Q4 2019 Earnings Call
Ladies and gentlemen, welcome to the Big lots fourth quarter Conference call. Currently all lines are in listen only mode. A brief question and answer portion will follow the prepared remarks, maybe require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
At this time I would like to introduce today's first speaker, Andy Regrut, Vice President Investor Relations.
Good afternoon. Thank you for joining us for fourth quarter Conference call with me here today in Columbus Star burst store, and our President and CEO, Lisa Bachmann Executive Vice President Chief merchandising, and operating officer, and Jonathan ramps and 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 today's call involve risks and uncertainties and are subject to our our safe Harbor provisions as stated in our press release, and our SEC filings and that actual results could differ materially from those described in our forward looking statements. All commentary today is focused on adjusted non-GAAP results.
Reconciliations of GAAP to non-GAAP adjusted results are available in today's press release.
This afternoon, Bruce will start the call with a few opening comments Lisa will discuss Q4 results for our merchandising perspective.
Jonathan will review the financial highlights from the fourth quarter and the outlook for fiscal 2020, 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 afternoon, everyone.
Our fourth quarter was a hard fought one with sales coming in below expectations as comps declined compared to our outlook of a slightly positive increase.
After running well ahead of plan in November with Christmas trees holiday decor, and lights, performing well sales slowed the week of cyber Monday as customers confronted with fewer shopping days between Thanksgiving and Christmas turned to the convenience of online shopping more than ever as we solve and our own burgeoning E.
Business.
Our usual brick and mortar rally the last 10 days, leading into Christmas didn't materialize, even with strong price cuts and promotional support and caused us to be more promotional for the balance for the quarter.
These incremental promotions weighed on gross margins and were exacerbated by adverse shrink results as we did our first tranche of annual physical inventories in January.
Jonathan will speak to this in a moment the gross margin rate pressure was significantly offset by continued strong expense management and favorability in the tax rate. The overall result was that EPS came in a penny short of our guidance range from the beginning of the quarter.
While we're not happy with this outcome. It is worth noting that for the full year, we delivered a positive comp and ended the year with significantly reduce debt levels and well controlled inventories.
In addition, we've positioned the company for future growth by enhancing our digital capabilities with BOPUS successfully launching the broad he'll Brad expanding the footprint of our fleet with new high volume stores and investing in marketing to drive traffic and build brand awareness.
Before we jump into our growth plans for 2020 I want to address two matters.
First as we continued to move forward with our operation North Star strategic transformation, we are evolving our approach as we focus on investing in areas that will drive the highest return for our shareholders.
Based on some recent softness in sales trends for our store the future program. We have made a strategic decision to slow our role while we will focus conversions on markets, where we expect to receive the strongest returns, but we prioritize investment in other high return growth initiatives under operation Northstar to be clear our store the future.
Stores continue to outperform our legacy stores.
However, we now have a larger base of converted stores and better visibility into performance. After we have gone through the high volume fourth quarter and at the same time, we've began rolling out other high growth initiatives.
We believe it is prudent to assess results of these various initiatives and refined the components of the conversions.
We remain confident that the initiatives, we are rolling out under operation Northstar fit well with store the future and we're focused on evolving in optimizing it as an ongoing growth vehicle.
Second the guidance, we are providing for fiscal 2020 includes the estimated Q1 sales impact the supply chain disruption, we expect to be caused by the grown a virus.
Beyond this impact the first quarter is off to a slow start and is further impacted by upfront investments and growth initiatives that will primarily benefit us in the second quarter and beyond.
We remain confident that we will see a sequential acceleration in sales through the year as these initiatives roll out.
Full year guidance does not incorporate any impact from the Corona virus beyond the first quarter, given we're not able to reasonably estimate longer term impact at this point.
Turning to the progress being made under operation Northstar as you know we first outlined this transformational road map, one year ago, and despite the challenging fourth quarter and a slow start to 2020, we continue to see positive results. We expect the progress on our strategic transformation will become increasingly evident as we've moved through the year.
As you will recall operation Northstar encompasses three discrete elements driving topline growth through multiple tested and proven initiatives funding the journey through significant expense reductions and ensuring we have the systems team and infrastructure in place to be a high performing organization.
Starting with growth, we expect topline improvement during 2020 from the following initiatives.
First at the end of the first quarter and into Q2, we will complete the launch of the broyhill brand across our entire chain.
As a reminder, we acquired all broyhill intellectual property, including exclusive rights in Tech and design specifications in late 2018, broyhill positions nicely into our strategy to grow all things home with special emphasis on our better and best offerings, an indoor and outdoor furniture and soft and hard home.
Brought hill enhances our value proposition elevates, our quality perception and increases the surprise and delight factor in our stores. The early reads on broyhill I've been very encouraging with season to date sales running ahead of our estimates and with some areas of particularly strong performance, including sofas and love seats, which are 50% over.
Plan.
Furniture represents the majority of the sales activity, thus far and we have major resets of product going to stores in a few weeks that will include top of bad sheets soft window, patio and area rugs and bath into core items.
Second by mid year, we will have completed a chain wide rollout of our pantry optimization initiative, which we formerly referred to as traffic drivers. This initiative reconfigures, our food and consumables assortments to strike the right balance between surprise and delight values from Closeouts and consistent brand name never outs, we expect to insert or perhaps arena.
