Big Lots Management Discusses Q3 2013 Results - Earnings Call Transcript

Executives

Andrew D. Regrut - Director of Investor Relations

David J. Campisi - Chief Executive Officer, President and Director

Timothy A. Johnson - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Paul Trussell - Deutsche Bank AG, Research Division

Meredith Adler - Barclays Capital, Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Joseph I. Feldman - Telsey Advisory Group LLC

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Patrick McKeever - MKM Partners LLC, Research Division

Jeffrey S. Stein - Northcoast Research

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Big Lots (BIG) Q3 2013 Earnings Call December 6, 2013 8:00 AM ET

Operator

Ladies and gentlemen, welcome to the Big Lots Third Quarter 2013 Teleconference. This conference is being recorded. [Operator Instructions] At this time, I'd like to introduce today's first speaker, Andy Regrut, Director of Investor Relations.

Andrew D. Regrut

Thanks, Katie, and thank you, everyone, for joining us for our third quarter conference call. With me here today in Columbus are David Campisi, our CEO and President; and Tim Johnson, Senior Vice President and Chief Financial Officer. Before we get started, I'd like to remind you that any forward-looking statements we make on today's call involve risk and uncertainties, and are subject to our Safe Harbor Provisions as stated in our press release and our SEC filings, and that actual results can differ materially from those described in our forward-looking statements. All commentary today is focused on adjusted non-GAAP results from continuing operations. For the third quarter, this excludes an after-tax gain on the sale of real estate of $2.2 million, or $0.04 per diluted share, and an after-tax loss for our wholesale operations of $2.6 million, or $0.05 per diluted share. Reconciliations of GAAP to non-GAAP adjusted earnings for both this year and last year are available in yesterday's press release. This morning, David will start the call with a few opening comments, T.J. will review the results for the quarter and our outlook for the balance of the year, and David will complete our prepared remarks before taking your questions.

So with that, I'll turn it over to David.

David J. Campisi

Thanks, Andy, and good morning, everyone. Speaking at a high level, our Q3 guidance suggests that we thought we were in for a difficult quarter. Difficult from the perspective of early sales trends that were challenging, and I highlighted some concerns within our merchandise content in certain categories. Additionally, during the quarter, I would imagine most retailers were not helped by some of the macro factors and government uncertainty. Although I'm not happy with our results, there were several positive signs in our businesses, which should only grow in importance, as we move through Q4 and into 2014. Specifically, I am encouraged by food and consumables. After several quarters of inconsistent business and disappointing our customer, this category experienced improving sales trends and comped up low singles in the quarter.

New management drove better inventory content and value, and Jennifer responded almost immediately. Along the same category line, our test of coolers and freezers and an expanded assortment in certain urban locations continue to perform quite well, driving incremental sales and transactions in our test stores. So I'm very bullish on our future prospects, and food and consumables.

Next is seasonal. Halloween and harvest were difficult and off our plan, but lawn and garden cleaned up very nicely for us, and overall comps in seasonal for Q3 were actually up to last year. We will adjust to deemphasize the shorter seasonal periods like Halloween and harvest, and move more aggressively towards amplifying the longer seasons, like Christmas trim-a-tree, where, by the way, I firmly believe our assortment and value proposition for Q4 is 1 of the strongest I've seen in all my travels over the last 90 days.

Furniture, a little bit of a challenging quarter, up against overly-aggressive pricing and heavy inventory liquidation last year. Our overall merchandise content and plans for Q4 look solid to me, and I am confident we will return to positive comps. Additionally, our furniture financing test in 100 stores continues to perform very well and drive incremental meaningful comps in this business, and I'm anxious to begin expanding the program postholiday and throughout 2014.

