Mar 3, 2011
Executives
Joe Cooper - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Interim Treasurer Charles Haubiel - Executive Vice President of Legal & Real Estate, Corporate Secretary, General Counsel and Member of Executive Committee Steven Fishman - Chairman, Chief Executive Officer and President Timothy Johnson - Vice President of Strategic Planning & Investor Relations
Analysts
Peter Keith - JMP Securities LLC Joseph Feldman - Telsey Advisory Group Meredith Adler - Barclays Capital David Mann - Johnson Rice & Company, L.L.C. Daniel Wewer - Raymond James & Associates, Inc.
Mark Mandel - ThinkEquity LLC Patrick McKeever - MKM Partners LLC Anthony Lebiedzinski - Sidoti & Company, LLC John Zolidis - Buckingham Research Group, Inc. Jeffery Stein - Soleil Securities Group, Inc.
Laura Champine - Cowen and Company, LLC
Operator
Ladies and gentlemen, welcome to the Big Lots Fourth Quarter 2010 Teleconference. [Operator Instructions] At this time, I would like to introduce today's first speaker, Vice President of Strategic Planning and Investor Relations, Tim Johnson.
Timothy Johnson
Thanks, Dave, and thank you, everyone, for joining us for our Fourth Quarter Conference Call. With me here in Columbus today are Steve Fishman, our Chairman and CEO; Joe Cooper, Executive Vice President and Chief Financial Officer; and Chuck Haubiel, Executive Vice President Real Estate, Legal and General Counsel.
And before we get started, I'd like to remind you that any forward-looking statements we make on today's call involve risks and uncertainties and are subject to our Safe Harbor provisions, as stated in our press release and our SEC filing, and that actual results can differ materially from those described in our forward-looking statements. As highlighted in this morning's press release, our Q4 2009 results contain one item, and full year fiscal 2009 results contain two items in continuing operations that we believe were not directly related to the company's ongoing operations.
We have provided non-GAAP reconciliations for both the fourth quarter and the full year fiscal 2009, and those schedules are attached to today's press release. Since we do not view these items as relevant to the ongoing operations of the business, the balance of our comments and comparisons between 2010 and last year's results will be based on 2009 non-GAAP results from continuing operation.
With that, I'll turn it over to Steve.
Steven Fishman
Thanks, T.J., and good morning, everybody. In terms of merchandising, the best-performing categories continue to be our discretionary higher-ticket businesses.
Furniture, Home and Seasonal each posted mid-single-digit comps, again, some tough comparisons from a year ago. We're very encouraged by the continued strength in our Furniture business, up against double-digit comps and especially given the fact that there have been changes in tax refund loans and the corresponding impact on our January business.
Although it may not seem like a holiday or Christmas business, we continue to find additional opportunities to drive Furniture during Q4 in the holiday time period. We're well-positioned heading into 2011, and I continue to believe that Furniture may be one of the largest growth opportunities we have for the future.
Seasonal Christmas trim performed well during November and December, particularly in lighting and trees, where our how high is high strategies delivered upside sales and margin dollars. The merchant team delivered extreme value and great quality and the customer responded.
This is an encouraging sign when we look forward to spring and our opportunities in Lawn and Garden. Also in the discretionary part of our business, our Home category was a leader in the store.
Newness and better quality goods and deeper inventory levels for key items worked well for us this holiday season. In contrast, other parts of our business were off to last year, namely Consumables and Toys.
As anticipated, our Consumables business comped down to last year. On our last call, I indicated to you that I believe we were not executing up to our full potential, and that we were working quickly to get this business back on track.
I like what I'm seeing in recent weeks. The phones have been lively of late with deals and some of the new programs we've been developing should start to appear in stores later in Q1 and Q2.
So although we have seen some encouraging signs, real change will take some time on into the first half of 2011. Our Toy business was challenged during the holiday season, as it appears to have been for most major discount retailers.
It was very competitive from a pricing standpoint, which is not unusual, but in my view, this was not our issue. Our customers continue to shop toys differently each year, and we need to change both on our approach and our assortment.
As you've heard me say on a number of occasions, if we're not changing, we run the risk of falling behind. We'll execute a different toy strategy for next holiday; that I'm confident of.
We took a major step forward in Q4 and in 2010 in both the pace and quality of new store openings. As Chuck will touch on in a moment, the productivity of our recent new store openings make this a key part of our long-term potential of this business.
From a stores perspective, it was our best executed holiday season yet. Our ready-for-business initiatives have improved the shoppability of our stores and, hopefully, left a more favorable impression of Big Lots to encourage more frequent visits from our customers.
In terms of marketing, we continue to test and learn from our Buzz Club Rewards program, which now totals over 7 million members. In summary, we were pleased with the outcome of Q4 in a difficult environment.
Total sales for Q4 of over $1.5 billion, representing an increase of nearly 4% driven by the strength of our new stores. We generated record operating profit of $177 million.
We achieved record earnings per share of $1.46 per diluted share, an increase of 11% over last year's record performance. We successfully opened 27 new stores, bringing us to a total of 80 new stores for the year.
And we managed our business very prudently and ended the year with over $175 million of cash and no debt. Now Joe's going to give you some of the details on the quarter and our expectations for 2011.
Joe Cooper
Thanks, Steve, and good morning, everyone. Sales for the fourth quarter were $1.519 billion, an increase of 3.8% over the $1.463 billion we reported for the fourth quarter of last year.
Comparable store sales were flat. For Q4, operating profit dollars were $177.2 million, an increase of approximately $4 million compared to last year.
In terms of gross margin, our increase in dollars reflected higher sales, partially offset by a lower rate. As anticipated, our rate of 40.8% was down versus last year with the decline resulting from lower IMU on certain of our holiday strategies and higher domestic freight costs due to rising fuel costs and higher carrier rates.
