Big Lots Comparable Store Sales Increase 2.9% - Will Close 41 Stand-Alone Furniture Stores

Furniture World Magazine

Big Lots, Inc. reported retail sales for the five weeks ended October 1, 2005 of $385.3 million, a 7.7% increase compared to retail sales of $357.6 million for the same period in fiscal 2004. Comparable store sales for all stores open at least two years as of the beginning of the fiscal year increased 2.9% in September, with the value of the average basket increasing 4.5% and the number of customer transactions decreasing 1.6%. Retail sales increased 6.8% to $690.8 million for the nine-week quarter to date period ended October 1, 2005, compared to $646.8 million for the same period in fiscal 2004. Comparable store sales increased 1.9% for the quarter to date period with the value of the average basket increasing 4.8% and the number of customer transactions decreasing 2.9%. For the thirty-five week year to date period ended October 1, 2005, retail sales increased 6.7% to $2,817.1 million, compared to $2,639.0 million for the same period in fiscal 2004. Comparable store sales increased 1.5% for the year to date period with the value of the average basket increasing 4.3% and the number of customer transactions decreasing 2.8%. September's comparable store sales increase of 2.9% was driven by a successful advertising circular early in the month and continued strength in the average basket. From a merchandise perspective, consumables and furniture were the strongest categories and comprised the majority of the basket increase for the month. Consumables benefited from a broad selection of recently delivered closeout merchandise in the food, paper, plastics, and household chemicals categories. The Company's furniture departments enjoyed double digit increases as a result of improved inventory position and assortment. The reported 1.9% increase in comparable store sales for the nine-week quarter to date period is consistent with the Company's current expectations for the third quarter where comparable store sales are estimated to increase in the range of 1% to 3%. WIN Strategy Update Commenting on the Company's progress of its recently announced WIN strategy, Steven S. Fishman, Chairman and Chief Executive Officer stated, "In August, we indicated we were in the discovery phase of developing a new strategy referred to as WIN, or What's Important Now. WIN will involve tactical plans to improve the financial performance of the business over the next twelve to eighteen months and is focused on three key areas: operating expenses, merchandising, and real estate. I committed to you that as the strategy is developed and decisions are made that we will update you on our progress. Today, we are sharing some initial actions involving our merchandising and real estate strategies and providing further clarity around our timeline for communicating a complete WIN strategy." Operating Expenses The Company's current cost structure is highly fixed in nature with a comparable stores sales leverage point that has steadily improved in recent years. However, given the disappointing sales results in 2004 and 2005 coupled with the Company's investment in store remodels, distribution centers, and new stores, the expense rate as a percent of sales has increased. Therefore, the Company is in the process of critically reviewing its overall cost structure and expects to communicate its findings and potential future expense savings opportunities in November. Merchandising The Company's merchandising strategy remains in the developmental phase. Nevertheless, the Company has identified incremental markdowns that will be necessary to lower in-store inventory levels and improve inventory sell-thru. While a markdown strategy and timing of execution has not been finalized, the Company anticipates the pre-tax impact of the incremental markdowns and related costs will not exceed $28 million, or $0.15 per share, and will be incurred throughout the balance of 2005. Real Estate New store openings for the Company have historically been very opportunistic in nature and not market specific. In recent quarters, the profitability of new stores has slowed due to the softness in Company sales and gross margin trends coupled with pressures of higher occupancy costs and capital required to open stores in a challenging real estate market. While the details of the new store real estate strategy will be communicated in November, the Company expects to develop a market specific strategy where the store size and costs will be tailored to match the estimated store or market potential. Based on this potential shift to a more market specific strategy, the Company will open fewer new stores than originally planned for the balance of 2005 and net new store growth is expected to be minimal in 2006, as the Company focuses on improving the sales and profitability of its current stores. The Company regularly reviews profit and cash flow results on a store-by- store basis in order to identify under-performing stores, review lease terminations and renewals, estimate future store closings, and test for the impairment of assets. At the end of fiscal 2004, this review led to a fiscal 2005 store closing estimate of approximately 40 stores. As a key component of the Company's WIN strategy, the Company has reviewed its entire fleet of over 1,500 stores paying particular attention, in light of recent Company performance, to a growing number of marginally performing stores in weaker or less densely populated markets. This critical store-by-store review has led the Company