Q4 2020 Big Lots Inc Earnings Call
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Ladies and gentlemen, good morning, and welcome to the Big lots fourth quarter 2020 conference call. At this time, all participants argue listen only mode.
If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
On the call today are Bruce Thorn, President and CEO, and Jonathan Ramsden Executive Vice President Chief financial and administrative officer.
Before starting today's call the company would like to remind you that any forward looking statements made on the call involve risks and uncertainties are subject to the company's safe Harbor provisions as stated in the company's press release, and SEC filings and that actual results can differ materially from those described in forward looking statements the company would like to own.
So point out where applicable.
Commentary today is focused on adjusted non-GAAP results reconciliations of GAAP to non-GAAP adjusted results are available in today's press release.
I will now turn the call over to Bruce Cohen, President and CEO of Big lots. Mr. Thorne. Please go ahead.
Thank you and good morning, everyone.
'twenty was a remarkable year for big lots and I am proud of our strong finish which is reflected in the results. We reported this morning.
Comparable sales for the fourth quarter increased seven 9% on our diluted earnings per share.
We're $2 50.
This resulted in our strongest ever sales and earnings for fiscal year with a comp of 16, 1% from $7 35 per share and adjusted earnings.
Along with these results have been made on the evolution of our entire organization, which has been strongly aligned around our operation North star goals, while working extremely hard to navigate what has been a very difficult external environment.
For that I want to say a big thank you.
All of our associates across our stores distribution centers and corporate headquarters our accomplishments in 2020, which I will talk more about and are moving we're truly a team effort.
As we entered 2021 there are reasons to be hopeful that the global pandemic that has ended so many things will recede and then we will be on a path to greater stability as the year progresses. However, we will not take our eye off the ball with regard to making our store workplaces as safe as possible and we will continue.
To work with clear and rigorous safety standards, social distancing and cleaning protocols in all of our store and workplaces.
During the course of 2020, we incurred more than $50 million and covered related expenses, including health and safety measures as well as incremental paying bonuses to stores and distribution Center associates, we expect to incur further expense in 2021, albeit at a lower level in.
In addition, we are encouraging supporting and facilitating our associates to get vaccinated as soon as they have the opportunity.
Coming back to the fourth quarter, we saw two distinct levels of performance strong performance in November and in January when we had more appropriate inventory levels and what I would refer to as a solid performance in December where we continue to see underlying strength in our business, but we're two sold through on our Christmas seasonal assortment.
To maintain the double digit constant mark the balance of the year.
Traffic was also clearly softer in December driven by COVID-19 related stay at home orders and different consumer shopping patterns caused private brings Emma.
However, our core business continued to perform well and following Christmas for the balance of the quarter comp growth returned to double digit levels benefiting from broad based category strength and new stimulus payments that began to flow in early January as our inventory levels were sold through we were able to navigate through the Holly.
Day period with fewer promotions from last year. This reduction in markdown significantly mitigated the pressures felt from increased spot freight rates and higher supply chain charges, we incurred.
Across all categories other than food and seasonal we saw double digit comps for the quarter as a whole.
<unk> sales increased 15% versus last year with strong growth in upholstery ready.
Our ready to assemble and mattresses. The home office trend continued throughout Q4 doubling year over year upholstery delivered a 20% increase in mattresses grew 11%. The broyhill brand had a strong impact on furniture, representing 17% of total furniture sales in the quarter upholstery was.
<unk> strong from broyhill, driving 30% of total upholstery sales.
Soft home had a double digit comp increase led by strong trends within the window home organization and basic net income <unk>.
Window continued strong performance for the year and was up over 35% for the quarter with curtains up over 40% driven by incremental broyhill and national brand offerings.
Home organization saw 25% growth driven by plastic storage and closet organization basic.
Basic betting was driven by strong performance in gross pillows, and mattress toppers, all delivering 20% comparable or greater.
Broyhill bedding bath window into core also delivered strong results delivering 20% of division sales in the quarter.
Our seasonal business started the quarter off with strong double digit comps however, given our reduced by a Christmas merchandise and the strong early sell through we saw a lack of inventory to drive sales during the key selling weeks, leading up to Christmas, resulting in a sales decline versus last year for the quarter up 12%.
This negatively impacted the sales growth, but we saw a quick rebound on our spring summer on patio businesses in late January and early February.
Apparel continued to grow on sales penetration with nearly a 50% comp fueled by recognizable branded closeout and key value items throughout the season, we saw strong sell through and graphic Tees fashion tops cold weather fleece and sports apparel as our customer is responding strongly to our well curated assortment we will continue to.
Lean into apparel, a category that is margin accretive and highly productive we are targeting another year of strong double digit apparel growth in 2021.
Hard home comps were up nearly 20% to last year with all departments delivering double digit increases key areas, such as kitchen appliances, cookware dinnerware and drink were delivered over 30% comps in part due to the Cook and dine at home strength.
So this trend we saw excellent performance from our cured pods and Keurig Brewers and momentum has clearly continued into 2021.
We've launched pantry optimization in third quarter of 2020 and as a reminder, this involve repositioning footage from food sales to food entertainment as well as the standard space for consumables, including cleaning product and health and beauty, combining competitively price national brands with an expanding assortment of Closeouts. This crew.
Based on significant value differentiation from the competition with an increased intensity of the pandemic during the colder winter months. This strategy outperformed our expectations customers were surprised and delighted to find more items on their shopping list and tremendous values. These categories drove repeat traffic and conversion lifting <unk>.
