Q3 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 third 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.

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.

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 can differ materially from those described in the forward looking statements.

I would also like to point out that commentary today is focused on adjusted non-GAAP results.

Conciliations of GAAP to non-GAAP adjusted results are available in today's press release.

The third quarter earnings release presentation, and 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 Q3 remained very challenging environment. The one in which we were able to deliver on or exceed our beginning of quarter guidance on all key metrics, we posted a sequential improvement in comp sales significant year over year improvement in gross margin rate and adjusted SG&A well.

[noise] below last year, despite absorbing additional expense related to the recent sale lease back.

We believe these improvements are being driven by the five key actions that underlie our strategy. As a reminder, these are two owned bargains to communicate unmistakable value to increase store relevance to win with omni channel and to drive productivity.

As these actions continued to gain momentum we expect an adjusted Q4 operating results ahead of last year, marking the first quarter of year over year improvement in nearly three years, and we expect quarterly year over year improvements to continue through 2024.

Progress on the five T actions lower freight costs and a reduced level of markdowns supported by an appropriate inventory position drove the improvement in the third quarter. These factors will continue to be the primary drivers for sequential improvement in the fourth quarter.

Sport, our ongoing turnaround our efforts to aggressively manage costs inventory and capital expenditures as well as monetize owned assets have enabled us to significantly strengthen our balance sheet. We are on track to achieve over $100 million of SG&A cost savings goals for the year prior to project springboard savings project.

Springboard is off to a strong start and on track to deliver 200 million a bottomline opportunities most of which we expect to realize in 2024, our net liquidity at the end of the third quarter was a solid 258 million. Despite the normal seasonal working capital build ahead of the holiday season.

I'd like now to circle back to highlight some of the recent progress we've made on the five T actions, which will continue to drive momentum in our business.

As it relates to owning bargains the third quarter marked an important milestone on our journey to provide incredible value our mix of bargains, which our closeout items opportunistic buys and other sourced products, where we have a significant comparable price advantage with nearly 50% of sales in Q3, well exceeding our goal of over one third by the end of the year.

Here, we achieved this by procuring products from over inventoried and distressed retailers and vendors and through new factory direct sourcing partners domestically and overseas.

That said our path to offer more compelling bargains across a broad range of categories is by no means complete.

Our next phases to offer more extreme bargains, whereas a typical bargain would be at a price that significantly below most retailers prices and extreme bargain would be priced significantly below price, leading retailers to help us accelerate our progress on owning bargains early today, we announced the creation of a new role senior Vice President.

I'm extreme value sourcing to help lead our growing team of closeout buyers and this leader will report directly to me.

<unk> is a highly seasoned closeout merchant, who will rejoin us next week after having spent time with our company earlier in his career.

Seth brings almost 30 years of experience in off price and close outsourcing and what's with big lots. When we we're the clear market leader in Broadline closeout retail he returns to big lots with a wealth of strategic sourcing experience deep industry relationships and merchandising background and extreme bargains.

As it relates to communicating unmistakable value our recent marketing efforts continue to bear fruit.

Customers are increasingly recognizing the value of the bargains, we are delivering everyday while also responding well to our promotions in early October we launched a black Friday is every Friday series of events with up to 50% off deals through December 22nd.

This is one example of how we are using extreme bargains events to engage customers drive traffic and create a positive halo around price perception.

And we have accelerated our efforts to showcase value in our stores by emphasizing comparable value for a bargain offers as well as increasing the penetration of bargains in our end caps and the drive aisle as a result, we saw further increase in our net customer value perception score.

We rolled out new promotional tools and processes in June which is helping us eliminate nonproductive promotions and target our promotional spend where we will see the greatest return and we expect to continue to accelerate this progress into 2024.

We're also getting better at refining our messages to our key customer segments to improve the effectiveness of marketing such as furniture and mattress focused campaigns that promote comp value price points delivered to homes segment customers.

We continue to focus on increasing store relevance, we are continuing to flex our assortment to capture customer demand. These efforts have shown encouraging results flexing our assortment encompasses increasing inventory in top performing categories in stores as well as taking inventory out of bottom performing categories in stores, creating white space opportunities.