Partially offsetting these challenges in the rate was a favorable merchandise risk of higher margin Seasonal and Home sales, a lower shrink accrual rate and lower markdowns. Total expense dollars were $442.8 million, an increase of $11.5 million or 2.7% compared to last year.
The increase in overall dollars was reflective of net store growth of 37 stores compared to the prior year. The fourth quarter SG&A rate was 29.2%, or down 30 basis points to last year, with the leverage coming from store payroll, distribution, transportation, lower bonus expense and lower stock compensation expense due to the acceleration of prior year's restricted stock awards during 4Q 2009.
Net interest expense was $0.8 million for the quarter compared to $0.4 million last year. And our tax rate for the fourth quarter fiscal 2010 was 37.6% compared to 37.3% last year.
In total for the fourth quarter of fiscal 2010, we reported income from continuing operations of $110.0 million or $1.46 per diluted share compared to income from continuing operations of $108.6 million or $1.31 per diluted share a year ago. This result was better than our previously communicated guidance of $1.36 to $1.42 per diluted share, which was based on comps in the range of flat to plus 2%.
Since our actual comps were flat, it probably makes sense to reconcile the $1.46 to the lower end of our guidance of $1.36, which as I mentioned, did assume a flat comp. The $0.10 beat was $0.07 from operating profit favorability both in gross margin and in expenses, and the remaining $0.03 was principally from a lower-than-anticipated tax rate.
The lower-than-anticipated effective tax rate was principally driven by a favorable state earnings mix and the related impact on state income tax, as well as an unexpected good news related to settlement activity Turning to the balance sheet, inventory ended the fourth quarter of fiscal 2010 at $762 million, up 1% per store compared to last year. So after timing differences for most of the fall due to intentionally moving up delivery dates on import receipts, we ended the year with inventory up only 1% per store, which is generally in line with how we plan to enter 2011.
Cash flow, which we define as cash provided by operating activities less cash used in investing activities, increased by $20 million for the quarter compared to last year. This was largely attributable to the timing of inventory receipts, net of the related decline in accounts payable leverage, as well as higher CapEx related to 27 new store openings in November this year versus nine last year.
Cash flow for the full year totaled $201 million, which was consistent with our guidance of $200 million. We ended the year with $178 million of cash and cash equivalents compared to $284 million last year.
This decrease in cash was a result of our share repurchase activity, partially offset by our cash flow generated during the year. In terms of our stock repurchase program, we did invest $342 million during fiscal 2010 to repurchase company stock; $150 million under the ASR program and $192 million through opportunistic repurchases.
With the final settlement of the ASR completed in Q4, the total amount of shares repurchased under the ASR was 4.5 million shares. Combining the ASR and our opportunistic activity of 6.0 million shares, our total number of shares repurchased during fiscal 2010 was 10.5 million or approximately 13% of our outstanding shares at a weighted average price of $32.74 per share.
As of the end of fiscal 2010, we had $58 million remaining under our current authorization to repurchase shares opportunistically in the open market. For the fourth quarter, capital expenditures totaled $24 million compared to $17 million last year.
Depreciation expense for the quarter was $21.1 million, an increase of $2.5 million. For the year, CapEx was $108 million compared to our guidance of approximately $115 million with a portion of the variance shifting into our 2011 plans that I'll address in a moment.
Also for the year, depreciation totaled $78.6 million. Moving on to 2011 and guidance, overall, we're planning 2011 EPS to be in the range of $3.05 to $3.15 per diluted share.
That's an increase of 8% to 11% compared to 2010's income from continuing operations of $2.83 per diluted share. Our 2011 plan calls for a comparable store sales increase of 1% to 2% and a total sales increase in the range of 5% to 6% compared to fiscal 2010.
At this level of sales, we're estimating a 7% to 10% increase in operating profit dollars. We anticipate our operating profit rate will be in the range of 7.3% to 7.5%, which is higher than last year's rate of 7.2%.
We expect our gross margin rate will be relatively flat to last year and the operating margin leverage will come from a lower expense rate. With this model, we estimate a flat to slightly positive comp is needed to leverage expenses.
Specifically, in terms of the gross margin rate, 2011's rate is expected to be similar to 2010, as lower anticipated markdowns and a favorable merchandise risk mix are expected to be offset by continued freight pressures and potential commodity and labor cost increases. Our 2011 expense leverage potential comes from several different sources, namely advertising, utilities, distribution, transportation and store payroll.
Partially offsetting this leverage, we're forecasting higher depreciation dollars and deleverage in rent and occupancy costs. In terms of advertising, you'll recall we've tested and executed reductions in the distribution of print advertising for the last 12 to 18 months.
We believe further opportunities exist to reduce print distribution, and we'll continue to test further ideas or reductions in 2011. Next, in terms of utilities, we made a sizable investment in energy management systems, or EMS, in 2010, and we'll make further investments in 2011.
This is another example of an initiative that we've tested over time and have determined is a good use of capital. Stores with EMS have been averaging in the neighborhood of a 15% savings in utility costs.
We also expect to generate leverage in store payroll and distribution transportation costs as the dollar growth in these areas is forecasted to be at a slower rate than our anticipated sales growth. So clearly, there are a number of different sources of expense leverage being executed in 2011.
However, there'll be areas of the business where costs will increase and deleverage; areas like occupancy, depreciation and equity-related expenses. In terms of occupancy, we expect slight deleverage as we open more new stores and stores in better demographic locations, which require a higher rent.
New stores are the best investment we can make with our cash and our new stores opened in 2010 performed well, leaving us very encouraged about the future. However, new stores typically deleverage on the rent line in their initial years based on the incremental pre-opening costs and the fact that recent new store openings have been trending similar or slightly below market productivity but do so on a slightly higher rent structure.
