Q1 2022 Big Lots Inc Earnings Call
Ladies and gentlemen, good morning, and welcome to the Big lots first quarter Conference call. Currently all lines are in a 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 Bruce Thorn, President and Chief Executive Officer, 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 him a call involve risks and uncertainties that are subject to the company's safe Harbor provisions as stated in the company's press release, and SEC filings and that actual results could differ materially from those described in the forward looking statements the company's first quarter earnings release and related financial.
Information are available at <unk>.
What's dot com slash corporate slash investors also available on the website is a previously released January investor presentation, highlighting the company's long term strategy and financial goals I will now turn the call over to Bruce Thorn, President and Chief Executive Officer of Big lots. Mr. Thorne. Please go ahead.
Everyone and thank you for joining us and you will recall from our comments in March our first quarter got off to a solid start but trends materially slowed in April and drove the need to be more promotional.
We believe the slowdown was caused by spending pressure our consumers felt from higher gas prices and broader inflation, which is affecting discretionary purchases across the retail industry.
We felt the early brunt of this due to our lower income customer being the most immediately affected.
More broadly it's increasingly clear that the economy is going through a major transition over the past few years consumer spending on discretionary purchases, especially those that enhance the home. We're buoyant. We are now in a new chapter where high inflation is greatly limiting the ability of consumers to make discretionary purchases, especially of high tech.
And items, we know that many Americans now are once again living paycheck to paycheck.
Our business did very well over the past two years as we benefited from strong home related spending and as operation North Star transform many aspects of our business delivering new omnichannel capabilities, demonstrating agility and improving how we serve our customer day in and day out and I want to be very clear that we expect to do very well.
Going forward in a more challenged economic environment, we have many advantages, including our opportunity to draw trade down customers are deep experience and close out the tremendous value we offer across a broad merchandise range and the fact that we serve and support consumers across a wide range of income levels. We believe all.
All of this will stand us in very good stead going forward.
In the meantime, we are in a transition where alongside others. We have found ourselves over inventoried against softening underlying trends and with some of our opening price points too high we will fix this quickly but in the short term our financial results will be significantly impacted.
Our goal today is to review Q1 lay out expectations for Q2 and speak to what we think is an achievable an acceptable level of performance in the back half and going forward.
Our first quarter results got caught in a number of cross currents, but do not diminish our belief in our operation North Star strategy. Thanks to operation North Star, we are in a much stronger position to manage through this than we were pre COVID-19.
In the midst of this difficult period, we can't Miss the forest for the trees, while we need to make near term corrections, we don't intend to be sidetracked from the tremendous longer term value creation opportunity. We see ahead of us or most importantly from our noble purpose to help her live big and save lots will be right there with her as she.
It works to manage their family budget that is being severely buffeted by inflation.
Turning back to our Q1 results, we missed our sales plan for the quarter by close to $100 million the vast majority.
Juruti in April .
Seasonal performed well in February and March up 40% on a three year comp basis, but historic builds into April did not materialize and comps were much softer while our indicators pointed to an acceleration in April we saw the opposite.
Furniture, another discretionary high ticket category and soft home correlated with furniture were also well down to plan in total these three divisions drove 90% of our sales Miss for the quarter.
Why it is clear that the lower income customer has been directly impacted by all time high gas prices and is worried about ongoing inflation.
Consumer confidence is at a low while real disposable income is declining and consumer balance sheets have depleted as stimulus receipts into the rearview mirror.
In this environment, there was a pullback in discretionary purchases, especially higher ticket items poor spring weather didn't help and we saw particular softness relative to plan in the Midwest, while the southeast did better.
And we had bought a big and seasonal chasing what we thought was a big opportunity, but quickly found ourselves with too much inventory as trends slowed markedly in April .
All of that meant we needed to be more promotional than expected.
It is clear we were not alone in all of this as other retailers saw the same slow down and start to move through elevated inventory levels.
Across seasonal furniture, and soft home, we know that we need to clear through excess inventory strategically adjust our opening price points and through closeouts and otherwise be positioned to offer our customer truly compelling deals they cannot get anywhere else.
Moving into the second quarter, we have continued to be promotional through may and have seen success in driving much stronger comps up mid teens for the month on a three year basis likely also helped by more favorable weather.
This improvement shows that our customers still ready to shop, when we can deliver great value to her.
Seasonal three year comps are up around 50% month to date with one year comps up to high teens in many of our seasonal customers are higher income customers, who are trading down.
