Exhibit 99.1
PRESS RELEASE
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FOR IMMEDIATE RELEASE
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Contact: Timothy A. Johnson
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Vice President, Strategic
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Planning and Investor Relations
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614-278-6622
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BIG
LOTS REPORTS FOURTH QUARTER AND FISCAL YEAR RESULTS FOR 2005
COMPANY PROVIDES GUIDANCE FOR 2006
COMPANY ANNOUNCES $150 MILLION SHARE REPURCHASE PROGRAM
Columbus, Ohio February 22, 2006 Big Lots, Inc. (NYSE: BLI) today reported fourth quarter
fiscal 2005 net income of $14.7 million, or $0.13 per diluted share, compared to net income of
$57.2 million, or $0.51 per diluted share for the same period of fiscal 2004. For fiscal year
ended January 28, 2006, the Company reported a net loss of $10.1 million, or $0.09 per share,
compared to net income of $23.8 million, or $0.21 per diluted share for fiscal year 2004. The
results for the fourth quarter and fiscal 2005 include charges related to the incremental store
closing of underperforming locations previously announced by the Company on October 6, 2005. The
charges to close these incremental stores along with their operating results have been classified
as discontinued operations for all periods being presented and are discussed in more detail later
in this release.
Excluding the results classified as discontinued operations, fourth quarter fiscal 2005 income from
continuing operations was $37.7 million, or $0.33 per diluted share, compared to income from
continuing operations of $56.7 million, or $0.50 per diluted share for the fourth quarter of fiscal
2004. For fiscal 2005, the Company reported income from continuing operations of $15.7 million, or
$0.14 per diluted share, compared to income from continuing operations of $31.4 million, or $0.27
per diluted share, for the fiscal year ended January 29, 2005.
Net sales for the fourth quarter ended January 28, 2006 were $1,394.9 million, a 6.1% increase
compared to net sales of $1,314.1 million for the same period of fiscal 2004. Comparable store
sales for stores open at least two years as of the beginning of the fiscal year increased 2.5% for
the quarter consisting of a 5.1% increase in the value of the average basket and a 2.6% decrease
in customer transactions. Net sales for the fiscal year 2005 increased 6.8% to $4,429.9 million
compared to $4,149.3 million in fiscal 2004. Comparable store sales increased 1.8% for the year with the value of the average basket increasing 4.6% and the number of customer transactions
decreasing 2.8%.
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Shareholder Relations Department
300 Phillipi Road
Columbus, Ohio 43228-5311
Phone: (614) 278-6622 Fax: (614) 278-6666
E-mail: aschmidt@biglots.com
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The 2.5% increase in comparable store sales for the fourth quarter of fiscal 2005 was driven by
strength in the average basket, which increased 5.1% and experienced growth in both units sold per
transaction and average item retail. From a merchandising perspective, home and furniture were
the best performing categories. The Companys home business benefited from an increased level of
closeout merchandise during the fourth quarter, while the furniture category was driven by an
improving overall assortment and strong performance of advertised items. After a slow start to
the fourth quarter in November, seasonal sales trends improved as the Company became more
promotional than originally planned. Additionally, clearance markdowns related to the Companys
previously announced merchandising initiatives positively impacted comparable store sales results
by approximately 1% for the quarter. Partially offsetting the basket strength was softness in
customer traffic, which remains challenging.
For the fourth quarter of fiscal 2005, the Companys operating profit from continuing operations
declined compared to the fourth quarter of fiscal 2004, as softness in gross margin was partially
offset by 100 basis points of expense leverage. From a gross margin perspective, the Company
experienced a higher markdown rate during the fourth quarter of fiscal 2005 compared to fiscal
2004 due to significant merchandise clearance activity, coupled with continued fuel cost pressures
impacting transportation expense and the price of materials in certain merchandise categories.
Expenses as a percent of sales for the fourth quarter of fiscal 2005 improved by 100 basis points
compared to last year as the Company benefited from increased productivity in its stores and
distribution centers while also recognizing certain cost savings as a result of the Companys
previously announced WIN initiatives.
The Company ended the fourth quarter of fiscal 2005 with inventory at $836 million, down 4% on a
comparable store basis to the fourth quarter of fiscal 2004, as an increased level of markdowns
and higher inventory turnover were partially offset by the planned, early delivery of lawn and
garden and summer merchandise to the Companys warmer weather regions. Bank debt at the end of
the fourth quarter of fiscal 2005 was $6 million, down $154 million compared to last year,
principally due to reduced inventories consistent with a lower store count and lower levels of
capital spending.
Discontinued Operations
On October 6, 2005, as a result of a store-by-store level analytical review of its real estate
portfolio, the Company announced its plans to close an incremental 126 stores that were
underperforming locations, producing operating losses, and not returning value to shareholders.
These 126 stores were incremental to the 40 stores the Company had already anticipated closing in
fiscal 2005 as part of the ordinary course of its business. Historically, the Company has closed
or relocated approximately 30 to 40 stores per year. Given the significance of the decision to
close approximately 8% of its store base, the Company began analyzing certain quantitative and
qualitative measures of each store to determine the appropriate financial reporting for this group
of stores. Based on this review, the Company concluded that the results specifically identifiable
to the incremental store closings, now 130 stores, should be reported as discontinued operations.
For fiscal 2005, the loss from discontinued operations of $25.8 million, or $0.23 per diluted
share, was principally related to the full-year operating results of the incremental stores closed
coupled with the costs to exit those locations including: (a) the write-down of property,
inventory, and deferred rent, (b) severance and benefits, and (c) lease termination costs. For
fiscal 2004, the loss from discontinued operations totaled $7.7 million, or $0.06 per diluted
share, which included the full-year operating results of the closed stores mentioned above along
with certain charges recorded in the third quarter of fiscal 2004 related to KB Toys, a former
division of the Company.
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Shareholder Relations Department
300 Phillipi Road
Columbus, Ohio 43228-5311
Phone: (614) 278-6622 Fax: (614) 278-6666
E-mail: aschmidt@biglots.com
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2006 Outlook
The Company anticipates fiscal 2006 earnings of $0.38 to $0.43 per diluted share compared to income
from continuing operations of $0.14 per diluted share for fiscal 2005. The Companys earnings
guidance is based on a comparable store sales increase in the 2% to 3% range with net sales from
continuing operations increasing in the 3% to 4% range compared to fiscal 2005. The Company
estimates expansion in the gross margin rate and leverage of the expense structure will lead to
improvement in the operating results of the business. For fiscal 2006, the gross margin rate
increase is anticipated to be the result of improvement in the initial mark-up related to the
execution of the merchandising aspects of the Companys previously disclosed WIN strategy combined
with a slight decline in the markdown rate compared to fiscal 2005. Additionally, the Company
expects that a comparable store sales increase of approximately 2% is necessary to leverage its
expense structure. The Company believes that efficiencies in stores and distribution centers along
with its previously announced WIN-related cost reductions will be partially offset by external cost
pressures such as transportation expense, cost of fuel and utilities and other inflationary
increases. This guidance includes an anticipated positive impact from the Companys 53-week retail
calendar in fiscal 2006, partially offset by the effect of SFAS No. 123(R), Share-Based Payment
related to the recognition of share-based compensation expense.
The Company expects interest expense for fiscal 2006 to be approximately $6 to $7 million and the
income tax rate is estimated to be in the range of 36.0% to 40.0%. Capital expenditures are
expected to be in the $50 to $55 million range with depreciation expense estimated at $105 to $110
million. The Company estimates this financial performance combined with an inventory turnover of
3.1 times should result in free cash flow of approximately $120 million, prior to the Companys
$150 million share repurchase program detailed later in this release.
For the first quarter of fiscal 2006, the Companys plan calls for a 1% to 3% comparable store
sales increase. Net sales are estimated in the range of $1,075 million to $1,095 million, an
increase of 3% to 5% compared to net sales from continuing operations in the first quarter of
fiscal 2005. Based on this level of sales performance, the Companys earnings are estimated to be
in the range of $0.04 to $0.07 per diluted share, compared to income from continuing operations for
the first quarter of fiscal 2005 of $0.06 per diluted share.
