Big Lots Inc (BIG) 2002 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Big Lots third quarter conference call 2002.

At this time all participants are in a listen-only mode and later we will conduct a question and answer session with instructions to be given at that time.

If anyone should require assistance during the conference, please depress zero and then star.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Bid Lots CEO, Mr. Mike Potter.

Please go ahead.

Thanks Marge and thank you everyone for joining us for our third quarter conference call.

With me today is Al Bell, our Vice Chairman and Chief Administrative Officer and Jeff Naylor, Senior Vice President and Chief Financial Officer.

Also with me today is Joe Cooper, Vice President, Treasurer and Head of Investor Relations as well as Chuck Haubiel, Vice President and General Counsel.

I'd like to remind you that 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 S.E.C. filings and that actual results can differ materially from those described in our forward-looking statements.

We want to accomplish a number of things this morning.

First after some brief opening comments, Jeff is going to cover the third quarter financial results in detail for you.

Then Al is going to update you on key strategic initiatives, particularly the store conversion and remodeling programs.

Following Al's remarks, Jeff and I will both speak to our fourth quarter outlook.

We'll then be happy to answer any questions you might have.

First let me cover a few of the highlights for the quarter.

We reported sales comps of 7.1%.

Net loss for the quarter was $5.1 million with a loss per share of 4 cents which compares favorably to a loss per share last year of 14 cents.

I'd say, overall we are very pleased with the strength in the top line which continues to generate strong earnings flow through as sales exceeded our original plan.

Our 10 cent improvement over last year on a 7.1% comp is actually an improvement on a relative basis to the 12 cent improvement we had in the second quarter on comps of 12.4 and our 11 cent improvement in the first quarter when the comp was 11.7.

As we mentioned in our October sales release, disciplined management of inventories and expenses enabled us to deliver this meaningful earnings improvement and beat the first call consensus estimate despite reported sales that were at the lower end of our previous guidance.

Let me dive a little deeper in the comp numbers.

The 7% comp was driven by a balance between customer transactions that increased 3% and a 4% growth in the value of the average basket.

Of particular note was the 3.1% increase in customer transaction comps which we achieved despite a reduction of one advertising circular compared to the same quarter last year.

As you recall there was a movement from Q3 to Q2 on one advertising circular.

So this marks the fourth consecutive quarter of growth for this important measure.

And as we've said many times and all of you know, if we had to pick one single most important metric that we grade ourselves on every day, it's customer transactions and expanding our customer base.

So we remain encouraged that the sales growth additionally was across a broad range of categories as well as across all regions of the country.

So generally, for the quarter, very pleased with the way our top line behaved.

However, when you look at sales, the quarter definitely had two contrasting sales trend.

The first seven weeks of the quarter were a continuation of our first and second quarter trends as comparable store sales increased in the low double digits.

However, customer traffic slowed considerably in the last ten days of September, a trend that was noted by most major retailers.

This soft customer traffic trend continued into the first week of October when our sales comps were relatively flat, however, then they picked up to mid-single digit comp range for the balance of October.

So, given that somewhat erratic behavior, we are definitely cautious about the current trend and what appears to us to be a soft overall economic and retail climate.

So, in this period of economic uncertainty, customers appear to be shopping closer to needs than ever before.

We may begin to see something similar in the fourth quarter in terms of two different stories on customer traffic, particularly when we look at November and December.

The first seven weeks-- I'm sorry, the soft customer traffic trend continued in the first week of October.

I'm sorry, I'm repeating a line.

Anyway, as we move into the second quarter, or move into the fourth quarter, we will be cautious in our top line guidance.

Jeff and I are going to speak to that more as we get later in the call.

But at this point, let me turn it over to Jeff to cover the third quarter in more detail.

Jeff.

Yeah, thanks.

This morning, as I've done in the past, I'll begin with commentary on the P&L and then move through the balance sheet and cash flow.

As Mike noted, we, this morning reported a loss for the third quarter of 4 cents per share.

That's a penny above first call consensus and it's also 10 cents better than we reported last year.

So, we are obviously pleased with the year over year earnings growth.

The operating loss for the quarter was $3 million, that's an improvement of $17 million which compares to a loss of $20 million in the third quarter of last year.

That's the operating loss.

