Q2 2022 Big Lots Inc Earnings Call
Good morning. This is Alvin Concepcion, Vice President of Investor Relations at Big lots and welcome.
Welcome to the Big lots second quarter Conference call. Currently all lines are in a listen only mode. A question and answer session will follow the prepared remarks.
You require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
On the call with me 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, we would like to remind you that any forward looking statements made on the call involve risk and uncertainties that are subject to the Companys Safe Harbor provisions as stated in the company's press release, and SEC filings and that actual results can differ materially from those described in the forward looking.
<unk>.
We would also like to 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 second quarter earnings release presentation and related financial information are available at big lots Dotcom slashed corporate slash investors I will now turn the call over to Bruce.
Good morning, everyone and thank you for joining us the second quarter was one in which we did what we said we would do despite a very challenging environment, we brought inventories down materially stay tight on both opex and Capex and made great progress on repositioning our assortment towards better bargains, closeouts and lower price points.
While enhancing our healthy offering of treasures in everyday essentials.
We also took important steps to strengthen our balance sheet and secure our liquidity will talk more about each of these points in a moment, but this is an appropriate moment to thank our entire team here at big lots for their outstanding contributions over the past quarter.
For our customer things remained tough with high inflation, making it more difficult for her to her for daily living expenses and causing her to pull back on discretionary purchases.
We serve customers across a wide range of like income levels, but are lower income customers have been hurt more than others.
Never has our mission to help her live big and save lots been more important than now.
We are working hard to provide her with more bargains in closeouts to help stretch for dollar and more surprising treasures to bring excitement and freshness to our shopping experience as well as improving our assortment of everyday essentials she counseling.
We are leveraging the foundations upon which our company was built and leaning into our brand DNA a phenomenal value, we're simplifying our value offerings, leveraging our scale and more deeply partnering with our vendor partners to deliver compelling opening price points across our assortment.
We are moving quickly to elevate our penetration of amazing bargains by way of Closeouts, We're clearly communicating the uniqueness of our value offering throughout our stores and online with new signage and powerful end cap displays more detail on all of these initiatives in a moment, but I want to make sure. The message for this call is clear we are.
Meeting the current challenges head on we are making tremendous progress in repositioning our business for the current environment and we expect that to become increasingly clear in our results in the near future.
Now I'll spend a few moments to share some more specifics.
As I mentioned, we remain laser focused on providing outstanding value to our customer to do this we are partnering closely with our vendors flexing, our long established closeout muscle and leveraging our excellent private label brands.
Earlier this month, we met with over 100 representatives of our top 50 vendors to ensure we are fully aligned on how we are going to partner to deliver great value last quarter. You heard me talk about cost engineering, and using our scale and relationships with suppliers to offer better opening price points to create unique deals that customers can only find at big lots.
These are not going to be baby steps and opening price points, we're going big across the furniture category. For example, we are margin engineering products to offer opening price points at pre COVID-19 levels over the coming quarters I'm very pleased with the progress here and you should expect to see more great opening price points on quality items in time for labor day.
For example, in sofas and Recliners as it relates to bargains, which our closeout items off price brands and limited time deals. It is a target rich environment for procurement, we've already capitalized on these opportunities and we continue to see great deals in categories, such as toys appliances soft home and apparel.
As we continue to aggressively rightsize, our inventory position. This is freeing up additional open to buy capacity for even more deals for our customers in order to meet our customers' needs. We are planning for the mix of bargains and Closeouts to reach one third of the business over time offset by strategic reductions in less productive a redundant never out merchandise.
Yes.
With regard to treasures, which are more unique corky trendy and seasonal items. We also expect this to represent a third of our assortment a great example of the excitement we can bring in this area is a Disney pop up shops within the lot section that will launch later this week.
In essentials, which include category Staples and never outs, we've already added more daily deals this month, particularly in the food and consumable categories and there will be more to come as we continue to curate and even better assortment of solutions in the back half of 'twenty, two and into 'twenty three.
With more bargains and treasures, we are adjusting our end caps to make it easier for our customers to find and recognize these great deals are new and cast will feature cleaner simpler and more compelling signage price points and assortment.
In July a little under 40% of our end caps were bargains and treasures by October it will be nearly 90%. So this is a substantial step up in messaging to our consumers.
Lastly, we're well positioned as a trade down destination as we continue to improve our value offerings, we've seen a significant increase of 16% in customer reactivation through our loyalty program.
Our private brands, especially broyhill will play a key role in increasing our appeal as a trade down destination.
With Broyhill Unreal living continues to do well with sales growth of around 20% at each brand across all divisions. These brands represent 30% of our business in Q2 up notably from the mid twenties last year.
