Andy Regrut - VP, IR Lisa Bachmann - EVP, Chief Merchandising and Operating Officer Tim Johnson - EVP, Chief Administrative Officer and Financial Officer

Vincent Sinisi - Morgan Stanley Dan Wewer - Raymond James Patrick McKeever - MKM Partners Paul Trussell - Deutsche Bank Peter Keith - Piper Jaffrey Joe Feldman - Telsey Advisory Group Brian Nagel - Oppenheimer Sean Kras - Barclays

Ladies and gentlemen, welcome to the Big Lots' Q1 2018 Earnings Conference Call. This call is being recorded. During this session, all lines will be muted until the question-and-answer portion of the call. [Operator Instructions] At this time, I would like to introduce today's first speaker, Andy Regrut, Vice President of Investor Relations. Please go ahead.

Thanks, Jake and good morning, everyone. Thank you for joining us for our first quarter conference call. With me here today in Columbus are Lisa Bachmann, Executive Vice President, Chief Merchandising and Operating Officer; and Tim Johnson, Executive Vice President, Chief Administrative Officer and Chief Financial Officer. Before we get started, I'd like to remind you that any forward-looking statements we make on today's call involve risk 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. Our commentary today is focused on adjusted non-GAAP results. For the first quarter of fiscal 2018, this excludes after-tax expense of $8.7 million or $0.21 per diluted share associated with the settlement of shareholder litigation matters and the retirement of our former CEO, David Campisi. Reconciliation of GAAP to non-GAAP adjusted earnings are available in today's press release. I'll now turn the call over to Lisa for an overview of our results from a merchandising perspective.

Thank you, Andy, and good morning, everyone. Q1 was challenging for our company, with comp store sales declining 3%, compared to our guidance to flat to slightly down. As we discussed on our last call in March, the month of February was difficult, primarily due to furniture softness and intense competition over the Presidents’ Day promotional period. And while company sales trends did improve from February to March to April, the rate of improvement was dampened by cool wet weather and it was not enough to make up the slow start to the quarter. We know our shortfall in March was solely in sales of seasonal merchandise and we know April was the coolest April on record in the last 20 years. Unfortunately, when transactions are down in our ownable category of seasonal, lawn and garden in summer, there is an unfavorable halo effect on other categories in the store as well. We are pleased to report the sales trends in May have improved now that the warm weather has finally arrived. From a merchandising perspective in Q1, soft home was the best performing category, up mid-single digits again in this quarter, with strength in flooring, bath, window and home organization. Congratulations to Martha, Kevin, and the team for another strong quarter. The expansion of additional space is proven to be a good decision, and our product assortments continue to improve and resonate with Jennifer as we bring trend right, coordinated assortments to her. Furniture was down low single digits, impacted heavily by February. Sales improved in March and April with the combined period up mid-single digits, with positive performance in all four departments of upholstery, mattresses, RTA and case goods. For the quarter in total, it did not deliver to expectations predominantly due to competitive pressures in February and a lack of newness in many core assortments. In Q2 we are increasing the amount of newness in recliners, motion sofas, sectionals and sofa love seats. Furniture in Q1 really lived the tale of two cities, experiencing a double-digit comp increase in our store of the future format. As a reminder, the product assortment is similar to the balance of the chain. In these remodeled stores, our strategy and new brand identity is introduced and Jennifer loves it. From our merchandise vignettes to a cleaner, better organized stores to friendly staffed departments, it's just an overall more pleasant shopping experience. Foods, consumables and Hard Home were also down low single digits. We’re seeing bright spots in each of these businesses for instance our new inline assortment of carbonated beverages and food continues to do very well, as does the expanded branded OTC offering in consumables. For each of these businesses, traffic was the unfavorable halo effect I mentioned a moment ago, it was challenged. Similar to other retailers selling products for outdoor living, our seasonal business was challenged by cooler wet spring weather during the quarter in most major markets. While comps for the quarter were down low double-digit, we do believe in our assortment and the team. Our confidence is based on three observations, one, strong May comp up double-digits when the warm weather finally arrived. Two, strong business online, where our assortments are expanded and performing quite well, and three, strong seasonal performance in the store of the future markets particularly Phoenix, Charleston, Myrtle Beach and now Austin. Electronics, toys and accessories comp down for the quarter as well. This business continues to be a space donor to our ownable and winnable categories. And while our assortment and inline productivity have really improved, it's not enough to offset the reduction in linear footage. And finally, our e-commerce business. It has been two years since we have launched this online platform and we have been diligently executing our strategy. Q1 was our best quarter to-date with the highest level of sales and our smallest operating loss. Congratulations to Eric and the entire team, who have worked very hard to expand our assortment to bigger, bulkier products to creative fulfillment option including SDF which is our supplier direct fulfillment and non-parcel where we are introducing shipping indoor and outdoor furnitures directly to Jennifer’s home. From a marketing perspective, we started to introduce Jennifer to our repositioned brand as a new kind of community retailer with the traits of friendly service, trustworthy value and community. This introduction will continue into Q2 and for the balance of the year. And it's being executed through collaborative cross functional teams that include not only marketing but our storage and field organization, our distribution centers and all functional areas in the corporate office. Serve Big. Save Lots is our brand line and is embedded in our communications on television, through digital channels and in-store messaging. Our marketing and in-store presentation are featuring affordable solution, coordinated products that assists Jennifer. And finally, Store of the Future is on track to complete approximately 180 stores this year. Mike and Nick have done a very good job, leading the team which has stayed on schedule and on budget. We remain encouraged by the results in Phoenix and Columbus, as well as by results in recently completed markets of Austin, Charleston, and Myrtle Beach. Sales growth continues to be balanced between increases in both traffic and basket. Furniture, seasonal and home remain the best performing categories accounting for nearly 80% of the sales increase in the store. Jennifer has told us she wants ideas when decorating her home and the store of the future showcases our ownable collections with trend right products that can help her. In addition, the qualitative data from her has been overwhelmingly positive. We’re currently completing remodels in four markets and we have six additional markets planned for the summer. I’ll now turn the call over to TJ, for insight on the numbers and our guidance for 2018.

