Q2 2023 Big Lots Inc Earnings Call
Good morning. This is Alvin Concepcion, Vice President of Investor Relations at Big lots and welcome to the Big lots second quarter Conference call. Currently all lines are in a listen only mode. If you require operator assistance. Please press star zero on your telephone keypad as a reminder, this.
<unk> is being recorded on the call with me today are Bruce Thorn, President and Chief Executive Officer, and Jonathan rather than executive Vice President Chief financial and administrative officer.
For starting todays 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 company's safe Harbor provisions.
And in the company's press release and SEC filings.
And that actual results can differ materially from those described in the forward looking statements.
I'd also like to point out that commentary today is focused on adjusted non-GAAP results we.
Reconciliations of GAAP to non-GAAP adjusted results are available in today's press release.
Second quarter earnings release presentation and related financial information are available at big lots Dot com slash corporate slash investors a question and answer session will follow the prepared remarks, I will now turn the call over to Bruce.
Good morning, everyone and thank you for joining US there are three key messages I want to convey this morning.
First our results for Q2 with comp sales down 14, 6% and an adjusted EPS loss of $3.24 illustrate that we remain in a very challenging environment in which our core lower income customer remains under significant pressure and has limited capacity for higher ticket discretionary.
Purchases.
Second however, we did see some sequential improvement in the quarter and we were pleased to come in ahead of or in line with our beginning of quarter guidance on all key metrics. We believe this improvement was driven by the five key actions we have outlined on prior calls, which as a reminder, our to own bargains to communicate.
Unmistakable value to increase store relevance to win with omni channel and to drive productivity.
We expect that these key actions along with a gradual improvement in the macro environment over time will enable us to continue to improve our results.
Third stemming from these efforts and bolstered by the completion of our $300 million sale leaseback and ongoing cost reduction and capital management, we have a robust balance sheet to carry us through this turnaround.
Coming back to the first point for the past year and a half we've been playing defense as the consumer environment quickly and sharply deteriorated.
High inflation has disproportionately impacted our lower income customers, who have delayed or pulled back spending on discretionary items, particularly in high ticket home and seasonal categories, which were already challenged by the post COVID-19 spend shift away from home categories. Further we were unfavorably impacted by a furniture products.
Shortage issue caused by the sudden closure of our key supplier late last year.
While the consumer environment will likely remain challenging and result of negative comp sales in the back half of the year. We are now in a position to get back to playing offense.
Supported by the incredible efforts of our associates and our outstanding vendor partners, who remained aligned with our efforts to offer great quality products and amazing value.
Coming back to the second point as we make further progress on our five key actions. We are optimistic that trends will continue to improve albeit slowly through the remainder of this year aided by a higher penetration of bargains more newness in our assortment freight reductions ongoing cost reduction and productivity efforts more.
Fact of promotions in a more normalized level of markdowns our confidence also stems from our belief that we have the right ingredients for success with the right strategy and the right team in place to make it happen.
I continue to be impressed by our associates, who have worked hard and demonstrated tremendous grip during a challenging time. Additionally.
Additionally, over the past year and a half we've added several new members to our senior management team. They have been in place long enough to make a significant impact on our five key actions and they're doing it with the high spirit of collaboration.
Lastly on the third point.
We significantly strengthened our balance sheet by closing $300 million sale leaseback deals this past Friday.
Combined with our efforts to aggressively manage costs inventory and capital expenditures, we are prepared and positioned to navigate through the current economic challenges on the cost reduction and productivity front, we're well on track to achieve our structural SG&A savings goal of over $100 million in 2023.
In addition, we have a clear path to over $200 million of additional bottom line opportunities across gross margin and SG&A through our partnership with an external firm project springboard as we now are calling these efforts is up and running and we expect a high proportion of these benefits to be realized on a run rate basis by the end of 'twenty.
24.
Jonathan will speak more to this in a few moments.
I'd like now to circle back to highlight some of the recent progress we've made on the five key actions.
As it relates to owning bargains, we took a huge leap in providing value as our mix of bargains, which our closeout items and other source products, where we have significant comparable price advantage was nearly 30% in Q2.
Putting us well on track to exceed our goal of over one third by the end of the year.
