-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QlZwsITytArMJwB7JXTrbVSSmkrkVVh+yYteBjiaibMCn0SWNPdC/nM80ZY0sI/O SLVxGUvxL7GhEqbN4JAC0Q== 0000950152-05-001533.txt : 20050225 0000950152-05-001533.hdr.sgml : 20050225 20050225171814 ACCESSION NUMBER: 0000950152-05-001533 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050221 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050225 DATE AS OF CHANGE: 20050225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIG LOTS INC CENTRAL INDEX KEY: 0000768835 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 061119097 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08897 FILM NUMBER: 05642380 BUSINESS ADDRESS: STREET 1: 300 PHILLIPI ROAD STREET 2: P.O.BOX 28512 CITY: COLUMBUS STATE: OH ZIP: 43228-0512 BUSINESS PHONE: 614-278-6800 MAIL ADDRESS: STREET 1: 300 PHILLIPI ROAD STREET 2: P.O.BOX 28512 CITY: COLUMBUS STATE: OH ZIP: 43228-0512 8-K 1 l12402ae8vk.htm BIG LOTS 8-K BIG LOTS 8-K
Table of Contents

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):     February 21, 2005

BIG LOTS, INC.

(Exact name of registrant as specified in its charter)
         
Ohio   1-8897   06-1119097
(State or other jurisdiction of   (Commission File Number)   (I.R.S. Employer Identification No.)
incorporation or organization)        

300 Phillipi Road, Columbus, Ohio 43228
(Address of principal executive office) (Zip Code)

(614) 278-6800
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 

 

TABLE OF CONTENTS

Item 1.01 Entry into a Material Definitive Agreement.
Item 2.02 Results of Operations and Financial Condition.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
Item 9.01 Financial Statements and Exhibits.
Signature
EXHIBIT 10.1
EX-99.1 PRESS RELEASE
EX-99.2 CONFERENCE CALL TRANSCRIPT

Table of Contents

Item 1.01 Entry into a Material Definitive Agreement.

On February 21, 2005, the Nominating and Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of Big Lots, Inc. (the “Company”), determined that no bonuses would be paid under the Big Lots, Inc. 1998 Key Associate Annual Incentive Compensation Plan, as amended (the “Bonus Plan”) for the year ended January 29, 2005 (“fiscal 2004”). On February 22, 2005, the Board established the Company’s fiscal 2005 planned earnings and, upon recommendation of the Committee, approved the performance targets established by the Committee under the Bonus Plan for the year ending January 28, 2006 (“fiscal 2005”). Attached as Exhibit 10.1 to this Current Report on Form 8-K is a description of the established performance targets.

On February 21, 2005, the Committee also granted to certain executive officers, including a named executive officer (as that term is defined in Item 402(a)(3) of Regulation S-K), non-qualified stock option awards pursuant to the Big Lots, Inc. 1996 Performance Incentive Plan, as amended. These stock option awards are evidenced by a Non-Qualified Stock Option Grant Agreement, the form of which was filed as an exhibit to the Company’s Current Report on Form 8-K on September 13, 2004.

Item 2.02 Results of Operations and Financial Condition.

On February 23, 2005, the Company issued a press release and conducted a conference call, both of which reported the Company’s unaudited fourth quarter and fiscal 2004 results, provided guidance for fiscal 2005, and announced that the Company would restate previously filed annual and quarterly financial statements to correct certain errors in lease accounting (as discussed in Item 4.02 below). The Company’s results of operations for the quarter and year ended January 29, 2005, as well as the comparative periods presented in the press release and conference call, did not take into account the impact of any lease accounting adjustments.

The press release and conference call both included “non-GAAP financial measures” as that term is defined by Rule 101 of Regulation G (17 CFR Part 244) and Item 10 of Regulation S-K (17 CFR Part 229). Specifically, the following non-GAAP financial measures were included: (i) adjusted selling and administrative expenses; (ii) adjusted operating profit (loss); (iii) adjusted income (loss) before income taxes; (iv) adjusted income tax (benefit) expense; (v) adjusted income (loss) from continuing operations; (vi) adjusted discontinued operations; (vii) adjusted net income (loss); and (viii) adjusted income (loss) per common share, basic and diluted, for continuing operations, discontinued operations and net income.

These non-GAAP financial measures exclude from the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) the following: (i) an after-tax charge to continuing operations of $5.7 million (net of a $0.6 million adjustment made in the fourth quarter of fiscal 2003) recorded in fiscal 2003 related to the settlement of California wage and hour litigation; (ii) the fourth quarter of fiscal 2003 partial charge-off of a note and warrant received when the Company sold KB Toys in December 2000, along with the related tax benefits; (iii) an after-tax charge to discontinued operations of $1.3 million recorded in the third quarter of fiscal 2003 related to the settlement of a national class action lawsuit concerning certain advertising practices of KB Toys; (iv) an after-tax charge to discontinued operations of $8.5 million recorded in the fourth quarter of fiscal 2003 related to KB lease rejections and certain tax matters; and (v) an after-tax charge to discontinued operations of $6.6 million recorded in the third quarter of fiscal 2004 related to the estimated liability resulting from the additional rejection of store leases and the default of a first mortgage by KB Toys. As required by Rule 100 of Regulation G and Item 10 of Regulation S-K, the press release, which was posted on the Company’s website and referred to during the conference call, contained a presentation of the most directly comparable financial measures calculated and presented in accordance GAAP and a reconciliation of the differences between the non-GAAP financial measures and the most directly comparable financial measures calculated and presented in accordance with GAAP.

The Company’s management believes that the disclosure of these non-GAAP financial measures provides useful information to investors because the non-GAAP financial measures present an alternative and more relevant method for measuring the Company’s operating performance, excluding special items included in the most directly comparable GAAP financial measures, that management believes is more indicative of the Company’s on-going operating results and financial condition. The Company’s management uses these non-GAAP financial measures, along with the most directly comparable GAAP financial measures, in evaluating the Company’s operating performance and as a measure of performance for incentive compensation purposes.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in accordance with GAAP. Non-GAAP financial measures as reported by the Company may not be comparable to similarly titled items reported by other companies.

 

Table of Contents

Attached as exhibits to this Current Report on Form 8-K are copies of the Company’s February 23, 2005 press release (Exhibit 99.1), and the transcript of the Company’s February 23, 2005 conference call (Exhibit 99.2), including information concerning forward-looking statements and factors that may affect the Company’s future results. The information in Exhibits 99.1 and 99.2 is being furnished, not filed, pursuant to Item 2.02 of this Current Report on Form 8-K. By furnishing the information in this Current Report on Form 8-K and the attached exhibits, the Company is making no admission as to the materiality of any information in this Current Report or the exhibits.

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

As previously disclosed, the Company’s $500 million five-year unsecured credit facility dated October 29, 2004 (the “2004 Credit Agreement”) provides the Company with proceeds for general corporate purposes, working capital, and repayment of certain indebtedness, including amounts previously satisfied in connection with the Company’s prior credit facility and privately-placed senior notes (both of which were terminated by the Company on October 29, 2004). In addition to revolving credit loans, the 2004 Credit Agreement includes a $30 million swing loan sub-limit, a $50 million bid loan sub-limit, and a $150 million letter of credit sub-limit. At February 24, 2005, the total indebtedness under the 2004 Credit Agreement was $184.5 million, comprised of $100.0 million in revolving credit loans, $53.9 million in letters of credit, $10.6 million in swing loans, and $20.0 million in bid loans. The Company historically has drawn upon its credit facilities to fund seasonal working capital needs and has substantially repaid these seasonal borrowings during the fourth quarter of each fiscal year. Due to the termination of the privately-placed senior notes, the Company expects borrowings and letters of credit through the middle of April 2005 to range between $150.0 million and $225.0 million. Given the seasonality of the Company’s business, the amount of borrowings under the 2004 Credit Agreement may fluctuate materially depending on various factors, including the time of year and the Company’s need to acquire merchandise inventory.

The 2004 Credit Agreement permits, at the Company’s option, borrowings at various interest rate options based on the prime rate or London Interbank Offering Rate plus applicable margin. The 2004 Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually agreed upon by the Company and the lenders. The weighted average interest rate of the outstanding loans at February 24, 2005 was 3.29%. The Company typically repays and/or borrows on a daily basis in accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of the Company’s liquidity position which is affected by (i) cash inflows such as store cash, credit card settlements, and other miscellaneous deposits, and (ii) cash outflows such as check clearings, wire and other electronic transactions, and other miscellaneous disbursements.

The 2004 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios — a leverage ratio and a fixed charge coverage ratio. A violation of these covenants could result in a default under the 2004 Credit Agreement which would permit the lenders to restrict the Company’s ability to further access the 2004 Credit Agreement for loans and letters of credit, and require the immediate repayment of any outstanding loans under the 2004 Credit Agreement.

Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

(a) As disclosed in its press release and conference call of February 23, 2005, the Company will restate certain of its previously filed annual and quarterly financial statements. This decision is the result of a review of the Company’s accounting for lease transactions. After consultation with its Audit Committee and independent auditors, Deloitte & Touche LLP, the Company concluded on February 21, 2005 that it will correct certain errors in its accounting for two types of leasing transactions. First, historically, construction allowances have been recorded as reductions to property and equipment and depreciation expense, rather than being recorded on the balance sheet as a deferred credit and amortized over the life of the lease as a reduction to rent expense. Additionally, the Company’s statements of cash flows reflected construction allowances received as a reduction of capital expenditures (within “investing” cash flows), rather than as an operating lease activity (within “operating” cash flows). Second, the Company had excluded the build-out period of its stores from its straight line rent expense calculations. All necessary corrections and restated financial statements for fiscal 2004, fiscal 2003, and fiscal 2002 are expected to be completed to allow the Company to timely file its Form 10-K for the fiscal year ended January 29, 2005. Accordingly, the previously issued consolidated financial statements for the fiscal years ended January 31, 2004, and February 1, 2003, and the interim periods ended October 30, 2004, July 31, 2004, and May 1, 2004, should not be relied upon.

 

Table of Contents

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits

       
Exhibit No. Description    
 
      
10.1
Performance targets for fiscal 2005 under the Big Lots, Inc. 1998 Key Associate Annual Incentive Compensation Plan, as amended.    
 
      
99.1
Big Lots, Inc. press release dated February 23, 2005.    
 
      
99.2
Transcript of Big Lots, Inc. conference call dated February 23, 2005.    

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

           
    BIG LOTS, INC.
 
