Q3 2019 Earnings Call

Greetings and welcome to the Big lots Q3, 2019 conference call. At this time, all participants are any listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero under telephone keypad as a reminder, this conference is being real.

Worded it is I my pleasure to introduce your host Eddie Red <unk>, Vice President Investor Relations. Please go ahead Sir.

Good morning, Thank you for joining us for a third quarter conference call.

With me here today in Columbus, our Bruce Thorne, our President and CEO , Lisa Bachman Executive Vice President and Chief merchandising and operating officer, and Jonathan Ramsden Executive Vice President Chief financial and administrative officer.

Before we get started I'd like to remind you that any forward looking statements. We make on todays 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.

For the third quarter of fiscal 2019. This excludes an after tax gain of $136.6 million or $3.49 per diluted share associated with the sale of our distribution center in Rancho Cucamonga, California, as well as an after tax expense of $2.6 million or seven.

Cents per diluted share associated with the implementation of our strategic transformation.

Reconciliations of GAAP to non-GAAP adjusted earnings are available in today's press release.

One other item to highlight we are in the early stages of planning and Investor event in New York City in March of 2020.

Additional details will follow in the weeks and months to come up but please be advised it is likely to occur in the same general timeframe as our fourth quarter earnings release.

This morning, we have scheduled one hour for the call Bruce will start with a few opening comments leasable discuss Q3 results from a merchandising perspective.

Jonathan will review the financial highlights from Q3, and the outlook for the fourth quarter and Bruce will complete our prepared remarks before taking your questions I'll now turn the call over to Bruce.

Thank you Andy and good morning, everyone I will start with a few comments on the third quarter before talking about what we're seeing so far in Q4, and then give you a preview of what you can expect from big lots in 2020.

It is important to put all of that into the context of the transformational strategic journey. We are undertaking where we remain very confident that we on a path to delivering significant improvements in underlying operating performance and free cash flow and most importantly in long term shareholder value creation.

Starting with Q3, our results were in line with our guidance coming into the quarter comps decelerated from Q2, but strengthen on a two year basis gross margin rate was slightly down but again in line with our guidance.

We continue to maintain excellent expense control, which helped us to deliver adjusted EPS in the upper part of our guidance range.

Before I dive deeper into the third quarter results and our transformation efforts I'm pleased to report that we're off to a solid start in the fourth quarter.

Jonathan will give more color on our outlook in a moment, but despite the adverse effect of the holiday shopping calendar compression. We believe we're on track to deliver a positive comp for the quarter.

Sales in the month of November which included Thanksgiving and Black Friday were ahead of plan and we're excited by their response from customers to our holiday Assortments.

Given our transformational journey as you would expect we're heavily focused on our plans for 2020 and beyond after a year of transition and restructuring in 2019, we expect 2020 to deliver a significant improvement in comps and returned to earnings growth as the fruits of our transformational efforts begin to be realized.

Returning to EBIT and EPS growth will be a key step on our journey and we expect the rate of progress to accelerate in 2021 and 2022.

As Andy mentioned, we will holding investor event in the first quarter of 2020 at which time, we will share more details on our strategy and roadmap, but I want to take a few moments now to discuss some of the key growth levers, we see for 2020 and beyond.

Our store the future rollout remains a central component of our strategy to provide a new and compelling experience for our customer. We ended Q3 with 452 stores or 32% of our fleet in the store the future format.

The sales lift for year, one stores continue to be in the high single digits with the large majority of the increase coming from the high margin merchandise categories located in the front of the store that is furniture seasonal and soft home.

Sales growth in these stores is driven by both the bigger basket and increases in transactions. In addition, net promoter scores, which are based on actual customer survey results are significantly up in these stores further validating that this format is resonating.

In total for the peak holiday selling season, we have approximately 250 more store the future stores. This year compared to last year for 2020, we expect our ongoing store the future rollout to continue to deliver at least a point of comp and we have enhancements to the new format, which should drive incremental growth next year and in years to come.

For instance.

On our last earnings call, we talked about a new initiative called the lock that we have been testing and a number of stores.

And these stores, we carved out an area of approximately 500 square feet near the front of the store, where we are featuring a series of programs focused on events that so far have included dorm savings backyard bargains tailgating and Halloween.

The lot is proving to be a great way to bring newness freshness and novelty our test stores have been experiencing a 1% to 2% total store comp lift with our theme presentations and based on customer intercepts and it's produced favorable feedback and repeat shopping trips.

We will roll out the lot to all of our stores are the future stores in 2020, which including both existing and new conversions will be well over half of the fleet.

In these stores, we will also rollout a new checkout experience featuring a reconfigured and streamline Q line that will enhance customer experience increased product density and build a bigger basket supported by new fixturing and product assortments, including new impulse items.

This initiative has also been a successfully tested over the past few months.