We're by no means finished with this effort it is merely the first milestone in our path to offer more compelling value.
To give you some context of how far we've come bargains were high single digit penetration, mostly in the food and consumables category before I joined in late 2018, and it got lower during the pandemic.
Now it has grown across a broader range of categories, most notably in soft home and hard home, where it's nearly 30% as well as furniture, where it's above 50% in the second quarter.
We achieved this by procuring products from over inventoried mass retailers distressed retailers and vendors and through new factory direct sourcing partners domestic and overseas. These.
These changes are resonating with our customers as our value perception scores increased more than 10% since the beginning of the year.
We also continue to step up the newness of our assortment, 75% of Broyhill upholstery is new as we begin the third quarter with seven core collections and six modern collections from our new suppliers.
This broyhill relaunch has been supported by a strong marketing campaign, emphasizing higher quality at bargain prices better than before we.
We also have additional modern furniture styles coming in September and October across nearly 400 stores, which we're very excited about further we are adding accent furniture in September filling a gap in our assortment and offsetting the consumer shift away from ready to assemble products.
As part of our consumables reset we introduced new branded baby products, such as diapers and wipes and a great bargain to our stores in August .
We have strong relationships with our vendor partners, who are invested in our success. They are fully aligned and working side by side with us to offer new great quality products as well as enhanced bargains.
We met with over 600 of our allies and our vendor summit in July and had tremendous support in dialogue around where we are going as a business.
As it relates to communicating unmistakable value our recent marketing efforts continue to bear fruit.
Customers are recognizing our bargain offers an improved pricing we held the first friends and family event. Since 2019 in June and offered exclusive E. Commerce promotions in July that drove incremental sales our clearance events over the course of the quarter were also successful in right sizing our seasonal inventory levels, we continue to emphasize.
Book value for a bargain offers as a result, we saw further increase in the net customer value perception score now up by more than 10% since the beginning of the year, when we began to rollout comparable value ticket pricing.
We rolled out new promotional tools and processes in June which will increase the effectiveness of our promotional markdown spend. Additionally, we continue to make progress in refining our customer segmentation and messaging.
Focusing on our best customers with our most attractive offerings, we are finding ways to improve the effectiveness of market.
We continue to focus on increasing store relevance.
We are continuing to flex our assortment by increasing food and consumables inventory in stores, where category demand is strong.
We also continue to optimize pricing and food consumables. These efforts have shown encouraging early results beyond. These initiatives. We're also exploring new store formats, which can provide us with learnings that can be applied to our broader store base.
And we have been improving customer experience to help us win with Omnichannel, we achieved a net promoter score consistently in the mid eighties range in Q2, which is up from the prior year and top tier in the industry are online net promoter score has also significantly improved in Q2 relative to the beginning of the year as we continue to improve the customer.
Our journey to a more curated experience better site navigation and eliminating friction on that note earlier. This month, we launched a new landing page to showcase clear value messaging easier navigation and an elevated design. We also drove significant improvement in cost structure in Q2 versus the prior year and we will continue to fight.
Ways to reduce costs.
So overall, we are excited to see signs of improvement across multiple fronts and combined with our focus on driving productivity are confident that they will translate into continued sequential improvement in financial performance as the year progresses.
I will now make a few more comments about Q2, which was an overall ahead of our guidance, but still nowhere near where we want to be in terms of driving growth and profitability.
Comp sales were down 14.6% ahead of our guidance of down high teens trends improved over the course of the quarter aided by the full mitigation of the furniture supply disruption. We ended the quarter with inventory down in line with sales as planned we continued to see a significant benefit from lower freight costs as reis.
<unk> gross margins were up by 40 basis points versus last year.
Looking at specific category performance in the quarter seasonal comps declined 26% in Q2 due to customers continuing to hold back on higher ticket outdoor furniture due to concerns about the economy.
Given seasonal is historically one of the highest margin categories. The significant promotional activity required to successfully right size, our seasonal inventory and favorably impacted our overall gross margin and.
In Q3, our assortment shifts from high ticket outdoor furniture into lower ticket decorative items, which our customers are less hesitant to spend on and Halloween is off to a strong start with a focus on new and unique theme decor.