          
Dated: February 25, 2005
  By: /s/ Charles W. Haubiel II    
         
    Charles W. Haubiel II
Senior Vice President, General Counsel
and Corporate Secretary		    

 

EX-10.1 2 l12402aexv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 PERFORMANCE TARGETS FOR FISCAL 2005 BIG LOTS, INC. 1998 KEY ASSOCIATE ANNUAL INCENTIVE COMPENSATION PLAN, AS AMENDED On February 22, 2005, the Nominating and Compensation Committee (the "Committee") of the Board of Directors (the "Board") of Big Lots, Inc. (the "Company") recommended, and the Board approved, performance targets which, if obtained, will provide a bonus under the Big Lots, Inc. 1998 Key Associate Annual Incentive Compensation Plan, as amended (the "Bonus Plan") to certain employees, including the named executive officers and other executive officers. No right to a minimum bonus exists under the Bonus Plan. The Committee derived its performance targets and defined the employees' bonus goals (e.g., floor, target and stretch) from the Company's planned earnings for fiscal 2005, as established by the Board. The specific criteria upon which any bonuses may be earned during the year ending January 28, 2006 ("fiscal 2005") is based on the greater of (i) income from continuing operations, (ii) income (loss) from continuing operations before extraordinary items and/or the cumulative effective of a change in accounting principle, (iii) income before extraordinary items, and (iv) net income, with each such measure being adjusted to remove the effect of unusual or non-recurring event items. In making adjustments to remove the effect of unusual or non-recurring event items, the Committee takes into account: asset impairments under Statement of Financial Accounting Standards No. 144, as amended or superceded; acquisition-related charges; accruals for restructuring and/or reorganization program charges; merger integration costs; merger transaction costs; any loss attributable to the business operations of any entity or entities acquired during fiscal 2005; tax settlement charges; any extraordinary, unusual in nature, infrequent in occurrence, or other non-recurring item charges (not otherwise listed) as described in Accounting Principles Board Opinion No. 30; any extraordinary, unusual in nature, infrequent in occurrence, or other non-recurring item charges (not otherwise listed) in management's discussion and analysis of financial condition and results of operations, selected financial data, financial statements and/or in the footnotes to financial statements, each as appearing in the annual report to stockholders; unrealized losses on investments; charges related to derivative transactions contemplated by Statement of Financial Accounting Standards No. 133, as amended or superceded (such as the amendment by Statement 138, if applicable); and/or compensation charges related to stock option activity. Employees' bonus goals are determined as a percentage of salary. The baseline percentage of salary for the each named executive officer (as is expected to be determined for the Company's 2005 proxy statement) has been established by their respective employment agreements. For other executive officers and employees, the percentage of salary is set by position level and is subjectively determined. The establishment of the Company's performance targets remains solely in the Committee's discretion. The performance targets adopted for fiscal 2005 are consistent with the Committee's philosophy, policies and procedures applicable to the Company's executive compensation program. EX-99.1 3 l12402aexv99w1.txt EX-99.1 PRESS RELEASE EXHIBIT 99.1 PRESS RELEASE Contact: Timothy A. Johnson FOR IMMEDIATE RELEASE Vice President, Strategic Planning and Investor Relations 614-278-6622 BIG LOTS REPORTS PRELIMINARY, UNAUDITED FOURTH QUARTER AND FISCAL YEAR RESULTS FOR 2004 COMPANY ANNOUNCES CHANGES RELATED TO LEASE ACCOUNTING COMPANY PROVIDES GUIDANCE FOR 2005 Columbus, Ohio - February 23, 2005 - Big Lots, Inc. (NYSE: BLI) today reported preliminary, unaudited fourth quarter fiscal 2004 income from continuing operations of $57.7 million, or $0.51 per diluted share, compared to income from continuing operations of $93.8 million, or $0.80 per diluted share for the same period of fiscal 2003, excluding from both periods the impact of adjustments related to the Company's review of its lease accounting practices discussed below. For the fiscal year ended January 29, 2005, the Company's preliminary, unaudited income from continuing operations was $32.3 million, or $0.28 per diluted share, compared to income from continuing operations of $90.9 million, or $0.78 per diluted share, for the fiscal year ended January 31, 2004, excluding from both periods the impact of lease accounting adjustments. Like many companies in the retail industry, the Company is reviewing its accounting for leasing transactions. Based on this review, the Company concluded on February 21, 2005 that it will restate its previously filed annual and quarterly financial statements, as applicable, to correct for certain errors. A more specific description of the Company's change in accounting for leases is detailed later in this release. For the 2003 fiscal year, results from continuing operations include items that, although they are accounted for as continuing operations, the Company believes these items are not directly related to its ongoing operations. Therefore, the Company has provided supplemental adjusted results that exclude these items. The Company believes that these non-GAAP financial measures should facilitate analysis by investors and others who follow the Company's financial performance. In the supplemental disclosures, the items excluded from continuing operations are: (1) the full-year charge (net of tax) of $5.7 million, or $0.04 per diluted share, related to the Company's California wage and hour litigation settlement, and (2) the fourth quarter fiscal 2003 partial charge-off of a note and a warrant, along with the related tax benefits, received at the time of the sale of KB Toys, a former division of the Company that was divested in December 2000 and subsequently filed for bankruptcy protection in January 2004. The net effect of including these two items in income from continuing operations is to increase income from continuing operations by (net of tax) $11.2 million for the fourth quarter and by (net of tax) $4.8 million for fiscal 2003. Excluding these items, income from continuing operations for the fourth quarter of fiscal 2003 was $82.6 million, or $0.70 per diluted share, and income from continuing operations for fiscal 2003 was $86.1 million, or $0.73 per diluted share, excluding from both periods the impact of lease accounting adjustments. Shareholder Relations Department [BIG LOTS LOGO] 300 Phillipi Road Columbus, Ohio 43228-5311 Phone: (614) 278-6622 Fax: (614) 278-6666 E-mail: aschmidt@biglots.com During fiscal 2003 and fiscal 2004, the Company incurred charges to reflect certain obligations or liabilities related to KB Toys that have been classified as discontinued operations for financial reporting purposes. Discontinued operations included in the fiscal 2004 results include a third quarter charge (net of tax) of $6.6 million, or $0.06 per diluted share, incurred to reflect the estimated liability related to the guarantee of lease obligations of KB Toys and the default of a first mortgage by KB Toys. Discontinued operations included in the fiscal 2003 results include: (1) a third quarter charge (net of tax) of $1.3 million, or $0.02 per diluted share, related to the settlement of a national class action lawsuit related to certain advertising practices of KB Toys, and (2) a fourth quarter charge (net of tax) of $8.5 million, or $0.07 per diluted share, related to KB lease rejections and certain tax matters. Including discontinued operations, fourth quarter fiscal 2004 net income was $57.7 million, or $0.51 per diluted share, compared to net income of $85.3 million, or $0.73 per diluted share for the same period of fiscal 2003, excluding from both periods the impact of lease accounting adjustments. For fiscal year 2004, net income was $25.7 million, or $0.22 per diluted share, compared to net income of $81.2 million, or $0.69 per diluted share, for fiscal year 2003, excluding from both periods the impact of lease accounting adjustments. Net sales for the fourth quarter ended January 29, 2005 were $1,380.9 million, a 3.9% increase compared to net sales of $1,328.6 million for the same period of fiscal 2003. Comparable store sales for stores open two years at the beginning of the fiscal year declined 1.3% for the quarter consisting of a 1.6% increase in the value of the average basket and a 2.9% decrease in customer transactions. Net sales for the fiscal year 2004 increased 4.8% to $4,375.1 million compared to $4,174.4 million in fiscal 2003. Comparable store sales were flat for the year with the value of the average basket increasing 2.0% and the number of customer transactions decreasing 2.0%. Commenting on the results, Michael J. Potter, Chairman and Chief Executive Officer, stated, "While our sales trends improved as we moved through the fourth quarter, the overall economic environment remained challenging for our core customer. The comp decline for the quarter was principally due to continued softness in customer traffic as the value of the average basket increased 1.6% compared to last year. Basket growth resulted from strong sales of our hardlines and home decorative merchandise, partially offset by disappointing results in holiday decorative, toys, and giftable categories. As we have previously communicated, soft sales in these seasonally sensitive categories led us to be more promotional with pricing in December and January than originally anticipated." Mr. Potter continued, "We ended the fourth quarter with earnings per diluted share of $0.51, which is in line with our recent guidance. As expected, gross margin results were pressured by end of year markdowns. Expenses continue to be tightly managed and below plan. While we are disappointed in our results, we continue to manage the business for the long-term and firmly believe the increased level of promotions in Q4 was critical to ensure we enter 2005 in a clean, fresh inventory position." Shareholder Relations Department [BIG LOTS LOGO] 300 Phillipi Road Columbus, Ohio 43228-5311 Phone: (614) 278-6622 Fax: (614) 278-6666 E-mail: aschmidt@biglots.com Commenting on the strength of the Company's balance sheet, Mr. Potter added, "Despite a very challenging year for the business, our balance sheet remains strong. After finishing December with inventory above plan, we made steady progress reducing our inventory towards more acceptable levels throughout the month of January. We ended the year with inventory at $906 million, up 4% per store compared to last year, and in line with our sales plan for 2005. The majority of the inventory increase at the end of 2004 is focused in key first quarter 2005 growth drivers including furniture and a higher concentration of closeout deals. Inventory levels of seasonal merchandise are below last year as we plan to flow product closer to expected sales during the spring season. With the majority of our key investment initiatives now behind us, we expect to resume generating meaningful levels of free cash flow in 2005." Reflecting on the year's results, Mr. Potter stated, "Clearly, 2004 was disappointing for Big Lots as we believe the macro economic climate presented significant challenges for our core customer and our business throughout the year. While these external factors are substantially out of our control, we have evaluated our 2004 performance in the areas of our business that we do control. The single biggest learning from 2004 is we must stay intensely focused on buying great closeouts and resist becoming too predictable or rigid in our merchandise assortment. Over the last several months, there has been significant effort and focus on delivering more exciting closeout deals and we believe we are making progress as we move into 2005." Mr. Potter continued, "Our list of key initiatives is very short for 2005: greatly improve merchandise content, deliver a higher percentage of our inventory in closeout merchandise, and successfully launch our new merchandise planning and allocation systems to support each of these merchandising goals. Merchandising content and delivering impactful closeouts is our key differentiator and our entire organization is intensely focused on this objective. After 4 years of investment and repositioning, we believe the foundation is in place to grow sales productivity and operating margins. The expense base remains lean with a planned leverage point of less than a 3% comp, and our capital allocated for 2005 is at its lowest level in years. We anticipate the combination of improving merchandise content, a tight expense structure, and minimal new capital investment will enable Big Lots to generate significant cash flow going forward." 