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Text: As I review this past quarter and provide insights into our current quarter's business, I want to reiterate that we will be providing comparisons to both 2020 and 2019.
Given the periods of quarantining and stimulus that impacted the business in waves last year, we are anchoring comparisons to 2019 to show underlying business trends.
To that point, I am pleased with our second quarter performance as we continue to demonstrate strong growth versus 2019, proving out our Operation North Star strategies, demonstrating progress in our core assortment and underscoring the relationships that we are building, both online and in store with our existing and newly acquired customers.
In the quarter, we saw strong double digit, two-year comps in Furniture, Soft Home, Hard Home and Apparel, Electronics & Other.
Consumables also posted a positive two-year comp, while Food was down mid-single digits, reduced on square footage basis by our pantry reset last fall.
As a result, while down 13% to last year on a comparable basis, comparable sales for the second quarter increased 14% to 2019.
Additionally, we delivered diluted earnings per share of $1.09 within our guidance range, despite ongoing supply chain and distribution headwinds that were greater than expected at the beginning of the quarter and cost us at least 1 point of comp.
While the Big Lots team is always busy, we were really busy over the past quarter engaging with customers leaning into our store count growth, continuing to upgrade our omnichannel offerings and removing friction from our e-commerce channel, launching a new warranty offering through Allstate, rolling out additional Lot and Queue Line stores, preparing for the launch of our two new forward distribution centers and Project Refresh at the start of the third quarter, further rolling out our BIGionaire's brand activation campaign and navigating a challenging supply chain market.
While addressing these initiatives and macro forces, our teams remained unwaveringly focused on our customers' needs, continuing in our mission to help them live big and save lots.
We are dealing with it now and navigating the dynamic and ever-changing complexities of the supply chain.
But at the same time we are leaning into and investing in our future and our promising long-term growth opportunity.
I speak for all Big Lots leadership when I convey how indebted we are to the over 30,000 Big Lots team members.
We remain very excited about the huge white space opportunity ahead of us, and know that investing in our customer, our people and our infrastructure will be critical to bringing that growth potential to fruition.
Freight headwinds weighed on gross margin for the quarter, and in addition, our performance for the quarter was also impacted by labor challenges in two of our regional distribution centers.
This dynamic is improving as we enter Q3, and stress on our network will be further reduced by the opening of our first two forward distribution centers.
In addition to alleviate immediate supply chain pressures and maintain speed to market, we have set up a nimble and agile temporary DC bypass program for the fourth quarter that will increase efficiency of our DCs and capacity to our network.
Meanwhile, we remain excited by our merchandising opportunities, and we are focused on driving customer-centric deals every day.
We continue to expand our ability to find close-out product in most areas of the store.
We are working hard to find great deals and big buys for our customers, whether we source them from closeouts, engineered closeouts or just incredible product we find add value in the market.
We see the potential for close-out opportunities to grow in 2022.
As we focus on item merchandising and key value messaging, our customer is responding well.
For example, our increased investment in apparel is leading to the acquisition of customers that are exploring more of the Big Lots assortment.
Additionally, this is a great example of increasing merchandised productivity within the box, driving incremental sales with a strong initial markup and expanding our brand recognition with quality product.
Turning to our category performance, Food and Consumables both declined versus Q2 2020 as we lap last year's COVID impact.
The Consumables were positive on a two-year basis and both categories exceeded our beginning of quarter expectations.
In Food, we have continued to see a shift away from grocery and baking categories and into more snacks, beverage, energy drinks and on the go food.
In consumables, we saw a rebound in the household chemicals category as well as cosmetics, while paper sales, demand on bath tissue and paper towels continue to be a bit challenged, driven by the prior COVID related stock-ups.
A year ago we reset Food and Consumables across the store and this is performing well.
As we approach lapping this reset, we continue to see opportunity to improve overall productivity and improved values with big deals, own brands and everyday low prices on brand names.