The net loss was $5 million this year which compares to a net loss of $16 million last year so we feel pretty good about solid year-over-over in pretax and after tax bottom line results.

One other comment, the operating margin improved 230 basis points versus last year.

I think, everyone knows that growth in the operating margin is an important objective for the business and we continue to make progress against that objective.

Sales for the third quarter were $868 million.

That's an increase of 12.3% over the third quarter of the prior year.

Drilling into that, the growth was driven by a 7.1% comp store sales increase with the remaining 5 points of growth attributable to additional square footage from new stores and also from furniture expansions.

As Mike noted earlier, we started the quarter very strong with low double-digit comps throughout the first half of the quarter, which was then followed by a slowdown in the trend in the back half of the quarter.

I thought it would be worth just drilling into that a little bit, in terms of the individual months.

Of course, August was a very strong month for us.

The comps were up 12.7%.

That 's in all merchandising categories performing well.

We also had strong conversion results from L.A. and two highly productive ad circulars.

So that is what drove August.

For September, we reported a comp increase of 6.3%.

That was despite the elimination of one ad circular that shifted this year into July.

So , this year, we were one ad circular in September up against two last year and we estimate that had an impact of about 2 to 3 points in the comp for the month.

So on a normalized basis, as we think about trends, September's [inaudible] was an 8-9% month.

We saw a slowdown at the end of September.

As Mike mentioned, that continued into October, into the first week of October.

For the overall month of October, the comps were up 3.8%.

And the way we get to that is, the first week was flat as the trend from September continued into October and then the balance of the weeks of the month were all in the mid-single digit range.

So, as Mike mentioned, we had a very inconsistent trend in customer traffic over the last 7-8 weeks.

The October trends, merchandise trends when we look at the individual product categories suggest to us that the customer has not yet begun to shop aggressively for toys or trim for the holiday season.

As these categories were soft throughout the month.

The bright spots in the category performance were home furnishings, specifically domestics and furniture and also food which comped up double-digits and that was up against a double-digit increase last year so we feel very good in the growth of that category which, I think as you all know, is an important traffic driver for the stores.

Just one last comment on sales.

As many of you know September is a four-week month for Big Lots against five weeks for most other retailers.

You know, in contrast, Big Lots has a five-week October whereas most other retailers have a four-week October.

So to better enable you to compare our recent comp trend to other retailers, our third quarter monthly comps, if we recalculate it to reflect the retail calender most other retailers are using, would have been 13% in August, 4% in September and 5% in October.

Let me now turn to gross margin.

We reported a gross margin for the quarter of 42.2%.

That's up 120 basis points over prior year and it was also at the upper end of our guidance which you'll recall was in the range of 41.7-42.2, that's where we have guided you in terms of the model.

As referenced in the press release, the improvement in the gross margin rate resulted from, really, mostly, the buying conditions.

We had very opportunistic buying conditions which have allowed us to expand the gross margin while maintaining low prices.

We continue to take markdowns on a timely basis.

The objective there is to maximize the gross dollars that we generate from the inventory investments that we've made.

As we look at the end of the third, inventory was up 1% on a per store basis.

So we feel like we're entering the fourth quarter with very clean, conservatively positioned and well positioned inventories for the all important holiday season.

In terms of G&A, the rate for the quarter was 42.5%.

That's an improvement of 100 basis points over last year.

We are happy to have that kind of leverage on a 7% comp.

It speaks very well to the model and how the model is working.

It's also in line with our prior guidance, that rate.

Obviously, you know, accelerating sales trend on our expense base, a large portion of which is fixed, helped drive that rate improvement.

But I would say, additionally, we've had excellent management of payroll and controllable expenses by our store team and we've also seen outstanding productivity improvements in supply chain particularly the distribution centers.

So, those improvements were partially offset by some increased insurance expense during the quarter.

Overall, we are just pleased with the continued improvement in SG&A leverage.

For the quarter, interest expense was $5.5 million.

That's slightly better than planned.

It's $1.6 million below prior year and the improvement to last year was primarily driven by lower average borrowings.

The income tax rate for the quarter was 39.5% and that's just unchanged both from prior quarter and also from last year.

In terms of the balance sheet, we continue to focus on managing our working capital and improving free cash flow.

I have already mentioned inventory, which was up 1% on a per store basis, very well controlled and managed.