2005 Outlook The Company has issued fiscal 2005 earnings guidance of $0.54 to $0.60 per diluted share, which represents growth of approximately 95% to 115% over 2004. This guidance excludes any effect of the adoption of SFAS No. 123(R), "Share Based Payment" related to the recognition of stock-based compensation expense. The Company's earnings guidance is based on a comparable store sales increase in the 3% to 4% range with total sales increasing in the 7% to 9% range. The Company expects the gross margin rate to increase 10 to 50 basis points compared to fiscal 2004. Gross margin improvement is expected to result from lower levels of clearance markdowns of seasonal and gift-giving merchandise as well as hanging apparel which was eliminated as a category in fiscal 2004. Additionally, the Company expects to achieve markdown efficiencies in the second half of fiscal 2005 from new merchandise planning and allocation systems. The selling, general and administrative expense rate is expected to decrease 20 to 60 basis points versus fiscal 2004 due to efficiencies in store payroll, increased productivity in the distribution and transportation network, and the impact of a 3% to 4% comparable store sales increase over an expense base with a large fixed cost component. The Company expects interest expense for fiscal 2005 to be approximately $7 to $8 million and the income tax rate is estimated to be in the range of 35.8% to 38.7%. The Company estimates this financial performance combined with an inventory turnover of 3.1 times should result in free cash flow of approximately $100 million. Shareholder Relations Department [BIG LOTS LOGO] 300 Phillipi Road Columbus, Ohio 43228-5311 Phone: (614) 278-6622 Fax: (614) 278-6666 E-mail: aschmidt@biglots.com For the first quarter of fiscal 2005, the Company's plan calls for earnings in the range of $0.04 to $0.07 per diluted share based on a 2% to 4% comparable store sales gain. The Company expects February comparable store sales to increase in the 3% to 5% range driven by a meaningful liquidation closeout and an in-store promotional event scheduled for the last week of the month. For March, comparable store sales are planned up in the range of 2% to 5%. March is expected to benefit from an earlier Easter holiday this year, partially offset by one less ad circular compared to last year due to a shift in the timing of the first of the month payroll cycle. April's comparable store sales are planned to be flat to slightly positive. April is expected to benefit from one additional advertising circular due to a shift in the timing of the first of the month payroll cycle, partially offset by the absence of the Easter holiday shopping period compared to last year. The Company's detailed earnings guidance for fiscal 2005 along with each of the quarters is provided in the attached table. Lease Accounting As stated earlier, the Company is in the process of reviewing its accounting for leasing transactions. After consultation with its Audit Committee and independent auditors, the Company concluded on February 21, 2005 that it will correct certain errors in its accounting for two types of leasing transactions. First, historically, construction allowances have been recorded as reductions to property and equipment and depreciation expense, rather than being recorded on the balance sheet as a deferred credit and amortized over the life of the lease as a reduction to rent expense. Additionally, the Company's statements of cash flows reflected construction allowances received as a reduction of capital expenditures (within "investing" cash flows) rather than as an operating lease activity (within "operating" cash flows). Second, the Company had excluded the build-out period of its stores from its straight line rent expense calculations. All necessary corrections and restated financial statements for fiscal 2004, fiscal 2003, and fiscal 2002 are expected to be completed to allow the Company to timely file its Form 10K; however, the corrections will have no impact on historic or future cash flows. The Company believes the impact of the corrections will be a reduction of net income of less than $2.0 million per year, or $0.02 per diluted share, for each of the fiscal years 2004, 2003, and 2002. Big Lots, Inc. will host a conference call at 8:30 a.m. EST today to discuss the Company's fourth quarter and fiscal 2004 financial results, and its outlook for fiscal 2005. 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. 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 9. A replay of the call will be available beginning February 23 at 12:00 noon (EST) through March 9 at midnight by dialing: 800-207-7077 (United States and Canada) or 913-383-5767 (International or metro-Seattle). The pin number is 4089. Big Lots, Inc. (NYSE: BLI) is the nation's largest broadline closeout retailer. As of the end of the fourth fiscal quarter, the Company operated a total of 1,502 closeout stores in 46 states operating as BIG LOTS and BIG LOTS FURNITURE. Wholesale operations are conducted through BIG LOTS WHOLESALE, CONSOLIDATED INTERNATIONAL, WISCONSIN TOY and with purchasing at www.biglotswholesale.com. The Company's website is located at www.biglots.com. Shareholder Relations Department [BIG LOTS LOGO] 300 Phillipi Road Columbus, Ohio 43228-5311 Phone: (614) 278-6622 Fax: (614) 278-6666 E-mail: aschmidt@biglots.com CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE 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 statement. 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 Company's 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," "will," and similar expressions generally identify forward-looking statements. The forward-looking statements are and will be based upon management's 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 Company's ability to achieve the results contemplated by forward-looking statements are subject to a number of factors, any one or a combination of, which could materially affect the Company's business, financial condition, results of operations, or liquidity. These factors may include, but are not limited to: - the Company's ability to source and purchase merchandise on favorable terms; - the ability to attract new customers and retain existing customers; - the Company's ability to establish effective advertising, marketing, and promotional programs; - economic and weather conditions which affect buying patterns of the Company's customers; - changes in consumer spending and consumer debt levels; - the Company's ability to anticipate buying patterns and implement appropriate inventory strategies; - continued availability of capital and financing on favorable terms; - competitive pressures and pricing pressures, including competition from other retailers; - the Company's ability to comply with the terms of its credit facilities (or obtain waivers for non-compliance); - interest rate fluctuations and changes in the Company's credit rating; - the creditworthiness of the purchaser of the Company's former KB Toys business; the Company's indemnification and guarantee obligations with respect to approximately 390 KB Toys store leases and other real property, some or all of which may be rejected or materially modified in connection with the pending KB Toys bankruptcy proceedings, as well as other liabilities arising out of the KB Toys bankruptcy; - litigation risks and changes in laws and regulations, including changes in accounting standards and tax laws; Shareholder Relations Department [BIG LOTS LOGO] 300 Phillipi Road Columbus, Ohio 43228-5311 Phone: (614) 278-6622 Fax: (614) 278-6666 E-mail: aschmidt@biglots.com - transportation and distribution delays or interruptions that adversely impact the Company's ability to receive and/or distribute inventory; - 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; - the effect of fuel price fluctuations on the Company's transportation costs and customer purchases; - interruptions in suppliers' businesses; - the Company's ability to achieve cost efficiencies and other benefits from various operational initiatives and technological enhancements; - the costs, interruptions, and problems associated with the implementation of, or failure to implement, new or upgraded systems and technology; - the effect of fluctuations in international freight rates and domestic transportation costs on the Company's profitability; - delays and costs associated with building, opening, and modifying the Company's distribution centers; - the Company's ability to secure suitable new store locations under favorable lease terms; - the Company's ability to successfully enter new markets; - delays associated with constructing, opening, and operating new stores; - the Company's ability to attract and retain suitable employees; and - other risks described from time to time in the Company's filings with the Securities and Exchange Commission, in its press releases, and in other communications. 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 Company's 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 filings made with the Securities and Exchange Commission. Shareholder Relations Department [BIG LOTS LOGO] 300 Phillipi Road Columbus, Ohio 43228-5311 Phone: (614) 278-6622 Fax: (614) 278-6666 E-mail: aschmidt@biglots.com BIG LOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
13 WEEKS ENDED 13 WEEKS ENDED -------------------- --------------------- JANUARY 29 JANUARY 31 2005 % 2004 % ----------- ----- ----------- ----- (UNAUDITED) (UNAUDITED) NET SALES $1,380,897 100.0 $1,328,609 100.0 ---------- ----- ---------- ----- GROSS MARGIN 554,688 40.2 564,386 42.5 SELLING AND ADMINISTRATIVE EXPENSES 439,435 31.8 417,590 31.4 DEPRECIATION EXPENSE 25,248 1.8 23,397 1.8 ---------- ----- ---------- ----- OPERATING PROFIT 90,005 6.5 123,399 9.3 INTEREST EXPENSE 1,644 0.1 3,963 0.3 INTEREST INCOME (123) (0.0) (293) (0.0) ---------- ----- ---------- ----- INCOME BEFORE INCOME TAXES 88,484 6.4 119,729 9.0 INCOME TAX EXPENSE 30,761 2.2 25,940 2.0 ---------- ----- ---------- ----- INCOME FROM CONTINUING OPERATIONS 57,723 4.2 93,789 7.1 DISCONTINUED OPERATIONS 0 0.0 (8,461) (0.6) ---------- ----- ---------- ----- NET INCOME $ 57,723 4.2 $ 85,328 6.4 ========== ===== ========== ===== INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.51 $ 0.80 DISCONTINUED OPERATIONS 0.00 (0.07) ---------- ---------- NET INCOME $ 0.51 $ 0.73 ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 112,761 116,917 ========== ========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.51 $ 0.80 DISCONTINUED OPERATIONS 0.00 (0.07) ---------- ---------- NET INCOME $ 0.51 $ 0.73 ========== ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 112,903 117,491 ========== ==========
BIG LOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED 52 WEEKS ENDED ------------------- ------------------- JANUARY 29 JANUARY 31 2005 % 2004 % ---------- ----- ----------- ----- (UNAUDITED) (UNAUDITED) NET SALES $4,375,072 100.0 $4,174,383 100.0 ---------- ----- ---------- ----- GROSS MARGIN 1,777,437 40.6 1,746,359 41.8 SELLING AND ADMINISTRATIVE EXPENSES 1,608,936 36.8 1,527,518 36.6 DEPRECIATION EXPENSE 97,857 2.2 88,513 2.1 ---------- ----- ---------- ----- OPERATING PROFIT 70,644 1.6 130,328 3.1 INTEREST EXPENSE 24,845 0.6 16,443 0.4 INTEREST INCOME (618) (0.0) (1,061) (0.0) ---------- ----- ---------- ----- INCOME BEFORE INCOME TAXES 46,417 1.1 114,946 2.8 INCOME TAX EXPENSE 14,087 0.3 24,051 0.6 ---------- ----- ---------- ----- INCOME FROM CONTINUING OPERATIONS 32,330 0.7 90,895 2.2 DISCONTINUED OPERATIONS (6,648) (0.2) (9,720) (0.2) ---------- ----- ---------- ----- NET INCOME $ 25,682 0.6 $ 81,175 1.9 ========== ===== ========== ===== INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.28 $ 0.78 DISCONTINUED OPERATIONS (0.06) (0.08) ---------- ---------- NET INCOME $ 0.22 $ 0.70 ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 114,281 116,757 ========== ========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.28 $ 0.78 DISCONTINUED OPERATIONS (0.06) (0.09) ---------- ---------- NET INCOME $ 0.22 $ 0.69 ========== ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 114,801 117,253 ========== ==========
UNAUDITED ADJUSTED RESULTS Schedule Provided for Informational Purposes Only BIG LOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS AND FISCAL 2003 KB TOYS MATTERS AND LITIGATION CHARGES (IN THOUSANDS, EXCEPT PER SHARE DATA)
13 WEEKS ENDED 13 WEEKS ENDED ------------------ ----------------------- JANUARY 29 JANUARY 31 2005 % 2004 % ------------------ ----------------------- (UNAUDITED) (UNAUDITED) ADJUSTED RESULTS EXCLUDING LEASE ACCOST ACCOUNTING ADJUSTMENTS, KB TOYS AS REPORTED EXCLUDING MATTERS AND LITIGATION LEASE ACCOUNTING CHARGES ADJUSTMENTS (NON-GAAP) NET SALES $1,380,897 100.0 $1,328,609 100.0 ---------- ----- ---------- ----- GROSS MARGIN 554,688 40.2 564,386 42.5 SELLING AND ADMINISTRATIVE EXPENSES 439,435 31.8 409,392 30.8 DEPRECIATION EXPENSE 25,248 1.8 23,397 1.8 ---------- ----- ---------- ----- OPERATING PROFIT 90,005 6.5 131,597 9.9 INTEREST EXPENSE 1,644 0.1 3,963 0.3 INTEREST INCOME (123) (0.0) (293) (0.0) ---------- ----- ---------- ----- INCOME BEFORE INCOME TAXES 88,484 6.4 127,927 9.6 INCOME TAX EXPENSE 30,761 2.2 45,329 3.4 ---------- ----- ---------- ----- INCOME FROM CONTINUING OPERATIONS 57,723 4.2 82,598 6.2 DISCONTINUED OPERATIONS 0 0.0 0 0.0 ---------- ----- ---------- ----- NET INCOME $ 57,723 4.2 $ 82,598 6.2 ========== ===== ========== ===== INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.51 $ 0.71 DISCONTINUED OPERATIONS 0.00 0.00 ---------- ---------- NET INCOME $ 0.51 $ 0.71 ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 112,761 116,917 ========== ========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $0.51 $ 0.70 DISCONTINUED OPERATIONS 0.00 0.00 ---------- ---------- NET INCOME $ 0.51 $ 0.70 ========== ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 112,903 117,491 ========== ==========
UNAUDITED ADJUSTED RESULTS Schedule Provided for Informational Purposes Only BIG LOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS AND FISCAL 2003 KB TOYS MATTERS AND LITIGATION CHARGES (IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED 52 WEEKS ENDED ---------------------- ---------------------- JANUARY 29 JANUARY 31 2005 % 2004 % ---------- ---- ----------- ---- (UNAUDITED) (UNAUDITED) ADJUSTED RESULTS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS, KB TOYS AS REPORTED EXCLUDING MATTERS AND LITIGATION LEASE ACCOUNTING CHARGES ADJUSTMENTS (NON-GAAP) NET SALES $4,375,072 100.0 $4,174,383 100.0 ---------- ----- ---------- ----- GROSS MARGIN 1,777,437 40.6 1,746,359 41.8 SELLING AND ADMINISTRATIVE EXPENSES 1,608,936 36.8 1,508,820 36.1 DEPRECIATION EXPENSE 97,857 2.2 88,513 2.1 ---------- ----- ---------- ----- OPERATING PROFIT 70,644 1.6 149,026 3.6 INTEREST EXPENSE 24,845 0.6 16,443 0.4 INTEREST INCOME (618) (0.0) (1,061) (0.0) ---------- ----- ---------- ----- INCOME BEFORE INCOME TAXES 46,417 1.1 133,644 3.2 INCOME TAX EXPENSE 14,087 0.3 47,587 1.1 ---------- ----- ---------- ----- INCOME FROM CONTINUING OPERATIONS 32,330 0.7 86,057 2.1 DISCONTINUED OPERATIONS (6,648) (0.2) 0 0.0 ---------- ----- ---------- ----- NET INCOME $ 25,682 0.6 $ 86,057 2.1 ========== ===== ========== ===== INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.28 $ 0.74 DISCONTINUED OPERATIONS (0.06) 0.00 ---------- ---------- NET INCOME $ 0.22 $ 0.74 ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 114,281 116,757 ========== ========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.28 $ 0.73 DISCONTINUED OPERATIONS (0.06) 0.00 ---------- ---------- NET INCOME $ 0.22 $ 0.73 ========== ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 114,801 117,253 ========== ==========
UNAUDITED ADJUSTED RESULTS AND RECONCILIATION Schedule Provided for Informational Purposes Only BIG LOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS AND FISCAL 2003 KB TOYS MATTERS AND LITIGATION CHARGES (IN THOUSANDS, EXCEPT PER SHARE DATA)