Another growth lever in 2020 will be broyhill, which will be rolled out in all stores and also be available online. This iconic brands will drive growth with special emphasis on our better and best offerings and indoor and outdoor furniture soft and hard home initial product is arriving this month to support our introduction.

One of Broyhill in January and the full chain wide rollout is scheduled for April 2020.

It will be supported with marketing messaging through our print circular and digital channels and through beautifully designed in store signage. All based on extensive work that has been done on brand positioning and guidelines.

Another chain wide launch coming during 2020 is the traffic drivers program, we've discussed on prior calls.

We believe our customer often shops big blocks first and our goal for her as defined even more items on our list at our stores.

This initiative focuses on Reconfiguring, our food and consumables assortments to strike the right balance between surprise and delight values from Closeouts and every aisle and consistent offerings and trusted brand name never outs to support this product mix rebalancing footage from food staple items will be reallocated to food.

Entertainment and consumables.

Our current coolers, which typically occupy approximately 20 linear feet and our low productivity low margin and expensive to maintain will be replaced by a smaller end cap cooler.

The extra square footage will be allocated to more productive categories, all while maintaining our eligibility to except snap any BT as a form of payment.

The traffic drivers initiative will involve some margin investment during the initial rollout, but once again, we are confident based on our testing that it will drive incremental sales.

Overtime, we expect it to become accretive through driving incremental traffic. This program will also be rolled out across the chain.

We expect all of these initiatives to drive a meaningful benefit to store comps in 2020, and we're excited by our customers reaction to the new experiences and Assortments, we are bringing tour in our stores.

Meanwhile, our excitement about our ecommerce business is also growing.

Q3 was our first full quarter with BOPUS that is buy online pickup in store. This convenient shopping option is now available in all stores and our customers response continues to exceed expectations BOPUS has nearly doubled the number of Viewable skews online and we continued to receive more orders per day per store.

Than anticipated in the average order value continues to trend higher than our original estimates.

Furniture has been her most popular choice and she frequently makes additional purchases in store when she picks up or order.

This is an excellent way for us to capitalize on the continued strong growth in our online traffic.

Cyber Monday with a record setting day for our ecommerce platform with record visits and excellent conversion rate and three times the demand of our previous highest day.

The rollout of BOPUS has also meant that our ecommerce operation as a whole is now profitable.

In 2020, it will remain a major area of focus and opportunity.

Finally, our CRM efforts will also be of major focus in 2020, our loyalty program Big rewards also had another great quarter with record setting performance. We ended Q3 with 18.8 million active members. Another all time high adding 500000, this quarter, which has a 15% increase.

These over last year.

We also achieved record loyalty program penetration for the sales and transactions in Q3.

The marketing team continues to do a very good job leveraging this base of loyal customers with messages through email social and digital channels.

We know our rewards members shop, our stores more frequently and typically drive a bigger basket highlighting the importance of these loyal customers.

Alongside these growth initiatives, we continue to focus on driving savings through our fund the journey initiative and Jonathan will speak more to that in a moment, we're taking a highly disciplined approach to both opex and capex and while some of these savings are being reinvested to support our growth initiatives the sustainable benefits they deliver will continue.

You'd beyond these investments.

In summary, we expect to close out 2019 on a positive note and as we enter 2020, we do so with the expectation that accelerated topline growth disciplined and judicious management of operating expenses and lower Capex is expected to drive a significant improvement and normalized free cash flow.

Before handing over I would like to take a moment to welcome a new member to the executive team Andre Mueller recently joined Big lots as the executive Vice President of business strategy.

This is an expansion to our leadership team and part of the transformational roadmap for future growth.

Andre has nearly 20 years of experience in the consumer industry and his expertise is centered around profitable growth strategy upgrading marketing sales and advanced analytic capabilities and delivering transformational change across a broad range of companies.

Andre will report to me and is responsible for generating customer and competitive insights as well as managing the company's strategic planning efforts, creating a data driven enterprise strategy group ensures that we achieve operational excellence and an evergreen strategic planning process and I'm thrilled to have him as part of the big lots family.

I'll now hand, the call over to lease of for detail on Q3 merchandising results that will return to make some closing remarks in a few moments.

Thank you and good morning, everyone total sales increased 1.6% in the third quarter in comps were essentially flat, which was in line with our guidance.

The merchandise category perspective furniture was the top performer Comping up mid single digits, which is on top of the 12.5% increase last year.

All forward departments that is mattresses upholstery case goods and ready to assemble were up in Q3 with mattresses, posting a low double digit increase driven by our transition to the Sealy assortment, which is now complete and has stepped up newness in our better and best assortment.

Upholstery was driven by our motion sets in sectional.

Case goods experienced strong sales in our master bedroom offerings.

Our two financing options for in store purchases remain very popular and continue to perform very well.

Easy leasing the lease to purchase program offered Twoq aggressive grew double digits in Q3 with penetration of furniture sales in the low 20% range once again this quarter.