<unk> such as in pet to grow frequency and optimizing our space with more productive skus, particularly in food and consumables.

It also means introducing more newness and trend right product in our assortment such as the rollout of our new broyhill collections additional modern furniture styles. Many of our stores accent furniture and expansion of its core which began in the last few months.

New products as a share of total skus are up year over year and while it's still early overall, we are seeing our sales and gross margin uplift from new items.

<unk> to the flexing of our assortment in areas such as consumables, where we've seen success. We're also experimenting with new store formats, showcasing expanded selections of trendy stylish and quality home decor and furniture with amazing comparable values the <unk>.

Tennis to provide us with learnings that can be applied to our broader store base.

Improvement in store execution is also critical to increasing our relevance to help us on that journey, we're thrilled that Kristen Cox will join the leadership team next week as our senior Vice President Chief stores Officer, Chris.

Kristin has significant experience in running highly productive off price stores, we're flexible branding and assortment at the store level is critical.

Most recently she was the senior Vice President at Burlington stores and before that at Macy's. So we're excited about her ability to drive the continuing evolution of our store base to better showcase our assortment value offerings and messaging.

And we have been improving the customer experience to help us win with Omnichannel.

We continue to focus our omni channel efforts and leveraging our store base and improving our customers experience across our digital platforms.

For example, our new landing page launched in August showcases clear value messaging easier navigation and an elevated design that she is responding to.

We've added comp values to the site to better communicate the value of that big lots provides everyday. We also added a buyouts landing page, which are closeouts that feature some of our best bargains that are often available only in stores that said, we have more work to do to enhance our platform with special attention to our big ticket furniture and seasonal products.

And she comes to big lots Dot Com to research first we're excited with our progress and even more excited with the opportunity we have to positively influence her home shopping journey.

We've also upgraded capabilities through our new order management system. This system provides a single view of inventory availability, which in turn improves product availability and promise states for our customers. We recently went live with the next phase of the rollout, which is to intelligently route and allocate orders to minimize split shipments to customers.

Enhancing their experience, while also reducing shipping costs.

We're also focused on extending our brand into new and untapped spaces to engage new customers.

In time for the holiday season, we're making it easier to take advantage of the bargains were known for by adding Uber eats to our suite of marketplaces. This partnership will allow us to engage new and younger customers with our brand and bolster our marketplace sales growth already up nearly 75% year to date through Q3.

These four key actions will be important traffic drivers in the future. The last key action is to drive productivity through structural cost reductions inventory turns and capex efficiencies as I mentioned, we're well on track with these efforts and Jonathan will speak more about what we're doing to drive productivity in a few minutes.

So to sum it up we are confident that the five key actions will translate into continued sequential improvement in financial performance in the near to medium term.

I'll now make a few more comments about Q3, which as I noted a moment ago was in line or ahead of our guidance on all key metrics.

Comp sales were down 13.2% in line with our guidance of down low teens.

Trends improved sequentially relative to the second quarter, driven primarily by an improvement in seasonal sales that said, we're clearly not happy that comps were negative.

<unk> continue to be cautious on high ticket purchases, such as furniture and traffic driving categories, such as food and consumables were impacted by fierce competition in the space, where there is less product differentiation, a point, where I will come back to in a moment.

Gross margins were up by 240 basis points versus last year. Despite the sales decline, which was above our guidance of up 200 basis points of year over year improvement was due to a significant benefit from lower freight costs and reduced markdown activity.

Looking at specific category performance in the quarter seasonal comps declined 15% in Q3 as a result of Comping high promotions from last year due to an oversized seasonal buy.

That said the rate improved relative to Q2 aided by solid sales for Halloween and Christmas items, a sequentially improved sell through rate combined with a material reduction in promotional activity versus last year and seasonal gave a major boost to our overall gross margin rate.

And Christmas items, new products and expansion of lower priced outdoor home decor, and glitzy styles performed well and benefited from being featured as an extreme bargain on one of our Black Friday is every Friday events.

In Q4, we are continuing to see strong sell through in Christmas items on a significantly lower by than last year.

Our furniture soft home and hard home categories were each down double digits with furniture slightly better sequentially relative to Q2 on a year over year basis.