Thanks Lisa and good morning everyone. Net sales for the first quarter of fiscal 2018 were $1.268 billion, a decrease of 2.1% versus the $1.295 billion we reported last year, with the decline resulting from a combination of lower same store sales and fewer stores opened year-over-year. Comparable store sales for stores opened at least 15 months plus e-commerce sales decreased 3% which compares to our guidance of flat to slightly down. Probably makes sense here to talk about trends during the quarter. At the time we set guidance, we knew February which was down mid to high singles primarily for the reasons mentioned, furniture and President’s Day along with difficult weather and seasonal. Our Q1 guidance assumed Marpril, March and April combined would be up low singles. We assume furniture trends would improve which they did in Marpril. Our guidance also assumes seasonal trends and weather would improve which did not happen. Marpril was actually down slightly with the entire miss of guidance reflective of one, seasonal merchandize sales; two, seasonal transaction and the associated balance of store halo, and three others seasonally sensitive merchandize such as fan, sandals, summer toys et cetera. Adjusted income for the first quarter was 40.0 million or $0.95 per diluted share which compares to our guidance of a $1.15 to a $1.22 per diluted share and to income with 51.5 million or $1.15 per diluted share for the same period last year. The gross margin rate for Q1 was 40.4% down slightly from last year, primarily the result of a slightly higher markdown rate in the sales miss in our seasonal category which is a high margin business for us. Total adjusted expense dollars were 456 million or up 2.5% the last year with the increase reflective of investments in our store of the future initiatives, higher domestic transportation rates and fuel cost and higher occupancy cost year-over-year. This result is consistent with our expectations and guidance for deleveraged highlighted on our last conference call. Investments in our business in the form of store of the future, cost pressures in the domestic transportation market and reinvestment of tax reforms savings which will begin in Q2 are all decisions or call outs planned for by the business. The adjusted expense rate was 36.0% compared to last year’s rate of 34.3% with the deleverage a result of the increases I mentioned in the delevering impact of a negative 3% comp. the adjusted income tax rate for the quarter was 27% compared to last year’s rate of 34.1% with favorability resulting from corporate tax reform. Moving on to the balance sheet, inventory end of the first quarter of fiscal 2018 at 815 million compared to 836 million last year with inventory levels per store increasing 3%, a result of the sale shortfall and seasonal and planned increases to support new merchandize set in other merchandize categories. Our inventories are well positioned for Q2 sales in all businesses and we are monitoring glide paths of seasonally sensitive product very closely. During Q1, we opened one store and closed two leaving us with 1415 stores until those selling square footage of 31.3 million. Capital expenditures for the first quarter of 2018 was $31 million compared to 22 million last year and depreciation expense was 28.5 million essentially flat for the last year. We ended the first quarter with 65 million of cash and cash equivalents and 174 million of borrowings under our credit facility. This compared to 66 million of cash and cash equivalents and a 116 million of borrowings under our credit facility last year. Our use of cash generated by operations was focused on higher CapEx and returning cash to shareholders. In terms of cash return to shareholders, I’ll remind you, we have a $100 million share repurchase authorization due to the uncertainty around our Former CEO situation we did not repurchase shares in the first quarter of fiscal 2018. We did however return $14 million to shareholders in the form of dividend payments primarily in the month of April. And as noted in the separate press release this morning our Board of Directors declared a quarterly cash dividend for the second quarter of fiscal 2018, also at $0.30 per common share. This dividend is payable on June 29th to shareholders of record as of the close of business on June 15th. Now turning to forward guidance. For Q2, we expect income to be in the range of $0.60 to $0.70 per diluted share, compared to last year’s income of $0.67 per diluted share. Our guidance assumes comparable store sales in the range of flat to plus 2%, compared to 1.8% increase for the same period last year. Sales comps remain today are within this range. The gross margin rate for the second quarter of fiscal 2018 is expected to be down slightly from last year and expenses as a percent of sales are expected to be higher than last year. For fiscal 2018, we have updated our guidance for adjusted income in the range of $4.50 to $4.70 per diluted share, compared to fiscal 2017 adjusted income of $4.45 per diluted share. This guidance is based on a comparable store sales increase of approximately 1%. We believe, this level of financial performance will resolve in cash flow of approximately $110 million to $120 million. So, in summary, Q1 was a challenging quarter with comps down 3% for the first time since 2013. We understand the why and may results today and our plans for the balance of the year we are just expecting comp growth for Q2 through Q4. We’ll focus on what we can control and even in a difficult quarter there have been some very encouraging strategic progress made in accomplishments. First, the introduction of our new brand identity across our entire fleet of stores and also reflected in our new corporate headquarters. It will help us communicate the future strategic direction of Big Lots, clarify for Jennifer who we are and what we stand for and attract in the retain the best and brightest talent to help us to build upon our already strong corporate culture. Next, our strategic investment in Apple Valley distribution center in California is moving along as planned and Carlos, Todd and the entire team are on time and on budget. Efficiency, supporting future growth and improving service to our stores and Jennifer are ultimately the goals here. And lastly, our store of the future program continues to speed ahead with results that remain at or slightly better than our expectations both qualitative and quantitatively. Jennifer’s feedback continues to encourage us and with full board support we are moving strictly and strategizing how we could possibly accelerate and increase the number of remodels in new stores we opened in the store of the future format as we move into 2019. With that, I’ll now turn the call back over to Andy.