This is quite an accomplishment considering the highly successful labor day promotion, we ran last year.

The big lots credit card had another excellent quarter with significant growth not only in furniture transactions, but across all other categories in store.

We're improving the card program with refreshed creative more prominent in store signage and new car design and the addition of exclusive events for cardholders.

Seasonal was up low single digits in the quarter, which is on top of the nearly 8% increase for the same period last year.

Q3 is a transition quarter for our seasonal business as we sell to our outdoor living Assortments remaining spring, we set in sell through Halloween and harvest and then quickly turn our attention towards the holidays and Christmas trim.

I'm pleased to report, we exited lawn and garden in summer quite well, we had good results in Halloween and early Christmas trends look promising.

Our seasonal business Comped up in all three months of the third quarter with sales accelerating to mid single digit range in October .

Consumables was also up low single digits, congratulations to the team who are celebrating the fourth consecutive quarter of positive comps.

Performance in Q3 was broad based with all five department posting increases.

And it was consistent with positive comps in each month of the quarter.

Similar to Q2, we experienced strengthened cleaning AIDS in our housekeeping business and I never outset in health and beauty.

I will impact also posted good results in the quarter in part by leveraging new presentations on themed in cats.

Thoughts home was essentially flat in Q3 fashion bedding home decor and home organization were strong in the third quarter, but offset by declines in other categories. Specifically window. We recently launched Green Street, our own brand in use betting storage furniture and decorative accessories. This fill the white space opportunity in the soft.

Category and repurchase space vacated by stationary from earlier this year.

So it was down in Q3 as planned some bright spots included candy snacks and beverages, where we are increasing space as part of the traffic driver initiative Bruce discussed a few moments ago. It was offset by softness in staple type items and once again this quarter.

We continued to see encouraging trends coming from our food reset that was completed at the beginning of Q2, which redirected inventory in space to entertaining categories, where we have a high permission to play.

And finally hard home and electronics Tilly's and accessories were down in Q3, reflecting a strategic decision to move space to other categories. However, we did see good performance and kitchen appliances and tabletop.

Now, let me address the topic of import tariffs.

Since the first announcement well over a year ago, we have been carefully reviewing the products on each of the four lift in assessing the potential impact.

We have developed short term measures, including working with manufacturers to reduce overall costs.

Adjusting retail prices where appropriate.

Evaluating the overall number of units purchased and in some cases absorbing the impact in margin.

In addition, the team has successfully expanded its global sourcing and we see an even greater opportunity over the next several years to further reduce our China exposure.

Before handing the call over I want to take a moment to thank our team for their extraordinary efforts and unwavering support to fuel our operation Northstar growth strategies.

The team has spent countless hours working on the rollout of these initiatives, while working very hard to deliver Q4, our most important quarter of the year.

I truly appreciate their partnership in support during this transformation and I'm confident we'll close this year with strength in carry the momentum into 2020.

I'll now turn the call over to Jonathan for insight on the numbers and our guidance for 2019.

Good morning, everyone and thanks, Lisa and I would like to add my thanks to our entire team for their incredible hardware can commitment during this period of significant change for the company.

Net sales for the third quarter fiscal 2019 were 1.16 billion up 1.6% versus the 1.149 billion, we reported last year.

The increase in total sales resulted from sales growth in high volume, new and relocated stores not included in the code base and the highest store count year over year.

Comparable sales were stores opened at least 15 months plus e-commerce sales decreased 0.1% compared to guidance of approximately flat.

In terms of the cadence throughout the quarter sales trends was slow in the month of August toughest comparison to last year, but improved sequentially in September and October inline with our expectations coming into the quarter.

The adjusted net loss for the third quarter was $7 million or 18 cents per share, which compares to our guidance of a net loss of 15 to 25 cents per share and to last year's Q3 net loss of $6.6 million will 16 cents per share.

The gross margin rate for Q3 was 39.7%, which was down 20 basis points from last year's third quarter rate.

As anticipated higher markdown rate and promotional selling was only partially offset by continued favorability in merchandise mix in shrink.

Total adjusted expense dollars were 468 million down slightly from the 469 million, we reported last year.

The adjusted expense rate in Q3 was 40.1% 70 basis points improvement versus last year.

Expense leverage resulted from lower store payroll and corporate headquarters expense.

Partially offset by higher depreciation occupancy and other charges.

Interest expense for the quarter was 5.4 million compared to 3.1 million last year.

Reflecting higher average debt and the higher average interest rate compared to last year.

The adjusted income tax benefit rate in Q3 was 31.7%, which was lower than last year's rate of 48.1%, which benefited from a number of discrete items.

Moving onto the balance sheet inventory ended the third quarter fiscal 2019 of 1.17 billion compared to 1.074 billion last year.

With the full was an increase coming from planned year over year sales increases and inventory builds and certain merchandise categories, including furniture and soft home.

