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Big Lots, Inc. (NYSE:BIG)

Q2 2007 Earnings Call

August 29, 2007, 8:00 AM ET

Executives

Timothy A. Johnson - VP, Strategic Planning and IR

Steven S. Fishman - Chairman, President and CEO

Joe R. Cooper - Sr. VP and CFO

Analysts

David Mann - Johnson Rice

Matthew Boss - JP Morgan

Mitchell Kaiser - Piper Jaffray

Presentation

Operator

Ladies and gentlemen, welcome to the Big Lots Second Quarter 2007 Teleconference. 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, Vice President of Strategic Planning and Investor Relations, Tim Johnson.

Timothy A. Johnson - Vice President, Strategic Planning and Investor Relations

Thanks, Rochelle and thank you everyone for joining us for our second quarter conference call.

With me here in Columbus today are Steve Fishman, our Chairman and CEO; Joe Cooper, Senior Vice President and Chief Financial Officer; and Chuck Haubiel, Senior Vice President and General Counsel.

We appreciate you joining us this morning a little earlier than normal. Before we get started, I'd like to remind you that any forward-looking statements we make on today's call involve risks and uncertainties and are subject to our Safe Harbor provisions as stated in our press release and our SEC filings, and that actual results can differ materially from those described in our forward-looking statements.

As you can see from our earnings release this morning, our results include both continuing and discontinued operations. The discontinued operations activity in the second quarter of fiscal 2007 reflects the 130 stores closed in January 2006, and KB Toys related matters as described in our Form 10-K. Given the amount is immaterial and we do not view the discontinued operations as relevant to the ongoing operations of the business, the balance of our prepared comments will be based on results related to continuing operations.

With that, I'll now turn it over to Steve.

Steven S. Fishman - Chairman, President and Chief Executive Officer

Thanks, TJ, and good morning everybody. Across the organization during the second quarter, I'm proud of how we continue to execute the Big Lots WIN strategy, a strategy focused on operating profit growth. And for the quarter, we drove significant operating profit growth with $33 million this year versus $7 million last year. We stayed focused on what was within our control and drove record second quarter performance for this company, $0.21 per share on a 5% comp, 5% increase in gross margin dollars per store on SG&A that was down 2% per store compared to a year ago. Overall, a very well executed quarter.

It all starts with merchandising and of course over the last two years we've thrown a number challenges at our merchant team, from raise the ring to delivering more floor-ready merchandise to generating faster inventory turnover and decreasing our cash conversion cycle. Our merchants continue to execute and drive not only comps, but the overall efficiency and cash flow of the business.

From a merchandising perspective, you'll recall that when we detailed our long range plan we anticipated that certain key categories would outperform the store, categories such as seasonal, furniture, and electronics in particular. I continue to be encouraged by the strength of these categories, as well as our performance across most of the major areas of the store.

Specifically, seasonal first, which accounts for a little less than 15% of our business annually, led the company for the second quarter with comps up in the mid teens. Strategically, we plan to carry heavier inventory levels later through the season in certain classifications in both summer, and lawn and garden. I am speaking particularly of outdoor living, patio, grills, pools and outdoor fun merchandise. These are classifications that carry a higher ticket, and quite frankly we sold through them too early last year, particularly in some of our warmer weather markets.

Next was furniture, which is also about 15% of our business annually. Furniture continued its strong performance with comps up in the high single-digits on top of a high single-digit comp in Q2 last year. Upholstery and the Serta mattress program were the key drivers, with RTA business starting to gain some traction and consistency. Even though the home furnishing sector continues to be challenged, our team is providing extreme value to the customer with a heightened focus on quality, and delivering trend-right products. It's not just about low prices.

Within the hardlines category, which is a little less than 15% of our business annually, electronics posted another good quarter with comps up in the high single-digits. We also bought deeper into electrical this year, which is fans, air-conditioners and outdoor lighting, and that paid off for us in a big way with comps up in the 20s.

