Big Lots Inc (BIG) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for stand being by.

Welcome to the Big Lots fourth quarter 2002 conference call.

At this time all participant lines are in a listen-only mode.

Later there will be an opportunity for questions and instructions will be given at that time.

If you should require assistance from an operator during the conference, please press 0, then star.

As a reminder, the call is being recorded.

I would now like to turn the conference over to your host, Mr. Mike Potter.

Please go ahead, sir.

Thanks Rita and thank you everyone, for joining us for our fourth quarter conference call.

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

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

For those of you joining our conference call via webcast today, a slide presentation accompanies the audio portion of this call.

For those of you listening via telephone, you can view the slides during this call by going to our home page at www.biglots.com.

From there, follow the links to our links to our fourth quarter conference call where you'll be offered three options for viewing the webcast slides.

If you're participating in this call by phone, please use the third link labeled "Live Slides."

The other two links labeled "Audio with Slides" are for our internet-only listeners.

The slides for today's presentation along with a recording of the call will be available in the Investor Relations section of our website by noon today and will remain available through midnight on Wednesday, March 12th.

The slides will help you follow along with our comments today, but are not necessary.

Consistent with prior conference calls, you'll get all the information just by listening to this call.

I'd like 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 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 this morning.

As I'm sure you've read in our press release, we have some exciting plans for 2003 that we want to tell you about.

Jeff will try to move quickly through the financial results of 2002 so we can turn our attention to 2003 and the next steps for the coming year.

Following Jeff's financial review, I'll begin our discussion of 2003 and our growth plans.

Al will then provide some detail on the real estate portion of the strategy, particularly our ongoing store conversion and remodel program as well as our plans for the furniture business.

Following Al's remarks, Jeff will discuss our 2003 guidance with you.

Then we'll be happy to answer any of your questions.

First a few comments about our progress towards the strategic initiatives that we announced in early 2001.

We have worked very hard these past two years successfully implementing key initiatives, all with the objective of driving top line sales, drawing more customers to our stores and delivering sustained earnings growth.

We won't take the time to cover all of this today because we've talked a lot about these accomplishments before.

The point here is that we believe these were absolutely the right things to do.

They have positively impacted the business.

We began to see that impact in late 2001 and now definitely with a strong bounce back in our performance in 2002.

Reflecting specifically on 2002, I've really never been more proud than I have been in the past year of what our team has accomplished.

We delivered strong financial performance during a tough time for the retail sector and the economy in general.

For the year we reported sales comps of 7.7% behind a 2.8% increase in customer transactions and a 4.9% increase in the value of the average basket.

The strong sales growth translated into substantial earnings growth with the operating margin increasing from 2% of sales last year to 3.8% this year.

And our earnings per share up 154% to 66 cents per share.

We've also strengthened our balance sheet by reducing net debt year-over-year by $126 million.

Overall we're extremely pleased with 2002, a year where we enjoyed sales and earnings growth in every quarter.

Although 2002 as a whole was a great year, we feel we left some opportunities on the table during the back half, particularly during the fourth quarter.

While we certainly were negatively impacted by the challenging economic and retail environment, the harsh winter weather and the shorter Christmas selling season, we also fell short on our execution in a few areas.

I'll give you a few examples.

Our great holiday toy selection was delivered to our stores too early in the season, creating some floor space constraints.

Additionally, in hindsight we bought too much Christmas decorative merchandise.

Both of these things have been adjusted in terms of our plans for the coming year.

Our 2003 spring and lawn and garden merchandise was late getting to stores due to the West Coast port dispute, and we still have much opportunity in allocation and inventory management during the peak fall season.

While we're proud of the things we did right in 2002, as well as our overall results, I think it's critical that we assess and understand our opportunities for improvement.

We believe 2002 confirms again what we've said before.

We have a great business and a uniquely differentiated business model with great economic potential.

Our success is dependent upon our execution, and we're getting better every day.

These issues that I mention certainly don't limit our long-term potential.

They present opportunities for improvement and upside and we're intently focused on getting these types of things right in 2003.

We'll have a stronger team in 2003 to help make sure we get it right.

We've continued to build our team over the past year, focusing on our supply chain in particular.

We've brought in a senior VP of planning allocation and presentation as well as a VP of allocation and a VP of store presentation.

The benefits of these key executives are just beginning to be felt and we're excited about what they bring to our business.

As I mentioned a moment ago, we were somewhat disappointed in our fourth quarter results despite the sales and earnings growth.

After a 5% increase in customer transactions through the first three quarters of 2002, this important metric turned negative in the fourth quarter.

The volatility of sales throughout the quarter was unprecedented as comp sales bounced from being down 6% in November to being up 10% in December and back to plus 1% in January.

Now, if we exclude our seasonal categories, our comp store sales for those three months were 3%, 7% and 5% for November, December and January.

The bright spot during the quarter was when it mattered most during the all-important holiday shopping season, that period of time from Thanksgiving to Christmas.

The customer responded well as we posted our first December double digit comp store sales increase in the company's history.

Coming out of the holiday, good momentum in our non-seasonal businesses combined with improving inventory levels in our seasonal categories leave us well positioned.

We begin February with lawn and garden inventory levels comparable to last year and now our spring decorative merchandise is also well-positioned to capitalize as the weather continues to improve, or as we hope it continues to improve across the country.

So, while we're cautious about the external factors affecting our business, we continue to draw new customers to our stores and drive meaningful bottom line growth.

And we continue to feel good about our ability to provide great value to our customers through a meaningfully differentiated shopping experience.