Thanks TJ. Okay Jake, we would now like to open the lines of questions.

[Operator Instructions] and we will hear first from Vincent Sinisi with Morgan Stanley.

Good morning guys, thanks very much for taking my question. So, appreciate the color on the headwinds in 1Q. Just to make sure those, so it seems like kind of the months February like you said you kind of knew that when guidance was given. Can you give any further thoughts around kind of the missed versus plan over the other two months in terms of was it really kind of all more the weather and the seasonal, or it was maybe the extension of some of the furniture and mattress promotions in those months also maybe a bit higher than what you expected and kind of what are you seeing there now?

Thanks, Vini for the question. So big picture, I think our March and April combined this way. Seasonal was just roughly 15% of our business comp down double-digit. That impact on comps alone total company is about 2.5 or 3 points. So, when we move from Marpril, which was down about 1.5% and we move into May, which is now solidly in positive territory including our e-commerce business, that sole difference is now seasonal its comping up double-digits. So, from down double-digits to up double-digit is about a 2 to 3-point swing in total company comps just in sales of that category alone. Also, in addition to that, we know that seasonal transactions in the first quarter were also down double-digits. The importance in understanding that is a basket that has seasonal product in it, Jennifer's shopping the entire store not just seasonal. So, on average of an average basket in a seasonal purchase is about $55 or $60 or nearly twice our company average. So that suggest to us when we look into the basket we know she is also buying food, consumables, potentially soft home or other categories. So, in addition to the seasonal sales that seasonal transaction has pretty significant value. Seasonal can be like furniture can be a deferable trip, meaning if weather is not great or if I am not ready for it for whatever reason, I can look at it or give Big Lots a chance the next time I am in there. So it really is a straight forward with that Vini. The second part of your comment or question around furniture, we actually saw furniture comps accelerate to mid-single-digits in the March-April timeframe, overall across all nine weeks of those two months. So, we think less about the competition that was prevalent in February and its impact about March and April and we come back slowly to sales of seasonal product and that halo that’s associated with the transaction. That’s the single biggest difference from last call to end of quarter of Marpril.

Okay, very helpful. Thank you, guys, good luck.

Yes, thanks.

And now we’ll hear from Dan Wewer with Raymond James.

Thanks. TJ with the success of the store of the future, what does the company need to do to accelerate the number of remodels next year, what kind of resources would you have to add to ramp up the roll out?