Another category that we probably don't talk enough about is consumables, which is around 30% of our business annually. Sales were above plan for the quarter with comps up in the mid-single digits, and increases in all classifications including food, HBC, chemicals, paper, pet, and home organization. This category has the highest penetration of branded closeouts, and this team just continues to deliver great value.

And of course the large home furnishings deal that some of... that there were some discussion about tree months ago on our last call turned out to be a successful deal for the company. We estimated that the deal added about 2% to the comps for the quarter, and as we sit here today, there is very little of the product remaining in our stores.

We get deals all the time, some are big ones like this, and some are small ones, and you don't necessarily hear about them, but this is our niche. We are in the closeout business and this is the type of deal that we would like to do more of and from an execution standpoint we have a model that works very well for us. Just to save a little time in the Q&A, this is the extent of the financial information we will be sharing on this deal.

What we really haven't said much about is that the comps for Q2 were actually driven more by merchandising and store execution than some of you may have thought, because our ad spent for the quarter was actually down to last year in TV and in print. Specifically, on print we did run one less ad circular than last year. We were able to execute 12-page Memorial Day ad, which actually did slightly more volume than two 4-page ads that ran around Memorial Day a year ago.

On a regional basis, our performance was strongest in the Northeast and Southern regions with the Western region lagging the company average as it had the fewest number of stores benefiting from the large home furnishings closeout deal in the quarter.

Shifting from comps to inventory management, our inventories are very clean and lean to start the third quarter. We ended the second quarter down $105 million or 11% per store compared to a year ago. Now, that's a big number, 11% down, and we have a couple of areas that may look a little light in the stores, but I want you to know we have plenty of inventory to drive the comps we're forecasting for the balance of the year. In fact, the in-store inventory, which is what customers see, is really only down about 3% to 4%, but our DCs are down significantly to the better flow strategies and record productivity by our DC teams.

We believe that given the uncertainties in the macro environment and struggles in certain areas of retail, it made good business sense to challenge our merchants to remain fluid and hold back more open-to-buy for deals, particularly in certain areas of the businesses like toys, home, and some of our play and wear departments where we're not particularly satisfied with our recent performance. So, we are ready to pounce on deals as they become available and we believe they will over the next few weeks.

Moving away from the quarter, I want to update you on a couple of strategic initiatives of interest. First, we continued to make progress on our store retrofit program in Q2. At the beginning of the year, I think we identified about 70 stores that were predominantly high volume and small square footage locations, principally in California. The purpose of the retrofit was to get more merchandise out on the selling floor and better allocate square footage to key categories. And in approximately half of these stores, we're creating enough space to move to a full-size furniture department from a partial department of principally RTA.

I visited a number of these stores personally in California in the last couple of weeks and I have to tell you that stores business was solid. We've learned a lot on how to execute the retrofit and I left there feeling that we accomplished what we had set out to do. The program for this year will be completed in the next few days, and we will evaluate the financial impact over the balance of this year. But my gut tells me that this will be a program that will continue into 2008, and potentially further, which is very encouraging.

Also, from a strategic point of view, the rollout of our new point of sale register system is moving forward very well. By the end of this month, we will have the new system up and running in about 475 stores. By the end of Q3, we should be up and running in about 700 stores with the balance of the chain to be completed in 2008. You'll remember from our last call that this is a system that was tested during the fall last year, and we are looking forward to the capabilities that we'll provide to the business in 2008 and beyond.

Now I am going to turn it over to Joe to speak to some of the dollars and cents. Joe?

Joe R. Cooper - Senior Vice President and Chief Financial Officer

Good morning everyone. For the second quarter of fiscal 2007, we reported income from continuing operations of $22.1 million or $0.21 per diluted share, compared to income from continuing operations of $4.7 million or $0.04 per diluted share a year ago. Our Q2 result of $0.21 per share was ahead of our guidance of $0.07 to $0.10 per share. If you were looking at the midpoint of our communicated guidance of favorability was approximately $0.12 and resulted from first higher sales contributed an extra $0.04 to $0.05 as comps came in at 5.2% versus our original guidance of 2% to 4%. The remaining $0.07 to $0.08 of favorability was SG&A-related and resulted from first continued operating efficiencies in both stores and distribution centers.