This is included in the model we're providing. Depreciation expense is forecasted in the $90 million to $95 million range against $78.6 million in 2010.
Higher depreciation is primarily due to store growth, both 2011 openings and the significant number of stores opened in the October-November 2010 timeframe that are now being depreciated for the full year in 2011. Additionally, our commitment to maintenance capital, our investment in EMS and to a certain extent, some carryover of capital spending from 2010 to 2011 will also cause an increasing amount of depreciation in 2011.
Finally, equity-related expenses were deleveraged given our current share price and assuming a new equity grant for 2011. Filling out the rest of the P&L for 2011, we expect net interest expense of approximately $1 million and the effective income tax rate is planned to be in the neighborhood of 38.0% to 39.0%.
For the year, capital expenditures are expected to be approximately $125 million to $130 million. Maintenance capital is estimated to be approximately $40 million, which covers our stores, DCs and the General Office.
We're planning a little more capital here than normal given first, as I mentioned earlier, capital spending for maintenance finished 2010 slightly under our plan, so we're providing for that capital and those projects in 2011. Second, higher store capital, specifically around replacing HVAC units in certain locations.
And finally, the maintenance capital supporting our five owned DCs is up slightly to last year. From a Real Estate perspective, new store capital is estimated at approximately $50 million to cover opening 90 new stores.
Investments in certain other strategic initiatives will represent approximately $35 million to $40 million of CapEx in 2011. These dollars will be focused on our implementation of SAP inventory systems, retrofitting and refreshing a portion of our store base and continued investment in energy management systems to save on utility costs.
We estimate this financial model for 2011 will result in approximately $205 million of cash flow. Finally, we're estimating our diluted share count to be approximately 76 million shares for fiscal 2011, down from 79 million for fiscal 2010.
This expected reduction results from last year's repurchase efforts throughout the year, partially offset by an estimated amount of option exercise activity and the anticipation of a new equity grant for 2011. Turning to the first quarter, we're estimating earnings to be in the range of $0.76 to $0.81 per diluted share, a 12% to 19% increase compared to $0.68 per diluted share last year.
This model reflects operating profit growth in the high-single to low-double digits, a tax rate towards the higher end of our annual guidance range and the diluted share count in the range of 75 million to 76 million. This level of EPS is based on comp sales in the range of slightly positive to slightly negative, and the total sales increase of 2% to 4%.
In the month of February, sales were on plan, a plan which was below last year due to an intentional shift of our semi-annual Friends & Family event from February to March this year and the fact that February last year was our strongest monthly comp of the quarter and was up nearly double digits. Now I'll turn it over to Chuck for an update on Real Estate.
Charles Haubiel
Thanks, Joe. During the fourth quarter, we opened 27 stores and closed 18, leaving us with 1,398 stores and total selling square footage of 30.2 million at the end of the quarter.
For fiscal 2010, we opened a total of 80 stores and closed 43 stores, for a net addition of 37 stores. Of the 80 new store openings, 33 were A-type locations with the balance in what we consider to be more traditional centers.
Of the 43 store closings, 23 were relocations and were either older stores being relocated to higher traffic areas in better strip centers or stores too small for a full-size Furniture department that were relocated to a larger space to accommodate our full Furniture assortment. The success of our new store programs for both 2010 and 2009 has led us to target a higher number of store openings for 2011.
Our plans for 2011 call for 90 new stores and our expectation for 45 store closings, equaling net store growth of approximately 45 stores or a little over 3%. We feel comfortable with the 90 store openings at this point, and are making a very concerted effort to open the best stores we can as early in the year as possible.
Looking at the breakout of types of stores, we expect to open 60 to 65 traditional locations and 25 to 30 new A-type locations. In terms of traditional locations, the availability remains good, and we're certainly an attractive potential tenant as our overall credit profile and business model remain strong.
Traditional locations open in 2010 have performed very well, and are trending near company average sales productivity, with forecasted cash flow in the neighborhood of $300,000 per store in their first full fiscal year. While it's still early, and we're still trying to better understand the most important attributes of success, the results of the last few months have been encouraging to us.
In terms of A-type locations, we see the potential for adding 25 to 30 stores in those locations this year, bringing the total to be in the range of 70 to 75 stores by the end of fiscal 2011. Remember, A locations are not just defined as our highest-volume stores.
They're the best retail centers in a given market, often power strip centers, with strong co-tenants, strong population density or household income or all of the above. In many of these locations, we're seeing new customer because we're now in a shopping pattern or retail trade area that they formerly -- for the A-stores opened in 2010, their financial performance is trending above their pro forma from the sales, profit and cash flow standpoint.
Just as important to us is the fact that the eight A locations opened as a test in 2009 continue to perform very well. Albeit only eight stores in their first actual fiscal year of operation, they averaged over $4 million in sales and over $180 per foot, while generating around $300,000 per store in cash as well.
Again, these results are actuals for the first full fiscal year. We believe this level of performance could lead to a very profitable growth going forward, and these results to date have exceeded our financial return targets.
As we've discussed on our recent calls, we're always testing and learning in Real Estate and in some situations, the result, the success and the direction is clear, like the A-stores for instance. In other areas, we still aren't there yet, and more work needs to be done to fully understand the potential.
This explains where we are on the small store strategy and to a certain extent, our store refresh program, still work to be done. Now back to Steve for some closing remarks.
Steven Fishman
Thanks, guys. We've given you a fair amount of information today about how we finished 2010 and what our expectations for 2011 are and how the Real Estate growth strategy is progressing.
