Q4 2021 Big Lots Inc Earnings Call
Ladies and gentlemen, good morning, and welcome to the Big lots fourth quarter Conference call.
All lines are in listen only mode.
A question and answer session will follow the prepared remarks.
If you require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
On the call today are Jonathan Ramsden Executive Vice President Chief financial and administrative officer, and Jack for Cello Executive Vice President and Chief Merchandising Officer.
Before we start todays call the company would like to remind you that any forward looking statements made on the call involve risks and uncertainties that are subject to the company's safe Harbor provisions as stated in the Companys press release and SEC filings.
Results could differ materially from those described in the forward looking statements.
The company would also like to also point out that 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.
The Companys fourth quarter earnings release and related financial information are available at.
Big lots dotcom forward slash corporate forward slash investors.
Also available on the website is the previously released January investor presentation, highlighting key themes from this call.
I will now turn the call over to Jonathan Ramsden Executive Vice President Chief financial and administrative officer of Big lots. Mr. Anderson. Please go ahead.
Thank you and good morning, everyone. Unfortunately, Bruce Thorn is not able to join the call. This morning due to an urgent medical situation involving one of his parents.
<unk> thoughts with Bruce and his family.
Good to read Bruce's prepared remarks. This morning, and then continue with my own commentary on our financial performance.
After the prepared remarks, Chuck Costello, Chief Merchandising Officer will join me for the question and answer session.
The following are Bruce his prepared comments.
Glad you are joining us for this morning's call is we'll have a lot of exciting ground to cover.
Today I want to focus on updating you on the forward looking opportunities that we more fulsome introduced last quarter and.
And discuss the excellent progress that we're making.
As you know we are fully committed to delivering tremendous shareholder value through operation North Star.
Our confidence continues to strengthen and our strategy.
Long runway for profitable growth and our ability to generate consistent strong cash flow and shareholder returns.
All of this leverages, our clear positioning as a home discount retailer.
Unique assortment.
Rapid Lee developing omnichannel capabilities and growing base of loyal customers.
Perhaps most importantly, we know the value never goes out of style.
The path to grow the top line of our business by several billion dollars over the coming years is clear and is driven by three key pillars.
<unk> productivity real estate growth and e-commerce .
Each of which strengthen and accelerate our positioning as a value obsessed home discount retailer.
The home of the hunt for a broad and diversified assortment not easily replicated on a national scale.
These drivers were evident in 2021, which ended as our second best year ever in terms of sales and adjusted earnings per share despite unprecedented.
Unprecedented dislocation in the global supply chain.
For a second year in a row, we delivered sales above $6 billion.
Far above where we hold it for a decade, leading up to 2020.
And we delivered phenomenal phenomenal customer experiences in 2021.
Our net promoter score averaged over 80 in the top quartile for retailers and a recent trends are at or even better than last year's levels.
Our team of over 36000 associates delivered these excellent 2021, while navigating many uncertainty throughout the year.
Primarily Q1 stimulus through a frenetic January with weather omicron and supply chain volatility.
The team provided countless excellent excellent experiences in store and online so that our customers could could continue despite what was going on in the macro environment to live big and save lots.
Your team.
2021 was a win but for more than just a financial results.
During 2020 one's journey, our team took away many important lessons from the year through the constant need to be agile and nimble through our test and learn culture.
From our investments in supply chain from our accelerated real estate program and through our strengthening vendor relationships.
All of these lessons are being woven into and are enhancing our operation North star strategies and I have never been more excited.
I encourage you to reference our January investor presentation, where we provide more color on our strategies and financial goals.
Our long runway for growth begins with our assortment and I would like to update you on the progress we are making to strategically increase our productivity.
And improve our assortment through new install programs, new tools and by leveraging our rapidly growing owned brands.
In 2022, we are accelerating our next generation furniture sales strategy.
As we have discussed during prior calls this initiative is delivering a strong positive sales and margin impact driving close to a 15% lift to the furniture business and stores, where it is rolled out.
This initiative increases furniture productivity lifts the entire box is accretive to our rewards program by adding members are beginning and greatly improves the home furnishing buying experience.
The program is currently in over 120 stores and will initially scale to around 650 stores by Q3 of 2022.
Which we believe will drive close to two points of annualized comp for the entire company.
A key aspect of optimizing our merchandise assortment is curating across each key product category. The correct penetration of bargains treasure hunt items unreliable convenience essentials.
It is important to dive into this a bit further <unk>.
Historically, we talked about closeouts versus other product.
As we've worked through operation North Star. It has become clear that we have to have standout bargains with a driven by big buys or Closeouts, we have to have unique treasures, representing seasonal or trendy items and we need to have never out of stock convenience items.
Having bargains treasure hunt items and convenience essentials imbalance creates outstanding value for our customer a great customer experience and repeat trips.
Penetration of how much bargain hunt product will differ by category and we will continue to evolve as we see opportunities to better serve customers grow market share and further strengthen strengthen differentiation from competitors.
It is part of the active category management that our merchant team is now employing.