Good question, Dan, and sounds like questions we get often from our collaborative Board and they’re very supportive of the store of the future initiative and we had a lot of dialogue in this topic. Big picture I’d highlight a couple of things that we were already working on in preparation or anticipation of continued good results. First off, we've invested in I’d say more real estate resources in the field to manage construction. We’ve also invested in store operations leadership and pull people out of day-to-day responsibilities for stores or districts and put them fully focused on remodeling markets and teaching and training our teams so that when they’re complete, the operations can continue seamlessly and provide that great shopping experience. And I think the third thing is really looking at from a home office standpoint or back there in Columbus making sure that whether it’s areas of merchandize, merchandizing, merchandizing presentation or or from an allocation perspective we’ve got enough eye balls on the floor plans and looking at results. So, we proactively look at investing in those three areas as part of our 2018 operating plan and in anticipation of these good results. Now it’s more about identifying the markets and making sure that we’ve got people lined up logistically to execute more markets than 2018 and additionally it's some of the dislocation out there in the real estate market with companies going out of business or closing stores, creates more opportunities for us to open either more new stores in new markets or relocate in existing markets we are definitely interested in that proposition too. So, you’ll recall from our prior analyst conference, we were looking at touching about 15% of the fleet of stores each of the three years that are planned so '18 '19 and '20 we think we can do more than 15% next year and that’s what we’re looking on with Nick and Mike and the teams as well as Martha and Michelle and their teams because they’re very closely involved in terms of laying out the store. Does that answer your question?

You did, thank you. You quantified the success in furniture and store of the future during the period. If you look at the store in this entirety, how did their same store sales perform to the rest of the chain?

I’ll say across the store in almost every category we’re seeing incremental lifts in business. I’d say the only areas that are flattish or can be down in certain stores depending on how the store has changed and the layout has changed, would be food and/or consumables. But even in those situations Dan we’re looking at flattish or maybe slightly down across the stores that have been completed. It's really about the move to the front of the store of those three most visible businesses with furniture, soft home and seasonal and it's about the overall traffic or transaction lift and the opportunity for more people to shop the balance of the store as well. So, we look at that as a win-win. I also think looking forward and this maybe a question later, so I’ll preempt it now, you will see in the next few days, you will see new and I’ll say more aggressive or more clear communication from a marketing standpoint around rebrand opening in these markets as they have been completed. We’re actually going to invest in Columbus, Phoenix, Austin Charleston, Myrtle Beach and even some of the markets that we are, we will have coming online in the next few weeks around a more clear aggressive marketing message. You may recall, we were moving very quickly last year to get stores up and running and the traffic that we were seeing or are seeing is really more about word of mouth in about our existing customer base. We are now ready with Steve on-board as our new Chief Customer Officer to communicate why Jennifer ought to give us another chance or why she ought to shop Big Lots more frequently with a more aggressive message. So that’s a future opportunity to try to help these stores get even better as we move forward.

And now we will take a question from Patrick McKeever with MKM Partners.

Just a question on gross margin in the first quarter and then the second quarter guidance as well. I was surprised to see it hold up as well as it did in the first quarter just given the weakness in the seasonal Merchandise. And then TJ on the second quarter, I think you said down slightly, but also mentioned monitoring the glide past, I guess, for markdowns. So, I’m just wondering, if you could maybe talk about that a little bit as well and how confident you are that the gross margin can continue to hang in there pretty well? And then my second question is just wondering, if you could give us some color on the performance of food and consumables in the store of the future?

Sure Patrick. I’ll start on the margin piece and then ask Lisa to chime in on food and consumables. First, thanks for the positive confidence on first quarter gross margin performance, the entire deep BPARM organization we think has done a very good job of controlling what they can control from a cost perspective and really watching closely their markdown levels along with their store partner. So, it really is about, we’ve seen, I’ll say stable IMU or initial mark-up. We continue to see favorable shrink results in our stores. So, could kudos to the stores and asset protection team. So those are good guides in the results or better than plan or little bit better than last year. The markdown piece is really is about the offer the delevering impact for the negative 3% comp. Think of it is, we do have a certain amount of fixed markdowns that occurs as a normal part of running our business. Additionally, we did a little bit better during promotional periods i.e. friends and family or other events which typically are a little bit lower margin, then some of the base business periods. So, a lot of puts and takes, but I think manage very, very well in first quarter. Second quarter, we expect a similar scenario to kind of play out with the wild card being sell through a seasonal product. So, we will monitor closely our glide paths. We will move the units that we need to move the question is, what average item retail will that be at. Obviously, we have a point of view and that’s embedded in our guidance. But we will do the right thing in terms of managing units in inventory. So, we exit second quarter clean and we give the merchants in our stores an opportunity to have clean inventory going into fall season and delivering newness in terms of back to campus and back to school. So that probably thinking about margins for second quarter. In terms of food and consumables I’ll kick it over to Lisa.