Our furniture soft home and hard home categories were each down double digits, but improved sequentially on a year over year basis relative to Q1.
As a result of better in stocks, we saw broyhill and real living increase their penetration of our business across all divisions to 26% versus about 23% in Q1.
As a result of better in stocks, we saw broyhill and real living increase their penetration of our business across all divisions to 26% versus about 23% in Q1.
Having the full assortment of our key private brands such as these will play a key role in increasing our appeal both in the category as well as a trade down destination.
We remain focused on emphasizing the furniture categories, where we can win.
We are testing new assortments in the fall in areas such as accents modern styles and pieces that are solutions focused such as storage sofas sofa sleepers and reclining sectional.
I focusing on winnable categories, offering great comparable value and sharp opening price points, we expect our results in the back half to benefit.
Food and consumables held up relatively well given the traffic challenges we experienced.
In general customers have been shifting their spend towards these essential categories and away from high ticket discretionary categories, which is also resulting in fierce competition in the space.
We're pushing forward and resetting our consumables assortment to optimize productivity and make room for new Assortments, and we'll flex our assortments to stores, where the demand is stronger in certain categories pet was a standout performer with positive comp growth and we're only getting started that.
Now represents 12% of our food and consumables business and we plan to expand our assortment in the fall Baby is also back and we began rolling out new branded items in August with an approach focused on creating great value for consumers. We expect this will drive incremental sales and traffic I will now pass it over to Jonathan and I will return out of.
A few moments to make some closing comments before taking your questions.
Thanks, Bruce and good morning, everyone. I'd also like to say a big Thank you to the big lots team for all of their efforts to drive improvements in our business.
I am, particularly pleased this quarter by the results of those efforts in terms of reducing our expenses and increasing our liquidity.
We drove significant cost reductions during the quarter and are confident that those efforts are going to continue to bear fruit. In addition, the closure of a sale leaseback transaction on our California D. C. In 'twenty to own stores are secured our liquidity position, which has been further enhanced by a day to day management of expenses and working capital.
For the quarter as a whole and prior to factoring in sale leaseback proceeds we were able to slightly reduce our ABL balance despite sales and margin headwinds.
I will now go into more detail on our Q2 results, which I will discuss on an adjusted basis, excluding synthetic lease exit costs distribution center closure costs adjustments to impairment charges the gain on the sale of real estate and related expenses.
Related to project springboard and evaluation allowance on deferred tax assets.
Second quarter summary can be found on page nine of our quarterly results presentation.
Q2, net sales were 1.14 billion, a 15.4% decrease compared to 1.35 billion a year ago.
The decline versus towards 22 was driven by a comparable sales decrease of 14, 6%, which was better than our guidance range going.
Going into the quarter as Bruce mentioned, we expected weakness in the sales environment due to inflation weak overall demand for high ticket items, however, improvements in our furniture business, particularly broyhill and effective promotional and clearance events helps us to do better than expected.
Importantly, our efforts to clear slow moving inventory was successful and leave us well positioned with inventory coming into Q3.
Our second quarter adjusted net loss was $94 4 million and the adjusted diluted loss per share for the quarter was $3.24.
The gross margin rate for the second quarter was 33.0%.
Up 40 basis points from last year's rate, which was better due primarily to lower freight costs, partially offset by higher markdowns.
At the end of the quarter, we took significant mark downs against our remaining seasonal spring and summer merchandise to make room for a new exciting fall and holiday seasonal assortments.
More normalized seasonal markdowns will benefit our gross margin in Q3.
Turning to adjusted SG&A total expenses for the quarter, including depreciation were 487.8 million significantly better than the $523 5 million last year.
And better than our guidance of down slightly versus 2022.
We saw favorability across multiple line items as we continue to manage expenses aggressively.
Adjusted operating margin for the quarter was negative nine 8%.
Interest expense for the quarter was $11 2 million up from $3 9 million in the second quarter last year due to a higher amounts drawn on our credit facility and higher interest rates year over year.
The adjusted income tax rate in the quarter was 23.3%. This excludes the impact of evaluation allowance against deferred tax assets, which significantly impacted the GAAP tax rate.
The valuation allowance resulted from being in a three year cumulative loss position at the end of the quarter.