The financial model is solid: Inventory management, becoming more efficiently with SG&A and generating significant cash flow. But I want to see the top line moving a little bit more vibrantly, and that's where we are most focused for the beginning of 2011.
From a merchandise content, our focus on improving our Consumables offering by improving our value proposition and expansion of some of our captive label programs and our expansion within International Food should provide some excitement in our single largest category and drive footsteps to the store throughout the year. In terms of marketing, as I mentioned earlier, we now have a Rewards membership of over 7 million members to work with and market directly.
We've been successful building a large database of customer information and have learned a great deal along the way in the past 12 months. Now, we've moved into the testing phase, and are attempting to develop strategic programs to begin to leverage the investment we have made in our Rewards loyalty program.
From a stores perspective, we continue to make progress with our Ready for Business standards. It's a store cleanliness, recovery standards and good merchandise presentation to make the store easy to shop.
It's also customer service, meet, greet and smile. And finally, our Real Estate growth strategy, particularly in A locations, is exposing our brand to a different customer segment, and we're very encouraged with the results.
These are just a few ideas, but we believe there are many different levers to potentially drive comps for the foreseeable future. To summarize and then go to a brief Q&A.
Up against some very challenging comparisons from last year, we posted record fourth quarter earnings. Our discretionary categories, which differentiate us from other discounters have been the best performing part of our store for the last several quarters.
The deal flow continues to be solid. We have a history of fixing and turning around any underperforming aspects in our business, and I absolutely expect we will see the same result with Consumables in 2011.
We're forecasting a flat to slightly positive leverage point for SG&A and fully expect SG&A as the rate of sales will continue to trend lower for the foreseeable future. We're continuing to make investments necessary to be successful, whether it's investing in systems, putting capital to work in our stores and distribution facilities or hiring talent where we need it.
We're growing our store base and have many years of growth ahead. We generate lots of cash and invest it wisely.
We have reason to exist with the customer and a defensible niche, each of which is very key in retail. And we happen to believe that great value will never go out of style.
With that, I'll turn it back over to T.J.
Timothy Johnson
Thanks, Steve. Dan, we'd like to go ahead and open up the lines for questions at this time.
Operator
[Operator Instructions] And our first question will come from Dan Wewer with Raymond James.
Daniel Wewer - Raymond James & Associates, Inc.
Looks like the company was very active in the share repurchase effort during the first three quarters of the year, but it doesn't appear that there were any shares repurchased during the fourth quarter. Was there anything that evolved during the period that resulted in the company being quiet on the buyback activity in that time period?
Joe Cooper
Yes, this is Joe, I'll take that. It's simply we invested $342 million on a share repurchase program that was relatively new, took out 10.5 million shares and felt like that was the right amount of shares to execute in 2010.
Daniel Wewer - Raymond James & Associates, Inc.
And then in your FY '11 guidance, there doesn't appear to be any meaningful buybacks baked in?
Joe Cooper
No. And that's consistent with last year.
As you recall, what we did last year is we baked in the ASR. We typically have never baked in opportunistic share repurchases.
Daniel Wewer - Raymond James & Associates, Inc.
And then, Joe, one other question, on your first quarter guidance, the flattish same-store sales, total revenues up low-single digits, but you're talking about a 9% to 11% increase in operating profit dollars. With that type of same-store sales growth, it would be difficult to get any meaningful expense leverage.
So what's driving the big increase in operating profit dollars in 1Q?
Joe Cooper
Well, in the first quarter, it is expense leverage.
Daniel Wewer - Raymond James & Associates, Inc.
But if your same-store sales are flat or negative, how would you lever SG&A?
Timothy Johnson
Dan, it's T.J. There's a couple different things.
I'll just you point back to last year first quarter where we had a blow away quarter and accrued a significant amount of bonus expense on the six comp and the out-performance on operating profit. So even though comps are expected to be slightly negative to slightly positive, we're managing the things that we can control, and we will have some level of benefit in terms of lower bonus expense.
Now, obviously, working against that are going to be the things Joe mentioned in the prepared comments both occupancy and depreciation. So we feel very good about the expense model for 2011.
But, obviously, we've got a little bit of near-term visibility to Q1 as well.
Operator
And next, we'll go to Jeff Stein with Soleil Securities.
Jeffery Stein - Soleil Securities Group, Inc.
Yes, I was wondering, are you guys at all concerned that perhaps the window could be closing on the A-type locations in terms of availability? What I'm hearing is, there's not a great deal of new construction going on out there and things are beginning to firm up in existing centers.
And wondering, a, do you think that's correct? And b, if so, why not open more A locations this year while the window is still open?
Charles Haubiel
Jeff, it's Chuck, I'll take that. I think first of all, you're right from the standpoint of what you're hearing about Real Estate.
Without a lot of new development, I'm not going to say the window is closing, but what was available a year ago in the form of maybe linens or circuits are starting to dry up. Having said that, there's been a couple of additional retailers that have either recently filed or are pretty strong rumored to file that could open up some space in additional A centers.
The second thing, and I think we've talked about this before that we're really starting to get some traction on, is making sure that with the new A centers, we've got new relationships with the developers. And as they are thinking about where they're going to be adding a footprint, they're thinking about us being part of that.
So I think that we'll always kind of ebb and flow if you will on what's out there from existing. But when the new market, the same thing that's causing the landlords to feel a little better and maybe get more aggressive on what their ask is for rent for backfilling those spots, they're also getting more aggressive about thinking about adding some new square footage.
Jeffery Stein - Soleil Securities Group, Inc.
And quick one for Steve. Steve, you alluded in your comments to a different approach in different assortments in toys for 2011.
I'm wondering if you could perhaps elaborate a little bit on that?