During Q3, we opened 21 stores and closed 14 stores, leaving us with 1418 stools and total selling square footage 32 million.

Capital expenditures for the third quarter of 2019 was 69 million.

Additionally, the company has reinvested approximately 69 million of the proceeds from the sale of our legacy telephone you DC to exercise a purchase option on our corporate headquarters real estate here in Columbus affected through a qualified intermediary to accommodate the 10 31 tax deferred exchange.

The sale of our legacy DC in Rancho Cucamonga, California, which was completed the ended the quarter realized proceeds of approximately 190 million.

Electing a 10 31 exchange and purchasing our headquarters building enabled us to defer approximately 15 million of taxes that would otherwise have been payable on that sale.

In addition to which we will eliminate approximately $6 million annual lease payments going forward.

Net of the reinvestment proceeds from the sale of the California, DC, we used to pay down a portion of our revolver debt.

Now the ended the quarter, we had 501 million of long term debt compared to $488 million a year ago.

At quarter end total debt includes 68 million relating to the secured equipment terminal agreement, we entered into at the beginning of the quarter.

Proceeds from which we used to pay down ruble.

As announced in the separate press release earlier today on December four 2019, a board of directors declared a quarterly cash dividend of 30 cents per common share.

This dividend payment of approximately $12 million is payable on December 32019 to shareholders of record of the close of business on December 16.

Year to date, approximately 87 million has been return to shareholders in the form of share repurchases in dividend payments.

Now turning to forward guidance for Q4, we expect EPS to be in the range of $2.40 to $2.55 per diluted share.

Which compares to net income of $2.68 per diluted share for the same period last year.

Our guidance assumes comparable sales increasing slightly with a positive spread to total sales growth similar to Q3.

The growth in total sales reflects more productive new store openings as well as a slightly higher year over year store count.

We expect our gross margin rate for the fourth quarter to remain under pressure driven impart by absorbing some of the impact from tariffs as well as from anticipated higher levels of promotional selling.

Fourth quarter expenses will be adversely affected by the year over year restoration of bonus accruals, California, DC transition costs and other items.

Mitigated by the continued excellent progress on from the journey savings.

In terms our outlook for the full year, we're maintaining our guidance for adjusted net net income to be in the range of $3.70 to $3.85 per diluted share.

Which compares to last years adjusted EPS before dollars and four cents.

It has been in the case in the past quarterly EPS figures will not some to the full year figure due to the impact of the timing of share repurchases on the calculation.

Inventory on hand at the end of Q4 is expected to be down slightly to last year, reflecting a favorable inventory sales trend coming into 2020 .

Q4, ending inventory will include the impact of investments, we're making to prepare for the boiler rollout and also some transitionally emerged rebuild relating to the move to a new California DC.

We foresee ending fiscal 2019 with total long term debt close to or somewhat lower than the probably a figure of 374 million.

Full year capital expenditures, excluding the like kind exchange of the Columbus headquarters building are expected to be approximately $250 million.

As Bruce referenced earlier, we're committed to a highly disciplined approach to operating and capital expenditure management.

Regarding capex, we're planning for a significant reduction and expenditures in 2020 below the figure of 250 million I just referenced.

Alongside that RF is to increase the savings from our from the June initiative will continue.

We previously spoke to a 100 million opportunity from this initiative over three year period.

Based on the way we have done since that initial estimate we now expect to see the goal by the end of 2020 and that we will continue to drive the overall figure higher.

As a reminder, these savings are gross and encompass both gross margin and history and a benefits portion of which will be offset by growth investments.

We will provide an update in more detail at our investor event in March.

All of our commentary has been on a non-GAAP basis, which excludes the gain on sale of our distribution center in rent true Cucamonga, California and costs associated with our strategic transformation merchandise category exits and legal settlement contingencies.

In our press release, we provided GAAP guidance for fiscal 2019.

The level of non-GAAP activity on an after tax basis is approximately 98.1 million with $2.49 per diluted share for the fiscal year.

Ill now turn the call back over to Bruce.

Thanks, Jonathan before we open the lines for questions I want to share a few closing comments over the Thanksgiving weekend I walked our stores and I believe the product assortments and value propositions looked very good our merchandise strategies anchored on trend right tasteful assortments coordinated across the categories of furniture Christmas tree.

Jim soft and hard home consumables food and toys create relevance because they are a destination for our customer as she prepares for the holidays.

At this point in the season it comes down to one thing execution, which is all about our people want to take a moment to thank our associates in the field, our distribution centers and here in the corporate office for their dedication passion and contributions.

We've been facing uncertainty in our business are result of a highly competitive and evolving retail environment. The trade war and the impact of tariffs and the team has been working very hard to transform our company as part of operation North Star as I mentioned in my opening remarks, I'm confident we will navigate through this environment to deliver a good.