Effective with the beginning of fiscal 2006, the Company announced that it will begin to report
sales on a quarterly basis, rather than on a monthly basis, and expects to report sales for the
first quarter of fiscal 2006 on Thursday, May 4, 2006.
$150 Million Share Repurchase Program
The Company also announced today its Board of Directors authorized the repurchase of up to $150
million of the Companys common shares as it believes that the repurchase plan builds value for
shareholders and that the size of the repurchase program approximates the Companys fiscal 2005
free cash flow and fits well within the Companys capital structure. The Company said it expects
the purchases to be made from time to time in the open market or in privately negotiated
transactions with such purchases to be completed within the next twelve months. Common shares
acquired through the repurchase program will be available for general corporate purposes.
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Shareholder Relations Department
300 Phillipi Road
Columbus, Ohio 43228-5311
Phone: (614) 278-6622 Fax: (614) 278-6666
E-mail: aschmidt@biglots.com
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Conference Call/Webcast
Big Lots, Inc. will host a conference call today at 8:30 a.m. Eastern Time to discuss the Companys
fourth quarter and fiscal 2005 financial results, its outlook for fiscal 2006, and provide an
update on its WIN strategy. The Company invites you to listen to the live webcast of the
conference call. The Company is hosting the live webcast at
www.biglots.com
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If you are unable to join the live webcast, an archive of the call will be available at
www.biglots.com in the Investor Relations section of our website two hours after the call ends and
will remain available through midnight on Wednesday, March 8. A replay of the call will be
available beginning February 22 at 12:00 noon (Eastern Time) through March 8 at midnight by
dialing: 1.800.207.7077 (United States and Canada) or 1.913.383.5767 (International or
metro-Seattle). The PIN number is 4596.
Big Lots, Inc. is the nations largest broadline closeout retailer. As of the end of fiscal
2005, the Company operated a total of 1,401
BIG LOTS
stores in 47 states. Wholesale operations
are conducted through
BIG LOTS WHOLESALE, CONSOLIDATED INTERNATIONAL, WISCONSIN TOY
and with
online sales at www.biglotswholesale.com. The Companys website is located at www.biglots.com.
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Shareholder Relations Department
300 Phillipi Road
Columbus, Ohio 43228-5311
Phone: (614) 278-6622 Fax: (614) 278-6666
E-mail: aschmidt@biglots.com
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Cautionary Statement Concerning Forward-Looking Statements for Purposes of Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for
forward-looking statements to encourage companies to provide prospective information, so long as
those statements are identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from
those discussed in the statements. The Company wishes to take advantage of the safe harbor
provisions of the Act.
This release, as well as other verbal or written statements or reports made by or on the behalf of
the Company, may contain or may incorporate material by reference which includes forward-looking
statements within the meaning of the Act. By their nature, all forward-looking statements involve
risks and uncertainties. Statements, other than those based on historical facts, which address
activities, events, or developments that the Company expects or anticipates will or may occur in
the future, including such things as future capital expenditures (including the amount and nature
thereof), business strategy, expansion and growth of the Companys business and operations, future
earnings, store openings and new market entries, anticipated inventory turn, and other similar
matters, as well as statements expressing optimism or pessimism about future operating results or
events, are forward-looking statements, which are based upon a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. The words believe, anticipate,
project, plan, expect, estimate, objective, forecast, goal, intend, and similar
expressions generally identify forward-looking statements. The forward-looking statements are and
will be based upon managements then-current views and assumptions regarding future events and
operating performance, and are applicable only as of the dates of such statements. Although the
Company believes the expectations expressed in forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of its business, actual events and results may
materially differ from anticipated results described in such statements.
The Companys ability to achieve the results contemplated by forward-looking statements is subject
to a number of factors, any one, or a combination, of which could materially affect the Companys
business, financial condition, results of operations, or liquidity. These factors may include, but
are not limited to:
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the Companys ability to source and purchase merchandise on favorable terms;
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interruptions and delays in merchandise supply from the Companys and its vendors
foreign and domestic sources;
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risks associated with purchasing, directly or indirectly, merchandise from foreign
sources, including increased import duties and taxes, imposition of more restrictive
quotas, loss of most favored nation trading status, currency fluctuations, work
stoppages, transportation delays, foreign government regulations, political unrest, natural
disasters, war, terrorism, and trade restrictions including retaliation by the United
States against foreign practices;
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the ability to attract new customers and retain existing customers;
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the Companys ability to establish effective advertising, marketing, and promotional programs;
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economic and weather conditions which affect buying patterns of the Companys customers;
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changes in consumer spending and consumer debt levels;
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the Companys ability to anticipate buying patterns and implement appropriate inventory strategies;
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continued availability of capital and financing on favorable terms;
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competitive pressures and pricing pressures, including competition from other retailers;
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the Companys ability to comply with the terms of its credit facilities (or obtain
waivers for noncompliance);
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significant interest rate fluctuations and changes in the Companys credit rating;
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Shareholder Relations Department
300 Phillipi Road
Columbus, Ohio 43228-5311
Phone: (614) 278-6622 Fax: (614) 278-6666
E-mail: aschmidt@biglots.com
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the creditworthiness of the Companys former KB Toys business;
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the Companys indemnification and guarantee obligations with respect to approximately
390 KB Toys store leases and other real property leases, some or all of which may have been
rejected or materially modified in connection with the KB Toys bankruptcy proceedings, as
well as other potential costs arising out of the KB Toys bankruptcy;
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litigation risks and changes in laws and regulations, including changes in accounting
standards, the interpretation and application of accounting standards, and tax laws;
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transportation and distribution delays or interruptions that adversely impact the
Companys ability to receive and/or distribute inventory;
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the impact on transportation costs from the driver hours of service regulations adopted
by the Federal Motor Carriers Safety Administration that became effective in January 2004;
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the effect of fuel price fluctuations on the Companys transportation costs and customer purchases;
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interruptions in suppliers businesses;
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the Companys ability to achieve cost efficiencies and other benefits from various
operational initiatives and technological enhancements;
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the costs, interruptions, and problems associated with the implementation of, or failure
to implement, new or upgraded systems and technology;
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the effect of international freight rates and domestic transportation costs on the Companys profitability;
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the Companys ability to secure suitable new store locations under favorable lease terms;
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the Companys ability to successfully enter new markets;
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delays associated with constructing, opening, and operating new stores;
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the Companys ability to attract and retain suitable employees; and
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other risks described from time to time in the Companys filings with the SEC, in its
press releases, and in other communications.
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The foregoing list is not exhaustive. There can be no assurances that the Company has correctly and
completely identified, assessed, and accounted for all factors that do or may affect its business,
financial condition, results of operations, and liquidity. Additional risks not presently known to
the Company or that it believes to be immaterial also may adversely impact the Company. Should any
risks or uncertainties develop into actual events, these developments could have material adverse
effects on the Companys business, financial condition, results of operations, and liquidity.
Consequently, all of the forward-looking statements are qualified by these cautionary statements,
and there can be no assurance that the results or developments anticipated by the Company will be
realized or that they will have the expected effects on the Company or its business or operations.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only
as of the date thereof. The Company undertakes no obligation to publicly release any revisions to
the forward-looking statements contained in this release, or to update them to reflect events or
circumstances occurring after the date of this release, or to reflect the occurrence of
unanticipated events. Readers are advised, however, to consult any further disclosures the Company
may make on related subjects in its public announcements and SEC filings.