We also know that our seasonal customer has a household income that is two times higher than our core customer. So we see that category as a year round trade down opportunity.
These are all important steps we've taken they are underpinned by the knowledge that across all our categories, including big ticket items are customers will shop is when they see a great deal.
While we have more work ahead of us our strategic direction is clear.
Turning back to the second quarter, despite volatility caused by the current macroeconomic backdrop I am pleased we are able to deliver second quarter results in line with the financial guidance we provided.
Looking at specific category performance in the quarter seasonal comps grew strongly accelerating sequentially from Q1 to up to roughly 30% in Q2 on both a one year and three year comp basis realm.
Relative to Q1 or Q2, three year comps sales also accelerated in soft home and a lot of apparel and electronics. It was inline in food, but decelerated somewhat in furniture hard home and consumables I'll give you a little more flavor on what drove some of the category performance in seasonal we had high sell throughs on many items such as.
Zabows and upper price points for resin Wicker, our Halloween sales were also strong up double digit versus prior year.
Our food and consumables categories have stabilized with strength in candy laundry paper and our salty snack categories.
Furniture soft home and hard home categories continued to be impacted by consumers delaying or cutting back on higher ticket purchases.
The lot and apparel drove a lot of excitement in our stores and showcase some of our newest items and best deals because.
As we progress into the back half of the year I'm excited about the lower opening price points, great Bargains and fund treasures and more productive essentials, which will help drive momentum across our categories.
It's now worth zooming out a little bit because it's easy to get caught up in the near term and lose sight of the bigger longer term picture. Our business has historically been resilient regardless of the economic environment, that's because value never goes out of style and that wont change this time around either.
Areas, where we are seeing great traction include our E com business up 35% in Q2, representing 77% of our total business.
We were particularly pleased with an improvement in the conversion rate online by 50 basis points, which we also saw in our stores within E. Com same day delivery grew over 80% and our convenience offerings continued to expand with new partnerships with door dash and shipped. Meanwhile, we continue to focus on removing friction across the e-commerce journey with improve.
Navigation access to deals and streamlined cart and checkout.
We're also excited to have rolled out our regional pricing model in California with more reasons to come more localized approach enables us to flex pricing to improve our competitive position and optimize our margin profile.
Our new space planning capabilities are also enabling us to flex and optimize our assortment across the fleet. In addition, we are investing in new tools to improve the efficiency of our promotions and are already seeing some quick wins from our work in this area.
All the furniture business has been challenging on an industry wide basis, we are proud to be one of the few furniture retailers that customers can go to and take their furniture home that same day, while still providing her options to order online and pickup in store at the curb or delivered the same day for nearly 1000 stores across the U S.
We continue to enhance our unique position with a new furniture sales model with improved staffing and incentive based compensation to drive engagement and sells. This model is now in 380 stores and is continuing to do very well delivering strong double digit lifts in stores, where the full new staffing models in place versus the rest of the chain.
Meanwhile, our new stores continued to perform well and we have been running ahead of plan with particularly strong performance in small town and rural markets that are increasingly the focus of our strategy. While we are prudently slowing down in the near term, we still see a long runway for growth with the potential for over 500, new stores over time.
Finally, we continue to improve our supply chain visibility earlier. This month, we rolled out a new tool that enhances inventory flow to both support sales and drive down costs in September we'll be opening our fourth for D C, which adds incremental capacity to help flow inventory in the peak season also by the end of September we'll complete fee.
As one of a multi year project to have an order management system, which will give us a single view of inventory to greatly improve the omni channel customer experience.
So to sum it up we did what we said we would do in the face of a challenging environment in Q2, but alongside that we continue to make tremendous progress on our journey to deliver outstanding long term shareholder value. We are confident in our ability to increase customers' shopping frequency to grow our business through good times and bad.
We're bringing in more bargains and closeouts that our customers need and will communicate these deals better we're getting sharper and more productive on pricing and promotions were driving more excitement and freshness through our treasures in the lot, we're getting better at selling quality furniture that customers can take home the same day or order online with speed of delivery.
Got a strong private label and seasonal offering to capitalize on trade down opportunities, we're improving our supply chain and tech capabilities to improve our business model and provide more convenient solutions for our customers. All of this will help us deliver on our operation North Star strategy, which remains more critical than ever.
Simply said, we are working hard to be her best destination for quality bargains and treasures, while improving her shop ability of our everyday essentials.
I'll now pass it 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 also like to express my gratitude to the entire big lots team.
I'm going to start by going into more detail on our Q2 results, which I will discuss on an adjusted basis, excluding store asset impairment charges and will then address our outlook for the back half of the year.