Let me turn it now over to Jeff who is going to cover our financial results.

Thanks, Mike, and good morning, everyone.

In Mike's remarks he spoke to the full year, so I'll focus my remarks on the fourth quarter.

I think you'll notice in the release today that we reported earnings per share for the quarter of 57 cents per share.

That's a penny above First Call consensus estimates of 56 cents.

It's also 7 cents better than last year.

The operating profit for the quarter was $114 million.

That's an improvement of $16 million over the prior year.

And finally, net income was $66 million for the quarter.

That compares to net income of $57 million last year, which represents roughly a 16% increase.

So net, we have a good solid year-over-year increase in our bottom line results in the fourth quarter.

Finally, the operating margin improved by 70 basis points over prior year, so we continue to make good progress against our objective of growing the operating margin.

Sales for the fourth quarter were $1.217 billion, that represents an increase of 6.9% over the fourth quarter of 2001.

The sales growth came from the 2.1% comp store sales increase combined with additional square footage that we added through new stores and also through furniture expansions.

Turning to the gross margin, we reported a gross margin for the quarter of 42.6%.

That's up 100 basis points over the fourth quarter of 2001.

That rate was towards the middle of the range of guidance that we provided, which was 42.3% to 42.8%.

So that was our guidance for the quarter and the gross margin came in right around the midpoint.

As referenced in the press release, the year-over-year rate improvement resulted from what we would characterize as opportunistic buying conditions which allowed us to expand our gross margin while maintaining the low prices that we're known for with our customers.

Also, we had very strong performance in toys in December and early January which very much helped boost the initial markup.

And these improvements were partially offset by promotional markdowns that were necessary to clear Christmas decorative merchandise as well as the negative impact of the initial markup because we sold less spring and lawn and garden merchandise in January this year than we did last year.

For the fourth quarter, our SG&A rate was 33.2%.

That's slightly higher than our prior guidance, which was 32.5 to 33.0% and that's principally due to higher insurance costs, specifically medical cost inflation.

The SG&A growth rate during the fourth quarter was the lowest of the year.

And we'll talk more about this when we get to 2003.

But we've positioned our cost structure to lever it slightly below a 4% comp going forward even with the impact of the investment and initiative spending we have baked into the 2003 plan.

Interest expense was $4.9 million for the quarter.

That's slightly better than planned.

It's $200,000 above last year.

The increase the last year was principally due to a higher average rate as we have, you know, the $204 million of borrowing against our term debt which has carried the higher rate.

And we had very little borrowing on our revolver which carries a lower rate.

The income tax rate for the quarter was 39.5%, and that's unchanged from both the prior quarter as well as 2001.

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

At the end of the year our net debt was $60 million.

That's our lowest level at year-end in -- for the past eight years and it's down $126 million versus the balance at the end of 2001.

Our free cash flow for the year was $122 million.

That's $72 million better than last year, and that's due to strong operating performance in the business and continued discipline in managing working capital and managing inventories.

This gave the company terrific liquidity as our peak borrowing under the credit facility this year was only $93 million.

And we had direct borrowings under the facility for only three months in 2002.

So, we feel really good about the way we're managing cash and liquidity.

We continue to take markdowns more aggressively and proactively than ever in the company's history.

What we're trying to do is to maximize gross margin dollars while keeping inventories fresh and clean.

We exited the fourth quarter with the inventories in stores, this would be inventories actually in the stores up only 1%.

Total inventory was up 6% on a per store basis.

That would include the inventory in our DC as well as inventory in transit That's slightly over our plan.

And that variance to plan was due primarily to below plan January sales as well as the receipt timing that was somewhat impacted by the West Coast longshoreman's issues.

I'd point out that the solid top line performance we've had this year coupled with ongoing inventory management has enabled us to improve our inventory turn from 2.7 turns in 2001 to 2.9 in 2002.

And that is actually also favorable for the plan we put on the street which calls for 2.8 turns in 2002.

So, we feel pretty good about that.

Capital expenditures in the fourth quarter totalled $34 million.

That's an increase of $12 million over prior year.

And that's principally due to the initial cost of construction of our Durant distribution center.

Capital spending for the year was $102 million.

That's consistent with our original plan and $6 million less than 2001.

As we noted in our third quarter conference call, we had actually projected that the first $10 million of Durant would shift to 2003.

But in order to insure timely construction of that facility, these costs were actually incurred in 2002.

Depreciation for the quarter was $20.6 million.

For the full year depreciation was on plan at $81.5 million.

In terms of store growth, we added nine net new stores and 31 furniture departments during the fourth quarter.

At the end of the year we were operating 1380 stores.

That included 49 free-standing furniture stores.

Our net increase year-over-year was 45 stores in 2002, and that was made up of 58 more closeout stores, which is consistent with the plan, as well as a reduction of 13 free-standing furniture stores.

Within the closeout stores, we had 687 furniture departments at year end, and that's 128 more or 22% more than we had last year.

Our square footage increased 6% over last year to 37.8 million square feet.

I'll now turn it back to Mike to discuss the plans for 2003.

Thanks, Jeff.

As you read in this morning's release, we're excited to announce our plans for the coming year.

The key components of our 2003 initiatives are one, to launch the company's first ever national television advertising campaign in April of this year.

That's two years ahead of our original plan, which provides a cost effective way to leverage the company's single brand and increase brand awareness.

Two, the opening of 90 new stores, and that's 60 net of closings.

Third, the continued expansion of our furniture business by adding 145 departments in new stores as well as through the elimination of hanging apparel in certain existing stores.