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Shareholder Relations Department
300 Phillipi Road
Columbus, Ohio 43228-5311
Phone: (614) 278-6622 Fax: (614) 278-6666
E-mail: aschmidt@biglots.com
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BIG LOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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JANUARY 28
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JANUARY 29
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2006
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2005
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(Unaudited)
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(Audited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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1,710
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$
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2,521
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Inventories
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836,092
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895,016
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Deferred income taxes
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78,539
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73,845
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Other current assets
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77,413
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63,400
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Total Current Assets
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993,754
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1,034,782
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Property and equipment net
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584,083
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648,741
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Deferred income taxes
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18,609
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12,820
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Other assets
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29,051
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37,241
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$
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1,625,497
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$
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1,733,584
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$
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161,470
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$
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149,777
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Property, payroll and other taxes
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106,858
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102,118
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Accrued operating expenses
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68,752
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58,792
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Insurance reserves
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46,474
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45,255
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KB lease obligation
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27,205
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32,498
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Accrued salaries and wages
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25,171
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20,860
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Other current liabilities
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593
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3,213
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Total Current Liabilities
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436,523
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412,513
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Long-term obligations
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5,500
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159,200
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Deferred rent
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42,288
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39,533
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Insurance reserves
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42,037
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35,955
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Other liabilities
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20,425
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10,893
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Shareholders equity
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1,078,724
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1,075,490
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$
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1,625,497
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$
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1,733,584
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BIG LOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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13 WEEKS ENDED
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13 WEEKS ENDED
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JANUARY 28
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JANUARY 29
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2006
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%
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2005
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%
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(Unaudited)
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(Unaudited)
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Net sales
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$
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1,394,902
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100.0
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$
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1,314,088
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100.0
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Gross margin
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517,023
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37.1
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529,345
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40.3
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Selling and administrative expenses
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426,831
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30.6
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415,324
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31.6
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Depreciation expense
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27,394
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2.0
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25,628
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2.0
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Operating income
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62,798
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4.5
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88,393
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6.7
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Interest expense
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1,424
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0.1
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1,644
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0.1
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Interest income
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(282
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)
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(0.0
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)
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(123
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)
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(0.0
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Income from continuing operations before income taxes
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61,656
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4.4
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86,872
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6.6
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Income tax expense
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24,003
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|
|
|
1.7
|
|
|
|
30,170
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
37,653
|
|
|
|
2.7
|
|
|
|
56,702
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)income from discontinued operations, net of tax
benefit(expense) of $14,142 and ($315), respectively
|
|
|
(23,001
|
)
|
|
|
(1.6
|
)
|
|
|
504
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
$
|
14,652
|
|
|
|
1.1
|
|
|
$
|
57,206
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) per common share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.33
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
Discontinued operations
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
$
|
0.13
|
|
|
|
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
113,428
|
|
|
|
|
|
|
|
112,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) per common share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.33
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
Discontinued operations
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
$
|
0.13
|
|
|
|
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and
common equivalent shares outstanding
|
|
|
114,024
|
|
|
|
|
|
|
|
112,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1: For all periods presented, discontinued operations includes the results specifically identifiable to 130 stores closed during fiscal 2005 which meet the
criteria of discontinued operations reporting of Statement of Financial Accounting Standards No. 144. In connection with closing the 130 stores, the Company
recorded pretax charges, primarily in the fourth quarter of 2005, of $20 million for the non-cash write down of property and equipment, inventory and deferred
rent; $3 million for severance and benefits; and
$21 million for contract termination costs.
BIG LOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 WEEKS ENDED
|
|
|
52 WEEKS ENDED
|
|
|
|
JANUARY 28
|
|
|
JANUARY 29
|
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,429,905
|
|
|
|
100.0
|
|
|
$
|
4,149,252
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,731,666
|
|
|
|
39.1
|
|
|
|
1,687,138
|
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
1,596,136
|
|
|
|
36.0
|
|
|
|
1,518,589
|
|
|
|
36.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
108,657
|
|
|
|
2.5
|
|
|
|
99,362
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
26,873
|
|
|
|
0.6
|
|
|
|
69,187
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
6,272
|
|
|
|
0.1
|
|
|
|
24,845
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(313
|
)
|
|
|
(0.0
|
)
|
|
|
(618
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
20,914
|
|
|
|
0.5
|
|
|
|
44,960
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
5,189
|
|
|
|
0.1
|
|
|
|
13,528
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,725
|
|
|
|
0.4
|
|
|
|
31,432
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)income
from discontinued operations, net of tax benefit(expense) of $15,886 and $5,313, respectively
|
|
|
(25,813
|
)
|
|
|
(0.6
|
)
|
|
|
(7,669
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
|
($10,088
|
)
|
|
|
(0.2
|
)
|
|
$
|
23,763
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) per common share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
|
|
|
|
$
|
0.28
|
|
|
|
|
|
Discontinued operations
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
|
($0.09
|
)
|
|
|
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
113,240
|
|
|
|
|
|
|
|
114,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) per common share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
Discontinued operations
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
|
($0.09
|
)
|
|
|
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and
common equivalent shares outstanding
|
|
|
113,677
|
|
|
|
|
|
|
|
114,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1: For all periods presented, discontinued operations includes the results specifically identifiable to 130 stores closed during fiscal 2005 which meet the
criteria of discontinued operations reporting of Statement of Financial Accounting Standards No. 144. In connection with closing the 130 stores, the Company
recorded pretax charges, primarily in the fourth quarter of 2005, of $20 million for the non-cash write down of property and equipment, inventory and deferred rent;
$3 million for severance and benefits; and $21 million for
contract termination costs.
Exhibit 99.2
Final Transcript
Conference Call Transcript
BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Event Date/Time: Feb. 22. 2006 / 8:30AM ET
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Thomson StreetEvents
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Contact Us
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©
2006 Thomson Financial. Republished with permission. No part of this publication may be
reproduced or transmitted in any form or by any means without the prior written consent of Thomson
Financial.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
CORPORATE PARTICIPANTS
Tim Johnson
Big Lots., Inc. VP, Strategic Planning & Investor Relations
Joe Cooper
Big Lots., Inc. SVP & CFO
Steve Fishman
Big Lots., Inc. Chairman & CEO
CONFERENCE CALL PARTICIPANTS
David Mann
Johnson Rice Analyst
Jeff Stein
Key Banc Analyst
PRESENTATION
Operator
Welcome to the Big Lots fourth quarter 2005 teleconference. (OPERATOR INSTRUCTIONS). At this
time, I would like to introduce todays first speaker, Vice President of Strategic Planning and
Investor Relations, Tim Johnson.
Tim Johnson
- Big Lots., Inc. VP, Strategic Planning & Investor Relations
Thanks Marie, and thank you everyone for joining us for our fourth quarter conference call.
With me here today in Columbus is Steve Fishman, our Chairman and CEO; Joe Cooper, Senior Vice
President and Chief Financial Officer and Chuck Haubiel, Senior Vice President and General Counsel.
Before we get started, I would like to remind you that any forward-looking statements we make on
todays call involve risks and uncertainties and are subject to our Safe Harbor provisions as
stated in our press release and our SEC filings and that actual results can differ materially from
those described in our forward-looking statements.
Just to set our agenda for this morning, first Joe is going to cover for you our financial results
for the quarter and some key metrics for the year; Steve will share his point of view on how we
ended 2005 and comment on progress made by the business towards our WIN strategy; and then Joe will
wrap up with our expectations about 2006 and we will open it up for your questions. With that, I
will turn it over to Joe.
Joe Cooper
- Big Lots., Inc. SVP & CFO
Good morning everyone. As discussed in detail in this mornings press release, our results
include both continuing and discontinued operations. First, I want to take a couple of minutes to
explain the discontinued operations component so we can move on and get to continuing operations.
In our September sales release issued on October 6, we announced that we were going to be making
some changes to our real estate strategy and would be closing some additional stores by the end of
fiscal 2005. We indicated to you that we would be closing an estimated 126 incremental stores in
fiscal 2005, an estimate that actualized at 130 incremental stores. This was on top of our plan for
the year for what we would normally close on an annual basis, which has historically been
approximately 30 to 40 stores per year. After evaluating certain quantitative and qualitative
measures, we determined that the closing costs and operating results of these incremental stores
should be classified as discontinued operations for financial reporting purposes, in accordance
with SFAS No. 144. As a result, the operations of these 130 stores are reflected as income or loss
from discontinued operations in our statements of operations for all periods presented.