Going forward, we will not be able to record a textbook benefit related to loss carryforwards until we are at a three year cumulative income position. Therefore, we expect the tax rate to be in the new zero range on an adjusted basis in Q3.
Total ending inventory at cost was down 15, 2% last year 0.9, 8 billion. This was driven by both lower on hand units and average unit cost and also lower in transit inventory.
During the second quarter, we opened one new store and closed six tools. We ended Q2 with 1000 and 422 stores and total selling square footage of $32 9 million.
Capital expenditures for the quarter with $13 million compared to 46 million last year.
Adjusted depreciation expense in the quarter was $34 2 million down 3 million for the same period last year.
We ended the second quarter with 46 million of cash and cash equivalents and $493 2 million of long term debt.
At the end of Q2, 2022, we had $49 1 million of cash and cash equivalents of long term debt of $252 6 million.
Our debt position at the end of Q2 as prior to the impact of the closure of a sale leaseback transaction subsequent to quarter end.
Turning to the outlook will not providing formal full year guidance in light of ongoing economic uncertainties sales come should remain should should improve sequentially in the back half of the year as a key merchandising and marketing actions continued to gain traction and as we lap easier comparisons, especially in Q4.
We expect comps in Q3 to be modestly improved relative to Q2 to be down in the low teen range.
Our net decrease in store count, partially offset by new stores relocations and contribute approximately 140 basis points of the sales decline compared to the third quarter of 2022.
In Q4, we see comes being down high single digits, reflecting further improvement from Q3.
With regard to gross margin, we expect to see accelerated rate improvement in the back half of the year with the Q3 rate up around 200 basis points versus the prior year due to more normalized markdown activity lower freight costs and cost reduction and productivity initiatives.
We expect our fourth quarter gross margin rate to improve to a rate of high Thirty's range driven by the same factors.
In Q3, we expect SG&A dollars to be down low single digits versus 2022.
This includes up to $6 million of rent expense related to the sale leaseback, who will discuss more in a moment, which will be partially offset by lower interest expense.
The incremental rent expense will be up to $9 million in Q4.
These figures are estimates of this at this point and subject to the Finalization of the sale leaseback accounting.
With regard to Capex, we now expect around $75 million for the year down from around $80 million previously and continue to look for opportunities to reduce further.
Yeah.
We expect 15 store openings in 2023, and 50 plus closures with the closures concentrated at the end of the year.
We do not plan to restart store openings until our business performance has stabilized.
Said, we do expect three store openings in 'twenty, 'twenty, four which will projects originally slated for 2023.
We expect full year depreciation of around 143 million, including approximately $35 million in Q3.
We expect share count of approximately $29 3 million for Q3.
We expect total Q3 inventory to be down approximately in line with sales again under being aggressive in managing inventory levels through the balance of the year.
Again, all of our commentary on Q3 excludes the potential impact of impairment charges and other items, including distribution center closure costs gains on the sale of real estate and related expenses and consulting fees related to project springboard.
We expect the 50 <unk> week will benefit our Q4 sales by approximately $65 million and EPS by a few cents.
I'd now like to spend a few moments to provide more details on our cost reduction and productivity efforts.
Our internal efforts or intent to do a identified over 100 million of structural SG&A savings through 2023 and we are well on track to achieving our goal.
We will also realize significant inbound freight savings in 2023, which benefits our gross margin.
Beyond those efforts as Bruce mentioned, we started action in project springboard in Q2, which we expect to drive an additional $200 million of more bottom line all opportunities across SG&A and gross margin from which we expect to start seeing meaningful benefits in Q4.
Areas of focus include cost of goods inventory optimization marketing.
Rising and promotions store and field operations supply chain and general office.
Project springboard is now well underway and we are pleased with the rapid progress we are making supported by our external partner.
Turning to liquidity, we are very comfortable with our position coming into the second half of the year.
We operated through Q2 without any increase in net debt. In addition, we are pleased that our liquidity position has been further strengthened through a sale leaseback transaction.
As a reminder, the sale and lease back and comes to our Apple Valley, California distribution Center in 22 owned store locations generating net proceeds of approximately $294 million.