In terms of debt, you'll recall that we have two pieces to the debt structure.

The first is a $359 million revolving line of credit facility with our bank group.

And we had, at the end of the quarter, drawn $89 million of that.

We expect our draw against revolving line of credit which parenthetically funds the seasonal inventory build in the business.

We expect that the peak draw against that line will be below $100 million this year.

That would compare to a peak draw last year of $279 million.

So we feel really, really good about the overall line of credit and how we are managing debt and cash.

The other piece of the debt structure is $204 million in term notes the majority of which mature in 2005.

That is unchanged over the prior year.

So when you put the lion of credit and the term debt together, overall net debt was $293 million.

And that's a reduction year over year of $106 million.

So again, feel good about that.

The improvement of the reduction debt is generated by improved operating performance, is generated by strong inventory management and it's generated by the income tax refunds related to the NOL's from the sale of the KB Toy business.

Finally, capital expenditures for the quarter totalled $20 million.

That's down slightly to last year.

You'll recall our plan for 2002 called for capital spending of roughly $100 million?

To more effectively manage cash flow, we have been able to compress the construction timeline for the 5th DC which is in Duran, Oklahoma which is scheduled to open in January 2004.

By shortening that construction period, it results in $10 million of capital we expected to spend this year not having to be spent until 2003.

So accordingly, we now expect CAP-X for 2002 to be approximately $90 million versus the $100 million plan we put on the street.

That $10 million difference in spending shifts incrementally in 2003 as more of the Duran spending will be in '03 versus '02.

Depreciation for the quarter was $21 million.

For the full year, we continue to expect depreciation to be on plan in the range of roughly $82 million.

That capital spending shift of $10 million from '02 to '03 doesn't impact depreciation estimates this year, as all the capital spent on Duran is construction in process and doesn't begin depreciating until the facility is up and running in '04.

So that's the summary of Q3 results.

I will now turn it over to Al.

Thanks, Jeff.

Following up on Jeff's discussion of capital expenditures year to date, I want to touch on our real estate growth this year.

During the third quarter we added 14 net new stores and 43 furniture departments.

At the end of the third quarter we were operating 1371stores. 39 more than at the end of the third quarter last year.

That includes 51 free-standing furniture stores.

Our square footage increased 5.8% over the prior year to 37.2 million square feet.

At the end of the third quarter, we were operating 656 furniture departments which is up 129 units or 24% over the prior year.

Now turning to our ongoing progress in executing our strategic initiatives.

Last year we told you that the growth of Big Lots would be driven by improving our customer counts which had been on the decline from 1997 through 2000.

Despite recent softening consumer demand across the retail sectre, the third quarter saw a continuation of the positive customer transaction trends we've experienced this year.

A direct result of our efforts to strategically reposition the business.

Our progress towards our strategic initiatives continues to drive in improving topline which is crucial for us to achieve our long term goal of operating margins in the 8% range or better.

As you know, part of our branding initiatives have been focused on converting and remodeling all of our stores that were operating under other trade names to the Big Lots brand.

With the conversion of the final 59 stores in the Los Angeles market, in August, this process is behind us.

We are now a single brand across all 1371 stores in 45 states.

Through the third quarter sales results of the converted markets continue to deliver sustained incremental sales lists in the mid single digit range.

That means that new customers that have been attracted to a converted store through grand reopening marketing and great deals are coming back to Big Lots.

We are particularly encouraged by the strong results in the Los Angeles market.

As many of you have commented, the L.A. market was thought to hold the most risk to us due to the strength of the Pic 'N' Save brand name.

We should add that the L.A. and Dallas/Ft.

Worth markets have the benefit of television advertising for the first time this year.

Introduced just prior to the re-grand opening of those two conversion markets.

These markets continue to reinforce the strength of TV as a brand-building investment.

TV ads in these two key markets will continue through the holiday season.

Now that conversion activity is done for the year, it may help to summarize this year's progress.

Following our conversion of 205 stores last year we converted 229 stores this year.

This year's activity included 59 stores in the third quarter, all in August.

This compares to a very busy third quarter last year.

In 2001 we converted 49 stores on August 1st.

That, although the conversion occurred in the last week of the second quarter, the sales lift was principally felt in the third quarter.