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2006 Thomson Financial. Republished with permission. No part of this publication may be
reproduced or transmitted in any form or by any means without the prior written consent of Thomson
Financial.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Originally, we estimated that the total pretax cost of closing the incremental 126 stores would be
approximately $60 million. During the fourth quarter, we actually closed 130 incremental stores at
a total pretax cost of approximately $44 million, or $16 million below our original estimates. This
favorability resulted principally because our recorded rental obligation totaled approximately $19
million, or $9 million below our original estimate, principally due to negotiated lease buyouts and
subtenant income. From an inventory perspective, our cost of inventory liquidation markdowns of $13
million were approximately $8 million below our original estimates as we were able to sell more
merchandise at the initial markdown level than originally estimated. And asset write-offs and store
severance costs were $12 million versus our original estimate of $11 million.
We were very pleased to execute these store closings so effectively and timely by mid-January. Now
lets turn to continuing operations and focus on the approximately 1400 stores that we began 2006
with.
For the fourth quarter, we reported income from continuing operations of $37.7 million, or $0.33
per share, compared to income from continuing operations of $56.7 million, or $0.50 per share a
year ago. Comparable store sales increased for the quarter by 2.5%, driven by an increase of 5.1%
in the value of the average basket, partially offset by a decline in customer transactions of 2.6%.
Basket growth remained balanced with a nice mix of higher units sold per transaction and slightly
higher average item retail.
From a merchandising perspective, furniture and home continued to be the best performing
categories. Our furniture business continues to trend well and posted double-digit comps for the
second consecutive quarter. Sales trends actually accelerated from Q3 to Q4 behind an improving
assortment and particularly strong customer response to our ad circular items over the Thanksgiving
weekend and throughout the holiday season. Our home business, which for us includes domestics, home
decor, tabletop, food prep and stationary, was also strong in Q4. Comps were up in the mid-single
digits, benefiting from an increased level of closeout merchandise, particularly in domestics and
scrapbooking. Comps in the consumables and hardlines categories were essentially flat to a year
ago, and after a slow start in November, sales in the seasonal and toys areas improved in December
and January to end the quarter only slightly down to last year.
Our gross margin rate for the quarter was 37.1%, down 320 basis points to last year, principally
due to clearance-related markdowns, along with higher inbound freight costs and certain IMU-related
cost pressures. Approximately one-half of the variance in the gross margin rate to last year was
markdown related. Specifically, as part of our merchandising initiatives, we had informed you back
in October that we would be taking up to $28 million of markdowns at cost over and above our plan.
Steve initiated this action early on when he arrived to move through slower selling items or
classifications. The clearance activity achieved this objective and our inventories ended Q4 in
very good shape, and the clearance activity actually benefited the comp in Q4 by approximately 1%.
In addition to the markdowns, inbound freight costs as a percent of receipts peaked in Q4. Aside
from the higher fuel costs, which have impacted our freight costs all year long, rates in Q4 were
pressured further by premiums passed on by carriers due to the availability of drivers and capacity
constraints in the industry, especially in the Western and Midwest regions. So, gross margin was
definitely challenged in Q4 and in a few minutes, Steve will discuss how we believe we can make
some progress on the gross margin rate in 2006.
This quarters SG&A rate of 32.6% was 100 basis points better than last year. Leverage was achieved
primarily through increased productivity in our stores and distribution centers. In stores, we are
improving our productivity per hour, and the inventory flow of cartons from our merchandising team
was better managed than a year ago, which was critical as our volume does ramp up in Q4. DC
throughput improved, particularly in our newest DC in Durant, Oklahoma, and our re-engineered DC
here in Columbus. In only its second year, our Durant DC is now challenging Tremont as the most
efficient location in our network. Partially offsetting these cost savings were the continued
pressure of higher fuel costs and utility rates, along with a shift of approximately $3 million in
advertising expenses from Q3 to the peak holiday shopping season in Q4.
Net interest expense was $1.1 million for the quarter; thats $0.4 million lower than last year due
to lower average borrowings.
The effective income tax rate for the quarter was 38.9%.
Turning to the balance sheet, our total inventory ended at $836 million, down $59 million,
principally due to a lower store count. On a comparable store basis, inventory declined 4% per
store versus the fourth quarter of fiscal 2004 as an increased level of markdowns on slower-selling
merchandise and improving inventory turnover was partially offset by the planned early receipt of
lawn and garden merchandise to support our clustering strategy for warm weather stores. For the
year, inventory turnover matched the Companys record high at 3.0 times.
Bank debt at the end of the fourth quarter was $6 million, thats down $154 million to last year,
principally due to reduced inventories consistent with a lower store count and lower levels of
capital spending.
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2006 Thomson Financial. Republished with permission. No part of this publication may be
reproduced or transmitted in any form or by any means without the prior written consent of Thomson
Financial.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Capital expenditures were $10.1 million for the quarter, down $17.1 million to the fourth quarter
of last year. For the 2005 fiscal year, CapEx was $68.5 million, down $66.8 million to last year.
The decreased level of capital spending related to fewer new store openings this year versus last
year, and no investment and store remodel activity this year, compared to 66 stores a year ago.
Additionally, we experienced a lower level of capital spending in our distribution centers in 2005
as last years capital included the Columbus DC re-engineering initiative. Depreciation expense for
the fourth quarter was $27.4 million. For the 2005 fiscal year, depreciation expense was $108.7
million, up $9.3 million compared to last year.
At the end of the fiscal year, total selling square footage was 29.9 million. We began the year at
1,502 stores, opened 73 new stores and closed 174 stores, including the 130 store closings reported
as discontinued operations, and 44 stores closed in the normal course of business. At the end of
the fiscal years, we were operating 1,401 stores. For comparison and modeling purposes, we began
the year with 1,372 stores, if you exclude the 130 stores we closed in 2005 classified as
discontinued operations. Also at the end of the fiscal year, furniture as a department was in
approximately 1,300 stores, or 94% of the fleet. Steve.
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Thanks Joe, and good morning everyone. Before I share with you an update on our WIN strategy
and thoughts about 2006, I want to comment briefly on the fourth quarter. As Ive told our team
here at Big Lots from the day I walked in, Im going to tell you some things that you like and some
things that you dont like. But I will always be honest with you and provide you with the best
information possible to understand how we are progressing and how weve been successful in
improving our business.
From strictly a financial earnings point of view, $38 million worth of net income or $0.33 a share
on a 2.5% comp that was highly promotionally driven is not where we want to be longer-term. The
potential for this business is much greater than that. So if youre focused on Q4, youre probably
disappointed.
But Im not focused on the last quarter, and neither is our team. Were focused on rebuilding a
business here, generating cash and driving sustainable growth well into the future. From that
longer-term perspective, Q4 was a very successful quarter when you think about all that the team
has accomplished in terms of developing the WIN strategy, closing the underperforming stores,
taking some markdowns to clean up our inventories heading into 2006, reducing the overall cost
structure of the business through some very difficult decisions, and continuing to improve the
percent of closeouts available for sale.
Also, before I move on to WIN, the business generated $154 million of cash in 2005 by making some
of these difficult decisions. We announced today that our Board of Directors approved a share
repurchase program of $150 million to be completed within the next 12 months. This represents the
largest share repurchase in the Companys history, but ultimately the amount of shares and at what
price will be determined in part by the markets.
So lets talk about one of my favorite subjects, and thats our WIN strategy. I told you back in
August that there would be three phases to the WIN strategy discovery, testing and execution.
During the last six months, weve been in the discovery phase and weve learned a great deal about
the business. We believe that the strategy is pretty much set and now, in 2006, will be significant
testing in many areas of the business. Remember, three focused components real estate, operating
expense structure, and merchandising.