The outcome for 29 team and I'm also confident that 2020 will be a year or significantly improved performance for the company as the fruits of all these efforts start to be realized I'll now turn the call back over to Andy.

Thanks, Bruce Kevin we would now like to open the lines for questions.

Thank you would that be conducting a question answer session, if you'd like to be placing the question could you. Please press star one on your telephone keypad, a confirmation tone would indicate your line is in the question Q you May press Star Q, if you'd like to your question from the Q4 participants using speaker equipment, maybe necessary to pick up or headset.

Before pressing star one one moment, please what we pull for questions.

Our first question today is coming from Brad Thomas from Keybanc Capital markets. Your line is now live.

Hey, good morning, everybody. Thank you for taking the question.

I was hoping you could give us a little bit more.

But preview of what you might tell us and.

In March about 2020, and talk a little bit about some of the puts and takes from a margin standpoint, and how you may be able to stabilize or drive some margin opportunity.

Sure Brad Good morning answer as Jonathan yet so I think the headlines of what we have speaking to for 2020.

First of all an acceleration in the comp.

We spoke to and Bruce enumerated a number of the drivers that we expect will drive that come forward and we can usone go back over those if thats helpful.

We do plan to reduce capex meaningfully in 2020.

We have some very high return projects that we will still be moving forward with including store the future, but we are confident we can give that capex figure down.

And then as we referenced earlier in the comments, we expect to drive EBIT and EPS improvement the EPS improvement will be somewhat greater than EBIT due to lower debt levels year over year, but we're confident that we are on track to deliver all those things we still have obviously a little work to do before we fully lockdown the plan and there were some still.

From investment decisions, we have to me, but were confident at this point in those broad parameters for 2020 in terms of the gross margin rate just a couple of comments on that.

We have got the tariff.

Cost impact built into that.

We have our mitigating actions offsetting that including working with our vendors passing some of that impact alone.

In terms of higher he wasn't absorbing some of it in gross margin, we will have a favorable mix benefit in 2020 on gross margin rate, which is important but we're also providing and outlook or in our thinking a lease the expectation that we'll also continue to need to be more promotional so all those things are baked in to outlook.

At this point for 2020.

Very helpful and if I could ask a follow up on on guidance for Fourq, you, obviously have given the EPS range, but could you help us some fine tuning our models in terms of your thinking on on some of the gross margin nationale puts and takes her for Q.

Yeah I mean.

Let me we said we expect you a slight improvement comes from what we believe we're on tract to do that.

We are going to continue to have some gross margin rate pressure as we did in Q3.

Politic from absorbing some of the tariff impact, but also from some increased planned increased promotional activity and then as I alluded to a couple of couple of minutes ago throughout subs expense headwinds in Q4, the we're lapping which when they're in Q3, particularly with regard to the restoration of the bonus accrual and also some transition costs as we.

The complete the transition of the.

California, DC. So we are prepared a few months leasing back the facility until were fully transitioned. So there's an incremental couple of million dollars expense in Q4 related to that so so I think gross margin rate pressure continues and expense in Q4 is more challenging was in Q3 because.

Primarily because of those two items.

That's very helpful. Thank you Jonathan and good luck keeping up the momentum entering Q4 Q.

Thank you.

Thank you. Our next question today is coming from Peter Keith from Piper Jaffray. Your line is that alive.

Hey, good morning, everyone.

To dig into few of the categories most specifically the.

Food category, which.

You talked about earlier in the year tried to be more focused on event. So.

Thank you you had that offset the into Q2 with the food category was still down in that in Q3 and could you give us a thought on how that that might trend with with Q4 and the tougher compare and then and then looking at the 2020.

Hi, good morning, Peter.

As you commented, which was down in Q3 and I do want to say that was we were planned to be down in Q3 on as we've talked about Weve continued to move space away from food.

Especially within the stable staple type of item, we have leaned into some of the entertaining types of product that.

Excuse me like the gift gift, giving for food as well as our snack.

Beverage and and Candy all of which have been a nice bright light for us.

Spaces that moved over into the consumable categories, where we've continued to expand some of our national brands and as you can see with the results in consumables, we continue to see the positive growth.

As a result of moving that space.

So as we as we look to Q4 again, we believe that food will be slightly down that's embedded into our forecast.

We will continue to support the efforts of Northstar initiative, which will again for next year look to to move additional space to consumables.

Thank you. Our next question is coming from Joseph Feldman from Telsey Advisory Group Your line is alive.

Hi, guys. Good morning, Thanks for taking the question.

I actually did also wanted to ask a little more detail on that.

Reallocation of food.

I just mentioned, it's going to entertainment and you guys feel you have right could play in the space can you talk a little more about that and like what.

What type of products in within entertainment and just to help clarify that.

Sure. So again a lot of what we've we've looked at here is a combination of some of the consumer insights studies that we've done at the beginning of the year as well as testing that we've done in our point of sale result, so when we talk about entertaining food or really leaning into things like snack so salty snacks.