Given the transaction closed late last week the sale leaseback proceeds would not included in the net available liquidity of $258 million, we had at the end of Q2.
We used $101 million of the proceeds to fully pay down the synthetic lease on the Apple Valley distribution center and the remainder to pay down debt on our asset based lending facility.
The sale leaseback on two additional owned stores is expected to close with due diligence was completed on deal proceeds of around $9 million.
We will continue to evaluate monetization opportunities for our two Romanians tools and our corporate headquarters building.
We will disclose details of how those sale leaseback will impact our financial statements and our third quarter 10-Q filing.
The transaction will result in a significant gain in Q3, which is excluded from our outlook commentary.
Due to our available Nols, we expect cash taxes on the gain on sale of the assets to be insignificant.
From an ongoing cash perspective, there'll be a modest impact to cash outlays as we've previously indicated since the cap rate on sale leaseback transaction is modestly higher than our ABL borrowing rate.
But book purpose, we will need to straight line, the rent and make other adjustments, which will increase the annual spread on a pre tax P&L basis up to around $12 million $12 million initially.
Well the last 18 months have been challenging we have taken decisive actions to lower costs manage capital and bolster our balance sheet.
All of these actions put us in a strong position to weather a continued period of macro driven colleges challenges and to stop moving to play offense as Bruce referenced in his comments.
We look forward to returning the company to growth and profitability. These efforts bear fruit.
I'll now turn the call back over to Bruce.
Thank you Jonathan so to sum it up our trajectory is sequentially improving in the face of a challenging consumer environment and we're confident that the key drivers of our improvement are the five key actions. We are taking to turn our business around importantly, we are now in a position to get back to playing offense as we've taken significant.
Thickened actions to build a robust balance sheet to carry us through this turnaround and now ill 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.
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One moment. Please so we poll for questions.
Thank you and our first question comes from Jason Haas with Bank of America. Please proceed with your question.
Hey, good morning, and thanks for taking my questions. So maybe to start off Chris Jonathan I'm curious if you could provide some more color on project springboard I'm, particularly curious where.
Where some of these cost savings are coming from.
Hey, good morning, Jason I'll jump in on that yes, so it's still fairly early days.
As we said in the script, we do have a clear line of sight to $200 million run rate benefits by the end of fiscal 'twenty. Four there was an SG&A component to that Theres, a coax direct component to that and then there is benefit we expect to get from inventory optimization from pricing and promo.
There are a few different buckets I think what we're gonna be likely doing is starting on the next call. We'll talk about the specific projects that we've put into effect and the accumulative benefit from those and then you'll see that number building over the next several quarters towards that $200 million run rate benefit in in late fiscal 'twenty four but again, it's a combination of direct SG&A reductions cost of goods.
And then other gross margin benefits.
That's great. Thank you and then Charlie can you provide any color on how you're thinking about free cash flow in the remainder of the year.
Yeah. So what we said Jason is that we anticipate no net cash burn from the end of Q1 through the end of Q4, we were slightly better in Q2, so over the balance of year, we wouldn't anticipate any net cash burn and that's obviously prior to factoring in the sale leaseback proceeds which will come in and who have come in in Q3.
Okay, great. Thank you.
Thank you.
Next question comes from Brett line of Brad Thomas with Keybanc Capital markets. Please proceed with your questions.
Hi, Thanks, Good morning, Bruce Good morning, Jonathan.
Oh can you just talk a little bit more about the sales trajectory. If you can just give us a little bit more color about.
Trends you saw in the quarter.
Are you thinking about <unk>, playing out and maybe some of the early read that you are seeing in terms of back to school and Halloween and some of the seasonal categories become more important for you.
The back half of the year.
Hey, Brad Yeah. So we talked about Q2, we saw some sequential improvement through the quarter. We did get some benefit in Q2 from the significant markdowns that we were taking on seasonal to flush through that inventory and we did run a couple of incremental promotional events. So we've guided to a slight improvement in.
Q3, and the comp trend and then a more significant one in Q4, which reflects.
With underlying dynamics, including the fact that we're not fully through the United furniture.
Yeah.
As in Q1 and Q2.
There's also some year over year promotional impact baked into that but.
But we do expect to see continued improvement.
