Q1 2020 Earnings Call
A brief question and answer portion will follow the prepared remarks.
It's a require operator assistance, please press star zero Wonder telephone keypad.
As a reminder, this carpets is being recorded.
At this time I like to introduce today's first speaker, Eddie Reg Vice President Investor Relations.
Please go ahead Andy.
Good morning, Thank you for joining us for first 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 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 today's call involve risks and uncertainties and are subject to our safe Harbor provisions as stated in our press release in RCC filings.
Actual results can differ materially from those described in our forward looking statements. Our first quarter results reported today do not include any non-GAAP adjustments, however comparisons to prior year or two adjusted non-GAAP results.
Reconciliations of GAAP GAAP to non-GAAP adjusted results are available in today's press release.
This morning, Bruce will start the call with a few opening comments Lisa will discuss Q1 results for our merchandising perspective, Jonathan will review the financial highlights from the first quarter and Bruce will complete her prepared remarks before taking your questions I'll now turn the call over the burst.
Thank you Andy and good morning, everyone.
I want to start by saying, how proud I am a ball, but our team here at big lots has accomplished over the past quarter.
We're certainly pleased with our financial results, which I'll come back to in a moment, but I'm proudest of how we have responded to the unprecedented crisis of cobot 19, and in many ways in which we have grown as an organization.
Across all areas of our business. It has been aspiring to see how we have stepped up our game over the past 90 days during that time, we have become more nimble we have seen new leaders emerge and most importantly, thanks to the incredible commitment of our store and DC Associates. We have continued to serve our customers and that's that saved our.
Men as possible.
We are particularly grateful to have had the opportunity to serve our country's here I was working in the medical first responder and emergency services communities, along with active military embed trends.
When the crisis began to unfold in March we aligned on five key priorities first that health and safety for associates and customers would take precedence second that we would batten down the hatcheries and focus on liquidity and business continuity to enable us to support our associates our customers in our communities.
There are that we would all lean on each other to successfully navigate this crisis as a team fourth that we would need to make quick and often in perfect decisions and last and we would think in stages of now next and later and make sure we were communicating regularly to all of our stakeholders.
The objective of our focus in actions wants to navigate the crisis and come out a bit stronger.
We realized quickly that we would need to incur some significant additional expenses to keep our stores associates and customers save.
We didnt hesitate to do that and look to fund those investments with savings in other areas, we decided to cancel our friends and family event for safety reasons and close on Easter day to give all of our associates, a well deserved break we knew these decisions would carry a cost but we also knew that they were the right things to do.
And the end. The result has been that our business has been much less disrupted then we feared our stores have remained open to serve our loyal customers and many new ones and a rabbit scaling of our E. Com business has been more critical to us than ever as we have seen E com penetration grow dramatically, particularly through BOPUS.
In addition, the team did a great job managing our underlying expenses did not result has been a quarter, which we posted our strongest comp in many many years and grow our earnings by approximately 37%.
Before getting some more color on those numbers I want a pause to thank all the associates for their commitment and dedication over the past months. That's truly been remarkable I also want to thank our merchandising and non merchandising vendor partners for being with US every step of the way through this crisis.
As you all know our quarter got off to slow start in February driven impart by a pull forward sales from heavy promotional activity in January in addition, unexpected choppiness an income tax refunds adversely impacted furniture sales, especially over Presidents' day weekend, well the obviously changed in March.
The onset of Cobot 19, as customers were confronted with a new way of living which included stay at home and shelter in place restrictions supplies to stock up pantries with food consumables, and other staples or critical and ourselves meaningfully accelerated in the month.
The cancellation of friends and family and closing on Easter contributed to a slow start in April. However, the lost business was quickly ever comment stimulus checks were received and many customers focused on spending in categories, such as furniture and seasonal to make their stay at home experience more pleasant.
Many of these products carry higher margins. So this mix shift helped to partially offset the heavy volume and lower margin food and consumables categories. The net effect was the gross margin rate down approximately 80 basis points from last year's first quarter right.
We did a very good job managing expenses during these uncertain times with our expense ratio improving 180 basis points.
In the quarter, despite incurring significant additional cost the latter included a temporary increase in the wage rate of $2 per hour for in store and DC associates beginning in mid March which we have recently extended through June alongside an enhanced 30% associate discount.
Additional bonus pay and also significant additional cost to clean and disinfect, our stores and distribution centers on an ongoing basis as well as personal protective equipment for our associates installing protective plexiglas shields and at our cash register areas and other steps.
Even with these costs included we were able to achieve an E. P. S $1.26 cents in the quarter, which compares to 92 cents last year beyond these outstanding results I'm pleased to report that we're off to a strong start in Q2 as in Q1, we have limited visibility on how our sales will perform for the balance of the core.
And we know that we will again incur some additional expenses, but we will manage through this with the same mindset, we brought to the first quarter.
With that I would like to talk about some key learnings that we have taken out of the past few months and how we believe we are positioned to win going forward.
First we have a strong balance sheet with plenty of liquidity, which we expect to further enhance when we close the pending sale leaseback transaction for our four on distribution centers second our merchandising mix is exactly what our customers want and need today food consumables and stay at home Assortments with structurally sound margins.
Our ability to lean into closeouts in the months to come will further differentiate our assortment and the value. We provider customers next we have a loyal customer base and that has increased in size over the past months and finally, we have learned more than ever that we have an outstanding team will become even more effective during the crisis east.
Thanks will further support the pursuit of our existing strategies under operation Northstar, where the rollout of key initiatives remain on track for.
For example, broyhill is now available on indoor and outdoor furniture, and soft and hard home Assortments. This iconic brand emphasizes our better and best offerings with elevated quality in and a compelling value proposition.
Across the board, whether it be patio furniture get cboes, sectionals occasional tables dining room, sats or accent items, including window coverings fashion bedding and home decor, all have sold through quickly exceeding expectations. Despite a delayed marketing launch of the brand as customers spruced up their living spaces.