Fourth, the continuation of the store remodel program by remodeling over 200 stores in eastern U.S. markets many of which will include expanded furniture departments as well.

Five, the implementation of key lab store learnings, and I'll explain that a little bit later in new stores.

And our 2003 remodels as well as to some extent some chainwide initiatives.

Six, making further progress on our key supply chain initiatives.

And seven, the construction of our fifth distribution center to be located in Durant, Oklahoma.

Focusing right now on our TV advertising strategy for a minute, national TV advertising will begin the first week of April.

We're planning 25 weeks of coverage combined with spot coverage in our larger, more established markets.

With the program expected to drive an incremental comp of over 1% in 2003, we estimate a benefit to the bottom line this year of about 2 cents per share.

The initial investment should have a strong compounding effect next year in 2004 and beyond.

This move to national TV exposure should enable us to broaden the audience for our TV ads that we believe humorously yet effectively convey the strong passion our customers have for the brand names, closeout prices they enjoy at Big Lots.

In fact, our most recent television ad campaign, and one of the campaigns commercials were selected as Gold Medal winners at the National Retailing Advertising and Marketing Association's annual conference earlier this month.

As you may know, we've opened six lab stores in the Columbus and Cincinnati markets since last May.

The three stores in Columbus were new stores, whereas, the three stores in Cincinnati were existing stores that were converted to the lab store format.

The lab stores, which for us that stands for learning and building the world's best bargain place, are designed to test new ideas related to all aspects of the store.

From merchandising assortment and presentation, to store layout, fixturing and signage.

Based on test results, we're going to roll out certain elements of the lab store this year to both new stores as well as the 2003 remodels.

Now, while I'm not going to go into detail about the specific fixtures and signage for those types of things, in general what we're doing is that we're taking some of the fixtures that we created for the lab store as well as key signage within the store and we're rolling those to our conversions, our remodels, our new stores and some elements of the signing package in particular will be rolled out companywide.

Additionally, we've learned a lot about the best arrangements for adjacencies, category adjacencies and to some extent layout of the store.

And certain feature areas, we call them closeout swing areas, and that will be incorporated as a part of our new stores going forward as well as the 200 remodels that we're going to be attempting this year.

We began construction of our fifth distribution center to be located in Durant, Oklahoma.

The DC will be completed this year and should be paid for out of operating cash flow.

We plan to begin receiving goods this coming December.

The DC including interior racking and equipment should cost approximately $70 million.

This DC will give us the additional capacity to support approximately 1750 stores across our entire distribution network.

Let me now turn it over to Al who is going to tell you about our store remodel plan and our 2003 furniture strategy.

Thanks, Mike.

With the successful conversion of 434 stores over the last two years, we have been 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.

We told you on our third quarter conference call that we believe 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 these 400 stores over the next two years.

We will begin by remodeling 213 stores in 2003.

The schedule of grand reopenings is planned as follows: 58 stores throughout April in it Chattanooga, Fort Wayne, Mobile, Pensacola, Toledo, Charleston, West Virginia, Huntington, Greensboro and High Point. 42 stores in the middle of June in Indianapolis, Louisville and Evansville. 45 stores in the beginning of July all located in Atlanta. 35 stores at the end of July in Knoxville, New Orleans and Jacksonville.

And finally, in the middle of August 33 stores in Pittsburgh and Lexington.

Based on our success to date in conversion stores and learnings from our lab stores, we will make certain enhancements to the remodel program for 2003.

We are excited about the opportunity to make certain store layout adjustments to improve category adjacencies and to encourage related selling to build a larger average basket.

This process will be more labor intensive and require additional fixtures and updated merchandise presentation standards.

Mike referred to several lab store fixtures, some of which will be incorporated into these remodeled stores.

Combined with the fixture replacements required by the more extensive store relay, these additional enhancements will increase the total cost the remodel program in 2003 to be about $180,000 per store.

This is up from the $100,000 per store in the first several phases of conversions, but similar to the cost to convert our stores in Los Angeles last year.

While we are excited about these changes, we are being more cautious regarding the expected sales list during the grand reopening period.

Most of the stores to be remodeled in 2003 are currently located in existing Big Lots television advertising markets.

Whereas, many of the 2001 and 2002 conversion markets became TV markets at the time of conversion.

And of course, our prior conversions carried the added element of a name change to generate excitement.

Even with the slightly lower sales list and the higher level of initial investment, the financial returns are still very attractive.

Turning to the P&L, we expect the comp store sales impact to be less than 1% and the two-cent cost to EPS to be -- of the 2003 remodels to be more than offset by the incremental earnings from prior conversions.

Of course, this 2003 investment will generate positive incremental returns in 2004.

As you know, our furniture business has been a great success since its inception seven years ago.

In 2002 furniture sales accounted for about 12% of our business.

With gross margins, sales productivity and inventory turns that are above company average, you can see why we love this category.

And the furniture category's synergy with our domestics and home decor categories make for a strong home furnishings business.

By year-end 2003 approximately 60% of our closeout stores will have furniture departments, up from 52% at the close of 2002.

This will include 80 departments in our new stores to be opened this year, plus another 80 new departments to be opened in existing stores.

Additionally, we will expand existing furniture departments in approximately 200 stores.

We'll make room for the additional furniture by eliminating hanging apparel in these stores.

We also plan to expand the square footage in another 15 stores to accommodate furniture departments.

This is a natural shift as apparel sales productivity is behind company average and has a slightly lower gross margin than furniture.

Let me explain how this will impact our 2003 financial model.