Sure Big lots into her everyday shopping trip by offering or even more items on her list at our stores as we detailed on our call in December the product mix rebalancing involves moving footage from food staple items to food entertainment and consumables and will include replacing our current coolers, but the smaller end cap cooler.
Which will allow us to maintain snap and he'd be t. eligibility, while redeploying space to more productive categories based on our trials. We expect this initiative to drive around a 1% total store comp lift on an annualized basis.
In late April we will start to roll out of the lot in Q line initiatives to all existing store the future locations.
These programs will also be included an all new store openings in store the future conversions throughout the year, which will be approximately 80 stores plus 100 or more additional unconverted stores. This would mean, we will have these programs in around half of our locations heading into Q4 as a reminder, our test stores with the lot have been experience.
And a 1% to 2% total store comp lift which represents a strong return on a modest investment in new fixturing signage and product.
In addition, we've seen equally encouraging results from our test of two lines, where we reconfigured and streamlined our checkout process, adding new impulse items to add to the basket as customers approach. The register again, we expect this program to drive comps with only a modest investment in fixturing signage and product along.
Side. These in store programs, we expect continued strong growth in our E. Com channel are moving toward a mindset of grow grow grow in 2019, we more than doubled our digital business. It now is nearly 2% of sales and we've identified a roadmap to improve the overall experience and grow the business by leveraging existing.
Sure.
Opus that is buy online pickup in store has been an excellent way for us to capitalize on strong growth in online traffic and as we look forward, we see additional growth opportunities from the digital omni experience, including expanding assortments and extended Io offerings, adding more payment options and improving the overall experience.
We believe E com as a major opportunity for growth in the future.
As I mentioned, a moment ago in the first quarter, we will be making upfront investments in these growth initiatives, which will result in expense deleverage. However, we expect comps to accelerate throughout 2020 as the initiatives are rolled out and that we will begin to leverage expenses as that occurs.
Turning to fund the journey, we have continued to make excellent progress on taking cost out of the business and more broadly, creating a culture of frugality, but the focus on cost management and operating efficiency. In 2020. This will include optimizing store labor with new tools to schedule associates during peak selling periods reducing in store.
Mark Downs and waste with new disciplines around food rotation and processing customer returns as well as improving shrink with renewed asset protection initiatives, including new product tagging and fixturing.
We're also lowering our indirect spend with detailed reviews of all line items of expense and partnering with key suppliers to reduce costs and improve margins.
A year ago, we communicated 100 million dollar cost reduction target over a three year period as we communicated last December we expect to be above that figure by the end of 2020. As a reminder, these savings include both gross margin in Opex components and portions are being invested back into the business.
Finally in terms of enabling our organization to succeed we have taken important strides in 2019 and we'll continue these in 2020 executing a strategic transformation starts with the leadership of the company, we've added muscle to the organization, including new roles and talent simplified organizational structure and increased communicate.
And then transparency, we have a healthy balance of fresh perspectives and institutional knowledge and we're creating a performance based culture to drive results and increased accountability.
In light of some of the factors mentioned earlier my comments, we have decided to postpone are forthcoming investor day, we believe it will be more beneficial to shareholders and investors to hold this event, we have greater visibility than at the present.
And when we will be able to provide more insight into the results of our newer growth initiatives with that I will hand over to lease and return to make some additional comments later.
Thank you and good afternoon, everyone.
Bruce noted sales finished Q4 below expectations with comps declining 0.9%.
The merchandise category perspective furniture with the top performer Comping up low double digits, which is on top of the 9% increase last year with notable strength in mattresses upholstery and case goods.
Hi, Matt just business continues to produce very strong results driven by Sealy would just stepped up newness in our better and best offering.
Upholstery was also strong benefiting from our introduction of broyhill and promotion sets in our core offering well case goods was driven by master bedroom in fireplaces.
Our two financing options for Instart purchases remain very popular and continue to perform very well.
Easy leasing the lease to purchase program offered to progressive grew in Q4 with penetration of furniture sales in the low 20% range once again this quarter.
And the big lots credit card had another very good quarter with significant growth not only in furniture transactions, but across other categories in the store.
Soft home was up slightly in Q4 with good results in storage home decor fashion bedding and Beth she didn't buy newness in assortments and in store presentations, which emphasize holiday collections across many categories and productivity improvements, partially offset by declines in other departments.
Food and consumables were each down to L. lie with food experiencing good, resulting giftables DST products offset by planned declines from reduced space in dry grocery and sales weaknesses in cookies and beverages, primarily coffee.
Similarly, consumables had pockets of strength in businesses like housekeeping that were offset by declines in other departments, particularly in areas like hair care that we're up against strong close outs from last year.
Seasonal with planned down for the quarter anticipating the shorter holiday season.
As Bruce noted in our opening comments after a strong starting November sales slowed the week of cyber Monday, and many Christmas related purchases were delayed until after the holiday when the product was on a markdown cadence.
The early reads on our outdoor living related assortments have been encouraging but it is very early in the lawn and garden season, and finally hard home electronics toys and accessories were down in Q4, once again, reflecting the strategic decision to move space to other categories.