Turning to seasonal one of our highest margin categories. You will see that we will continue to lean even further into this category in 2022 and beyond for both major moments such as Christmas and for what we are calling small season opportunities, which drive sales through more frequent newness.
In addition to Valentine's day, and Easter we have expanded our assortment in summer with pools of indoor plants as well as tailgating supplies and full cleanup.
All in an effort to be seasonally relevant every month of the year.
Moreover, these additions help improve our overall space productivity the more consistent sales throughout the year.
Within our key owned brands Broyhill continues to grow strongly and accounted for approximately $140 million in Q4 sales up 7% over the same quarter in 2020.
Similarly, real living continues on its strong trajectory up over 20% versus Q4 of last year.
In 2021, broyhill drove over $700 million of sales and real living drove over $600 million on both a clear clearly on their way to becoming established billion dollar brands.
These owned brands will be pivotal in 2022, as we navigate through the current inflationary environment, enabling us to deliver great value opportunities at excellent margins.
Perhaps most importantly, the quality and value of these brands will provide an exciting trade down opportunity for new customers to big lots, who will quickly join our rewards program and provide repeat shopping experiences when they discover a great bargains treasure Hunt and home essentials.
As we introduced last quarter, we have other new initiatives on the way as well.
Our lots under $5 offering represents a further opportunity to drive higher productivity.
We have successfully tested the program, which will sit at the front of our stores and will enhance our value image as well as the treasure Hunt factor discussed earlier.
The product line will rotate every two to three months with a mix of $5 and under price points items, driving impulse basket expanding purchases.
The product will be a mix of seasonally appropriate items as.
Well as unique treasures and fines at unbeatable value.
Net store growth is another critical area for acceleration in 2022.
In 2021, we opened 23 net new stores and these stores are performing ahead of our expectations underscoring our confidence in our growth strategy.
And while we have opened great new stores in the urban markets such as in our backyard in Columbus, Ohio.
We have also opened superb performing stores in smaller markets, such as Hummels town, Pennsylvania, South Port North Carolina, Weirton, West, Virginia, and Lebanon, Missouri, which which are a mix of single big lots store markets and multiple store markets.
These stores are outperforming their plans specifically in furniture proving that we have white space opportunity of these customers have been hungry for big lots and we are moving in.
In 2022, we are on target to meet or exceed 50, 50 net new stores.
And we expect these stores to be margin accretive driving 10% EBITDA returns.
We expect further acceleration of new store opportunities. After 2022, and we are seeing a strong deal pipeline to support this.
Turning to ecommerce we have grown this business profitably and it is now three and a half times 2019, well north of $300 million.
We continue to plan for this to be a $1 billion business, 10% to 15% penetration to the entire business.
Our approach to date has been to replicate the friendliness of our in store interactions online by removing friction points and allowing a customer to purchase where she wants how she wants with what tendency wishes to have that product fulfilled through the channel that she prefers.
Since the initial rollout of focus in 2019, we now provide curbside pickup ship from store capabilities and same day delivery by <unk> and pickup.
And we continued to make investments to scale these offerings.
We continue to see approximately 65% of our demand fulfilled through these new capabilities.
In the coming year, we will further improve our customers' experience by adding pumps, indicating new and best selling products.
Riding more personalized shopping experiences and improving our product content.
Finally in 2022, we are launching a new order management system or RMS to further improve the profitability of e-commerce shipments from stores distribution centers will direct from vendors.
We will also be redesigning our online car to improved checkout and ease of use focused on mobile first.
Further enhancing our online experience, we have introduced real time apply and buy online with the big lots credit card.
Our journey to provide a frictionless checkout experience is bearing fruit.
Last fall, we rounded out our mobile payment suite by accepting Paypal and paying for and have grown our mobile wallet usage to 28% of total transactions improving our overall conversion.
By the way since launch a significant percentage of web customers, who checked how using paypal with new to big lots and the customers using Paypal is painful tend to be younger and spend more than our existing customers further building, our customer file and expanding our average basket size.
While our main focus is on our three core growth drivers, we continue to build our enabling capabilities and infrastructure.
Throughout last year, we provided updates on our supply chain initiatives as we work to modernize and optimize our ability to get our assortment to a customer how where and when she wants it.
Last year, we stood up to forward bulk distribution centers or FTC's easing flows around network in the southeast and northeast.
2022, we will open two new additional ftes in the Pacific Northwest and Midwest to further increase efficiency in our network and empower our legacy regional distribution centers to better focus on the throughput of smaller pick and pack goods.
An additional key enabler for us is making our in store customer experience consistent and positive across our fleet.
To that point project refresh is well underway with over 50 stores refreshed in 2021, and 200 stores on the docket for 2022.
Overtime under project refresh we will upgrade approximately 800 stores that were not included in the 2017 to 2020 store of the future program.
This project will create a more consistent consumer experience better.
Better represent the big lots brand through imagery and signage in each store and will harmonize internal processes.
We are currently catering to too many differently formatted will condition stores.
As we previously disclosed the average cost of the program is just over $100000 per store fall below the prior store of the future conversions.
