Big Lots 2007 Annual Report Download - page 109

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Operating Strategy
In August 2005, we introduced our operating strategy called the What’s Important Now (“WIN”) Strategy.
The WIN Strategy is comprised of 3 distinctive phases: Discovery, Testing and Learning, and Execution. The
Discovery phase (second half of 2005) included tactical decisions to improve near-term performance along with
the development of strategic changes to be implemented or tested during 2006. Throughout the Testing and
Learning phase (2006), we implemented or tested several merchandising, marketing, and operational strategies
to better understand our business’ future potential. With certain tactical changes made and the knowledge
gained from testing and learning, we are now in the Execution phase (2007 through 2009). Our long-term
strategy is based upon results from the first 18 months of the WIN Strategy and encompasses a complete
assessment of all areas of our operations in order to identify the key growth initiatives and strategic investments
needed to improve the performance of our business. The Execution phase includes a strategic roadmap focused
on expanding our operating profit rate, driving sustainable growth in earnings per share, and generating
significant cash to reinvest in the business or to return to shareholders.
The following sections provide additional discussion and analysis of our WIN Strategy with respect to
merchandising, real estate, and operating expenses.
Merchandising
We developed our merchandise strategy with the goals of growing sales per square foot and increasing gross
margin dollars. Our customer surveys have found that brand name merchandise, the “treasure hunt” experience,
price, value, and savings were most important to our customers. Certain elements of our merchandising strategy
were tested and executed in 2006. Also, in 2006, we refined our detailed merchandising plans in order for each
merchant to understand his or her targeted levels of closeout merchandise, engineered closeout merchandise
(items that we often develop along with our vendors), and product categories that our customers expect us to
consistently have in stock. Our objective is to maximize the amount of closeout merchandise which we believe
provides the greatest value to our customers. We have communicated many of these expectations to our vendors
so that they understand our expectations and can collaborate with us to get the desired types and quantities of
merchandise to our stores.
During the 2006 holiday season, we conducted additional customer surveys and learned the following:
• Over 80% of our customers come to our stores without a shopping list or without something specific
in mind that they are looking for.
• Price dominates top of mind awareness and our customers look to us for value and savings.
• Almost one half of our customers surveyed said their shopping trips last 30 to 60 minutes, which we
interpret as they are coming to us to shop the store and for the “treasure hunt.”
One of the key elements to the success of our merchandising strategy has been the “raise the ring” strategy. The
“raise the ring” strategy involves offering a merchandise mix to the customer that includes items with slightly higher
average item retail sales price. One method used to accomplish this is to offer larger package or quantity sizes. For
example, instead of offering an item for sale on a per piece basis, we may offer the same product in a package of
three or six pieces. Another part of the “raise the ring” strategy involves offering types of merchandise that increase
average item retail, based on our belief that as long as the value proposition is compelling, our customers are willing
to purchase higher ticket merchandise from us. Based on our customer surveys, we believe our customers want high
quality merchandise, which often results in high average item retail. The “raise the ring” strategy has resulted in fewer
cartons processed by our distribution centers and stores while positive comparable store sales were achieved.
We expect to drive comparable store sales with both merchandising and marketing. From a merchandising
perspective, we will continue to focus on “raising the ring” and offering top brand-named merchandise. We
expect to offer high quality merchandise at prices that represent good values, even if the sales prices are
higher than what has traditionally been found in our stores. Our global sourcing team is expected to be key
in improving quality and quantity of our import business in seasonal, furniture and some of the home and