The summary of our financial results for the second quarter can be found on page 10 of our quarterly results presentation.
Q2, net sales were 1.346 billion, a 7.6% decrease compared to 1.457 billion a year ago. The decline. This is 2021 was driven by a comparable sales decrease of nine 2%, which was within our guidance range.
As you will recall, our second quarter sales got off to a strong start in may with a mid teen three year comp fueled by a strategic decision to elevate promotional activity aimed at reducing inventory levels.
As we successfully drove an inventory levels lower we were able to reduce promotional activity as the quarter progressed.
Turn a three year comp sales trends slowed over the course of the quarter.
Well at the lower end of our guidance range three of comps ended up nearly two points ahead of Q1 at about plus 4%.
The slowdown in July was seen across the broader retail environment, and we would not immune consumers continue to feel spending pressure from high inflation and a lower income customer continues to be the most affected.
High inflation is causing consumers to delay or cut back on discretionary purchases, especially of high ticket items.
Since then we've seen comp sales trends stabilize on a one year basis, which will be primarily which we will be primarily referencing going forward from July into August .
Our second quarter adjusted net loss was 66 million compared to 38 million of net income in Q2 of 2021 the.
The adjusted diluted loss per share for the quarter was $2.28 versus diluted EPS of $1.09 last year.
The gross margin rate for the second quarter was 32.6% down approximately 700 basis points from last year's rate and in line with our guidance.
This included significant impacts from higher markdowns and freight although as we will discuss in a moment we are starting to see both of these headwinds term.
Turning to adjusted SG&A total expenses for the quarter, including depreciation with $523 5 million very close to the $523 9 million last year, and a touch better than our guidance of slightly up year over year.
Store payroll costs bonus accruals and equity compensation were all below last year, but were offset by increases in distribution and outbound transportation expense.
We expect transportation headwinds to continue through the back half of the year, but at a moderating pace as we've seen some relief in recent spot fuel rates.
Adjusted operating margin for the quarter was negative six 3% compared to a profit of 3.7% in 2021.
Interest expense for the quarter was $3 9 million up from $2 3 million in the second quarter last year.
The adjusted income tax rate in the quarter was 25, 5% compared to last year's rate of 26, 7% with the rate change primarily driven by discrete items related to audit settlements unemployment related tax credits, partially offset by lower non deductible compensation expense.
The tax rate comparison was impacted by comparing in an income tax benefit this year to income tax expense last year.
Total ending inventory at cost was up 22, 8% last year, a 1.159 billion in line with our guidance and driven by average unit cost.
Represents a significant sequential improvement versus Q1.
During the second quarter, we opened 11, new stores and closed three stores. We ended Q2 with 1442 stores and total selling square footage of $33 1 million.
Capital expenditures for the quarter were 46 million compared to 45 billion last year.
Depreciation expense in the quarter was $37 million up 2 million to the same period last year.
We ended the second quarter with $49 million of cash and cash equivalents and $253 million of long term debt at the end of Q2 'twenty 'twenty. One we had 293 million of cash and cash equivalents and no long term debt.
The year over year change reflects share repurchases executed during fiscal 'twenty, 'twenty, one and higher inventories.
We did not execute any share repurchases during Q2 would have $159 million remaining available under our December 2021 authorization.
On July 29th we executed an engagement letter for a new five year syndicated asset based revolving credit facility of up to 900 million with additional uncommitted increase option of up to $300 million.
We're making good progress on the new facility and expect it to be completed during the current quarter.
Replacing and refinancing our current 600 million dollar five year unsecured credit facility.
In addition, we expect to further strengthen our balance sheet through asset monetization. This includes the outright sale of approximately 20 volt twenty-five owned stores, we are targeting targeting to complete by the end of the year. In addition to which we are evaluating sale leaseback proposals on our remaining owned stores under their owned assets.
On August 23rd our board of Directors declared a quarterly cash dividend for the second quarter of fiscal 2022 of 30 cents per common share.
This dividend is payable on September 'twenty, three 'twenty, two 2022 to shareholders of record as of the close of business on September 19 2022.
Turning to the third quarter outlook, we expect the sales environment to remain uncertain.
We expect one year comes to be down in the low double digit range in line with what we have seen quarter to date net new stores will add about 140 basis points of growth versus 2021.
We expect continued promotional activity will drive our Q3 gross margin rates into the mid Thirty's.
Well this is down from the prior year it was sequentially better than Q2, driven in part by lessening promotional activity as we have made good progress in clearing through inventories.
We expect SG&A dollars to grow low single digits versus 2021 due primarily to increased outbound transportation costs and costs related to two incremental food distribution centers.