These stores will benefit from new exterior signage interior repainting in Florida, the new vestibule experience remodel bathrooms and interior wall graphics.
Brand activation is critical to our operation North Star journey, and we are thrilled with the continued expansion of our via <unk> brand campaign that started last spring.
As a reminder, this campaign is grounded in extensive consumer insights around why customers love to shop us.
She sees as the home of the hunt for exceptional bargains and surprising treasures custom.
Customers. So savvy she loves to express itself and we frankly didn't think there was a word in the English language that would suffice.
She feels like a million bucks when she is hunting for the best deals at a neighborhood big lots.
We are laser focused on continuing to delight every day in stores and online.
As we close fourth quarter with a holiday Big AD campaign, featuring Eric's Stonestreet Molly Shannon, we received excellent feedback with the ads our attention grabbing likable and driving intention to show and.
In fact schools were even higher than our launch faults earlier in the year.
And our brand awareness for Q4 was at an all time high.
As we have shifted to 2022, we hope you saw our President's day ads featuring Eric's Stone Street.
They were entertaining and highly productive as they perfectly convey the exciting values that we can provide to our customer.
We are very proud of that holiday weekends performance during which we drove double digit comp growth over the comparable holiday weekend in 2019.
The <unk> campaign continues to resonate well with our growing rewards program provides increasing brand awareness consideration and purchasing from our loyal community of bargain hunters and treasure seekers.
Community Iraq are active rewards members now stands at close to 22 million members strong and growing.
As I hope you can tell we have deep confidence in operation North star and in our ability to achieve our goals. We are correctly prioritizing our initiatives by investing in growth, while simultaneously shoring up our foundations.
This discipline on these strategies will deliver our long term financial goals as we scale over the coming years to deliver sales of $8 billion to $10 billion, expanding our operating margins to 6% to 8% and driving returns on invested capital well in excess of our cost of capital.
Throughout this evolution, we will continue our track record of excellent access to liquidity.
Consistently strong free cash flow generation and capital return.
Since 2016, we have returned over $1 billion to our shareholders and expect to continue capital return going forward.
Thus far I have discussed our initiatives our systems, our networks, but I have not talked about our people and the depth that they deserve.
What gives us the greatest confidence in our ability to scale this business over the coming years and to achieve the financial goals as referenced in our January investor presentation is.
Is the team that we built in the past three years, new enhanced and strengthened teams in every call function as well as new growth areas such as apparel.
This is a team that is focused collaborative and fully aligned around our mission to help her live big and save lots.
And recently, we returned to the office and found that we are even stronger when we are together.
With this team I am confident we will achieve our goals and become the best destination home discount store.
Before turning to an in depth review of the numbers I do want to quickly discuss how our fourth quarter of 2021 ended and how we have started 2022.
After clearly performed very well during holiday with plus 9% two year comps fourth quarter ended below our guided sales range driven by more inclement unexpected weather in January .
The spike in Homochromous effect on traffic and some inventory challenges.
On a two year basis Q4 comparable sales increased five 4%, while declining two 3% to 2020.
This represented a sequential deceleration in two year comps that was greater than anticipated driven entirely by our performance in January .
Total sales in Q4 increased approximately 8% versus 2019 with 230 basis points of favorability from a net new and relocated stores.
Given that stimulus and other macro traffic drivers have subsided as factors in our results.
These two year sales growth statistics are an appropriate measure of the impact of our operation North Star strategies.
So while we are disappointed with how January actualize. This undisclosed prior comments on where we're going and provides proof of our momentum.
Sales for the quarter again benefited from growth in basket, driven by AUR expansion across each category.
We did see a drop off in our furniture trend during the quarter driven by inventory availability as we work to overcome supply chain sluggishness in the back half of the year.
The full shutdowns in Vietnam and supply chain shortages with domestic upholstery sales, but we were able to partially offset these pressures and some opportunistic buys and furniture.
On a positive note because of the work we have done internally and with our partners. We are now in the best inventory position in broyhill up upholstery, and mattresses and the past year and a half.
In fact, despite continued supply chain disruptions, we were able to end the quarter well positioned in inventory for the start of 2022.
With the subsiding of winter weather and the Homochrome variant and improving in stock levels, we are regaining traction.
Seasonal we had a strong November and December through holiday, but a softer January given some similar inventory delays.
<unk>, we expect to be in a progressively better position as we move through Q1.
Our adjusted earnings per share for the quarter of $1 75.
Was below both our initial and updated guidance ranges.
As we will discuss shortly our adverse January shrink results at the end of the quarter drove approximately <unk> 37 per share reduction in our earnings as we began our annual cycle of physical inventories.
We have strategies in place to fix this issue going forward, which should provide some margin tailwind towards the end of 2022.
After a difficult January we're more pleased with the start we've made to 2022 with twinned with trends improving in February despite more more weather issues in the slowest start to tax refund season.
As I mentioned earlier, we have worked with our global supply chain partners to ensure improved product availability and entering the quarter and this continues to get better every day.
This is especially important as we left sales on the table the each of the past due February given the beginning of the year inventory levels.