Before handing the call over I want to take a moment to thank our team for the efforts in support of operation Northstar throughout 2019, the team spent countless hours developing testing and rolling out initiatives to grow the business funded the journey and improved core processes.
I really appreciate their dedication and continued passion to execute the strategies in the here to come.
I'll now turn the call over to Jonathan for insight on the numbers in our guidance for 2020.
Thanks, Lisa and I would like to add to your things to the entire team here at big lots I'm going to start with some comments on Q4 in 2019, and then provide some some more color on our outlook for 2020.
Net sales for the fourth quarter fiscal 2019 were 1.6 to 7 billion compared to 1.599 billion, we reported last year.
With the increase resulting from sales growth in high volume, new and relocated stores not included in the MACOM base and a slightly higher store comp year over year, partially offset by the comparable sales decline 0.9 bus.
In terms of cadence for the quarter, the absolute comps of distorted by the calendar shift the sales ran well ahead of time in November before missing plans significantly in December and being roughly in line. So January.
The December Miss was predominantly in the final 10 days, leading up to Christmas, where we did not see the store traffic we expected.
Net income for the fourth quarter was 93.8 million will $2.39 per diluted share, which compares to our previously communicated guidance of $2.40 to $2.55 per share.
The last year's fourth quarter, adjusted net income of 108 million will $2.68 per diluted share.
Gross margin rate for Q4 was 39.5% down 170 basis points from last year's fourth quarter rate result of higher markdowns from promotional selling and an increase in shrink expense.
The higher shrink expense arose as we began annual physical inventory cycle in January and was not anticipated when we gave our guidance in early December.
It contributed approximately 30 basis points to the gross margin rate erosion, and we believe stem from a transition in the store labor model. We made during 2019 was part of our phone the journey efforts.
With that transition now behind US we are making the reversal of this trend the key priority for us tools and asset protection teams.
The remainder of the gross margin rate erosion came from additional markdowns and promotions, which was Bruce referenced we're more intense than we anticipated at the beginning of the quarter.
Total expense dollars for the quarter were 508 million down from a 511 million we reported for the same period last year.
Expense rate in Q4 was 31.6% a 30 basis points improvement versus last year.
This was an excellent results given some of the expense headwinds we were up against in the quarter, including costs associated with our California DC transition on the partial restoration of bonus accruals.
Expense leverage resulted primarily from lower store payroll and corporate headquarters expense.
Interest expense for the quarter was 3.2 million flat with last year on the income tax rate in Q4 was 23.2% compared to last year's rate of 24.9%, resulting from favorable state settlements and hiring based credits, partially offset by higher non deductible executive compensation.
Moving onto the balance sheet inventory ended the fourth quarter fiscal 2019, and 921 million, a 5% decline compared to 970 million last year when inventory levels with somewhat elevated as a result of terrorists mitigation activities.
Excluding in transit effects in inventory on hand was inline with expectations or the beginning of the quarter.
During Q4, we opened four stores and closed 18, leaving us with 1400 and full stools and total selling square footage of 31.7 million.
Yes, we opened 54 stores with the majority continuing to be relocations into larger boxes within the same market, allowing us to support the bigger bulkier assortments and the merchandise categories of food and seasonal.
We also closed 51 location during fiscal 2019 for a net increase of three stores.
First you have met positive store growth since 2012.
Capital expenditures were approximately 265 million and depreciation expense was 135 million or approximately 10 million higher than last year.
Free cash flow defined as cash provided by operating activities less capital expenditures was approximately 74 million for the year, excluding the net effect of the sale of our California DC on the reinvestment of a portion of the proceeds in our Columbus headquarters.
We ended the year with 53 million of cash and cash equivalents and 279 million of long term debt compared to 46 million of cash and cash equivalents and 374 minute millions of long term debt year ago.
Again, we were pleased with the debt reduction we were able to accomplish during the quarter, which exceeded our beginning of quarter expectations.
For the full year, we returned $19 million cashed, Russia shareholders in the form of quarterly dividend payments 48 million and share repurchases 50 million.
As announced in the separate press release today February 26, 2020 Board of directors approved and declared a quarterly cash dividend of 30 cents per common share.
This dividend payment of approximately $12 million will be payable on April 2020 to shareholders of record as of the close of business on March 22020.
Turning to guidance for 2020, we estimate fully.
Diluted earnings per share to be in the range of $3.20 to $3.40 compared to adjusted.
Diluted earnings per share of $3.67 in 2019.
This guidance is based on comparable sales in the range of flat to low single digit increase this guidance takes into account a slow start the year bakes into Q1 sales impact from the supply chain disruption, we expect from a grown buyers.
It does not include any impact from the Corona virus. So.
Subsequent quarters, which as Bruce said, we count reasonably estimate at this point.
We expect the gross margin rate to be flattish compared last year.
From the journey savings and favorable mix effects offset by some continued tariff impact an ongoing promotional pressure.
From an estimate perspective at our projected sales levels, we expect some de leverage as investments in our growth initiatives, including upfront expenses on additional marketing support plus higher depreciation and occupancy expense and the impact of wage pressures are only partially offset by from the journey savings.
Well as we did throughout 2019, we will continue to Chris.