Total sales productivity for food and consumables, while driving margin expansion.
Consumables had 15% sales growth with key changes in laundry household chemicals and health and beauty. These departments grew at 23% and 19% respectively.
It was up 1% on the quarter on a very good result, considering we reduced and redistributed space in September.
Our holiday gift sets helped drive a 6% comp increase in the candy gift area. We also saw a nine 6% increase across our beverage baking and coffee departments. Thanks to the new Assortments implemented during the pantry optimization initiatives.
Across all categories closeout sales in the fourth quarter were up 50% over the same quarter in 2019.
Closeouts on an important part of our heritage and a significant reason why she shops us in the quarter. She was able to find closeout, including brands such as Reeboks Black and Decker non accrual Scott brothers, bedding, and Taylor and ceiling, given our expanding range of closeout from strong heritage, we see continued growth.
Here is a clear opportunity, especially as we strengthen our buying relationships and take advantage of space made available through our <unk> line project on identifying through space planning and optimization and store.
Our active rewards membership reached an all time high in Q4 with positive nine 5% growth year over year.
Rewards customer spent 21% more than last year in Q4, and 11% more per customer Big here has continued in Q4 with our now always on 10% discount for military and veterans.
25% of participants where new Big rewards members. We also successfully ran a targeted campaign to reactivate lapsed customers and at risk of lapsing shoppers.
<unk> was another great growth story up 38% to Q4 2019, we enrolled 9 million customers to big rewards for the full year, our biggest enrollment year ever with all of these strong drivers rewards attach sales exceeded 70% of our total sales for the quarter representing more than 700.
<unk> points and penetration expansion for last year.
Awards has been on an incredible trend up around 10% per year for each of the past three years.
Throughout the quarter, we saw significant benefits from our operation North Star strategies.
These include our standard e-commerce capabilities Broyhill, the law and our front end queue line initiatives. All of these initiatives have been successful in positioning us well to drive further gains in 2021, as we also accelerate additional closeout investments and depth in our apparel assortment.
Our ecommerce business was a huge success story throughout 2020 within pandemic, increasing customer expectations to be able to shop, how when and where they want to.
To that end, we have focused heavily on removing purchase friction and creating better customer experiences. During 2020, we introduced curbside pickup same day delivery in partnership with instant card and same day delivery with big lots dot com with pickup, allowing customers to order any item available at their local big lots store.
Our instant card and pickup delivery services continue to accelerate during the fourth quarter, making a significant contribution to our overall e-commerce driven growth as we detailed on that third quarter call. We now have ship from store capabilities from 47 store strategically identified to ensure two day delivery.
To 90% of our customers across the country.
Over the past year, we have extended payment type choices available on site to now include gift cards, the big lots credit card and lease online pickup and store each of which have driven incremental volume as you know all of these achievements resulted in us being ranked number one in total retail pop omnichannel retailer.
As reported.
In total E com and Omnichannel sales grew over 130% versus Q4 last year contributing close to 300 basis points to the overall company comp case.
<unk> was strong across the business with site traffic up close to 40% and conversion more than doubling evenly.
Even with our increased demand we were able to offer an improved delivery times through two day shipping same day delivery and curbside pickup all new compared to holiday 2019.
While we are pleased with the comp success in 2020, we still have a long way to go on our omni channel journey and this will be a key area for our future investment as I will detail in a moment.
We believe there is a tremendous runway as we reach new customers and drive incremental growth beyond 2020 performance.
Our broyhill line, which launched in the spring far outperformed our expectations in 2020. The line expanded beyond core home furniture to include area rug bedsheet and decorative pillows.
The customer reaction to the entire offering of this iconic brand remains very favorable and we remain extremely excited about our 2021 extension of royal into housewares and kitchen textiles from.
He'll generated over $400 million in first year sales and we firmly believe it is on track to being a $1 billion brand.
Broyhill customer spend twice as much as non broyhill customers and 10 times as much as non furniture customers.
This dynamic is driven both by basket size and visit frequency.
One third of broyhill customers on new to big lots and 50% of broyhill customers have already returned to make a second purchase either in stores or through big lots Dot com <unk>.
Likewise, the lots of the queue line strategies were very successful in 2020, we rolled these strategies out to 750 stores, which performed well upon launch and accelerating in the fourth quarter driving close to three incremental comp points across these stores.
Based on this success, we are now increasing our anticipated lot on queue line conversions to 550 additional stores in 2021, most rolling out in spring, meaning.
Meaning that by mid year over 90% of our stores will feature a lot in Q line footprint features and Assortments.
Another key aspect of operation North Star has been a keen focus on our expense architecture.
Through our fund the journey initiative I am proud to announce that we have secured $130 million on SG&A reductions to date, including savings baked into our 2021 operating plan. Additionally, through partnerships with our vendor base and through more thoughtful and store markdown activity, we've expanded margin.
Approximately $30 million.
Our efforts to drive more savings will continue in 2021 and beyond as we turn to 2021, our key focus will be to make investments in our supply chain to increase throughput improve efficiencies and support omnichannel demand.
Latest Simon on we will open to third party operated forward distribution centers, one in the northeast and one on the southeast to help process bulk items, primarily our furniture offerings and palletize goods such as bottled water.
In addition, we will invest in centralized repackaging capabilities at our DC in Columbus that will allow for more efficient and cost effective picking on a per store basis of less than a full case of items, even as our store count and demand growth.