Steven Fishman
I guess I'll make a general statement and then really not get into it in too much of detail because we're finalizing plans. My opinion of the Toy business is it has shifted pretty dramatically.
And what the consumer wants today is electronics. That's being very simplistic, but that's the reality.
Things that plug in, things that go in your ear, things that you can plug into the television. And the traditional older days of games and toys and boys toys and girls toys and plush and those kinds of things become more and more of a challenge going forward.
And I don't think we reacted fast enough to the kinds of things, technologically, that children and their parents are looking for going forward in the future. And I can promise you, we are all over it, and we will have a very exciting toy assortment to offer the consumer of what they want, not just in the fourth quarter, but sooner than later.
Because the Toy business, although it's not nearly as large clearly for second and third quarter to us, there's still a lot of business to be done for us and we make a lot of money in that business. And we will be the player and the dominant leader in those items and classifications going into the third and fourth quarter of next year, I promise you that.
Operator
And next, we'll hear from David Mann with Johnson Rice.
David Mann - Johnson Rice & Company, L.L.C.
My question is regarding advertising. Can you give us a sense on the absolute spend in '11, how will that compare to '10?
And perhaps, when you talk about removing or changing from print distribution, can you give us an idea of how that distribution has changed in terms of either number of markets or number of flyers that are dropped?
Steven Fishman
I think both of us -- Joe, you may want to address, if you want to. I can tell you, David, that marketing as a total dollars spend was down to the lowest that it had been.
In 2010, we were under $100 million for the first time. Planning at slightly up this year but very negligible dollars, so we fully we expect it to leverage.
Joe Cooper
But it won't be up as high as the overall sales, probably.
Steven Fishman
No, no. Flattish to slightly up in dollars.
Joe Cooper
What we've done, David, and we continue to do is twofold. Number one, our print advertising as number of pre-prints continues to be the same.
I think it's 27, but if you really need that number, I can get it to you. I'm almost positive.
The distribution that we've done with all the testing and understanding number of pre-prints we need to drop by marketplace, we've become better and better at. And that's a mix of just understanding what kind of response we're getting, what kind of leverage we're getting from the newspapers that we're distributing with and the Buzz Club membership because as we continue to increase the Rewards program by store location, which clearly we understand, we're continuing to drop off some level of distribution on print advertising.
So that's where the majority of the savings is. As a percent of total, the media part of our business, which is television and includes Internet, which to you probably is Buzz Club, probably is over 45% of the total spend, which a few years ago was about 40% of our spend.
So we've gone from 60%, 40% to around 55%, 45%. And that number from a print standpoint will continue to leverage or continue to drop down.
And media spend will continue to increase. But overall, as a percent of total, it's now under 2%, if I'm not mistaken, which is the first time we've taken it under 2% as a total spend.
So we think we're being very judicious when it comes to the spend in marketing and really understanding how to do it and really defining -- a lot of things are going on and now that we have the 7 million-plus mailable Rewards members and targeting them for the things that they're spending and on what the classifications of business they are interested in shopping us for on a consistent basis and those kinds of things. And the cost associated with that is incrementally much less than it would be from a television or a print standpoint.
David Mann - Johnson Rice & Company, L.L.C.
Can you talk a little bit about the performance in the Rewards program in terms of, let's say, how that customer spends versus a customer who doesn't spend on the program? And what percentage of sales maybe are coming from that program?
Steven Fishman
Sure. We won't comment specifically on that, but just to say, it's a very important part of our business and a growing part of our business.
The overall sales though of that Rewards customer, number one, in average spend is probably double our average sales check. It's close to $40 versus over $20.
So that's the average. So if you're talking about a non-Rewards customer spending $19 to $20 and our Rewards customer spending about $38, $39.
So that's pretty significant to us. The frequency is much more consistent, and clearly, the loyalty associated with it as far as what percent of total it is, it continues to increase.
It continues to important to us. And that's what we want.
I mean, that's the strategy. Because the cost associated with communicating with your core loyalty customer who shops you the most frequently and has the largest spend clearly is an advantage to the future of the growth of the business.
David Mann - Johnson Rice & Company, L.L.C.
And then one last question on the performance of your A stores relative to the traditional stores, it sounds like the cash flow performance is relatively similar. Is that something that you would expect to continue over the life as those ramp or would you expect there to be more diversion and much higher cash flow from the A stores?
Steven Fishman
It's still early. I'm sure that we can answer that question realistically at this particular point, David.
I can only tell you we're extremely encouraged by the A locations' performances, and we're really trying to understand. And I think Chuck gave you color on the first full year of the stores that were open for over 12 months, but the number was eight stores.
But the ones that we've opened since then in part of all of 2010, part of the issue is, is not only did the A stores do well, but the traditional stores performed well. And we really are deep-diving to try to understand what we did that is the secret sauce of continuing to want to do that going forward.
Joe Cooper
David, it's Joe. I'll just add, clearly, we view an opportunity in those A locations because of the co-tenancy and the population density to kind of test how high is high.
So is the upward potential of those greater? I mean you can certainly make a case and we're optimistic that, that will be the case.
Also in some of those A locations, the population around them may not know us as well because we are new to those particular locations. So a case could be made that the comp delta to average store comp will be greater going through the first five years.
But again, as Steve said, we're early, and we're learning. But we're certainly encouraged and feel very good about the opportunities those locations give us.
Operator
And next we'll go to Meredith Adler with Barclays Capital.
Meredith Adler - Barclays Capital
I was wondering, Steve, you mentioned briefly about more international products on the Consumables side, maybe could talk about that a bit more. And then maybe just talk about if there's anything else you expect to do with Consumables and what percentage the international could end up becoming.
Steven Fishman
I'll answer that one quickly. I won't tell you what percent international can become because we're really new in it.