We estimate incremental furniture sales in 2003 will add about 1% of comp to our results.

Due to the minimal capital outlay required, we should recover the incremental investment in just over one year and drive 2 cents of incremental earnings per share this year.

Now that Mike and I have outlined the initiatives planned for 2003, Jeff will help you understand how these investments flow through the year and impact the quarters.

Thanks, Al.

What I'm going to do is address the overall plan, and then I'll address the individual quarters.

We developed the sales plan for 2003, and it calls for total sales growth in the 9 and 10% range.

That's based on a mid-single digit comp increase combined with 4 to 5 points of sales growth coming from the 60 net new stores.

During 2003 we anticipate opening 90 new stores and closing 30 stores as Al mentioned.

We'll also add a net of 145 furniture departments, and those will be added to the new stores as well as to existing stores.

By quarter our plan is based on an improving comp performance through the year and I'll explain that further a little bit in a moment.

But in essence it reflects the compounding effect of our 2003 initiative that Mike and Al just described that have a compounding impact as the year progresses.

And that includes our move to national television, it includes the store remodel activities and it includes the addition of furniture departments throughout the year.

We also will benefit as we move through the year from more favorable comp comparisons in the back half of 2003.

Overall we're planning 2003 EPS in the range of 74 to 78 cents.

That's up from 66 cents this year.

That represents 15 to 20% increase in net income and it represents a 12 to 18% increase in EPS.

We've attached a table to the press release that sets out this plan and actually might be helpful to have that in front of you as I go through my remarks on the 2003 financial plan.

The 2003 plan is also based on a gross margin in the range of 42.0 to 42.4%.

And the midpoint of that is flat to 2002.

So, in essence we're planning on guiding margins flat for next year.

The improvement in markdown management that we expect will be partially offset by slightly lower initial markup caused by increasing import freight rates and merchandise shifts.

The increasing import freight rates, and we're looking right now at working through this with the carriers, but we believe that the increase in freight rates are going to challenge most retailers.

And the majority of that pressure is going to come in the back half of the year.

Import deliveries that we've received for first half, or will receive for the first half sales are basically under the prior rate schedule with rate increases beginning with second quarter deliveries.

And that's the second quarter deliveries will translate into sales in the second half of 2003.

So to the extent there is pressure on the gross margin from the import freight rates it will come in the back half of the year.

The rate throughout the year, let me just mention, will be consistent with 2002 with the higher import rates putting some pressure in the back half.

And we wanted to provide some caution around this trend given where we are in those negotiations.

Regarding SG&A, we're planning a rate that's in the range of 37.9 to 38.3%.

That represents 10 to 50 basis points of leverage over 2002.

We're happy that we're, you know, planning the expense leverage and that we're able to lever comps at a planned mid-single digit comp.

And as I noted earlier, expenses begin to lever at roughly a 4% comp.

And that's with some significant initiative spending in 2003 that Al and Mike went through earlier.

Interest expense should be in the 18 to $19 million dollar range, which assumes lower average borrowings, and we're also planning the tax rate at 39.5%.

That's consistent with our historical experience.

Let me now take a moment to walk you through the quarters in a little more detail.

As I mentioned, it would be helpful if you had the attachment to the press release that lays out this guidance in front of you.

In the first quarter, we're planning comp sales in the low single digit range.

As we mentioned in our January sales release, we planned February at a low single digit comp.

That was our original plans for February coming into the year.

And that's up against a strong 14% increase in February of the prior year.

Given the severe weather that we've seen throughout the country for much of the month, we're now expecting February comp store sales to decrease in the low single digit range.

In terms of March, as a result of the timing of Easter, March comparable store sales are expected to also decrease in the low single digit range.

And that's on top of last year's 14.5% comp.

April comp store sales are planned to increase in the mid-single digit range versus last year's 6.2% result.

We've adjusted, and I'll say more about this later, but we've adjusted our months to be on a more conventional retail calendar.

And again, I'll have some additional things to say about that later in the call.

As we've been telling you, the arrival of our spring decorative and lawn and garden merchandise was delayed this year due to the longshoreman's dispute.

This delay contributed to lower sales in these categories in January and February compared to last year.

However, we think due to the harsh winter weather a lot of that merchandise that arrived late wouldn't have sold in January and February anyway.

And that some portion of those sales have shifted and will shift into March and April when the weather hopefully will be more favorable.

Now obviously only time will tell, but we certainly expect that some of the lost sales in the seasonal categories for January and February will be offset in March and April and that's reflected in the plan.

The first quarter gross margin should be about flat to 2002.

The G&A rate is expected to be between 39.2% and 39.6% and that's versus last year's 39.1%.

So, the challenge posed by the lowest comp plan of the year, Q1 being our lowest comp, combined with our beginning national television advertising in April, those are the principal reasons that the rate is expected to slightly deliver in the first quarter.

Our EPS for Q1 is estimated at 7 cents to 11 cents and that compares to EPS of 11 cents a year ago.

Turning to the second quarter, we're planning a comp in the low to mid-single digit range.

This represents a slightly higher comp than the first quarter.

And I want you to note here that we're eliminating an ad circular in the second quarter.

So, despite that we're expecting a low to mid single digit comp for a couple reasons.

One is we're going to have 13 more remodels, re-grand openings in the second quarter of this year compared to last year, 150 more stores will have furniture departments in the second quarter of this year compared to last year.

And all stores are going to enjoy the benefits of national television advertising during all three months of the quarter.

That's about 1400 stores in TV markets in the second quarter versus only about 580 stores being covered last year.