Add 39 stores converted last year in the last week of August and the 62 stores completed the first week of October and we estimate that the higher level of activity last year when compared to this year reduced this year's third quarter comp by about 1%.

As we conclude this phase of our re-branding strategy, it may help to clarify a point about the conversion initiative.

When we began, the over arching objective was to build one national Big Lots brand that could be the foundation for a strong national brand identity as well as an enhanced level of consumer awareness.

With great execution, the conversion markets have consistently enjoyed 20-30% sales lifts during their re-grand opening periods into mid-single digit sales lifts thereafter, returning their capital in just over one year.

However, please remember that the intent was to build a national brand.

We've now done that and are excited about the potential of having a single brand that can be leveraged in advertising and customer communication and can drive increased awareness and trial of Big Lots.

Based on the success of the name change program, we are considering how to address the balance of the chain.

That is, the existing Big Lots stores in some of our mature markets in the eastern part of the country.

At this point we believe that we have about 400 stores that are in need of a remodel.

Based on our rate of conversion in 2001 and 2002, our initial plans call for remodeling approximately 400 stores over the next two years.

On our fourth quarter conference call we intend to be more specific about the strategy and our plans for 2003.

Now let me turn it back to Jeff who will discuss our outlook for the balance of the year.

We noted in the press release today that the company's current guidance for the fourth quarter calls for comp store sales in the low to mid single digit range with earnings per share in the range of 57 to 62 cents.

That EPS compares to 50 cents last year.

The guidance is unchanged from the direction that we gave in our last conference call; however, as we called out in the press release, based on some of the recent customer traffic trends, we're now estimating sales and earnings will both be at the low end of the range.

As far as how the low to mid single digit comp for the quarter lays out, we think November is going to be the most difficult month for the quarter.

I think everybody is aware Thanksgiving moves this year from week three to week four.

So this year, we have two days post-Thanksgiving.

Last year we had nine days post-Thanksgiving and obviously that has an impact on the year over year trends for the month of November.

We expect that the loss of that full week of post-Thanksgiving holiday shopping will, obviously, adversely impact the November comp.

We're gonna especially feel it over the next seven days.

So, given that, and given the recent sales trends, the November plan now calls for a comp sales decline in the mid to high single digit range.

The December comp is expected to be up in the mid-single digits as we think shoppers will make up for some of the lost shopping days in November.

Additionally there's an extra shopping day this year in December.

In terms of January we would expect comp store sales also to increase during January in the mid-single digit range.

So that's how the quarter lays out in terms of the comp.

Similar to the third quarter, we expect fourth quarter gross margin to improve.

We think it will be up 70 to 120 basis points over last year.

Opportunities for great deals just should continue to benefit the initial markup and drive that improvement over the near term.

G&A as a percent of sales in the fourth quarter will be roughly in line in terms of rate, in terms of what we saw last year and our expectations right now would be for flat to slight deleveraging on a low single digit comp.

For the full year we remain comfortable with our previously communicated EPS guidance of 66-71 cents, although consistent with the fourth quarter, we would now expect that earnings will be at the low end of that range.

That concluded my remarks.

I'll turn back to Mike now for some closing comments.

Mike.

Thanks, Jeff.

Let me just take a brief moment for a couple of final thoughts and then we'll take your questions.

First I want to recognize our wholesale team.

We don't often talk about the opportunity - or we don't often take the opportunity to discuss our wholesale business.

It's about 1% of our sales so it can definitely be overshadowed by the retail operation.

However, it's an important piece of the business as it services over 1500 customers and it gives us critical flexibility on the buy side of our business.

This year's performance for wholesale has been particularly impressive.

Year to date their sales were up 28% over last year with profit up 72% to a level of over $4 million.

In fact, for the first time in the company's history we are expecting wholesale to top the $50 million mark.

Great congratulations to our wholesale team.

Secondly regarding the West Coast port situation, we continue to monitor the flow of merchandise through these ports.

While our exposure during the holiday season is minimal, we're closely monitoring deliveries of early spring decorative items due to land in stores in late December and January.

You may remember that sales in this catagory were particularly strong last January accounting for almost half of the 8.7% reported sales comp.

Let me go back to our retail business and the comments Jeff made about fourth quarter estimates.

I guess, in general, as we sit here today and we look forward to fourth quarter forecast, there's quite a bit of our business that we feel very good about.