Thanks TJ. Patrick, I think your question was pertaining to food and consumables and the performance in store of the future. And as TJ had mentioned across the board we’re seeing I say low single increases to slight decreases in the food and consumable business in store of the future. I think it's important to note that in most of our stores that we remodeled the position is now in the back of the store. But again, we’re happy with the performance with that move to the back, especially when you see what has happened with the three ownable, winnable categories that have moved to the front of the store.

Are there any learnings from the store of the future, as it relates to food and consumables, that you may end up bringing into the rest of the store base, before the retrofits, the remodels become more material part of the company?

We continue to believe that we can win in this category as it relates to both store of the future and the balance of our stores. And close out continue to an important part of that value proposition for us. But also note that consistency in our assortment is very important and as a result we will continue to expand our never-out in both branded and private branded categories. But this is really happening in both store of the future as well as balance of the chain.

Got it, okay thanks very much Lisa.

And now we’ll hear from Paul Trussell with Deutsche Bank.

Good morning. wanted to just follow-up on the second quarter guidance from a top-line standpoint, believe comps up flat to plus 2. If you can maybe just talk a little bit more about your expectations of certain categories to make that 0 plus 2, is there other things we say keep in mind, especially given that the seasonal business is up to such a strong start of double-digits in May, what are the other puts and takes to your view on 2Q. And then second, obviously the first quarter was disappointing and you missed expectations from an earnings standpoint, can you walk through any of the metrics that you have changed in terms of your outlook on a go forward basis, versus where they started at the beginning of the year. Thank you.

Sure, thanks for the question Paul. I think from our point of view when we think about second quarter comps in particular, and I am not going through and provide comp forecast by category, but I’ll speak in big chunks to say. What gives us the confidence around Q2 are really three things, first, May results to-date now that we have somewhat of the level plain field on weather. I think second, store of the future results which we will have more stores come online in second quarter in the comp base and more stores come online in third and fourth quarter in the comp base. As we move through the year that becomes a bigger part of the comp, that’s in the plan, that’s no reason not to continue to expect that based on results to-date. And I think the third thing as Lisa mentioned in the prepared remarks, as we move through the second quarter we know we will be delivering more newness particularly in upholstery category, we know some of that product is already been passed and is expected to perform so the trends that we see coming out of the month of May should actually improve as we move through the quarter in our furniture business. So, I think those three things Paul are the single biggest things that give us confidence around forecasting second quarter. I do want to say that you know right up front we know seasonal has to be a big part of second quarter. Its double-digit comps May to date and we see no reason why that shouldn’t be the result for the quarter as well. So, we know that’s a key driver and we have the ammunition to do that from an inventory perspective. I think the second part of your question Paul, as we look forward in the guidance, what’s really changed I think if I understood you right. Let me address that by saying first off one of the things that has not changed is our commitment to investing in the business both in the form of introduction, continued introduction around brand identity, continued focus in roll out of the store of the future and also investments and things like Apple distribution center and really some of the strategic things that we want for customers and forward specifically in marketing or e-com. So, we are not allowing first quarter results or concerns around EPS forecast for the balance of the year to slowdown or change any other investment pieces in the strategy I want to be really clear there. Having said that, as we move through the balance of the year, we do expect continued pressure around transportation particular and fuel costs and that’s largely reflected in our forecast. We continue to expect to invest in our associates through tax reform and primarily through improving the wage rate in many, many of stores. Unfortunately, one of the things that’s kind of part of the put and take equation is based on the slower lease starts to the year, we do expect a lower bonus payout this year where many of our associates and that’s unfortunate because everybody is working extremely hard and first quarter was largely outside of their control. So those are some of the big puts and takes Paul. I don’t want to go through every line item in detail in the model but I do feel confident that overall from an expense management standpoint again, there are puts and takes that the team is focused on it and the performance in first quarter was largely very close to what we had embedded in our guidance 90 days ago.

Now Peter Keith with Piper Jaffrey will have the next question.

Hi, thanks good morning. Maybe just to piggy back off Paul’s question, furniture -- excuse me, is 20% of sales for Q2 up double digit would imply you kind of had 2% or more with that alone. So, the guidance for the quarter and also where you are tracking in May would suggest that the rest of the businesses flat to down. So, can you give us little color on how the rest of business is looking?