That means the second quarter will have the biggest year-over-year change in television advertising.

We think that will help drive the comp.

The year-over-year change in TV advertising certainly is driving the top line.

However, it's a big reason from an expense standpoint that we believe expenses will deliver in the second quarter.

Also impacting the cost structure is the incremental number of remodels that are subject to re-grand opening compounded by the P&L impact of the remodel program.

So, both of those, both TV advertising and remodels will have an impact on expenses in the second quarter.

EPS is estimated at flat to 4 cents.

That compares to EPS of 3 cents a year ago.

Turning to the back half of the year, we're planning mid-single digit comps in both the third and fourth quarters.

As you recall, our sales trend slowed this past year in the middle of September, making those comps easier to anniversary when we get into the back half of 2003.

The third and fourth quarters should also benefit from the shift to national television advertising as about 850 stores were covered by television during the third and fourth quarter last year and will be national this year with all stores having coverage.

Q3 and Q4 will also benefit from incremental furniture departments.

And these benefits I just outlined will be slightly offset by less remodel activities in the third quarter.

We converted 25 more stores in 2002 than we're going to convert in 2003 and 2002 included L.A.

So that will have a little bit of an offset to the positive impact from television and from furniture departments.

We expect the gross margin to be flat to slightly down in the back half of the year.

As I mentioned a moment ago, margin pressures most likely result from the impact of the import freight rates on our initial markup.

SG&A should lever in the third and fourth quarter because one, we have a higher planned comp in the third and fourth quarter than we do in the front half of the year.

We have fewer stores being remodeled in the third quarter than were converted during the third quarter of 2002.

And the year-over-year increase in advertising that we'll experience in the back half is less than of an increase than we're experiencing in the front half of 2003.

In the first half EPS -- I'm sorry.

In the third quarter EPS is planned at a loss of 3 cents to a 1-cent profit.

That compares to a loss of 4 cents last year.

And in the fourth quarter the mid-single digit comp combined with strong G&A leverage is expected to drive EPS improvement of 7 to 12 cents over 2002.

Now that we've walked through the impact of the strategic investments and our annual and quarterly guidance, you can see how the benefit from initiatives will be primarily realized in the second half of 2003.

In other words, a lot of the comp benefit that we're getting from these 2003 initiatives is going to build as we move through the year and compound.

Whereas, the first two quarters, the G&A impact is going to be felt disproportionately in the front half of the year.

By quarter we estimate a comp benefit from the initiatives of 1% in the first quarter, so that's one point of incremental comp in Q1. 2% in the second quarter, 2.5% in the third quarter, and that will build to 3 points of incremental comp in the fourth quarter.

The comp upside will be partially offset in the second quarter when we eliminate an ad circular, and we estimate that impact at about 1 point for the quarter.

So all told, we estimate that these strategic initiatives will drive an incremental comp of about 2 points for the full year and that incremental comp will build as we go through the year.

We've also give than you the impact of the bottom line.

And due to the front-loaded nature of some of the investments, we estimate that the impact on EPS of the 2003 initiatives will be a reduction of 1 cent in the first quarter, a reduction of 2 cents in the second quarter, incremental EPS of one penny in the third quarter and incremental profit of 4 cents in the fourth quarter.

And of course, the initiatives will have a net benefit for the year overall of two cents.

Turning to the balance sheet, we expect inventories to continue to be managed in a very disciplined way.

Right now our plan calls for a turn improvement from 2.9 to 3.0 turns from 2002 into 2003.

Capital spending is planned in the range of 160 to $165 million dollars.

That's reflective of 90 new stores, 295 additional furniture departments or expansions, 213 store remodels and construction of our distribution center to be located in Durant, Oklahoma.

We also expect to reduce our net debt an additional 20 to $40 million dollars next year and depreciation for 2003 is planned in the 93 to $95 million dollar range.

Let me now take a moment to discuss two changes we're making to our external communications going forward.

The first relates to the monthly calendar and the second relates to the Monday morning recorded sales message.

First the monthly calendar change.

And I referenced this earlier.

As you know, we've historically reported monthly retail sales and comp store sales results on a 4-4-5 basis.

In other words, the first two periods of the quarter have four weeks, and the third period is reported on a five-week basis.

That's inconsistent with most retailers where results are reported on a 4-5-4 basis.

And that obviously impacts comparability.

So, what we decided to do is effective with the first quarter of 2003, we will begin reporting retail sales and comps on a 4-5-4 basis so that those results, comparisons are more easily drawn between our results and those of our competitors.

And the 2003 guidance we provided today reflects this new calendar.

For reference, the March 2002 comp reported on a five-week basis was 14.57% and the April comp reported on a four-week basis was 6.2%.

As you know, we also record a sales message each week on Monday that keeps you up to date as to the company's progress against the monthly sales plan and also provides some category information in terms of what's driving sales.

We do plan to continue this practice and we believe that this information is useful and timely to our investors and the analysts who cover us.

However, beginning this month we will not record a message on the Monday that immediately follow's month end.

In essence, what we will do is comment on sales three days later when we release that information in the monthly sales release where we can provide more information around sales performance to a broader audience.

That concludes my remarks on the 2003 plan.

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

Thanks, Jeff.

Let me just make a few more comments and we'll get to your questions.

One year ago we gave EPS guidance for 2002 of 35 to 40 cents per share with comps increasing in the mid-single digit range.

We committed to completing our store conversion program and making Big Lots a single brand across the country.

We committed to focus on continuing to grow our customer base.