With this new collection.
We are increasing the density of the furniture department by adjusting and enhancing the layout of the furniture pattern, adding new fixturing.
The configuration of our Q lines, which in some stores moves our cash registers into banks also frees up square footage in front of the furniture Department. The combination of all these moves will allow us to explore white space opportunities and furniture, expanding our broyhill offering or display big buyouts and closeouts across other category.
As in the front of the store to drive higher revenue increased box productivity and generate more margin per square foot.
In May we started to roll out of the lot and Q lines to existing store the future locations and certain other stores that are in the legacy balance of chain format.
Our test of these programs continued to generate strong results with each one generating more than a point of comp for the store a lot in the queue lines will also be included in our new stores and store the future conversions. This year and we expect that approximately 750 of our stores will have both you for the holiday selling season.
The chain wide rollout of our pantry optimization initiative will now begin in September This initiative Repositions, our food and consumables assortments by moving footage from food Staples to food Entertainment and consumables, where we have a higher permission to play the assortment will include national brands and everyday low prices coupled with own.
Brands and Closeouts this compelling offering will allow our customers to find more items on their shopping was in our stores, which we also believe will result in higher frequency of shopping trips.
We've added new sinus throughout the store that clearly calls out closeouts big by alerts and other great deals we know our customers love the value from these offerings and we are making it much easier to find though.
Alongside these in store programs, we expect continued strong growth in our E. Com channel Q1 was our highest volume quarter since launching the platform in April of 2016.
Through yesterday with BOPUS included E comp sales have exceeded last year's full year totals and the business continued to see growth and province, with the direct business, excluding BOPUS breaking even for the first time. In addition, we're making meaningful improvements to the online experience with better search reduce delivery time and expire.
Handed payment options for example in April we added easy leasing our popular leased to purchase program to the E. Com platform Lopez that is leased online pickup in store as we call. It has been very well received by customers with penetration and online furniture sales quickly trending up and we will also be able to it.
Except the big lots credit card and big lots gift cards online over the summer months.
And finally, the very popular shopping and delivering option Instacart will soon be available for our customers. We believe this is a very important next step in our omni channel experience and we are exploring other same day delivery services for our larger product assortments, including furniture, the growing popularity of curbside pickup, which we added.
In Q1 has validated the opportunity we see to grow these convenience opposite options at an accelerated pace to meet the customers new demands both throughout the crisis and then the post cobot 19 world.
Turning to expenses, we have continued to make excellent progress I'm, taking cost out of the business and more broadly, creating a culture of frugality.
Our original cost reduction target of 100 million will be achieved well ahead of schedule and we believe there's significant opportunity beyond this figure.
With that I will hand, the call over to lease up but all returned to make some additional comments later.
Thank you and good morning, everyone. As Bruce noted Q1 sales were significantly stronger than expected with comps increasing 10.3%.
Well the merchandise category perspective, six of the seven businesses were up in the quarter.
So models with the top performer up 27% with positive results in all departments, which is inline with the dramatic shifts in consumer buying trends, it's what the supplies needed for the pandemic.
Paper sales increased nearly 70% in the quarter in household chemicals housekeeping products in health and beauty, we're all very strong.
Our team has done a very good job working with our vendor partners to keep these critical assortment in stock as much as possible.
Food also posted a very strong quarter comping up in the low double digits.
Similar to consumable the strengthen food with broad base with increases across all departments and notable strength and DFT dry grocery and beverages.
Soft home was up high single digits with very good results in nearly all departments in part driven by our launch of Roy Hill.
Home decor, including Campbell wall art mirrors, and tabletop item, along with decorative pillows and fashion bedding, we're all very strong.
Our customers have noticed the quality and value in the broyhill brand and they have responded in a big way.
Electronics toys and accessories also increased in the high single digits driven by strong sales until late in graphic Tees, which were rolled out to the entire change during the quarter.
Seasonal was up in the mid single digit range in Q1, which was a very good result, considering the puts and takes in the quarter that Bruce described.
Our outdoor living assortments, including the new items and Broyhill have remained popular in may and our inventory levels have been selling down quickly.
As a reminder, much of our lawn and garden in summer product is purchased a year in advance indirectly imported so it is challenging to chase the season, if we're experiencing outsized demand similar to this year.
Furniture was also up mid single digits, which was a good quarter given that it is on top of the 6% increase in Q1 last year and that February which is normally a sizable month for furniture sales in the quarter was below expectations.
All departments in furniture posted a positive comp with ready to assemble a mattress is producing the best result.
And similar to soft home in seasonal a customers love the newness in the Broyhill collection in upholstery and Keith good items.
And finally hard home was down in Q1, which was inline with our expectations as we reduce space in the store and reallocated to more productive categories.
Before handing the call over to Jonathan I want to thank our beep arm teens, consisting of buyers planners allocation replenishment in marketing for the extra efforts during these unprecedented times.
They've been working day and night to secure the supplies our customer needs to get to the pandemic.
The dynamics of Cobiz 19 in the impact on non essential retailers has created the unique shifting close out product availability.
Over the last few years are close out assortment has been highly concentrated in the merchandise categories of food and consumables.
Very few large closeouts had been available in furniture and seasonal and the close out opportunities in home didn't necessarily worker coordinate with the quality of our planned assortments and soft and hard home.
As you might imagine high demand for food and consumables during the crisis has stressed the supply chain eliminated the excess product available in these categories.
But that is offset by the excess product available in other categories, including furniture and other home related item and apparel.
For instance, we have recently secured a very good close that opportunity in children's apparel, the girl's tops in shorts now hitting stores.
We have an experienced team of merchant planters and allocators that are well burst in the close outsourcing model and our quickly pivoting the organization towards these opportunistic buys.
I'll now turn the call over to Jonathan to discuss the numbers.
Thanks, Lisa and good morning, everyone I would like to add my appreciation for the outstanding efforts of everyone across a big lots team.