You evaluate all expenses and expect to continue driving cost out of the business.
As Bruce referenced earlier, we've made good progress on cost reduction and now expect total savings from my phone the junior initiative to be significantly more than $100 million by the end of this year.
The capital expenditures are expected to be approximately 160 $270 million. This presents a further reduction from the estimate of 200 million. We gave on our December earnings call.
The reduction stems largely from a low a number of stores the future conversions, which as Bruce mentioned, we have now reduced about 80 for the compared to 205 Remodels in 2019.
These conversions will be focused on the stores in markets, where we expect to give storms returns.
As with operating expenses, we will continue to take a disciplined approach to capital expenditures and only approved projects that clearly and significantly exceed our cost of capital.
Depreciation expense for fiscal 2020 to forecasted at approximately 150 million against 135 million in 2019.
We expect improvement in free cash flow driven by lower capex with with EBITDA roughly flat.
As part of our capital allocation objectives, we are targeting improvements in underlying inventory efficiency will look for 2020. This will be offset by some investments we need to make head of the rollout of growth initiatives.
Inventory efficiency will include the rollout of a new replenishment system in 2020.
We expect interest expense will be down due to lower average debt levels and the tax rate to be up a little as we anniversary some discrete benefits from 29 team.
The first quarter, we estimate net income to be in the range of 30 cents to 45 cents per diluted share compared to last years adjusted net income of 92 cents per diluted share.
This guidance is based on a comparable so comparable sales decrease in the low to mid single digit range.
Compiled for the quarter reflects a stone slow start Bruce mentioned earlier on the impact from supply chain disruption, we expect from a corona virus later in the quarter.
Our first quarter gross margin rate is expected to be modestly down last year due to increased promotions and tariff affects offset by benefits from some of our fund the junior initiatives and favorable mix effects.
As to you that expense for the quarter will de leverage due to factors listed a moment ago with the impact exacerbated by negative Q1 homes, we expect to see sequential improvement on the that we will leverage expenses the back half of the year.
Overall as Bruce referenced well first quarter will be challenging we are confident in the will we will see significant sequential improvement in results as we go through the year.
I'll turn the call back over to Bruce for his closing comments.
Thank you Jonathan as we have described we are facing some challenges as we enter 2020.
However, our confidence that we're taking the right actions to create long term value for all stakeholders remain on diminished and we expect that to become more visible as we move through the year in the meantime, we see many opportunities ahead, and we're committed to managing our business in a highly disciplined way and being judicious stewards of shareholder capital.
Finally, I also want to take a moment to thank all of our 35000 associates for their hard work and perseverance during a year of transition in 2019, I could not ask to lead a more dedicated and talented team I'll now turn the call back over to Andy.
Thanks, Bruce operator, we would now like to open the lines for questions.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation totally indicate that your line is in the question in queue.
You May press Star too if you would like to remove your question from the Q.
For participants do you think speaker equipment, it may be necessary to pick up perhaps at the four pressing the star Keith.
Our first question comes from Paul Trussell with Deutsche Bank. Please state your question.
Good afternoon.
Thanks for taking vessel.
So to start certainly understand some of the holiday challenges. So I actually wanted to kick off with a better understanding of the backdrop, you're describing here in the first quarter, maybe you can elaborate.
One why you think this quarter is off to a soft start.
And what exactly are you seeing in terms of disruptions in the supply chain.
I'll start off Paul and then hand things over to Jonathan.
Just to kick off our fourth quarter with a hard pop at quarter as we talked about we started off with a good November a tough December as as our customers started to ship to purchases late.
Right before Christmas and and that impacted our ability since our customer shops relatively late historically speaking that said.
We caught back up in January through heavy promotions and and going into the Q1 those heavy promotions late in the quarter may have had a pull forward.
For February into January.
That said Q1, a couple other things that are hitting us in Q1, our first off income tax refunds.
Versus last year through yesterday, where behind by about 30 plus percent, we have very elastic sales with those refunds.
Also the supply chain impact.
Krona virus is built into Q1 at this point and we're already working on mitigation programs for that.
For the balance of Q1, Jonathan Yes, Paul I'll, just add a little bit on the Corona virus here the impact is when we see in April.
We saw a sort of high teen percentage.
And Dave directly from China.
And obviously, that's being impacted by the year the closure of factories, there and that effect is also now spilling over into your Vietnam, which is another important near sourcing country frozen and there's also some indirect impact from that so we already know that some receipts arrive those sort of your delayed potentially what when becoming.
And we baked in about a point in half of Combet impact in Q1 full.
Our current best estimate of the sales impact of delayed receipts into it into our Dcs because of what's what's happening there as we've said we haven't baked in any impact beyond Q1, we know the will be some in Q2, what we think there's heavy likely to be some.
Essentially beyond that but we've estimated.
And incorporated into our guidance for Q1 that impact based on what we're aware of to date.
That's helpful. Thank you for that color.
My follow up is regarding your remarks online.
Reassessing the capital allocation strategy, maybe just dig into that a little bit for us, especially.
As I'm, a little bit surprised that you are slowing the rollout of the store the future just help us understand.
Yes, Paul I'll add a little color to begin with on the first of all as we've said in the past few we're focused on being highly disciplined capital allocation, we want to make sure that every capital dollar that we invest is getting the best possible risk adjusted return. So there's still believe going on your first of all.