Our ability to forecast.

Generally at this point in time, the most important things to try to estimate and sometimes the most difficult are the sales comp and the resulting markdown levels for that comp.

For us, because our business between now and Christmas is so heavily weighted in trim and toys, let me give you a commentary about how we feel about those two key categories.

First of all, toys, we think, is an upside for us and is not a liability concern.

First of all that business has tended to come later and later each year.

And quite frankly, last year we fell short in the final two weeks of the holiday shopping period with toys.

We literally left some business on the table.

We recognized that last year and we have bought very well into the category, a very good legal of inventory and the buy side has been good in the category with a lot of brand names and some great values.

So we feel good where we are going to go in the toy category all the way through the final day of the holiday shopping season.

The other thing that is very good about toys is, we sell toys year round.

Regardless of the level we finish at at the end of the year, we know we have confidence that it will just flow into our regular inventory at the end of the year and doesn't concern us in terms of a markdown liability.

That leaves us with trim.

And at this point we've had, as Jeff mentioned, a slower start to the trim category and we've seen two prior seasonal categories particularly harvest and Halloween that have shown conflicting trends.

One of them actually had slower start, finish strong, one had a stronger start and finished weak.

So we don't have a lot of good indicators as to how trim will fall.

What we do know, however, is that we did it buy relatively conservatively.

We feel better about the inventory position this year than we did last year and also we consciously bought more toward the basics of the catagory and less into the higher risk decorative merchandise.

But we think that helps us in terms of markdown liability.

What that also does, is with that conscious shift in the mix of the merchandise, we know that we're going to have a slower start and stronger finish because the decorative sells earlier and basics sell at the end.

So, all in all, in terms of the way we are forecasting for you the sales guidance we gave with the earnings guidance, we feel like we've put a good collar around our markdown need.

And we have assumed the markdown rate that is expecting that we're going to have sluggishness in the trim category, so that we think we put a pretty good handle on that and what's left is for us to understand the ultimate sales pace and, of course, December to statistically , the Thanksgiving weeks through December is the all important point in time.

So we think we are being appropriate in our estimates in that low to mid-single digit comp range given the trends in customer traffic and also given the obvious shift in the calendar.

So that's the general perspective how we are looking at the fourth quarter.

Overall, one of the things we are excited about even with the low comp estimate we are gonna be able to generate good strong earnings gains and hopefully earnings that are still in the double-digit range for the fourth and finish out a very strong year.

So with that, let me turn it over to your questions.

Ladies and gentlemen, if you wish to ask a question please press 1 on your touch tone phone.

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Once again, if you do have a question please press 1 at this time.

We do have a question from the line of Brent Rystrom with US Bancorp.

Please go ahead.

Hi.

Good morning and congratulations on the good numbers in, I know, a tough environment for you guys..

Real quickly.

Out of curiosity, when you look at the comps the first couple of quarters this year, how much of those comps would you attribute to the re-branding?

Talking about the conversion stores?

Yes, sir.

It's roughly in the 1-2% range.

So of the roughly 12% of each quarter only 15-20% of it really came from re-branding.

That's right.

What's important for everybody to remember is that this year in particular is probably a good year to look at the re-branding because we had year over year conversions.

So really, at no point in time this year did the net effect of the re-brandings ever account for more than 2% of our comp.

Generally it was between 1 and 2 and lately, of course, it's either slightly negative or flat.

All right.

Secondly, to get to the mid-single to high single digit negative comp in November, what is your assumption for traffic in November?

If you look at it just the way the calendar is reported, which is at mid to high single digit negative, which has the flit in the calender, we would expect traffic to be negative.

But, I'm assuming, just modestly negative.

No, the bulk of what we're gonna see in sales decline is going to be the result of traffic because what you're losing is that post-Thanksgiving week in which you have higher volume of visits to the store as well as much higher purchases.

We'll probably see some basket adjustment, also, but I'd say the bulk of it would be expected in transaction.

That's right.

It's not just similar to when we eliminate an ad circular, and we see most of the comp impact is in traffic as opposed to basket.

So I think that's what we'd expect to see, Brent.

Okay.

Are we still assuming approximately 100 net new stores next year?

I think what we've said, this is Jeff, what we said publicly is that we would add new stores at the rate of about 100 new stores and that we would close roughly 30 so the net stores would be in the 60-70 range.