These capabilities will help make our other regional distribution centers more efficient as they can focus on case picking these.
These investments will enable us to get merchandise to our stores more quickly efficiently and responsibly improving our in stocks on many items. In addition, four distribution centers will provide a scalable platform to support our future growth and we expect to stand up additional FTC locations beyond 2021.
Another 2021 prioritization is to enhance the customer experience on our stores, particularly those stores that did not flow through a full remodel under our store of the future program.
Starting in 2021 and extending over the next few years, we will invest in our store refresh program encompassing new exterior signage internal repainting and updated floors and bathrooms. This program will be much less expensive on a per store basis and our prior store of the future program that will deliver a more consistent brand X.
<unk> across our stores.
We will work in 2021 to further strengthen our ecommerce capabilities and customer data insights, we will invest to improve user experience omnichannel capabilities with ship to store and personalization capabilities through expanded use of customer data platforms online customer panel and more advanced segmentation.
We are excited by new merchandising initiatives in 2021.
These include the strengthening of our value driving assortment with closeouts across our merchandise categories. The aforementioned apparel expansion additional broyhill growth into adjacent departments, expanding our pet offerings, given the acceleration of pet adoptions during 2020, and the trend of the Humanization of pets and the productivity of pet.
Also our big by initiatives that will increase our value price impressions throughout the main aisle and featured end cap presentations.
Finally seasonal is a key area of opportunity for us as we know we left sales on the table with depleted inventory levels in 2020.
We continue to enhance our value focused proposition our newly launched Wonderland program offers a selection of products price a one dollar to drive conversion and exciting.
Additionally, we are transforming how we work as an example on 2020. One we will launch data driven space planning capabilities for the first time on the company's history.
Focusing on space productivity, we will have better analytical tools to impact future by cycle optimized floor plans per store further optimize allocation and replenishment and improved store compliance for planet Graham execution, we expect that these capabilities will greatly enhance our productivity store by store on category by Cat.
<unk> with a focus on shelf availability of relevant products and most importantly, we will create a more relevant customer assortment to increase sales and increase customer satisfaction. Fielding return visits we are excited to be adding this tool to our merchandize program as we've transformed the way we work as a result of all these initiatives.
We are entering 2021 with momentum and excitement about the opportunities ahead of us this year.
While the unusually cold and snowy winter weather impacted traffic trends mid February the year is off to a strong store comparable moderated in March as we lap the stock up period. During the first phase of the pandemic last year and again from mid April when we are up against the first stimulus driven sales period. However, we expect to end with positive comps for the quarter.
<unk> and growth in EPS on top of a strong growth quarter last year.
Overall bulk comparatives will be challenging throughout this year and especially in Q2 and Q3, we expect to continue driving significant improvement in our underlying performance and shareholder value creation.
Over the past year, we have clearly benefited from government stimulus and from the nursing trend that resulted from the pandemic. However.
However, we are very confident that our performance is also being driven significantly by our operation North star strategies and that week by week, we're becoming a stronger company on.
I'll now turn the call over to Jonathan for more insight on our financial results for the quarter and our outlook for 2021.
Thanks, Bruce and good morning, everyone I would like to add my heartfelt thanks to the entire big lots team for their amazing efforts and commitment over the past year.
On the team is pulling together as we enter 2021 to continue the great progress we made in 2020.
Net sales for the fourth quarter were $1 738 billion on 8% increase compared to $1 $6 7 billion a year ago.
The growth was driven by a record fourth quarter comparable sales increase of seven 9%.
Comps were driven by strong growth in basket across both channels.
Transactions were down slightly driven by store traffic, which was impacted by stay at home orders, particularly on the West coast.
As well as the generally softer traffic we've seen on peak shopping days during the pandemic.
As Bruce mentioned in terms of cadence through the quarter. The underlying trend by month was strongest in November and January with relative softness in December.
Given slower traffic and lower levels of seasonal inventory.
Our strong fourth quarter comp comps drove us to record annual sales of $6 2 billion net increase of $876 million from 2019.
Net income for the fourth quarter was $98 million compared to $93 8 million in Q4 of 2019.
Diluted EPS for the quarter was $2 59.
<unk> <unk> above the high end of our guidance range provided in early January.
As a reminder, we reported EPS of $2 39 last year.
For the full year, we achieved adjusted diluted earnings per share of $7 35.
More than twice, what we reported for 2019 and resulting in record earnings on both a GAAP and adjusted non-GAAP pieces.
Gross margin rate for Q4 was 39, 4% down slightly from last years fourth quarter rate with freight headwinds offsetting a significant reduction in markdowns.
Our gross margin rate was essentially in line with expectations at the beginning of the quarter, although the freight impact on markdown benefit were both somewhat greater than expected.
Total expense totals for the quarter, including depreciation were $554 million up from $508 million last year again, essentially in line with beginning of quarter expectations.
Drivers of the increase were $12 million of additional expense from sale on leaseback of our distribution centers $11 million of additional store and corporate bonus expense $6 5 million of higher noncash equity comp expense on.
And COVID-19 related cleaning colson supplies of approximately $5 million and some expense flicks on higher sales.
Interest expense for the quarter was $2 6 million down from $3 2 million in Q4 last year.
Primarily as a result of paying off the balance on our unsecured line of credit earlier in 2020.
Partially offset by notional interest associated with the gain deferral on a sale leaseback transactions.
The income tax rate in the fourth quarter was 24, 6% compared to last year's adjusted rate of 23, 2%.