In furniture, we have seen significant improvement in comps in Q4 to date, which is a very encouraging sign for our overall business.

The improvement is a result of better in stocks and newness and broyhill items as well as clearing through United furniture mitigation products, which were less optimized we scramble to procure assortments to fill the void and were not able to feature complete sets of pieces, we would have wanted.

As a reminder, we are just starting to lap the abrupt closure of United furniture, previously, our largest furniture vendor, which created significant headwinds for us beginning in Q4 last year.

The improvement in furniture is also providing a positive halo effect on soft home sales also our new assortments in areas such as accent decor and modern styles started to rollout in the third quarter and we expect sales momentum to continue to build as we lean into newness and value offerings.

In food and consumables, we were not aggressive enough with offering bargains in these highly competitive categories. We are focused on accelerating the penetration of extreme bargains, particularly in the food category. This will be one of the areas of focus for SAP as it begins to accelerate our closeout buy.

Along with our ongoing efforts to optimize and reset our consumable assortments, we're already seeing an improvement in these categories, which we expect to gain momentum in Q4.

In regards to Q3, although the overall sales performance was not where we would like it to be we saw benefit from flexing food assortment up in high demand areas as well as an optimized and reset consumables assortment, particularly in personal care categories, such as hygiene and hair care pet.

<unk> was again, a standout performer with positive comp growth aided by the expansion of our assortment in the fall.

Before I pass it over to Jonathan I'd like to take a moment to thank our over 30000 associates or as I like to call them value creators for all of their hard work and efforts.

Despite the challenges we continue to navigate I know, we can count on them all to bring their big everyday I'd also like to welcome our new value creators Seth marks and Kristen Cox to the team.

I will now pass it over to Jonathan and I will return in a few moments to make some closing comments before taking your questions.

Good morning, everyone and I would like to Echo Bruce's things to the entire team here at big lots for their outstanding efforts as we continue through our turnaround.

As Bruce noted we are encouraged by the progress we've made to stabilize and turn our business and look forward to deliver an adjusted Q4 operating results ahead of last year for the first time in almost three years.

We are confident that the five key actions of the excellent progress we are making on project springboard will continue this forward momentum in 'twenty to 'twenty four.

I will now provide some more detail on our Q3 results, which I will discuss on an adjusted basis, excluding distributions into closure costs impairment charges gains on the sale of real estate and related expenses and fees related to project springboard.

The third quarter summary can be found on page nine of our quarterly results presentation.

Going into the quarter, we expected continued weakness in the sales environment due to inflation and weak overall demand for discretionary items.

However trends improved sequentially relative to the second quarter, driven by easier prior year comparisons and improvements in our seasonal business, particularly Halloween and Christmas items as well as effective promotional events.

As a result, our inventories are at an appropriate level down similar to sales and leaving us well positioned coming into Q4.

Q3, net sales were 1.03, billion% to 14.7% decrease compared to 1.21 billion a year ago.

The decline versus 2022 was driven by a comparable sales decrease of 13, 2%, which was in line with our guidance range.

Our third quarter adjusted net loss was $127 9 million, resulting in an adjusted diluted loss per share for the quarter of $4.38.

The gross margin rate for the quarter was 36, 4% up 240 basis points to last year and above our guidance.

The improvement versus last year was driven primarily by lower freight costs and a reduced level of markdowns, particularly in seasonal items.

Turning to adjusted SG&A total expenses for the quarter, including depreciation were 487.7 million down 6% versus $519 5 million last year and better than our guidance of down low single digits. SG&A included rent of approximately $6 million, resulting from a recent sale leaseback, which also.

So had the effect of reducing depreciation expense by around $750000.

Our strong performance on SG&A was driven across multiple line items and included some initial benefits from project springboard.

Adjusted operating margin for the quarter was negative 11, 1%.

Interest expense for the quarter was $13 $6 million up from $6 $3 million in the third quarter last year due to higher average amounts drawn on our credit facility.

Interest rates year over year.

Adjusted income tax for the quarter was zero point $5 million recall that last quarter, we recorded a valuation allowance against deferred tax assets, resulting from the company being in a three year cumulative loss position at the end of the quarter.