Let me touch briefly on the real estate first. After a tremendous amount of store-level analysis,
weve gained an understanding of what works and what doesnt. Based on these learnings, we told you
back in October we were going to close about 8% of our store base because they were underperforming
locations and would cost us up to $60 million. During the fourth quarter, we closed 130 incremental
stores and did so for about $44 million; a lot of money, but less costly than if we allowed these
stores to continue to weigh on the business performance. We also told you that we were going to be
slowing new store growth until our business begins to improve. Joe is going to give you more
details on that in a moment, but we will open a minimal number of stores in 2006, in the area of 15
or so. Our new store strategy is very market-specific, and not all over the country. The market
focus of our new stores will be in states like California, Arizona, Washington, New York, and New
Jersey; areas of the country where we have been most successful recently. Again, these are not easy
decisions because some of the people see this as slowing growth, which from our perspective, it is
the fiscally responsible thing to do until our operating margins begin to improve. We believe that
we can drive more growth and generate more cash in the near-term by improving our productivity to
the existing fleet of 1,400 stores. And finally, weve proven to the landlord community that we
will walk away from locations. If the deal is not the best deal for Big Lots, then we will walk
away. This also means that we are taking an aggressive approach on renewals and attempting to
renegotiate some of our existing leases as well. I feel very good about our progress in the last
six months in real estate.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
The next component of WIN is operating expenses. Back in November, we indicated that approximately
$30 to $35 million of annual cost reductions had been identified. A portion of those, approximately
$5 million, was realized in 2005, leaving $25 to $30 million of incremental reductions included in
our 2006 plan and guidance.
We made some headcount-related changes, and I would estimate those reductions were a little less
than half of the total annual cost savings. These actions were taken in the general office here in
Columbus, organizational changes were made in our distribution facilities, and most recently in
January, we restructured our field operations team. We realigned their responsibilities based on
the store closings and lower expected store growth in the near-term. Additionally, we eliminated
some redundancies in the organization between the closeout and furniture operations. These changes
are behind us, and were moving forward as a more efficient, focused organization. In terms of
headcount reduction and initiatives, this is what we had planned, and we are not currently planning
any significant changes in the foreseeable future.
The remaining cost reductions will occur in our stores, but as a result of cross-functional
alignment across the entire organization. Or in simple terms, all areas of our business can and
will help our stores team become more efficient. We need to become a selling organization as a
company, not just take the approach that if we buy it, they will come. What I mean by a selling
organization starts at the merchandise buy how it will be priced? We need to simplify our
pricing strategy, and probably move to fewer price points, which should make it easier for the
customer to understand and our stores to execute. Are the items pre-ticketed? How will the
merchandise arrive at our stores, case packs, pallets, PDQs. All of these decisions impact how
productive our store associates can be. Additionally, the level of cash-related work we were asking
of our stores was way too extensive and inefficient. I have said this on many occasions I want
our stores team focused on getting the merchandise out to the selling floor, keeping a clean
store, and servicing the customer. Thats it, its just that simple. We are in the closeout
business, and merchandising at unbelievable values needs to take over from there.
So thats how we will get the cost savings in 2006, but we are not finished there. I committed to
you on our last call that were going to be looking at our long-term expenses as well
distribution and transportation, stores, rent and occupancy, advertising, all areas of the
business.
First, transportation and distribution. Weve brought in some outside expertise to help us evaluate
our processes and begin to test merchandise flow-through, hopefully later this year.
Next, stores. I have approved about $5 million worth of capital to begin to test a new point of
sale register system in 2006. We believe there is an opportunity not only in the store efficiencies
and processes, but also in improving our markdown processes.
Rent and occupancy. I believe our real estate strategy and more frugal capital spending has us
headed in the right direction here.
So we are not resting on 2006 savings, because in my view, we still have an opportunity to lower
the SG&A rate of the business and not just through higher sales. Were moving forward in thinking
about the cost structure for 2007 and future years.
Marketing is another area of the business that has a pretty significant SG&A budget. We have new
leadership in marketing, and along with new leadership comes new ways of thinking about our
business. We will begin testing a number of different areas during the first half of 2006. The
ultimate goal in testing here is to drive sales and profits and to learn more about what our
optimal advertising spending dollar spend, or mix of spend, should be. We will be doing a
significant amount of advertising testing in 2006; in fact, I think the number was around 20 or so
different variables that we want to learn about levels of television coverage, types of ad
circulars, presentation, radio coverage, and also,, in-store presentation. I can tell you that we
have a new approach to television, which begins the first week of March. So over the next several
months, we will learn a great deal in marketing to better understand what is the best way to
communicate to our customers, and also, are there efficiencies or cost savings available in this
area?
The real estate and operating expense work has and will continue to positively impact our results
by lowering our SG&A rate, and ultimately the comp leverage point. Im very excited about the
testing planned for marketing and what we will learn about our potential in that area of the
business. But at the end of the day, we are a merchandising company.
In our view, the long-term prospects of this company rest on improving the sales productivity of
our store. At $145 to $150 per square foot, we are underperforming to the competition. We have
portions of our store achieving much higher productivity and some lower. The point is, we are too
inconsistent across categories and we need to address it.
Second, we must stabilize and start to work on improving the gross margin rate of the business.
Every tenth of gross margin rate declines cost us about $4.5 million pretax, or $0.02 EPS.
Significant numbers.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
So how do we work on the sales per foot and stabilizing the gross margin rate of the business at
the same time? Its with a detailed, specific merchandising strategy. Know what your customer wants
and what theyre willing to pay for it. Its through building better vendor partnerships, getting
the best deals and the best price on the cost side. Its getting the merchandise here, where you
want it, packaged the way our stores can handle it, and putting it in the right stores to maximize
sales and markdowns.
Lets review briefly whats already been done. Three decisions, already actioned that will help in
improving sales and margin. We exited the stand-alone furniture stores. We were not making money
and the stand-alone concept was not a focus. Dont misunderstand, we love the furniture business.
Last year alone, we did over $650 million in furniture sales, one of the top furniture retailers in
the country. I know furniture causes anxiety in the market, given the failures of others in this
category, but we have to listen to our customers, and they have voted with their dollars. Joe
mentioned earlier double-digit comps in the last two quarters and an accelerating trend in the
holiday season. Additionally, as weve moved into the tax refund selling season, we continue to see
strength in this category.
Second, we have completely exited the frozen food category. Not a good business for us. We have a
better use for this space. Generally in most stores, we replaced frozen by expanding our pet
category, which has been a strong category for us and a lot of retailers. For us, pet is a heavily
closeout category, with more top brands being added soon. Better margins and easier execution in
our stores.
Finally, and this one was tough in the near-term, but we told you we would be taking up to $28
million of unplanned markdowns in Q4 to move through slower selling items during the peak holiday
traffic periods. A tough call, a lot of money, but it was executed well and within our estimates
that we gave you in October. Weve entered 2006 with very clean inventories and ready for business.
Going forward, Ive committed to our merchants that we will take markdowns timely, and we will keep
inventory moving, making room for the next big deal. But large, unplanned, Big Clearance markdown
initiatives such as the one we have just executed, cannot and will not be tolerated again.
These are actions taken, so now what about the strategy going forward? Weve completed an extensive
amount of customer research and learned a great deal about what is most important, which is brands,
treasure hunt, price, value, and savings. I shared a lot of this information with you back in
November, but maybe the single biggest takeaway was the fact that the majority of our customers
consider themselves to be treasure hunters and come to our store without a specific item in mind to
purchase. What an amazing opportunity for our business when we execute. They want brand names at
great value and savings. So brands and great prices will be a critical part of the strategy, but we
knew that. How do we think out of the box on how to deliver that treasure to our customer?
One the most critical components is going to be do we have enough top brands in each category, and
good and collaborative relationships with those manufacturers? At the end of January, we hosted our
first-ever business summit here in our home in Columbus, with over 100 key executives from the
nations leading companies in attendance. For some of those companies in attendance, we were
already a large customer. But there were many of those in attendance who we currently do no
business with. I personally walked them through our merchandising strategies and challenges and
demonstrated how we may be able to partner together to make each one of them, and us, more
successful.
I shared with them that we think of the assortment in our stores as having three components.
Closeouts, which is our focus and the majority of our assortment. Always the preference and biggest
source of value to our customer. Next, engineered closeouts items that we often develop along
with our vendor partners, preferably a top brand, but definitively and definitely easily
recognizable as a great deal by the customer. The visual and value characteristics should be
similar to a closeout. A very good example is a branded manufacturer thats made a toy for other
in-line retailers. They already have an investment in making the mold, or establishing a line. So
for them, a few thousand extra units in different packaging is not a big deal. With this excess
capacity, they can make a little extra money on their investment and sell the units to Big Lots at
a reduced price. Brand names, and to the customer it feels like a true closeout because of the
value savings. Or a famous name apparel manufacturer who has the ability under a brand name to
manufacture us jeans or shorts around back-to-school, or spring break, or for warm weather stores.