From a stores perspective, payroll continues to be well managed and our merchant and planning teams are helping to improve our store productivity. Merchandise initiatives like raise the ring and one touch or delivering more floor-ready merchandise are having a very positive impact in the stores.

Raise the ring is key, and unless you are inside our business, I am not sure that you can understand the significance. If per store dollar inventories are down year-over-year, and average item retail is up, then the number of units is down even more than the inventory dollars. That's just the math. The store managers and the DC directors deal in units or cartons. It goes a long way in helping them run a more efficient store or building. Additionally, today nearly 50% of our goods come pre-ticketed and ready to go straight to the floor. This is up from about 45% a year ago.

Also from an operational perspective, our distribution and transportation performance was better than anticipated. Our DC productivity was at record highs for Q2, and we are starting to see benefits from our transportation initiatives a little earlier than originally anticipated.

Next, part of the SG&A favorability stems from healthcare and insurance-related costs. Again, this was one of our strategic initiatives and our experience in Q2 was better than anticipated. Since changing healthcare providers at the beginning of the year, we have been encouraged by claim trends and the higher discounts we have achieved.

Finally, the business flexed very well and as sale exceeded plan, we needed very little incremental payroll dollars in order to execute.

Sales for the second quarter were $1.085 billion, an increase of 2.7% over the prior year. And as mentioned, comparable store sales increased 5.2%. The strength of the comp continues to be driven through the average basket and our raise the ring strategy.

Looking at the P&L, gross margin dollars increased 5% per store. As anticipated, the second quarter rate of 38.8% was slightly lower than last year's rate of 39.0% due to certain promotions, as well as a slight shift in mix towards lower margin categories.

SG&A dollars per store were down approximately 2%, as the SG&A rate of 35.7% was 260 basis points better than last year. Along with the natural leverage impact of a 5.2% comp, leverage for the quarter was achieved primarily through operational efficiencies in store payroll, and distribution and transportation, lower insurance and occupancy-related costs, and a lower advertising spend in both print and TV during the quarter. These efficiencies were partially offset by higher bonus expense based on the overall profitability of the quarter.

Net interest income was $1.5 million for the quarter, a $0.8 million improvement compared to last year, due to the company's improved operating performance and inventory management, partially offset by the use of cash to opportunistically repurchase stock during the quarter.

Our tax rate for the second quarter of fiscal 2007 was 36.6%, which was within our annual range of 36% to 39%, and benefited from certain settlement-related activity. As we have mentioned on our last two conference calls, the adoption of FIN 48 can result in more quarter-to-quarter variance in our tax rate going forward.

Turning to the balance sheet, our total inventory ended the quarter at $714 million, down $105 million or 13% compared to last year. The decline in inventory is attributed to lower store count and an 11% decrease in inventory on a per store basis. Inventory per store was down to last year in all major merchandising categories, with the exception of seasonal where, as Steve mentioned earlier, we plan to carry higher inventory to take advantage for sales opportunities we missed last year through Labor Day.

We ended the second quarter with total cash and investments of $109 million compared to last year when our cash was minimal, and we are in our revolver for about $31 million.

Cash flow, which we define as cash provided by operating activities less cash used in investing activities, was $87 million for the second quarter compared to $5 million of cash outflows last year. The variance to the prior year is a function of, first, Q2 net income was $19 million above last year. The balance of the variance is from lower inventory levels and higher AP leverage. As Steve mentioned, part of the inventory variance is related to keeping open to buy, and part of the variance is timing-related as we plan to flow goods differently year-over-year.