13 WEEKS ENDED 13 WEEKS ENDED --------------- ---------------------------------------------------------------------- JANUARY 29 JANUARY 31 2005 2004 --------------- ---------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) KB TOYS MATTERS ---------------------------------------------------- AS REPORTED AS REPORTED EXCLUDING LEASE EXCLUDING LEASE ADVERTISING ACCOUNTING ACCOUNTING NET CHARGE-OFF OF LEASE GUARANTEE PRACTICES ADJUSTMENTS ADJUSTMENTS NOTE & WARRANT OBLIGATIONS SETTLEMENT --------------- --------------- ----------------- --------------- -------------- NET SALES $ 1,380,897 $ 1,328,609 ----------- ----------- ----------- ---------- ----------- GROSS MARGIN 554,688 564,386 SELLING AND ADMINISTRATIVE EXPENSES 439,435 417,590 9,598 DEPRECIATION EXPENSE 25,248 23,397 ----------- ----------- ----------- ---------- ----------- OPERATING PROFIT 90,005 123,399 (9,598) INTEREST EXPENSE 1,644 3,963 INTEREST INCOME (123) (293) ----------- ----------- ----------- ---------- ----------- INCOME BEFORE INCOME TAXES 88,484 119,729 (9,598) INCOME TAX EXPENSE 30,761 25,940 (20,168) ----------- ----------- ----------- ---------- ----------- INCOME TAX CONTINUING OPERATIONS 57,723 93,789 10,570 DISCONTINUED OPERATIONS 0 (8,461) (14,277) ----------- ----------- ----------- ---------- ----------- NET INCOME $ 57,723 $ 85,328 $ 10,570 ($ 14,277) $ 0 =========== =========== =========== ========== =========== INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.51 $ 0.80 DISCONTINUED OPERATIONS 0.00 (0.07) ----------- ----------- NET INCOME $ 0.51 $ 0.73 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 112,761 116,917 =========== =========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.51 $ 0.80 $ 0.09 $ 0.00 $ 0.00 DISCONTINUED OPERATIONS 0.00 (0.07) 0.00 (0.12) 0.00 ----------- ----------- ----------- ---------- ----------- NET INCOME $ 0.51 $ 0.73 $ 0.09 ($ 0.12) $ 0.00 =========== =========== =========== ========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 112,903 117,491 =========== ===========
13 WEEKS ENDED --------------------------------------------------------------- JANUARY 31 2004 --------------------------------------------------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) KB TOYS MATTERS --------------- ADJUSTED RESULTS EXCLUDING KB TOYS CA WAGE AND MATTERS AND LITIGATION TAX MATTERS HOUR SETTLEMENT CHARGES (NON-GAAP) ----------- --------------- ---------------------- NET SALES $ 1,328,609 ----------- ----------- ----------- GROSS MARGIN 564,386 SELLING AND ADMINISTRATIVE EXPENSES (1,400) 409,392 DEPRECIATION EXPENSE 23,397 ----------- ----------- ----------- OPERATING PROFIT 1,400 131,597 INTEREST EXPENSE 3,963 INTEREST INCOME (293) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 1,400 127,927 INCOME TAX EXPENSE 779 45,329 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS 621 82,598 DISCONTINUED OPERATIONS 5,816 (0) ----------- ----------- ----------- NET INCOME $ 5,816 $ 621 $ 82,598 =========== =========== =========== INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.71 DISCONTINUED OPERATIONS 0.00 ----------- NET INCOME $ 0.71 =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 116,917 =========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.00 $ 0.01 $ 0.70 DISCONTINUED OPERATIONS 0.05 0.00 0.00 ----------- ----------- ----------- NET INCOME $ 0.05 $ 0.01 $ 0.70 =========== =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 117,491 ===========
UNAUDITED ADJUSTED RESULTS AND RECONCILIATION Schedule Provided for Informational Purposes Only BIG LOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXCLUDING LEASE ACCOUNTING ADJUSTMENTS AND FISCAL 2003 KB TOYS MATTERS AND LITIGATION CHARGES (IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED 52 WEEKS ENDED --------------- ---------------------------------------------------------------------- JANUARY 29 JANUARY 31 2005 2004 --------------- ---------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) KB TOYS MATTERS ---------------------------------------------------- AS REPORTED AS REPORTED EXCLUDING LEASE EXCLUDING LEASE ADVERTISING ACCOUNTING ACCOUNTING NET CHARGE-OFF OF LEASE GUARANTEE PRACTICES ADJUSTMENTS ADJUSTMENTS NOTE & WARRANT OBLIGATIONS SETTLEMENT --------------- --------------- ----------------- --------------- -------------- NET SALES $ 4,375,072 $ 4,174,383 ----------- ----------- ---------- ------- ------ GROSS MARGIN 1,777,437 1,746,359 SELLING AND ADMINISTRATIVE EXPENSES 1,608,936 1,527,518 9,598 DEPRECIATION EXPENSE 97,857 88,513 ----------- ----------- ---------- ------- ------ OPERATING PROFIT 70,644 130,328 (9,598) INTEREST EXPENSE 24,845 16,443 INTEREST INCOME (618) (1,061) ----------- ----------- ---------- ------- ------ INCOME BEFORE INCOME TAXES 46,417 114,946 (9,598) INCOME TAX EXPENSE 14,087 24,051 (20,168) ----------- ----------- ---------- ------- ------ INCOME FROM CONTINUING OPERATIONS 32,330 90,895 10,570 DISCONTINUED OPERATIONS (6,648) (9,720) (14,277) (1,259) ----------- ----------- ---------- -------- ------- NET INCOME $ 25,682 $ 81,175 $ 10,570 ($14,277) ($1,259) =========== =========== ========== ======== ======= INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.28 $ 0.78 DISCONTINUED OPERATIONS (0.06) (0.08) ----------- ----------- NET INCOME $ 0.22 $ 0.70 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 114,281 116,757 =========== =========== INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.28 $ 0.78 $ 0.09 $ 0.00 $ 0.00 DISCONTINUED OPERATIONS (0.06) (0.09) 0.00 (0.12) (0.02) ----------- ----------- ---------- -------- ------- NET INCOME $ 0.22 $ 0.69 $ 0.09 ($ 0.12) ($ 0.02) =========== =========== ========== ======== ======= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 114,801 117,253 =========== ===========
52 WEEKS ENDED -------------------------------------------------------- JANUARY 31 2004 -------------------------------------------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) KB TOYS MATTERS --------------- ADJUSTED RESULTS EXCLUDING KB TOYS CA WAGE AND MATTERS AND LITIGATION TAX MATTERS HOUR SETTLEMENT CHARGES (NON-GAAP) ----------- --------------- ---------------------- NET SALES $ 4,174,383 ------- ------ ------------- GROSS MARGIN 1,746,359 SELLING AND ADMINISTRATIVE EXPENSES 9,100 1,508,820 DEPRECIATION EXPENSE 88,513 ------- ------ ------------- OPERATING PROFIT (9,100) 149,026 INTEREST EXPENSE 16,443 INTEREST INCOME (1,061) ------- ------ ------------- INCOME BEFORE INCOME TAXES (9,100) 133,644 INCOME TAX EXPENSE (3,368) 47,587 ------- ------ ------------- INCOME FROM CONTINUING OPERATIONS (5,732) 86,057 DISCONTINUED OPERATIONS 5,816 (0) ------- ------- ------------- NET INCOME $ 5,816 ($5,732) $ 86,057 ======= ======= ============= INCOME PER COMMON SHARE - BASIC INCOME FROM CONTINUING OPERATIONS $ 0.74 DISCONTINUED OPERATIONS 0.00 ------------- NET INCOME $ 0.74 ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 116,757 ============= INCOME PER COMMON SHARE - DILUTED INCOME FROM CONTINUING OPERATIONS $ 0.00 ($ 0.04) $ 0.73 DISCONTINUED OPERATIONS 0.05 0.00 0.00 ------- ------- ------------- NET INCOME $ 0.05 ($ 0.04) $ 0.73 ======= ======= ============= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 117,253 =============
BIG LOTS 2005 GUIDANCE RANGE OF EXPECTATIONS (ISSUED FEBRUARY 23, 2005)
COMPS GROSS MARGIN RATE SG & A RATE E.P.S ----- ----------------- ------------ ----------- ANNUAL 2005 GUIDANCE 3%-4% 40.7%-4.11% 38.8%-38.4% $0.54-$0.60 2004 (a, b) 0.0% 40.6% 39.0% $0.28 Q1 2005 GUIDANCE 2%-4% 40.6%-41.0% 40.0%-39.6% $0.04-$0.07 2004 2.7% 41.2% 39.8% $0.06 Q2 2005 GUIDANCE 3%-5% 40.6%-41.0% 40.7%-40.3% $(0.01)-$0.03 2004 0.2% 40.8% 41.6% ($0.06) Q3 2005 GUIDANCE 3%-5% 40.9%-41.3% 42.8%-42.4% $(0.12)-($0.08) 2004 (a, b) -1.4% 40.4% 43.1% ($0.22) Q4 2005 GUIDANCE 2%-4% 40.7%-41.1% 33.6%-33.2% $0.57-$0.62 2004 (a) -1.3% 40.2% 33.7% $0.51
(a) Includes $0.05 charge in the third quarter and $0.01 benefit in the fourth quarter related to the expected retirement of senior notes during the third quarter of fiscal 2004 (b) Excludes KB Toys matters recorded as discontinued operations NOTE: Guidance excludes any effect of the adoption of FASB No. 123(R) related to the recognition of stock-based compensation expense. Results listed for 2004 are preliminary and unaudited and exclude the impact of any lease accounting adjustments
PERIOD BASIS POINT CHANGE - 2005 TO 2004 - ------ --------------------------------- ANNUAL 10-50 20-60 Q1 (20)-(60) 20-(20) Q2 (20)-20 90-130 Q3 50-90 30-70 Q4 50-90 10-50
EX-99.2 4 l12402aexv99w2.txt EX-99.2 CONFERENCE CALL TRANSCRIPT EXHIBIT 99.2 FINAL TRANSCRIPT [THOMSON STREETEVENTS (SM) LOGO] CONFERENCE CALL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL EVENT DATE/TIME: FEB. 23. 2005 / 8:30AM ET EVENT DURATION: 1 HR 4 MIN THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
1 (C) 2005 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL CORPORATE PARTICIPANTS MIKE POTTER Big Lots, Inc. - Chairman, President & CEO JOE COOPER Big Lots, Inc. - SVP & CFO CONFERENCE CALL PARTICIPANTS DAVID MANN Johnson Rice - Analyst JEFF STEIN Keybanc Capital Mkts/Mcdonald - Analyst MITCH KAISER US Bancorp Piper Jaffray - Analyst RON BOOKBINDER Sterne, Agee & Leach - Analyst ANDREW SODOTI William, Smith and Company - Analyst ROBERT RODRIGUEZ First Pacific Advisors - Analyst SHAWN TESORO Wachovia Securities - Analyst PRESENTATION OPERATOR [Caller instructions.] At this time I'd like to introduce today's first speaker, Mike Potter. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Thanks Marie and thank you everyone for joining us today for our fourth quarter conference call. With us today is Joe Cooper, Senior Vice President and Chief Financial Officer, Chuck Haubiel, Senior Vice President and General Counsel as well as Tim Johnson, Vice President of Strategic Planning and Investor Relations. I'd like to remind you any forward-looking statements we make on today's 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. We'd like to accomplish a number of things on the call this morning. First, Joe is going to cover our preliminary financial results for the fourth quarter and 2004. Next I'll share some final thoughts about last year and move into our overview of our plans for 2005. Then Joe will walk you through our financial guidance for the coming year. Joe? JOE COOPER - BIG LOTS, INC. - SVP & CFO Thanks, Mike, and good morning, everyone. As discussed in detail in this morning's press release, our fiscal 2004 and 2003 results include discontinued operations as well as items included in continuing operations that are not directly related to the Company's ongoing operations. Therefore, we provided supplemental non-GAAP fourth quarter and full year financial statements that exclude these items. A presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation between the GAAP financial measures and the non-GAAP financial measures are also included in our press release which is posted on our website at www.biglots.com under the "Investor Relations Press Releases" caption. We believe that these non-GAAP financial measures should facilitate analysis by investors and others who follow our financial performance. Additionally we are in the process of reviewing our accounting for leasing transactions. After consultation with our Audit Committee and independent auditors, we concluded that we will correct certain errors in our accounting for 2 types of leasing transactions. These are discussed in this morning's release and consistent with the nature of corrections that have been recently announced by many other retailers and restaurant companies. It's important to note that the financial results reported in this morning's release and are reported THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
2 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL today on this call exclude the impact of lease accounting adjustments. However, to give you some perspective around the P&L impact, we believe the impact of the corrections will be a reduction of net income of less than $2 million per year or $0.02 per diluted share for each of the fiscal years, 2004, 2003 and 2002. During the balance of my discussion this morning, I will focus my comments on results excluding these items as we believe they better reflect the underlying operating performance of the business. This morning, we reported preliminary unaudited net income of $57.7 million for the quarter or $0.51 per share, compared to net income of $82.6 million or $0.70 per share a year ago. The downturn in EPS was primarily the result of below plan sales and a more promotional pricing strategy which we shared with you over a month ago. Sales for the fourth quarter were $1.38 billion. That's an increase of 3.9% over the fourth quarter of 2003 as the year-over-year net addition of 72 stores partially offset a comp store sales decline of 1.3%. Turning to gross margin, we reported a gross margin rate for the quarter of 40.2%, down 230 basis points to last year and in line with our guidance. As expected, the rate decline to last year is principally due to markdowns on excess seasonal and gift giving merchandise, and the merchandise mix pressure that comes from missing the sales plan in higher margin categories. The excess markdowns were a direct result of missing our sales plan in November and December, particularly in longer lead time seasonal categories where orders were placed in the early spring. Additionally, our new furniture team completed a thorough review of our assortment and marked down certain items including discontinued styles, in an effort to maximize the early tax refund selling season. These markdowns helped support sales in January but at a lower gross margin rate than our original plan. While we are clearly not happy with $0.51 per share for Q4, we recognize that the markdowns were critical to clear older inventory, keep our in-store inventory fresh, and give our merchants enough open to buy flexibility to source new closeout deals. For the fourth quarter our SG&A dollars were up less than 2% per store compared to last year. The SG&A rate of 33.7% was in line with our guidance but above last year due to the comp decline of 1.3% mentioned earlier. SG&A dollars continue to be managed well. Net interest expense was $1.5 million for the quarter, down $2.2 million compared to last year, benefiting from the Company's new bank deal with a lower interest rate versus the $204 million, 8.2% senior notes carried by the Company last year. Our income tax rate for the quarter was 34.8%, favorable to our guidance of 38 to 38.5%. The lower rate is principally the result of tax credits recognized over lower than planned pretax earnings. In terms of the balance sheet we exited the fourth quarter with total inventory of $906 million, which is up 4% on a per store basis. After finishing December with inventory above plan, we made steady progress throughout the month of January by reducing our inventory to more acceptable levels. Inventory growth at the end of 2004 is focused in key comp drivers including furniture and closeout deals. We also continue to make progress managing our seasonal inventory flow to align better with planned sales. Inventory levels of seasonal merchandise at the end of January were below last year and will build by region of the country throughout the first quarter of 2005 to align with sales expectations. For the year inventory turnover was an estimated 2.9 times. Our bank debt at the end of the year was $159 million, up $125 million compared to our senior notes of $204 million less invested cash on hand at the end of 2003. The increase to last year was primarily due to our $75 million share repurchase program executed in the second quarter, heavy capital spending as we completed our investments to reposition the business, a debt prepayment charge at the end of Q3 to retire the senior notes, as well as, the underperformance of the business throughout 2004. Capital expenditures were $23.7 million for the quarter, down $15.1 million compared to fourth quarter of 2003. For the 2004 fiscal year, CapEx was $121.1 million, down $42.6 million compared to 2003. The decreased level of capital spending in the fourth quarter and for the fiscal year is principally due to the construction of our Durant DC during 2003. Depreciation expense,for the fourth quarter was $25.2 million, up $1.9 million compared to 2003, and for the 2004 fiscal year was $97.9 million, up $9.4 million compared to 2003. Total selling square footage at the end of the year was 31.0 million, up 7% to last year. We added a net of 72 new stores with 103 new stores offset by 31 closed stores. At the end of the year, we were operating 1502 stores including 43 freestanding furniture stores. Now I'll turn it back over to Mike. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Thanks, Joe. There's really no other way to characterize 2004 for Big Lots other than to say it was extremely disappointing. It proved to be very challenging for us as well as for other retailers who target the budget shopper or lower income demographic. Our comps for the year were flat with the value of the average basket up 2% and customer traffic declining 2% after 3 successive years of positive customer comps. We entered 2004 with some momentum and confidence that we could grow our earnings and continue to benefit from the significant improvements and THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
3 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL investments we've made in our business since 2001. Instead, our core customer was faced with difficult economic conditions, high gas prices, lower confidence and uncertainty around employment and other economic and international events. While we certainly have seen these types of pressures before, in all my time at Big Lots, I don't recall a year in which these factors remained for such an extended period of time. So while we believe the external factors of '04 definitely impacted performance in our business, they are unfortunately not within our control. It is important, however, for us to be self-critical and evaluate our performance in those areas of our business where we do have control, most notably in merchandising. Our seasonal business remains challenging and very competitive. Our furniture business struggled at certain times this year with gaps in merchandising assortments and challenges with inventory levels in certain key items. Finally and most importantly, we believe our merchandise content needed more excitement and simply was not compelling enough to offset such a difficult environment. Despite the challenges of '04, we had several noteworthy achievements. We successfully executed our first ever share repurchase, $75 million and 5.4 million shares. We recapitalized our balance sheet by retiring our higher interest senior notes and our prior secured bank facility in exchange for an unsecured bank only facility. We successfully opened a new regional distribution center in Durant, Oklahoma, a furniture distribution center in California, and are nearing the completion of the reengineering of our oldest distribution center here in Columbus. We strengthened our merchandising team by adding proven category managers in the areas of home, seasonal and furniture. We created and staffed a new subsidiary, Big Lots Capital, to pursue more atypical deals of closeouts coming from bankruptcies, business liquidations, and insurance claims. Also, we built a merchandise planning and allocation team and assimilated them into our business. As we close the book on 2004, I want to share some perspective on the amount of initiative work that was completed during the year and what impact it will have as we look forward to 2005. First, despite a difficult year, our newest TV markets continue to outperform the balance of the Company stores. For 2005, our plan mirrors 2004 in terms of the number of weeks and the frequency of exposure. We have evolved a new creative in our TV campaign for the coming year, focusing more on shopping urgency and specific item and price to increase shopping frequency. We remodeled a total of 66 stores bringing the total number of remodeled stores in the last 4 years to over 700. Given that approximately 75% of our stores have been remodeled or opened as a new store in the last 6 years we, are not planning to remodel any stores in 2005. We completed the rollout of UPC shelf labeling to some of our high unit velocity categories making more efficient use of our store payroll, as approximately 20% of the SKU's in our store are now UPC labeled. We have been testing the installation and programming and in-store execution of rolling out debit card readers to our stores. We expect to install debit card readers in close to 1100 stores during the first quarter of 2005. Debit card usage as a percent of tender, continues to increase. And the cost to process a debit card can be up to 50% lower than a credit card transaction, and it creates an SG&A leverage opportunity that Joe will speak to in a moment. Turning to the supply chain, we accomplished a great deal. We opened a new distribution center in Durant, Oklahoma which is quickly becoming one of our most productive centers, we opened a new West Coast furniture distribution facility in Redlands, California, and we made significant progress reengineering our Columbus distribution center to improve productivity and reliability in this our oldest building. This project will be completed in 2005 on time and with our costs on plan. After considerable development, testing and implementation work, we are nearing the completion and rollout of our new merchandise planning and allocation system. These systems will help us tailor our merchandise mix and start to address micromarketing opportunities. It will improve our sales per square foot productivity and increase our inventory turns, and we believe the benefits of these new systems should start to show impact in the second half of 2005, primarily through improved inventory turns and a lower markdown rate. Finally, during 2004, the Company added a net of 224 furniture departments, bringing us to a total of 1069 furniture departments. So approximately 73% of our existing closeout stores now have a full furniture department up from 845 departments and 61% last year. These departments generally range in size from 2000 to 5000 square feet. Additionally, in an effort to expand the Company's furniture presence to the western region of the country, the company opened a new distribution facility in Redlands, California last year. The Company began shipping merchandise from this facility in September to approximately 300 stores principally in the western region of the country. The majority of these stores support approximately 700 square foot of selling feet in furniture with a limited merchandise assortment consisting primarily of RTA, futons, and lamps. With the expansion of furniture to the western region, the Company now maintains a furniture assortment or a furniture presence in over 90% of our closeout stores at the end of fiscal 2004. As I look back at 2004 and at the last 4 years, I'm certainly very proud of the organization and all that has been accomplished to lay the groundwork for long-term earnings growth. With those initiatives now behind us, our mission in 2005 is very straight forward. We're going to focus intensely on great merchandising THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
4 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL content and driving better same store sales. We want to deliver a higher concentration of closeout merchandise and do so consistently across all categories and all stores. We want to successfully launch our new merchandise planning and allocation systems both of which will help with the prior 2 initiatives. And overall, we are intentionally keeping our initiatives to a minimum this year, not only to insure our focus on merchandising is absolute, but also to keep our costs and capital to a minimum and to maximize our opportunity for free cash flow and earnings growth potential. We expect the merchandise content to improve throughout 2005 in each of our major categories. With the completion of our key strategic initiatives, investment in talent in certain key areas and the completion of staffing of planning and allocation teams, each merchant should benefit from more available time. Incremental time should allow our merchants the opportunity to increase their focus on sourcing great deals, meeting with vendors, and visiting stores and competitors to gain an edge in better understanding both customer demand and to improve our closeout sourcing. As we look back at when Big Lots has been at its best, the common denominator has always been great closeout deals. For the first time now in our history, each merchandising team has been given a closeout merchandise target that they will be accountable to for the future year. Additionally, we expect Big Lots capital will supplement our already strong position in sourcing direct from brand manufacturers by being an aggressive player in the areas of bankruptcies, liquidations and insurance claims. Already we've seen the potential of Big Lots capital to drive customer transactions and a bigger basket. We believe these types of deals can start to generate more excitement and buzz to shop our stores more frequently. Now let me turn it back to Joe who will walk you through our guidance for 2005 and each of the future quarters. JOE COOPER - BIG LOTS, INC. - SVP & CFO Thanks, Mike. Overall we are planning 2005 earnings to be in the range of $0.54 to $0.60 per share up from 2004's earnings of $0.28 per share. The increase over 2004 is significant and will be the result of improvement in several key financial measurements. This guidance does include the estimated impact of our new lease accounting methodology. Also please note that this guidance excludes any effect of the adoption of SFAS 123(R) related to the recognition of stock-based compensation expense. First, we've developed a 2005 sales plan that calls for a total sales growth in the 7 to 9% range which is based on a 3 to 4% comp and the addition of 45 net new stores. During 2005, we anticipate opening 85 new stores and closing 40 stores. As Mike mentioned, the key comp drivers of 2005 are merchandise-related in terms of increasing the level of closeout merchandise in our stores and improving the merchandise assortment across all key categories. Additionally, we expect to continue to benefit from our national television advertising program which will be in its third full year. The earnings plan is also based on improving gross margin performance with the rate expected to be in the range of 40.7% to 41.1% or up 10 to 50 basis points to 2004. The key driver of the gross margin rate improvement is markdowns, which are planned significantly lower than last year for several reasons. Markdown improvement is expected to result from lower levels of clearance markdowns of seasonal and gift giving merchandise as well as hanging apparel which was eliminated as a category in 2004. Additionally, we expected to achieve markdown efficiencies in the second half of 2005 from new merchandise planning and allocation systems. The SG&A rate is expected to decrease 20 to 60 basis points versus prior years due to efficiencies in store payroll, increased productivity in distribution and transportation costs and the impact of a 3 to 4% comparable stores sales increase over an expense base with a large fixed cost component. Productivity improvements in our stores and distribution and transportation network will result from items such as UPC shelf labeling in place for a full year, no specific store-related task initiatives such as store remodels, the rollout of debit card readers and leveraging the recent investments in our distribution and transportation network. Based on the plans we have in place for 2005, the expected leverage point of SG&A is a comp slightly less than 3%. Net interest expense should be in the $7 to $8 million range down from $25 million in 2004 or $16 million net of debt prepayment charges. This significant decline is attributable to replacing our senior notes and previous bank facility with a new unsecured revolving credit facility with more favorable rates. The effective income tax rate is planned to be in the range of 35.8 to 38.7% range. For the year, capital expenditures are expected to be in the $80 to $90 million range, our lowest level since 1996. As we have stated on several occasions, our capital allocation for 2005 will be focused solely on new stores and maintaining our existing stores and DC's. Depreciation expense is estimated to be in the $110 million to $115 million range. When you add up all the metrics we have provided for the year, estimated free cash flow is expected to be in the $100 million range. As we normally do, we have attached a separate table to today's press release that highlights our annual and quarterly guidance for 2005. Now I'll take just take a moment to walk through the quarters in a little more detail. In the first quarter, comp sales are planned up 2 to 4% on top of a 2.7% gain last year, which was our best quarterly comp of 2004. For the quarter, we are planning for 6 THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