Both impacted by the resolution of discrete items.
The impact of favorable discrete items was similar in value in 2020 compared to 2019 from the impact on the tax rate was less significant due to much higher pre tax income.
Prior to discrete items. This year as income tax rate was 25, 9% compared to last year's adjusted rate of 26%.
Moving on to the balance sheet inventory on hand was down mid single digits with total inventory was up two 1% to $940 3 million driven by higher in transit inventory as we work to have products shipped prior to the lunar new year.
Drive replenishment after a strong fourth quarter sell throughs and to match underlying stronger business trends versus the close of 2019.
During Q4, we had no new store openings and closed three stores, leaving us with 1408 stores and total selling square footage of $32 million.
For the full year, we opened 24 stores on close to 20.
Our new store openings were impacted by decisions, we made at the beginning of the pandemic to defer some openings into 2021.
But we were pleased to still achieve net store count growth.
This was aided by our new store performance intervention program, along with successful lease renewal negotiations negotiations, which reduced the number of store closures.
We expect to accelerate net store count growth in 2021 on most significantly beyond and.
And continue to believe that unit growth can be a major driver of our performance.
Capital expenditures for the quarter was $32 million compared to $33 million last year.
Full year Capex was 135 million vs $265 million last year.
With the reduction driven by our evolution away from store of the future as well as fewer new store openings and lapping investments in our new California distribution Center.
Depreciation expense in Q4 was $33 6 million.
Ultimately three $8 million lower than the same period last year.
We ended the fourth quarter with $560 million of cash on cash equivalents from 36 million of long term debt.
This represents a $750 million year over year, increasing on a net cash position.
Driven both by tremendous free cash flow on the net proceeds from the sale and leaseback of our distribution centers completed in June.
As a reminder, at the end of 2019, we had $53 million of cash on cash equivalents on $279 million of long term debt.
We repurchased one 6 million shares during the quarter was $73 million on an average cost per share of $46 38 on.
Under our previously announced $500 million.
Share repurchase authorization.
With $327 million remaining as of the end of the quarter.
Share repurchases remain an important part of our capital allocation strategy going forward in particular, given our significant excess liquidity.
In total we returned $219 million to shareholders during 2020.
As announced on a separate release, our board of directors declared a quarterly cash dividend for the first quarter of 2021 of <unk> 30 per common share.
This dividend is payable on April <unk> 2021 to shareholders of record on the close of business on March 19 2021.
Turning to 2021 based on currently available information from the first quarter. The company expects to achieve diluted earnings per share in the range of $1 30 to $1 45.
Compared to $1 26 per diluted share in 2020.
This guidance is based on a low single digit comparable sales increase and.
On the total sales increase of approximately 80 basis points higher than the lift in comparable sales.
This guidance considers our strong start to 'twenty, one 'twenty to 'twenty, one, but anticipate comp pressure as we lap strong stock up comps from the first phase of the pandemic in March of last year.
And particularly from mid April when government stimulus significantly accelerated sales in 2020.
The guidance does not incorporate any share repurchases, we may complete in the first quarter.
We expect gross margin rate for the first quarter to be flat to slightly up to last year as a year over year markdown benefit early in the quarter is largely offset by continued higher freight costs on the mix impact of pantry optimization, which launched in Q3 of last year.
From an SG&A perspective at our projected sales levels, we expect some deleverage in the quarter.
However, excluding approximately $12 million of expense impact from the sale on leaseback.
On June 2020 expenses would lever slightly.
With regard to the full year, we expect that our financial performance will be significantly affected by the ongoing pandemic, including the continued evolution of consumer shopping behaviors.
Potential additional stimulus and other macro driven factors.
As a result of this point, we do not believe we have sufficient visibility to provide full year guidance on sales or EPS.
We do expect to face ongoing pressure from higher freight costs through the year as well as some adverse mix impact from a pantry optimization strategy.
This will be partially offset by lower shrink and other mix effects, but with the net result that our gross gross margin rate is likely to be slightly down.
We expect SG&A expense dollars from year to be down with benefits from lower COVID-19 related expense.
Normalization of bonus expense and structural expense savings.
Set by incremental expense from the sale leaseback.
Hi on noncash equity comp expense.
New store expense due to increased openings.
Higher wage levels on investments in a new forward deployment centers and other strategic investments.
The forward deployed center investment for this year will add approximately $10 million of SG&A beginning mid summer.
Our SG&A expectations with full year incorporate around $30 million of incremental structural expense savings across store labor, our supply chain and general office.
Moving to close of 2021.
We'll have reduced SG&A by at least $130 million versus the start of 2019.
And supported by our ongoing culture of Frugality, we expect to drive this figure higher.
Capital expenditures for 2021 unexpected to be in the range of $180 million to $190 million with a focus on strategic investments to strengthen and accelerate the business.
These investments include the aforementioned lot in queue line store conversions omnichannel capabilities space planning technology on customer analytics capabilities. In addition, we expect to open 50 to 60 stores in 2021 of which around 'twenty will be relocations.
As we think about inventory levels throughout 2021. It is important to note that we will be up against some very depleted 2020 inventory levels.
Which we know caused us to miss sales and adversely impact our customers' in store experience.
And in addition, we expect to flow from receipts earlier to mitigate free costs.
As a result, we expect headline inventory levels to be up significantly over 2020.
Especially at the end of Q2 and Q3.
However, on a two year basis inventory levels will reflect strong turn improvement.