Okay.

We do have a question from the line of John Rouleau with Wachovia.

Please go ahead.

Good morning, gentlemen.

Mike, I was wondering if you could quickly commend on the promotional environment?

I know in the fourth quarter it's just natural that the promotional environment kind of heats up here.

But given the shift in Thanksgiving it seems like - that that's kind of escalated ahead of previous periods and I'm wondering how you keep pace with that as others kind of sharpen prices and advertised a little bit more.

You know, how, what's your strategy in keeping in pace and check with others out there?

I think that's a great question.

You might be surprised at the answer.

We actually monitor the competitor's ads very, very closely and we monitor them year over year as I'm sure you would expect us to do.

And while I've heard a lot of discussion about particularly mall retailers and apparel retailers getting more aggressive earlier, we have not seen that in the discount environment compared to last year.

I would say it's pretty consistent to what people did last year so far.

Now come Thanksgiving week, usually all bets are off and you never quite know what's is going to happen.

But, for the most part, we thought the environment to date has been, you know, very similar to prior years.

Our own approach is actually going to be a little different based on last year versus this year.

We'll actually be, I guess you could call it a little less promotional from Thanksgiving through the Christmas period primarily because we've managed our inventories so much better.

Last year we were a little bit more reactive to slower starts.

We had a higher commitment to seasonal inventories and we committed to finishing clean in our inventories so it would start next year and be strong so we were promotional to make sure we cleared through inventory.

We don't have that same level of risk today.

And we're moving back toward the basics of good strong Big Lots advertising which is good products at good prices and not a lot of the discounting.

We've eliminated the coupon bounceback that we had done the prior two or three years, so we think we're managing it for a reasonable level of sales and traffic but a much stronger level of earnings productivity.

Okay.

Kind of shifting gears toward the early part of next year, in the, say first part of the year, are you making any shifts or planning any shifts into the advertising calendar or should that remain constant year over year for the first and maybe second quarters?

We're in the middle of creating all of our plans for next year.

We typically give you all of the details of our plans for next year when we do our fourth quarter conference call.

I don't think we are going to vary from that.

From a circular standpoint, I wouldn't expect that you're gonna hear us say we are going to do too much different.

And as we look at the calendar itself, it doesn't look like it requires much in terms of flipping of fliers or month over month or quarter over quarter changes.

Okay.

And then last question.

I mean, you talked about discretionary merchandise being somewhat soft.

I think Halloween sell-throughs were good, maybe harvest ended up being a little bit weak but then you have areas like furniture, which are clearly discretionary and sales trends have been pretty good there, domestics has been pretty good.

So it seems like it's just difficult to draw any patterns or any trends from that side.

Is there anything more you can add or color you can add in terms of discretionary basic and some of the trends you are seeing?

Yes, I think I can.

First of all, in terms of seasonal, Halloween we actually finished in good shape and it all came at the end.

It came at the last 10-12 days.

Whether that's a sign for Christmas trim or not, it's hard to say.

And harvest, we are very pleased with the way we finished the season.

We actually will have a double-digit increase in harvest net net for the season, but it actually had a stronger start more due, I think, to the way we presented it and flowed it and a little weaker at the end but we came out clean.

So those two seasons worked out well for us.

The other categories you mentioned, I'm not sure it's as reflective of consumer behavior as it is the environment or the way we managed it.

By that, I mean, domestics, we are doing well in domestics primarily because we are managing the category better.

We see it as a growth category.

We didn't think we had a very strong business and we have a lot better selection and a lot better brands and the customers responding to that.

So, I think, that's a little bit more of what we are doing and on furniture that's just been a steady category for years for us and that may be partly due to competitive issues.

That environment of lower price furniture retailers, frankly, some of them have gone out of business.

There isn't a lot of strong competition head-to-head with the way that Big Lots goes to market.

It's fairly need-based, it tends to be a lower income customer and so it doesn't behave as discretionary as it might in the furniture industry.

S that's some of the color around those categories.

Generally when we look at prior seasons and we look at history, we are led to conclude that the early trends of trim in October and early November do not necessarily predict what happens from Thanksgiving to Christmas and that very well may be true this year.

But, of course, until we get into the heart of that time period we don't know for sure.