Overall this will result in a significant operating loss for the quarter.
We expect a share count of approximately $28 9 million for Q3.
As we move into Q4, we expect the cleaner inventory levels, improving sales momentum due to our efforts in providing better value to customers and lower freight and Andre costs will lead to a recovery in Q Q4 gross margin to be approximately in line with the prior year.
While we expect the sales environment to remain uncertain, we see a more normalized fourth quarter gross margin rate for a few reasons first relative to Q3 sales should improve sequentially on the one year comp basis as our images get into a clean position, creating open to buy opportunities to offer better deals for our customers with increased bargains and close it offers.
<unk> unique and exciting treasures and lower opening price points.
And improving sales and clean inventories there was a reduced need for markdowns and promotions, which will benefit our gross margin.
Inbound freight costs are easing in Q2, higher inbound freight costs, including detention demurrage charges approached 400 basis points of gross margin rate erosion versus 2019.
Freight costs have been coming down since the early spring and we are starting to see this benefit flow through Meanwhile, detention and demurrage charges will be much lower in the back half because we've cleaned out of D. C yards of golf past much of the supply chain disruption over the past 18 months.
Third non freight costs are also coming down as we're seeing price reductions from our vendors was raw material prices have moderated.
Fourth as Bruce referenced we're being more targeted and efficient with pricing and promotions are really work in food and food and consumables indicates a 20 million dollar annualized gross margin opportunity that we are already actioning and expect to see benefit from in the second half.
Last we expect to see a shrink benefit in the fourth quarter versus the headwind we have faced in the first three quarters.
We are also continuing to intensify our expense reduction efforts, we continue to expect to take out $100 million in SG&A. This year versus our original plan of which approximately 70 million of structural.
This will be partially offset by outbound transportation expense, including the impact of higher fuel rates we.
We have achieved approximately half of these savings in the first half of the year and while there was some benefit in Q3 much of the balance were in Q4 due to seasonality effects.
As a reminder, the $70 million and structural savings will come from store payroll supplies of other goods not for resale and headquarters costs, the balances driven by expense flex on lower sales and lower bonus accruals.
We expect to continue to drive savings in 'twenty, two 'twenty three and beyond.
In regard to Capex, we now expect approximately $160 million versus 175 million previously on.
On the storefront recall that last quarter, we prudently slowed the pace of store openings given the current economic uncertainty.
We still expect over 50 openings in 2020 to low due to economic conditions. We have also taken a harder look at stores, we would like to exit including both lease stores underperforming owned stores.
Based on this review the number of closures at the end of 2022 is likely to be higher than previously anticipated and could be similar to or greater than a number of openings.
We see this as a very healthy pruning of our fleet and in some cases and acceleration of closures that would otherwise have occurred in later years.
Meanwhile, our store refresh program remains paused.
Looking forward, we continue to see major store growth opportunity and expect to continue with a healthy rate of openings in 2023.
Albeit while continuing to take a prudent and watchful approach.
We expect full year depreciation of around 153 million, including approximately $38 million in Q3.
We are committed to ending Q3 with cleaner inventories as we drove higher sell throughs and reduced receipts.
<unk> mentioned this increases our ability to go after close out later in the year. When we will have more open to buy opportunities. We expect total inventory cost to the end of Q3 to be up mid to high single digits year over year, which will represent a further substantial narrowing the sales to inventory spread from where we ended Q2.
We continue to expect Q4 and inventory to be flat to down compared with the prior year.
Beyond this year, our confidence in the long term runway for growth has not wavered and we are optimistic about the value we will create as operation North Star progresses.
I will now turn the call back over to Bruce.
Thank you Jonathan I'd like to end the call by again thanking our associates for their focus on playing to win and maintaining that obsession with the customer that has led to the very positive customer feedback together, we achieved a net promoter score above 80% in Q2, which is top tier in the industry as a result of their efforts 22.
2 million customers have rewarded us with their loyalty I'll now turn the call back over to the moderator. So that we can begin to address your questions. Thank you.
Thank you well 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, a confirmation 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.
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 now live.
Don for Greg.
Just given the volatility in trends and weakness in the lower income consumer that we're seeing and I think a lot of people and retailers seeing how are you thinking about the setup for the holiday season.
And then with the heavy discounting that we've seen across retail do you think theres been any pull forward from <unk> sales into the third quarter potentially into the second quarter as well.
Hey, good morning, I'll jump in on that and then maybe Bruce wanted to add a couple of comments so.
Our guidance is some.
Moderation in comps from where we were in Q2.