Import freight rates in Q1 were also much higher year over year, and we have continued to incur significant detention and demurrage charges due to supply chain congestion.
These effects were incrementally more significant than we expected.
Great and markdowns will continue to put significant pressure on gross margin in Q2, and we expect more erosion for the quarter than in Q1 importantly, we view this gross margin rate pressure as transitory.
Moving beyond Q2, we expect the environment to remain challenging, but we see significant opportunities ahead, while remaining highly focused on managing the business prudently, including first getting inventory back in a cleaner position by the end of Q2, which will increase our open to buy enabling us to leverage our muscle to go out.
Closeout opportunities.
Second getting back to an acceptable gross margin rate in the high Thirty's by Q4.
Third continuing to accelerate our expense reduction efforts. In addition to the $150 million of SG&A, we have taken out over the past three years, we expect to take out an additional $70 million this year.
These savings will come from store payroll supplies and other goods not for resale and headquarters costs.
We have reorganized and redoubled our efforts on cost reduction with much more to come.
And fourth lowering capex as we prudently slow store growth and pullback on other spend.
We are now planning around $175 million for the year versus our original guidance of up to $230 million.
We have completed around 150 project refresh stores year to date, bringing the cumulative total to over 200, but are putting additional refreshes on hold for now we are reducing 2022 net store openings from 50, plus to 30, plus and reducing and deferring other capex.
More specifically on gross margin our key priorities include a strong focus on lowering opening price points to drive traffic, having more open to buy to chase closeout, where we expect there to be significant opportunities, which we are already starting to see minimizing detention and demurrage charges as our new FTC's and.
Lower receipts reduce the pressure on our supply chain on a trailing 12 month basis, we have incurred around $50 million of detention and demurrage charges, and we will drive that back to much lower levels starting in Q3.
Being more targeted and efficient with pricing and promotions. Our early work in food and consumables indicates a $20 million annualized gross margin opportunity that we are already actioning.
We are optimistic that the results of our efforts on shrink will become more evident as the year progresses.
Improving our supply chain visibility, where we are in the midst of rolling out a new tool that will enhance inventory flow to both support sales and drive down costs.
In addition, we are starting to see important container rates turn this effect will take some time to come through in our numbers, but we believe it can be very substantial overtime in Q1 alone we incurred over $60 million of additional import charges versus 2019.
We are committed to ending Q2 with cleaner inventories as we drive higher sell throughs and reduced receipts. Once again, we are excited about our ability to go after close out later in the year. When we will have more open to buy opportunities. We expect total inventory at cost at the end of Q2 to be up around 30% to 2019, which will represent a <unk>.
Stanchion narrowing of the sales to inventory spread from where we ended Q1.
The net effect of all the above will be that we will again lose money in Q2, driven by gross margin rate erosion, we are not providing full year guidance at this point, but again, our primary focus is to get our gross margin rate expenses and inventory in line to deliver a sustainable operating margin during these inflationary conditions.
We are confident we can do that by Q4 and end the year in a very different place than today.
Overall as I stated a moment ago, we continue to believe the goals of operation North Star are achievable and can deliver tremendous value during the quarter. There were many proof points of the progress we're making.
Our E comm business remains a standout with record sales of around 7% of total business and a growing impact on our business.
Same day delivery grew 20% as we continue to serve our customer when where and how she wants to shop us.
Despite tough traffic versus the stimulus fueled quarter, a year ago, we added $1 2 million new rewards members holding total rewards members at around $22 million.
And our customers are loving the shopping experience, we provide with an all time high net promoter score of 85% in Q1.
Our easy leasing program and the big lots credit card picked up momentum during the quarter and we're glad to have these options available to our customers as the economic environment becomes more challenging.
Broyhill Unreal living continued to do well and we believe our private label offering will be critical in helping US go after trade down opportunities in the quarters ahead across all divisions private label represented close to 30% of our business up notably from the mid twenties last year.
Our new furniture sales model is continuing to do very well and delivering strong double digit lifts in the stores, where we have fully rolled it out.
And thanks to the amazing success, we have seen with broyhill over the past two years, we were recently recognized by furniture today as the leader of the pack in the furniture business and last but not least our new stores continue to perform well with both 2021 and 2022 openings on average running ahead of plan. Despite the Q1 slowdown.
That said, we are prudently scaling back on store growth this year as well as other initiatives, while we weather current conditions, having said that let me be clear that we continue to believe in our long term store growth opportunity and we will be well positioned to pick up the pace of openings again, when the time is right.