Okay.

Thank you.

We do have a question from the line of Jeff Stein with McDonald Investments.

Please go ahead.

Good morning, Mike.

A question regarding CAP-X for next year.

If my numbers are correct, I think you had been originally planning 150 with the new DC.

Your flipping about $10 million from this year into next year on that DC.

In addition you're probably going to have some additional expenses on the store renovation program.

Can you give us kind of a range of where a revised CAP-X number might fall next year?

Jeff, this is Jeff.

We'll finalize that when we update full year guidance.

We provide 2003 full year guidance on the fourth quarter call.

Having said that, we've guided in the 140-150 range.

I think, with the $10 million flip, that would take us more in the 150-160 range and I think we still feel reasonably comfortable at this point with that range.

Although, having said that, we are still in the process of finalizing plans.

Most of the things that you mentioned we had already incorporated in that earlier guidance.

Okay.

Great.

And with respect to inventories, your selling space at the end of the third quarter was up almost 6%, your total inventories were down 1.5% and you did indicate that your same store inventories were up 1%.

I presume, when you're saying up 1%, that's inventory that's actually in the store and that the overall drop is DC-related.

Is that correct?

Just to look at it, you look year over year.

Last year we had $960 million.

This year $945 million on the balance sheet.

But you'll also recall last year we took non-cash charges i the fourth quarter for some inventory-related items.

So we had some dollars in our last year third quarter balance that were subsequently written off at year end so we've adjusted that out, Jeff.

And when you make that adjustment and look at the total inventory in the company, both DC and store, and how that compares on a per store basis year overyear, that's the plus 1%.

Got it.

Okay.

Does that make sense?

Yes.

How about - fourth.

Can you give us a guesstimate on fourth quarter interest expense?

Yeah.

About consistent, close to $5 million.

A little under.

A little higher rate this year and offset by lower offset by lower average borrowing.

Okay.

And final question.

Any estimate on the number of new furniture departments that will be added next year?

Haven't finished our plans so we'll give that to you in the fourth quarter call as well.

Okay.

We'll continue to grow it though without a doubt.

Okay.

Thank you.

We do have a question from the line of David Mann with Johnson Rice.

Please go ahead.

Hi.

Yes.

Good morning.

Can you comment a little bit on SG&A in terms of the magnitude of the three factors that you gave in terms of how much in basis points they helped you or hurt you?

This is Jeff.

I don't know that we've commented in the past, David, on those individual elements.

I think we'd just as soon not comment on that now in this call.

In terms of the payroll management benefits that you had there, obviously you've done a lot over the year in terms of improving customer service, I guess my question is how much more benefit can you see in payroll management to where it does not hurt customer service?

What we'd been doing is, we had something called a dock to stock initiative throughout initiative the company that has allowed us to improve the way in which we flow goods from the back of the store from the time the truck hits, through the back room on to the sales floor.

As we've improved that productivity, what we've been able to do is to take those hours and basically redeploy them into customer service.

We've done a portion of the fleet this year.

We're gonna do another portion of the fleet and complete that initiative next year.

So, in essence, what we've been able to do is to have a lower than you'd expect flexup on hours in the store and we've been able to do that because we've been able to shift hours from the back room to the front room.

That would probably, I would say, continue to be our focus.

Is finding ways where we can make the stores more efficient and hold our back our hours relatively flat and put more hours on the floor and at the front end of the store where it matters most to the customers.

In terms of the decision to view additional remodels of existing Big Lot stores, have you -- do you have any data on any stores you might have done as part of this, the move to one brand already?

Meaning are there any markets where you had Big Lots that changed where you got some benefit to you or that's giving you comfort that this is a worthwhile investment?

We do, in fact, in the state of Texas we went ahead and converted approximately 50 stores that were already named Big Lots and gave them the full remodel, the additional customer service initiative and the re-grand opening marketing and they responded in a very similar fashion to all of the stores that actually had their name changed.

So that's one of the things that gives us great comfort going forward, that's a good part of our strategy to go ahead and remodel stores in the coming years.

David, we have always been critical about return on our capital and always will be going forward.

And so, regardless of what we announce in the coming year, we would expect that whatever we do will provide the appropriate return.

And certainly we've had some good evidence of that in the last two years.

And then one last question on gross margin.