5 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL advertising circulars, which is similar to last year. However, we are expecting different levels of comp improvement in each of the months of the quarter, so I want to take a minute and explain our expectations by month for the first quarter. February comps are expected to increase in the 3 to 5% range benefiting from 2 significant events which are somewhat unique to the month. First, we acquired a meaningful amount of merchandise from a national drug store liquidator, which has positive impacted the comps in approximately 750 stores. Additionally, we experienced very good response to our friends and family promotional event earlier this week, which has positively impacted our comps for the month. For the month of March, we expect comps to increase in the range of 2 to 5%. March is expected to benefit from an earlier Easter holiday this year, partially offset by one less ad circular compared to last year due to a shift in the timing of the first of the month payroll cycles. April's comps are expected to essentially be flat to slightly positive. April is expected to benefit from one additional advertising circular due to the shift in the time of the first of the month payroll cycle, partially offset by the absence of the Easter holiday shopping period compared to last year. Sales for the combined period of March and April are planned up in the 2 to 4% range. The first quarter gross margin rate is expected to be 40.6 to 41.0% down 20 to 60 basis points to 2004. Leveraging SG&A in the first quarter poses the biggest challenge as it has the lowest comp assumption of the year and we do not anniversary the opening of Durant until the end of the quarter. The SG&A rate is expected to be 30 basis points lower to 10 basis points higher than last year. Considering these assumptions, we are expecting earnings in the range of $0.04 to $0.07 per share compared to earnings of $0.06 per share a year ago. In the second quarter, despite dropping an ad circular in the month of June compared to last year, we expect comps to increase in the 3 to 5% range as we begin to anniversary last year's slowdown in customer traffic. Gross margin rates are expected to potentially show some improvement compared to 2004 based on a lower level of clearance markdowns planned in seasonal and hanging apparel. which was beginning its liquidation phase last year in Q2. Most importantly, we are planning significant SG&A leverage for Q2 based on several different factors. First, the reduction of an ad circular in June. Second, efficiencies in store payroll based on no store remodel activity in the quarter compared to last year. Third, D&TS productivity improvements as we anniversary the Durant opening, and fourth, the introduction of debit card readers to over 1100 stores will help drive lower credit interchange fees. Based on all these factors, we expect results in a range of a loss per share of $0.01 to earnings per share of $0.03 for the second quarter. Continuing into the third quarter, we will continue to be up against the softness of 2004 and estimated comps will increase in the 3 to 5% range. Gross margin rates are expected to grow significantly to last year against heavy clearance markdowns in seasonal and hanging apparel. SG&A leverage is estimated to be 30 to 70 basis points based on improvement productivity in store payroll and our distribution network, along with the benefits from debit card readers. Based all these factors, we expect a loss per share in the range of $0.08 to $0.12, which compares favorably to last year's loss of $0.22 per share. For the fourth quarter, we are planning comps up in the 2 to 4% range. We believe that the all-important fourth quarter will continue to be an extremely competitive environment and we are developing our merchandise strategies accordingly. Fourth quarter earnings are expected to be in the range of $0.57 to $0.62 per share or up approximately 10 to 20% compared to earnings of $0.51 per share in 2004. We do not plan to repeat last year's excess inventory position and accordingly, do not anticipate needing the same level of clearance markdowns in December and January as was necessary this past year. SG&A leverage of 10 to 50 basis points, lower than Q2 and Q3 principally due to a slightly lower comp assumption and a higher planned bonus provision compared to last year as expected. Now I'll turn it back over to Mike for some closing comments. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Thanks, Joe. While 2004 was a setback and we still remain cautious about the well-being of our core customer, we look forward to 2005 and future years. With the distraction and the cost of key investment initiatives now behind us, we have a great opportunity in the coming years to leverage our model. You can expect to see us maintain lower levels of CapEx in coming years, and as a result, we have an opportunity to generate meaningful cash flow and maintain a strong SG&A leverage point going forward. We believe both of these outcomes will aid us in generating EPS growth drivers and ultimately assist us in enhancing shareholder value. We know the key driver of our success is differentiation in merchandising, driven by great closeout content. We think we've made meaningful progress in that regard this year and it will remain our number one focus. With that, Marie, if we could turn it over to you, we'd be happy to address any questions that you may have. THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
6 (C) 2005 2002 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. QUESTION AND ANSWER OPERATOR [Caller instructions.] The first question comes from the line of David Mann with Johnson Rice. David your line is open. DAVID MANN - JOHNSON RICE - ANALYST Yes, good morning, gentlemen. Can you talk a little bit about some of the specific merchandise category plans in '05? Specifically I guess you mentioned a little bit about a more conservative seasonal posture in the holiday period, and also can you elaborate on furniture given that it had been weaker in the second half of the year? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Okay. I'll go backwards. First of all, in terms of furniture, we do think we have a lot of opportunity in furniture in the coming year. We've made some changes in the merchant organization. And we feel real good about the progress we've made both in terms of the staff as well as in terms of the inventory flow as we've moved through the fall season, and we definitely had some misses last year and they were in varying areas for varying reasons. Right now as we're heading into the balance of February, the merchandising inventory feels pretty good. I think we've made some good adjustments in categories and SKU's based upon what we've seen in the performance and sell through of certain items from last year. And we expect furniture will be a pretty decent comp driver for most of next year, and probably we would expect that to gradually improve as we go through the year. In seasonal, it's a little bit of a complicated story depending upon the season itself. We actually have a fairly good outlook for the spring seasonal. We have continued to lower our exposure on what we had traditionally called summer decorative; a lot of the outdoor decorative statutes and ceramic products. We continue to reduce that exposure pretty dramatically, but we are getting good increases and have seen good increases in things like patio sets and other basic lawn and garden-related merchandise. So we look for lawn and garden to be a comp driver in the spring pretty similar to the Company's comps, and look for some of the decorative to be down. In fall, we are a little bit more conservative on fall in particular the trim category, but it is also a mixed story, and that is we dive into the details of where we are getting our comp and where we are having our greatest exposure, we have a lot of opportunity in still allowing the basic products. We had a bigger inventory of things like Christmas trees and outdoor decorative this last year, and frankly we fell short. We have more opportunity to pursue that than we did in our buying last year, so we're going to step that up next year, but we're also going to again, after a couple years of doing this but even more dramatically, reduce the indoor decorative pretty substantially, and that's traditionally been where our markdown exposure has been. So trim is actually planned to be relatively flat. Maybe even just slightly down for the fall season, but it's a mix between planning down large double-digits in areas that have caused us our markdown liability and our concerns in the past and planning up those areas where we've fallen short and have done well, primarily the outdoor decorative. DAVID MANN - JOHNSON RICE - ANALYST Okay. And then one more question. On the planning and allocation system, can you just walk through how that will be implemented? Any kinds of risk issue in terms of that implementation? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Yes. Both of those systems do not go in with a big bang approach. They are phasing in. In fact, we've already been phasing in some of the systems to this point. We've phased in some of the allocation system already in certain categories, so we're actually implementing that on a roll-in basis, over a period of time, and we have the complete ability to delay or to roll back if we see any problems. Right now it's worked very well. We're real pleased with what it's doing. It's already leveling out inventories by store based upon sell-through, and it's doing what we expect it to do and so that's already in place and it looks like it's being executed real well. The planning system really doesn't naturally have the same kind of risk as an allocation system because it is addressing the planning phase of the business and not the actual implementation of allocation, and that will come in later this first quarter and right now everything looks like it's on track for that system as well. OPERATOR [Caller instructions.] The next question comes from the line of Jeff Stein with KeyBanc. Jeff, your line is open. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Good morning, Mike. Mike, I'm wondering if you might address the issue of how you're going to approach the fourth quarter in 2005? You acknowledged that the trim business is becoming tougher, and I just see more and more people in that business each year. The question is what are you going to replace it with? As that business continues to erode, it's just going to create a bigger hole for you guys to fill. And that has historically been a significant percentage of your sales. You know, what does Big Lots become THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
7 (C) 2005 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL during the fourth quarter this year that it it has not been in the past, I guess? I'll let you answer and I've got a follow-up question. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Yes. I think that's a good question Jeff. Obviously, I just kind of gave an overview of the trim category, and it's important, I think, that we recognize how to manage that business so that we are differentiating in an area that is incredibly competitive, and frankly there's not much in terms of closeouts. So we don't really have the ability to differentiate as easily in the sourcing of that category, and so we have to pick our spots and be real smart. We also have to recognize it's a very big percent of our business, and even when we have markdown exposure, it's one of the highest gross margin categories that we have, but obviously if markdowns exceed our expectations, it impacts our forecast. So we are not expecting that to be a comp driver, and of course, Joe mentioned that our comp expectations are relatively conservative for the fourth quarter recognizing the issues you pointed out. What Big Lots becomes more of in the fourth quarter is closeout and opportunitistic. It's the perfect time for treasure hunt opportunistic closeouts to shine because customers are looking for gift giving ideas, and they are opening up their bigger share of the wallet in the fourth quarter than they do at any other time of the year, so across all categories that we have and through the sourcing of Big Lots Capital, Big Lots needs to represent a lot more fun and excitement and treasure hunt in the fourth quarter than it has for the last few years, and a lot less in terms of the more predictable merchandise assortment that you might find in other retailers, and we are finding a lot of success in our home area in closeouts and in our hard lines area in closeouts. The toy marketplace for closeouts is always very good. So really across categories and in areas that we may not have dealt in either at all or in a very limited sense, sporting goods and others, those are the markets we're trying to open up so that Big Lots is a ball to shop during that time of year. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Where do you see your closeout mix evolving over the course of the next 12 months compared to where it's been historically? And if I remember correctly I think you've historically been about 50% or just north of that in closeouts, and if you do become more aggressive in closeouts, will that necessitate you becoming more heavily skewed to circulars once again just to create that sense of urgency and create the visibility of those new incoming products to your customers? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO You're right, the closeout percent for us right now we think is about 50%. We've done more in the last year to truly measure it than we ever have in the past, and internally we go through a couple of different things to kind of establish a pure measurement of closeouts. But the way we've traditionally communicated it with all our investors right now we think we are around 50%. We're trying to take that up by 10% this year. That's a planned objective and increase of 10%, and that's a combination of all categories being challenged up and Big Lots Capital contributing as well. In terms of circulars, no, I don't think that means that we're dependent on more circulars. We've already learned what more circulars looks like and it really doesn't deliver the quality of profits when you add circulars that we would like to. We think it speaks to the quality of the content of each circular, and we don't in any way believe we have reached the peak on what a circular can generate in traffic and sales by making sure you maximize the content in each circular, and when we do a circular right and we have exciting incredible values, the difference you see in the behavior of a circular financially is pretty dramatic, and we have I think lots of years of getting the quality of our circular productivity up before we ever would consider adding more. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Can you give us an idea, Mike, what percent of your sales are driven off of ad items in the circular? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO I am hesitating a little bit because you kind of have to decide whether you're including some kind of estimate on related sales or not. But for a week in which we run a circular, I would say it's about 10% of the sales in that week. OPERATOR The next question comes from the line of Mitch Kaiser with Piper Jaffray . Mitch, your line is open. MITCH KAISER - US BANCORP PIPER JAFFRAY - ANALYST Hi, guys. Much has been said about the macroeconomic environment, and I was just wondering if you could comment on what your thinking is as it relates to your guidance for 2005 related to the macroenvironment? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Well, I wish we could predict it and we can't. MITCH KAISER - US BANCORP PIPER JAFFRAY - ANALYST You're not the only one, Mike. THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
