Big Lots 2008 Annual Report Download - page 87

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Operating Strategy
In August 2005, we introduced our operating strategy called the What’s Important Now Strategy (“WIN
Strategy”). The WIN Strategy is comprised of three distinct elements: merchandising, real estate, and cost
structure. Over the last three years, our strategy has followed a roadmap focused on expanding our operating
profit rate (which increased from 0.6% in 2005 to 5.5% in 2008), driving growth in earnings per share from
continuing operations (which increased from $0.14 per diluted share in 2005 to $1.89 per diluted share in
2008), and generating significant cash provided by operating activities to reinvest in the business or to
return to shareholders ($900 million in aggregate share repurchases in 2006, 2007 and 2008 under publicly
announced share repurchase programs). In 2009, we expect our 1) operating profit rate to be flat to down 30
basis points based on our projections that comparable store sales will be flat to down 2% and the gross margin
rate will be similar to 2008, 2) earnings per diluted share from continuing operations to be $1.75 to $1.90, and
3) cash provided by operating activities less capital expenditures of approximately $80 to $85 million to be
approximately $145 million.
The following sections provide additional discussion and analysis of our WIN Strategy with respect to
merchandising, real estate, and cost structure. The 2008 Compared To 2007 section below provides additional
discussion and analysis of the impact of these strategies on our financial performance and the assumptions and
expectations upon which we are basing our guidance for our future results.
Merchandising
We developed our merchandise strategy with the goals of growing sales per selling square foot (which increased
from $146 per square foot in 2005 to $160 per square foot in 2008) and increasing gross margin dollars (which
increased from $1,731.7 million in 2005 to $1,857.4 million in 2008). Our customer surveys have confirmed
that brand name merchandise at extreme value, the “treasure hunt” experience, price, value, and savings are
most important to our customers. The treasure hunt experience is how our customers refer to the experience
of shopping our stores looking for their favorite brands of merchandise at great values as our assortment of
branded merchandise continually changes based on the availability of closeout merchandise. In 2006, we refined
our detailed merchandising plans to improve the understanding of each of our merchants regarding his or her
targeted levels of 1) closeout merchandise, 2) engineered closeout merchandise (items that we develop along
with our vendors), and 3) merchandise categories that we consistently 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 work
with us to offer the desired types and quantities of merchandise in our stores. We constantly evaluate our mix
of closeout merchandise and merchandise that we consistently stock. Our future net sales results could fluctuate
materially depending on the availability, timing, and/or size of closeout deals.
One of the key elements to the success of our merchandising strategy over the past few years has been to
offer our customers better quality merchandise, better values, and more prominent brand name products. This
strategy involved offering a merchandise mix to the customer that included items with slightly higher average
item retail sales price. One method used to accomplish this was to offer larger package or quantity sizes. For
example, instead of offering an item for sale on a per piece basis, we offered the same product in a package of
multiple pieces. Another part of the strategy involved offering merchandise with higher average item retails,
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, our customers want higher quality
merchandise, which often results in higher average item retail. This strategy has resulted in fewer cartons
processed by our distribution centers and stores and achieved positive comparable store sales.
From a merchandising perspective in 2009, our goal is to continue to provide unmatched value, better quality,
and continue to increase the recognized brand name merchandise as a percentage of the overall merchandise
assortment. Because of our long-standing relationships with our vendor partners, we anticipate brand name
closeout merchandise deals will continue to be available to us to purchase at savings that we can pass on to
our customers. In 2009, we expect our major merchandise categories will remain the same as prior years but
the percentage of business by category may fluctuate from time to time based on customer demand and the
availability of compelling deals that we are able to source and offer in our stores.