For the tremendous support we have received from our external partners.
Turning to the numbers net sales for the first quarter were 1.439 billion.
An 11% increase compared to 1.296 billion a year ago.
The growth resulted from a comparable sales increase of 10.3% and sales growth from new and relocated stores not in the home base.
In terms of the cadence through the quarter comps were down at the high single digits in February for the reasons Bruce outlined however in much sales accelerated to a low double digit increase as customers stocked up on a centrals.
That impact faded in late March in early April, which also got off to a slow start due to the canceled friends and family of and and Easterday closing.
Beginning in mid April we sort of material improvement in combs. The continued through the balance of the among lenders further continued intimate.
April month to date Combs turn positive roughly two weeks prior to quarter end and continued to improve rapidly.
Net income for the first quarter was 49.3 million up 33% compared to first quarter adjusted net income of 37 million last year.
Diluted EPS of <unk> dollar and 26 cents was up 37% compared to adjusted EPS of 92 cents last year's first quarter.
Gross margin rate for Q, almost 39.7% down 80 basis points from last year's first quarter adjusted rate with the decline, resulting from a shift in our product mix toward the lower margin categories of food and consumables.
Shrink.
Drinking Greece's inline with the higher accrual rate, we moved to in Q4 based on the initial results of our annual physical inventory cycle.
Physical entries in Q1 have been good tailed somewhat by the crisis for the results we've seen a broadly consistent with what we saw in Q4.
Total expense dollars for the quarter were 496 million up from the 471 million of adjusted expenses reported for the same period last year.
The increase included unplanned expenses of approximately 17 million associated with the crisis responds actions Bruce described a moment ago.
Including temporary wage increases and additional bonuses, new cleaning protocols supplies and equipment for protecting customers and associates as well as some other unplanned expenses.
However, these incremental expenses was significantly offset by savings relative to plan in other areas and our ability to hold expenses well significantly beating on the topline.
As a result as DNA as a percentage of sales was 34.5% in Q1, representing 180 basis points of improvement compared to last year even.
Even with significant unplanned expenses included.
We remain confident our ability to drive SGN they leverage over time.
We've established new cost reduction targets across the business, but we believe our aggressive but realistic.
Alongside this we are continuing to promote a broader culture frugality.
Once again first quarter results of validated our ability to do more with less.
Interest expense for the quarter was 3.3 million down slightly from last year as a result of low debt levels.
The income tax rate in Q1 was 27.3% compared to last years adjusted rate of 28.1%.
Moving onto the balance sheet inventory ended the quarter at 807 million, a 13% decline compared to 927 million last year.
With the decline, resulting from strong sales and most merchandise categories in the quarter.
As part of our initial response to the crisis, we pulled back significantly on inventory receipts for those actions have now created additional capacity to pursue close out another opportunities.
During Q1, we opened six new stores, but also closed six tools, leaving us with 1400 and force tools and total selling square footage of 31.7 million.
Capital expenditures for the quarter were 29 million compared to 77 million last year.
With the decline primarily coming from fewer store the future conversions and no required investment in ABDC This year.
Depreciation expense in Q1 was 37.7 million or approximately 4.9 million higher than the same period last year.
For the full year, we now expect capital expenditures to be around 130 million to 140 million, representing a significant reduction from our original guidance.
We ended the first quarter fiscal 2020, with 312 million of cash and cash equivalents and 437 million of long term debt.
This represented a significant improvement in net debt compared to the end of the first quarter fiscal 2019, when the company had 64 million of cash and cash equivalents and 470 million of long term debt.
During the quarter out of an abundance of caution we chose to draw down additional amounts on our revolving credit facility to provide protection against the unknown potential impacts of the crisis.
As Bruce referenced we expect a strong liquidity position to be further enhanced by the closing of the previously announced sale and leaseback without full owned distribution centers.
As noted in a separate press release. This morning, our board of directors declared a quarterly cash dividends for the second quarter fiscal 2020.
30 cents per common share.
This dividend is payable on June 26, 2020 to shareholders of record as of the close of business on June 12 2020.
Turning to guidance at this point, we don't believe we have sufficient visibility to reinstate full year guidance.
The second quarter to date comparable sales are running up strongly reflecting a continuation of the acceleration in business that began in mid April.
We expect these trends will moderate or the bounce the quota due to a number of factors, including competitors and other retailers reopening the plan cancellation of his life friends and family event potential in would.
Potential inventory constraints in certain categories on the abatement of stimulus driven demand.
Assuming comparable sales of the second quarter similar to first quarter results, we would expect diluted EPS to be in the range of 65 cents to 80 cents.
This outlook incorporates anticipated pretax expenses related to cope with 19 were approximately $18 million.
The further incorporates an approximate $7 million adverse pretax impact from the expected closing of the sale and leaseback transaction for own distribution centers, but excludes the expected gain on sale from the transaction.
Based on quotas. They sales we believe the comparable sales assumption is conservative.
Notwithstanding the prior commentary given the highly fluid environment, an uncertain outlook on consumer behavior. The company believes the range of outcomes is wider than than the normal quarter.
We intend to resume the practice of providing formal guidance when business conditions returned to a more normal environment.
I'll now turn the call back over to Bruce.
Thanks, Jonathan before we open the lines for questions I want to take a moment to once again express my sincere gratitude to the entire big lots team, especially our associates in the stores and in our distribution centers.
Ralph this crisis they have been on the front lines each and every day.
They are truly heroes and we cannot thank them enough for their service and dedication.
No, but 19 has changed the world in a short period of time I believe it has been a defining moments in our 50 plus year company history.
We affords the new way of operating new way of collaborating and a new way of succeeding with the common goal for our company to serve our customers on our communities in a safe and healthy environment for all we really don't know what is ahead of us.
But as I mentioned in my opening remarks sales have been strong in the month of Maine, and we remain confident and optimistic about the impact of the rollout of our operation Northstar initiatives.