There's probably seven or eight initiatives that we're working really aggressively on in Consumables to get that business going. And I will mention, as I mentioned before, at least, at a very high level, that the Consumable business has certainly been more encouraging in the most recent days, I guess, is the best way to put it.
January and February also, and of course, the first week of March, although we're just into the first week of March, Consumables is performing much better as a percent of total than it had been performing last year. So we're certainly encouraged by that.
There's a number of issues that we've worked on. First off, if you've been in the stores recently, and/or if you haven't been, take a look at something that we're highlighting of trying to aggressively increase transactions and show great value at the same time.
You could call it a wall of values, you could call it anything you want to. But we've got 10 to 15 consumable items that are either going to be in the front of the store when the walk in or in front of the registers for one reason or another.
And those 10 to 12 items, because they're selling so quickly, first off, give extreme value offerings. They are all throughout Consumables, and they're turning quickly and turning probably on a weekly basis.
The international food fair thing is going to be supported by 12 to 16 feet worth of European gourmet jams and cookies and pastas and condiments. We started working on that in the third into the fourth quarter of last year because the specialty part of our Food business, we saw real opportunity.
Number one, it's a higher-average unit retail, higher ticket, but it's also something our customer has been coming to us and looking for us, unique different type items that can continue to set us apart. So going to see that coming in into the first quarter and, in fact, you'll probably see it in a couple of ads featured in mid to late March, and then it'll be executed probably within the next week or two.
Then we continue to focus on the Buzz Club member, who is a, particularly a consumable member. And we've been targeting Internet blowouts to them on specials in consumable items like water and carbonated beverages and paper products and all those kinds of things, selectively encouraging them to come into the stores.
The initial fresh finds or our private label assortment is just coming into the stores at this particular point. We really haven't talked much about that.
Beverages, salted snacks, olive oils, things like that, that are unique and different but of great value. So if you take a look at that, you should see the extreme value signing that we're implementing in and around both the Consumable areas and that kind of classification of business.
And then we've got a couple spring events coming up that, clearly, we wouldn't talk about at this particular point, but expanded assortments in the Storage business, which is quite good for us right now. A new stick program that's coming in, and then the front of the store, which is the key critical piece of transaction counts.
We have a new cash wrap program, with high-impulse items that came in, in February. We have a new incremental gum and mint fixture program coming in, in the month of March, and we're going to have a new impulse snack program in the month of April.
So our feet are not touching the ground when it comes to Consumables and when it comes to transactions.
Meredith Adler - Barclays Capital
And then I have a question, this is probably for Joe, about share buybacks. I understand it's not in your guidance.
Is there any reason to believe that with $200 million of free cash flow and $175 million of cash on the balance sheet, that you won't be doing some additional share buybacks this year?
Joe Cooper
That's something we discuss with the Board of Directors. So I really can't comment on it right now.
Operator
And next, we'll go to Joe Feldman with Telsey Advisory Group.
Joseph Feldman - Telsey Advisory Group
Wanted to ask a little bit about what you're seeing in the consumer out there. It seems like your Discretionary businesses continue to do well, Furniture, Hardlines, some of those.
Are you seeing any difference in spending? Are you seeing any difference in the kind of consumer or the way people are paying for things in terms of tender that would give you any increased confidence that the consumer is starting to shop a little more frequently or coming back?
Steven Fishman
Yes. No, honestly, Joe, we haven't seen any change other than I kind of alluded to the fact that the tax refund to the consumer is down about 20% so far this year.
So tax refunds are coming a little bit later, so our expectations are that maybe as good as we feel about the Furniture business, particularly, and then of course, any of the other high-ticket areas like Seasonal, we only think that it should get better. I will tell you, it's unbelievably consistent, and you and I personally have had this conversation.
You've heard me say it on many occasions, early season, highest-ticket items, best quality items sell quickly. It's just been so consistent, it's amazing.
Our Lawn & Garden business, which again, I want to first say, it's very early, which I always say at the beginning of the season on the calls, has really started out well. And it is all the high-ticket items.
The most expensive set, the most expensive gazebo, those are the first things selling. Consumers continue to furnish their homes with the Upholstery business.
Actually, the Case Good part of our business, which is the bedroom part of our business is a little bit better than it's been in a while. So we're real excited about that.
They're not afraid to spend money as long as there is great value associated with it.
Joe Cooper
It's Joe. I'd just add that the tender mix has stayed very, very constant.
Debit's up like a point, but you would expect that. So no change in tender mix to your question.
Joseph Feldman - Telsey Advisory Group
Got it, that's helpful. And then if I could just follow up with another one, can you remind us or let us know how you're thinking about gas prices?
Obviously, I understand from the expense side, you talked about that. But given all the turmoil in the Middle East, say gas prices continue to rise at a little more rapid rate, how should we think about sales going forward?
Do people consolidate trips or do you see that decrease in spending or is that not going to impact?
Steven Fishman
Well, Joe, from an expense standpoint, we do the best job we possibly can, but we absolutely, as you can understand, have no control over that. The only good part of that is that everyone we compete against has the exact same problem.
From a shopping standpoint, I can only tell you that we're planning a decent spring season and a pretty aggressive fall season that we'll talk about, of course, as we come into the third and fourth quarter. And we're certainly not hesitating on the growth of our business because there may or may not anticipated be trips because of the cost of fuel.
We've seen this before, and I just, I think we'll see it again. We're not economists.
What we are is retailers, so we plan our business to the best of our ability based upon what we can control. And then as things fluctuate around it, we do the best of our ability of trying to adjust our business based upon occurrences.
We did a pretty good job in the third and fourth quarter, even though I didn't like the top line of delivering the bottom line based upon some lack of sales at a high level. But we're good at that.