In the fourth quarter, you're planning a decent increase and just to clarify from the earlier question, you're assuming no necessary increase in your promotional cadence in the fourth quarter versus last year?

Yeah, I'd say, if anything, over the last quarter we have increased what we are expecting to require in our markdown lines.

But, if you look year over year, we will be down in markdowns.

More because of what we needed to do last year, given the level of traffic we saw, given the investment we had in our seasonal and just the environment at that point in time.

So, it's more of a year-over-over change and the benefit we're gonna get from gross margin in the coming quarter is largely going to be a change and an improvement in the efficiency of our markdowns.

Thank you.

We do have a question from John Rouleau at Wachovia.

Please go ahead.

Hi.

Just a follow-up, guys.

Mike, in talking of about the Christmas trim business again.

I mean, unlike- it's a little different from Halloween in a sense that a lot of the Halloween business is made up of candy.

Which is obviously a very late business.

If you get it the last week or last four or five days, it's okay.

But trim has a different cadence to it.

At what point, if trim sales are sluggish, how many weeks, how many days would you have to start getting a little bit more aggressive or maybe change your plans?

I mean, what is the timing of the way trim typically flows in late November and early December?

Well, two things I guess.

First of all when we looked at Halloween and when I spoke about Halloween, I'm excluding candy.

We are looking at the seasonal decorative, that portion of it.

Okay.

Yes, there is a Halloween candy business.

That's been excluded.

There's also a Christmas candy business, and I'm excluding that as well.

Okay.

As far as the way it patterns out.

We have looked at - we call it a glidepath - looked at the different ways that the trim sales could occur.

Looked at, you know, up side / down side.

Looked at where risk was and patterned it all out and we've made decisions as to what we're gonna do in forward ads as to how we will be promoting trim.

I think we have a good enough handle on it today.

In fact, I know we have a good enough handle on it today.

But most of the key decisions have been made.

What will end up happening is in the last week or two of December is when you make some of your final decisions about, typically pockets of the inventory.

There are always going to be certain categories or certain particular looks or buys that don't perform as well as you think they should and that's when you do some, sort of, rifle markdowns on particular items to make sure you've got good balance and sell-through.

But in terms of the macro decisions of when do we respond, normally, as all competitors do, do a percent-off sale as you get closer to December, those decisions have already been made and those markdowns have already been incorporated into our forecast.

Okay.

Thank you.

We do have a question from John Harris of Morgan Stanley.

Please go ahead.

Good morning.

Can you talk, on the port issue, are you seeing any problems in terms of containers availability or product flow for that Spring business or are you, just kind of, looking at contingencies now.

And then secondly, on the food business, just give me a little color in terms of what's driving the sustained double-digit growth there. 'cause we've started to hear signs of slowdown elsewhere in the business.

Okay.

Well, on the containers, yes, there is some ripple effect.

There is container issues.

Every week the news gets a little bit better.

And again, to make sure we emphasize what the issue is for us, it's primarily an issue for our West Coast stores only which is about a quarter of our store base, and about a quarter of our buys are imports.

So, generally the impact we're going to feel is January and February some slowdown in the receipt of early lawn and garden, early summer decorative, to some extent a little bit of Easter product and things like that.

We see that today as being more of a change in when you get the sales and not yet an issue of a markdown liability or a net net sale.

Most of those seasons are long enough or far enough into the Spring that today we don't see any net-net impact, certainly for the first quarter.

Of course, you have to keep the door open and say what else could could could happen.

So far the news gets better every week.

The number of backlog containers goes down.

The flow of containers from Asia improves so, I think, generally we've got that well contained today.

As far as food, I think we are real early in our growth of the consumable business.

We've never had a real dominant consumable category.

Just in the last year or two, we are beginning to improve our presence and improve the merchandising execution of it, improve the flow of it.

So, regardless of what the industry is seeing, I think we're in our infantcy in that catagory and we would expect that to continue to do well for a number of years just given where we are in the past.

Because that is primarily a branded category, just about everything we present is Great Quality Brands and the pricing and the value is so dramatic, it's a traffic driver for us for the future and I would expect it to continue to comp well.

Thank you.

Gentlemen, there are no further questions.

Please continue.

Okay.

Well, we thank you all for joining us for our call and we'll speak with you again during our fourth quarter release.

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