As a result, this quarter and going forward, we are not able to record a tax benefit related to loss carryforwards until we are in a three year cumulative income position.

As a result, we expect the tax rate to be in the near zero range in Q4 as well.

Total ending inventory at cost was down 12.5% last year, a 1.18 billion.

This was driven by both lower on hand units and average unit cost and also lower in transit inventory.

During the third quarter, we opened eight new stores and closed two stores. The openings were all projects, we committed to some time back.

We ended Q3 with 1428 stores and total selling square footage of $33 million.

Capital expenditures for the quarter were $15 million compared to $38 million last year depreciation.

<unk> expense in the quarter was $33 1 million down 4 million to the same period last year.

We ended the quarter with $46 6 million of cash and cash equivalents of $533 million of long term debt.

At the end of Q3, 2022 we had $62 1 million of cash and cash equivalents and long term debt of 459.9.

Our debt position at the end of Q3 reflects the impact of the completion of the sale leaseback on our California D C and twenty-three owned stores.

Turning to the outlook, we continue to expect sales comes to improve sequentially in the fourth quarter into the down high single digit range as a key merchandising and marketing actions continue to gain traction and as we lap easier comparisons.

The 50 <unk> week is expected to contribute approximately 400 basis points of sales benefit compared to the fourth quarter of 2022.

This benefit will be partially offset by a net decrease in store count, which will have an unfavorable impact of approximately 300 basis points on sales.

With regard to gross margin, we continue to expect our fourth quarter gross margin rate to improve and to be around 38% driven by reduced markdown activity lower freight costs and cost reduction and productivity initiatives.

For Q4, we expect SG&A dollars to be down low single digits versus 2022.

This includes approximately $8 million of rent expense related to the sale leaseback, which will be partially offset by lower depreciate depreciation of around $1 1 million.

We expect interest expense to be approximately $8 million in Q4 slightly ahead of last year.

With regard to Capex, we continue to expect around $75 million for the year.

We have opened 15 stores in 2023, including three in the fourth quarter to date and expect 48 closures with the closures heavily concentrated in this quarter.

We currently expect full store openings in 2024, three of which were projects. Originally slated for 2023 to which we were already committed and want you to a relocation of the store, where we are losing our lease.

In general all new new store commitments remain on hold until our business situation improves.

We expect full year depreciation of around $140 million, including approximately $36 million in Q4.

We expect a share count of approximately $29 3 million for Q4.

We expect Q4 total inventory to be down mid teens, representing a very favorable spread to sales as we continue our aggressive approach to managing inventory levels.

Again, all of our commentary on Q4 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 turn to spend a few moments to provide more details on our cost reduction and productivity efforts.

We've now secured over $400 million of structural SG&A savings in 2023.

To the initial benefits from project springboard.

Overall, we are progressing in line with plan on project springboard, which we expect to drive $200 million of more bottom line benefits across SG&A and gross margin.

Ultimately, 40% of the project springboard benefits are expected to come from cost of goods sold 40% from other gross margin driving activities, such as inventory optimization pricing and promotions and 20% from SG&A savings in store and field operations supply chain and general office.

We expect a high proportion of the spot project springboard benefits to be realized in 2024.

Turning to liquidity, we ended the quarter with $258 million of net liquidity. Despite the seasonal use of cash in Q3 as we build inventories ahead of the holiday season.

We are comfortable with our position coming into the fourth quarter and I expect to generate substantial free cash flow in the quarter.

With regard to working capital we are working towards a step change in how we manage inventory turns targeting an improvement of 15% to 20% over the next year and more overtime.

A few items to cover as it relates to a sale leaseback transaction with <unk>.

Transaction completed in the third quarter incumbent or Apple Valley, California distribution Center, and twenty-three owned store locations generating proceeds of $306 million.

We used $101 million of the proceeds to fully pay down the debt at least on the Apple Valley distribution Center and the third for the 4 million to pay closing expenses and taxes.

The balance of the proceeds provided us with additional liquidity to support our ongoing operations.

We will continue to evaluate other asset monetization opportunities, including six remaining owned store locations, our Columbus headquarters building and other assets, which combined we believe would have a monetized will value over $100 million.