One year later now we're reporting that all of our stores now operate under the Big Lots brand and we've delivered a 2002 comp of 7.7%, which includes the 2.8% increase in customer transactions.

With strong flow through of incremental sales, we beat our original guidance by 75% and improved over last year's adjusted earnings per share by 154%.

More importantly, we've taken all the steps to position the business for sustained growth.

We set the table over the last two years by completing the conversion of 434 stores to the Big Lots brand name in just 16 months.

We expanded our TV advertising reach, focusing our store efforts on improved customer service and operating efficiencies, refining our merchandise offering and continuing to build a world class team with particular focus on supply chains.

We believe 2002 proved that our repositioning is working and we think we're just getting started.

Our plans for the coming year help insure that we keep our eye on the ball and stay focused on our customer.

Despite a disappointing end to the year amidst a very uncertain economic and global environment, we're enthusiastic about moving into the next phase of our strategy with national TV advertising, store remodeling program in the east and expansion of our successful furniture strategy.

As you can see, we continue to invest in our business for the long-term.

As we've told you before, we will not trade tomorrow for today.

We are remaining very intently focused on long-term management of our business.

The good news is, we think we've passed the point right now where we had to sacrifice short-term earnings in order to produce long-term strength.

And we believe we've shown you that 2003's investments are tested strategies that have been successful for us in the past.

Our business continues to have so much opportunity with relatively low brand awareness and low sales productivity.

Now, many of you have questioned or ability to comp in 2003 on top of 2002's strong sales performance, particularly in the first half of the year.

We think that's a fair challenge.

We think this plan will enable Big Lots to tackle that challenge and continue to build on the success of last year.

While the last two years were critical, they were certainly somewhat risky and incredibly challenging.

Next year is vital as we move from a business that has been labeled as a so-called turn around story into one that we would like to have classified as a great business with growth opportunity that provides consistent performance over time.

The future is bright as our merchandising, customer service, supply chain and overall execution continue to get better each and every day.

Let me make one more final comment, particularly for the investors that have been with us for a year or more, maybe to try to put this in perspective.

Today you have a business that has $120 million more in cash than we had a year ago.

We have a business that has passed the point in time of which we were taking great risks in order to reposition ourselves.

Risks like name changes, major shifts in merchandising mix and marketing mix and the start-up of a new DC in 2001.

You have a business today that has an accelerating inventory turn and has just finished the year with the highest turn in the company's history.

That we think is very important for a retailer because it's an indicator of the future more than it is of the past.

It means we have fresher inventory and we have a store that is turning and becoming more exciting for our customers.

We have a business today that has a larger base of customers than it did one year ago.

We have a business today that has had five steady quarterly increases in customer perceptions as measured by the Gallup organization.

We surveyed over 130,000 customers during the year.

And we have a business that has continued to invest in the future and its stores and its customers and we think we have some strong strategies to realize our growth potential.

With that, let me turn it back to Rita for your questions.

Ladies and gentlemen, if you would like to ask a question, please press the number 1 on your touch tone phone.

You will hear a tone indicating your line has been placed in queue.

You may remove your line from queue at any time by pressing the pound key.

One moment for the first question.

Our first question is from the line of Lee Backus, Buckingham Research.

Please go ahead.

Mike, as far as advertising spend, it seems like you're going to be increasing TV advertising fairly substantially and only eliminating one ad circular.

How do you see advertising as a total percentage of sales changing this year?

Yeah, Lee, actually, our advertising per cents of sales changes very little.

We think it goes up about 1/10th this year over last year, so it's getting pretty close to flat, assuming that mid-single digit comp that we gave guidance for.

What we've been able to do is actually refine the way we're approaching television in terms of the mix of spots, TV versus national network or national cable TV as well as some of the other things we've been doing with print and sort of reallocate dollars and make better use of those dollars.

So what's encouraging about this, we originally when we set out on this five-year plan we thought that national network TV was two years away.

We're able to do it this year without sacrificing this year's earnings.

We actually think it will be about a net benefit of 2 cents in earnings this year.

And what's exciting about it, isn't so much what it does this year, but it sets us up for the compounding effect that you get in year two and beyond.

And there's substantial operating profit improvement that we can expect in 2004 as a result of this shift.

So, it's been a real good discovery for us to be able to accelerate that strategy.

Could you also comment one of your key initiatives was on the shopping experience, customer service in the stores.

Could you comment where you are, how much you think you've accomplished in that area?

Yeah.

I think one of the -- that's one of those areas where it can be hard to measure, but by partnering with the Gallup organization, and there's only certain things that I can reveal about the process that we go through, but clearly they're the best that we know of that are involved in that type of measurement activity.

We know through thousands and thousands of customer surveys of our existing customers how we trend in all those aspects, customer service, speed of checkout as well as some of the measurements of passion and loyalty that customers may have.

And what I can tell you is that for every single question we ask, every single quarter, we have improved our measurement each time.

We're right now in most of the measurements above what Gallup would call best practice retailers as they benchmark and measure the other retailers that are out there.

So, we are making substantial improvement.

And you know, you don't get there just by measuring.

You get there by changing behavior.

And we have a lot of initiatives and training that we do to create some passion among our associates and to improve the performance in the stores.

So, it's working real well right now.

Thank you.

Our next question is from the line of Jeff Stein of McDonald Investments.

Jeff Stein, CFA: Good morning, guys.

Congratulation on a great year. 2001, you kind of took a bullet by really continuing to stick to your credit, sticking to a very aggressive remodeling store plan even while sales were not meeting expectations.