Yeah, I think what we mentioned earlier Peter I’m not going to go through and forecast every category for you but I think again the impact of seasonal coming out of Myrtle into the month of May is very encouraging for us. That needed to happen when the weather got better and so we were encouraged by that and because we were very confident in the team and the assortment, I think when we look at other categories in the store not significant trend changes coming out of Myrtle going into the month of May. Again, this is albeit at 1.8% comp, it is our most difficult comp comparison of the quarter. And additionally, May, comping up against May, May was our best month for the second quarter last year. So, there are a lot of data points to point to and give us confidence that we should be able to comp this quarter, that’s reflected in guidance. But again, there are puts and takes by category. And some of them honestly Peter are intentional or space changes from prior year or inventory changes to fund other categories from prior year. So, it’s not a straight forward as the math that you and I have gone through.

Maybe just a little more color on Memorial Day. So, with President's Day, you guys had cited some promotional activity in the marketplace that was slightly disruptive. And from what we can tell that same promotional activity continue here with Memorial Day and my sense is it will continue for July 4th and potential for Labor Day. Were you able to better react against that or how is the overall furniture category to form over this most recently can with regard of the promotional cadence?

Overall, I’ll take this. Overall, we were happy with the Memorial Day weekend from a total company perspective. And leading into the weekend, we were happy with our performance and furniture as well. We were a little bit more aggressive with the offering that we have for this weekend especially in our mattresses. We had a save up to $400 promotion versus what we, normally have done last year, the save up to 300. And so again, I think we were able to compete with that albeit, we still know that there were some very, very aggressive promotions set to place from a competitive standpoint. But as it is Memorial Day and as we move into second quarter we’re very confident about the furniture business. I talked earlier about the need for newness and that newness is hitting now, it’s hitting throughout second quarter and quite honestly throughout third quarter. So, we’re very, very confident about what the business looks like going forward.

Now moving to Joe Feldman with Telsey Advisory Group.

I wanted to just ask on e-commerce, I know still relatively small. But you did discuss that, you had your highest sales and smallest operating loss this quarter. Can you maybe share I am more interested in the profit side of things? How you’re able to manage that and maybe some areas you’ve seen some improvements?

Yes. I’ll touch on a couple of the metrics part of it. And then Lisa and team has done a lot of work around the assortment. Now that changed during second quarter and are doing first quarter and that’s a big, big benefit and not just the quarter, but as we think about second, third and fourth quarter. So big picture Joe, first off, the nice benefit we have from an e-commerce standpoint and how that business is evolving, it has evolved towards some of our higher margin categories. So, most important online to Jennifer during the first quarter and order was seasonal by a large margin, furniture and soft home in close proximity to each other depending on the week of the day. So, two of the three of those are our best margin categories, that’s big plus stores. I think the second thing from our view anyway the website and the experience has continued to improve for Jennifer, including a lot of different aspects, which I am sure Lisa will touch on as well. I think third, from an expense standpoint and really managing and controlling what we can control, our productivity in the distribution side of the business right here in Columbus, which is our only shipping point currently was very good and our transportation team continues to work very, very hard on creative ways to keep that shipping cost under control. I mean if we were to rewind the clock and think about the business when we started two years ago and imagine we would be sitting here with the day and day out offer it free ship at $99 and continuing to grow volume. I think that would surprise us, but that’s what we’ve done. And behind the scene, Carlos and his team and Mike have done a great job of managing the cost side of that and working with our vendor partners. So, I am encouraged that first quarter volume was actually higher than holiday in fourth quarter and we have plans for second quarter to be higher than first quarter, because of the assortment that we have.

Yes, again I’ll add a little bit of color on the product side. Q1 was very exciting for us as we really introduced and expanded assortment for Jennifer predominantly within furniture and within seasonal giving her additional options online versus what we have in store. We did that through extended isle as well as utilizing some prior direct fulfillment and it was very, very successful. And we look to continue to grow upon our supplier direct fulfillment as we move through the year. Also, in May we introduced what we refer to as non-parcel shipment within our supply chain, which enables us now to be able to ship directly to Jennifer's home, larger parcel sofas, both in indoor, outdoor furniture and out of the box we saw some really great response to that. Lot of improvements being made to the site as TJ mentioned, we’re really excited about displaying for her all of our affordable solutions and how she can pull together product in her home and we have certainly learned that as Jennifer looks to us for guidance on how to decorate and we’re really leveraging that assets to help her to do that. So again, very positive results in Q1 that we’re going to continue to grow and look to for Q2 enhancements as well.