We will disclose more details on the accounting for the sale leaseback and our upcoming 10-Q filing.

For book purposes, we will need to straight line, the rent or make other adjustments, which will create an initial annual incremental debt rent expense or approximately $33 million, which will be partially offset by an initial annual reduction of approximately $4 million and depreciation expense and approximately $21 million.

Our interest expense, our current rates, resulting from debt paydown.

I will also note that through Q1 of this year, we were incurring rent expense on a synthetic lease on the Apple Valley distribution Center.

Synthetic synthetic lease rent expense was $6 $3 million for the 2022 fiscal year, including $2.3 million in Q4 of 2022 and $2.3 million in Q1, 2023 from which points in synthetic lease payments were reclassified as interest expense until the suits them.

The synthetic lease was fully paid down on completion of the sale leaseback in August.

As a result, not all of the sale leaseback rent is incremental.

Turning back to our overall outlook. We believe we are in a strong position to return the company to growth and profitability as we continue to execute on our five key actions. We have made significant progress in lowering our costs managing capital and bolstering our balance sheet.

As a result, we.

We remain confident we can weather a continued period of macro driven challenges until then as a turnaround continues to gain traction.

I will now turn the call back over to Bruce.

Thank you Jonathan so to sum it up our trajectory continues to improve and we delivered in the face of the challenging consumer environment.

It's becoming more evident that the key drivers of our improvement are the five key actions, which will enable us to return to growth and profitability over time.

In the meantime, we are well positioned to weather prolonged macroeconomic challenges due to our aggressive actions to strengthen our balance sheet.

I'll now turn the call back over to the moderator. So that we can begin to address your questions. Thank you.

Thank you.

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Thank you and our first question is from the line of Joe Feldman with Telsey Advisory. Please proceed with your question.

Hey, guys. Thanks for taking the question.

Wanted to get a little more understanding of the.

The hiring of Seth marks to run the extreme value and I guess, how does that fit in with the chiefs near Chief merchandising officer, and because I know I think you said, that's going to be reporting to you but.

We will have a different buying group or how will that work mechanically I guess within the organization to to improve the merchandising and the closeout side of things.

Hey, good morning, Joe disperse I'll take that question and we're really excited about Seth marks joining the company as we mentioned in our opening remarks. He brings a lot of great experience from the extreme value sourcing.

Industry, Closeouts and what's with us years ago, when big lots was the leader in that area and and he is going to join our team actually next week.

He is.

I'm going to lead a continuing.

Our continuously growing group of.

Closeout buyers he'll have a matrix reporting relationship with Margarita Igen, and Tony our chief merchant and myself and the AR and the embedded closeout buyers under that DMM structure.

That type of sourcing as you probably know is a little bit different than just.

Some of the other sourcing we do for never out type of product as well as some of the.

Off price.

Type of sourcing we'd get from factories across the across the globe and it requires relationship building and we've been building that so bringing in staff he'll add a lot of value to it one of the main reasons he'll be reporting to me is to get very quick decision, making capability out many times.

These deals require 24 48 hour turns.

Getting the finances, right, making sure the supply chain and all those things can coordinate and so that just gives some faster access to making the deal get done, but margarita stats and I will be glued to our hips are getting this done and we're really excited about what he can bring as we mentioned in the opening remarks, we're already at 50% penetration.

<unk> on bargains are which are a great value against most retailers and now we're really focusing on this extreme bargains were set plays.

His third generation in his family doing this business and we've seen and we believe it will accelerate that penetration as well.

Got it thank you and maybe just as a quick follow up.

How are you guys, you mentioned food and consumables.

You know maybe.

Missing the Mark a little bit there and having some opportunity to improve and I guess.

Our strategy in food and consumables seems like it's no change.

Changed a little bit over the past couple of years and I'm just curious what your how you view that fitting in going forward.

Yeah, we.

The food and consumables marketplace right now is fierce competitive fiercely competitive marketplace.

And for us to be able to compete better and very much requires us to get more extreme bargains Closeouts. If you will high quality Closeouts, we werent as aggressive in pursuing those.

In the quarters before Q3.

We have changed our stance on that we're making room for at our open to buy in those areas has increased and we've got a team working on it and that should start changing this quarter and we've got new leadership.