And we'll continue to be good at that. But I don't want to stop the process of the growth opportunities we think we have.
Operator
[Operator Instructions] Our next question will come from Patrick McKeever with MKM Partners.
Patrick McKeever - MKM Partners LLC
Just was wondering if you might talk, even broadly, about the whole rising cost issue that so many retailers are talking about right now, and what kind of an impact you see from costs, rising product costs, and I mean I know you've talked to it to some extent via the guidance. But maybe you could talk about just pure product costs and what you're seeing there and whether or not you feel like you'll have some pricing power to pass along some of the higher costs that are likely in 2011?
How you feel just relative to your discount store competitors in terms of navigating around these higher costs, those sorts of things?
Steven Fishman
We have the same problems, Patrick, everybody else does. We're seeing cost increases on everything that we develop ourselves from overseas, but it's been no different for the last six years.
As prices go up, we just continue to put more value into product and offer different quality. The gazebos this year are the perfect example.
This must be the third or fourth year in a row that we've seen cost increases because of either the top pieces of it because of fabrication or cotton prices or the steel pieces of it or metal pieces of it. But we just offer a better value to the customer and the customer tends to understand that.
Remember the other piece of our business is we price off of everybody else. So if prices go up, as long as our value equation is 10% to 50% below what everybody else is doing, we continue to do a good job as far as that goes.
Incrementally, I will tell you, sometimes, when prices go up, it can be a good thing for our business. And we try not to worry about it.
We don't like it. I know there's a tremendous amount of talk about it.
I spent myself personally about two weeks in about four or five different markets between the electronics market here domestically and then I spent about eight or nine days in Singapore, Vietnam, Hong Kong and Shanghai, and I was on the ground and saw exactly what was going on. There's a lot of confusion between manufacturers and retailers on costs associated with commodities.
But I think we have a really professional group of people particularly from a global sourcing standpoint. And we'll be as aggressive as we have to be, maybe even more so because of some of the price increases some of the other people will have to absorb on products going forward.
Remember, half of the business or about half the business is still a closeout or a advantageous buy. So we'll be buying it as best as we possibly can and being priced underneath all of our competitors.
Operator
And next, we'll hear from John Zolidis with Buckingham Research.
John Zolidis - Buckingham Research Group, Inc.
Question on the ultimate size of the chain in terms of how many stores you think you can have. Have you tried to put together an estimate on that?
And what would be the determining factor in your opinion? Is it the size of the closeout market?
Would that determine how many stores you could potentially have?
Steven Fishman
Yes. No, it's not.
John, we said all along, the infrastructure can handle, that we have right now, at least 1,800-plus stores, and we've always felt based upon demographics and population density that we could handle 2,000-plus stores, okay? It might be slightly higher than that.
It is absolutely not a deterrent because of closeouts that are available. Remember, half of our businesses is not closeouts.
And we develop it and whether I like it or not, has been the strongest piece of our business, probably in the last 24 months on a consistent basis. So that's not close out.
Number one. And number two, the other piece of the business, and I can only describe it is as if you spend time in our office.
We turn down much more than we actually buy. There has never been at any time economically good times or bad times an inconsistent flow of closeout availability.
It may vary from industry to industry at times, but never on the overall basis.
Operator
And next we'll go to Laura Champine with Cowen and Company.
Laura Champine - Cowen and Company, LLC
You talked about a desire to grow sales faster, and I share that hope for Big Lots. But when you mentioned leveraging SG&A expenses, advertising, I think, was the first call out.
Are there things you can do to actually ramp up advertising expenses in creative ways that would drive that comp higher?
Steven Fishman
Well, we're trying to do that, but we're utilizing that in the most cost-effective way, and we're trying to do it via the Buzz Club. We think that, that's our best opportunity.
Cost associated with print is quite high, Laura, to be quite honest with you. And although I'd like to tell you, we get a bigger return on investment, it's not something I'm quite encouraged with.
And I'm not willing to spend the kind of money to add another pre-print. I don't think it makes sense.
Our customer looks for great value. Not that they don't react to a pre-print, but I don't think that's probably an advantageous way for us to make an investment to grow the top line.
The cost associated with it is dramatic.
Laura Champine - Cowen and Company, LLC
It feels like the Buzz Club would attract your existing customer. Are there other things you can do just to make people aware of what's inside a Big Lots store in different kinds of media?
Steven Fishman
We'll, we're really doing that, Laura. And, in fact, one of the things that I talked about most recently, probably in the last 12 months is we love our current core loyalty customer, and they continue to grow and spend more and more.
It's the infrequent customer that we've really focused on. And we're doing a better job at it and actually had some very encouraging feedback from our customer surveys that we do twice a year that we just got back the other day from the holiday season.
And what I mean by that is the customer who knows us, who shops us, but shops us infrequently. In the crossover of where they're going to and where they're shopping from a competition standpoint for the first time in a while was at a slower rate.
So that was encouraging. What that means is the customer who may or may want to shop us and who they shop in the way of competition, shop those direct competitors at a much slower rate than they did in the past.
And it's one of the reasons why we think some of our discretionary businesses grew at a faster rate. So we're constantly working on ideas.
But we think it's all about the deals, the merchandise content and how we execute in the stores to really do it at a better rate. I mean, I understand the frustration level everybody has with the Consumables business.
And I have the same frustration. So I don't want this taken the wrong way.
But we were facing the same thing as every other retailer in the United States was facing. The Consumable business for us grew almost high-single to low-double digit for five years in a row.
We all faced the same thing in the last 12 months. And although we don't like it, we're coming back.
We're seeing a light at the end of the tunnel. And we're not the only ones who have struggled with his percent of total business.