Both on a one year and a three year basis, we did get some benefit obviously from the intense promotional activity in Q2, which were kind of modeling out for Q3, and then we expect Q4 to be a little better than Q3 for a number of reasons, including some of the supply chain constraints. We had last year. So yeah. We think that there's probably been some pull forward and we've tried to model that.
Into our outlook for the balance of the year.
And I'll add by saying I think we've got a good holiday plan. The team is working very very hard on making sure that we're all staffed and ready to go with good product. We've obviously tailored our assortment for the holiday we're off to a good start with Halloween as we mentioned in our opening remarks, halloween's up double digit versus last year and.
We're very much looking at what's top of mind for our consumers right now it's tough out there and necessities are top top of mind, we're making sure. We're in good stock there are.
Deals on Big ticket items are also top of mind credit is still in good shape with the consumer.
We believe Washington, and some cases in the medium to upper income levels better than pre pandemic. The lower income levels are still pretty strong she's frugal she's smart food items are still top of mind, but also home maintenance cleaning storage resilient are all are resilient and the holidays, especially.
For the holidays, she never stopped shopping for holiday holidays are important to her in good times and bad times, and we're set up to meet our expectations for the holiday.
Great. That's helpful. And then just to dive into SG&A for a minute can you talk about what's driving the growth in and three Q and then how are you thinking about pulling further costs out of the business as you as you start to right size the cost structure, given given where the top line is today.
Yes, So Spencer and Q3 are the big drivers really transportation expense.
We're continuing to run it pretty pretty well up from a year ago.
So the cost of our two newest four distribution centers, which will come on stream. So that's what's driving SG&A up a little bit in Q3, and then we see.
More favorable dynamic in Q4, as we got more savings coming through so we'd expect more peak kind of flattish in Q4 and on SG&A.
Currently overall, we think there's still significant opportunity to take structural cost out of SG&A. We've taken 70 million out. This year you know the biggest chunk of that has come out of the stores, but also some out of the quarters in other areas and we think that is an ongoing opportunity.
We will be going after that we are intensifying our efforts there we've got a task force set up to really dive deep into that and we think there is still significant opportunity beyond 2022.
Great. Thank you.
Yeah.
Thank you. Our next question is coming from Sarong vora from Peg. Your line is now live.
Hey, good morning, guys.
My first question is on the current trends can you provide color on the low double digit negative comps you're seeing quarter to date is the trends that category trends very similar to what we saw in the second quarter or are you seeing shifts given the changes in the consumer behavior.
Yeah, Hey, so wrong, yes, I'll be happy to take that.
So, yes, generally consistent with what we're seeing in Q2 clearly comps in seasonal were pretty strong in Q2, as we were supporting them with a lot of promotions a little bit of moderation, there, but generally pretty consistent and generally we would say that that sequential decline from where we were for Q2 is primarily a factor of the higher promotional activity, particularly around seasonal and.
Q2.
Yes.
As the quarter goes on that remaining fairly consistent although August was probably a somewhat more challenging comp for us than the balance of the quarter.
Got it and my second question is on the composition of inventory.
Clearly made progress from <unk> to <unk> and it seems like you know there is a work in progress right now.
But you know as you go towards the end of fourth quarter I heard that it will be flat to down by the end of the year. So just curious if you could share color again on like you know category like how are you managing that inventory to be flat to down for fourth quarter are you ordering less.
Are there any categories that could see significant decline as you go through the fourth quarter, just curious to know they're trained on the inventory side and the composition of inventory towards.
The second.
Sure.
It comes back to seasonal so we've been carrying excess these limited through Q2 and some to some degree into Q3, and we expect that problem to be largely so.
We go into Q4 and have a much more normalized seasonal limitary level than last year. We brought in a lot of seasonal relatively early in Q4. So thats one of the reasons why we're going to be down at the end of Q4 as we don't expect to fully lap that yes, we have essentially to smooth the supply chain issues brought in some receipts early in Q4 last year to set it up.
What we thought was going to be a strong selling season for.
Some of them lawn and garden, but yeah, we feel good about this and because that was an important point behind that is that it's opening up open to buy to go after better closeout opportunities and we're excited about it.
Sadly the seasonal inventory we worked through in Q2 was predominantly the patio lawn and garden furniture, and we weren't big in that buy last year.
We will be able to comp and unfortunately, there was a pullback in customer spending early in Q1 and into Q2 as you know this year and so the majority of our inventory bulge and markdown and promotional activity was to move that product in Q2, which we've for the most part put behind us to go forward seasonal inventory there is on.
A lower ticket items and more seasonal items that we that we've curtailed and right sized for the Q3 and Q4, we expect to see really nice sell throughs on that.