Our Seasonal assortment, which includes patio, lawn and garden and summer categories like coles, and 4th of July themed goods was challenged for the quarter due to shipping delays and inventory availability.
The overall category comped down 15% to last year, but up 4% to Q2 2019.
Moving into Q3, our inventory situation has improved, and we have seen a resurgence in sales with early strength from our Halloween and Harvest assortment.
Although supply chain pressures related to Asian port and manufacturing disruption will continue to create challenges, we are much better prepared to win at the all important holiday season.
Soft Home comps were up 14% versus 2019.
While we saw softness in fashion bedding, all other categories met expectations.
Bath rugs and towels, patio rugs and floor mats were particularly strong this quarter.
Also noteworthy were the candle collection categories within home decor with strong double-digit growth to 2019.
Hard Home comps were up 13% to 2019, exceeding our expectations with appliances and home organization, delivering double-digit increases in 2019.
Key classifications such as floor care, kitchen appliances, storage, dinnerware and cookware continued to trend strongly, partially offset by lower, but positive comp sales to 2019 in tabletop, food prep and home maintenance.
Closeouts in Hard Home were up even more over 2020 with appliances, cookware, home organization all doing very well.
Toys, now rolled into our Hard Home category following our merchandising reorganization also performed quite well and ahead of expectations.
Furniture delivered another very strong quarter, with comps down 10% to last year, but up 30% to 2019.
The furniture team did an outstanding job of mitigating inventory challenges, primarily as a result of chemical shortages affecting foam production, and we achieved our strategic goal of winning Memorial Day weekend with positive comps to last year and two years ago.
Upholstery was particularly strong in Q2, delivering a flat comp to 2020 and up almost 40% to 2019, driven by high demand for sofas and sectionals.
Anchored by the Broyhill brand, which continues to gain share, it is now over 40% of total upholstery sales.
Apparel, Electronics & Other also performed very strongly, up 15% to 2020.
Apparel delivered a 90% comp for the quarter, with casual and athletic lifestyle dressing dominating the women's business.
Although tops remains strong, we saw high sell-throughs in capris and shorts as well.
Mens active tops and shorts performed well.
Closeouts continued to build within the assortment, offering value, breadth and new classifications.
Accessories saw nice increases with hair and jewelry.
Additionally, luggage was introduced as a new category in July with strong sales results that will provide additional growth as we look toward the back half of the year and into 2022.
The Lot continues to strengthen as delighting our customers with fun, innovative treasures just right for life's occasions while delivering nearly 2% of the Company's sales in the quarter.
We executed a camping theme set and a nostalgia set during the quarter, both of which resonated well with big hits from national brand camping suppliers, novelty [Phonetic] small appliances and unexpected finds such as PopCorn-themed items, a TV projector, large video game units and novelty pet styles.
I would now like to turn to our longer-term growth strategy.
We remain excited about the tremendous progress we are making under Operation North Star, where our growth drivers are growing, our customer base, improving our e-commerce conversion, improving merchandise productivity and increasing our store count.
With regard to customer growth, we are thrilled with the continued rollout of our, Be A BIGionaire, brand campaign that we gave a glimpse of last quarter.
This program is grounded in extensive consumer insights around why customers love to shop us.
She sees us as the home of the hunt for exceptional bargains and surprising treasures.
I'm delighted to share that this campaign is driving a 2% lift in transactions in the markets where we have rolled it out.
New BIGionaires visiting Big Lots for the first time are driving 60% of these incremental transactions.
The campaign has also increased brand awareness, consideration and purchase rates, showing that we are gaining relevance.
Our first campaign featured Retta who successfully transferred her relatability and humor from Good Girls and Parks and Recreation into our BIGionaire campaign.
As we gear up for this holiday, you can expect to see additional stars hunting for bargains and treasures at their neighborhood Big Lots.