In the balance of our categories is where we have merchandise content challenges, and I later will share some thoughts on how our edit-to-amplify strategy will likely progress over the coming quarters. Strategically, over the last 90 days, there have been several significant developments and decisions made, which I am confident represent a turning point for the future of our business. I am very excited about the new leadership we have in 2 key parts of the 3-legged stool, namely marketing and merchandising. Andy Stein, our new Chief Customer Officer, who joined us in October, brings new strategic thinking skills to our team and his experience in the digital, social, e-commerce and omni channel space will be critical to the future implementation and success of our plans. Rich Chene, our new Chief Merchandising Officer, joined us in November. Rich brings with him a broad experience based in many of the categories in our store: positive relationships in the vendor community and a track record of results. We're excited about the leadership he brings to our organization. We also announced earlier this week the appointment of 3 experienced general merchandise managers, all who have held senior leadership roles for successful retailers in the discount, off-price or department store space. I am very excited to have our new merchandising leadership structure in place to build from, as we move into 2014. We have also learned a great deal about our customer. Why does she shop us? Why has she stopped shopping us? What will it take to get her back in the store and keep her? We conducted surveys of our rewards customers who have lapsed or stop shopping us. We also conducted consumer focus groups, which candidly were painful to watch. Not surprisingly, merchandise offering in terms of selection, quality and value are crucial and at the top of the list, along with digital, online and social opportunities, as well as store service and standards. Good news is each of these opportunities or consumer demands line up with key initiatives being worked on as part of our strategic plan.

Over the last 90 days, our executive team has continued its detailed evaluation of our current operations and potential new business prospects. As we chart a new course that will give us the best opportunity to win and provide value for our customers, our associates and our shareholders.

As part of our strategic planning process, we have also had to make difficult decisions about existing businesses or investments where we are not generating a good financial return, or where we do not see an opportunity to win longer term. As such, a few weeks ago, we announced our decision to close our wholesale business, and exit the business by the end of Q4. After careful deliberation and consideration of our options, we also announced yesterday our decision to exit the unprofitable Canadian market, where we currently operate 73 stores under the Liquidation World or LW brand names, 5 stores under the Big Lots brand name and 2 distribution centers. When this struggling business was acquired in 2011, the intention, as I understand it, was to revamp the LW operations as the base for bringing extreme value, merchandising and ultimately the Big Lots brand to Canada. Over the last 2 years, we have invested in excess of $85 million in this business. Our team of associates has been highly engaged and dedicated to the course. However, we have not been able to gain the traction necessary to be profitable or see profit on the horizon for several years in the Canadian marketplace.

After carefully reviewing our options, we decided that a significant additional capital investments and execution risk associated with continuing to pursue a turnaround would not be in the best interest of our the company and our shareholders. We intend to begin an orderly wind down process in Canada immediately, and expect that the process will be completed during the second quarter of fiscal 2014.

As a result of these changes, approximately 1,600 positions will be eliminated. This was not a decision we took lightly, as it will affect a number of dedicated associates who have worked very hard in an effort to grow our business. While the strategic and financial rationale supporting this decision is clear, we deeply regret the impact that the closings will have on our associates, our customers and the communities where our stores and distribution centers are located.

We are committed to exiting our operations in a thoughtful and deliberate manner in order to minimize disruption for our associates and customers. Our new management team here in Columbus remains focused on identifying the best opportunities in the U.S. to serve our target customer. The strategic decisions to exit Canada and close our wholesale operations will enable us to focus our resources on the positive growth prospects associated with rolling out coolers and freezers, launching the furniture financing program and introducing e-commerce and omni-channel capabilities, while significantly realigning our merchandising organization and moving quickly to implement our edit-to-amplify merchandising strategy. These steps forward all possess the singular goal of strengthening the Big Lots brand and reinvigorating our U.S. business by better serving Jennifer.

And now I'd like to turn the call over to T.J. for more detail on Q3 and the outlook for the balance of the year.

Timothy A. Johnson

Thanks, David, and good morning, everyone. For the consolidated company adjusted, net sales for the third quarter fiscal 2013 were $1.143 billion, an increase of 1.6% over last year. Comparable store sales decreased 2.5%. The adjusted loss from continuing operations was $9.1 million, or $0.16 per diluted share, compared to last year's adjusted loss from continuing operations of $6.2 million, or $0.11 per diluted share.

Adjusted net sales for U.S. operations were $1.105 billion for the quarter, an increase of 1.8%, compared to last year adjusted $1.086 billion for Q3. Comparable store sales for stores opened at least 15 months decreased 2.5%. For the third quarter of fiscal 2013, the adjusted operating loss from continuing operations for our U.S. business was $6.4 million, as compared to the adjusted operating loss of $2.7 million for the same period last year.