And better management overall across our product lines merchants have done a nice job our planning allocation replenishment team that really tightened things up and we're going to add a lot more bargains and treasurers, that's connect side, our customers going into the back half.
That's great good luck with the quarter. Thank you.
Thank you. Thank you.
Thank you. Our next question is coming from Peter Keith from Piper Sandler Your line is now live.
Hi, This is Matt on for Peter Thanks for taking my question.
First one the.
First one from me just.
Curious.
If you're seeing any tightening with your credit providers for in regards to consumer credit.
Yeah, no no significantly net.
We actually saw an acceleration in that big lots credit card penetration of sales in Q2.
Leasing was more sort of flattish, but we haven't seen any significant impact yet from your tightening of credit.
They were building.
Okay, Great and then secondly, I was wondering if you could provide a little bit more color on your furniture.
Sales specialists.
Thank you said and.
It's still still are getting a nice lift but is there anything else to call out and are you all still planning to expand its store wide and maybe by next year or what are the plans for that thanks.
Yes, Matt just to cover off the furniture sales program we.
Basically have a furniture sales lead and three furniture specialists and about 380 stores right now.
It gives us open to close furniture coverage, whereas typically we don't have that in the in the balance of chain were seeing nice sales lift lifts double digit sales lift and fully staffed stores.
We expect that over time going into next year as we as we are.
As we roll this program out we can get to over 600 stores and and it's really important because buying furniture broyhill large ticket items real living these brands are going to be billion dollar brands.
It's a it's a big ticket sales for our customers and helping them through that.
Requires an incentive team knowledgeable team to make that that engagement really good engagement and once again you heard us talk in opening remarks, as we open up new stores, especially in the rural markets. Our furniture furniture program does very well there along with our omni channel capabilities to pick up same day from the store.
Take it away from the store, but we're also have it shipped to our customers. So we think that the furniture sales program that we're that we're rolling out right now.
Something that will continue to grow in most in most stores across our balance of chain over time.
Great. Thank you all.
Thank you. Thank you. Our next question is coming from Christina Katia from Deutsche Bank. Your line is now live.
Hi, good morning, Thanks for taking the question.
I wanted to ask about the opening price points and just to the proportion of closeout that youre working to widen which sounds like a good opportunity any way to quantify how the customers have responded to your efforts here and how best to think about the competitive dynamics across your peers as we entered the fourth quarter.
Also just you know considering closeouts.
Mostly in the discretionary categories are you are you, making any assumptions that maybe you should go out after close outs and consumable categories as well just because that's what we see right now the customers are really looking for and is a traffic driver.
Yeah, first hi, Kristina I'll I'll take this the first part of your question regarding opening price points.
During the last couple of years with the inflation rates and so on they really pushed some of our products out of the opening price points and we've worked hard with our great vendor community to bring those back down.
Especially in areas like furniture for example.
Our Recliners moved from 299, and the 200 to $300 range up to the four 500 dollar range with all the freight cost in component costs, we've not work to bring that back and this fall we'll have a 299 recliner back and that's just one example across the home categories, where we're making efforts to do that and should have a very nice.
Operating price point, that's what hooks customers back in and then we shop to trade them up but with the bargains and deals that we have in store with regards to bargains are what we are calling bargains that encompass closeouts. It's basically anything that has a lower comp than other retailers really pleased with the progress of our merchandising team.
He is making and sourcing and sourcing.
Bargains, one I explained that it's beyond food and consumables, although food and consumables are still a big part of it in fact, we just are.
We just.
I've just got a national closeout on potato chips to do the packaging changes just last week that it's going to sell very nicely for our customers in Q3 and Q4, but it's across the board as you Matt as we mentioned in our opening remarks.
These closeouts will find their way to our end caps and July less than 40% of our end caps and a basic store is about 3500 capstone in general around the racetrack only about 40% had bargains and treasures in October this year, we'll have that penetration grow to 90% where bargains, we'll make our bankers a major part of that and cap.
So it's going to be across all categories.
We're seeing good traction, it's a target rich environment out there we're seeing it in toys appliances, vacuums, Tom textiles furniture branded product even secondary branded product.
We're very focused on buying smart in with a good exit plan and everything we buy in the closeout bargain arena.
We're trying to make sure that it's accretive to that category as margin and overall company margin. So we see a lot of opportunity to especially during these tough times for our customers.
To bring the deals to her that she really enjoys.
That's great and then just a follow up on the gross margin outlook.
Obviously, it sounds like the third quarter will still be under a little bit of pressure, maybe just talk about your confidence in getting back to gross.
Gross margins in the fourth quarter.