Into Q3 from Q2 and further in Q4 from Q3 and beyond that into 2024.
That's great and then and then maybe just as a follow up as you sort of step back and reflect on the first half of the year and some of the challenges.
You had to go through with the supplier changes in the furniture category. Yeah. Do you think that that was a net.
One for you for sales with having to deal with that or.
A little bit of a benefit from some of the promotions you had.
Just trying to think about payer access how do you assess the performance and impact from those versus the <unk>.
Potential lift that you may be seeing going forward that he had seen assortment.
Yeah, Brian I'll take that obviously, the disruption to broyhill supply was a definite headwind for us it was a nine month interruption.
Now have that behind us we're looking forward to.
Launching we have launched broyhill, we've got great product coming out.
75% of Broyhill upholstery is now new heading into Q3 we've.
We've got new accent furniture coming in.
We've got 99 different styles of furniture coming in from all over the place, adding new freshness fear of missing out across as we mentioned in her opening remarks. So we feel very good about recovering our broyhill interruption in entering the back half of the year with just bargain furniture, a great quality great great brand.
Great.
Trend right.
Modern furniture across our fleet. So we're excited about that and some of the other challenges we had in the first half I was just selling the seasonal lawn and garden patio furniture large discretionary item the pull back from a lower household income customers was evident I think it was evident across the marketplace. We did.
Have to Mark down to right size that inventory, that's now behind us and as you heard in the opening remarks, we'll be focusing on lower priced season.
Seasonal items, we've adjusted our buys accordingly, we expect to have better sell through in the back half of the year as we go through Halloween, which is off to a great start and into the holiday season. So we feel very good about that.
Freight continues to decline for the cost of goods.
You know overall land and that costs are declining in the back half, which gives us a room and margin opportunity going into the back half and the traction we're making on our bargains and.
Across all categories.
<unk> is resonating with our customers as they as we've increased our value perception. It's a measurement we do to see how we're trending with them.
And moved it up pretty significantly since the beginning of the year. So we feel a lot better going into the back half we got our five key action points working and gaining momentum. Our assortment is is in good shape. Our inventory is in good shape and and we're also as I mentioned earlier, where we're flexing to what our customers.
So across all categories. We have some markets that are pantry stores and we've made maybe not have had enough inventory in food and consumables. There. We're now having up in those markets for the that customer that searching for it as well as in the low density of rural markets, It's been underserved home store area.
And where we're flexing up with our Assortments there so that we're being more relevant for those customers. All of this is playing into the back half and that's what we say when we're playing offense going into the back half. So we feel pretty good about that.
Great. Thank you very much Chris.
You got it Brian .
Thank you.
As a reminder to ask a question today you May press star one from your telephone keypad.
Our next question is from the line of Cristina <unk> with Deutsche Bank. Please proceed with your questions.
Hi, good morning, and thanks for taking my question.
My first question is one of your main competitors, but isn't this last quarter.
I was wondering if you could talk about how that impacted your business. During the second quarter. We certainly saw promotions that were targeted to these customers can you just speak to any lift in your sales that you saw and just how you see the opportunity in the back half of the year.
Hi, Christine I'll take that.
Tracking.
Very closely to.
I assume you're talking about bed bath and beyond.
And just for informational stake or overlap of stores to their overlap.
And a 10 mile radius is about 60% and so we're seeing a lift in the stores that were close to their stores in the second quarter a lot of the things that the customers are shopping our <unk> appliances and decor.
We're also up.
We're also capitalizing on distressed inventory coming out of that closure.
We're looking to play a bigger role and back to school back to campus. We ran our total event, which had good.
Penetration with customers and we expect that it will continue to grow this season and into the future. So.
And it's unfortunate when you see a company go out of business, but we're here to serve customers. The best we can and we're seizing the opportunity.
Great and then just as my follow up.
Just on the sequential improvement in the top line.
Obviously, you're guiding to a low teens decrease in the third quarter and high single digits in the fourth quarter. So I was wondering if you can talk to one is that generally in line with your quarter to date.
That you are seeing is that a fair assumption and two maybe just what would be the biggest.
Variance in.
In performance relative to the second quarter, I should get us to make that up high single digits by the fourth quarter.