As Bruce you talked about we saw a little softness in the fourth quarter in our existing units toward the future your fleet.
Same time, we have some very high return other programs like the law.
Your pantry optimization few line, which we're prioritizing.
And we need to make sure we fully understand what's going on in the store the future. Your fleet currently in the meantime, we are continuing to continue with the rollout, but just to the lower pace and focusing on markets, where we believe we're going to get the best returns and continuing to roll out some of these high return projects alongside it so.
So.
I would say it all comes back to being very disciplined in our capital allocation and again, making sure we're getting a risk adjusted return the very comfortably exceed the cost of capital.
Adjusted Paula Paul I'd like to add a little bit about a store the future on on the back of Jonathan's comments and like I said a year ago store. The future is a is a very good platform for our growth and that.
It enables us to standardize our fleet refurbish keep up with the competition showcases many of our great categories and some of the things that we're doing to make it even better as we think about our store evolution as all the green shoot initiatives that we've come up with an operation Northstar and Thats, what will be loading up.
Turns of the good capital allocation as well as good value engineering to bring the cost of of the store in the future down so that as we roll it out going forward. It's much more productive it's a great experience for our customers and it's also higher return on investment.
Thanks for the color best of luck.
Thank you Paul.
Our next question comes from Joseph Feldman with Telsey Advisory Group. Please state your question.
Yes, hi, good afternoon, guys. Thanks for taking the questions I.
I wanted to.
Follow up with sort of the future question I guess.
What exactly.
We'll be the story the future like it seems like you guys have come up with a lot of other as you said green shoot initiatives to add to it and now it feels like we're back to lots is different.
Store versions with lots of different things going on as opposed to here's our format. This is what we're going to roll with an eye.
I would have thought that it would be working I mean, you're driving.
Doug.
So double digit furniture growth, you're driving home growth you, it's doing what you want it initially.
So I guess some can you help me understand like.
How soon do all stores have the new single Q line, how soon do all stores have the new furniture assortment. How soon do they have all these different things.
Thanks, Joe This burgers.
I said before absolutely think store the future is a great vehicle for growth I think that any initial plan, especially when you're talking about store.
Store, Refurbishments and new new set ops and they constantly evolve over time as you get smarter and you read how the customers responding to it and where you're getting your best best investment return. So having said that we are pleased with store the future the growth lifts.
In the first sheer continued to be strong our customers do enjoy traffic.
Still remains up versus balance of chain basket is still strong in terms of the growth that.
The thing is as we look at it we know it can do better by having more disruption for example by inserting the the lot in the front right corner, we get a 1% to 2% lift and we and we and back to our customer insights.
We surprise and delight or with new fresh products that are changing every six weeks or so in addition to that to Q, adding the Q. So the store the feature in the future as long with along with the balance of change and we'll continue to retrofit that we'll have a Q line. This once again is easy convenience upfront for her to grab and go go with product another.
You know, 1% to 2% lip pantry optimization is something she talked about and as she wants from allowing her to shop name brands at competitive prices, but still get closeouts in the iOS and big deals all of those things will be in the retrofitted store the future going forward and then I'll there are additional.
Convenience foods upfront for quick grab and go. So we're also looking at how we.
Tell the story better in the store with navigation tools more brand.
Brand signage and ultimately once again, it's about using the base toward the future as a vehicle to continue to add on retrofit and grow this going forward.
Thanks, and then if I follow up question.
Ben on the shrink that you guys noted you found it through the annual inventory, which makes a lot of sense you would find it then but can you help me understand you said that it stems from the transition to the new store operating model I guess.
I didnt quite understand what that meant if you could tell me.
Yeah John.
I will try to elaborate elaborate a little bit yeah, we changed as sort of your store.
Operating model in terms of sort of management structure there was some.
People, who left the company as part of that.
And there was there was some upheaval as went through that that transition and that appears to be the root cause of.
I've kind of maybe shrink not being quite as high as of a priority.
As it has been other points in time. The good news is that's behind US. We backed was settled stable structure and as we said stores all ops team and the asset protection teams are very focused on you're getting shrink back down to where it's been over the last couple of years, where we've been on improving trends. So we look at this is being primarily or kind of want all.
The it was just associated with a lot of change occurring in our stores during 2019.
And Joe I wanted to just to answer your question around some of the timing that you had regarding the store the future and the layout I think it's important to understand that we will be going back and retrofitting all of the store. The features in may they will have the lot the Q line.
In all stores, we will have broyhill and pantry optimization. So we still think it's really important to maintain that consistency across our store the future and all new stores and Remodels going forward for 2020 will follow that same path.
That's great that's good to hear.
Thanks, I'll cede the floor to others a good luck with this quarter. Thanks.
Thank you.
Our next question comes from Karen short with Barclays. Please state your question.
Hi, Thanks.
Couple of follow up some comments you've made so the first question is just on the store labor model.
I know you talked about.
Has been sector need just answered the question in terms of.
Maybe slightly backfired, but I guess I'm not totally clear on what youve.
Reverse.
That will improve going forward.
My first question.
Hi, Karen the Spurs.