Just curious to hear your assumptions around the competitive environment across retail I, just you know.
Considering that there is a lot of retailers that heavy inventory still as of today.
Yeah, Hey, Kristina I'll jump in on that and I think Bruce will add a few comments yeah. So we are expecting some continued promotional pressure on margin in Q3, which is why we've guided to the mid Thirty's, we're still working through the seasonal inventory that we came into the early spring with so that will continue to weigh on us a little bit by the time, we get to Q4, though we do think that.
It will be behind us.
Number of factors, which we think will drive that gross margin higher in Q4, which we talked a little bit of that in our prepared remarks, yeah. We're gonna be in a better inventory position in general coming into Q4, we're not going to have the supply chain issues that we had last year are.
We can do better on shrink detention of the merge is going to come down meaningfully as we cleaned out our yards and freight rates have started to turn and we're starting to see that benefit now flow through in our gross margin rate. So all those factors. We think we're gonna be tailwind as we come into Q4, we do assume it's still going to be a somewhat challenging promotional environment.
Some sort of outlook bakes that in but overall, we're optimistic about Q4 and were up against the 37 three.
3% rate in 2021, which we expect to be in line with Q4.
And I'll add I feel like we're doing really good work to end fiscal 'twenty two in a stronger position.
Keeping in mind, what we said earlier seasonal for lawn and garden played a big role in the first half of this year moving through that inventory, that's pretty much behind us at this point.
Promotions are going to be much more efficient going forward, our vendor community is working well with us once again, restoring those opening price points reengineering product with good quality potato, but more margin for us as well all of that is going to play into a better back half. So a back half should continue to grow in <unk>.
Arjun right and.
And the teams really focused on that.
That's great. Thank you so much for the color and best of luck.
Thank you. Thank you.
Thank you. Our next question is coming from Kate Mcshane from Goldman Sachs. Your line is now live.
Good morning, This is mark Jordan on for K today I.
I guess following up on that last question, how do you feel your opening price points are positioned relative to your competitors.
That's a good question Mark you know what we do is we look at our competitive pricing on a weekly basis, and we've added new tools third party resources and tools and systems to help us do a better job ensuring that were placed.
Good competitive points, so that helps us establishing opening price points. There are some areas, where we look at the elasticity and we understand the range. We can be on basic easy to shop, especially named brand items and the consumables and food areas. Other areas are a little bit more difficult to shop, but we but we maintain a good comparison ratio.
And then once again.
The increase in bargains, our ability to bring our own brands into the comparison and off price or closeout brands in that penetration growing across our assortment gives us a competitive edge against everyday low price mass retailers grocery chains et cetera. So I feel like we're in a good position and it's getting better every week.
And it's going to get stronger through the back half of this year and 123 from a really good position with a nice balance of bargains treasures in everyday essentials and in that regard.
Inaccurate respect, we're aiming to get to a third of bargains across our assortment, which is better than everyday low price deals out there or a third treasures, which were already in a good place, it's an emotional and delightful.
Purchased for her and everyday essentials, we're working on that's where you can really get to the price competitiveness, we're looking at reducing some of the redundancy and making it even more productive with more solutions for her at competitive prices. So I think we're in good shape and getting better every week.
Perfect.
I guess it might be early but do you.
Haven't done your inventory counts, yet and do you have any updates on shrink.
Well, we really told them yet.
Pointed out physical inventory cycle typically starts in January which is where we get the full re we are planning to do some late September .
Sample test of inventories to see what traction we've got I mean, I think as we talked about in the past, there's an accounting impact in Q4, even if our shrink rate didnt improve at all because we are effectively in Q4 2021 have to take them sort of hit for all of 2021 in terms of increased shrink rate. So we're up against effectively of 60 basis points impact in 2020.
One of last year, but yeah, we're optimistic that we're going to be better than hold the rate flat and we think all of the things we rolled out including new shrink technologies embedded in their training at store level, new incentive plans and so on you can help us bring that down but we will get off this read in September that we'll report on that at our next earnings call and then we'll get a full read in January when we began the year.
Ooh physical inventory program, but for next year.
Great. Thank you.
Thanks Marty.
Thank you next question is coming from Jason Haas from Bank of America. Your line is now live.
Hey, good morning, and thanks for taking my questions I'm curious if you've seen any early signs of trade down and if not yet fully I'm curious what categories going forward do you think are most likely to attract that trade down customer.
Hi, Jason trade down is happening we believe the process is beginning we're already in the beginning stages of it right now just to give you an overview of how we see trade down trade down you know customers are pretty loyal to the store they shop, they will trade down within that store, we see that in our own stores, especially in the furniture category.