That completes Bruce's prepared remarks, and I will now continue with my prepared commentary on our financial performance.
While 2021 ended with a challenging months. It is important to reiterate that it was still the second best year in the company's history.
Both high sales.
Yeah.
Yeah.
I would like to thanks.
Company, who made that happen.
We made up a.
Transitory issues, namely traffic there was affected by weather and omicron rates in January and adverse shrink results from our latest physical inventories.
We have seen traffic improve in February and we are already implementing strategies that should turn out 2021 shrink impacts and the potential late 2022 tailwind.
A summary of our financial results for the fourth quarter can be found on page six of our quarterly results presentation.
Q4, net sales were $1 $732 billion, 0.3% decrease compared to $1 $738 billion, a year ago put up seven 8% to the fourth quarter of 2019.
The decline versus 2020 was driven by a comparable sales decrease of two 3% below our original guidance of slightly positive.
This Miss was driven by January performance.
Two year comps were five 4% buoyed by the holiday period with November at 10% and December at 8% followed by January down 4%.
Our fourth quarter adjusted net income was $53 6 million compared.
Compared to $98 million and net income in Q4 of 2020 and $93 $8 million in 2019.
Adjusted diluted EPS for the quarter was $1 75.
As a reminder, we reported diluted EPS of $2.59 last year.
The gross margin rate for the quarter was 37, 3% down approximately 210 basis points from last year's rate and 220 basis points below 2019, underperforming our guidance driven by shrink and freight headwinds.
Versus our guidance at the beginning of quarter shrink drove approximately 80 basis points of gross margin rate erosion for the quarter we.
We typically begin our annual physical inventory cycle in early January and by the end of the month, we have completed enough inventories to extrapolate results across the chain.
This year those results showed a significant spike in our shrink rate, which is in part attributable to the well documented industry wide retail crime epidemic.
Our shrink results were notably worse in California than in the rest of the country.
As we have analyzed these results over the past few weeks, we are confident the steps we are already taking will enable us to bring the rate down in 2022.
For example, we will be completing needle tagging for apparel, where we saw high shrink rate in 2022.
Additionally, we will be accelerating the rollout of shopping cart wheel locking systems and a higher shrink stores during the course of the year.
And significantly enhancing in store training and incentives around shrink mitigation.
Last we have already addressed the point of sale technology issue that contributed to our 2021 shrink.
Turning to SG&A total adjusted expenses for the quarter, including depreciation were $574 million up from $554 million last year.
This was slightly better than our expectation coming into the quarter.
The increase the last year was driven by incremental investments in labor and in our four distribution centers, partially offset by lower bonus expense.
Adjusted operating margin for the quarter was four 2% compared to seven 5% in 2020 and seven 8% in 2019.
Interest expense for the quarter was $2 $1 million down from $2 $6 million in the fourth quarter last year and $3 $2 million in Q4 2019.
The adjusted income tax rate in the fourth quarter was 24, 1% compared to last year's rate of 24, 6%.
With the rate change primarily driven by prior prior year tax return true ups audit settlements unemployment credits.
We offset by disallowed executive compensation and deferred tax adjustments.
Total ending inventory was up 32% to last year, a 123 8 billion.
And up 34% to 2019.
Heard about beginning of quota quarter guidance due to higher in transit inventory, particularly seasonal.
The increase versus prior years includes a significant unit cost component.
During the fourth quarter, we opened 16, new stores and closed nine stores. We ended Q4 with 1431 stores and total selling square footage of $32 7 million.
Capital expenditures for the quarter with $38 million compared to $32 million last year.
<unk> expense in the fourth quarter was $37 million up $4 million to the same period last year.
On a full year basis capital expenditures were $161 million.
We ended the fourth quarter with $54 million of cash and cash equivalents and $4 million borrowed on our revolving credit facility.
As a reminder, at the end of Q4, 2020, we had $560 million of cash and cash equivalents of $36 million of long term debt.
The year over year reduction in cash levels reflects the deployment of proceeds from the sale and leaseback of our distribution centers towards share repurchases and our increased investment in inventory.
In total we returned approximately $460 million to our shareholders during 2021 through our quarterly dividend and share repurchase program.
During the quarter, we repurchased two 1 million shares for $96 million at an average cost per share of.
A $43 90.
We have $159 million remaining outstanding under our December 2021 $250 million authorization.
On a full year basis, we had sales of $6 151 billion.
Which was down two 5% on a comparable basis to 2020, but up 13, 2% on a comparable two year basis to 2019.
Versus 2020 total sales were down just under 1% with 170 basis points of growth driven by new and recently relocated stores.
On a two year basis, we had 230 basis points of non comparable growth from similar real estate impacts.
Our full year adjusted operating margin of 4% was down 240 basis points to last year, but up 10 basis points to 2019.
Adjusted operating income of $244 8 million was down to 2020, $397 5 million put up almost 18% to 2019 operating income of $207 9 million.
Or approximately 50% after adjusting for the incremental sale leaseback expense you took on in 2020.