Overall 2022 will be another challenging chapter to add to the ups and downs over the last two years, but we are highly focused on navigating near term headwinds and confident in our ability to see much stronger results later in the year and to deliver on operation North Star overtime as ever I know, we can't count on our fantastic.
Vic team of 35000 associates to do that and I. Thank them for all their tremendous efforts.
We will grow through this as we go through this and emerge stronger and we will not lose sight of our noble purpose is to help our customer live big and save lots.
Now over to Jonathan and I will return in a few moments to make some closing comments before taking your questions.
Thanks, Bruce and I would like to add my thanks to the incredible team we have here a big lots.
I'm going to start by going into more detail on our Q1 results and then address our outlook for Q2 and beyond.
Summary of our financial results for the first quarter can be found on page eight of our quarterly results presentation.
Q1, net sales were 1.375 billion, a 15.4% decrease compared to 1.626 billion a year ago.
The decline versus 2021 was driven by a comparable sales decrease of 17% below our original guidance of a low double digit decrease.
As Bruce mentioned, the Miss was driven by seasonal furniture and soft home.
Our three year comps were one 9% with April the biggest month of the quarter coming in flat.
Our first quarter net loss was $11 1 million compared to $94 6 million of net income in Q1 of 2021.
The loss per share for the quarter was 39 cents.
Diluted EPS of $2 62 last year.
Sales were the biggest driver of the year over year reduction in EPS with a gross margin rate also being a major driver.
The gross margin rate for the first quarter was 36, 7% down approximately 350 basis points from last year's rate.
Significantly underperforming our guidance.
This included significant impacts from both rate and higher markdowns.
Turning to SG&A total expenses for the quarter, including depreciation were $518 million down from $531 million last year with.
With the reduction driven by bonus accruals and equity compensation.
Sit by increases in distribution and transportation.
Outbound transportation costs came in higher than planned by $6 million driven by higher fuel and trucking costs and we expect these headwinds to continue through Q2 and into the back half of the year.
Operating margin for the quarter was negative 1%.
<unk> to a profit of seven 5% in 2021.
Interest expense for the quarter was $2 8 million slightly up from $2 6 million in the first quarter last year.
The income tax rate in the first quarter was 27, 3% compared to last year's rate of 21, 8%.
With the rate change, primarily driven by discrete items related to the settlement of equity awards and the impact of audit settlements.
Set by employment related tax credits.
Total ending inventory at cost was up 48, 5% last year, a $1 three $3 9 billion with units up modestly while average close to come to for most of the increase driven both by inflationary increases and the mix effects.
This was above our beginning of quarter guidance due to the sales Miss and some earlier than expected receipts.
However, a substantial part of the increase was planned as we continued to improve our in stock positions and also deal with inflationary impacts on inventory.
During the first quarter, we opened seven new stores and closed four stores. We ended Q1 with 1434 stores and total selling square footage of $32 8 million.
Capital expenditures for the quarter were $44 million compared to $32 million last year.
Appreciation expense in the first quarter was $37 4 million up $3 4 million for the same period last year.
We ended the first quarter with $62 million of cash and cash equivalents and 271 million of long term debt.
At the end of Q1, 2021, we had $613 million of cash and cash equivalents of $32 million of long term debt.
The year over year change reflects share repurchases executed June fiscal 'twenty, 'twenty, one and the rebuilding of inventories.
We did not execute any share repurchases during Q1 could have a $159 million remaining available under our December 2021 authorization.
So the end of Q1, we had over 300 million of remaining availability under our revolver and we expect to generate around $100 million of free cash flow during Q2.
We announced today that our board of directors declared a quarterly cash dividend for the first quarter of fiscal 2022 of 30 cents per common share.
This dividend is payable on June 24, 2022 to shareholders of record as of the close of business on June 10 2022.
Turning to the second quarter, we expect three year comes to be well above Q1 and in the positive mid to high single digits equating to a mid to high single digit negative comp. This is 2021.
That new stores will add about 150 basis points of growth versus 2021.
Our current expectation is that promotional activity will drive Q2 gross margin rate into the low thirties.
SG&A dollars to be slightly up to 2021.
Overall this will result in another significant operating loss for the quarter.
We expect a share count of approximately $28 6 million for Q2.
We believe we will be positioned to deliver much better results later in the year on a.
Corrective actions are taken effect.
We expect sequential improvement in gross margin rate in each of Q3 and Q4 ending the year with the Q4 margin that is approximately in line with the prior year quarter.
