Big Lots, Inc. (BIG)

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Big Lots, Inc. (BIG)

Q3 2010 Earnings Call Transcript

December 3, 2010 8:00 am ET

Executives

Tim Johnson – Strategic Planning and IR

Steve Fishman – Chairman, President and CEO

Joe Cooper – CFO

Chuck Haubiel – Legal and Real Estate, General Counsel and Corporate Secretary

Analysts

Jeff Stein – Soleil Securities

David Mann – Johnson Rice

Dan Wewer – Raymond James

Meredith Adler – Barclays Capital

Mitch Kaiser – Piper Jaffray

Patrick McKeever – MKM Partners

John Zolidis – Buckingham Research

Laura Champine – Cowen and Company

Joseph Feldman – Telsey Advisory Group

Charles Grom – JPMorgan

Joan Storms – Wedbush Morgan

Presentation

Operator

Ladies and gentlemen, welcome to the Big Lots third quarter 2010 teleconference. This call is being recorded. During this session, all lines will be muted until the question-and-answer portion of the call.

At this time, I would like to introduce today's first speaker, Vice President of Strategic Planning and Investor Relations, Tim Johnson.

Tim Johnson

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

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

As discussed in this morning's release, our results for the third quarter and year-to-date periods of fiscal 2009 included in items and continuing operations that we believe was not directly related to the company's ongoing operations. We have provided a non-GAAP reconciliation for both periods last year and those schedules are attached to today's release. Since we do not view this item as relevant to ongoing operations of the business, the balance of our prepared comments and comparisons this morning will be based on the non-GAAP results from continuing operations.

With that, I’ll turn it over to Steve.

Steve Fishman

Thanks T.J., and good morning, everyone. During the third quarter, our customers continued to be selective in their purchases, but were willing to spend money where they saw tremendous values as evidenced by the continued strength in certain of our higher ticket discretionary categories.

From a merchandising perspective, furniture, seasonal and home continued to lead the way. For the fourth consecutive quarter furniture comped up double digits with a very solid execution across all classifications. In particular, upholstery was excellent, Stratolounger closeout deal and the furniture road show supplemented by solid performance and our day in and day out assortment.

Close out deals are a nice shot in the arm when we get them, but the real strength is our everyday assortment at a value and quality level that makes us an industry leader in the low to moderate price point furniture business.

Our seasonal category comped up high single digits for the second quarter in a row. Lawn and garden, particularly our tailgating assortment was strong early in the quarter, and each of our fall seasonal businesses comped up mid to high singles. There I’m referring to Halloween, Harvest and early Christmas selling. Again, this is one of the higher price points in the store, further reinforcing to us that we’re presenting great value and we think this bodes well for the holiday season.

Home comped up in the low single digits on top of improving trends from a year ago. So comp on comp, which I believe is an indicator, a category gaining momentum. Results were driven by a combination of good deals and improving quality on consistency product.

We experienced improving trends in some of our hardlines classifications like tools, appliances and home maintenance offset by a slight decline in our electronics business, as we anniversaried the very successful launch of our video game software program a year ago.

Our most challenged business was consumables, where we comped down in the low single digits.

For those of you who have followed us for a while, you know that we don't make excuses for our performance. In this situation, I don't believe we executed as well as we're capable of, and did not provide the customer with the offering that they've come to expect from us. The team is working very hard and swiftly to make changes to prepare us for the New Year. So we posted a positive comp for Q3, but we always want to do better. Having said that, clearly there are some very encouraging performances in the third quarter.

Now, Joe is going to give you some details on the quarter, and how we're looking at our forward guidance. Joe?

Joe Cooper

Thanks, Steve and good morning, everyone. Sales for the third quarter were $1.056 billion, an increase of 2.0%, over the $1.035 billion we reported for the third quarter of last year. Comparable store sales increased 0.7%.

For Q3 operating profit dollars were $27 million, a decrease of approximately $8 million compared to last year's gross margin growth – gross margin dollar growth was offset by an increase in expense dollars. In terms of gross margin our dollars grew by approximately $10 million, or 2.4% due to a combination of total sales growth and expansion in the gross margin rate.

Our rate for Q3 up 40.5% was 10 basis points above last year and better than our guidance. The rate increase was due to lower markdowns, lower shrink costs and a slightly favorable mix impact. In particular, the favorable merchandise mix impact in lower markdowns were the direct result of better performance in certain of our discretionary categories, particularly seasonal and home. These improvements were partially offset by higher freight costs both domestic and import.

Total expense dollars were $401 million, an increase of $18 million or approximately 5% compared to last year. We believe there were certain unique factors in the third quarter and we do expect to expense leverage to return in the fourth quarter.

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