2021 adjusted earnings per share of $5.44 was second highest in the company's history only to 2020.
In 2020, our adjusted EPS was $7 35.
The adjusted 2021, EPS was up 48% to 2019, adjusted EPS of $3 67.
We announced today that our board of directors declared a quarterly cash dividend for the fourth quarter of fiscal 2021 of 30 per common share.
This dividend is payable on April one 2022 to shareholders of record as of the close of business on March 18 2022.
Turning to guidance for the first quarter of fiscal 2022, the company expects to report diluted earnings per share in the range of $1 10.
To $1 20.
Compared to $2.62 learnings put a diluted share for the first quarter of 2021, and <unk> 92 of adjusted earnings in Q1 2019.
This earnings per share guidance does not include the impact of any future share repurchase activity.
Excluding the impact of additional potential share repurchases our guidance reflects a diluted share count of approximately $29 3 million shares for Q1.
This outlook reflects a comparable sales increase of approximately 10% to the first quarter of 2019, which equates to a low double digit decline in comparable sales. So this is the first quarter of 2021 as the company lapsed the impact of stimulus, which we estimate will provide 12 points of comp drag was last year in Q1.
And five points of comp drag on a full year basis.
In Q1, we expect to see roughly 130 basis points of growth from net new and relocated stores.
The outlook further reflects a decrease in the gross margin rate of approximately 50 basis points compared to the first quarter of last year and a slight increase in expense dollars compared to the first quarter of last year.
A decrease in the gross margin rate is primarily due to freight costs, which are above prior expectations and the highest shrink accrual rate as a result of January physical inventory results.
The increase in expense dollars is primarily driven by incremental supply chain expenses.
<unk> re wage impacts and new store related expenses.
Partially offset by the variable expense impact of lower sales and lower bonus and equity compensation expense.
With regard to the full year. The company is targeting both comparable sales and gross margin rate to be approximately flat to the prior year.
With operating expenses deleveraging modestly due to inflationary impacts and growth related investments.
Given greater than usual uncertainty, resulting from supply chain disruption and inflation at this point the company is not providing formal full year guidance.
We expect imaging to end Q1 up in the mid 20 percentage range to 2019, including again, the significant intrinsic component, which may fluctuate as we get close to quarter end.
This reflects strong progress in rebuilding our inventories to support lawn and garden and summer sales and improved in stock positions and key furniture items.
We expect 2022 capital expenditures to be between $210 million and $230 million, including around 70 store openings of which under 10 will be relocations.
Our capital projection includes approximately 200 project refresh tools in 2022.
On a net basis, we expect total store count to grow by about 50 stores in 2022.
To reiterate Bruce's prepared comments, despite near term challenges and uncertainty we have great confidence in our long term sales and margin growth opportunity.
We believe that a low single digit sustained comp is realistic once we are clear of the stimulus and supply chain impacts over the past two years.
And then it will be augmented I couldn't system store count growth.
All of this will enable us to leverage our model deliver strong margin rate improvement providing outstanding overall returns.
We are committed to achieving these results and confident we can deliver.
I'll now turn the call back over to our moderator. So that we can begin to answer your questions. Thank you.
Thank you.
We'll now be conducting a question and answer session.
If you'd like to be placed into the question queue. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it might be necessary to pick up your handset before pressing starkey.
Once again Thats star one to be placed into the question queue. At this time, one moment, while we poll for questions.
Our first question today is coming from the line of Greg <unk> with Wolfe Research. Please proceed with your question.
Good morning. This is Spencer hanus on for Greg can you just talk about the improved sales management in February following the mixed results in January and how that impacted your inventory planning for the year as well as your overall thoughts on the underlying demand from your consumer.
Yes, good morning expenses I'll be happy to jump in on that and maybe Jack may want to add a couple of comments. So yes, we are.
Call that we've seen an improvement in February I think at this point in the appropriate way to look at it is on a two year comp.
So as we called out in the fourth quarter two year comps ran pretty strongly in November and December than just one negative.
January February on a two year comp basically we were ahead of the Q4 trends so certainly a significant.
Recovery from the negative four we had in January on a two year comp basis. So we're encouraged by that and that by the way is despite the fact that tax refunds have been a little bit slow and the fact that we're still getting some of our seasonal inventory in particular process through the supply chain. So we feel good about the start before the first quarter.
In that context in terms of your full year inventory planning.
We are going to be we're planning to be relatively heavier on seasonal embedded chip, there's a lot of that inventory.
Long shelf life, and we want to make sure we have the inventory to sell.
Seeing great traction on Broyhill, we're seeing great traction on seasonal.
Well again, we want to make sure we have the inventory. There is also a component playing into that of course of average unit cost being significantly higher which is taking our inventory levels up to some degree, but overall as we think about inventory.
Turning higher in furniture and seasonal adjusting for those impacts most of our other categories that the lead time to react is significantly shorter.
So we have more flexibility there, but obviously, we're watching the trends very closely.
On a regular basis internally to plan that out.
We feel we have the appropriate level of flexibility of those plans going forward to deal with a range of different sales scenarios.
Hey, Jack.