I'll give you a little bit of color on it as we went through the year part of our.
Our store labor restructuring.
It was too.
In certain volume stores is removed one of the assistant and leaders and transformed those hours is there and to more customer facing hours. So quite frankly, we ended up with more customer facing hours in the store, but the actual disruption of that event and a good good amount of our stores.
Left us with less oversight over some of the shrink operations that that leadership would normally overview and quite frankly, I think that to jonathan's point. It was a it was a blip that will be correcting shortly.
Okay. That's helpful and then.
I guess.
Softness.
Hopefully this is somewhat transitory I guess.
Typically don't have.
Short term.
So a little more color on why you would slow start in future.
Currently based on that and I understand you're looking at returns and things like that but you did call.
This is one of the reason why you're slowing.
Okay.
I'll start off with that care and handed over to Jonathan Cronto virus is not the reason why we would slow down store the future Cronto viruses, just baked into our first quarter.
In terms of headwinds from a from a sourcing and supply chain standpoint, but not in Q2 through four as sort of the future slowed down is quite frankly.
Giving us time to better use our capital allocation and 2022 once again add the operation Northstar Green shoot initiatives like we talked about to retrofit those stores some of the balance of chain stores.
In very high returning.
Types of investment and then getting to a new base that we continue to grow and with store evolution post 2020. So it's just a matter of timing and using good count capital allocation to create a better shopping experience better returns and an improved comp sales.
Kevin I just want to go back to the shrink point again, you have the to the changes we made two point you referenced the changes we made in the stores. The ones. We believe we're absolutely the right things to do and they've contributed a very significant.
<unk> expense reduction so while we have seen that shrink impact you know, it's relatively small compared to the savings that we've been able to.
Gain from that change.
Again, we believe we can fix it going forward. So yeah, we certainly don't think it undermines our decision to you to do that and the other thing I would call out is that your since that change net promoter score, which is a key a key measure of kind of store experience has actually been at all time highs. So we don't think the changes we've made of adversely affected.
The consumer experience.
Okay.
[music].
Retailers in general most of the retailers that have reported already has.
As it relates to.
It's kind of already.
Yes, and or on its way, so that should impact sales and one Q.
Called that out and then the second question I'm, sorry to assets, but.
Only gotten this question.
The Investor day invitation at the end of January so.
I guess curious how you thought three doing.
Obviously your can fine.
Yes, so just on defense piece, Karen I mean, we.
We have specific delays in receive coming out of China, we've been an extensive contact with our vendors and as merchandise. The scheduled you have to get in and be out in stores by the end of the quarter that as basically what we know today is not is nothing to be there. So we're working very hard to mitigate that we hope what we've baked into our guidance.
Turns out to be conservative.
Based on what we know today, we thought it was necessary due to include some effect.
From that turning to divest today.
Yes, I think first of all the the whole context around this would have grown virus is one that's evolved very rapidly over the past few weeks and that's in the impact our visibility and I think many other retailers and businesses and other industries have spoken to that node certainly for the balance of the I think the other point, though is.
In particularly given the soft start we've seen in Q1, you. We do believe that we're going to have some positive news to report as we get towards the middle part of you in terms of the incremental progress we're making from.
Our various growth initiatives and we just felt that would be a bit of backdrop pool, where we actual results to report rather than projections of results you'd have become more hopeful investor day for you for shareholders in the community as a whole right.
I just want to add a couple other things Karen on that just just recall that current a virus when it did hit it caused the extension of Chinese new year.
People not going back to work still to this point people are in China hours are still not at full strength in these factories. So.
You know unless you're cycle times on ordering are very very long, you're definitely going to get impacted in Q1, and so that's what we planned on and Thats, where we expect.
That's really helpful. Thank you.
Our next question comes from Anthony Chukumba with <unk> capital markets. Please state your question.
Hi, Thanks for taking my question, sorry, I dialed in on a few minutes late so sorry, if I missed this but.
How much do you think of the.
The fourth quarter Miss you know.
Underperformance in the month of December how much do you think.
To do at the competitive environment.
Particularly from a promotional perspective in other words worthy competitors sort of seeing the same trade as far as you could tell when your competitors sourcing the same trends that you were doing that you were seeing in that's being brought more promotional thank you.
Okay.
Hi, Anthony is Spurs just to it you know the whole tale of the quarters.
It is an interesting one after a good starting November.
Really December the sales declined for us the valley. If you will in the in the quarter was the was the final 10 days going into Christmas, where where things got very promotional but also.
The extension of late shipping by pure plays like Amazon really gave a lot more alternatives to.
To our customers and many customers and quite frankly, our customer traditionally has shop late in the season and and by extending the late shipping.
Obviously, she had many many altered alternatives to go with so it was really those last 10 days before Christmas.
That actually cause December to decline and then as we got more promotional to clear our inventories in January we took our margin head, but we felt that that was the right thing to do we didn't want to keep on holding onto that inventory going into the new year.
Got it that's helpful and then.
Related question, you mentioned, the fact that.
You just and you just mentioned again, the fact that.
And people can shop online in that and that sort of hurt you I mean does that change at all the way you think about your omni channel strategy I've always gotten impressed and you've been somewhat.
A conservative with that Omnichannel strategy and I just wonder if you know what happened makes you might make you rethink that.
