Release Date: June 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Improved gross margin rate by 190 basis points year-over-year due to lower markdowns and benefits from Project SpringBoard.
- Exceeded targets for operational initiatives, leading to better consumer perceptions and increased productivity.
- Secured a new $200 million term loan facility, enhancing financial flexibility.
- Achieved significant progress on five key actions aimed at business turnaround, including increased bargain penetration.
- Positive momentum in several categories, such as toys and grocery, driven by extreme bargains.
Negative Points
- Missed sales goal due to continued pullback in consumer spending, particularly in high-ticket discretionary items.
- Q1 comp sales trends were down 9.9%, missing guidance of down mid-single digits.
- Soft consumer environment with declining consumer confidence and sentiment, impacting overall sales.
- High assortment mix in underperforming categories like home furnishings, leading to muted overall results.
- Significant number of underperforming stores, despite 70% of stores generating positive four-wall adjusted EBITDA.
Q & A Highlights
Q: Can you quantify the performance and comps between bargains, IQstream bargains, and the rest of the box?
A: Bruce Thorn, President and CEO: Extreme bargains now represent 28% of sales at the end of Q1, nearly $1 billion in closeout sales annually. The goal is to reach 50% by year-end, equating to about $2 billion annually. This penetration is happening across all categories, with significant improvements in toys, hard home, and furniture. The focus is on leapfrogging price leaders in everyday essentials and food consumables.
Q: Is there any remaining value in the $200 million in assets that could be monetized?
A: Jonathan Ramsden, EVP, CFO & CAO: Part of the $200 million was used as collateral for the Filo term loan. There are still a few owned stores valued around $20 million and some equipment in the Apple Valley, California DC.
Q: Can you elaborate on the gross margin improvement throughout the year?
A: Jonathan Ramsden, EVP, CFO & CAO: Gross margin rate improvement is expected to accelerate from Q1 to Q2, with at least 300 basis points improvement in Q2. This is driven by reduced markdowns, benefits from Project SpringBoard, and lower freight costs. The improvement will continue in the back half of the year.
Q: Does achieving positive comps later this year require any improvement in the macro environment?
A: Jonathan Ramsden, EVP, CFO & CAO: No improvement in the macro environment is assumed. The improvement will be driven by extreme bargains, Project SpringBoard benefits, and lapping aggressive promotions from last year.
Q: How is the health of your core customer, and have you seen any changes in their purchasing behavior?
A: Bruce Thorn, President and CEO: The core customer, particularly lower household income customers, is still pulling back on large discretionary items. Inflation remains high, and credit card balances are increasing. However, there is some normalization in Q2, with traction in big-ticket items and trade-down behavior.
Q: How do you view the supply for closeout products for the remainder of the year?
A: Bruce Thorn, President and CEO: The closeout environment is robust, with a strong pipeline of opportunities. The Company is rekindling relationships and accelerating its penetration of extreme bargains, with no significant competition seen at this point.
Q: What are the key drivers for the expected positive comps later this year?
A: Jonathan Ramsden, EVP, CFO & CAO: Key drivers include the acceleration of extreme bargains, benefits from Project SpringBoard, and the abatement of promotional headwinds from last year.
Q: Are there any specific areas where product is particularly attractive in the closeout environment?
A: Bruce Thorn, President and CEO: The closeout environment is robust across all categories, with significant opportunities in food consumables, everyday essentials, hard home, soft home, and furniture. The Company is focused on extreme bargains and opportunistic buys.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