Our adjusted gross margin rate of 39% was up 70 basis points to last year. This was consistent with our expectations, as we anticipated fewer markdowns in certain of our categories, namely furniture, this year, compared to last year. Total adjusted expense dollars were $437.9 million, and essentially flat to last year on a per-foot basis. The third quarter adjusted expense rate was 39.6%, up 100 basis points to last year. Expense deleverage came from higher depreciation expense, higher occupancy cost, increased advertising expense and the deleveraging impact of a negative 2.5% comp as on certain fixed expenses. Additionally, you may recall during the third quarter last year, we had a significant one-time adjustment related to our former CEO, which lowered equity-related compensation expense.

Interest expense of the U.S. operations was slightly lower than the prior year, and our U.S. tax benefit on pretax loss was 45%.

In summary, our U.S. business reported an adjusted loss from continuing operations of $4.1 million, or $0.07 per diluted share for the third quarter of fiscal 2013, compared to last year's adjusted loss from continuing operations of $0.03 per diluted share, or $0.09 per diluted share if you exclude the favorable equity adjustment I just mentioned. Our result of the $0.07 loss was above the low-end of our guidance by approximately $0.04, which was evenly split between lower sales dollars and a lower gross margin rate than anticipated.

In Canada, our net loss was $5 million, or $0.09 per diluted share, compared to last year's loss of $4.3 million, or $0.07 per diluted share. Net sales decreased in the quarter 1.9%, to $38.3 million, as comps decreased 0.9%.

Moving on to the balance sheet. Inventory on a consolidated basis ended the third quarter of fiscal 2013 at $1.238 billion, compared to $1.191 billion last year. The growth in inventory was driven by a 2% increase in store count and a 2% increase in inventory per store in our U.S. stores.

Capital expenditures for the third quarter of fiscal 2013 were -- totaled $32 million, compared to $39.7 million last year. On a year-to-date basis, CapEx totaled $83.7 million, versus $100.4 million a year ago. Depreciation expense for Q3 was $29.5 million, an increase of $2.9 million to last year. We ended the quarter with $67.7 million of cash and cash equivalents, and $324 million of borrowings under our credit facility. This compares to $66.3 million of cash and cash equivalents last year, and $463 million of borrowings under our credit facility.

During the third quarter, we opened 25 new stores in the U.S. and closed 14, leaving us with 1,525 stores, and total selling square footage of 33.4 million. In the first 3 quarters of this year, we opened 52 new stores and closed 22 locations. For fiscal 2013, we now believe we will open 55 new stores and close 57 stores, ending the year with 1,493 stores in the U.S.

Moving on to guidance. Let me start with a reminder that the fourth quarter of this year has 13 weeks of operations, compared to 14 weeks last year, and the full year of fiscal 2013 has 52 weeks, versus 53 weeks in fiscal 2012. As you may recall, we estimated the impact of the extra weak last year to be approximately $0.05 per diluted share.

For our U.S. business, we're updating our Q4 guidance of adjusted income from continuing operations to be in the range of $1.40 to $1.55 per diluted share, compared to adjusted income from continuing operations of $2.08 per diluted share in the fourth quarter of fiscal 2012. This forecast assumes comparable store sales of negative low- to mid-single digits, a lower gross margin rate, and expenses as a percent of sales higher than last year. All are reflection of expected sales trends and the impact of higher markdowns, as we see -- as we sell through seasonal merchandise and intensify editing categories in our edit-to-amplify strategy. Our guidance today does represent approximately a $0.57 change to the high end of the prior guidance. The elements are estimated to be approximately $0.30 in sales, $0.30 in the gross margin rate, partially offset by expense flex. Sales, obviously, is about the comp. The gross margin rate is a combination of normal activity of approximately 10% to 15% based on the lower sales, and the action towards edit-to-amplify in the range of $0.15 to $0.20.

Expenses in this model are forecasted at the lowest rate per foot in the last several years. Our challenges remain top-line driven. In Canada, we expect a net loss in the range of $38 million to $43 million, or $0.65 to $0.75 per diluted share. This estimate includes the expected 2013 cost associated with closing this business, including a charge of $32 million to $34 million for severance, lease liabilities and impairment of assets, including inventory, fixed assets and goodwill. We anticipate final shipments of merchandise in January, and we expect our DCs will cease operations by the end of fiscal Q4. We anticipate store closing activity in Canada will have a positive short-term impact on sales results, as merchandise this markdown to sell through in an accelerated cadence. The expected impact of sales margins and cash flow have been reflected in our estimates. We expect all Canadian stores to be closed by the end of first quarter of fiscal 2014.