Capital expenditures totaled $11.8 million for the second quarter, up $2.7 million to the second quarter of last year. The increase is primarily due to our new POS rollout and store retrofit activity in approximately 70 stores. Depreciation expense for the quarter was $21.8 million or $3.1 million lower than last year.

During the second quarter we opened one store and closed eight stores leaving us with 1,369 stores and total selling square footage of 29.2 million at the end of the second quarter. For the year, we continue to estimate a net store count reductions of approximately 35 to 40 stores.

In regards to our 2007 share repurchase program, during the second quarter of fiscal 2007, we purchased 7.5 million shares in open market transactions at a cost of $215 million at a weighted average price of $28.74. Year-to-date, we have repurchased $329 million of the $600 million authorized by our Board; $100 million under a guaranteed share repurchase or GSR program, and $229 million through opportunistic repurchases.

Although our GSR were not settled until the fourth quarter, if we were to assume that it's settled at the end of Q2, our total number of shares repurchased would have been 11.1 million or approximately 10% of our outstanding shares. We have $271 million remaining under our current share repurchase program as of the end of the second quarter and we will continue to closely monitor the market and our share price in an effort to make the best use of our cash.

Moving onto guidance, for the third quarter, comp sales are estimated to increase in the range of 1% to 3%. This guidance is on top our best comp of the year last year when we comp 5.8%, and benefited form a large drug store liquidation deal. Q3 earnings are estimated to be in the range of $0.09 to $0.13 per diluted share, compared to $ 0.02 per diluted share last year. As a reminder, the third quarter of fiscal 2006 included litigation charges totaling $0.05 per diluted share.

We expect the gross margin rate to be flattish with continued SG&A leverage driving the operating profit growth. Leverage drivers that have occurred in the first half of the year are expected to continue in Q3, recognizing that the amount of leverage will vary given our 1% to 3% comp guidance versus the 5% comp experienced in Q1 and Q2.

For the fourth quarter, comps are planned up in the 1% to 3% range. We expect Q4 operating margin improvement from last year from continued SG&A leverage with the gross margin rate up slightly to last year. Given these assumptions along with the lower share count due to second quarter share repurchase activity, we estimate income from continuing operations to be in the range of $0.87 to $0.92 per diluted share, compared to $0.83 per diluted share last year. As a reminder, the fourth quarter of fiscal 2006 included incremental earnings of approximately $0.05 per diluted share related to the extra week included in the retail calendar during fiscal 2006.

In our press release today, we increased our guidance for the full year, and now expect EPS from continuing operations to be in the range of $1.43 to $1.48 per diluted share. This revised guidance represents a 42% to 47% increase over last year's income from continuing operations of $1.01 per diluted share. The increase in EPS is the result of the strength of Q2 operating results, current favorable expense trends, and a lower share count due to the significant amount of share repurchase activity that accrued in Q2.

For the full year, our comparable store sales guidance remains unchanged at 3% to 4%. We are estimating 150 basis points to 170 basis points of operating profit expansion assuming a flat gross margin rate and leverage in SG&A. As a result of the share repurchase activity in Q2, we have lowered our net interest income forecast to $6 million for the year.

Based on the first two quarters' activity and what is expected to occur for the balance of the year, we now expect the tax rate for the year to be in the range of 37% to 38%, or right in the middle of our prior guidance of 36% to 39%.

For modeling purposes only, assuming no additional share repurchase activity for the balance of the year, we would estimate the number of weighted average diluted shares to be approximately $106 million for the year, below our prior guidance of $110 million to $111 million. This change driven by the repurchase activity in the second quarter contributed about a nickel to the revised EPS guidance for the year that we announced today. However, I want to emphasize we have $271 million of remaining authorization under our current share repurchase program, and have the flexibility to invest as a little or as much of this as we deem appropriate over the balance of the year.

Given record inventory turnover for the first half of 2007 and our current inventory position, we now expect inventory turnover of approximately 3.6 times for the year. Further, we now expect to generate $240 million of cash flow, up from prior guidance of $190 million.