For Q1, including in transit.
Ending inventory will be up around 15% as we lap depleted inventories at the end of the first quarter last year.
But approximately flat to 2019 against a two year double digit sales increase.
We expect that inventories will continue to run close to flat on a two year basis through the balance of the year.
We expect interest expense for the year to be approximately flat.
With lower interest on borrowings offset by notional interest expense related to the sale leaseback gain deferral.
Overall 2021 headline numbers will reflect challenging comparisons to 2020, but we believe we will loose will reflect strong underlying performance and excellent growth versus 2019.
We have great momentum coming into the year and a strong plan got it by operation North Star.
I'll now turn the call back over to our moderator. So that we can begin to address your questions.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed from the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue.
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Our first question today is coming from Greg by the scheme from Wolfe Research. Your line is now live.
Good morning. This is Spencer hanus on for Greg.
Can you talk about what gets you comfortable with the low single digit comp for the first quarter and then how are you guys thinking about the benefit from stimulus during <unk>.
And then I guess on a tier stack basis, it implies comps up roughly low teens.
Is that a good way to think about comps for the full year a good starting point.
Yeah, Hey, Spencer I'll be happy to take that and then maybe Bruce will want to add a couple of comments. So obviously Q1 is a very complex quarter. Because there are lots of moving parts on we're up against some significant variability by week as we went through Q1 last year. When February started off fairly soft and then we saw the.
Stock up benefit in March.
Little bit of a dip before we saw the first day.
Stimulus in mid April, which drove drove comps a lot higher so we're modeling against that and we're looking at each of those weeks were factoring in the impact of the timing of tax free funds, which are coming out later this year.
On the stimulus effect from the December stimulus, which is still having some impact on the skills from dollars to drop on that we haven't at this point baked in.
The next stimulus, which appears likely to pass in the near future I would say what we've seen over time is a little bit of a diminishing return on those stimulus injections. The benefit we got from the December stimulus.
Less than the April stimulus and we're assuming that will probably go low.
Partly because people are saving more of the stimulus payments than they were at the beginning of <unk>.
<unk> direct with the first round, so there's lots of moving parts.
On modeling it out based on all those moving parts and we're obviously close to five weeks into the quarter.
So we've seen where we've been quarter to date on that gives us some comfort about where we're trending for the quarter as a whole I think the key point is that our underlying business is very strong when you sort of bracket out some of those timing of stimulus driven differences, we're seeing really strong comps across most of our categories not surprisingly food and <unk>.
Consumables is a little light.
Right now given what we are starting to come up against.
Feel good about the trend and we feel that the the guidance we've given on comps makes sense given everything we're seeing.
And Spencer I will just add to what Jonathan said Q1 definitely is off to a good start we think the customers help AC still valuing value home E Commerce and shopping on her terms I think our operation North Star initiatives.
Are proving very very well to be what she wants from Q1, and we're entering 2021 with more reward customers than ever before so we feel good about how we're starting the year.
And then it depends on just to come back.
Point of your question about two year comps, yes, I agree with your math on Q1, I wouldn't necessarily take that as well.
A hard and fast guidance, where we're going to be every quarter is different this year.
In Q1, we are still getting some benefit from yes from the December stimulus.
Get to the latter part of the year.
We're assuming there will be little or no stimulus, where unemployment benefit that we are currently benefiting from.
But they're all also puts and takes on every quarter, including the fact, when we get to Q4.
We'll be lapping a seasonal headwinds I think you have to look at every quarter differently, but I wouldn't I wouldn't count on the two year comp being the same for the balance of the year.
That's really helpful. And then on your inventory how comfortable are you with with what where inventory levels are today.
And do you feel a little bit lighter or are you are you guys today.
Yeah, I think I think we feel pretty good we.
Our on hand has remained in negative territory and we are working to get that back.
Two to something that makes it more comfortable closer to flat.
A little bit higher on hand.
At the end of Q1.
We've had some processing challenges as we've talked about getting inventory throughout DC, which is.
Which has impacted the on hand levels.
We are on track we are hopeful that we're going to be back on a good position. Obviously sales is an important dynamic in that.
But we feel good about where we're tracking to at the end of Q1.
And then you talked about 50 to 60 new stores in 2021.
How should we think about where those new stores will be located there going to be in your core markets are going to be in new markets and then how does the store format differ from what your existing store it looks like today.
Yes. These expenses these are mostly conventional stores pretty much all in fact, consistent with our existing store format from about 20 of them are reloads, where we are in many cases, taking more space moving from a store whether it was limited furniture penetration for example to our biggest store, where we can have a full furniture assortment.
But other than that they are generally consistent with our existing boxes.
The geography that they're pretty diverse in terms of where they are across the country I wouldn't say, there's any particular call out there but to your point, we are continuing to explore different.
Formats for store is going forward our priority. This year is to return to healthy store count growth. We were slightly positive for the last two years that we want to accelerate but we do big there were a lot of interesting opportunities going forward on that spoke with or existing format, whether a fill in opportunities in existing markets, where we do well as well as well as a lot of white space.
<unk> in markets, where we are on penetrated and then there is an opportunity for different formats.
We're spending a lot of time evaluating right now.
Great. Thank you.
Thank you. Our next question today is coming from Joe Feldman from tag or why it is not wise.
Great. Thanks, guys.
Wanted to ask on on.
E Commerce business.
Can you share a little more color on on what's selling like are people starting to buy more of the furniture and bulky items that kind of I guess sparking the.