No I think you answered it well Jonathan the only I guess, yes, I would add one piece that I'm.
Part of it and part of the inventory planning is also just getting back in stock and as he mentioned Roy Hill real letting getting back in stock and then catching up with the seasonal inventory that has been delayed at bolt and good adds to the February sales.
Got it that's helpful and then how much of the <unk> SG&A dollar growth is driven by structural changes in costs are just some of these more transitory issues like freight and then you called out the 50 basis point headwind in gross margins and <unk>, but flat for the year, So what drives the improvement.
2020 to eliminate some of the strength that you guys have seen.
Yes, so certainly the last one we now have to accrue at a higher rate.
We saw at the end of Q4 until.
Next round of physical inventories you demonstrate reported down and we're obviously, we don't want to wait all the way until January of next year to live in that so we're gonna be implementing some steps along the way to get a better read on that and that should enable us hopefully to bring the accrual rate down as we go through the year, but in Q1 will be.
The higher rate.
And then I guess.
Other than that there was some mix impacts in there.
You play out over the course from a freight standpoint, we don't suddenly got worse from what we thought in December we think we have that pretty well baked in now for the full year, but it's really just more about the quarterly cadence and kind of what we're up against the year over year, but all of those effects are baked including much higher freight to what we're seeing in the shrink rate case.
Since we expect to see over the course of the year.
Great. Thank you and sending our best embarrassing his family.
Thank you Spencer.
Thank you. Our next question is from the line of Joe Feldman Telsey Advisory Group. Please proceed with your question.
Hey, guys good morning, and thanks for taking the question.
Wanted to ask you about inventory again and kind of the shrink situation.
Can you explain again what happened like that.
I guess I'm wondering how got out of whack and if I.
If I heard you guys correctly, it sounded like you're implementing maybe new inventory system.
To monitor the inventory better and.
Just had a few more questions kind of about what happened like why apparel.
Was heavy why was the west coast more of a problem all those kinds of things. Thanks Darren.
Yes, Joe let me try to break that down a bit so yeah. So our annual physical inventory cycle starts in January and runs through the summer and then there's kind of a pause before we start the next year's cycle. Although we did do some inventory work in his latest September and it didn't really demonstrate the significant spike we saw when we started to take a full.
Annual physical inventories in January .
Things that we think are playing it clearly in California, there's a major crime epidemic.
On enforcement of.
Penalties was shelf lifting had been largely kind of abandoned their uncertainty you've heard of other retailers essentially even clothing stores because they cant operate and viably. So so we saw California spiked pretty significantly and relative to what we were seeing as late as June or July and I'll ask Brian to physical inventories there was a significant step up there.
Why hasn't gone up the value of whats being stolen has also gone up with that and there is also a mix component in there we saw significantly very high shrink rate in apparel, particularly among more expensive items and thats one of the things that we were already well on our way to addressing we would've addressed it earlier, but it took us a while.
Get you all the needle tax through given the well documented supply chain constraints really even affected things like that but that that it now will very soon be completed so we'll have needle tagging on all of our apparel items.
And then we saw lots of instances of these push outs, where people just come into stores and put it with impunity attempt to walk out of the store with stolen merchandise.
We've rolled out the wheel locking systems, a number of stores, which is essentially prevent the costs from being pushed out and we're going to be accelerating that now in light of what we're seeing we're also doubling down on re trading our store teams to mitigate shrink.
Modifying how we incent, our store level and asset protection field teams in terms of managing shrink. So we think we've got a.
Long battery of things, we're doing to respond to it but the underlying causes would be yes.
General across retail increases in shrink and well documented crime issues.
Particularly in California, but also some issues are a little more specific to us in terms of our product mix evolution, including towards apparel and then we did have a issue we contributed which we think contributed little bit related to point of sale issue that got fixed and that we've now fixed that probably contributed to some of the shrinking and <unk>.
Q4, so so we feel good about all the things, we're doing but that but it is a combination of I would say external factors and some things that are more specific to us, but either way. We have we're confident we're going to be able to address them going forward.
Got it that's helpful. Thank you, yes, because I first like that.
Our system issue, but now it sounds like it's much more.
External than that.
Maybe follow up question I know you had said that freight and supply chain pressure, maybe a little bit worse than you would have taken that into account at this point, how should we think about it as the balance of the year. It does though it should it Mike as we lap it in the second quarter does it get better or are you assuming it will still be it at a higher <unk>.
Right and even last year.
For the second half.
Yes, Joe So what we're saying is that the contracted rate.
Annual negotiation cycle now and typically that gets wrapped up in may and what we're seeing is those contractual rates are well above where it had been historically and that's obviously not unique to us.
And we typically are obviously looking to push most of that.
Leads through those contracted rates and those rates are just coming in much higher than I think we are probably most of us anticipated. So those rates will be in effect for most of 2022 until the next round of negotiations take place and then there's always the obviously the spot market, where you're typically buying some capacity. So we have that baked in we don't necessarily expect it to get worse.
We also don't necessarily.
Expect it to get better during 2022.
