect from the startup costs and just from operating the e-commerce business this year?

Tim Johnson

I believe when we gave initial guidance for the year, our estimate was an operating loss in the range of $10 million to $12 million for the year on sales of 20 million to 22 million, I believe were our original estimates for the year. So hopefully that helps from a modeling perspective. Again, when you think about the operating loss, a couple of things to consider; we’ve got roughly a $40 million asset, meaning we invested about 40 million of CapEx between late ’14 and the entirety of fiscal ’15. That will depreciate primarily over a five year to life for the most part, but some parts are a little bit long. So I think our guidance was roughly a $5 million to $6 million depreciation number included in that operating loss.

Our expectation would be, we’ll have shipping cost and not net shipping revenue, but there’s a cost associated with - a net cost associated with shipping that you could add to depreciation, and then obviously with a partial year volume that from a loss perspective, we will not have a full year’s worth of volume. So still a tremendous amount to learn between now and the end of the year, before we would be even remotely close to thinking about providing financial information of half the shares.

So with roughly 3,000 skews on the website, and knowing that as we move through this year we’ll have - we may still have 3,000 but it will likely be a different 3,000 skews and how does Jennifer respond to that is still in front of us too. And the last comment and I’ll stop talking about e-com is, I would say the seasonal nature or the cyclical nature of this business is something we’re going to learn too.

We understand our cadence and seasonality in brick and mortar, and we’ve made some assumptions that e-com will follow that, that’s assumption. We may find that it calendarizes differently for whatever reasons. So still a lot to learn from an e-com perspective, but I feel good that we’ve got the disciplines around the cost, I feel good that we’ve got governance around shipping cost. We meet every week to discuss shipping results and future promotions and I feel good about how Lisa and the BPARM teams are really trying to manage inventory and adjust inventory levels based on results positive or the other ways.

So I think we’ve got a lot of eyes on it Laura, but we’re still focused on the other 99.5% of the business is where our primary focus is.

Laura Champine

Got it, but some very early days, T.J. no reason to change the guidance you’d already given or the outlook you already gave on the $10 million to $12 million loss this year?

Tim Johnson

No reason at the moment Laura. I would tell you again, we’ve already adjustments in inventory, we’ve already made adjustments in terms how we’re going to market with shipping cost and other things. So, we’re already learning and applying those learnings to results. But as we’ve talked about, we’ve really three or four full weeks’ worth of selling. I think it’s way too early to make adjustment for the year. I think it will be more appropriate to talk about third and fourth quarter expectations after we learn from second quarter.

Andy Regrut

Thank you every one. Derek will you please close the call with replay instructions.

Operator

Absolutely. And ladies and gentlemen, a replay of this call will be available to you by 12 noon Eastern today. The replay will end at 11:59 PM Eastern Friday June 10, 2016. You may access the replay by dialing toll free USA and Canada 888-203-1112 and enter replay passcode 4012430 followed by the ‘#’ sign. International 719-457-0820, and entering replay passcode 4012430 followed by the ‘#’.

Ladies and gentlemen, this concludes today’s presentation, thank you for your participation. You may now disconnect.

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