As promotional intensity moderates and we begin to see benefit from our the gross margin rate actions.
It is important to note that on a full year basis, higher inbound freight costs, including detention and demurrage charges or approaching 400 basis points of gross margin rate erosion versus 2019.
In addition, outbound transportation expense is delivering around 100 basis points of operating expense deleverage versus 2019.
While it will take some time to see all of his term you continue to believe the normalization of supply chain costs will be a significant margin tailwind over time.
In the near term as Bruce referenced.
<unk> has significantly reduced detention and demurrage costs, which have run at around $50 million on a trailing 12 month basis.
On a full year basis, we now expect SG&A to be down around $100 million to original plan driven by expense flex on lower sales lower bonus accruals and $70 million of additional cost reductions.
Partially offset by higher distribution and outbound transportation expense, including the impact of higher fuel rates.
We expect total inventory at cost to in Q2 up in the low twenties versus 'twenty, 'twenty, one and up around 30% versus 2019 reps.
Representing a significant reduction from Q1 ending inventory levels.
We now expect 2022 capital expenditures to be around $175 million.
On a net basis, we expect total store count to grow by about 30 plus stores. In 2022. This is our prior guidance of 50, plus as we have intentionally reduced the number of 2022 openings.
We expect full year depreciation of around $153 million, including approximately $38 million in Q2.
To reiterate Bruce's prepared comments, we are navigating through a challenging transition, but remain confident in our long term runway for growth.
And expect to deliver outstanding shareholder value was operation North Star continues to fulfill its potential.
I'll now turn the call back over to Bruce.
Thank you Jonathan.
I want to end, our prepared remarks by reaffirming our confidence in our long term model.
We are going through a period of dislocation as consumers and retailers adjust to a new environment.
We're taking aggressive actions now to adjust to the new environment ensure our value proposition is compelling and position ourselves for much better results later in the year and for years to come.
As you've heard US say many times value never goes out of style and while things may look tough now I am excited about our promising future.
I'll now turn the call back over to the moderator. So that we can begin to address your questions. Thank you.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
<unk> tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions.
Our first question today is coming from Greg <unk> from Wolfe Research Your line is alive.
Good morning. This is Spencer hanus on for Greg, maybe if we could start on inventory how can.
And are you getting back to normal by the end of Q2 and then how is this impacting your planning for the holiday and how aggressive the buyers are going to be this year.
Yeah, Hey, good morning, I'll kick off on that and then maybe Bruce will add a couple of comments.
We are aggressively focused on getting to the inventory level, we want to be at the end of Q2.
The year over year increases, we guided two should cut in half roughly versus where we were at the end of Q1. So obviously there was a sale of assumption baked into that and there is a markdown assumption baked into that but we absolutely committed to getting that there'll be a little bit more cleanup still to come through in Q3, which is one of the reasons why Q3, we will still have some margin rate impact for that but.
We wanted to open up that open to buy so we can go after the great deals we think it's going to be out there. So we are confident we can hit those numbers.
Yes, I'll just add to it our.
Our merchant team is doing a great job reacting to the environment right now.
Full full throttle on moving through the rich inventory that we've got.
And at the same time.
Looking at our open to buy and getting more productive inventory going forward, we're really focusing on closeouts.
Opportunities for Closeouts is getting bigger and bigger.
As we look at it obviously.
We see a good opportunity for us to get better at that and we're seeing that right. Now. We're also smoothing the flow of our inventory to the back half, which is going to help us.
Deal with deal with the supply chain and get good good margin from that product. So we see our ability to sell through and get better inventory better opening price points get the closeouts in place get new items at better prices and have that value. That's good for the customer and also good for our margin in the back half of the year.
Got it that's helpful. And then give you the improvement in three year comp in major sign.
Underlying trends starting to turn or is that really just a function of the step up in discounting and whether braking, that's helping helping to drive the seasonal comp.
Yeah.
It's hard to parse it out but given the level of promotional activity we've been.
Going through but we think there's probably been a little bit of a pick up whether it's probably helped but it's hard for us to be precise about that.
Okay got it that's fair and then understanding youre pulling back on on the Capex and store growth given given the current trends what would you guys need to see to start deploying that capital again for those expansions is that and is that more of a 2023 story at this point.
Yes, I mean, the lead time expensive road renew so there's fairly loans. So the plan is for 'twenty, two we're already pretty well baked. So we've pushed some openings out from 'twenty to 'twenty three we still have significant latitude with regard to <unk> 23 in the next few months, we'll have to take a view on how many stores we want to open on a net basis in 2002.
