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Big Lots to Upgrade Home Lines

Through customer surveys and improved capabilities on its recently re-launched website, $4.7 billion closeout retailer Big Lots is sharpening its fix on its more upscale customer demographic and will spend the next three years tweaking its merchandise mix and marketing to cater to the more affluent shopper.

That includes plans for a better quality assortment in domestics, including higher thread counts in sheets and better bath towels.

Home and furniture as well as electronics were the bright spots during the quarter, as the 1,375-unit chain's net income rocketed to $104.3 million, six times its net income of $14.7 million for the same period one year ago. For the full year, profit was $124.0 million, compared to a net loss of $10.1 million in 2005. (Results based on continuing operations only were somewhat less dramatic, as two major factors were not included — the activity of 130 stores that were closed in January, and the results of former Big Lots division KB Toys.) Comp-store sales rose 4.6% for the quarter.

"We made Big Lots a stronger company in 2006," said chairman and ceo Steven Fishman during the earnings call last week, emphasizing, "Some of the categories that were strong in the [fourth] quarter will be very relevant to our long-range strategies."

Potentially at the expense, square footage-wise, of some "more male-oriented hard line categories," he said, Big Lots plans to expand the footprint of domestics "to capture some of the upside volume that we're not getting today."

Home Textiles Today research pegged Big Lots' home textiles sales volume at $402.0 million for 2005.

Fishman noted that domestics, furniture and electronics "are not new categories for us, but were our strongest classifications in the fourth quarter. We're just scratching the surface, and expect them to lead our company in comps in the foreseeable future."

This shift comes upon the retailer having recently confirmed through research what it said it already believed — its core customer is not a lower-income or an ethnic minority. Rather, 75% are female and Caucasian, and have a higher household income than the national average.

About 80% of these customers shop without lists and for 30 to 60 minutes on average — describing the store as "fun" and as offering "value" — and saying they have lately seen more deals in the home and seasonal categories.

And key — that consumer is willing to pay a higher price point for products that have a recognizable value and/or brand. In fact, Fishman said, a suggested improvement that came from shoppers was a call for higher quality goods: "These customers are willing to pay more for quality and branded goods, and price point is not an inhibitor.

"It's about selling 400 TC sheet sets instead of 200 TC sheet sets, and a $6 towel rather than a $3 towel," Fishman said. "We're not walking away from opening prices. We still have a need and a customer. We've just shifted the mix of how much of that we have, and it is a lower percentage at the opening price point."

More than 30 tests that employ this strategy have already been implemented and the results thus far support this move to higher ticket offerings.

Global sourcing will play a role in this expanded merchandise mix, Fishman added.

"Our new global sourcing group will be very keen on improving the quality of our import business in seasonal, furniture and some of home and hard lines," he said.

New marketing initiatives will also play a role here. "We will run same number of circulars as previous years, but we're making some changes to our TV campaign, shifting more dollars toward better quality or more widely viewed TV shows," Fishman said. Additionally, Big Lots will continue using its online Buzz Club as a tool to sign up new members and alert them about new merchandise and offerings at the store level.

In September, Big Lots overhauled and re-launched its www.biglots.com website. As the fourth quarter came to a close, the customer list grew to more than 1 million from 250,000.

Over the next three years, the company plans to focus on refining its merchandise mix, marketing efforts and internet capabilities, rather than boost its store count.

"Our store count will likely contract in each of next three years," Fishman said. "Right now, real estate is not a value. We're not afraid to open new stores with our cash position. We could open a significant amount of new stores. But I absolutely will not overpay for real estate. When the market softens and our offers look more appealing to landlords, we'll be ready."

During the fourth quarter, Big Lots opened one new store and closed 29 stores; and over fiscal 2006, it opened 11 stores and closed 37 units.

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