Got it okay. That's helpful. Thanks, and good luck and wish Bruce Okay. Thanks.
Thank you Joe.
Next question comes from the line of Brad Thomas with Keybanc. Please proceed with your questions.
Hi, Good morning. This is Andrew on for Brad Thanks for taking our questions and of course I would like to add my best wishes.
And his family as well.
First question I wanted to go over why is your closeout strategy I. Just wondering if you could provide an update on that and specifically what percentage of sales. Our closeout is currently tracking.
And what are you seeing from an availability standpoint for closeout deals.
Yeah. Thanks, Andrew It's Jack I'll take that one so.
We have talked about creating that limited limited time deal treasure Hunt, which closeouts as part of buying and historically we've said.
We've been about 55% never outs in the store and the other 45% that seasonal trend limited time deals and Closeouts as part of that we continue to face challenges finding closeouts in food and consumables area, but quite honestly, we're finding.
Really good closeout deals really really good limited time buys in food.
And sorry in soft home and hard home, we've expanded that into some opportunistic buys and furniture and we even actually looked at some deals on lower supplies.
Slow serving.
That came through sorry, so delivery product that came through with the seasonal so overall, it's becoming a bigger part of our business. Our customers are responding well, we're getting access to good brands and we're going to continue to push that part of our business.
Got it thank you.
And I wanted to shift towards the furniture category and what Youre seeing there I know that you've you've done a great job at utilizing the broyhill brand and bringing in new product.
But from a broader industry perspective, we've heard that trends have seen some weakness more recently I was wondering if you could talk about some of the demand trends youre seeing in your furniture category, especially now that now that we're in.
The first quarter and we have seen flat that January stimulus.
And then how do you expect this category to evolve for you in the quarters ahead.
Yeah, I'll jump in and Jonathan if you want to add anything to it. So we saw really strong furniture sales across the business in in the fall into the fourth quarter, we really constrained ourselves with not being able to get some of the inventory specifically the broyhill product.
The broyhill product has responded the customers responding really well to it.
And then what we're seeing as we build back our broyhill inventories, we started to get better at the end of the quarter and at the same time omicron head people weren't getting out to stores the weather hit and you had some outs.
Outside factors that kind of slowed things down in February we've seen.
Pick back up we're confident that we're getting the right product, we're getting back in stock in broyhill, and we're getting new styles and different versions of the furniture team and.
Is getting some great product and we're feeling really good about where it's going from a customer traffic point of view, obviously with inflationary pressure as people are deciding where they are spending money in our view will be that we'll have a good offer and continue to go after market share.
Anything you want to add Jonathan.
You've covered it Jack.
Sure.
Understood. Thank you that's all for me.
Alright, thanks for the questions Andrew.
Our next question is from the line of Karen short with Barclays. Please proceed with your question.
Hi, This is Zane Brock encore can chalk.
I have two questions. So your preliminary 2022 outlook called for positive comps, which I think you've called out on the Q3 call.
What are some of the factors over the past few months.
You've seen that are driving that.
Outlook lower.
If you can maybe comment on your expectations around the cadence of sales in Q1.
Given you'll be lapping the big March stimulus.
So why are you running now versus your expectations through the remainder of the quarter and I have a follow up.
Yes.
So let me let me take a pass at that so what we said on the December earnings call was that we expected positive overall sales overall sales growth in 2022, and we expect to get at least a couple of percentage points of growth from net new stores or the implication was better than the down to negative comp.
So what we're talking about today is that we're targeting a flat comp. So we think that is consistent with what we said back in December . So again, it's the distinction between total sales and comp sales, but so that that was what we said back in semi and clearly the implications of what we're saying today is that we're going to have topline growth with a flat comp and net new stores, adding on.
Of that.
To create growth.
Overall.
Sorry, and then the second part of your question was about the cadence I think within the first quarter and obviously, it's really complicated because of some of the references you're alluding to February was a pretty clean comparison, because that was pre COVID-19 .
Two years ago. So we really haven't seen any impact of stimulus or anything else. So that's why we think that two year comp in February which accelerated ahead of where we were in Q4 as is meaningful.
And that was despite the fact again that we saw some slow of tax refunds and still have some inventory headwinds, particularly in seasonal to a lesser degree in furniture.
But as Jack spoke to so as we look out through the balance of the quarter.
At March on a one year basis, we're up against the American rescue plan X stimulus with last year.
And then that was it.
Very hard in March and then yes. It was still there in April although it had a less significant impact, but what we're saying there is we said in the prepared remarks.
He was a 12 point impact of stimulus positively in 2021 that we're lapping so when we talk about being down 10 in Q1 of this year in total.
If you adjusted out the stimulus impact of that that would imply up around two on an underlying basis in 2022 and that it was consistent with what we think we are seeing in the business today, Although I would certainly agree that is implied in your question. There was a lot of complexity and a lot of moving parts in it but that's how that's how we're looking at it.
Thank you for the clarification Thats very helpful and can you talk a little bit about your expectations around traffic and ticket.
<unk> didn't take it in 2022.