And it almost sounds like you might be setting yourselves up for the same type of situation again.

Are you at all concerned that you've got a lot on your plate this year and even with all of these initiatives that -- I mean, is a mid-single digit comp increase a realistic target in this type of environment?

Well, the way Jeff broke out the comp plans for you, Jeff, is we actually have identified, given the history that we have of what some of these initiatives do for our comp performance.

The TV we know from eight years of analysis will produce in total for us this year a little better than a 1% incremental comp.

The shift from hanging apparel to furniture, we know what that does because we know the productivity of both of those categories.

We know that that will contribute about 1% per comp.

So, as you break out our comps by quarter, we don't just plan a comp and hope that it happens.

We know that as you account for the initiatives and the things that we know will drive comp and you're left with what is sort of a core comp that the business is operating on, the run rate going forward is basically consistent with what we've seen over the past quarter or two.

So, what we don't know, of course, is what the future bears.

And there's a lot of international uncertainty and economic uncertainty and all those things are very important discussions, but certainly makes it harder to forecast.

Outside of that we think the plan is very sound and it builds from the bottom up.

Jeff Stein, CFA: Mike, if you look at the 213 stores that you're going to remodel this year, roughly what percent of your sales volume do they account for?

I don't know if I'd be able to give you a quick percent today, but they are slightly larger physical stores, but aren't too far off of the company average.

So, if you just want to do the number of stores that we're remodeling divided by the chain, that's probably a good representation of the percent of sales.

Jeff Stein, CFA: Volume wise they're about the same as the rest of the chain?

Yes.

Jeff Stein, CFA: Okay.

And in terms of -- you know, last year you incurred whatever it was, 14, $15 million dollars to refurbish the stores.

What is the similar metric going to be this year for this batch of 213 locations?

I'll let Jeff take that.

We've looked at it on a per store basis.

Al mentioned overall we spent in prior remodels about $100,000 per store.

We're looking here at about $180,000 per store.

And the stores in L.A. were more in the 150 to $160,000.

I don't have the total numbers in front of me.

But on a per store basis, that's the way it breaks out.

Jeff Stein, CFA: And how much of that would be capital versus expense?

More of it's, the majority of it is in capital, it's a little bit higher payroll, but most of it is going to be in the CAPEX line because we have more extensive relays, there's going to be more fixture replacement.

Frankly, a lot of that is deferred maintenance that we're dealing with old stores here that as we start moving fixtures around, a considerable number of those will have to be replaced.

And that's baked into the capital expectation.

We're also looking at bigger stores.

We're going to be adding furniture departments in a lot of these stores.

And a Mike mentioned, putting in some more lab elements.

So that's what drives the capital.

Jeff Stein, CFA: Okay.

Thank you.

John Rouleau of Wachovia.

Hi, guys.

I'd like to focus on the seasonal category, if I could for a minute.

And obviously that's been, you know, somewhat of a disappointment in the fourth quarter and probably a more volatile part of your business.

I mean, do you have any speculation as to why that is in terms of, you know, competitively in the marketplace?

And has that impacted the way you're buying this category this year or the way you're looking at the seasonal business this year?

What are your assumptions for the comps in seasonal business?

That's a real good question, John.

We -- let me put it in perspective.

First of all, even with some disappointment in the fall in sell through and some higher markdowns to make sure we were going through the season appropriately, seasonal for us is still one of the most profitable categories that we have.

Right.

So there's a lot of flexibility in that category.

So, for us it's not an issue of, is it a bad business.

It's a great business.

Our challenge is to try to do a better job of managing.

There's a fashion element to it that we either need to minimize or take appropriate steps to strike the right risk-reward relationship on it.

And we've now learned quite a bit from the past two fall seasons in particular, and we do have a different strategy for next year.

We do have a more conservative buy strategy for trim next year.

We have some changes in the way we're mixing basics versus fashion.

And I won't go into too much detail for competitive reasons.

And we're also going to do some different things within our marketing because it is a category that we stand for, we differentiate more retailers have walked away from it.

There's an opening there for us and it's a real, real profitable category.

I think our challenge is executing it well because it is a key differentiator and it is a real important strategy.

We are changing our approach going forward.

As far as the spring season, that's a longer season than the fall is.

Lawn and garden and spring decorative is nearly a 7 or 8 month season.

The negative today is we lost some of the momentum we had last year in January and February, particularly in the colder weather areas because the weather shift was so dramatic.

We have some things to learn about what happens now over the next two or three months, but we're much better at managing slow and watching all of that.

So, we think we'll be able to manage through it appropriately.

Okay.

And then real quickly, for the new store remodels, Al mentioned that your comp expectations aren't quite as high as what they were for the previous remodels.

Maybe you can just remind everybody what that was.

I think it was 20 to 30% increase in the first four weeks and then it leveled off to something like 6% over the year.

Remind everybody what those were.

And then I don't know if you can give us a little bit more color or detail, you might not want to quantify it.

But kind of what you're looking for, what are the metrics out of the new stores you're looking for?

Yeah, John.

This is Jeff.

In terms of the -- in terms of the comp, in the past we've done anywhere from 20 to 30% incremental comp list so we've seen 20 to 30 points of incremental comp over the balance of the chain during that four-week re-grand open period.

And then what that does, is that tapers off so that a year later it's still comping up in the mid-single digit range.

Right.

What we would expect is we'd expect on these remodels those slips to be closer to 20% and that we would see the sort of low to mid-single digits thereafter.

So, sort of settling as opposed to settling to 5 or 6, settling more around 4%.