As good question Anthony now, we're not conservative in fact than last 18 months, we've gone from less than 1% penetration of total sales to nearly 2% to doubling the business and were profitable in that in the process of that so and just interesting to note that in Q4 alone because we added an accelerated our work on buy online pickup in store law.
With our overall ecommerce.
Platform.
The it added about a point of comp in Q4 alone and so that that right. There shows from the customer insights, we did and now a little over a year ago, we realize that our customers 25 plus percent of time will start their journey online.
And over 50% of them have an Amazon Prime card. So it's very important for us to compete in this area and Thats why set in our earlier remarks, it to grow grow grow opportunity for us and I think over the next three years, we're going to like the answer there. The good news over the next year 2020, we get to leverage our infrastructure continue to grow.
And as strong way in a meaningful way our customers are truly enjoy the convenience of it and quite frankly.
We now look at it we want to get a more personalized from move more friction and and keep keep the customer coming back. So we're competing in E commerce and were really thinking hard about how we become a true good omni channel.
Resource for her.
That's helpful. Thank you.
Thank you Anthony.
Thank you. Your next question comes from Brad Thomas with Keybanc capital markets. Please state your question.
Hi, Thanks for taking my question.
Hoping Jonathan maybe you can give some more color on.
Margins and how to think about to us both in the first quarter and.
And particularly the gross margin puts and takes care to bounce the here.
Sure, but we'd be happy to do that yes, we said that they could have prepared remarks that.
For the year as a whole we see gross margin rate being flattish.
Then in the first quarter, we see being down.
It with some promotional pressure you're writing on that you the as a whole as you look of the sort of full year picture given sort of behind that getting back to flat there with them.
Turning to the significant moving pops that you're in a couple of different directions. Obviously, there is still some sort of year over year tariff impact, which has abated somewhat from what we saw a couple of months ago, but it's still there and we've sold to mitigate that in multiple ways, but still a bit of a headwind coming into into 2020.
That may or May evolve as we go through the year.
We're also assuming that there will be some need to be.
Incrementally more promotional based on where we've been for the past couple of quarters. So that's baked in the gains that we've made good progress you threw off on the journey initiative in and taking cost out of.
Cogs.
Through some of the initiatives that we've been running there both in terms of relationships with our vendors and also in terms of in store markdowns loss shrink and so on where we we expect to make continued good progress a broadly those things we see kind of offsetting in 2020 for the full year in the first quarter.
We baked in to some margin rate erosion due to the assumption that will be more promotional as well as some of those other effects. So just went through.
Very helpful.
Across the company from a store standpoint had accelerated growth last year.
What do you locked in on in terms of at least as you've signed and stores that you will open this year and and then I presume, you'll you'll probably evaluating whether you want to keep opening up stores can you just talk about that.
Process a little bit.
Yes, I mean first of all in the near term I mean, the results. If you typically a fairly long lead time, but sort of store openings.
So yeah, we would expect to be broadly on a similar pace.
Currently to last year for openings and closings you probably similar to without to something we obviously have more time to manage through and one of the things. We are heavily focused on is looking at our low performing stores and how we can get them to be more productive and more profitable.
Thank you. So we don't have to close them. So we can keep.
The topline from those tools you beyond that we're looking it up a longer term real estate strategy. That's something we've been spending a lot of time on again, you recently and what we think the opportunity could be that and I think we've spoken in prior earnings calls we thing that is a potentially significant opportunity, we're not quite ready to quantify that but.
When we do rescheduled Investor day, I would expect us to be at a point, where we're ready to talk more fully about that.
Great. Thank you John.
Thanks.
Thank you in just a reminder to ask a question at this time press star one on your telephone keypad.
You also May press star too if you would like tear move your questions from the Q once again to ask a question press star one on your telephone keypad.
Our next question comes from.
Peter Keith with Piper Sandler Please state your question.
Hi, good afternoon, everyone.
So I understand what's going on with.
With Q1, I understand that tell you have some initiatives rolling out to improve results I guess, if we look at quarter's future for implied in the full year cop getting backup the flat to low single it.
Improves.
Have a low single digit comp for the rest of year after Q2.
So just looking at the initiatives I guess and that fanatically with the pantry and a lot I could see accomplished but.
I wanted to get detail on is how many stores had decent tested in.
Do you feel confident that that comp benefit is going to be consistent as you've rolled out across at a much broader basis stores.
I believe it or this is Bruce I'll start off with the answer so weve tested these concepts and up to 50 stores across our network and maybe pantry optimization in more than that at this point as and we've done it for a good good amount of time going through.
Different occasions, when it comes to the lob. So we can understand the actual rolling in field for that and our ability to keep up with in sourcing so.
We have not put them all together in one store.
But we but we've built in.
Built in that factor into our Q2 through Q4 guidance.
Okay.
And I wanted to dig into a little more on food and consumables because we've killed it could be talking about this the food area for that the last year around that pivot more entertainment oriented food.
Saxon drinks and things like that but that the food comp just hasn't really.
Got any better.
Any thoughts on what that the headwind is there, particularly because I guess I wouldn't think of it as a holiday impacted.
Category or weather impacted category.