Yes, I'll be happy to kick off that Jack and then is there anything you want to add.
Generally speaking what we've seen is that we've been driving sales through higher basket Highway you are including mix shift and the traffic has been relatively challenging.
However, when our traffic when you look at us compared to <unk>.
General bricks and mortar retail traffic and you normalize for stimulus and everything is actually pretty pretty reasonable and the other key consideration for US is the mix of our business is shifting over time away from higher frequency items towards higher ticket items, which are not inherently shop as frequently.
So we would expect to some degree that trend to continue.
Our basket offsetting traffic challenges in basket, certainly driving most of our comp growth on a forward looking basis over the coming years, Jack anything to add on that yes.
Yeah and thanks.
Thanks for the questions and so one of the things. We're really excited about is the way, we're pricing and using some pricing models and making it more of a muscle in the business and so as we manage our AUR is we're being much more thoughtful about the way we're protecting opening price points, ensuring that we've got some of our customer come in but also making sure that as we get.
The right flow periods, we stay competitive in the marketplace and so we'll see some inflationary pressures on AUR and <unk> going on.
But we're getting much more structured and sophisticated in the way, we're thinking about that from a customers' lens across the whole store. So in the early results are positive for us both in a sales point of view and a margin point of view.
Thanks, Paul actually if I can ask one more.
Hi.
Limited outlook on FY 'twenty two especially.
Given your confidence long long term sales and margins.
Yeah, well I think we've given some pretty good guardrails for 2022 I think.
There is uncertainty about how the consumer's going to behave over the coming quarters.
How quickly the supply chain, we will get back to normal and that while we think we've got to have the freight piece of it.
Relatively well covered there's still uncertainty about does that normalize.
How does how does that affect inventory levels.
There's still some I think more than typical uncertainties, how does the consumer react to inflation will generally whether it's specific to a product or the general environment, obviously geopolitical uncertainty today. So all of those things put us in a position where we think we're in somewhat sort of uncharted territory and we just think it's appropriate to be a little bit more cautious we do.
We hope to resume giving full year guidance.
Soon.
At this point in the cycle, we felt during Q1 guidance and then some higher level guard rails for the full year was the most appropriate.
Path to take.
Understood. Thank you very much beneficial servers, some best of luck this quarter.
Thank you J J.
Our final question today comes from the line of Jason Haas with Bank of America. Please proceed with your questions.
Hey, good morning, and thanks for taking my question. So the first is just on <unk>.
We've heard a lot about the lower income customer getting into worse financial position after they're often a stimulus and government support programs. So I'm curious just with that.
Kind of out there.
Something going on in the macro environment, you are seeing any evidence of that in the business, maybe that customers trading down from.
Like best products to good products.
Or I don't know if to what extent if at all you expect to see or are you starting to see a customer trade down and maybe wasn't shopping I think lots before.
It is now starting to you what you expect that there also are just kind of curious.
If youre seeing any of that in the business at all.
Yeah, I guess I would say, Jason that we think our underlying business trends have been strong, but there were some specific factors that hit us in January some external and some internal in terms of inventory availability, but bracketing all that we think our underlying business is strong.
And I would say at this point, we haven't seen clearly yet at least.
We're looking very closely but we haven't seen those factors playing out.
Jack.
Yes. Thanks for the question, Jason and I would add if you think about and Bruce talked about this with our private brands, we've got done over $700 million in broyhill real living as fast growing over $600 million. Those are both on their way to being billion dollar brands for us and so as the customer mix different choices and categories.
We're really well positioned to have both a broyhill price offer and a real living kind of middle middle of the opening price point offer.
And we're seeing that great success across the business from categories.
Got it that's helpful and then.
Maybe for Jonathan on the gross margin improvement through the year. It sounds like you're hopeful to do some more inventory counts and improved the shrink issue I'm curious if you could talk about.
The other drivers there.
In terms of freight or sorry, the other I guess expectations there in terms of in terms of freight.
What the expectation would be for the shrink headwind.
Just to get to your gross margin outlook.
Yes.
Again, Jason is a bigger headwind than we thought three months ago that was contractual rates coming in fairly.
Fairly significantly higher than we thought and we're able to pass some of that through but not all of it. So that's been an incremental headwind and as you recall on the last call in December we said, we expected gross margin rate to be up in 'twenty. Two we're now guiding to flat and that reflects building in some incremental freight pressure and some incremental shrink expense, although again, we do expect to.
Show some improvement in shrink later in the year knock it all the way back to probably 2000.
'twenty levels this year, but certainly make significant progress on that.
Got it. Thank you that's helpful.
Thank you.
We've reached end of our question and answer session I will now turn the call back to Jonathan Ramsden for some closing comments.
So thank you everyone for joining us on today's call. Once again, our thoughts are with Bruce and his family, but I can certainly say that Bruce and all of us.
Cited to update you on our progress on the next quarterly call and at Investor events, we'll be holding in the meantime, and continue to reaffirm our confidence that our strategies are putting them on the right track.
Again look forward to having the opportunity to share more with you in coming calls.
Thank you for joining us today.
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