We've lowered our CapEx guidance for the year to $65 million to $70 million, down from $70 million to $75 million. This change is the result of slightly lower than anticipated costs associated with our new POS rollout along with the revised estimate of approximately 7 new stores this year compared to our original plan of 10 to 15. Accordingly, we now estimate depreciation expense of approximately $90 million for the year.

Steve?

Steven S. Fishman - Chairman, President and Chief Executive Officer

Yes. I want to make one more comment before we get into the Q&A. During these calls, investors or analysts typically may comment and ask questions, sometimes supportive and sometimes they are contrary. But there is another audience that's very important that listens to these calls, and that's our team of associates. From the executive team and its drafting of the WIN strategy back in the fall of '05 to the team of nearly 40,000 associates who've executed it beyond our expectations, I want to say job well done. We're further along than any of us including myself thought that we would have been at this point.

Over the last two years, we've made some very difficult and sometimes unpopular decisions, but never wavered or looked back. I wouldn't be surprised if we don't get some questions shortly on some material topics like new stores, why isn't this metric higher or this one lower. But please remember this, in 2007, we now expect EPS to be five times what it was in 2004 before we got started.

Based on our guidance, sales per square foot will be at the highest level ever at over $160 per foot this year. Gross margin dollars per foot are forecasted to be at a record high for this business. SG&A as a percent of sales is expected to be at a level that this business has not seen in 10 years. And inventory turnover for this year of 3.6 times, which is our updated guidance, is nearly 20% higher than before we began our work.

We've generated over $575 million in cash flow in the last 24 months, and we've repurchased over $475 million with the company stock. And those of us who are running the business know that we're still making our business better. In March, we outlined our long-term growth plan. We have a number of initiatives identified to continue to expand the operating profit rate of this business and ultimately drive higher EPS. So to the team that's out there listening to this call, great job. We're far from done and stay focused on the price.

Timothy A. Johnson - Vice President, Strategic Planning and Investor Relations

Thanks Steve. Rochelle, at this time we would like to go ahead and open up the lines for Q&A.

Question And Answer

Operator

[Operator Instructions].

Steven S. Fishman - Chairman, President and Chief Executive Officer

Rochelle, are we seeing any questions at this time?

Operator

Yes, hold on, just a moment please. Our first question is from the line of David Mann at Johnson Rice.

David Mann - Johnson Rice

Yes, good morning. Nice job guys.

Steven S. Fishman - Chairman, President and Chief Executive Officer

Thank you.

Joe R. Cooper - Senior Vice President and Chief Financial Officer

Thank you.

David Mann - Johnson Rice

In terms of the comments made on gross margin, when we look at the back half of the year, the sequential improvement you are looking for, can you just drive down a little deeper in terms of how you expect perhaps your promotional cadence and the mix to affect that or any other factors in terms of that improvement?

Steven S. Fishman - Chairman, President and Chief Executive Officer

Well, David, from a promotional cadence, I don't think you are going to see anything significantly from an expense standpoint than last year, other than I will tell you we have some real surprisingly powerful plans from a marketing standpoint, particularly media. There is going to be a shift and I will give you two seconds on it. We are going to be spending the same amount of money because of the efficiencies we have been able to continue to call out of our paper part of the pre-prints, we have been able to take that savings, still run the same amount of pages and pre-prints that we ran last year and put additional money, that savings money into media, television particularly. And I think you will recall last year we were real pleased with our performance last year when it came to television and the message we were able to send across to the customer base that we have out there and hopefully there are some new customers.

We've made a change recently in the last 30 days in our advertising agency, for the first time in many-many years in the company because we felt it was rightly so time to move on to something a little bit different and we are really excited about the ideas that we have for media for the fourth quarter in particular, but to say the least, I am not going to share any of it with you right now other than to say that we think it's really different, it's really unique, it will continue to drive home what Big Lots is all about and the great brand names and savings that we offer, so from that perspective.