That's what we've assumed in the plan.

There's obviously, you know, in terms of the how well we execute it, you know, it can have an impact.

We think that how we market it with television can have an impact.

And we also think that adding furniture into those stores could also have a positive impact.

So, there are some pluses and some minuses as we do these remodels versus the conversions.

Let me tack on a couple of thoughts.

Two reasons why we think we should be more conservative in our sales estimate on these stores versus the ones we've done over the last two years.

The first point is that these are very mature markets and the majority of them have been on television spots advertising for a number of years.

And many of the other markets that we did had not.

And secondly, we no longer have a name change as part of a marketing hook.

So, when we were drawing attention to the fact that we changed our store, the marketing hook for customers is, you know, your Pik 'N' Save is now Big Lots.

And there was a lot more of a story to tell.

We still think that we have a good hook, but it's not the same and it's not as dramatic.

So we think that that's appropriate that we would temper our expectations.

Just trying to get a feel for how much you're tempering them.

Thank you.

And the last line we have queued up with questions today, David Mann, Johnson and Rice.

David Mann, CFA: Yes, good morning.

A few questions.

First of all, in terms of the furniture benefit that you saw in 2002, can you just quantify what that was in terms of same-store sales and earnings similar to the way you're projecting for '03?

I don't know if we have that in front of us.

I don't think we have that handy, David.

David Mann, CFA: Okay.

In terms of the television advertising, if I remember correctly, last year Dallas and L.A.

I think were a couple of markets that got TV for the first time.

Were you able to quantify in those new markets what kind of benefit you thought you got from television and how, you know, that translates into the third of the markets that will get TV on a go-forward basis?

Well, on a broader base on TV, I will tell you that what our experience has been, and TV takes more time to build the momentum than a circular does for obvious reasons.

But over the course of certainly a year's time, what you tend to find in a TV market versus a non-TV market is about a mid-single digit kick in sales when you make that change.

Now, there's a little bit of a difference in terms of what we're doing going forward because it's not just whether you have TV or whether you don't have TV.

It's how much TV you have, how many TRPs or GRPs or how much eyeball exposure you have.

And to make sure everybody understands our change, we're taking our peak television exposure in terms of the number of markets we had last year.

During the fall we hit our peak, and it was about I think 65, 70% of our stores had television during the peak season last fall.

And next year those stores go full-year exposure with the same amount of spots during the week as they had last year.

So, the existing markets have no change.

The new markets, the remaining television markets go on the same number of weeks, but somewhat less exposure due to the national network approach.

So, we still think it's the exposure needed to draw some kick, but we don't assume that those additional markets will have the same mid-single digit comp kick because it's a lesser exposure in terms of the number of TRPs as they measure it.

I don't know if I made it more complicated for you or easier, David.

David Mann, CFA: I may follow up with Jeff or Joe on that.

David, coming back to your first point, we had a chance to do some -- somebody put a piece of paper in front of me.

It would be about a point of comp this year would have been driven by furniture, in 2002.

And as Al mentioned, that expectation will be for about a point of comp in 2003.

David Mann, CFA: Okay.

It will end up being slightly less than a point this year.

David Mann, CFA: Okay.

In terms of the L.A.-based stores in terms of what you've done in those few stores, I think you said you had some existing stores that you touched, do you have any experience in terms of the benefit there versus the control group?

Not enough time has passed.

We converted three very old Cincinnati stores to a very new and upgraded lab store format.

We did that in the fall season.

We definitely saw a dramatic kick, but it's too early to know where that's leveling out and whether we're going to get the kind of long-term benefit in sales to give us the appropriate pay back in the remodeling expense.

So our plan on the full lab, we're not rolling out lab any further.

We're just rolling out elements of that store.

We plan to take this year to continue to look at the Columbus, but more importantly to look at the three Cincinnati, which will tell us more of what happens when you take an old store and make it a lab store.

So, there's a lot to learn this year.

David Mann, CFA: Okay.

And then one last question on the store remodels with which sort of two angles.

The store remodels that you did in '01, do you have a sense on how they were comping after they anniversary now that you have a couple of quarters under the belt?

And then also, store remodels that are similar to the ones that you're going to be doing on the East Coast, were there any that sort of, you know, by nature of geography that you ended up changing an existing Big Lots store and you have some color on how the next group of 400 stores might help you?

I'll take the first part of the question.

We've talked about the list we see from a remodel store.

One year later we're still seeing, you know, incremental lists in that mid-single digit range, and then it levels out to company average.

So, in essence you've got incremental business that you developed through the re-grand opening period and over the first year of the remodel.

And then those stores then tend to build on that higher level of sales and comp that company average going forward.

That's what we have begun to see in '01, as we've sort of [INAUDIBLE] and recognized that that was in the back half of 2002 to begin to lab and have a full year experience in those remodels.

And if I understood the second part of your question, we did convert Big Lots to Big Lots in primarily some Texas markets, about 50 of them.

Now, it's not a perfect analogy because it was done in conjunction with some of the McFrugals changing over.

But those Big Lots to Big Lots actually showed some very similar kicks as the McFrugals to Big Lots.

So, that's one measurement that we have.

It's still a little bit different than what we're doing next year, but it certainly gave us some comfort that when you make a change, regardless of whether you make a name change, you're still going to get some benefit from the customers.

David Mann, CFA: Okay.

Great.

Thanks, guys.

Thank you.

Rita, do we have any more questions?

Okay.

Well, I appreciate your attendance on our call.

We look forward to talking with you next quarter.

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