Coming soon, you'll see Eric Stonestreet, most famous for his role in the beloved comedy, Modern Family and Molly Shannon, best known for her fantastic characters on Saturday Night Live.
Both Eric and Molly embraced the Big Lots personality.
We cannot wait to share future details with you soon.
We're also thrilled that the campaign is resonating with the younger audience.
In our demographic distribution, we've seen a 600 basis point share increase in new customers with ages 25 to 39, with the distribution shifting from those 55 and older.
Savvy shoppers of all ages are discovering Big Lots and they love that we provide everything for their home with incredible value and superior style.
Meanwhile, our rewards membership continues to contribute productive growth to the business with active membership of 8% versus the second quarter of 2020 adding 1.8 million more new members this past quarter with rewards membership currently at 21.5 million.
Additionally, rewards customers in total spent 16% more than last year and 7% more per customer.
Over 72% of our sales this past quarter were attached to our rewards membership.
That penetration to sales is up 400 basis points to the same quarter last year.
Finally, we continue to see great reactivation through thoughtful win back programs to recapture lapsed rewards members and keep them coming back.
Demand increased 10% over the second quarter of 2020 representing over 400% of growth to Q2 2019.
While side business declined in the quarter versus Q2 2020, as we lap the height of the pandemic response in 2020, the declines in traffic were more than offset by increases across conversion and basket size.
Demand for our seasonal lawn and garden assortment and for furniture continued the momentum that we saw in the first quarter.
ECom growth is supported by our investments in the channel to further improve search, purchase and fulfillment capabilities, buy online pickup in store, curbside pickup, ship from store and same-day delivery with Instacart and Pickup.
They've all been very successful and drove over 60% of our demand fulfillment.
To support holiday, we are increasing the number of stores providing ship from store fulfillment to 65.
We are further reducing transaction friction by introducing our third mobile wallet payment program, PayPal, in time for holiday joining our lineup of Apple and Google Pay, and we expect to introduce a new buy now, pay later offering later this quarter.
Additionally, we have updated the look and feel of the website to match and enhance the upbeat feeling of our brand and the BIGionaire campaign.
Turning to merchandise productivity, momentum remained strong within our growing Broyhill businesses as the assortment drove $194 million in Q2 sales.
This represents a $77 million increase to Q2 2020, at which point we had just launched the brand.
We remained thrilled with Broyhill's trajectory and continue to see strong growth ahead for the brand with over $400 million in year sales today, up to last year's full year performance and showing continued acceleration to becoming $1 billion brand.
In addition, it's important to call out that Broyhill is just one aspect albeit a huge focus of our own brand strategy.
We are also leaning heavily into Real Living, a private brand in our furniture and home goods area of the store with a lower price point than Broyhill.
We are seeing early growth in this brand by consolidating our offering of unbranded goods and transitioning from other private labels currently in the store.
We are also introducing new products to make sure we have a complete offer in the Real Living brand.
Real Living has ramped up quickly, generating over $400 million in sales year-to-date, and we are confident that it, too, will become a $1 billion own brand for Big Lots.
For Lot and Queue Line, front end strategies are now rolled out to approximately 1,225 stores.
These initiatives act as innovation labs with newness that plays into the rest of the stores assortment, strengthening customer engagement.
The Lot and Queue Line continues to drive 3% incremental combined lift to our store performance.
Additionally, both have become established aspects of the Big Lots shopping experience as transactions containing items from the Lot tend to be of larger value, include more items and attached to more of the balance of the assortment, while the queue lines are driving strong incremental unit impulse buying upon checkout.
In prior calls, we introduced you to our next generation furniture sales team test that puts dedicated furniture focused associates on the sales floor to help educate our customers about the breadth and quality of our home furnishings.
I'm excited to announce that this test now in over 80 stores continues to perform very well, delivering around a 15% furniture sales lift.
We expect to roll this next-generation model to several hundred stores in 2022 delivering at least 1 point of comp to the total Company, on an annualized basis.