Those new to forward distribution centers or are people still buying smaller ticket, maybe just any complexion you could share on that would be helpful.
Yes, Joe I'll start thus far off thanks for the question and we're really pleased with our growth in ecommerce sales.
We stated before opening remarks.
It's growth significantly twice last year's volume in Q4, and in Q4 was nearly 5% of sales and it.
It wasn't so long ago, when we were under $50 million in sales toll that was back in 2018 and now the channel looks like it could grow to $1 billion.
And a handful of years, so we're really pleased with that.
The type of items that are selling or anything from an instant card order that will fit in the back of a trunk.
All the way up to broyhill sectional sofa.
That can be delivered same day pickup or on a two day ship from store out of one of our 47 stores. So we're really pleased with that we are seeing tremendous interest along with this home nesting trend ought to buy that furniture online and so that's been a nice a nice addition, and we're seeing a tremendous amount of new customer.
Through the E Com channel that we didn't have before so conversion rates continue to grow in fact doubled over last year very strong traffic nearly 40% up year over year, we've made it easier to shop with Vince to car pickup ship from store and direct vendor shipments as well so.
Seeing a lot of home type of products.
Non-GAAP being ordered through the E Comm channel.
Got it that's helpful. Thank you and then.
You mentioned, new customers and that was something else. We wanted to ask you about.
With.
You said it would the reward program you saw 9 million new customers for the year and I was just wondering.
It's what you are seeing are they.
On behaving the same way as your historical customers or are they different at all younger.
They're buying different things spending more.
And maybe if you could tie in the ecommerce new customers youre seeing to that too that'd be helpful. Thanks.
Next question.
First off a lot of or some months half of our our rewards customer assignments come through the E Commerce channel and and so that's that's that's a nice way to pick up new customers, but you are right. We added 9 million rewards customers our growth in rewards customers are new to our <unk>.
Bill has been roughly 10% for the last three years, so at $21 million in total we're retaining these customers at a better rate than prior years and these retain customers that we're getting are spending more than 25% more in 2020 than they did in 2019.
And the satisfaction scores across our network in stores has never been higher from on net promoter score. So we're happy to see them in terms of age I can't comment on that right. Now we will look into that a little bit more on get back to you, but I do know that there is a lot of the nesting trend going on in their furniture and proving our pump space from <unk>.
Work for life.
Is key and we technically see a younger customer in that area. So I'm sure. There's some.
From aging down which is a good trend to have and that customer growth.
Gross but this.
This growth to $21 million and growing 10% a year has lots of customer annuity pipeline for us and sets us up in a nice way for 'twenty one.
That's great. Thanks, guys and good luck with this quarter.
Thanks, David.
Thank you. Our next question today is coming from Charlie <unk> from Goldman Sachs. Your line is now live.
Hey, good morning, guys. Thank you for taking the question.
I'd like to talk about.
Share repurchase debt.
You guys from <unk> 72 million.
Lots of shares at 46 Bucks in the quarter, obviously, a bit higher than that right. Now has been the last couple of weeks.
Think about buyback going forward.
Could you perhaps throw some color as to how you think about it you know do you think about repurchase more opportunistically or is it based on a forward plan.
Thank you.
Hey, John Good morning, and thanks for the question I'll be happy to take that one so just as a reminder, we had a $500 million share repurchase.
Authorized by the Board last August we've done we did $173 million of that through the end of Q4 net to the point of your question.
When we authorized that amount.
Felt confident that we would have I would call the excess liquidity available to fund that and clearly since then we've continued to perform well so that picture hasn't changed and we certainly think we have the liquidity to continue moving through that $500 million authorization. The specific decision on execution is when we make quarter by quarter, We review without.
<unk> Board and capital allocation planning Committee in Sydney.
Taking into account where the stock is currently trading when we set the grade typically we're doing a <unk> one plan that we're looking into the beginning of the quarter on those plans are structured to become more aggressive low stock price levels.
Also to lock in a kind of base level of repurchases typically so.
Again, it's a quarter by quarter determination.
Certainly don't intend to carry excess liquidity, we have on the balance sheet on a long term basis that we want to deploy that capital in a more productive way and we expect gross share repurchases will.
Remain the key way that we will do that and in the near term on obviously that takes into account the.
The assumption that our capital expenditures in the business, which would be our top priority to invest within the business are going to be fully funded from operating cash flow, which we certainly expect to be the case.
Great and if I could a quick follow up on on gross margin for next year.
Actually as we think about the promotional environment that most retailers have talked about as we go beyond the first quarter. How do you think about the promotional backdrop.
The freight charges and how do you think that sort of flows through the balance of 2021.
Good morning.
Yes sure go ahead, Bruce Yes, yes.
Yes, no. It's a good question Tommy we expect that our promotional activity will be lower than 2019, we've got a good lower promotional activity through 2020 with regard to <unk>.
<unk>.
Freight impact we're doing things to mitigate that we are in negotiations, we've got a great ecosystem of vendors and freight carriers that we're working with smoothing out volumes to lower those rates and and get the capacity, but overall.
Just tremendous.
Tremendous could work with less markdowns in 2020, we pick that.
Okay.
Alright.
Okay.
A little bit.
Go ahead Jonathan.
So yes, Charlie I would just add that I think.
So that because really what Bruce said that.
We've got much more effective at deploying promotions I think during 2020. So we used to do a lot of those big Holthaus friends and family events, which were fairly blunt instrument and as that rewards database has grown and we have more data.