'twenty three.
Just looking to see some stabilization in the business and obviously some improvement from the trends.
We're seeing recently and then that would give us the confidence to Reaccelerate. Those plans just to add to that we do like what we're seeing with our new stores.
Just a little bit we also know that that.
One of the top reasons why customers leave us as they moved away from our stores are being relevant being in the location, where she is important to us our new store fleet.
The class of 2021 class of 22 stores are beating our expectations.
They've got great conversion rate and basket. So we're pleased with how theyre performing and so this is something that is as we see things improving we will get right back to it.
Got it thank you.
Thank you our next question today.
From the line.
Of Joe Feldman from Telsey Advisory Group. Please go ahead Joe.
Hey, good morning, guys.
I wanted to ask about the opening price point.
What actions are you guys, taking I guess to get to that opening price point.
Beyond just markdowns I guess, but.
Is that something that you need new product to come in in order to get those price points lower end.
How far off the Mark do you think you are with some of those opening price points right now.
Joe dispersed yes.
Yes. Good question I think that over the last year or so with a high cost of inflation freight rates all of that it's pushed our AUR is up the mix has gone up a bit too and we've got to just get back to the basics and getting those opening price points in a good place.
Now, we've we've lowered price points and we've taken a margin squeeze as you can see.
But as we go forward our plan is to remove that rich inventory or get some of that bridge inventory down. So that we can open up our open to buy specifically closeouts are a great opportunity to do that and we're seeing good good closeouts pop up all over the place.
Across all of home categories, less food, but what we're seeing in consumables as well recent examples bedding soft home tabletop et cetera, we're seeing nice opportunities to get 50 plus points on margin rate at very good opening price points.
<unk> shoes, and those types of products 60 plus points.
Points on those so we feel like as we clean up our open to buy.
Move through our inventory that Closeouts are going to play a big role in that are in and out business is another place where we can bring in new products new vendors.
And we're also reengineering product as we speak with our ecosystem of vendors they are helping too because they see what's going on.
And that's that's going to allow us to have good price points and better margin as we go through the back half of the year. So a lot of work going on right now couldnt be prouder of the merchant team and what Theyre doing too.
To sell through the current inventory and replace it with more productive inventory for our customers and for our investors.
Got it thank you and I guess are there.
Good question.
With regard to the gross margin as you guys look out to the second half and I know.
You are talking about getting back to we're pretty close to last year levels by the end of the year I guess, what gives you confidence that you will get there like are you seeing something I don't know in terms of freight costs or anything that you can kind of share a little more color on why you think you can get back to that level.
Yes sure.
Im going to take a first pass at that and Bruce may want to comment. So there are a number of levers. We think we're going to help us get the back half of the year.
Not necessarily.
Certainly a big improvement year over year at all.
We do think the detention demurrage will come down significantly in the back of the year one of the.
The upsides of what we're doing in Q2 together inventory as clean as we are going to finally after two years Dcs clean from an inventory standpoint with the yards will be empty.
The process stuff as it comes in rather than having these backlogs, which we've seen drive really significant.
Costs in the supply chain. So that's one piece of it.
<unk>.
Optimistic that we're going to see a benefit even if we don't didn't even if we didn't get a substantive benefit because of accounting benefit in Q4 because of what we booked in Q4 of 2021, which was essentially a full year's worth of incremental shrink, but we do think we're going to we're going to see a benefit from that.
We think the margin the closeouts that we're going to be bringing in can be margin accretive. The work, we're doing around pricing and promo we're starting to see better from that and we think that will accelerate.
Most of the year and then last week, we do anticipate that it will be a less promotional environment, because we get to third and fourth quarter I think many other retailers came into Q1.
Pretty high inventory to sales spreads and as things slowed a little bit there's been some pretty aggressive promotional activity out there people together inventories back in line.
Our expectation would be that we will be in a more normalized environment by Q4, and finally Q4 of 2021, we were fairly promotional then so were lapping a quarter, where we did have a higher level of promotion in the prior year. So all of those things give us confidence that we can get back close to in line year over year in the fourth quarter.
We won't get there in Q3, but we do think we can get there in Q4, and then I would just add once again.
We've got a commitment to rebalance, our and in our assortment and our closeout assortment in never out assortment. We think we can lean harder much harder in the closeout with margin rich product in and out as well and we're also reengineering as I've said a lot of the product as we speak with our vendors to to get too high.