From a margin perspective, I mean, it's really going to be driven by the fact that initial markup continues to really be solid and particularly because of the global sourcing program and we are almost 12 months into that right now and of course we have big plans in the second half for our seasonal business that traditionally is higher margin businesses, we are real excited about this seasonal business and what's been put together and that's on top of what we consider to be a real solid first Christmas last year and a very solid spring and summer season this year. Initial reaction to fall, particularly Halloween has been good. We are real excited about it and I am absolutely elated with the trim-a-tree program that I think you are going to see in the stores shortly and how we are going to be able to drive that. Clearly, if those programs are good, I think gross margin will be driven by probably reduction of markdowns versus last year.

David Mann - Johnson Rice

Right.

Joe R. Cooper - Senior Vice President and Chief Financial Officer

Yes. Just tagging on, the freight initiative that really kicked in the end of the second quarter will certainly add some benefit to the gross margin in the back and remember, from the standpoint of the markdown rate, we did exit our old mattress program in the back half of last year when we started delivering Serta, and also there were some markdowns in home, toys, and apparels. So we do expect the markdown rate to benefit, to Steve's point.

David Mann - Johnson Rice

And then in terms of the open to buy that you have, can you just give some comment after you have seen such success with the Pier 1 deal, and the Oscar deal last year, what's the prospect for... out there in terms of larger deals or the breadth of more medium-size deals as you are looking right now?

Steven S. Fishman - Chairman, President and Chief Executive Officer

I would tell you a couple of things. First and foremost, you know we don't comment on our deals because that's our business and we would never do that. We held back open to buy dollars probably a little bit more going into the third quarter than last year because of what we continue to hear out there in the way of problems with the economy and at least a lot other retailers have stated that they are very-very concerned about it. I would tell you only this and admit to this. Deals are vibrant and I would tell you in the last couple of three weeks in particular, they are at a higher level than we have seen and that's a pretty high level. Our anticipation is as most people get through back-to-school and get well into the third quarter and start thinking about the fourth quarter, we will be able to see even more deals. Some of them are small, some of them are medium-sized, and I probably put a handle more on a lot of medium-sized deals and to me that's in the multi-millions because that's effectively what's important. They are across all aspects of our business and probably a secret I shouldn't give away, coming from all areas of other retail economics that we didn't see before and what I mean by that is not just certain segments of the business, but may be even department stores and higher-end retailers that we never saw before.

David Mann - Johnson Rice

Very good. Thank you, congratulations.

Steven S. Fishman - Chairman, President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Charles Grom from J. P. Morgan.

Matthew Boss - JP Morgan

Yes good morning. This is actually Matt Boss filling in for Chuck Grom.

Steven S. Fishman - Chairman, President and Chief Executive Officer

Hi, Matt.

Matthew Boss - JP Morgan

Hi how are you?

Steven S. Fishman - Chairman, President and Chief Executive Officer

Good.

Matthew Boss - JP Morgan

Just had a couple of questions. First, could you provide us with some additional detail regarding SG&A performance in the quarter? I was hoping may be you could break down the benefits achieved from lower insurance DC efficiencies, advertising, fixed cost leverage in terms of the benefits that we can expect going forward from each of these and also which factors most came in above your expectations?

Joe R. Cooper - Senior Vice President and Chief Financial Officer

This is Joe, Matt. We're not going to provide that level of detail. What we will provide are the components of that, but as far as prioritizing or quantifying --

Matthew Boss - JP Morgan

Sure.

Joe R. Cooper - Senior Vice President and Chief Financial Officer

We're not going to provide that. We will say that the benefits that you just outlined, as we mentioned in the call, we do expect to continue to the back half of the year.