Finally, with regard to store count, our growth is accelerating this year and will further accelerate in 2022 and beyond.
Based on all the work that we have done in recent months, we are confident that there is white space to grow our store count by hundreds of stores in the coming years with two to three times the net store growth in 2022 than the net increase of around 20 stores we expect to achieve this year.
At the same time, we expect to continue slowing our rate of closures as a result of our store intervention program, which this year will be only around 15 stores.
All of these growth drivers are supported by key enabling investments.
Earlier this year, we announced that we would be opening mid-year two forward bulk [Phonetic] and furniture distribution centers to support our growth and relieve pressure in our current regional distribution centers.
We are pleased to announce that our first FDC opened in early August, and our second will be receiving inventory early next week.
Additionally, we are pleased with the performance of our new transportation management system, which has been crucial to mitigating the pressures that we've experienced within our distribution network.
Meanwhile, during Q2, we initiated a multi-year program, which we're calling Project Refresh to upgrade our approximately 800 stores not included in our 2017 to early 2020 Store of the Future program.
These stores will get new exterior signage, interior repainting and floor repair, a new vestibule experience, remodeled bathrooms and anterior wall graphics, all at a much lower cost than our prior Store of the Future conversions.
This will create a consistent brand experience across our stores and enhance our brand for the long run.
The average cost per store will be around $100,000, much lower than the prior Store of the Future program.
As I hope I've impressed upon you, both in this quarter's discussion and in previous calls, we have resolute belief in our Whitespace potential and in the continued growth opportunities that Operation North Star presents.
The underlying progress we are making is increasingly evident.
Before handing over to Jonathan, I want to turn back to the supply chain and distribution headwinds we've discussed, which we expect will continue to impact our business in Q3 and Q4.
Prior to the recent global resurgence of COVID, we were seeing increased import cost driven by global increase in demand for ocean freight.
Over the past few months, we have seen that dynamic exacerbated by the temporary shutdown of the port at Yantian, China and temporary factory and port closures elsewhere in Asia.
Vietnam, where segments of our furniture and seasonal categories are sourced is currently under COVID restrictions that impact our supplier's ability to produce at scale.
The Vietnamese government is targeting September 15th, as the date to ease restrictions.
In addition, the port of Ningbo, China experienced a terminal closure in mid-August, although has now reopened.
These developments highlight the fluidity of the situation and the ongoing uncertainties caused by COVID-19.
While these pressures are expected to be transient, they are resulting in both cost increases due to an imbalance of container supply and demand, as well as sales impact due to delayed inflow of product, particularly from Vietnam.
The guidance that Jonathan will cover in a moment bakes in our current estimates of these impacts.
In summary, we are facing some near-term challenges, but our underlying business remains strong as evidenced by our strong two year comps in the second quarter, which have continued into Q3.
We are as confident as ever that our Operation North Star strategies will drive significant growth in the coming years, supported by key investments we are making.
As Bruce referenced, so much was accomplished this quarter as our teams remain focused on providing a great experience, great assortment and great value to our customer.
Net sales for the second quarter were $1.457 billion, and a 11.4% decrease compared to $1.644 billion a year ago.
The decline was driven by a comparable sales decrease of 13.2% as we lap stimulus impacts in 2020, on the height of last year's nesting activities, partially offset by 180 basis points impact from net store openings and relocations.
Our comp result was slightly off our negative low-double digit guidance, driven by labor challenges at two of our regional DCCs -- regional DCs, which adversely impacted store inventories.
Sales in total were up 16% to 2019's $1.252 billion with a two-year comp of 14% [Phonetic] driven by basket size.
As a side note, when we reference two-year comps going forward, we will be doing so on a multiplied rather than an additive basis.
Net income for the second quarter was $37.7 million compared to $110.1 million in Q2 of 2020 and $20.6 million in 2019.
Diluted earnings per share for the quarter was $1.09 within our guidance range coming into the quarter.