Incremental business, easy to handle in our stores, we can control the quantity and quality, and
the distribution. Thinking differently. Just a couple of examples of how we have to think outside
the box in merchandising to drive sales and margin dollars.
And then, the third source of supply is consistency product, or items that the customer expects you
to have, like shaving cream, bottled water, things like that. We would see ourselves addressing
these customer demands through a captive brand or a private-label, preferably captive brand. As an
example, in the past several weeks we started carrying Rival dog food. Rival is a brand name that
we now control. Consistency product under a brand name for the customer. But this program should
not be your typical private-label program, were Big Lots. Our items need to be unique in size,
quantities, and features.
I tried to stress to our guests at the business summit that they could potentially satisfy any one
or all three of these different types of supply. Were not boxed into a specific type of sourcing
with them, and these can be collaborative and can change. I said at this meeting and many of the
guests in attendance agreed with me after the meeting. If were one of the largest retailers in the
country and they are some of the largest manufacturers,
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
then we should be doing significant business, or something is not right, and I firmly believe that.
Im positive that these business leaders from some of the top brands in the country walked away
thinking that things are different and buzzing at Big Lots. Partnering with the top manufacturers
and being associated with the top brands in each of our major categories will be incredibly
important to satisfy the treasure hunter as we move forward.
Another source of supply that does not necessarily apply to all types of merchandise category is
refurbished products. My definition of a refurbished product for our stores would be to have good
quality, a desired brand name and an excellent source of value to the customer with an appropriate
warranty or guarantee of quality. There is not a significant retailer that Im aware of that owns
this business in a major way. We already do a fair amount of business in refurbished items in
certain areas, such as electronics, home maintenance and small appliances. But were looking at
this as an opportunity for us in the future.
So taking into account all that weve learned from our customers and all that were doing on the
vendor side, each merchant now has been given a very specific roadmap for their category which
details for them, by class or category, what is their sales potential and what category should it
come from? How much of the business should be closeout, engineered closeout, or how much of the
business should be expected under a captive or private-label? Next, the roadmap targets the top two
branded vendors in each classification. It identifies quality standard or benchmark for the
category whether its in a big box retailer or a specialty retailer, in the case of a seasonal or
home category. It importantly defines the pricing strategy. Is it simple and easy to understand?
Can it be easily executed in the store, and are you getting the best price on the buy side and on
the sales side in terms of average item retail from the customer? Do we have an exit strategy?
Markdowns to keep the category turning, and ever-changing for the customer.
Within each category buyers are thinking about, buzz builders, basket builders and must haves.
Buzz builders are the WOW items that create excitement in a store and customers love to brag
about to their friends, like famous maker jeans for $12. Basket builders are impulse items that
can increase the average basket, like snacks, seasonal items or grabbing a Coke, and must haves
are frequently purchased items, such as batteries, bottled water, and bleach. These items can be
satisfied by closeout product, engineered product, or captive label. This is different than the
standard never-out program we had previously been touting in our stores.
A lot of people are focused on customer traffic and asking me what were doing to drive more
customer transactions in their store. I told you earlier theres a significant amount of testing
and marketing ideas that will hopefully give us an answer or a series of potential ideas to get new
customers into our stores. But my focus in the near term is on how do we capitalize on and earn
more of our loyal customers current spend? How do we raise the ring? I believe the answer is
better merchandising, more consistent merchandising execution across all categories in the store,
and thats what our merchants are focused on. All of our strategies are designed to get more
dollars from our existing loyal customer base, a strategy were calling, raise the ring. Item
selection, thinking outside the box, and pricing will be critical. Who wouldve thought that Big
Lots could sell a $300 vacuum cleaner, but we did. Earlier this month, we had a Dyson vacuum
cleaner in our weekly circular, and sold almost 3,000 units in a week. Thats thinking outside the
box, thats raising the ring. This past week we offered a $598 generator in our southern stores.
Thats raising the ring. Were going to hit some home runs with this approach, and we will also
make some mistakes. Mistakes during this testing phase are okay if we learn something along the
way. But when mistakes occur, and they will, our markdown plans give us the flexibility to take
markdowns and fix the mistakes. I want to encourage our merchants to try different things. We have
to think differently, were Big Lots and thats what our customer expects and demands from us.
Now dont misunderstand me, raise the ring is not all about higher prices. Its about how do you
build a higher customer basket of great values each time they shop our stores? It could be basket
builders or units sold per transaction, or in my earlier examples, it could be a higher price point
item that represents significant dollar savings to the customer.
So the merchandising strategy is evolving, and I can tell you that each merchant has a very clear
view of what success will look like in 2006. And as the CEO and a merchant, I can guarantee you
that they will be held accountable for that strategy.
Joe is going to give you details in a moment on 2006, but let me try to give you my thoughts
briefly at a higher level. Sales at a 2 to 3% comp is sort of the price of admission in retail,
what you need to cover inflationary cost increases. The last couple of years, weve not achieved
that, but I can assure you were running fast and the team is very energized about driving sales.
Gross margin rate improvement is critical. We need to buy it smarter, price it better, put it in
the right stores and drive turnover. Our markdowns have been high in recent years, and we can do
better. Its important that you understand, though, that I will take markdowns to stay fresh, drive
the business and turn the goods. We will make mistakes, merchants always do. Especially this year
as we test ideas, there will be winners and there will be losers. We will celebrate the winners and
address the losers with timely markdowns and move on. We will learn a tremendous
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
amount about our business in 2006 with all of the testing thats scheduled. Testing in areas of
merchandising, raising the ring, marketing, merchandise flow-through, POS register systems. Were
focused on growing the operating margin of this business and generating cash.
Our team enters 2006 with incredible momentum and energy. There is a buzz in the building here in
Columbus and our field operations team across the country has embraced the changes were making.
Business is everything but usual, and were thinking differently. Were making decisions about
merchandise we want to carry, how we want to buy it, price it, market it and distribute it to our
stores. Were focused on becoming a selling organization, and we do not see any one factor thats
inherent in our business that would keep us from accomplishing our goals. There will always be
external challenges or pressures that can impact our results like fuel costs, weather, the economy
or competition, but I firmly believe in this business and the potential of this operating model.
And how we execute to our plan, manage our business, work together as a team and communicate to the
customer are powerful opportunities that will determine how successful we will be in 2006 and in
the future.
Joe Cooper
- Big Lots., Inc. SVP & CFO
I want to touch on some of the details of our 2006 guidance. Hopefully then Q&A can be less
about financial modeling questions and more about strategy and where Steve intends to take the
business.
Overall, were planning 2006 earnings to be in the range of $0.38 to $0.43 per diluted share, up
from 2005 income from continuing operations of $0.14 per diluted share. This guidance includes the
positive impact from a 53 week retail calendar in fiscal 2006 of approximately $0.05 per share,
partially offset by a $0.02 per share impact from SFAS 123(R) related to the recognition of
stock-based compensation expense.
Our 2006 sales plan calls for total sales growth in the 3 to 4% range, which is based on a 2 to 3%
comp. During 2006, we anticipate opening approximately 15 new stores and closing about 40 stores.
We will have fewer openings in 2006 compared to past years as we move from an opportunistic real
estate strategy to a market-focused strategy targeting desired trade areas in our strongest
markets. The closings will come principally from underperforming stores, up for renewal in 06,
where we anticipate that the landlord will not be able to reduce occupancy costs enough to help us
satisfy our required rate of return. The overall decline of 25 stores in fiscal 2006 is expected to
occur primarily in the fourth quarter. In terms of the furniture business, we estimate that
approximately 1,350 stores, or approximately 98% of the chain, will have some form of a furniture
offering at the end of this year.
As Steve covered earlier, were expecting gross margin rate improvement in 2006 through a
combination of improvement on the cost and sourcing side, along with the raise the ring strategy.
Additionally, we believe that through improving inventory turns and better systems and processes,
we should be able to make some progress on lowering our markdown rate compared to the last two
years.