Timothy A. Johnson - Vice President, Strategic Planning and Investor Relations

Matt, this is Tim. I would add on there to Joe's point a couple of the items that we mentioned, that you mentioned specifically, we do quantify in the Q like advertising costs, for instance, that will be in the Q. So I think it's fair to say now that the number this year was about $20 million versus about $25 million last year. And again, as Steve mentioned, we pulled back a little bit on TV and we did run one less pre-print year-over-year. Now if you remember, we had about the exact same dynamic going the other way in the first quarter. So it's just how we have plan the business and how we are executing it that really looks at the variance to last year. The distribution and transportation costs we also quantify separately in the Q and you will see that, and that was about in the neighborhood of say 50 to 60 basis points of the leverage, as was advertising. The balance of the leverage that we continue to see in the business and I would go on to say that we forecasted for the rest of the year is coming from areas like store payroll, like our new insurance program, the move to Anthem has been a good thing for the business and those types of things. So what we have experienced in the first half, we have done our best job to try to forecast for the back half.

Matthew Boss - JP Morgan

Okay. That's very helpful. Second question, given the margin assumptions that you've walked through in terms of the second half guidance, it now appears that gross profit is going be down on a full year basis as opposed to flat that you guys had previously forecasted. Could you just list some of the factors driving this revision and what are you guys seeing in terms of a mix perspective now versus what you are looking for going forward?

Joe R. Cooper - Senior Vice President and Chief Financial Officer

Actually we did not revise the gross margin guidance, Matt. What we said we are about 40 basis points down year-to-date. What we are talking about is flat in the third quarter and up in the fourth, and flat for the year, so there was no revision.

Matthew Boss - JP Morgan

Okay. Could you provide us with some of the details in the fourth quarter in terms of the gross profit increase?

Joe R. Cooper - Senior Vice President and Chief Financial Officer

Well, we didn't provide by quarter, but that's essentially what we just answered for David Mann.

Matthew Boss - JP Morgan

Okay.

Joe R. Cooper - Senior Vice President and Chief Financial Officer

On the gross margin, the components of that.

Matthew Boss - JP Morgan

Okay. Thank you.

Joe R. Cooper - Senior Vice President and Chief Financial Officer

We can walk you back through that again, later Matt, if you would like, be glad to.

Operator

All right. Our next question comes from the line of Mitch Kaiser from Piper Jaffray. Go ahead.

Mitchell Kaiser - Piper Jaffray

Good morning guys. Nice quarter congrats.

Steven S. Fishman - Chairman, President and Chief Executive Officer

Thank you Mitch.

Joe R. Cooper - Senior Vice President and Chief Financial Officer

Thanks Mitch.

Mitchell Kaiser - Piper Jaffray

Steve, I was wondering, you talked about some of the categories that showed really strong performance; seasonal furniture, hardlines, consumables, could you talk us through maybe some of that underperformed a little bit relative to the 5.2% comps that you posted?

Steven S. Fishman - Chairman, President and Chief Executive Officer

Yes, I mean, I think I mentioned that before. I mean, we were less focused and working very hard on the play and wear division, which to you is predominantly the toy part of the business, and I don't know if that's a surprise and we are clearly holding back and being reserved. Kind of expected a lot more questions on the toy issue with what's going on nationally and worldwide in the last couple of weeks. We didn't get hurt all that bad and we had some goods that had to get returned, but more on an open to buy standpoint, some goods that were on order, but it really won't dramatically affect the business. I think the question I have in my mind is how's the consumer going to respond to toys in general between now and the end of the year with the bad taste they may have in their mouth. But we have more branded goods there than we have ever had before and we are getting offered better deals and my assumption is by holding back some of that open to buy with what's going on, there maybe even some better deals coming forward still.