8 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Yes, I know. Everything that I'm hearing isn't really very optimistic. That if anything, gas prices are really not going to come down in the future. They are going to reach a new peak in the late spring and the summer. Those things are probably the most meaningful for our customer. At best, we're assuming that when we start to anniversary it this coming mid to late spring, that it starts to equalize out a little bit, but it's very hard for us to know where that goes. I think we continue to have a year-over-year difficult comparison until we get to about June or so, and that was when we really saw the decline in sales traffic, and that's when many retailers saw the decline in sales traffic, and when we see June and July sales that will be the first time when we really know how does the year-over-year compare, and has the environment changed or has the customer kind of anesthetized them to the environment and their behavior comes a little more normalized. MITCH KAISER - US BANCORP PIPER JAFFRAY - ANALYST You talked a little bit about Big Lots Capital, but I was wondering if you could elaborate on any successes or things you can point to to show that you're placed with how things are going there? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO First of all, I'll say it in two different ways. You probably won't be very satisfied with this answer. First of all, we're absolutely very excited about the pace upon which we've taken it from a concept to a business that's generating some impact. We're real happy with the deal flow. I'd say right now what it looks to be is pretty consistent deal flow, and it varies from large impactful deals to a lot of smaller impactful deals. We're learning about how to process things that are very manual and learning that every deal is a little bit different. I think we're doing a pretty good job of regionalizing them. And making sure that we're not spreading too thin, but putting them in stores so that they have individual store impact. There's a lot of excitement in the field organization. Looking for these kinds of things, they love when they are chosen as part of a region or group of stores that gets a particular deal. But I guess the other flip side of it is just from a competitive standpoint and for the sheer fact that it has only been a handful of months that we've really been up and running I don't want to go into too much more detail than that. But I'm definitely excited about what we have here. There's definitely a big market in bankruptcies, liquidations and insurance deals. And I think we're just beginning to scratch the surface. And it's putting product in our stores that the customers have not seen and it's creating some real excitement. And that's what we need to change the trend in the traffic right now. OPERATOR The next question comes from the line of Ron Bookbinder with Sterne, Agee. Ron, your line is open. RON BOOKBINDER - STERNE, AGEE & LEACH - ANALYST Good morning, can you give us some color on the furniture? You talked that you were making some changes there. Is it pricing, opening price points? Is it a shift to more ready to assemble? Can you give us a bit of color on that? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO I'm not sure there's an overriding theme that I would point out, Ron. I think it's more category by category, whether it's in the upholstery area or the case goods area or RTA or lamps or anything else. I think it's us learning a lot as we've grown this business about what price points are working, what styles are working, how broad our assortments should be, and thankfully now with the tools that we have, we have a lot of information at the class level and the item level that we learn a lot about what's working and what's not working, and there is a lot of opportunity for us to continue to increase the productivity. I wouldn't tell you that it's from a pricing standpoint, it's high or low that matters as much. It's value that matters the most. It's important for us to have opening price points and you know, low bargain price points for that consumer that's looking for the lowest product available, but we also have I think over the years surprised ourselves at the higher price points we can sell when we are offering extreme value. You know, we've been able to sell leather recliners and leather couches and love seat sets at pretty high price points, but when the shopper compares, they are saving a lot of money and that resonates, so it's all about the value. RON BOOKBINDER - STERNE, AGEE & LEACH - ANALYST Okay. Can you give us a little bit of color on your transition and the search for your replacement? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Sure. I'll tell you what I can. The Board is in the middle of the search process. The Company engaged Korn/Ferry, as I think we announced earlier. The Board has created a search committee comprised of 4 board members and then also myself and Brad Waite our EVP who has a variety of departments that he's responsible for including human resources. Those 6 individuals are participating in the search process. We are conducting an external search and right now it's still fairly early in the process. We think we are on schedule with it and are feeling good about the progress we're making. But generally we believe that it's likely to be late spring or summer when we have this completed. THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
9 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL RON BOOKBINDER - STERNE, AGEE & LEACH - ANALYST Okay. And lastly, how come a balance sheet wasn't included in the press release today? JOE COOPER - BIG LOTS, INC. - SVP & CFO Ron, as we announced, we are in the process of reviewing the lease accounting, and so we've deferred issuing a balance sheet until we finalize that. OPERATOR Thank you. The next question is a follow-up question from Jeff Stein with KeyBanc. Jeff, your line is open. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST I have a couple questions on the lease accounting. First of all, when you guys sign a lease, do you depreciate the assets over the initial lease term, or do you also include the option period? JOE COOPER - BIG LOTS, INC. - SVP & CFO Jeff, our policy is to depreciate the leasehold improvements over the lesser of the lease term or the useful life. Our useful life is 5 years, so for the most part, it is since our lease terms are generally 5 years and a few a little more than that, they most often correlate. They are the same but it's 5 years. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Okay. And how about your construction allowances? Generally how big are they? JOE COOPER - BIG LOTS, INC. - SVP & CFO Oh, it varies. It costs about ballpark $300,000 to build a store between leasehold improvements and fixturing, so it can go as high as $100,000, $200,000 or nothing. A large number of our leases don't have a construction allowance, so it can vary. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Okay. And maybe you can tell me a little bit. I'm not sure I understand what the accelerated component represents. How would - - maybe you can talk to me a little bit about the timing issue? What creates the charge to earnings? Because it sounds like most of this is geography on the profit and loss statement. Where are the timing issues in your review of your lease accounting? JOE COOPER - BIG LOTS, INC. - SVP & CFO Well, the biggest one is what you talked about what the press is calling a rent holiday or what the SEC calls a rent holiday. And that's where we execute a 60-month lease and the landlord gives us access to that vacant property 2 to 3 months prior so that we can buildout the store. The common treatment is to initiate rent expense when your lease term commences. What we are now going to do is initiate lease expense when we have access to the property, so it would start 2 to 3 months prior to the store opening. Now we would straight line over 62 or 63 months instead of 60 months. And what that does is put more rent expense in year 1 and less in years 2 to 5. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Got it. JOE COOPER - BIG LOTS, INC. - SVP & CFO So that generates the P&L hit in year 1. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Okay. And one more accounting question. A lot of retailers have built SFAS123(R) into their guidance, and I'm kind of curious as to why you have elected not to do so. JOE COOPER - BIG LOTS, INC. - SVP & CFO Because we will implement that or plan to implement that in the third quarter. And we have just deferred until we finalize implementation plans to issue guidance at that point. You can certainly estimate the impact based on prior years -- JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST It looks like it's about $0.05 or $0.06 a share. JOE COOPER - BIG LOTS, INC. - SVP & CFO Yes. right. For the full year, but we've just elected to defer that until its final and implementation is firm somewhere in the second quarter. But you're in the ballpark. If it's $0.06 cents a year, you can certainly estimate what it would be for half a year. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
10 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL And final question, share count, what kind of share count are you basing your guidance on? JOE COOPER - BIG LOTS, INC. - SVP & CFO About 113 million for the full year '05. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Okay. Thanks a lot, Joe. OPERATOR The next question comes from the line of Andrew Sodoti with William, Smith and Cove. Sir, your line is open. ANDREW SODOTI - WILLIAM, SMITH AND COVE - ANALYST Good morning gentlemen. Just a follow-up question on the CEO search. I just want to get a feel for what are you looking for in a new CEO and what ideally would you like him to bring to the table at Big Lots? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Well, I'll try to give you a feel, but obviously we are trying to keep a relatively broad scope. The Board is interested in obviously the right kind of leadership skills, the right kind of resume and background, the types of companies that the individual has spent his or her career. Certainly retailing background is an advantage. And they are- - if you had to look at a particular skill set or focus, they they are primarily focused on merchandising and marketing related experience. We think that's probably the most important skill set that the individual can bring, but of course it's going to come down to a lot of other factors in assessing the individual in a variety of ways., but that's generally where the Board is leaning. ANDREW SODOTI - WILLIAM, SMITH AND COVE - ANALYST Okay. and then just lastly, if you could just maybe comment on the coming back to the furniture in your western stores, just how that has performed versus your expectations I guess both in terms of driving traffic and in driving the average basket? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO It has been good. We have been happy with it. Actually, to some extent when it kicked off, we had some stronger sell throughs than we had product to back it up,so I think we have opportunity next year in driving stronger sales through just being in stock. It's a pretty simple department. It's primarily RTA. It's kind of cash and carry products and it's something that in that marketplace they have not seen from us before. We are offering good values, and frankly even the competition in that region is not as intense as it is in some of our other markets, so I think it continues to be something that should generate some growth for us for a number of years. OPERATOR [Caller instructions.] We have a follow-up question from the line of Jeff Stein. Jeff, your line is open. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST I'll take one more. Mike, I'm wondering, given the fact that you intend to drive your closeout percentage up by about 10 points, number one, what are the margin implications of that? And what are the inventory implications? In other words, is Big Lots capital incremental to the open to buy from your merchants in your day-to-day business? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Okay. Well, first of all, let me clarify because it might be in the way I said it. We're trying to increase that 50% by increasing it by another 10% which means taking it from 50 to 55%. Now, we may exceed that. We're going to obviously go as far as we can, but we want to make sure we're doing it smart so that that which we're buying less of, which is some continuity products and obviously has generated sales in the past. We want to make sure we're taking the appropriate steps and not going too far too fast. The way this looks, it varies a lot by department, Jeff, as to what the margin impact is. In some areas the closeout margin can be better than the non-closeout margin and in other areas it is not. Generally for the Company, what we're trading off which is kind of how we phrase trading off in and out buys for closeout buys; closeout buys come at a lesser IMU slightly, but we know from history that it generates stronger turns and it has less markdown liability, so it could have a net slightly negative effect on the gross margin because in a lot of cases we're trading out real high IMU import type of goods, but we know it's a lot more exciting. It's going to create a lot more buzz and a lot more excitement and ultimately more traffic. And it turns faster and that's a better [GMROI] in return on investment and it should drive more gross margin dollars. JEFF STEIN - KEYBANC CAPITAL MKTS/MCDONALD - ANALYST Is this going to skew your quarterly inventories when you report? THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