The SG&A rate is expected to improve with an estimated leverage point at a 2% comp. The leverage
obtained from WIN-related cost reductions and a 2% to 3% comp are expected to be partially offset
by bonus expense, along with external cost pressures, such as fuel and utilities.
Net interest expense should be in the $6 to $7 million range.
The effective income tax rate is planned to be in the range of 36 to 40% versus the 2005 effective
income tax rate of 24.8%. The expected variance is due to the expiration of the work opportunity
and welfare-to-work federal income tax credit as of December 31, 2005, and no comparable
anticipated write-down of the deferred tax asset due to enacted law changes that occurred in 2005,
as well as, settlement activity isolated to 2005, and finally, the jurisdictional mix and magnitude
of earnings expected in 2006 versus 2005.
For the year, capital expenditures are expected to be in the $50 to $55 million range. Thats our
lowest level in the last 10 years. Maintenance capital is estimated at $30 to $35 million, real
estate capital principally in new stores is estimated at approximately $10 million, and IT-related
capital of approximately $10 million is planned related principally to the Next Generation store
systems Steve mentioned earlier.
Depreciation expense is estimated to be $105 to $110 million.
Our planned performance, combined with an inventory turn of 3.1 times, should generate free cash
flow in the $120 million range. Thats prior to the $150 million share repurchase that we announced
earlier today.
In the first quarter, comp sales are planned up in the 1% to 3% range. Total sales are estimated in
the range of $1.075 billion to $1.095 billion. Thats an increase of 3% to 5% to last year. Q1
earnings are estimated to be in the range of $0.04 to $0.07 per diluted share compared to $0.06
last year.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Finally, as we announced this morning in our press release, we will begin to report sales on a
quarterly basis in fiscal 2006, rather than a monthly basis. As many of you know who have followed
the Company for any length of time, monthly fluctuations due to special merchandise deals,
advertising shifts, holiday shifts or even weather are not unusual for our business. We would
expect that monthly fluctuations and sales trends would normalize during a given quarter. We
believe quarterly comps are a better, longer-term measurement and similar to many other large
retailers, we believe a longer-term view is a better evaluation of business performance and how
well our strategies are working. We expect to report sales for the first quarter on Thursday, May
4.
Tim Johnson
- Big Lots., Inc. VP, Strategic Planning & Investor Relations
We would like to go ahead and open the lines for Q&A, Marie.
QUESTION AND ANSWER
Operator
(OPERATOR INSTRUCTIONS). David Mann, Johnson Rice.
David Mann
- Johnson Rice Analyst
Good morning, thank you. I guess the first question I have is about the operating margin
potential that you might see for these core group of about 1,400 stores. In terms of the guidance,
it looks like youre guiding to the 2% or a little below that. Where do you think the operating
margin potentially could go as you effect some of the strategies?
Joe Cooper
- Big Lots., Inc. SVP & CFO
Were not putting out a long-term model for the business at this time, and I guess we could
just leave that up to you. Youre clearly very familiar with the business and would model that out.
David Mann
- Johnson Rice Analyst
In terms of the other question I might have, youve talked a lot about some of these
strategies to increase the average ticket. Can you give a sense on sort of the traffic trend in
terms of when you might expect that to start to sort of moderate, the decline youve seen over the
last year or so?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
I think thats a difficult one, David. I dont think were any different than most of the
retailers, at least that Ive seen, whove talked about it. Traffic is not robust and increasing in
most retailers. I dont think we have seen it I think the last quarter was about consistent with
the last few quarters. I think January clearly was better because of the topline sales, and you saw
that. And initially, were seeing the same kind of performance as we go into the spring. But the
reality is, were focused on our existing customer base.
I think you might be interested when you start seeing some of the media that breaks at end of this
month, actually really this weekend, first of March or so. That we are weve decided not only to
address the existing customer base, but some new customers. And I hope over time were going to
eventually squelch the declining traffic customer issue, customer transactions. Its not count, its
customer transactions in the store. But it certainly is not quite as bad as it was when I first
entered the Company, and hopefully it will continue to get better.
I think the second quarter we have a better opportunity than the first, and I think youll see our
business get better and better as it goes forward towards the end of the year. I think it takes an
amount of time for the strategies that weve put into place to really take effect. So its not just
the customer count, but its almost addressing everything that you or anybody else might ask me,
which is, the business itself. We anticipate the
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
strategy taking hold in the first quarter, but better in the second than the first. Clearly, better
by back-to-school and by Christmas, really starting to move.
David Mann
- Johnson Rice Analyst
If I could just follow up one last question on that. In terms of the success I guess youre
indicating on sort of the higher price point on the branded vacuum and in the current ad, you have
some really high-quality branded patio furniture. Do you feel like youre starting to perhaps
attract a slightly more affluent customer that may be returning back to the store being some of
that?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Give me time. I think we said before, and if we havent, we have all types of customers. We
know from all of the information that we got that we have three levels of customers. If I havent
shared this, I will share with all of you now. We have a challenged economic customer base, we have
a mid-line economic customer base, which is basically the model of the average American, which is
predominantly what are customer is, in the $42,000 income range. Young, married, early 30s with a
family. And then we have a customer clustering of $75,000 to $150,000 income customers. And Id
love to tell you that they are responding to some of the things that weve done. We clearly saw in
some of the locations, because the ad youre speaking to specifically was a market-specific
clustering strategy. I talked about our clustering strategy. We were very focused. That actual
Brown Jordan promotion ran in Miami, Florida, southern locations, and San Diego, if Im not
mistaken, and we had store locations that clearly individually sold a tremendous amount of it, and
Im sure it was to a better quality customer. The first week of the month, you mentioned that tab,
I dont know if you caught that, we had some unbelievable name-brand values of high-end
televisions, and we did quite well. Our last two promotions that we have had this month, were
really pleased with. The look of the print is new also. I really didnt address it, but I tried to
give the perspective that everything that were doing in marketing is changing. And the two
promotions we ran so far in February, we were very pleased with.
David Mann
- Johnson Rice Analyst
Steve, thank you.
Operator
Jeff Stein, Key Banc.
Jeff Stein
- Key Banc Analyst
Steve, a question with regard to engineered closeouts. Im wondering if you might address the
issue in terms of where you want to take that piece of your merchandising strategy this year, and
what implications are for gross margins. In other words, can you earn as high a gross margin on a
deal that youre striking directly with the vendor to produce goods for you, as you could buying it
on the closeout market, where basically they may be under considerably more pressure?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Thats a good call and a good catch. Let me answer what I thought was two separate questions.
First off, were very encouraged by our ability to do some things with existing vendors and new
vendors from an engineered closeout standpoint. The intention would be that we have gross margin
responsibilities in each and every department, but I must tell you, were focused on gross margin
dollars and thats going to be the key to the strategy. And there will be engineered closeouts that
we will make margin numbers that are very similar to closeout businesses, and there will be
conscious decisions to make where we might not make the norm of a real closeout, but it makes
sense in its incremental volume over and above the existing plan and were willing to accept that
because its going to generate traffic. And more importantly, it puts us instead of second or third
on the pecking order, at the top of the list with the existing vendor when closeouts become
available.
So really, its a really full-circle complete strategy, Jeff. One, to have somebody whos willing
to let us tag along at end of a production run, or in the box change or a UPC code change or the
fact that it doesnt cost them anymore because theyre running the mills, running the machines,
have
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
the molds or whatever the case may be. In some of the cases, were making exactly the same amount
as were making in the closeout business. And in some cases, there will be slightly less. But those
will be major opportunities that are incremental volume over and above the existing plan, and were
very conscious of that.
Jeff Stein
- Key Banc Analyst
Any ideas, Steve, in terms of what percent of your buys this year might fall into that
category?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
The answer is no. But just because everybody will shake their head at the end and say that we
cant give you that, but let me be realistic. We know a number of different elements about our
business. The actual closeout business is critical to us. Every roadmap that every one of our
merchants has outlines what percentage of business should be closeout, and what percentage of the
business can be engineered closeout and what percentage of the business can be must-haves. Thats
what were calling it must-haves. And weve seen an increase in our closeout business. Weve
never separated the difference between what today were going to start calling an engineered
closeout business and a closeout business. We still want to drive our business through actual
branded closeouts. But it was a nice increase in the fourth quarter in almost every aspect of
business. In fact, the one business that really has been no closeouts, which is the furniture
business, had probably one of the biggest lifts in closeouts because we addressed the ability to
buy closeouts in the furniture business more than weve had since weve been in the furniture
business, and interestingly enough, the largest rises that we saw in increase of closeout business
in the fourth quarter were our businesses that were the largest comp increases that we had for the
fourth quarter the home businesses and the furniture business.