That’s great, thanks guys. And then another follow-up. I know you guys have mentioned in the furniture side meaning or wanting to refresh some of the product areas and you kind of gave maybe some of the styles or trend that you have. What is that mean to the current inventory situation, Mike will there be any clearance that we’ll have to work through or is this just kind of settle mixing in some newness?

Great question. We have been planning for this newness, so yes there is some liquidation that occurs but it is very carefully done through how we advertise and also how we begin to pull back on receipts as we introduce newness. So, all of this is contemplated, you know it’s in our numbers. So, it’s just as I said earlier we would have liked it to happen a little bit sooner but we’re well positioned to introduce the newness in Q2 and Q3.

Thanks. And then if I can sneak one more in. I noticed you guys didn’t buy back stock this quarter, any explanation or thoughts on that program at the moment?

Certainly, Joe this is TJ. I think we mentioned in our prepared remarks I mean in consultation with the Board, we thought it was appropriate given the uncertainty around the situation during early March and on into late March and April that we stay out of the market. Maybe a conservative approach but one that we felt was appropriate given again the sensitivity around whatever the ultimate outcome of that discussion and evolutions was going to be. So that‘s the simple reason, obviously we have a history as you know very well Joe of returning cash to shareholders through share repurchase programs. I’m sure you also remember that we purchased about a $150 million of stock last year at an average price in the mid to high 40s. So, we look at the market today and based on our confidence in the strategic outlook going forward particularly around some of those key initiatives I mentioned store of the future, ownable categories, introduction of brand identity and we look at where the stock is today and obviously going forward we would see that as an opportunity based on prior share repurchase programs and based on our and the Board’s confidence in the strategy looking forward.

Alright, thanks and good luck with this quarter guys. Thank you.

Thanks Joe.

And now we will hear from Brian Nagel with Oppenheimer.

Hi, good morning. Thanks for taking my question. I only have two couple of questions, I'll shove into one. First up, obviously a lot of discussion on the weather and the impact of weather upon your business here in the first quarter. We’re seeing now what seems to be a nice rebound in that seasonal category early in Q2, but the question I have there is as you look at the business do you think the sales that did not occur in Q1 were just simply delayed into Q2 or is there some potential loss business there? Then the second quarter I have and again we’re talking about weather, anything you’re seeing with regard to price competition within your sector. I mean clearly Walmart has been more aggressive in pricing and is that the absence of that company or others having any impact upon your sales or your go to market strategy? Thanks.

Sure Brian, this is TJ and I’ll take the first part and then Lisa and the merchant teams are watching very, very closely pricing in all categories in all competition. From a weather perspective I would love to imagine a scenario where those sales are just delayed from Myrtle into May and June at full ticket. I don’t think that’s realistic. So, I think that our forecast contemplates obviously moving through the unit inventory we have but our expectation is that it will be done at a lower average item retail than originally planned, because we have more units to work through with Jennifer in a shorter timeframe. So, our expectation is that units will move, inventory levels will come down, we will stay on glide path, but we will likely do at a slightly higher markdown rate and a slightly lower average out on retail.

In regards to pricing question and what’s happen from a competitive standpoint. Our team is out comp shopping all the time. So, we certainly are seeing some of the prices and key categories being very competitive. I think the one thing that we look to is part of our opportunity and close out is where we are able to very much offer an important value proposition. So, if products are coming from closeouts, we’re looking to -- we’re still are able to be below where our competitors are. And then for the most part, in our never-out products, we really work to be very competitive to those big box retailers. And our team gets very, very creative on how we can stay competitive and margin mix and there is a lot that we put into that. But we’re also seeing in some cases in certain commodities that where prices are going up, retails are also going up. So, it’s a constant evaluation and again, I think our team is very much on top of what’s happening in the marketplace. And we’re very confident in our ability to respond and react and creatively mix within our current model from a margin standpoint.

If I could squeeze one more question in, it’s a bigger picture. But I wonder more interesting aspects of the call is the success you’ve had with the store of the future particularly during Q1. If the bigger, I understand that one of the biggest pressures upon your business was weather, something largely out of your control, the store of the future performance much better what is it about that new store format that allows you to perform better in a weather impacted period?