And I can only tell you, I like the mix of our business of 30% Consumables because a lot of the people are doing 50%, 60% and 65% of the total mix of the business and their business has been a lot more challenged than ours has been over time.
Operator
And next, we'll go to Peter Keith with JMP Securities.
Peter Keith - JMP Securities LLC
I was curious if you could talk about the store maturity curve that you're seeing with some of your new units as you've re-engaged in store openings in recent years, particularly as we also would think about the A locations and some of the re-los [relocations] because certainly, as we look out to your comp store base over the next couple years, you should be adding some relatively fresh units. And I'm just curious if there's a ramp-up period that might be supportive of comp growth in years to come?
Timothy Johnson
Peter, it's T.J. I'll take that and everyone else can jump in.
But typically, what we've said in the past is a store will open below market productivity and then ramp in years two, three, four, upward of five at a faster rate than the balance of the company. I think what we're suggesting with these most recent store openings is that first of all, remember, they are recent.
So '09 and 2010, so it's tough to answer the maturity part of your question, but I think what we're seeing is and what's most encouraging is, we're not seeing that same delta in year one. So I'm making up numbers.
If we were 85% or 90% of market productivity, we're much better than that now. And that's very encouraging to us.
So we're opening stronger. And again, particularly in the earliest of A stores, we opened strong, and we didn't see it really let up.
So I guess what maybe that's suggesting to us is people are finding it as a more pleasurable experience to start off and sticking with us. So that's really all we have to go on at this point is a stronger new store opening, again recognizing that we re-entered the store growth mode here late in '09 and in 2010.
So our number of data points are small right now. But certainly, the feedback that Steve mentioned from some of our consumer surveys around new stores and what we're seeing in the actual dollars and cents is encouraging to start with.
Operator
And next, we'll hear from Anthony Lebiedzinski with Sidoti & Company.
Anthony Lebiedzinski - Sidoti & Company, LLC
Could you guys tell us the timing of new store openings and closings for 2011, please?
Joe Cooper
Yes, Anthony, we're not going to break that out by quarter. What I suggest to you is two things: I think we all learned a little bit from 2010, and we'd like the store opening cadence to be pushed forward a little bit, so a little more even openings throughout the first three quarters than what you saw last year and less reliance on November openings.
Clearly, we wanted to get those stores opened, and we would do the same thing if in that position again, but we want to make sure we try to stress the organization a little bit less as they prepare for holidays. So expect a little bit more on store opening front in the first three quarters and less in the fourth.
Store closings, two factors to consider: As we talked about in Chuck's remarks, approximately half of those are going to be relocations. So those will be spread throughout the year, in particularly, the early part of the year.
The balance are going to be more towards the fourth quarter because they come up on lease expiration, and that's when a lot of our leases expire. So we can't really break down the – or won't really break down the calendarization for you, but that's some direction.
Anthony Lebiedzinski - Sidoti & Company, LLC
Okay, that's helpful. And also when you look at the business longer term, could you give us perhaps where you think you can increase your operating margins to what kind of level?
Joe Cooper
Yes, Anthony, we did an update, we gave a three-year view at the beginning of last year. We're not going to get in the habit of updating that every year or rolling on a new year.
But what we talked about there were two things. I think first off, structurally, we don't see any reason why it shouldn't continue to expand for the foreseeable future.
And you see that happening again here with our guidance for 2011, a higher operating profit rate on one to two comp. And then secondly, in that three-year view that we gave a year ago, we had targeted an operating profit rate in year three of 8%.
Clearly, 2010 was in line with what we told you it was going to be. This guidance that we're talking about for 2011 continues that three-year view.
So I don't know that there's any reason that we have to believe that it should change at this point.
Operator
And next, we'll hear from Mark Mandel with ThinkEquity.
Mark Mandel - ThinkEquity LLC
I just wanted to drill down a little bit deeper into the Furniture business, which I find intriguing. When you have promotionally-oriented companies like Raymour and Flanigan and Bob's out there very visibly.
What do you see as your key competitive advantages? And I don't know if you can shed any light on the economics of this department and whether you're changing the space allocation for this area?
Steven Fishman
There is no change economically to space allocation. We love that business.
We think that there are two key factors amongst a lot of things that we do in Furniture. One of them that people don't seem to understand and haven't for a long period of time is we have furniture at the store and you can buy it and take it with you immediately.
We think that's a huge advantage. The second is the fact that we have just unparalleled value day-in and day-out versus all competitors.
And we don't play the game of the high-low when it comes to Furniture. We have great Upholstery.
We have great Case Goods, we have great Dining, we have great RTA, and we have unbelievable value day-in and day-out in the Mattress part of the business and it's predominantly branded. And we think those two key factors have been a real advantage for us over time.
Mark Mandel - ThinkEquity LLC
And where do you currently stand with the exclusive arrangements with companies like Serta?
Steven Fishman
Well, that's a relationship we've had for a number of years that they make and deliver direct to each one of our stores and have 27 or 26 filling stations around the country and efficiently give us what we need, which is great value and branded names. We absolutely have had discussions and always continue to discuss with some of the other people in the business, but Serta has always performed extremely well for us.
So that's a relationship that's been long-standing, and they've been a great partner with us in the business.
Operator
And at this time, we have no further questions.
Timothy Johnson
Okay. Thanks, Dave.
We thank everyone for joining us on our Fourth Quarter Conference Call here, and we look to talk to you all soon. Thank you.
Operator
And ladies and gentlemen, a replay of this call will be available to you within the hour and will end at 11:59 p.m. on March 17, 2011.
You can access the replay by dialing (888) 203-1112 or (719) 457-0820 and entering passcode 1659098. Ladies and gentlemen, this concludes today's presentation.
Thank you for your participation. You may now disconnect.