Learn more about what promos work I think our ability to be much more targeted without promote promotions.
Our significantly improved and then you look at the months January of this year, where we were significantly less promotional.
And we still delivered a great call.
Feel good about that we may have made a lot more money in January than we have done in past years.
Great. Thank you so much.
Thank you. Our next question today is coming from Peter Keith from Piper Sandler Your line is now live.
Hi, Thanks, Good morning, everyone I hope you're doing well, maybe just to follow on that last question regarding gross margin.
Theres certainly a lot of investor concern around trade headwinds and ocean freight and I was hoping you could provide maybe that the shape of that headwind to your to your full year or is that something that you see.
We will run smoothly or equivalent across all quarters or is it front end loaded backend loaded and maybe even any full year quantification of the impact it would be helpful.
Yes, I'll be happy to.
Great I'll be able to pick up on that.
Yes, we definitely think it's going to be a full year headwinds. There's no reason at this point to think that it's going to kind of a base in 2021, it will probably be in 'twenty two before we start to see year over year relief on that based on everything we're seeing and hearing and talking to our partners.
I would say in terms of the cadence through the year, probably relatively even at this point based on what we're seeing.
And we haven't really quantified it.
Moving to evolve obviously, but it is.
It is a meaningful headwind throughout 2021.
Okay, and I guess I think on that debt.
My remarks, Jonathan factoring that and you would still expect gross margin just to be down slightly.
Exactly yes, we think it will make up some ground in other areas.
I'll put it on that range.
Okay great.
Moving out to a different topic you did mention this.
New capability with data driven space planning capabilities and I was hoping you could unpack that for us a little bit.
Maybe give us a sense of debt the timing of when that starts to roll out and even qual.
Qualitatively, what what what might we see at the store in terms of changes as this technology gets implemented.
I'll take that one Jonathan good question Peter Space planning is something that under new leadership Jack test our merchandising is something that we've already started working on it.
Our first store and to better utilizing our space in our store. So it's basically being able to plan and gram down to the store level and customize to every store because not all stores are equal the space. So that we can get better allocation, we can get better planning better sell through and getting in and out of stats better. We can also.
So increase our ability to customize the assortments to a store localization and because of that we believe we're going to get improved.
Improved sales per square foot and margin dollars per square foot in our stores and so this this has already started this progress has been.
<unk> started and by mid year, we should start seeing some some rollout of this and then extending to our entire fleet. So it's going to take some time, but we will see benefit starting in back half of 'twenty, one and then going into 'twenty two.
Perfect sounds good thanks, so much.
Thank you. Our next question today is coming from Anthony <unk> from loop capital markets. Your line is now live.
Good morning, and congratulations on a really strong year.
Just wanted to I had two questions I guess the first one is on.
On lease to own and what you saw there in the fourth quarter and how much of a consumer that was to your to your strong our furniture sales.
Yeah, I'll be happy to kick off on that.
Anthony Good morning, Thanks for the congratulations.
Yeah.
All year is that our leasing business has been down.
Yes customers have had more cash available to purchase furniture, so no year over year, the approval rates have been pretty consistent but the.
On the leasing demand has been low just because we've seen a tend to shift to other types of purchases.
Got it and then I just wanted a little bit of clarification.
Okay. So you said youre going to open 50 to 60 new stores.
But 20 of those are going to be relocation so in terms of.
Just sort of completely new stores than Youre talking 30 to 40 and I guess I was just wondering what do you anticipate in terms of just sort of store.
The store closings.
Yes, that's a key part of the equation here Anthony we're trying to get the closings down so we're anticipating something in the region of 15 outright closings for the year.
To drive meaningful net store count increase.
And thats, partly coming from.
Yeah, what we refer to as our store performance intervention program, where we've spent a lot of time looking at underperforming stores, particularly those coming up for lease renewal and really worked hard to improve that performance that we don't need to close them and then also we had some some good productive negotiations with landlords in 2020 that have helped win from a occupancy standpoint.
To make make it viable to keep more stores open so it's a constant.
Process I guess the other key point again, just to reiterate as beyond 'twenty one yes, we do.
Do expect to continue to accelerate the openings and we're hopeful that we can keep the closures that are the outright closures at a pretty low level. So we can continue to grow that net store count impact to our overall sales growth.
Got it thanks, so much to keep up the good work.
Thank you.
Thank you. Our next question today is coming from Jason Haas from Bank of America. Your line is now live.
Great Good morning, and thanks for taking my questions.
You talk about what Youre seeing with regards to closeout availability with Hudson.
Commentary from others that.
There maybe some challenges given how strong sales have been in inventory shortages. So curious to know what you are seeing there.
And then also related to that could provide some more color on just what you're doing with regards to that department are you, adding any sort of new merchants or any other sort of capabilities there. Thanks.
Yes, Jason good morning, Thanks for the question.
I will tell you what we're really pleased with our focus on close out from getting back to our roots, our DNA being the deal place, but I will tell you. We grew 50% in terms of Closeouts in Q4 across all categories.
We continue to grow in these areas.
We're trying to find the intersection where quality and price intersect in availability and we haven't reached that yet. So it's a good news we still think there's good strong availability, it's a bit tougher in food and consumables and that's where we've lagged a bit because of the pandemic things are tighter there.
Across all other categories were getting back into these things. So it's all growth and it's all north if you will on that.
On the deal store Closeouts like I said, our DNA, we're starting to see great penetration.