I'm also very encouraged by our team's ability to be nimble on pivot towards new opportunities as they become available.
As we've learned over the last 90 days, our environment can change quickly and unpredictably.
But we will continue to navigate through that as we did in Q1, focusing on doing the right thing and playing our part to help our country returned to a more normal footing.
I'll now turn the call back over to Andy.
Thanks, Bruce operator, we would now like to open the lines for questions.
Certainly would not be conducting a question answer session. If you like to be placement. The question Q. Please press star one on your telephone keypad, a confirmation tone that why does it look question Q you may Prestart Q, if you'd like cubic question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before presses.
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Once you have that star one to be placed into question Q1 moment. Please what we pull for questions.
First question three is coming from Ashaji Luther from Goldman Sachs. Your line is not alive.
Hey, guys. Thank you for taking my question inch congratulations on a great quarter, I hope, you'll actually well.
It's in a way to parse out the impact from stimulants worse is perhaps the new customers you acquired in this in the last you know to 18 months.
By the fact that you are open and others were not and then you know further west of the our efforts save a lot and brought held.
What are you doing in in your efforts just sort of you know retain those new customers that you acquired thank you.
So John ill take the first piece of that and then turn it over to Bruce I think it terms of breaking out well the impact both to the stimulus was underlying credit and it's very difficult to do that quite frankly, we don't know what the will would've looked like that we know.
Through the covert 19 pandemic. So weve said he spent a little time trying to understand that focus frankly has been much more on the second part of your question, which is how do we emerge from the crisis in a very strong position how do we retained the customers that have come to big look through the crisis and how do we generate more ongoing you business traffic.
Yeah, I'll take the second part shiny and thank you for your kind words, yes, Q1 was a roller coaster ride we saw a lot of traffic early on during the stockpiling phase in March.
And and actually in.
Q1, we saw reward signup up high single digits actually nearly 10%.
So that was good for us what we've done to attract more customers are things like.
Like going after them in social media Social media is played a big role in our customers like many Americans today are focusing on trusted brands trusted companies and we're becoming a social anchor point for that our heroes discount 15% off I continues today and that recognizes all the first responders medical staff.
Out there our veterans, everyone working very hard and as they come in and their new customers. We've offered them bounce back programs by $10 off their $40 next purchase and we've seen really good response on that we've also increased and run promotions, where if they become a new rewards customer altergott, 20% off and that's something that we've put.
It on and off and that compares very good compared to what we normally run which is usually $5. After their first purchase so we're happy to see new customers come in experience a big lots for the first time bounced back reward all those heroes out there. So it's been great and as they come in they are seeing new things that we've done you know.
Across the store, whether it's our furniture, our broyhill line or new stores now the lot where the Q line, that's been rolling out and first quarter I. We're excited to see how they're giving us good feedback I will also mentioned as they come in throughout this covert 19 first quarter net promoter scores have been the high.
Yes, we've seen an engagement has just been wonderful and so we're really pleased with what we're doing well continue to lean into new customer acquisition through more branding marketing social media, our coupled with our promotions and extreme value we offer customers.
Great and if I could just quick follow up there.
Are there any color you you all could perhaps till one performance by geography by urban versus suburban markets as they've been.
A shift in trained in markets, where do you know.
It does that started to reopen and locked on measures have.
Thank you so much.
Yeah, I'll start off that team wants to add anything we've seen across the board in Q1, and even into May just uniform strong trends.
Both across categories much categories and geography, there are occasions, there have been occasions through Q1.
When there were locked out our shelter in home and close stores, where the trapped might be a little lower in one state versus the other.
For the most part they've all trended upward and we've been uniformly successful across the board at the new New competition starts opening up in America I think.
We have not seen.
A an impact at this point I suspect that many non essential retailers as they open up are probably getting their legs back and trying to figure out how to staff up and so on we have not seen a marked decrease in our business as result of that so I think.
Time will come I will tell we'll see more impact that more stores open up and there's more opportunity for for customers to spend across the board, but right now we've not seen any geography.
You know change versus the versus another I wouldnt say locally in terms of urban versus rural.
We have been strong in both areas.
Great. Thank you.
Thank you. My next question is probably from Peter Keith from Piper Sandler Your line is not a lot.
Hi, Thanks, Good morning, everyone and congratulations on the great results.
I was hoping.
Maybe Bruce you could talk to Q2, it sounds like there's pretty broad based strength and.
So perhaps no negative mix shifts like you saw in Q1 with consumables just based on the EPS guide. It seems like you might be baking in some gross margin pressure. So I want to kind of understand that the context of the Knicks and I guess, you gross margin shaping up for the quarter.
Yes, I'll start them hand things off to Jonathan our lease up but we continue since this stimulus checks unemployment checks we've seen strong growth from about mid April across the board across multiple categories. All categories quite frankly, and that's continued into into may with strong results in may.
Uh huh.
I think for the most part we think at some point stimulus checks and unemployment checks.
Might start to wane, but well out of the gates very strong across the board in May yes. They did a good morning, and just just to add a couple of points on the sort of PML.
Gross margin rate standpoint in Q1 about 50 basis points of the erosion year over year was due to the mix effects. We spoke too so based on where we are today, we don't anticipate that being the same in Q twos and the mix is even now more.
In Q2.
But we do still have enough focus a little bit of modulator erosion year over year, I think what you policies and expenses. We obviously believe we did an extremely good job in Q1 of keeping expenses very tight actually reducing expenses significantly on an underlying basis, even while sales were going up and that obviously was offset.
A significant degree by some of the onetime expenses.
We did pull back on a couple items like marketing, where we are planned to fund a little bit more into that in Q2. We do think it's important that we take this opportunity to bring in new customers will retain customers of the shelf big lots over the last couple of months. So we are looking at deploying some will knock me expense in Q2, and that's baked into the outlook.