Andy beverages.

And during fourth quarter, we actually do a very nice business with our food gets.

And so that those are the categories that were going to.

Provide more and more space for more offering for Jennifer and really move away not eliminate that move away from some of the staple item that we currently carry.

Yes, just if this is Bruce if I can add just a little bit more onto what leases said, where thinning down some of the food staples, where in the past. We may have had multiple types of catch up for canopies that are very competitive in the marketplace, where slimmed down that staples invest into the areas. We know we can we.

NN and and then take some of that space and like she mentioned earlier give that to a more competitive position that we have and consumables which is.

House cleaning et cetera, and so it's planned down its expected down but in the areas. We want to play we want to be able to win.

Got it got it and I could follow up.

Bruce Your comment. This is very started a car you said you know fourth quarter is off to a really solid start.

And that the guidance.

For the comp was just up slightly.

Yes.

Is that what you meant to say I guess when I heard you say that I got more excited that maybe it was you could do you know plus one maybe more than that this quarter I'm just trying to reconcile the to the two it again it is that comp bottom advantages.

Yeah, I would like the way I [laughter] Philippe I that way I feel about a fourth quarter is is that first off I think we've got a really healthy customer out there the sentiment.

A customer consumer sentiments strong confidence still seems strong all accounts were seeing healthy progress when we when we take this thanksgiving shift that's happening in fourth quarter and compare to other years like that.

And put that into our plan and look at the performance we had across Black Friday.

Cyber Monday in cyber Monday weeks ongoing I, we feel very good about how we're performing gets plan, albeit you know it's early in the quarter as so we're still we've still got.

Nearly.

Almost two months left to go but we're really pleased with the strong performance against our plan for the fourth quarter at this point.

I'll just add to that just a reminder, that we are up against that calendar shift. So you are whatever come we delivered in effect, you know stronger than that because of because of the adverse calendar shift effect.

Yes, thank you for that.

Good luck with the quarter guys appreciate it.

Thank you Justin.

Thank you. Our next question today coming from Karen short from Barclays. Your line is now live.

Hey, Good morning. This is actually Renato basanta on the line for Karen.

So so my first question is is really on the the store the future performance, but but more specifically for year. Two performance I think you had quite a few stores that recently anniversary the remodels.

So I was hoping you could talk about performance that there.

Specifically, if you can talk talk to the year, two left and the gap and performance versus the rest of the chain that'd be helpful. Thanks.

Hi, Rinaldo. This result take it and if others want to join and they'll follow up first off I just want to reiterate were real we're very pleased with our store the future progress.

Continues to be a great platform for us to build more and more growth shoots on top of I'll, just reiterate our high single digit lift tier one year, two we've got some more markets and and the best way out with some it up as they continue to perform better than our legacy stores, which is encouraging.

The the return continues to be strong nearly double or actually double our weighted average cost return and then also what I really like about and we've mentioned it before is that it really puts our showcase categories right upfront from the furniture the soft Tom the seasonal all upfront low side visions to the back where you can see the pantry the food.

In consumables, it's a great way to shop and as we look towards the future. We're taking this phased approach we've got a lot a good things coming out of operation Northstar that we're going to be able to phase then and hang onto this toward the future in fact, the way we start thinking about store the future right. Now is in terms of years. So what we're talking about for next year store.

The future 2020, which will start including the lock idle start including a job.

The Q traffic drivers will be in it increased density and so on so we're really excited about how this store the future 2020 is going to evolve and keep getting better. So to answer. Your question, we feel good about it and year to is performing better than legacy.

Okay I'll just add from from up from a capital standpoint, you a Bruce mentioned the lot in Q line and we're seeing very very strong returns on investment on those.

I should have so we are prioritizing rolling those initiatives out to our existing store the future stores to continue to drive the as Bruce referenced to continue to drive forward. The performance of those stores alongside that we will absolutely be continuing with our store the future rollout on a similar or slightly accelerated pace to 22019.

Okay. That's that's helpful. And then just a question on inventory.

Turning a bit higher than sales growth.

How are you feeling today about the levels and makeup of your inventory and and when should we expect inventory to grow more in line with note with sales growth.

I'll jump in their installed on the category basis.

Our largest investment coming out of Q3 and inventory was positioned in furniture and yeah. As we mentioned in the earlier remarks furniture was up mid single digits in Q3 and that comp continued to build throughout the quarter and actually straight into November as well if.

To a positioning there is really in line with sales and our expectation for fourth quarter.

And we saw strong result, as you know in Thanksgiving and Black Friday as well the other portion of our inventories within the soft home category and again, we're very well positioned for fourth quarter performance, we do very strong businesses.

With our cold weather product and we also just launched our own brand Dream Street, which is the children decor product and seating. So we really feeling very good about where that increase in inventory is positioned.