As we complete the wind down over the course of the year, we will report our Canadian business as discontinued operations beginning in the first quarter of fiscal 2014. There may be some tax benefit associated with the closure, however, we are unable to estimate the amount or timing as of now.

For the consolidated company, adjusted income from continuing operations in the fourth quarter is estimated to be in the range of $0.65 to $0.90 per diluted share, compared to adjusted income of $2.08 per diluted share for the fourth quarter of fiscal 2012. For our U.S. operations for fiscal 2013, we estimate adjusted income from continuing operations for the full year of fiscal 2013 to be in the range of $2.40 to $2.55 per diluted share. This compares to our 2012 adjusted result of $3.21 per diluted share. This is based on a total sales decrease in the 1% to 2% range, and comparable store sales decrease of 2% to 3%. The adjusted gross margin rate for fiscal 2013 is expected to be slightly lower versus 2012, driven by higher anticipated markdowns.

Expenses as a percent of sales are expected to increase, with a majority of the increase coming from higher occupancy cost, depreciation and distribution and transportation expense. In Canada, we now expect a net loss for the full year of fiscal 2013 in the range of $0.90 to $0.98. Our outlook for the full year of fiscal 2013 for the consolidated company now calls for adjusted income from continuing operations to be in the range of $1.42 to $1.65 per diluted share. This compares to fiscal 2012 of $2.98 per diluted share. We now expect to generate approximately $120 million of cash flow.

So with that, I'll turn the call back over to David.

David J. Campisi

Thanks, T.J. The profit outlook for Q4 has changed pretty meaningfully. And as you heard T.J. mentioned, a portion of that change represents sales trends in November and our commitment to ensure we execute for squeaky clean in our seasonally-sensitive categories. Just as importantly though, we are taking markdown action now for the future of our business. What I mean by that statement is we are in the early stages of our edit-to-amplify merchandising strategy, and we have learned enough to know that what we want to stand for or amplify and what we need to edit or liquidate.

In Q4, we are beginning the edit process by marking down certain categories within our electronics, home and hard-line businesses in order to be in a better position to amplify certain categories going forward, where we can be a destination for Jennifer. The editing process will last to varying degrees into the spring season of fiscal 2014, and is a crucial step to our long-term success.

In retail, if you aren't constantly changing, you're dead. We must change our merchandise offering to accentuate winnable, ownable categories in order to encourage our existing Jennifers to shop more often and encourage our lapsed, or lost customers, to return and give us another try. I cannot over emphasize how important this step is to our strategic transformation.

To summarize, and then I will be happy to take your questions, I am excited about the progress we have made on our strategic plan. Now we move on to developing our implementation plan, which should be completed by our next call. I look forward to sharing with you our vision at an Investor's Day in the spring. I am confident edit-to-amplify is the right merchandising strategy. Our customer is telling us loud and clear, our results in ownable categories are good, but can be much better, and we do not need to assort a store or tie up precious inventory dollars, trying to be everything to everyone. I am confident we have the right senior merchandising leadership team to drive our business forward.

It's clear to me today, than ever before, e-commerce and omni-channel are not an option. They're a requirement in today's retail environment. E-commerce, omni-channel, digital, social. She wants options to shop us more frequently and options on how to communicate about Big Lots with her friends. I am confident we have identified actionable changes and initiatives to drive sales in 2014, namely coolers and freezers, furniture financing and expansion and contraction of certain merchandising categories. I am very proud of how our entire organization has come together, but particularly on how our store operations team has embraced our vision and Jennifer. I've traveled stores from coast to coast in the last 3 months, and I see enthusiasm around our mission statement and a sharper focus on the customer. I'm hopeful this holiday season, Jennifer will notice a difference, and put us on her shopping list more often.

So with that, I'll now turn the call back over to Andy.

Andrew D. Regrut

Things, David. Katy, we would now like to open the lines for questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Paul Trussell with Deutsche Bank.