Okay, Peter I'll start on that one and I think Bruce will also jump in.
First of all the food and consumable categories are very important for us and we look to food to your point, we have grown our.
Assortment in more of the beverage can be salty snack.
DST portion, but and which has been performing for us.
But we've also been moving space away from pantry and some of the basics.
We still want to offer that consistency of assortment when she comes to the store, but it's just a matter of really rationalizing that.
To the right level of investment so I think with the pantry optimization, I think thats really where both the food and consumables national brands come together. So that we can we can offer her consistency while at the same time still.
Rising and delighting her with our close outs, which continues to be about 25% of our business and we believe that that will continue to be a very important part of that assortment.
So you will see as we rollout pantry optimization this summer.
We'll see the assortment growing from a national presence within the consumable area, you'll see some space being allocated over.
And we also talked about the elimination of the freezer and cooler that we have moving that space to other more productive categories within food and consumables and we will also have one in cap still available for the cool their product again to maintain our eligibility.
For snap and EBT tea.
Hey, Peter this is Bruce I'm going to add on a little bit of what.
Lisa just talked about explained very well I'm actually excited about where are our food and consumable business is going to go I mean quite frankly, you've heard me talk about this we are not necessarily going to went on a canopies in and get somebody to come visit us first versus their grocery store, but where we are good at is bringing excitement with exotic.
Uhhuh fresh foods, new new find as well as having a proposition where you can shop name brands, which were adding into the consumables and food sections at competitive pricing, but also be surprised by a good close out how that has been somewhat muted in our in our in our back score at this point, especially in the store the future.
Sure what we're looking at as we go as we go into 2020 is just elevating that you hear me talk a little bit earlier about signage in the store showing where the good deals are the big buys the engineered big by the close out buys and putting that writing in the same miles with withstood clear messaging compared to.
The everyday items name brand items at competitive prices. So when you really think about it it's really our ability to get on the everyday Jennifer.
Shopping trip, where she does 50 plus of those a year, we want to disrupt that and make sure. She understands that are offering that has competitive name brands price as well as closeouts that could be 10% to 40% lower is a better proposition that maybe others that are dealing with manufacturing coupons and so forth. It's just telling that story upfront.
In the store a lot more and then quite frankly, when thinking about the store the future I'll lay out in some of the improvements we want to do we realize that that there could be more food and consumables disruption upfront. That's why we have the Q in the space at the Q opens up for us can be better utilized with some quick grab and go convenience foods while.
Not disturbing have and low profile view of furniture, all the way back to the to the pantry section of our store. So we're excited about where this will will lead and this is what you learned when you start using sort of the future as a vehicle for growth and building on top of it.
Okay. Thank you very much for that feedback and good luck.
Thank you. Thank you.
Thank you. Our next question comes from Jason Haas with Bank of America. Please state your question.
Great. Thanks for taking my question. So I know there's been a few questions on.
On the store labor that.
There are some reductions during the store I understand that overall as a benefit to margin, even excluding that shrink headwind on but did that impact the comps at all I mean, if that is that one of the reasons why but the cost were a little weaker and are you planning to add maybe add back in some labor hours into into the stores. Thanks.
Yes. Thank you Jason good question.
The once again.
The the number of hours in a store actually in terms of customer facing improved as a result of this we actually took some overhead cost of the assisted team leaders, where we had maybe.
Too many per the volume the volume that the store did that was actually the true cause of it. So there was a better match.
Better utilization of the labor hours in the store there was also a.
Better matching of labor to demand in terms of the store operations. So quite frankly, we did not see a disruption to sales with that respect. It was just a momentary oversight of shrink measures that you would do in a normal store with after et cetera that that spiked and.
We're confident in our team is getting their hands around that so I feel good about where we are and I think the net promoter scores being at all time high I shows that this was the right decision while also.
Bringing tremendous expense savings to the bottom line.
Great. Thanks, and then I wanted to ask if you could speak a little bit more towards the bright Hell rollout I know you said that in initial customer response has been strong I know that theres been some higher price point introduced Im curious to know out if you've seen customers are subject to those higher price point items. Thanks.
Yes, Jason we've been very pleased with the broyhill rollout and we are ahead of plan on a life to date basis and to your point, we introduced them higher price points that had tremendous value proposition for our customers and we've seen.
Great response, and very I would say little to no.
Negative impact on intact we.
We have several sectionals in our stores that are at that 1000 dollar price point.
And we again had been performing very well for US now what's it those are the early indications for also really excited about our patio furniture that we've introduced very similar situation.
Slightly higher price points from where we were last year, but just incredible value proposition within the resin wicker and early indications have been strong.
In April we will be rolling out our soft home component of Boy Hill, and we feel very confident with what we'll see.
Great. Thanks, and if I could add one more I might've missed this but could you say what.
The interest expense and the tax rate is implied in your guidance for 2020. Thanks.
Yes, Jason we didn't we weren't specifically, what we did say interest expense will be down Jude you too low and net debt levels and then the tax rate will be up a bit.
As we we had some one time will leave what we would expect to be nonrecurring benefit to 2019 rates the tax rate will be up little bit.
Alright, thank you.
You're welcome Okay. Thank you everyone. Operator would you please close the call with replay instructions.
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February 27.
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