As a reminder, we reported adjusted earnings per share of $2.75 last year, which excluded the gain on the sale of our four owned distribution centers.
EPS for this year's second quarter reflected continued strong control of expenses which offset the slight miss on sales.
In addition, we've got approximately $0.03 of benefit from share repurchases during the quarter.
Gross margin rate for Q2 was 39.6%, down 200 basis points from last year's second quarter rate, and 20 basis points below 2019, in line with our guidance.
Our margin rate reflects freight headwinds, partially offset by first cost benefits, pricing increases and judicious markdown deployment.
Freight headwinds were greater than initially expected with freight costs closing close to 200 basis points of gross margin contraction year-over-year.
Total expenses for the quarter, including depreciation were $524 million, down from $534 million last year, and slightly lower than beginning of quarter expectations, despite the distribution and transportation cost pressures, while deleveraging versus last year expenses leveraged 120 basis points versus 2019.
All of the above drove us to an operating margin for the quarter of 3.7%, versus 9.1% last year and 2.6% in 2019.
Excluding the freight headwinds, our operating margin would have been closer to 5.7%, a 300 basis point improvement to 2019.
Interest expense for the quarter was $2.3 million, down from $2.5 million in the second quarter last year.
In light of our strong liquidity position and current market conditions, on June 7th, we prepaid the remaining $44.3 million principal balance under our 2019 term note secured on the Apple Valley distribution center equipment.
In connection with the prepayment, we incurred a $0.4 million prepayment fee and recognized $0.5 million loss on debt extinguishment in the second quarter.
The income tax rate in second quarter was 26.7% compared to last year's rate of 25.8%, with the increase primarily driven by the impact of the Section 162(m) executive compensation add back.
Moving on to the balance sheet, total inventory was up 32% to $943.8 million, slightly ahead of our beginning of quarter guidance.
The increase was driven by the lapping of a typically low inventory levels at the close of the second quarter in 2020.
Inventories were up 8% of Q2 2019, maintaining a strong two-year turn improvement while supporting our ability to drive third quarter performance.
During Q2, we opened 12 new stores and closed seven stores.
We ended Q2 with 1,418 stores and with total selling square footage of 32.3 million.
Capital expenditures for the quarter were $45 million compared to $41 million last year.
Depreciation expense in the quarter was $35.3 million, approximately $1.3 million lower than the same period last year.
We ended the second quarter with $293 million of cash and cash equivalents and no long-term debt.
As a reminder, at the end of Q2 2020, we had $899 million of cash and cash equivalents and $43 million of long-term debt.
The year-over-year reduction in cash levels, reflects our deployment of proceeds from the sale and leaseback of our distribution centers toward share repurchases and the payment of taxes on the gain on sale and leaseback.
We repurchased 2.4 million shares during the quarter for $153 million at an average cost per share of $63.57, under our previously announced $500 million authorization.
There is approximately $97 million remaining as of the end of the second quarter of 2021.
For the program to date, we have repurchased 7.3 million shares at an average cost of $55.18, including commission.
As announced in a separate release today, our Board of Directors declared a quarterly cash dividend for the third quarter of 2021 of $0.30 per common share.
This dividend is payable on September 24, 2021 to shareholders of record on the close of business on September 10th, 2021.
As Bruce noted earlier, we are facing significant sales and margin challenges as a result of Asian manufacturing and supply chain disruption due to recent COVID issues.
In addition, we will incur additional expense in the back half related to actions we are taking to ensure we are competitive in hiring and retaining labor in our stores and DCs.
Our guidance below incorporates are a best estimate to all of these impacts, although they remain fluid.
In the third quarter, we expect a diluted loss per share in the range of $0.10 to $0.20 compared to $0.76 of earnings per diluted share for the third quarter of 2020.
For the full year, we expect earnings per share in the range of $5.90 to $6.05.