Eating food.

In that respect as well focused on that.

Really important for us to differentiate ourselves in food, especially with extreme value.

Better than the leading price retailers grocery stores and we have every ability to do that Seth will play a big part in that as well and in the other way, we differentiate ourselves as having more of a manufacturer label a good value compared to a national brand, but will also have national brands.

For consistency of shop, but we're changing the mix to be.

Much better value assortment and still good good quality and that will start changing it as changing already and we'll start seeing the effects of that in the middle of Q4.

Got it thank you and good luck with fourth quarter.

Sure.

Our next question is from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your questions.

Hi, good morning.

Wanted to first ask about gross margin you know that's been a nice bright spot for the company and Jonathan I was hoping you could just give us a little more context about maybe how much more runway you think there is as we look out to next year in terms of the benefits from the container rates and some of the more disciplined markdowns.

Yeah, Hey, good morning, Brad Yeah, we feel really good about the progress we're making on gross margin a big sequential step up nice beat last year into our initial guidance coming into the quarter. We continued to see a nice freight benefit through Q3, and also a significant benefit from lower markdowns, particularly on seasonal which as you recall.

We're a big drag on margins earlier in the year. So we're really pleased to see that story, the holding and coming together as we go through the year and Q4 will continue to get a year over year freight benefit will also get another benefit from lower markdowns in Q4, and then in the first half with 24, we will continue to see a fairly significant year over year freight benefit.

At the rates that we were paying in the spring of this year was still elevated relative to where we are today. So back half of next year that would probably be sort of even out but the first half of the year, we should see a nice benefit. So we're expected to be up 38% in the fourth quarter. We think we're going to make good progress back towards 40% in 2024.

We won't get all the way there in 'twenty four but we think we'll make further progress relative to where we were for the full year was a whole in 2023. So we feel good about the progress we're making on gross margin.

It's been a really nice tailwind, but also getting markdowns down significantly and it's been really important.

That's very helpful. Jonathan Thank you.

And Bruce if I could just follow up on some of the merchandising evolution and the deals and bargains that you're offering now could you talk a little bit more about maybe how much you want the merchandise assortment to change over the next six and 12 months, which categories. You're most focused on driving the deals in and then.

Can you give us these percentages for the percentage of the business.

Quote deals.

Can you describe just a little bit more how much of this is really true closeout versus product. The same manufacturer just for Ya. Thanks, Yes got.

Yeah, Brad what the.

The more we can move our assortment to an off price comp value the better we'd like to move as much of it is possible. We set a goal this year to be a third of our assortment.

And the bargain category, which means that we're beating most of our reference competitors and those prices that we have a we actually are trending as you saw nearly 50%. So we've blown by that and we will take that as high as we can get it really when I think about all of our assortment and Margarita as well it's.

Having that clear value assortment.

Price points, and then also having a mix of.

Our collective collective items that are differentiated and our home categories and through furniture.

Bargains bargains are harder to shop and comp.

We've got a great value assortment, we always had a great value assortment, there, but we're leaning into that even more and focusing on our good.

Better and best mix there over the over the time of Covid and the inflation are good a good selection got a little bit out of whack and we've had to restore those opening price points over the course of 2023, and we've made great progress we've upgraded the quality across.

Across our furniture items I've, just got a great assortment out there so when I think about it I'd love to see the the the store be a.

Comp store in almost every respect and ER and be differentiated with with exciting quality products with with.

Turning to the extreme value or the extreme bargain penetration.

I can't see that gets into a definition that that the prices will have on those types of items will not just be better than most other retailers were referenced retailers.

Competitive set if you will but better than the price leaders in the industry much better than them and so that gets into the type of extreme closeout that we used to be known for and so we want to get that penetration growing when I joined the company that penetration was less than 10%.

Back in late 2018 during the pandemic could drop to mid single digits and it was only in food and consumables because of CPG companies just couldn't provide that type of.

Ah closeout during those times. So now we've we've grown that we believe it's a it's back up to.

Two and above where our where we were and we want a double if not more than that and continue to expand our competitiveness in those areas as well. So we're excited about it we're now care rating it better in their store on end caps and the drive aisles on the furniture pad, putting those types of items right out front and center all of our customers.