Paul Trussell - Deutsche Bank AG, Research Division

David, you gave a lot of information there, a lot of changes. Could we just focus first on edit-to-amplify strategy? You mentioned I believe completion by early part of 2014. Could you just talk about what we will see going on in the stores over the next few months? How many stores will be touched? Just refresh how many categories -- will that strategy, at all, include a further rollout of the cooler program? And -- let's start there.

David J. Campisi

Okay. Paul, thanks for the question, and hopefully I can remember everything you just asked me. But I'll start with the edit-to-amplify. Again, as I've said to you guys in the past, editing our assortments and then amplifying where we win, specifically, if you look at our company and you say today, we win in furniture, we win in the seasonal areas; so we want to continue to amplify those businesses. We also are starting to show some really big wins in the food and consumable areas, so again, we want to amplify that business. I believe we told you guys on the last call that we were going to open up another 700 stores, I believe it is, T.J., of coolers and freezers for the first half of this year. So obviously, that's a big amplification of the food businesses as well. The editing process, so you guys understand and specifically to you, Paul, has been part of the Part 2 of our strategic planning process that we've been working on since our last call, which we've gone through a process of what businesses are we going to grow in this company, which businesses are we going to maintain, what are the down-trending categories and then what are the exits. This process is a very highly-disciplined process that many of the new hires have been schooled on, same as I have in my career. What businesses aren't meaningful. So as an example, in the hardlines areas, we are exiting categories like kitchen faucets and plumbing and things in the do-it-yourself world that really Jennifer doesn't look to us for leadership. And as we mark down those categories and exit those categories, we will reallocate footage in the areas I just mentioned. Along with that, we will continue to find lineal footage for the home side of our business, which we have just revamped and reorganized. Just as recently as last week, we are splitting it into 2, with the hardlines division -- I mean, the hard side of home and the soft side of home, where we want to amplify both businesses and really go after categories that we know we can do well, and then that's tabletop and cookware and kitchen gadgets. So if that makes sense, instead of having us carrying kitchen faucets, which she is not looking to us for leadership, we'll be carrying more kitchen gadgets, as an example.

Timothy A. Johnson

Paul, it's T.J. Just to clarify a couple of things from your question, for others. Edit-to-amplify is a total company strategy, so as David mentioned, the merchandising elements are in all stores, and changes in those elements will impact all stores. What's starting now is that kind of markdown process on some of the items, where Jennifer is not looking to us for leadership on, and moving that product out of the way so that as we amplify the other businesses, there's room for it. Secondarily, from the cooler and freezer standpoint, as David mentioned, that rollout will start postholiday. We're actually looking closer to probably 600 stores next year and a similar number the following year. We are in about 125 stores as we sit here today. And again, those results continue to validate for us, that that's a direction that we need to move in sooner rather than later. So that's a pretty expeditious process on the part of the company to get to that number of stores next year.

Paul Trussell - Deutsche Bank AG, Research Division

That's very helpful. And just to follow-up on that, so by the first quarter of '14 you feel that the inventory levels will be relatively fresh and the markdown process, which will be ongoing very aggressively this quarter, will have been largely completed, correct?

David J. Campisi

No. What we said in our prepared remarks was, we're starting the process here in the fourth quarter that will last through the spring time. So I wouldn't have an expectation that starting in the first quarter we will be where we want to be that will actually last through the spring -- spring season, which would include first and second quarter.

Paul Trussell - Deutsche Bank AG, Research Division

And then my last question is just on the cash. With all these changes, how should we think about capital expenditures for next year? And also, what is the cash amount needed to support the exit out of Canada?

Timothy A. Johnson

Yes, we're not giving total company guidance on 2014 at this point. Obviously, as David mentioned, the implementation part of the strategic plan is still ahead of us, and 2014 will be the first year associated with that. Second part of your question, as it relates to Canada in terms of the -- over the, I'll call it fourth and first quarter, estimated cash flow needed to exit the business in round numbers is in the range of $40 million to $45 million, and that includes obviously recouping cash from sales inventory and netted out or exceeded by what our estimates of some of the liabilities associated with closing down the business, with the $40 million to $45 million would be our best estimate based on what we know today. Having said that, we also said in our prepared remarks that these estimates are before any potential tax benefit on some of the operating losses we would be able to take here in the U.S., and that's something that we're working on here in the fourth quarter, both through our tax department here, as well as engaging outside experts to work with us on that. So more to come, but excluding any tax benefit, we're in the range of $40 million to $45 million over the next couple of quarters.