I'd say beyond that we're going to continue to move forward with this mindset of frugality and as we did throughout Q1 look to try and reduced expenses that we have in our forecast so hopefully to get a better result than what you're seeing baked into that but we don't want to count on that until we've actually got it looked at it.
Okay. Thanks, guys Thats helpful. Maybe a separate question I get to Jonathan.
On the that real estate sale of the the Fourg sees could you provide some updated thoughts on the accretion of that transaction with.
Your share price now, indicating above $40. It certainly much different than when the share price isn't that the mid teens and that the terms where were finalized.
And on that note to it.
If and when the deal is closed is there anything would hold up a share repurchase authorization.
In the near term or tours would this be something that authorization would have to wait for a number of quarters.
If it ever to respond to all that so first of all we feel extremely good about how quickly. We go through this transaction, particularly in the difficult background context, and like to express my public appreciation for everybody on Aptima Pocahontas Oak Street to move expeditiously through this and we do believe.
Pretty close to closing there.
Once we close the transaction our overall your perspective on use of proceeds as same as what we announced generically press release, when we announced the sale leaseback.
Intend to put pay down our revolving credit facility, we're going to retain some additional liquidity, which we think is appropriate in the in the current environment, but we do ask additions start to normalize expect to deploy the remaining proceeds for other purposes, including investments in growth, but also potential share repurchases subject obviously to a.
Can you share repurchase authorization from the boards that remains you thought about thinking.
With regard to show, which is generally our view is yeah. We will continue to view that as appropriate use of excess liquidity.
With the stock is priced attractively on a long term basis and that yes.
It doesn't change.
But beyond that it will be more when we get to that.
Okay. Thanks, a lot guys. Good luck.
Thanks Peter.
Thank you. My next question today is coming from Joe Feldman from Telsey Advisory Group. Your line is that a lot.
Great Hey, guys congratulations on the quarter.
Wanted to ask about inventory you touched on a little bit you know supply chain seems like it's okay, but.
Maybe some constraints in some areas can you talk a little bit more about.
Where inventory stands today and you know how you feel I would imagine down 13% is not quite where you'd like to be and presumably you have more you you didn't fuel sales higher so just maybe talk about that a little bit where where how we should expect that to play out in the second quarter and beyond.
Hi, Joe I'll start there and maybe him back over to Jonathan.
But to your point, you'll be inventories coming down 13% in the quarter.
Very high sales volume and across all of our merchandise categories in the quarter.
If you think about as I stated lawn and garden that is definitely a sell down position.
So again, we'll see fewer markdowns.
The result of that if we look to the balance of our supply chain I will say that there has been.
Some stress like I'm sure you've seen in many industries.
We've experienced some disruption, but it's been fairly short term with our domestic suppliers as they too have experienced perhaps some colgate related illnesses.
But we're pretty much from a from a domestic perspective within those key areas pretty much getting back on track there.
I think you know food and consumables vendors.
Just in such unprecedented demand that we have seen.
So we continue to to chase there, but I think part of the the silver lining here as we've really opened up.
Of open to buy for us to go after close outs in this unprecedented environment.
Really quality close outs that are out there. So that's going to also help balance.
Some of the things that we are chasing it will start to see on a weekly basis actually now.
Really great quality close outs hitting our stores.
Team is being very aggressive we've gone out after current vendors new vendors.
We've had many vendors that are coming forward.
To us because of some of their retailers that have either were closed or experiencing.
Difficulty in their sales demand. So I'd say overall you know we also feel that we can do more with less.
So we have experienced great inventory turns throughout the quarter.
And at the same time, yeah, we want to be able to true up the key categories that need that additional inventory, but we certainly have learnt that we can really turn our inventory tighter.
But again excited about also the opportunity for the close outs that or are in the environment right now.
Maybe just a little shadow there for leases team I mean, I think we put them through a lot over the past quarter. We this crisis started to unfold. We didn't know what was going to come goes to move in a very conservative direction and ask people take out significant receipts that as we obviously did far better than the than those lower case scenarios, we had to they've still chasing.
Back into that I think it's been remarkable how nimble the team has been and adjusting our inventory levels, where we need to be to support the business. I'd also add one other thing Joe the our vendor partners have just been outstanding working with US and we've got create we've done creative things to get product from them to us into our customers.
Just a shout out to all our partners there I think for the most part Chinese back on track Vietnam's, Okay to Andy is still struggling a bit into domestic says Lisa said are getting back on track so feel good about future.
If I could follow up but on the Closeouts and thanks for getting into that Lisa with regard to those.
Should we expect them in beyond the categories that you see you know like you mentioned that in the prepared remarks like apparel and seeing some good stuff in kids.
Which is not typically where you guys are focused and I'm just wondering will it be things like that or will it be more focused on okay. Within the home furnishings furniture area here is a great deal that we got and how we should think about that going forward.
Joe we're seeing opportunities across all of the categories that we traditionally do business with first and foremost so whether its furniture soft home hard home.
Tronics.
So we're really going to see incredible.
Ill across the business, but we're also very much opened for what we call white space opportunities and apparel is a category that we spoke about it in the past is something that we believe we have a REIT permission to play from our customer and we have recently introduced into the lot apparel and our graphic Tees.
Which.
Have been very well received but that's a perfect example of the white space opportunity that we're going to go. After I think you know we were giving I felt that permission here to really open up and look at all opportunities that are available.
Yeah, we have a really experienced team.
Yes, thats involved with helping to secure these closeouts and not only that but with our store team leaders as well as our merged protein, we really know how to create that exciting environment in store.
So it's really again, it's an exciting time and opportunity for us that we're going to maximize I can just bad on Joe.
I'm really excited about leasing merchandizing team, what they're doing to lean into this area. We kinda treat this area and this time.
In our business as a innovation time and incubation time, if you will there's a lot of opportunity to sell a lot of things in white space and close out and this is going to be fun, there's going to be funded to test into it this year.
Great. Thanks, and if I could sneak one more and I just thought on.