Hey, Kristina I'll give it a little bit of color on that yeah. I mean, that's usually we don't give specific quota today comes put out guidance for the quarter is reflective of what we've seen year to date and obviously in any given month or a promotional cadence changes and so on that impacted that.
That particular month relative to the quarter as a whole, but but our guidance is consistent with what we've seen quarter to date I think some of the things that up.
The sequential change from Q2 Q3.
In Q1.
The abatement of the United furniture headwind that we've talked about which was fairly significant in Q1 was still down in Q2 and that was essentially gone. It was also as you'll recall the tax refund adverse impact in Q1, a little bit of that in Q2, and then I think another significant factor is always a year over year promotional cadence and again, we did have to clear through a lot of.
Seasonal inventory in Q2.
Which you gave us a little bit of a cum benefit but a significant gross margin rate impact. So so that effect is abating a little bit. So overall, we feel comfortable with that we will see some modest improvement in Q3, and then more significantly in Q4 Q4 is our easiest comparison on both a one year and a multi year basis, so that will help us.
But we're also expecting more of a year over year less of a year over year promo headwind in Q4 than we've seen in the in the earlier quarters.
That's great. Thank you and best of luck.
Thank you Christine.
The next question comes from the line of Daniel Silverstein with Credit Suisse. Please proceed with your question.
Okay.
Hey, good morning, Thanks for taking our question.
Just kind of similar to the last question with respect to achieving a sequential improvement in comps in two H. What do you guys have planned in terms of driving customer traffic and engagement in an environment, where big ticket is still pressured.
Beyond the family and friends sales events planned to get customers in front of the new product.
Yeah, I'll take that one Daniel.
First off you know, we're making great progress on our bargains penetration and as you know bargains or closeouts anything off price.
Things that we source from all over the world factor dragged distressed retailers distressed vendors and that that amount of bargain penetration is up substantially going into third quarter, nearly 30% of the assortment and it's resonating with our customers, it's hard to move our value index with customers and to move it.
Significantly like we did in Q2 gives us momentum and reasons to believe going into the back half and keep in mind. When I joined the company back in late 2018 that penetration of bargains was high single digits and dropped two.
Even lower than that during COVID-19. So we're making progress there now the key thing that we are doing going forward is communicating that sounds mistakable value better than ever before so we've added comp ticket pricing in store.
Which in many cases takes that need to promo out of the equation and you know I was looking at social Influencers on Youtube and everything else and they're seeing this incredible value and it's starting to work, but we're starting to get out our bargain in caps have grown significantly and this is high quality products, so communicating more increasing our <unk>.
Messaging, both on dotcom social Influencers.
And our campaigns with Fort Hills back end and baby and Pat and all these things are just going to drive that messaging, even more so in the back half.
In addition to that the relevance of our stores where they're at.
Haven't flexed inventory and Assortments and pricing as effectively as we should have in the past that all is changing as we enter into the back half of the year, we're having up in the pantry areas, where we know consumers shop, the pantry for food and consumables and that's that's more needed now than ever and we're upping.
Our inventories with new freshness fear of missing out accent furniture, new broyhill collections modern styles all of these things hitting the back half of the year in the fall.
In those rural areas that are underserved.
Wrapping it all together and easy to shop Omnichannel experience that.
That where we have a lead against other off price peers.
And we're investing in that infrastructure, we just redid the landing page.
We treat it as any influence shopping experience, where they can do everything online we've got the ease of delivery and pickup in store financing all of that online and and so we feel pretty good about where we are a lot of new freshness.
Lot of bargains penetration our goal was to be a third of bargain penetration in the assortment by the end of the year, we're almost there now and whereas we focus on on that and bringing more bargains here will think that number will just go up and we will get more aggressive about the messaging. So they know that were back as a value player.
Okay.
And just a follow up on the higher bargain slash closeout penetration is there a big product margin Delta on those sales versus you know company average, let's say.
Yeah, you know it's a good question, yes, the bargain penetration.
As a as.
Is margin accretive to the rest of the box that's N D O and requires less product markdowns.
And and that's why it's appealing to us and and is resonating with the customer as well, it's just an easy sell its quality product at a great discount.
Yeah.
Thank you so much.
Thank you.
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