Consolidated retrenches for profits - close out chain - company profile

Discount Store News, May 9, 1988 by Richard C. Halverson

Consolidated Retrenches for Profits

COLUMBUS, Ohio - Consolidated Stores, the nation's largest closeout chain, is targeting 1988 as a year to allow management and systems to get in synch with its explosive growth.

The closeouter is also looking to improve gross margins by increasing soft good sales and doubling the amount of imported merchandise carried in the stores.

In the five years since Consolidated, once just a closeout wholesaler, opened its first retail store, the chain has grown to more than 300 units, with 1987 sales of $590.7 million, a gain of 49 percent from $389.2 million in 1986. Consolidated operates its stores under the name Odd Lots in Ohio. Its stores outside Ohio are called Big Lots.

Earning last year headed in the opposite direction, however plunging by 33.3 percent to $13 million, equal to 29 cents a share, from $19.5 million and 45 cents a share in 1986.

Of its 1987 earnings, 20 cents per share came from fourth quarter results.

"Consolidated had its best fourth quarter ever," said James Guinan, who came aboard last November as president of the company's retail store operations. "But it wasn`t enough to save the year."

A veteran of Gold Circle, and Caldor, Guinan temporarily halted expansion, except for stores committed before his arrival, and is slowing reopening the new-store tap in the second quarter. Consolidated will open only about 30 stores this year, compared to 88 last year, Guinan said.

Guinan's predecessor, Sol Norflus, who headed the now-defunct Rinks department store chain before coming to Consolidated, retired last October.

Chairman and founder Sol Shenk hired Guinan last November as a major step toward bringing the company into line with his aspirations of becoming a billion dollar chain, operating up to 500 stores. Last month, Guinan was elected to the Consolidated board.

Norflus guided the chain from its inception to expansion to almost 300 stores, Shenk said. But at age 66, Norflus voluntarily retired last October, saying he was tired and that it was "getting too much" for him, Shenk remarked.

"We knew how to secure merchandise," Shenk added, "but we were lacking in installing procedures and people.

"The bottom line was that sales were down, the warehouse was a mess" Shenk said. "We were not able to meet projections. We didn't have the attributes and professional skills of a company our size."

Consolidated is installing a "whole new layer of top management people," Shenk reported.

Guinan reports directly to the chairman, bypassing the company president, Shenk's son, Charles. The younger Shenk's main responsibility is overseeing buying operations.

A shortage of merchandise early in 1987 proved to be a major stumbling block for Consolidated, said president Charles Shenk. "A lack of direction" from the top that resulted in underbuying and a backed-up distribution system, rather than a lack of closeout goods, accounted for inventory shortage, Shenk said.

Guinan said the "gut issue" facing him is to digest the 300 stores already opened and "turn the place around."

"I was pleasantly surprised that the problems were so readily identifiable," Guinan said.

The two most obvious problems "jump right out at you," Guinan said: low gross margins and high distribution costs.

Consolidated already has improved gross margins to 41 percent from 39.5 percent in 1987, Guinan said, and is shooting for about 43 percent.

"There's nothing wrong with the closeout concept," Guinan said, and is "There's no end to closeout merchandise.

"What was wrong with gross margins was that the buying lines simply couldn't absorb the number of stores they were opening in early '87. They opened 7 in the first quarter, and you couldn't write fast enough.

"As a result, they filled in the shelves with a lot of low-end goods, papers and chemicals. They were great buys for the consumer, but the margins weren't there."

By adjusting buying capabilities to match a 300-store chain and slashing distribution costs through a new, mechanized center (see story, page 22), Consolidated "is back on track, thunderingly so in the fourth quarter," Guinan said.

"The only question is how to maintain good value for the customer while enhancing gross margins by a couple of more points," Guinan said.

"One way is by properly going into the soft goods business. Another is to go selectively into imports," remarked the chain's president.

Consolidated intends to increase soft goods to as high as 25 percent of sales from 10 percent and double imports to 20 percent from 10 percent. "There are a lot of closeouts to be had offshore," Guinan said.

In textiles, a lot of closeout purchases are either going to smaller closeout chains or being sold in place at steep markdowns, he said.

`Soft Goods Terribly Underutilized'

"Soft goods are terribly underutilized. We just have to develop soft goods, but we don't understand it."

After gross margins and distribution costs, the third major problem was the quality and quantity of senior management, Guinan said.

In his first hire, Guinan looked back to Caldor for David Lynn, who became his vice president, distribution.