The consumables in food.
Given the strength and I know a lot of it has been pandemic related.
Rethinking that category at all I know you've been undergoing a space optimization, there but has the latest.
Couple of months, given you any pause or rethinking on that thanks.
Oh, we've we've always believed in the food and consumables business and we've you know we have remix.
Some of the product within the food Department as we've been talking about over the past several quarters.
And with Pantry OS optimization coming into our stores in the September timeframe.
That I think thats, just going to take the assortment to the next level I'm really giving our customers those everyday brands that she.
I would expect see from us.
We'll also be there on close out.
As as those availabilities become available, but will also be able to offer her those national brands everyday very competitively priced so what we're continually looking at that assortment, but from what we've seen in what she's coming for from a stock up standpoint, we're encouraged with what we've done with pantry optimization that that's only.
Going to helped fuel the demand that we're seeing from her.
And I'll just add a couple of things that I think Lisa answer that very early but just you know there's really two types of customers I mean, theres many types of customers that shop us, but when you boil it down there's been everyday customer call, our everyday Jenny and there's that destination shopper destiny, if you will everyday janney she's coming into that food and consumer.
This business and we've got to help make sure we haven't so as we as we lean into operation North Star in the strategic initiatives, we're going after there from the Q line, which makes more space up in the front area. The store to the pantry optimization at least a talked about our offering is compelling because they've got everyday low prices on brand names.
So she can shop further down or list on those 50 shopping journey is a year or so and we also have closeouts or big by alerts that give a 10% to 40% discount right next to US next to it and as Lisa mentioned in her remarks, new signage and that allows that new customer our customers to find that value add you know where they shop through.
Our stores is something Thats coming this year, we've already started rolling it out. So we also have spaced throughout the store, where we can disrupt with more food and consumables. So I think our focus is on that every day traffic driver that means that we could expand into those areas throughout the store, while not losing the destination shopper with the high big purchase items.
The furniture soft home seasonal categories.
That's great then and good luck this quarter guys. Thanks.
Thank you.
Our next question today, it's come from Matthew Boss from JP Morgan. Your line is now alive.
Great, Thanks, and congrats on nice quarter as well.
Thanks, Bruce maybe to continue to close out conversation I think today, it's 9% to 10% of a mix.
Passed it was close to 50% at peak anyway to think about it targets for Closeouts as a percentage of sales and just see the timeline for change how we should think about.
But if this change and it just any other larger structural changes to the model that you're considering out at the crisis.
And now good question, Matt no not really giving a goals yet in terms of closeout penetration in some of the Closeouts. We're gonna do will be engineered big buys et cetera, but I know that will be more than the overall store boxes, 910% I think there's still room and a in the food and consumables business, which right now penetrates around.
Many 5% and once again, you know haven't clearly designated areas.
The aisles and caps and so on that bring that life I think will help out as well you know as you heard leases say you know earlier and the conversation.
The closeouts that we're looking at this year.
Our across all categories and they're good quality Closeouts and were rekindling all those relationships. We've got a lot of Masoli. We're building dashboard and said that we review weekly and and we're also you know leases got everyone going through the art of the deal training classes and so on just bringing that back across the other categories other than food and consumables. So it's early.
And for us to share.
What those goals look like but we're excited about it we're excited about rekindling those partnerships and I wish I could tell you. The details of the close out deals that we've secured so far I really want to tell you that Matt, but I don't want to give away our are caught secret so to speak but we're excited about the value and as we look at where the customer is today.
And a good thing about our business is value never goes out of style. It just doesn't in America. It's always in style and then given the pandemic that we're all suffering through here, it's even more into it in style and I'm. We're leaning into that you know having this good priced at good quality priced product and the extreme value.
The ease of shopping and all the other benefits. We do is something that we're excited about leaning into even more so.
Great, Okay, but for it to those are the team to help them.
Just as friends on the cost so if you could you.
[laughter] Gadget [laughter] as a follow up on gross margin Jonathan maybe what do you see if the right long term sustainable gross margin for the company as baby, we look back and think about 40% to 41%.
Past peak levels and just beyond this year.
I don't want that noise related so at what you rank gross margin drivers from here.
Sorry, I didnt quite quite catch the second part of the question.
Just just gross margin from here, how would you rank the drivers and how to think about the sustainable long term growth margin for the company pellets at the 40% to 41% peak in the path.
Yeah, I think it overall were put another way to give you a precise answer on that today, but.
Moving positive business you a little things are changing kind of as we speak and have over the last couple of months. So I think we still need to get greater visibility on what the shape of that business is going to be by category going forward, which will drive the I think what we have seen as the it's extremely powerful impact.
Outlined leverage on our business, where we can get us sales up you know even if that.
Tells a bit of investment margin will potentially yesterday at some point, we're likely to get a very strong return for that so I think overall, it's hard for us to be sort of too precise about where gross margin rate is going to goes what was going to be influenced.
But by mix, but I think we are proving that at this current gross margin rate. We can drive incremental productivity also be very close to our core gross margin rate.
I think most important growth due to continued to drive topline productivity and a budget rate.
It also extremely important but you know what we need to do a margin rate will be <unk> public function of where we're going on on the topline.
That's great best of luck.
Thanks, good ex thanks.
Thank you next question today, it's coming from Paul Trussell from Deutsche Bank. Your line is that a lot.
Yes.
Good morning, and my congratulations as well outstanding results.
D digital growth.
The digital growth sounds encouraging and as you mentioned is becoming a bigger part.
The business now.
Maybe talk a bit more about how you're positioning the company she really attack that digital.
Growth opportunity and maybe highlight for us how we should think about the partnership and the assortment.
That would be on Instacart. Thank you.
Yeah, Paul Thanks again.
E Com is something that we started leaning into at a more significant way last year, when we launched our focus accelerated opus and.
I'm happy to say that in Q1, our E com with BOPUS was four X. last year Q1, and that's very exciting for us and as you heard me in the remarks say you know just recently we did in the first part of this year.