Jeff Stein
- Key Banc Analyst
One last question. Ad spending wondering if you could address your anticipated level of ad
spending as a percentage of sales, and how you might be planning to change the mix between print
and TV?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Ill address that, and I will give you what were planning on right now. But Jeff, I want to
be very cautious we really have a huge amount of testing. Advertising spend-through runs about
2.3% of total, which by the way, even weve been criticized as a number that has dropped as a
percentage to total, no matter what has happened to the SG&A of this companys business every year
and will drop as a percentage of total this year also. So its a little over $100 million in round
numbers.
Right now, the print part of the business is about 60% of the investment, the media part of the
business in round numbers is 40% of the business. But Rob Claxton has got a huge variable testing
program going on between now and June, that if we see many, many issues that say we need to shift
to more media, we need to shift to more print, were going to be doing some radio, which weve
really never done before because radio offers us a great promotional opportunity, and Rob also has,
which has been asked of me before and we will address, money budgeted in that budget to take a look
at the Internet because its time for us take a step back and take a look at how were handling the
Web, and what our options are there. We have no idea, I dont want anybody to jump to conclusions
there, but we do have money in the budget, which is an ample amount within that funding level to
take a good, hard look at what should we be doing with the Internet. So we clearly have more than
enough money to do everything we want to do.
Jeff Stein
- Key Banc Analyst
When you say the Internet, are you talking about Internet advertising, or selling product over
the Internet?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
I dont know, but were sure going to find out.
Jeff Stein
- Key Banc Analyst
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Thank you.
Operator
(OPERATOR INSTRUCTIONS). David Mann, Johnson Rice.
David Mann
- Johnson Rice Analyst
Thank you. Can you clarify, Joe, in the guidance, does the 2006 guidance include the effect
for the buyback?
Joe Cooper
- Big Lots., Inc. SVP & CFO
Yes it does.
David Mann
- Johnson Rice Analyst
Should we assume current prices in terms of the number of shares, or how would you factor that
in?
Joe Cooper
- Big Lots., Inc. SVP & CFO
I wont be that specific on that, David.
David Mann
- Johnson Rice Analyst
One other question in terms of the seasonal business. Steve, it seems like every year, the
company is sort of taking a new stance or a tack or a level of conservatism towards the seasonal
business, as for Christmas. Can you give a sense on how you are looking at Christmas 2006 in terms
of the seasonal differences?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Actually I will. Some of you who know me know that just as a merchant, I do have a background
in merchandising hardlines and seasonal is one of those businesses Ive been involved with. So I
understand it. I like it. It doesnt offer us the closeout branded opportunity that every one of
our other businesses offer us. So I dont want to send a signal there, but I can tell you this. We
have made changes in our seasonal organization, probably more significant changes from an overall
management perspective than I have in any one of the other businesses Ive touched on since I
started with the Company. Thats number one.
Number two, I was very specific to our new trim-a-tree buyer who joined us, spent about a week with
us, then went overseas about how to aggressively pursue, and he so far and its real early, as
you well know, David has found some great opportunities. Because of the challenges some of the
trim-a-tree manufacturers have had in the past, weve made some really good buys for the Christmas
season already. But we will have an extremely conservative Christmas seasonal plan. I instructed
him that we are not reaching in that business until we understand how we really want to run it,
because I dont want to come back to you and tell you we had another bad seasonal season, to be
quite honest. So it will be very conservative, single digit plan.
David Mann
- Johnson Rice Analyst
Very good, thank you.
Operator
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Jeffrey Stein, KeyBanc.
Jeff Stein
- Key Banc Analyst
Just a follow-up question for Joe. Wondering, Joe, how much of the store closing costs charge
you took with cash, and will there be any residual cash charge taken in 2006?
Joe Cooper
- Big Lots., Inc. SVP & CFO
There will be residual cash charges, to the extent principally related to the lease
obligations, Jeff.
Jeff Stein
- Key Banc Analyst
Any thoughts in terms of what that might be?
Joe Cooper
- Big Lots., Inc. SVP & CFO
Just a second.
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Do you have another question while were scrambling?
Jeff Stein
- Key Banc Analyst
Yes. Im wondering, are we going to get restated first through third quarters from last year,
to account for the discontinued operations?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Yes, that will be in the 10-K.
Jeff Stein
- Key Banc Analyst
Thats all I had.
Steve Fishman
- Big Lots., Inc. Chairman & CEO
Were trying to find that other answer, Jeff, but if we dont get it to you, we will get it to
everyone. Do you have it?
Jeff Stein
- Key Banc Analyst
Steve, I have one more question, if youre going to cut back your seasonal programs, lets say
your holiday trim program for 2006, any thoughts in terms of how that selling space might be used?
Steve Fishman
- Big Lots., Inc. Chairman & CEO
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
You termed it cutting it back. Im not cutting it back. Im just not going to have this
aggressive growth plan so we that dont get ourselves into trouble.
Jeff Stein
- Key Banc Analyst
Got it.
Steve Fishman
- Big Lots., Inc. Chairman & CEO
We actually, from a store repositioning standpoint, were not changing the floor space on any
of those seasonal businesses, other than maybe going forward in prototypical stores the
positioning of the seasonal business. I know the Company in the past has worked very, very hard and
talked a lot before I got here about the new prototype and retrofitting the stores, and if you
walked into one of our stores, Jeff, and anybody else there, in a traditional store, youd see
seasonal in the middle of the store, and the fluctuations and stuff like that.
Were also working on our own new variation of a new store prototype. Its strictly a test, its a
laboratory, I dont want anybody to get all excited about Steves going to retrofit 1,400 stores,
because I have no intention of doing that at any point. But I am working on something that is what
I consider to be more customer-friendly, next generation that we have finished, and now were
playing with at this particular point and frankly going to open a number of the new stores in a
different format, and since you mentioned it, seasonal will not be in the center court of the
store.
Jeff Stein
- Key Banc Analyst
Got it.
Joe Cooper
- Big Lots., Inc. SVP & CFO
Jeff, heres the we mentioned about $44 million. About $10 million is future rent, the
balance was paid we had inventory liquidation charges, that was actually cash positive because
we had already invested in the inventory. And then the balance was principally write-off of assets
and stores, which was non-cash.
Jeff Stein
- Key Banc Analyst
Joe, finally, when you look at your $120 million of free cash flow, approximately how much of
that might be working capital?
Joe Cooper
- Big Lots., Inc. SVP & CFO
For this year?
Jeff Stein
- Key Banc Analyst
Yes, for this coming year. In other words, will working capital drop in 2006?
Joe Cooper
- Big Lots., Inc. SVP & CFO
We have a positive impact to the extent of the turn. And thats Ill let you model that
through, but go ahead and model through the turn is expected go from 3.0 to 3.1. No real
increase in AP leverage. So principally, the balance is operations.
Jeff Stein
- Key Banc Analyst
Thank you.
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Final Transcript
Feb. 22. 2006 / 8:30AM, BLI Q4 2005 Big Lots, Inc. Earnings Conference Call
Operator
(OPERATOR INSTRUCTIONS). At this time, we have no further questions.
Tim Johnson
- Big Lots., Inc. VP, Strategic Planning & Investor Relations
Thank you, Marie and thank you everyone for joining us. We look forward to talking to you
soon.
Operator
Ladies and gentlemen, a replay of his call will be available to you within the hour. You can
access the replay by dialing 1-800-207-7077 and entering PIN number 4596. Again, that phone number
is 1-800-207-7077 and the PIN number, 4596. Ladies and gentlemen, this concludes todays
presentation. Thank you for your participation, you may now disconnect.
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