to decide to close approximately 85 additional closeout stores by the end of fiscal 2005. The Company's analysis suggests the cash flow impact is slightly positive to close these stores in January 2006 when compared to leaving the stores open through the balance of their lease terms. Similar to total Company, these stores were originally planned for profit improvement in 2005; however, the Company now forecasts that current year performance in this group of 85 stores will actually decline and result in four wall pre-tax operating losses of approximately $9 million, or $0.05 per share. These 85 stores represent approximately 6% of the Company's closeout store base while accounting for approximately 4% of sales in closeout stores. These additional stores tend to be lower volume, located in small, rural, or weaker performing markets with low population densities per store. On a regional basis, the Midwest will incur the largest number of closings while very few closings are expected to occur in the Company's strongest markets (West and Southeast) or new markets (Northeast and Pacific Northwest). Furniture Stores Additionally, the Company has indicated its intent to close its 41 stand- alone furniture stores by the end of fiscal 2005. In recent years, the total sales growth of the Company's furniture category has been the result of the rapidly growing number of furniture departments in new and existing closeout stores, not from the stand-alone furniture stores. Furniture sales within existing closeout stores represent approximately 12% of total Company sales and will continue to be a key differentiator for the Company in comparison to other value retailers. Stand-alone furniture store sales represent less than 1% of total Company sales and recently have been generating operating losses. Closing these stand-alone furniture stores is expected to improve future annual operating profit by approximately $0.01 per share, lower inventory investment, and focus the Company's resources on the more profitable furniture departments in closeout stores. The closing of approximately 85 closeout stores along with the 41 stand- alone furniture stores are incremental to the 40 stores the Company had already anticipated closing in fiscal 2005 as part of the ordinary course of its business and is expected to result in a total of 165 to 170 total store closings for the year. Based on the combination of fewer new store openings mentioned earlier in this release and the incremental store closings for fiscal 2005, the Company now anticipates ending fiscal 2005 with approximately 1,400 stores. The Company estimates the pre-tax charges related to the incremental store closings (closeout and stand-alone furniture) will be approximately $60 million, or $0.35 per share. 2005 Guidance Certain WIN related costs, such as the lease obligations, asset write- down, and severance costs related to store closings, can be reasonably estimated by fiscal quarter for the balance of 2005. However, the calendarization is less certain when estimating the incremental markdowns surfaced through our merchandising strategy development or the markdowns which will be taken as part of the store closing process, as these decisions will be made throughout the balance of the fiscal year based on weekly sales and a targeted merchandise exit date. Additionally, research has begun and should be completed by the end of the third fiscal quarter regarding how these incremental charges may impact the Company's ability to realize certain state income tax net operating loss carryforward benefits. Given the materiality and uncertainty surrounding the timing of the WIN related charges discussed in this release and the corresponding impact on the Company's effective income tax rate, the Company has discontinued forward looking earnings guidance until such point that more facts or assumptions are known and can be reasonably quantified. Accordingly, earnings guidance previously provided by the Company should no longer be relied upon. Hurricane Katrina and Hurricane Rita Update Hurricanes Katrina and Rita have significantly impacted the Gulf Coast region of the country and hundreds of Big Lots associates. The Company has been in contact with all store management and district management associates; however, the Company has been unable to determine the status of several store associates. The Company's Emergency Hot Line at 1-866-834-7325 remains available so the Company can provide assistance to any displaced Big Lots associates. The Company estimates lost sales from store closings that occurred as the hurricanes came inland were offset by the pre-hurricane preparation sales that occurred in days immediately preceding the events. As of October 5, the Company reported 10 stores remained closed, 7 from Katrina and 3 from Rita. Of the 10 stores, it appears that 4 stores will reopen in the next several weeks and 6 stores could be a total loss or could take up to several months to rebuild. The Company anticipates any losses, such as merchandise, furniture and fixtures and business interruption, that occurred as a result of these hurricanes will be substantially covered by insurance proceeds. Big Lots, Inc. is the nation's largest broadline closeout retailer. The Company currently operates a total of 1,536 stores in 47 states operating as BIG LOTS and BIG LOTS FURNITURE. Wholesale operations are conducted through BIG LOTS WHOLESALE, CONSOLIDATED INTERNATIONAL, WISCONSIN TOY and with online sales at http://www.biglotswholesale.com/. The Company's website is located at http://www.biglots.com/.