Alrighty products, especially in the home business businesses.
And that will produce greater gross margin. There is also a trade down factor keep in mind that our seasonal business, our typical customer and a seasonal business. What we're seeing is considerably a higher income customer I think as inflation persist and if you look at morning consult analysis, it's showing that trade down is promising.
It's already starting to pick up in April and I think we're well positioned with our broyhill line a real living line both of them still doing well in fact real living has has grown significantly and is outpacing broyhill and that's that's a very good value model for our customers. All of that is I think is positivity in the future of what.
We think we can do.
Got it.
That's great. Thanks, guys for the color and good luck with this quarter.
Thank you.
Thank you next question today is coming from Peter Keith from Piper Sandler Your line is now live.
Hey, Thanks, good morning, everyone.
So certainly the closeout opportunity sounds interesting Bruce can.
<unk> got a couple of that margin.
Dynamics by category.
What are you seeing right now you've been trying to ramp up closeouts for the last year.
Or maybe you're plus or are you seeing consumers attracted to closeouts or is that an area of outperformance in the stores today.
Yes, I think over the last couple of years.
It's Ben.
Well everything even the paying off the wall, but during a pandemic.
And chasing supply.
And Closeouts got tight in that environment, but as things slowed down.
We're seeing more and more opportunity to get back into the core of that I think with food, that's always going to be type of CPG companies have tightened up their skus.
We don't expect to see a kind of food closeouts grow, but consumables and the home categories, which are margin rich and even into apparel.
It's opening up quite nicely and we've got muscle there.
And quite frankly, I think we could've done a better job in the future and the path going after that and our team is fully committed on that today. So it's just a really good opportunity to buy up a lot of cancelled orders out there, especially in the home category, So that our margin rich and some of the apparel shoes area shoe areas.
And and were working real hard in Q2 bite the bullet.
And our inventory in good shape and our open to buy checkbook ready for that and I think thats something that when you think about big lots, we're about value creation, we're value creators and it's something that's close to our DNA. It's our purpose we help her live big and save lots of it we're getting back to it and rebalancing that closeout level. So there is a strong commitment.
From the team to get after that to improve that value proposition for our customers and the margin points for us.
Okay.
Very helpful.
And I know youre not providing.
The EPS for sales guidance, but I guess does sound like you have some plans on SG&A reduction reining in Capex. So.
What's assumed in the plan in terms of the economic outlook.
You feel like the backdrop right now is going to continue or perhaps a planning that it might actually get a little bit worse.
Yes, so Peter we're assuming that it was likely that the U S.
Economic environment is going to remain pretty tough for a while particularly for lower income customer book, probably over time also for people higher up.
Income lateral as well.
And we think that's obviously a challenge for us, but also an opportunity we have the opportunity to go off the trade down business, which we started to see a bit up but we think there's a lot more of that to come and that's also why we want to go back to making sure. We have a really compelling opening price points supporting our core consumer.
And there are obviously struggling right now with I guess places inflation it won't last forever, but well at last we want to make sure we're there supporting them.
And just out prices as part of that particularly making sure we have inventory flowing in at really compelling opening price points.
And we think we can benefit from trade down as well.
Adding a little bit.
There is no doubt.
The consumer is feeling the the increase in inflation and she is concerned about the future I think the last time.
<unk> saw something like this where inflation soared and sentiment decreased so much was maybe about 40 years ago. So.
What new for all of us and feeling it like that but she is shopping the basic needs right now and and she is also shopping.
Things that youll need to go back to work and events.
And that's where she is spending her money.
Our customer base.
While we serve all household incomes, we do penetrate to the lower income customer our customer is about four customers, making $100000 or less we are penetrated about 80% there and American populations in the 60, so we do penetrate to a lower income customer.
Why it's so important for us to not abandon her during these tough times. It is important for us to get the opening price points back that traffic back and then trade FSC shops through the store it's important for us to go after the close out the new product.
That's a good value for her and great margin for us and that's just our job that's what we do and we're going to get after it we see this as a transitory pinch right now and we'll come out stronger we will grow through this as we go through this.
And.
History has proven we do quite well in times of.
Difficult inflation, and it's just us getting back to the basics.
Okay. Thank you very much and good luck.
Yes. Thanks.
Thank you next question today is coming from Kate Mcshane from Goldman Sachs. Your line is not a lot.
Hi, Thanks for taking our question.
We actually have two questions.
Shrink was actually something we flagged in the last quarterly call it.