Where she will go from broyhill purchase to a real living purchase its just they are entry level price point, there and so we've seen in fact, a real living pass broyhill in overall sales in Q2, which is a good thing for US both owned brands are doing quite well and then they'll start changing stores and we're seeing that.
That's starting to occur to just at the beginning stages of it we're starting to see.
Customers are the higher income over $100000 just ever so slightly started trading into us and gaining penetration in overall sales.
But we've got a great assortment for that I think the trade down happens in lawn and garden patio, our seasonal areas. We already know their household income of the customer in that area is to XR core customer and so we've already proven the trade down happens there furniture and home categories hard home soft home are great ideas for her.
Now when she's once she is being frugal about these big ticket purchases. The accessories. She can have in hard home and soft home are big lots is a great option for her so we think trade downs happening we think as this macroeconomic environment continues that trade down we will accelerate and what's more is.
Exciting in a related way is that our lap our reactivated customer.
Growth has significantly grown Q2, this year versus Q2 last year up mid teens versus last year. So they are coming back as well to shop us.
Thank you that's good to hear and then as my follow up question I'm, just curious maybe for Jonathan if you could talk about the.
The rationale for doing a sale leaseback and I guess potentially.
Sorry, I can't remember the exact way that you phrased it between the sale leaseback.
The sale of those George but I'm curious, what what was the rationale for doing that and what's the plan.
Use those proceeds for.
Yeah. So there's a couple of different buckets of that Jason. The first is we've got 25 owned stores, which we are planning to sell out right now.
Leaseback and they are underperforming stores that if you impute a normal rent charge there they are not economic and we can sell those 25 stores for a very significant multiple of the cumulative EBITDA generating in some cases, they're generating negative EBITDA. So without one we think is kind of straightforward and that's going to be a.
Fairly significant some then we have another 25 or six owned stores that were considering sale leaseback proposals forward. We've also got our corporate headquarters here.
The ability to execute sale leasebacks on those which we are considering proposals currently adult made a final decision on but that's something that we're actively considering and then we have the synthetic lease on their Apple Valley distribution Center in California.
Which needs to be refinanced by 2024 in any case, we have the equity attached to that belongs to us. So if we were to.
<unk>.
At least it back I mean does the potential equity game that day for us.
The other piece, we need to address them and were working on currently too so in terms of proceeds.
First of all our priority is to make sure we have appropriate levels of liquidity. So we're protected from any downswing is like that.
So we will just seen over the past couple of quarters. We wanted to make sure. We've got healthy levels of minimum liquidity at all times next priority is to make sure. We're appropriately investing in the business to drive long term growth and shareholder returns and then obviously the dividend of any share repurchases, which assuming we have excess liquidity and we.
We utilized capital to support appropriate levels of investment in the business. If we have excess liquidity beyond that then we think share repurchases.
As an appropriate use of that excess liquidity.
Thank you.
Thanks, Jason.
Thank you next question is coming from Zachary Donnelly from Keybanc. Your line is now live.
Thank you.
So over the course of the past couple of weeks we saw some.
Pricing investments from competitors like family dollar different dollars and discounters and so I was wondering kind of over the longer term, how you're thinking about potentially the need for price investments.
Especially within the consumables segment.
Yeah.
Yeah. Good question Zack right you know what we've done is we partner with a third party consultant to review, especially our food and consumables line. So that we maintain competitiveness and also have the right bargains and deals and we've rolled that out on the consumables side of the house.
And just raw and just started rolling out.
Food side of the house and in some cases, what we've seen both regionally and across products and national brands as well as off price for bargains is the opportunity either take prices up or take prices down to grow our share of the marketplace and we think that.
That's on an annualized basis, this will add $20 million worth of margin.
Just in food and consumables up to two or to our P&L.
That work will start showing up in Q4. So you know that's just work that we're doing to ensure that we're priced competitively and also have the bargains and treasures penetration growing at the same time with opening price points that are appropriately set we're continuing to roll that out across the country and we will we'll take that as I mentioned.
Earlier to other categories across the store so we've got and once again, we price grape every week, we review things the team has a very agile.
And responsive and our competitive position.
Muscle that we've actually worked on quite a bit over the last 90 days and we're getting better and better at it.
Great. Thank you I appreciate it.
You got exactly.
Thank you that does conclude today's teleconference and webcast a replay of this call will become available you can access the replay until September 13th by dialing toll free 870, 76606853 and enter the replay confirmation 1373 to 156.
Followed by the pound sign but toll number is 120161 to 7415 replay confirmation one 373 to 156, followed by the pound sign you may now disconnect and have a great day, we thank you for your participation.