As we head through the quarter and we are we in the quarter for Q4 were currently forecasting to come in a slightly down to last year.

Which will well position us as we make that turn into 2020.

Okay. That's that's helpful. And then just my last question is really about your store footprint I think you've talked in the past about net positive.

Store growth.

As we look to next year and beyond.

I was hoping you could flesh out your thoughts on store growth.

Why sort of an environment, where most retailers are scaling back on physical stores.

We feel like you can you can grow the store fleet. Thank you.

Given all the Bruce here, and then I'll hand, it off to Jonathan to give some more specifics you know from our research study early last year.

And now operation Northstar, we did a geographical study of all the markets, we plan to competitive set and our ability to grow it gave us great.

Support and understanding that our footprint our footprint could expand and in areas that we didn't think possible. So that is now becoming part of our real estate strategy. It's taken a while to build that back up again, we've done a nice job over the last several years in terms of cleaning up our fleet of stores to a very productive a modest.

Stores and as we look at our competitive set.

The things that we're adding what our customers are saying it does look like we have expansion opportunity along with increased presence in E com, especially with the use of BOPUS, so becoming more of an omnichannel customer and becoming more convenient to our customer is definitely our growth strategy for us with that and mine were slightly net positive stores.

And 29 team this year I will continue in 2020, and then 21 could mean an acceleration of that.

And just try to you a couple more data points around that I think you're seeing in Q3, an acceleration of the spread between calm and total reported sales to a very healthy level, we anticipate that continuing Q4 through 2020, and and frankly be up beyond as good as Bruce Bruce just referenced so that's going to be we think it important part of our growth and it's up.

About opening more continue to open more productive new stores, but also we're looking very closely at store closures year, we've been closing Lotus tools over the past few years and we're looking at how we can go through the lower tier of underperforming stores.

And you take actions that will enable them to be profitable and provide a good return going forward and that will be another way that we can continue to two to drive that known called components of our growth.

Okay, Great. That's very helpful best of luck.

Thank you. Thank you.

Thank you as a reminder, that star one to be placed into question Q. Our next question is coming from Paul Trussell from Deutsche Bank. Your line is that alive.

Hey, good morning.

North and south solid results.

So can we talk a little bit about.

One is just the home category, especially the soft home category.

And what you're seeing in there and how you're thinking about that business on the go forward basis, and then separately and completely different I would love to for you to give a few more details around e-commerce .

Especially what you've seen as you rolled.

Ill BOPUS and how you're thinking about scaling both on the topline and from a profitability standpoint. Thank you. So.

Good morning, Paul I'll, I'll start out talking a little bit about the home category and we really as you know within the store the future.

Furniture and home is front and center.

And we feel very very very good about the growth.

We are experiencing and we'll continue to experience in the category.

As we look to broyhill I think thats, a munis that we will be bringing into our assortment at the end of the year and throughout 2020.

Our broyhill owned brands will be represented both in soft home as well as indoor outdoor furniture.

So within the soft home categories, you'll see it and run home decor and by the time, we hit 20 in spring of 2020, you'll also see an expansion within our never out programs across our.

Our towels are betting on so we feel very very strongly about the our own brand presence and especially the in the impact that it will have on our furniture and soft home category.

As I mentioned earlier, the Dreams Street used launch just happened as well in every week, we're seeing that volume build week over week. So we feel very very confident.

About the growth of that category and again optimizing that also in 2020.

Yeah, I'll take the second part of that Paul, but just before I do that I just want to add on your soft home 22 quarters of positive growth. This last quarter, just flattish with all the things we've got going on behind behind three.

Dream Street, and everything that Lisa mentioned, we're feeling very strong about our positioning and soft home, but now getting onto the E. Commerce be BOPUS question on 2018, we did roughly 41 million in sales and in 29 team where now on on on course to double more than double that we did three times.

Volume Q3 over Q3, and we're off to a really nice start we made a decision early and the year to really lean Nan and launch focus earlier based off the customer insights studies that that we conducted in as part of operation Northstar and we think we've got a bright future with BOPUS in e-commerce and our stores.

Working hand in hand together.

One thing that I'm very excited about we're all very excited about is that we get great traffic to our website and that's many times of difficult thing for for retailers not for us we'd get great great traffic, how we know through the studies that we've done that our customer starts many of our journeys online mobile.

Device and and they all over half of them have a a Amazon prime account, so for getting that traffic and being relevant for her is extremely important what we've learned through this process is that we think we've got a long runway of expanding BOPUS up for the full year into 2020, we do have some fixes.

From a from a funnel discovery, while it is strong as you go through and view the cart and tried to work through it. She has some difficulty there. So we've got some navigation work that we need to do that teams all over that.

And also checkout and then finally, you know delivery, we're looking at smart ways to to minimize cost delivery and make it more easy for her so a lot of things the combo being but we're being very circumspect about how we add cost of this model and and maintain our profitability as we grow strongly at 2020 and beyond.