Pretty big issue for you I, just wondering if you're seeing any improvement tomorrow. After implementing some of the processes that you talked about last quarter.
Yeah, Hey, good morning, I'll be happy to take that one yes.
We started our annual physical inventory cycle in January and it runs through the middle of the year. So when we began to cycle in January of this year the rate was significantly higher than the prior year. The rate we had been accruing at and that caused us to take a significant shrink in Q4.
Essentially with both related to Q4, but also a catch up related to prior quarters when that shrink have been manifesting itself. So we have a whole range of actions we're taking.
They include the apparel tagging, which we started the rollout in 2021, but because we had limitations on supply we weren't able to fully tag apparel, that's now fully rolled out.
We have these wheel looking shopping carts and many of our high shrink stores.
We did a whole retraining on shrink with our store associates.
We've also fix the point of sale issue, we had with warranty, which we talked about on the last call going forward, so that will eliminate that issue.
And all the other actions beyond that so we're doing all those things we're very optimistic.
To provide a benefit going forward until we start to go to a physical languages. Later this year, we won't have a really solid hold on that but we are going to try to find a way to get more visibility to that as we go through Q3 in particular, so it doesn't all come at the end of the year, but we feel optimistic about that and again, even if we didn't improve at all it will be in <unk>.
Counting benefit in Q4, because we would year over year, we'd be lapping a big hit we took in Q4 of 2021, and it's a bit of a headwind in each of Q1 and Q2 and Q3 for the same reason, but we feel optimistic about it store bonuses and now have a component was linked to improving our performance on shrink which wasn't the case in the past.
Everybody is motivated and focused and we think we can definitely bring the rate down.
Okay. Thank you.
If they had been addressed slightly already but I just wondered tougher macroeconomic times do you look to lean into more consumables and a little bit away from discretionary historically or is that something that you would consider given.
Maybe what you've been seeing in the last few months herself.
A good question Kate.
In tough times food and consumables do matter. That's what she is buying right now we've got a very good value assortment for her and even the first quarter, our food and consumable business held up very nicely, having said that we make we make great sales and margin on the home categories and so it's an and not an or for.
We will continue to do well in food and consumables. During these tough times and also give her that desk she needs for a child at a great value that recliner, new recliner all those things she is still buying those at the right price points and we've proven that in late April when we became promotional we've proven that now in may.
They'll buy at that point, she wants that pre pandemic, we were doing well in those categories. Despite the marketplace just growing it maybe 4% we were growing double digit we are good market share gainer in those times and we expect to continue to do that we've just got to get back to basics on opening price point value get.
The right items, then and I'm very confident on our merchandising team teams ability to do that and so it's an and not an or.
We've got a good assortment across multiple categories, and we're going to bring our value.
Thank you.
You got it.
Thank you. Our next question today is coming from Jason Haas with Bank of America. Your line is now live.
Hey, good morning, and thanks for taking my questions.
First is on inventory.
I think you gave the number for <unk>, but I am curious I apologize that I missed it what youre expecting for inventory to look like by the end of the year.
I think you typically build inventory through the year I know that this year.
You are running a little bit elevated but I'm curious if that's still the case that we should see it build through the year and if so how do you plan to fund that.
Yeah, Hey, Jason Good morning, Yes. So just as a reminder, we said at the end of Q1 inventory year over year was up 48, 5%, we expect that to roughly cut in half in Q2, we expect it to be in the single digits by Q3, and then probably sort of flat to slightly down in Q4 is that we're seeing.
Okay, great. Thank you that's helpful and then a follow up question.
I'm just curious if you could talk about the profitability variance among the stores and how they're performing I am curious if you have.
Certain percentage of your stores that maybe aren't profitable relative to the rest of the chain.
Yeah, Yeah. So we obviously look at that on a regular basis, we have a relatively small number of stores that are unprofitable.
There's a pretty broad range of profitability varies a little bit with geography, and some other factors.
The actual number of stores is loss, making is pretty small.
Got it that's helpful and if I could squeeze one last one in.
I think in the prepared remarks.
Bruce had mentioned that.
Youre seeing customers increasingly use the big lots credit card and easily thing I'm curious about what's what's driven that and any other color you can provide around that.
Yes.
I think just a tough inflationary times.
Those are great tools for us to to help her.
Filled her needs and so during the pandemic with stimulus checks. We saw decrease in easy leasing program I think we're penetrating prior to the pandemic, maybe about 20% usage of that benefit.