Remember we are only at the end of August here. We have gotten deals as late as October 1st to November and been able to react to them still for the fourth quarter as we did last year. So we are kind of waiting in the wing for some of these big things to happen. We haven't been happy with that business. We think we were slightly unfocused and we think we've got a better plan for the second half of the year there. The play and wear division, there's a couple of elements of that, and we worked really hard on that and I am more encouraged about the fact that the performance hasn't been good, but I think we have a good plan for third and particularly fourth quarter, and that revolves mostly in two areas of the business. One is the jewelry and accessory part o the business, and we really have revised that part of the business and you are going to be seeing a lot better quality and value prices in our stores. In fact, you may see some of it right now and you are going to see much more vibrancy in that category going in to the end f the third quarter and the fourth quarter. So we are exited about that. And something that we call lingerie, which is kind of a misnomer because it includes a lot of different things, we have been getting some very high-end department stores and mid-line department store things that have positively affected the business in the last 30 days, particularly at back-to-that's given me cause to believe that we are on the right track at fixing that part of the business.

The last part of the business that I would agree that none of us have been happy about because it's a business we've driven pretty successfully is the home parts of the business. Now that's broken down in the two areas. The domestics, or linens and domestics part of the business has always been relatively strong and it continues to outpace the balance of the home businesses, and there are some fabulous deals that we have got planned for the third and fourth quarter, in particular branded deals, probably better than ever before, consistent with what I think I have been saying all along. We are getting better and beer deals, more braded, higher-end type goods, and we like that average higher price point.

The part of the business that we struggled in is the home decor and the housewares part of the business and we've got a new team in there that is really focused and is committed to executing a plan for the fourth quarter, and I feel good about what progress they have made so far and I am going to feel even better as we get closer as some of the deals continue to come our way. We've seen a lot more deals recently in that part of the business. So, we run focused. I mean, I never make excuses for our businesses that lag and our folks know it. They are less focused than the guys who are executing the strategy, but we are back on track and I think those businesses will be a lot better.

Mitchell Kaiser - Piper Jaffray

Okay.

Timothy A. Johnson - Vice President, Strategic Planning and Investor Relations

I would also add on there, I know you follow our ad circulars very closely. The categories that we've really identified and went aggressive on the front page were in some of the categories that outperformed too. So to a certain extent, they've got a lot of the really prime real estate and focus of our marketing programs as well.

Mitchell Kaiser - Piper Jaffray

Okay.

Timothy A. Johnson - Vice President, Strategic Planning and Investor Relations

Rather than some of these other categories that Steve had mentioned.

Mitchell Kaiser - Piper Jaffray

Okay, good. Could you talk a little bit about what you are seeing on the electronics category area, specifically with TVs? There is a lot of concern with... with the price points coming down and the supply issues in the... on the electronics side, are you seeing nice open to buys there and if so, what types of brands are you getting and what should we expect --?

Steven S. Fishman - Chairman, President and Chief Executive Officer

I absolutely am not going to give you that, Mitch, and you well know that. I would say that you hit the nail on the head, though. I think there is a lot of chaos going on in that industry and has been and I think we actually identified that in January when we came out of the electronics show. I think what is happening very recently and I mean within the last 7 to 10 days, there's a lot of deals popping up that we weren't sure if we were going to be capable of getting. But remember, as I said to you before, a number of deals came to us very late last year, most of those deals quite honestly were electronics and we still anticipate that we are going to have some great value and some brand names as we always deliver in electronics going into the third and particularity the fourth quarter.

Mitchell Kaiser - Piper Jaffray

Okay. Would you be willing to comment on where they are coming from and what types of brands you are getting?

Steven S. Fishman - Chairman, President and Chief Executive Officer

No, of course not.

Mitchell Kaiser - Piper Jaffray

Please. No? Okay, all right guys, thank you... all right thanks guys, congrats.

Timothy A. Johnson - Vice President, Strategic Planning and Investor Relations

Okay. I guess at this time Rochelle, we are seeing no more hands up in the queue. We would like to go ahead and end the conference call. We would like to thank everybody for their participation and we look forward to talking to you at the end of November. Thank you.

Operator

Ladies and gentlemen, a replay of this call will be available to you within an hour. You can access the replay by visiting this link http://reg.linkconferencecall.com/digitalplayback/digitalplaybackregistration.aspx?recid=5678. Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect.

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Source: Big Lots, Inc. Q2 2007 Earnings Call Transcript
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