Great question. So, I think first of in full transparency, when we talk about the full markets that we have the most information on one is in Phoenix, Arizona which would be difficult to play the weather card in just full transparency. And then two more of them are han in the Southern parts of the country, where again, there is a better chance of it being warmer earlier. The fourth being here in Columbus and we know very well, it’s been a cool spring, here in Columbus we probably have gone right from winter to summer, the way it looks. So, having said that though what I think from our point of view definitely impacts store of the future are a number of things. But first off, putting those three big businesses right in front of the stores. So, Jennifer clearly knows what we stand for and what categories we want to own is step one. I think step two is the, I’d say there the adjustments for the changes to the layout of this store to provide not only front and center but often times more footage to those categories not necessarily in terms of inventory, but just in terms of easy of shop and a better experience for Jennifer. I think the third thing is the power of our teams and our associates in those markets is huge. We go out and meet with every one of the markets in advance of them starting their store of the future remodel and help them understand the why, help them understand what we’re investing in, help them understand how their store is going to change and what our expectations are. And without fail we have done this in 10 markets now the introduction I mean. Our store associates are a powerful aspect of the company and they are excited about their store changing, they say great ownership in it and they communicate that to Jennifer, each and every day when she comes into the store. You are seeing in store of the future remodels, you are seeing our future brand identity and our future strategy and expectations real time. Again, it's about the future but it can only get better from here for the marketing reasons that I mentioned that Steve and his team are going to bring there. So, I think there’s a lot of factors Brian that play into the success of the store of the future, but clearly, she is seeing, Jennifer is seeing a cleaner, more organized easier shop store that is reflective of where we want to go, not where we have been.

And we have time for one follow-up question, and it will come from Sean Kras with Barclays.

Good morning and thanks for taking my question. Maybe I missed this earlier, but did you say how many stores were in the store of the future format at the end of the first quarter and then a related question on that is how many more will be added this quarter?

Sure Sean, this is TJ. We did not mention that in our prepared remarks. But at the end of the first quarter let’s say we had approximately 30 to 35 stores I have seen approximately because there are a couple of stores candidly Sean that we had to close all together and reopen and I don’t remember those reopen within the quarter or outside the quarter. There is another I’ll say 45 stores give or take that are in process right now, which leaves us about 63 stores the remaining balance of year and again I am speaking about the stores that has been remodeled, obviously we are opening new stores throughout the year and the majority of our new store openings are in front of us. So, our evaluation of the success of the program is really based on those four markets that were fully completed for the majority of first quarter, two of those markets that we completed last fall, and we’ve got a fairly decent run way on about 35ish stores to understand. I think another point to mention here is, we’re focusing a lot of our time and attention on the results after the remodel is complete. But I don’t want to underestimate the importance of the process and how well Nick and his team with lot of cross functional effort to really relay the store candidly while its open, kind of like changing the tires while the car is driving down the road, a lot of this work, most of this work is done at night however, we have to be ready for Jennifer every morning during this process so to have stores have minimal if any disruptions of sales volume during the four to five to six week, process depending on the store that we’re remodeling it, that’s a big, big win. I am sure you have been in stores that are being remodeled and you can tell in many of our stores it's difficult to tell, other than the categories in different place the last time you were there. So, I think that minimal disruption has been key but also evaluating those 35ish stores that have been up and running for at least a quarter if not more is what we’re basing our analysis on.

Thanks for that color, that’s very helpful. Then just a quick follow-up, something that hasn’t copied on the call, just the relaunch of the rewards program in the fourth quarter last year, could you give us an update on enrollment trends and also what you’re seeing in terms of frequency and spending from these customers?

That’s a great question, well done. We regained or did the rewards program last year around about November 1st and candidly Sean all that’s happened since there is signups have gone up, ease of communicating with Jennifer has increased. Our store teams are more engaged in encouraging royalty participation and as a percent of our business, loyalty or rewards penetration has increased fairly significantly. We think this is a big opportunity for us again as we move through 2018 and move into 2019 to encourage just one more shop from Jennifer. We have roughly I think some round numbers about 15 or 16 maybe 17 million members now that we have the opportunity to email on a fairly regular basis and that’s where we’re focused. It also gives us an opportunity Sean without going into too many details because it's still very new to try to communication to these customers outside of email and other social or digital channels. So, a lot of learnings are going on right now for our business and for Steve and the team and this is a very robust topic as an opportunity with our Board of Directors over the last two days. So, we’re encouraged by the opportunity that’s in front of us with the royalty programs. So more to come but good catch in terms of asking the question.

Thanks for that and appreciate you guys squeezed me at the end here.

Okay. Thank you everyone, Jake would you please close the call with replay instructions?

Of course, ladies and gentlemen a replay of this call will be available to you by 12 Noon Eastern Today. The replay will end at 11:59 PM Eastern on Friday June 15th 2018. You can access the replay by dialing toll free USA and Canada at 18882031112 and enter the replay passcode of 5522371 followed by the pound sign. International callers can dial 17194570820 and enter the replay passcode of 5522371 followed by the pound sign. Ladies and gentlemen this concludes today’s presentation. Thank you for your participation and you may now disconnect.