In areas like apparel, where we mentioned in the opening remarks, having brands like Reebok's, Nautica and Taylor Scott's brothers and in soft home and hard home deals as well. So we're excited about our growth in these areas and we know our customers are as well and the vendors that are supplying these closeouts.
We are happy to see us back from the business year over year, our closeout growth grew over.
Nearly 40% so we see this as loads of opportunity as our team continues to reach out to our vendor base and growth so food and consumables lagging a bet everywhere else, it's it's green and grow.
That's great. Thank you and then as a follow up question. How are you thinking about the assortment as debt.
Country begins to reopen and vaccinations start to go out just what are you expecting in terms of how customer.
Learning habits might shift and any color on.
What youre doing to retain a lot of big customers that you've gained over the past year.
Yes on a great follow up question.
Our customer is all about value.
And shopping on her terms, so e-commerce being an omnichannel retailer and all the work. We've done there is really playing out as well as our assortment fits that that need very well on all the operation North Star strategic work. We've done is doing nicely. So we can see we see even post COVID-19 that home nesting trend to continue.
We think we're well positioned with our with our growth in broyhill and other brands in the home home office is going to continue to be.
A winner in an area for penetrating into that we do believe that she will want to travel a bit more so we're looking into all things that that helped travel luggage and things like that.
Our convenience e-commerce, we're going to continue to get better and better at that and making it safety as a convenient that's going to be a trend that's going to continue and we're going to add a lot more personalization.
And services this year that remove friction through.
Through that channel, making it easy to shop, and best sellers more more types of payments and personalization to really reach their value is going to continue to be huge.
Never goes out of style and so we'll continue to grow our closeout deals are engineered big buys named brands are pantry optimization initiative that are competitively priced deals deals deals. So I think we're well positioned for post COVID-19, and I think the customers healthy on those trends on value home on that.
E Commerce.
The next day and be strong.
Great. Thank you.
You got it thank.
Thank you, ladies and gentlemen in the interest of time. Our final question today is coming from Brad Thomas from Keybanc capital markets. Your line is now live.
Hi, Good morning, Thanks for taking my question and congrats on a great year.
Wanted to ask two questions about.
How to think about 2020 at a high level non you haven't given full year guidance the first on sales.
It seems to me you have.
A ton of opportunity still to grow on what you did last year with elements like expanding a lot.
Merchandising and quarters, where the inventory was later where you wanted it.
Is there any ability to maybe.
Quantify.
What that opportunity is just from the blocking and tackling in the initiatives being a bit better here this year.
Yeah, I'll be happy to take a pass on answering that Brad again, there were a lot of moving parts as we think about our comps quarter.
Quarter by quarter, many moving parts in 2020 on as we look to 2021 that will remain the case I think a key point, though is when we came into 2020, we said we expected our homes to accelerate through the year, but in Q3 Q4, we would be posting pretty nice comps, reflecting the benefit of all of the initiatives.
The country off Q, low broyhill E com growth and Thats really what we believe happened.
I asked a little bit by the stimulus from the listing trend but underneath that.
Our data says that we really didn't get the benefits on mall that we expected from those initiatives.
To continue that into 2021, and then on top of that you've got the kind of one time effect of the stimulus and probably next thing will be a one time effect eventually when things return to a level of normalcy, but the big.
One point for us as we believe our underlying strategies are working on that when we kind of get back to normalcy, there will continue to.
It was forward.
Thats helpful.
And then regarding SG&A, Jonathan can you give us any more help on how to think about modeling SG&A for the year. I think you mentioned that $30 million savings that they desire to get that higher.
For 2021 versus 2020.
How should we think about where it might be if sales come on the stryker stronger on the spectrum versus yes.
These proved to be tougher comps and you have a little bit more trouble against a really tough comparisons you're up again.
Yeah, I think probably studying standard like a broken record with us come on but it's very complicated again in terms of expenses because of all the puts and takes.
Year over year.
What we learned in 2020 very clearly was that.
On the expense flex as we delivered higher sales was very modest so we got tremendous leverage from yeah from delivering higher sales.
And again over time, our objective is to grow our productivity significantly and harvest that.
Net leverage benefit.
If you look at some of the other puts and takes in 2021, you've got the.
Significant COVID-19 expenses in 2020.
Central portion of which we don't expect to lap, but we will continue to have some of those we had full stretch bonus payments pretty much in 2020 and that will normalize in 'twenty one.
And then we've got the benefit of the structural savings you just talked about against that we've got the full year impact on sale leaseback expense.
Also golf strategic investments, we're making including without new stores with a distribution.
Distribution centers, we talked about and then there was a little bit of wage pressure we alluded to.
And then various other puts and takes including equity call them. So that's a fairly long winded answer to say that.
There are a lot of moving parts our guidance for the year is that SG&A will be down in dollar terms.
On to the extent of the sales.
Coming in higher than we are assuming an average total plan.
Wouldn't expect to be adding a lot of SG&A dollars or some investments we might choose to make at that point.
On the country, if sales come below our plan, yes, we certainly have the ability to take expenses out, but we do have a lot of fixed expenses in that which also on the downside opportunity somewhat there, but but again, we remain highly focused on trying to take structural cost out.
Savings options, which we.
Louisville, there beyond what we have baked into our internal plan and then to that guidance on we'll be working very hard to harvest those in 2021.
That's all really helpful. Thank you so much.
Thank you Brett.
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Im sorry, excuse me.
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