The index continues to improve as we do this it's giving us more content to message to our customer segmentation.

It's been much refined by a great marketing team and so we feel like we'll just keep building on this and you know it's one of the reasons why our margins improving two as we as we have these comp value.

Items and it grows penetration in a box back to Jonathan's earlier answer to your question. It gives us less reason to have to mark down and so we are becoming well known to be a place. She can trust for extreme value all the time.

That's very helpful. Thank you Bruce and good luck this holiday season.

Thank you Brett.

Yeah.

Our next questions are from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.

Hi, Thank you good morning, and thanks for taking our questions.

Wondering if you could talk a little bit about the cadence of the quarter or what the comps were by month.

How are you start traffic progressed, and how you're thinking about traffic specifically for the fourth quarter.

Yeah, Hi, Kate this is Bruce and I'm sure Jonathan I'll add a lot more color, but we were pleased to see the comps in Q3 get sequentially better from August through October and what's more is.

Through November they continue to.

Sequentially improve in traffic as well so we're pleased with the things we're doing where the momentum is going in the right direction. Our five key actions are working the teams wrong together very nicely and the customers responding to the value assortment, we're providing.

Yeah, I think you've covered it Bruce.

And then we wanted to follow up with the second question with regards to furniture, you mentioned youre lapping the closure of the furniture manufacturer, but we were wondering if furniture inventories are back to normalized levels and if not when will they returned to normalized levels and can you talk to that that big ticket discretionary.

Demand.

Have you seen any kind of stabilization.

Within furniture for it the bigger ticket.

Okay, maybe I'll take the first piece of it I think Bruce who come in so in terms of furniture, yeah. Both in terms of the level of inventory in the assortment, we feel much better than we felt for a long time, we really pretty much back to where we'd like to be and thats important coming into the fourth quarter because as you know, we just lapped the closure of United.

Furniture.

And that didn't have an immediate impact but by the time, we got into January of last fiscal year. We are starting to have a pretty significant impact. We are seeing continued certainly into Q1 and Q2 and really only now are we kind of fully mitigated that so that will be a tailwind for us, particularly as we get to January but even prior to that we feel much better about our furniture assortment that we have for.

A wild and the level of inventory is appropriate and we started to see some good momentum improvement in furniture as we referenced in the prepared remarks.

And I'll, just add that having boy held back as is great.

And going into fourth quarter, 75% of Broyhill upholstery was new.

We had strong promotional support for the new Broyhill a campaign in Q3 that resonated well gave us strength into Q4.

True to just stated we had seven core collections and six modern collections in new new styles coming in late in the fall.

There's just been a great thing to have it come back and like I said earlier, just having the opening price points and a strong good position.

And a better as strong better and best position in furniture is starting to resonate with our with our customers. We're starting to see some nice upticks in that regard.

Thank you.

Yep.

Our next questions come from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hey, good morning, everyone.

Just looking at project springboard, you've got the $100 billion of cost Takeouts and SG&A that are complete I guess I was hoping you could talk a bit more about the additional cost takeouts that are more cogs and.

Gross margin focused.

Are there any early signs of success there.

<unk> seen a bit more operational in nature.

Yeah, Hey, Peter I'll jump in on that one yeah. So there are really two separate things at the $100 million plus SG&A savings, we generated in 2023, which as you noted is complete we we've come in above that number going to come in above that number. We're really pleased with the results of those efforts you've seen that showing up in our SG&A, which was.

Down mid single digits in each of Q2 Q3, we guided to down low single digits in Q4, but don't forget there's an extra week of expenses in there as well as a full quarter of the sale leaseback expense on it.

Underlying basis in Q4, SG&A is going to be down more like high single digits. So we feel really good about the progress. We've made an important point as project springboard is then completely on top of all of that so we have we're expecting a further $200 million of benefit from project spring, but we have got some of that in Q3 and Q4, probably about 20 million.

Between the two quarters.

Mainly factory into SG&A, but some of it getting into into gross margin and then as we talked about it in the script. The 200 million is about 40% Cogs, 40% of the gross margin impact and about 20% SG&A and we expect to realize a majority of that in fiscal 2024, there's a couple of hundred different initiatives.