Thanks for the colors to best of luck.

Thank you.

Thank you. Our next question is coming from Jason Haas from Bank of America Merrill Lynch Allied is now live.

Great. Thanks for taking my question could you discuss your progress towards the $100 million in cost takeout.

My understanding is that labor optimization was one of the first big pieces, just curious going forward kind of what other areas, you're looking out to achieve that call. Thanks.

Yeah, Hey, Jason as Jonathan I'll be happy to take that yes. So we've spoken I think a couple of quarters back to 100 million dollar opportunity, which was coming sort of thing 40 million in 1930 incrementally in each of the next couple of years as we said in a prepared comments, we think we're going to get you to and B.

On the 100 million by the end of 2020, so we're running kind of well ahead of that schedule and we think.

There is significant upside opportunity beyond that figure and will will I think we'll be able give some more color on that when we get to the investor event in March the the store labor was a big component of that the other stores organization has done an outstanding job.

Frankly throughout the year of taking cost out in the reorganization in that.

Out of the business was.

A big driver the reduction.

Some of the so the fund the journey things are a combination of a brother just one important cabot on that we were able to take that cost out in the stores, while maintaining a very strong net promoter score. So we were really pleased about that so just as a reminder, the savings come both from gross margin.

And from SGN, a store labor was it was a meaningful piece there were some corporate headquarters savings that we implemented through the year, we're working through what we calls of indirect spend goods now for resale.

We've had good results on that so far but thats one of the areas, where there's a lot more upside to come over the next year in particular, and then on the gross margin components there.

Elements around what we call you strategic vendor management to you to drive incremental benefit out of Cogs also where we're driving shrink.

And we reference that in Q3, we had benefited from shrink and we think it was great great opportunity that going forward and also in some of the in store markdowns. So so those various projects roll in different stages.

But I think the headline there is that we're confident that we're going to be passed 100 million dollar figure by the end of 2020 on that number is going to keep moving higher because as we go forward.

Great. Thank you and then as a follow up I had a question somewhat similar on a the guidance for the lower Capex next year. I think you said below 250 million and I'm just trying to figure out what the drivers are that based on the breakout that you had given for 2019 on specifically curious if you found.

Hey to lower the Capex investment in the store the futures.

And just reconciling that with the fact that you'll be rolling out the lot.

A more stores and then it sounds like the freezer cooler reductions will have some cost associated with it. So any color there would be helpful. Thanks, Yeah, absolutely. So I think a reasonable assumption at this point for 2020 will be capex in the range of around 200 million. So youve a 50 million also lower than what you are aware we've been this year.

To your 0.1 of the big drivers of that is well, we're continuing with the pace uneven side accelerating store the future in 2020, we're getting the cost of that down significantly. So we're doing that a couple different ways. You're one is we just continuing to identify which of the elements of that really are the most meaningful.

Customer.

And to reduce the cost per store. We're also looking at some different tiering of store of the rollout. So we have a sort of full mobile for the store the future conversion, but also a couple of.

Slide the light of versions of that where we build incorporate all of the components that we do in the full on a big driver that is something like flooring. For example, where we have newest stores that were converting where we're finding we don't need to spend as much on on redoing. The floors in those stores and that is has been a big driver the expense.

In the full model of the of the store the future. Some other things around fixturing. Some other items in the full store remodel that we selectively taking out of some of the lower.

Tier conversions and then.

On the like like basis. The full conversion is also coming down relative to where we were so store the future Capex is a big driver that reduction there was some other puts and takes but thats certainly one of the major components and if I could just add on.

In terms of adding the lot one of the things we love about a lot is that it gives like we said the store, 1% to 2% comp lift its 500 square feet, it's minimal investment and Capex and Opex and it's a really nice ROI. So while we're rolling it out which will be roughly 700 ish plus stores next year.

And our capital intensive.

Got it that makes sense and if I could slip in our I really quick follow up I'm. Just curious if you could provide an update for the ecommerce sales in EBIT guidance I think on the last call. It was you had said you would be over 55 million in terms of sales.

I'm not sure if there's any update you provide there but that's helpful. Thanks.

Yes, Jason I'll give you that update.

Happy to state that we're exceeding that.

We should be over to acts of what we were last year.

Just had one point of my prior comment one of the other drivers of the Capex reduction is the ABDC investment rolling off in 2020.

Of course, okay that out that makes sense. Thank you.

Thank you.

Thank you if there are no additional questions at this time I'll turn the call over to Andy Reg.

Yes, thanks, very much everyone, Kevin we close the call with replay instructions certainly ladies and gentlemen, a replay of this call will be available Q by 12 noon Eastern time today December six replay will end at 11 59 PM Eastern time on Friday December Twentyth 2019.

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Ladies and gentlemen. This concludes today's presentation. Thank you for your participation you may now disconnect.