11 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO No. No. We have modified our open to buy to make sure that we have open to buy accounted for sourcing through Big Lots Capital. OPERATOR The next question comes from the line of Robert Rodriguez with First Specific Advisor. Robert your line is open. ROBERT RODRIGUEZ - FIRST PACIFIC ADVISORS - ANALYST Hi, Michael. I'm just kind of curious, I'm trying to think about over the last several years of what you've done and the store traffic changes that have occurred, and then we've had all of this increase in the dollar stores out there. So we're talking about a much different competitive landscape. I'm just trying to get a sense from you that when you talk about your increasing of closeout merchandise from 50 to 55%, how you think about that in terms of how that relates to what the competition is doing? So even though your increase is occurring, your rate of change in what you're doing to the entire store, how do you give us a sense of what it relates to what the competition is doing? You may be improving, but you may be improving at a lesser extent and therefore your competitive position in total is not increasing all that well. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Well, I think the way we're looking at it , Bob, is what we're trying to do is change our extent of differentiation. I'm not sure it's just a pure dollar growth against dollar growth comparison. What I think is important for Big Lots in terms of lining up against the dollar stores is that we really do not compete with each other in the same business. We're not in the same business. They are in a much more convenience value proposition but really not a high amount of treasure hunt or opportunistic or closeout mix. They are satisfying a daily need, a general consumable mix. And they're in a type of business that they are going to do very well with what they do. And it's important for us to not either go head to head with them or head to head with the discount stores. When Big Lots is at its best, it's a highly differentiated store a very different place and people go to it for a different reason. And that all comes down to the excitement and the extreme value and to some extent that unpredictability and a fun place to shop. We're not as much a need place to stop as the dollar stores or the discounters. We're opportunistic and that's where I think we need to move that shift back, and that's where this initiative is coming from. ROBERT RODRIGUEZ - FIRST PACIFIC ADVISORS - ANALYST Okay. And the second thing was was that you wanted to broaden the exposure of Big Lots to a wider consumer group, and that was the whole purpose of national advertising one name, et cetera. What metrics can you give us to say how that has occurred? And if it has not occurred to the extent that you have done or expected, where do you place that reasoning? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Well, first of all in terms of the TV initiative we know that that's provided the right return, and we've actually been able to reduce our advertising percent of sales over the years as we've been able to leverage both circular and TV. I know that that has assisted us in driving traffic. Although obviously in 2004 it's the first year in 4 now that we have failed to drive additional traffic. We do know through studies that we have to some extent expanded our customer base but not as far as I think our goals were to do that. An important part of bringing them in and keeping them was all the things that we did to upgrade the stores and all the things that we did in our infrastructure to become a better retailer. I think what's missing is all about the content. And that there are -- perhaps if we try to simplify the business there's 2 types of customers. Those that need a bargain and those that love a bargain, and our core customer is those that need, and I do believe if we do things right, we can greatly expand into those that want, and that comes down to the content. I'll give you an example, you know, advertising is important but merchandise content creates a buzz and a word of mouth that is a lot more powerful than advertising. And when we put some of these special deals in a store, whether it's a major drug store liquidation or whether it's a major sporting goods manufacturer. Or whatever we might buy that its clearly different than what a customer sees when they go into a discount store or dollar store. We can put that in and not advertise a thing and maybe want even put a sign in the store and it creates a ton of buzz, and people on their cell phones, and it creates a passion that has always made the business good when we do it well, and that's what we need to do better than we have done before and focus on. ROBERT RODRIGUEZ - FIRST PACIFIC ADVISORS - ANALYST Okay, and last question and that relates to the executive search that you were talking about and some of the elements of what you were looking for in terms of merchandising marketing expertise. There are a few areas in retailing where that really focuses. I can think of some of the stores, whether it's a ROSS store a TJ or somebody like that. Is that an area that you're looking for somebody who has already been in the what I would call the treasure hunt timely item acquisition as opposed to going to the Orient and putting forth a production order like many other stores do? I mean, how do you differentiate what this merchandising marketing professional expertise is going to be? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
12 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL I think that's a great question. Obviously, it's highly unlikely we're going to find the absolute perfect ideal CEO if we drew one up from scratch right now. You do your very best to match up the needs of the business with the talents of the individual, and I think you implied the right thing. Everything that we've described whether it's in this quarter or prior quarters about where we are headed with the business, what we believe we need to do, our plan for 2005, the Board is very set on knowing confidently that this is the direction the business needs to go, and it's very important for us in our CEO search to find a CEO who can enhance that strategy and build upon it and get it there as fast as we can. We're not looking for a brand new strategy. We know the business well. The Board knows the business well. We know what we have to do and we want somebody that can deliver that. OPERATOR The next question comes from the line of Shawn Tesoro with Wachovia Securities. SHAWN TESORO - WACHOVIA SECURITIES - ANALYST I have a few question regarding your bullish comments on free cash flow is there another repurchase program that might be in the cards here? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Board takes that a step at a time. As we've mentioned before we did do a buyback last year. I think one of our rules has always been we are not going to lever up the Company and get ahead of the cash flow and jeopardy our investment ratings. But as cash flow has generated, it is the Board's intent to return or provide a return to shareholders. It obviously believed last year the stock buyback was an advantageous way of doing that. I'd say if it continues to be that type of environment situation they'd probably look at that again. They are very open to making sure they understand what shareholders would like. We do not believe there is a great acquisition for us or anything that we should be pursuing from an M&A standpoint. I wouldn't rule that out completely, but I don't think we really know of something that we believe would be a significant value added. But we do believe cash flow is a growth vehicle for us in terms of shareholder return. And it's certainly not our intent to just accumulate it. It's our intent to provide a return. SHAWN TESORO - WACHOVIA SECURITIES - ANALYST Okay. Is there a height on the closeout as a percentage of the total mix that you would go to? You know, you mentioned you're looking for 10% growth from the 50% to, say, 55%. Do you get to a number there where you just say, you know, maybe this is kind of the height that we want to be at in terms of closeouts? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO I don't think I can pick a number. I do know that given the strength of a lot of the ways that we go to market on a pure closeout definition, I don't think this business can ever be 100%., so I think we just take it a step at a time. It will be real important to to see category by category and in the business, in total, what happens to us as we have made meaningful progress, meaningful in the customer's eyes progress in enhancing closeout mix, and then we'll go from there. SHAWN TESORO - WACHOVIA SECURITIES - ANALYST Okay. Thanks, guys. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO We'll take one more question, Marie. OPERATOR Our last question comes from the line of David Mann. David Mann, your line is open. DAVID MANN - JOHNSON RICE - ANALYST Yes, if I could follow up on the earlier question about your customer base, given the struggle your lower-end consumers had, are there any plans or, you know, attempts to try and attract a better customer? Especially given what you're trying to do with the mix? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Well, I think we always have been working to expand the customer base David but we never want to walk away from the core customer. And that's very important for us to do, and we know through a lot of studies, there is still a share of wallet that we can get from our core customer that we haven't been getting through our own execution, so it's not like we've tapped out in that regard. Obviously their traffic right now is challenging and they are being very careful about the number of trips and the visits that they are making and how much they are spending, but that in no way implies that we've reached our limit in terms of what we can get from that customer, and then in terms of attracting a broader customer, the majority of the population still has no idea who we are, and the majority of Americans love to save money, and I think that, again, back to content, when we put something exciting in a store, the word gets around and the more we attract that and the more we create the buzz, the more you get momentum from that. THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
13 (C) 2005 2002 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. FINAL TRANSCRIPT BLI - Q4 2004 BIG LOTS, INC. EARNINGS CONFERENCE CALL So I'm kind of repeating myself, but I still think now we've set the stage in all of our improvements in the business, improvements in stores, systems and everything else. We've kind of set the table and now we just have to keep inviting them back in. DAVID MANN - JOHNSON RICE - ANALYST And in terms of the directives that you're giving to your buyers, I guess you mentioned that you're planning on giving them targets for closeouts. Any other comments you can make I think on the last call you talked about working on some incentives for them. Any more detail or progress on that? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO No. I won't go into any further detail. I will say, though, this is not a forced initiative. This is actually something that this organization embraces unanimously. I think to some extent we all have to just make sure we are being clear about what the expectation is and our buyers want to expand the closeout percent. That's where their entertainment in the business is, and that's where they know they can add a lot of value, but at the same time, we all have to hold hands in terms of saying we're going to buy less of some categories that have provided sales for us in the past because we want to trade that for the opportunities, and that causes a little uneasiness because you never know where your next closeout is going to come from. You never know where your next phone call is going to be, and it's trading the predictable for the unpredictable, and by planning that and by saying we're going to commit to that, I think that's how you make that happen, so they are fully behind it, incentive or no incentive, I think we've got a lot of support behind the initiative. DAVID MANN - JOHNSON RICE - ANALYST But in terms of how you're going to measure their productivity, will [GMROI] or some sort of gross margin criteria still be used? MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Yes. [GMROI] has always been a very important metric for our merchant organization. That will continue to me a measurement going forward. And that's really an important one because as I mentioned the dynamics between a closeout and an in-and-out it does come in some cases at a different margin rate. But it effects term differently and it affects your gross margin dollars compared to your inventory carrying and it's that return we're looking for. DAVID MANN - JOHNSON RICE - ANALYST Okay. Great. Thank you. MIKE POTTER - BIG LOTS, INC. - CHAIRMAN, PRESIDENT & CEO Thanks. I think that concludes our call, Marie. I'll turn it back to you. But thank you all for joining us and we'll speak again during our first quarter conference call. OPERATOR Ladies and gentlemen a replay of this call will be available to you within the hour. You can access the replay by dialing 1-800-207-7077 and entering pin 4089. Again that phone number is 1-800-207-7077 pin 4089. Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect. DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. (C) 2005, Thomson StreetEvents All Rights Reserved. THOMSON STREETEVENTS streetevents@thomson.com 617.603.7900 www.streetevents.com
14 (C) 2005 2002 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. -----END PRIVACY-ENHANCED MESSAGE-----