There are many individual work streams.

We'll go into detail on them, but yeah.

There are many different initiatives.

We work closely with an external partner as you know, we're really happy about the progress, we're making school still a lot of work to do but we've already approved a significant number of projects that will go a long way towards.

Hitting our goal of a majority of the 200 million hitting in 2024.

Yeah.

Okay and then.

Jonathan you. It also referenced plans for a targeted 15% to 20% inventory reduction over the next year.

I was hoping you could provide a little more insight on on what you guys are working on for for that level of production and then just to push back on it I guess wouldn't the push to greater extreme value and closeouts actually great and greater inventory and working capital commitments on a bigger buys.

Yeah, It's a fair point on the second point, Peter and actually we had previously been talking of targeting at somewhat higher increase in terms. So we've soften that a little bit to allow for the fact that you know that.

Closeout modal may require some additional working capital investments so you're absolutely right about that I think when we look at our two goals relative to where we've been historically.

Seems that improvement would be so kind.

Getting us back into that kind of zone.

Some of the things from project springboard will influence that in terms of the effectiveness of inventory allocation, where we think there's a.

Significant opportunity there, but overall, we think that is a very realistic goal given our historic turn rates over time, we'd love to do better than that but youre absolutely right from a business model standpoint, as we pivot to extreme bugs as we close out we need to make sure we fully account for that and how we're thinking about it going forward and I'll just add some of the other things helping in.

Productivity is our ability to not flex the assortments in our stores. We've got some stores that obviously our stores that are deal with more of the pantry customer and some stores that deal more with the home furniture customer, but in the past and those historic turn rates, we've pretty much peanut butter. The the assortment now we're flexing that that gives us more productivity.

The opportunity in open to buy for those Closeouts. So all of that coming together are producing.

Produces at 15% to 20%.

And I'll just add one other comment Peter which is if you look at the end of Q4, we're guiding to a mid teens reduction in inventory on a much lower production and sales that were starting to see the meaningful improvement in tons at the end of Q4 this year.

Very good thank you so much.

Thanks Peter.

Thank you. Our final question today comes from the line of Cristina <unk> Italia Deutsche Bank. Please proceed with your questions.

Hi, This is Justin on for Christine and Thanks for taking our question I was hoping that you could talk a little bit about and the new collections and furniture that you Friday and then any initial reads on.

And how that is driving on traffic of course outperformance in the stores.

Yeah, the team Margarita San Antonio leaves just doing an outstanding job once again, and we've got a great a great vendor alliance and with respect to the new Broyhill line a larger domestic.

Vendor, that's great partner, along with a handful of others and what we've brought US the heritage collections back in our upgraded quality and style and fashion forward along with modern styles.

And the other thing that we've done is added a lot of the teams added a lot of accent furniture, which is really resonating with our customers because it's not a ready to assemble but it's they're out on the out on the floor great quality marble tops.

Very good actual wood type of credentials and things like that all of that stuff is coming in at <unk> at a very good value off price value of the customers. There are enjoying that the upholstery line has gotten much much better and we're actually seeing that.

Comps in that improve greatly so we're excited about how we are coming back into into good stock position with great product that our customers are going to love as loving and that will only get stronger as we put more time between us.

The COVID-19 stimulus nesting pull forward that we saw over the last couple of years.

And feel good about the future.

Thank you and then just as a follow up on you mentioned that.

That you're seeing a lot of promotional intensity can you talk a little bit more about what you're seeing in the promotional environment how much of your competition.

I think promotional environment is.

Is.

As always intense during this time, but.

But we've been able to.

Put front and center, our comp value, our extreme value and that's helping us be smarter about the promotions when we actually mark down and so that's seen on customers at the end of the day they shop everywhere at this point and they are looking for the price and value.

Price quality value combination I think for showing up very nicely. There I think our fiercest competition isn't pantry.

The pantry prices across the board, it's what it's what she needs more than anything right now, especially at the low household income customer level and that's an area, where we're going to compete harder.

Very deliberately go after extreme value and value offering and we will expect to improve those those those categories in short order.

Thanks, a lot best of luck.

Thank you.

Thank you.

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