While this represents a decline to last year's adjusted diluted earnings per share of $7.35, it represents 60% plus growth to 2019 earnings.
The guidance does not incorporate any share repurchases we may complete in the third or fourth quarters.
On a two year basis, we expect comps to be up low double digits.
As Bruce referenced, our Q3 has got off to a good start, with two year comps running ahead of Q2, but we have baked in some moderation as the quarter progresses due to receipt delays.
For the full year, we expect a negative low-single digit comp versus 2020 which will again equate to double-digit comps on a two-year basis.
Our full year sales outlook bakes in approximately $60 million of adverse impact in Q3 and especially Q4, related to COVID related manufacturing shutdowns in Vietnam.
We expect the third quarter gross margin rate to be down approximately 175 basis points to last year, driven by freight headwinds as Bruce previously discussed.
Versus 2019, the rating -- versus 2019, the rate is expected to be down approximately 100 basis points, essentially all freight-related.
Recent shutdowns of the port of Yantian in China resulted in a significant increase in container rates that will impact our cost of goods in Q3 and Q4.
For the full year, we now expect a gross margin rate impact from freight of approximately 150 basis points resulting in gross margin rate being down approximately 50 basis points versus 2019 and approximately 100 basis points versus 2020.
We expect freight pressures to abate as we move forward and we continue to see other areas of gross margin opportunity, including promotional and pricing optimization and shrink reduction.
With regards to SG&A, at our projected sales levels, we expect Q3 and the full year to deleverage versus 2020, but both to show healthy leverage versus 2019.
In Q3, expense dollars will be up slightly to last year, driven by incremental expense investments in labor and in our forward distribution centers.
The full year SG&A expense dollars will be up to 2020 driven by the full year impact of the sale and leaseback of our distribution centers, additional supply chain expenses including investments in our new forward distribution centers, other strategic investments and higher equity compensation expense.
These increases will be mitigated by more than $30 million of structural expense savings, which remain an ongoing area of focus and priority.
We continue to expect 2021 capital expenditures to be around $200 million to $210 million including around 55 store openings, of which around 20 will be relocations.
Our capex outlook also includes the first wave of store upgrades, under our new Project Refresh program.
On a net basis, we expect total store count to grow by about 20 stores in 2021.
We expect to further accelerate store count in 2022 and beyond.
As Bruce said, our work has increasingly validated the opportunity to grow our store count materially in the coming years, and we are making the necessary investments to support that.
We continue to expect inventory to increase significantly versus 2020, reflecting very depleted levels of a year ago.
As Bruce referenced earlier, we are seeing strong early sales for our late fall and early holiday assortment, supported by higher inventory levels.
We expect ending Q3 inventory to be up around 10% versus 2019, continuing to reflect healthy turn improvement.
We expect a similar two-year inventory increase at the end of Q4, which will include some accelerated lawn and garden receipts, support Q1 sales and minimize the risk of further supply chain disruption.
We know we left sales on the table and seasonal over the past 12 months to 18 months, and we are heavily focused on recapturing those sales as we go forward.
As well as the impact in Q4 ending [Phonetic] inventory, these early receipts will drive around $6 million of additional supply chain expense in Q4.
Overall, our third quarter will be a challenging one, driven by supply chain challenges, resulting sales impacts and cost increases.
However, we expect our underlying business measured by our two year comp trend to remain strong, with healthy margins after adjusting for freight effects, supported by continued strong expense management.
We continue to work very hard to ensure we are well positioned -- as well positioned as possible for the all important holiday season.
And we look forward to continuing to demonstrate strong underlying performance in 2022 and beyond.

user
big lots q2 earnings per share $1.09.
q2 earnings per share $1.09.
qtrly sales of $1.46 billion with 2-year comp of 14%.
sees q3 loss per share $0.10 to $0.20.
qtrly ecommerce demand up 10% to q2 2020 and up 400% to 2019.
sees full year earnings per share in range of $5.90 to $6.05.

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