Volume equal to all of last year. So it is something that given this pandemic.
It's accelerated.
You know omnichannel retailers are the people are companies going towards the convenience around the customer and and we're well positioned for that and we in a very scrappy weighed launch curbside pickup as well in Q1 and that's been that's been growing exponentially alongside of the BOPUS are the into.
One of Instacart.
Think of it in a way of.
Anything that fits in the back of a sedan.
For same day delivery pretty much the small items.
We partnered up with that I believe we sealed the deal and that'll be rolling out shortly.
In coming soon but thats just the beginning we've got other same day delivery options that we plan on on moving towards later this year that will help.
Help our customers order and have delivered a items beyond the back of the sedan or the Trump. If you will all the way up to a furniture and delivery to their home and eventually to White club treatment and competing in those areas. We want to remove all the friction that we can a very productive and profitable way to grow our business.
Both through brick and mortar and online and a and especially during this time, where people are and you know focusing on increased localism home centric lifestyle protective health and obviously digital acceleration and once again, you know adding to all of that you know, bringing all the other convenience we have.
By on line or Lisa easy leasing so Lopez, our the credit card online all of that together, we see this as an opportunity to continue to grow with her needs and and continuing to penetrate at a higher level. The E com sales and total versus total sell so we see it us as a major growth opportunity.
And a profitable on a path.
Thank you for that color.
Turning back to SGN a.
Your your well on track to meet your goals, maybe just touch.
Into a bit more detail for us on where you're finding a those additional savings and just also what we should keep in mind as it relates to what the kind of Colby Kobe related expenses were for once you unexpected but to queue. Thank you.
Yes, so the code I'll start with.
Before as we called out in your prepared remarks.
I had remarks, the cobot expenses in Q1, Q2 was 17 18 million basically both quarters are pretty consistent.
Then in Q2 that bakes in the continuation of the two dollar hourly rate increase through the end of fiscal.
As of June so that sort of where we are on that overall with regard to ask today.
Yes, the original hundred million target was comprised of significant store payroll component.
Indirect expenses non merchandise expenses with big piece of it varies other store components.
And then central office component as we're looking at the the next leg of opportunity with a 100 million pretty well secured.
We're good looking across the entire you know so continuing to look the stores in supply chain rental opportunities.
And really trying to identify everywhere, where we think we have meaningful opportunities.
And so we've established targets we've.
Themes that I wouldn't against those and there's also a broader kind of cultural Peafiel now, which is how do we just make sure. The entire organization is thinking frugally about our business every day every dollar of examined to make sure. We really believe it as an ROI. We don't leave anything on the table and I think we've we've really done a great job on that over the past quarters getting people more.
And that mindset you know.
On the Christ came along it obviously accelerate some of that thinking we want to keep that going. This is one of the one of many areas, where we think we've got great momentum through the crisis and we want to make sure we keep that going forward.
Thank you bye bye.
Thanks, Michael.
Thank you next question today is coming from Liz Suzuki from Bank of America. Your line is now alive.
Great. Thank you I'm just a question on a an easy leasing penetration how how high do it given the core for furniture, specifically I think that's your seasonal product, which are the two that are usually offered with easy leasing add just if you could give any comments on the competitive environment for at least at all.
And I appreciate it.
Yeah, I'll start off and thanks list.
Easy leasing in our partners that progress continues to be great partners with US are easy leasing you know just to let you know you know they have partners actually helped to their customers our customers by giving them breaks through this covert pandemic and a into default rates have been extremely low so.
Just shows what good partnership we have with them really proud of a of what they've done and what we've done but easy leasing continues to penetrate at a good amount a high high teens in terms of overall furniture sales.
We did see a slight reduction in the basket in first quarter typically that basket could be around $700 are so it decreased slightly and we believe that was because outwit stimulus checks and so on care care care packages. If you will have more customers went to just direct buying.
But we still saw strong results in the easy leasing program, it's still a great differentiator and now with that lease online pickup in store I, we're seeing that penetrate at a very nice level of overall easy leasing as so it's a it's been a good it's been a good run at least anything out there.
I think the only other thing I would say that the easy leasing customers.
Penetrating very heavily into our rewards customers. So this.
Over 50% crossover there in growing.
Hi, good.
Great. Thank you.
Thanks, Larry.
Thank you next question today is coming from Brad Thomas from Keybanc Capital markets. Your line is now a lot.
Hey, good morning, Thanks for taking my question and all the details here.
I wanted to follow up on on store, the future and some of the other investments you're making in stores clearly some.
Exciting things happening with a lot and the Q I guess could you talk a little bit about how you're thinking about.
What your store should look like for the next five years and what you're trying to learn during this time and when you might be in a position to come out with a new.
Capital plan and remodeling please thanks.
Yeah, Thanks, Brad ill start off and then kick it over to Jonathan Lisa, but just to answer your store the future I mean.
Right now Q1 will have approximately foreign stores and that'll comp store. The futures stores, if you will and job and just to give you a little color on it our balance of store.
Balance of chain stores actually performed very well compared to us for the future just slight differences in Q1.
We're just planning 65 more store the futures and 2020.
And that will bring our total to 530 31.
In total for 20 2024 of those will be new 22, remodels arrest will be what we call blend and extend our we still consider this like when I started a platform for growth the standardization.
Refurbishment, if you will not necessarily a strategy for growth what we like his job is are the things that you've talked about in your question, which is adding.
Adding higher growth higher return on investment.
Strategic initiatives like the law for acute pantry optimization Broyhill E. Com say, if you think about how I think about the future of the store. It's it's basically we do need to evolve the store and that really means you know like touches on renovating them remodeling them moving them when they're nonproductive areas and we'll always.
To do that.
But in terms of in refreshing them, so they look and meet the brand standards.
But our focus is really on high returning strategic growth initiatives like the lot in a lot. For example, right now I will be at 510 stores in May.