On furniture sales and it declined substantially during the pandemic and issuance of stimulus checks that's starting to increase now.
For obvious reasons. If you just think about what the consumer has been through and the inflationary hikes across not just at the gas pumps, but everywhere at this point she needs vehicles to help her purchase thing purchaser needs at this point. So we expected that to go up and we are well positioned with easy leasing in our big lots credit card.
<unk> has done a really nice job we've made it simple for her to use and so we're seeing a lot of traction on that too and.
I think thats going to continue to grow as.
As inflation stays high and.
When sentiment is low and she is trying to preserve cash.
Got it thank you.
You got it.
Thank you. Your next question is coming from Karen short from Barclays. Your line is now live.
Hi, Thanks very much.
So I wanted to talk a little bit in terms of inventory, because you're obviously choosing to lean into inventory and close in.
Discretionary category and so I mean, I guess why do you think that this is transitory in terms of where the consumer is at and kind of triangulate that with the fact that you are leaning in.
More closeouts in discretionary categories, and then I had another bigger picture question.
Yeah, I'll I'll kick off currency overall.
We're clearly saying is that we were over inventoried and some of the discretionary categories in Q1 I.
I think like others, we bought up to a trend.
Deteriorated over the course of Q1, particularly.
April and we're not alone in seeing that so we're working very hard right now to get our inventories down and seasonal high ticket items and to some degree in furniture.
And some of that is just because we need to get our inventory levels down but part of it is also that we want to open it up to bring in great value closeout in those categories.
That's how we're seeing it and I would just add that.
We call discretionary, but if you're a recliner breaks or two all youre going to replace it if your daughter needs a desk.
Youre going to Youre going to buy it. So it is discretionary to a point and I think the proof point to just what we're seeing in May right now as we get to the right price points for her.
We're seeing mid mid double digit comps three year comps across all categories, but if you just look at seasonal low 50 plus percent three year comp when we get the pricing right for her so that just puts it back to us on.
How do you do it and get good gross margin through it through better products at the right price points and good margin to us. So it's closeout business, it's working with our vendors to reengineer things to get that gross margin up but the price points right and the demands there she is.
She is buying it up now so that's why we would lean into it. So it's just about getting our mix to a better place a good opening price points and and growing those businesses discretionary two points. He is going to replace things as they break or just kept tool.
Okay and then my second question is you know obviously your model clearly demonstrated the benefits of library during the pandemic.
But now your model is clearly demonstrating the rest of deleverage on the P&L. So I guess.
Still not sure how we can get comfortable that you can stabilize the business for the next several quarters from a margin perspective, or Rob because you'll likely end the year at flat to slightly negative margins operating margin for the year, but in that context more importantly, you know.
You better I reiterate I think Eric 6% to 8% kind of below the algorithm. So maybe some color on how you could possibly see that path playing out.
Yes, so I think Karen you're one of the key points along the way will be Q4, where we think we can get back to a much better gross margin rate after youre dealing with some of the challenges we're facing in Q2 and Q3 I think it's also relevant as we called out in the script that between inbound and outbound transportation and freight costs, we got about five.
100 basis points of margin rate loss relative to 2019 that we're certainly not expecting all of that is going to come back over time, but we do think some of it will come back and we're starting to see pretty rich too and we talked about the detention and demurrage, which we think will be able to get under our own control from $50 million or so run rate down to a pretty pretty low fee.
Pretty quickly.
And then we go to all the other levers that we talked about which we think can help to get gross margin rate up over time.
That's how we're thinking about it and we think by Q4, we'll be in a more normalized environment and then at the same time, we're going to continue to go after SG&A reduction we talked about taking out another $70 million. This year and the fact that we are far from done on that so we'll continue to.
Take that Alex is certainly part of the path for us has to be getting gross margin rate back up closer to historical levels that it's running in Q1 and Q2 in some degree in Q3, which we're confident we can do and I'll just add to Karen I mean, if you look at where we're at here is a lot of this is systemic it's the macro impact that where we're all dealing with.
That's going to work its way out.
I think over time, it's going to get a lot better but.
But we can't count on that so it's really about our execution I think there's some things we could've done better over the course of the last year, it's hard to anticipate these things, but we've laid out an execution plan that goes all the way through what we're going to do about product, how we're going to improve our improve our gross margin what we're doing about operating.
As all of the things Jonathan laid out and what we've laid out in the investor presentation, but all of those things are a roadmap of how we're going to control we can control as the conditions around us improve.
Okay. Thank you that's helpful.
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