We'll have nearly 750 stores by holiday that will have the lot and they're comping nicely about a car appoint a comp with 500 square feet enlightened that's been.
Focusing on those light life occasions, where you get high traffic frequency and an urgency because you know that products not going to stay forever, and that's that surprise and delight and the Q line, which which is now by the end of May I will be in about 270 stores.
And and by a by holiday 750 stores on a 51 stores once again near comp a point of comp that it adds to the store high ROI see low investments space savings that allows us to add more product right in front of the store whether it's at the increase to the furniture, Pat if that makes sense and that store or more disruptive.
Close out big by alerts and food consumables in other categories. All of that is what we're looking at so basically what does the store looks like in the future. It looks like a refresh that will we working on it looks like more disruption of Ah of extreme value add across multiple categories and it looks like.
<unk> innovation with things like the lock the Q line and many other things that lease and her team are working on our March innovation pipeline.
That's very helpful Bruce and Jonathan if I could ask a housekeeping item on the sale lease back I think you quantified 7 million Oh incremental costs from leasing those properties into Q can you just correct my math on an annual basis. It looked like like that might be about 50 million am I in the ballpark what.
The annual rate.
Yeah, that's assuming about two months worth of impact in.
In Q2.
Great. Thank you.
Thanks, Brett but.
Thank you next question today is coming from Cowen short from Barclays. Your line is now live.
Hi, this is actually remodeled.
Congratulations on them as Corey Thanks for taking my questions.
So so you mentioned sales continued to be strong Q basically gave that satcon scenario.
Are you willing to Telx actual Tom.
In May maybe just discussed the magnitude to which may accelerated.
Yeah I think.
I think I'm going to repeat the question just let me know if I if I've got it right you wanted to get insight into what Q2 comp is looking like and maybe in May is that correct.
Right.
Like how much out on that.
Yeah, you know without going to sort of parse that out more than we have enough. Yeah prepared comments would you know we said comps were up strongly in may and clearly will.
Playing with the above the outlook we've given.
For the quarter as a whole at this point, but as we stated in the prepared remarks throw a number reasons why we expect comes to moderate over the balance of the quota.
Okay and then just wondering if you can provide a little bit more color in the health of your core customer clearly, there's a lot stimulus out there won't be also level check with Asian about woman et cetera. So so wondering how she's managing and feeling and do you think most of the impacted the stimulus.
Checks. It is now behind us or is there still some spending time here.
Oh, that's a good question on the health of the customer I think the customer like all of US has gone through a roller coaster ride over the last 90 days or so but right now.
The customer spending power is very strong with the stimulus packages I don't know I think we still have more distributed and and and there may be more coming as we as we watch a government proceedings.
But it could dissipate at some point it will dissipate to some degree unemployment checks remain healthy so right now the buying power of our customers very strong.
And and continues to be through May at least.
I think that we're very well positioned you know once again I think the customer or is it is a like all of US one from panic to acclamation I think we're starting to entering some level of recovery at this point and maybe a return to a new normal that looks like our post our past normal and through all this.
The themes that we're seeing at the customer is facing is increased localism.
So on trusted brands and companies a neighborhood discounters like Big watch.
Home centric lifestyle, and you know they they not only need to store and bulk up on their products, but they also I want to make sure their work environment from home and they're living conditions at home or better how they're thinking about protective help.
Which is they want to trust that the you know the retailers they shop or keeping up with the cleaning and our team out there our frontline here they've done a fantastic job doing that and their personal health and wellness those product categories, we've got for them as well.
Once we once again, the digital acceleration and the way that we're positioned to get after that from our E. Com business BOPUS Lopez curbside pickup announced card and beyond I think that's going to continue to be something she expects and then a cash constrained whether it's now or in the future.
As always we'll see that you know raising its had a little bit more than ever and so our leaning into a big buys closeouts and ER and giving her more ways to shop with us in a convenient you know high valued cash constrained way I think it's going to resonate really well so I think the customer strong.
Right now and I think we're really well positioned for now.
Next in later.
Okay. That's that's very helpful. And then just a last quick one can you provide us with the actual traffic and ticket breakdown in India.
Oh.
Traffic and ticket breakdown for the Q1 Q2 comp is for these I didn't know that we typically broken that out so oh yeah.
No no money when she was specifically.
Yeah, we typically have broken it out.
Alright, great. Thanks.
[music].
Thank you.
Thank you. My next question today is coming from Anthony Chukumba from group capital markets. Your line is now live.
Good morning, let me add my congratulations as.
As well on a very strong quarter. Most my questions have been asked at this point I did just have a quick clarification, you talked about comps by month.
When we give a lot of really good color, but what was the comp for the month of April I mean, I know you mentioned that accelerated that.
Sounds like significantly after UBS stimulus checks.
First start to hit but I'm just wondering if you could just give us a little bit more granularity.
In terms of what that couple it's for the month of April thanks.
Thanks, Thanks for the comments, yes, you know we did give a pretty good amount of color on that so were getting putting up in a post that have any further but april.
Started out slow it would seem with if after the stock up period and then we also had the friends and family that we Didnt run.
Headwind and then the are these the closing which was also a headwind and then a couple of weeks before the end of the month, we flipped into positive territory as we began to see that stimulus impact other than that.
As we said escalated rapidly through the end of the month, but probably cover to provide but much more coal than that.
Okay Fair enough and then just one quick follow up obviously, we're kind of strange times. So so maybe this type of this but but I was just wonder if you had the color in terms of rescheduling you're at your analyst day.
Yes.
Specifically, we are ready to announce on that I think obviously, we need to wait a little longer until a thing things settle down a little further but we do look forward to the opportunity to do that to talk about you know more about many of the things that have come up on the call. This morning.
Got it okay. Thank you.
Thanks Anthony.
Okay.
Thank you, ladies and gentlemen, we've reached end of our Q and a session and I wouldn't I will now close the call with replay instructions.
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