Operator

[Operator Instructions] We'll take our next question from Meredith Adler with Barclays.

Meredith Adler - Barclays Capital, Research Division

Well, you got a lot of stuff on your plate. Maybe we could talk a little bit about your vision for consumables. You had -- every time you've talked about coolers, you emphasized the urban stores, but that isn't your entire store base. So is the expectation that the coolers will go everywhere? And then when you think about the assortment that you have in the food section, is it going to have a lot of product that is truly unique, more specialty product? Or is it going to be, I hate to use this word, but run-of-the-mill kinds of food products? And how would it be differentiated from a Dollar store or even a Wal-Mart?

David J. Campisi

Well, let me to try to start there, and T.J., step in where you feel needed. But when we mentioned the urban store test, you're right, and I was out in California looking at that last month. And what's happened with that is we have a lot of learnings from that where it's allowing us to rollout with significant confidence in the rest of our stores day in and day out categories that our customer wants from us. And that's one of the things, Meredith, we learn from the focus groups, too, is that, that Jennifer's out there asking us for consistent assortments. And those are in those what I call need, use, buy most categories. And as you well know, a bulk of our food consumable business has been run by, primarily, mostly closeouts, and that means that she don't have consistent assortments. So we are adding more consistency into the entire chain of food products that we've learned from the urban test. And as far as the unique products, I mean, we have expanded that specialty part of our food business. We have buyers that were over in Europe earlier, a couple of months ago, and we continue to expand on specialty foods. What really differentiates us from the rest of the guys out there, candidly, is we have a very strong team that clearly understands how to buy closeouts. And we deliver terrific value, whether it's in the snack category, the cereal category, and that really differentiates us not only from a price point of view but a value offering versus a Wal-Mart or a Dollar store in a pretty significant way. And then I would also add that when you look at the assortment that we're working on in the consumables area, one of the changes we're making is, is we're increasing our SKU count in Canada. We were doing that throughout the business on our never-out programs and -- to offer her more consistent assortment there as well. And it appears to be working and being well received by our customer.

Meredith Adler - Barclays Capital, Research Division

Okay. Just kind of a follow-up. Of the 125 stores that you've got coolers in now, there is -- is there a mixture of locations, some that are more urban and some that are more suburban? Because I'm just still trying to figure out customer may say she wants consistency, but why would she shop at Big Lots to buy paper towels or to buy cleaning supplies when she can get them almost anywhere?

Timothy A. Johnson

Meredith, this is T.J. I guess, for the first part of your question as it relates to coolers, we are in now 6 major markets spread throughout the country, east to west, north to south, in different types of demographics, different types of centers, anywhere between A, B and C locations. And the results have been fairly consistent across markets that we are driving both positive comps, and that positive comp is coming through higher transactions. Again, whether there's a higher penetration or lower penetration of EBT and SNAP customers as a part of that days in the store, the results have been very favorable. So that's what gives us confidence that moving forward with this initiative is the right thing to do going forward. Additionally, what's -- somewhat of a nice marriage here between the 2 initiatives we have going into next year is we were seeing similar types of results in our furniture financing test, in that different types of stores, different geographies, the customer is looking to us for options. I think that's the key. Coolers and freezers are an option for them to shop us more frequently going forward. Furniture financing is an option for them to shop our furniture area more frequently going forward. So kind of taking down those barriers in those 2 specific examples has been well received to date.

Operator

We'll take our next question from Matthew Boss with JP Morgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Can you talk about the cadence of sales as the quarter progressed? Any headwinds impacting the customer? And just elaborate a little on November and what really happened here.

Timothy A. Johnson

Yes. Matt, it's T.J. Our comps were pretty choppy through third quarter, candidly. I think we indicated on the last call, August got off to a slow start. Labor Day weekend in and of itself also was difficult. We were starting to see some level of improvement moving through the month of September in those middle weeks. The challenges got tougher as we got to the end of September weekend, and we think some of that might have been external in nature. October -- I guess of the 3 months, October was probably slightly better. We had very successful friends and family weekend. We had some other promotions in store that were fairly well received. But unfortunately, October was not strong enough to make up for what we had missed earlier in the quarter. The second part of your question as it relates to the fourth quarter, I think about it this way, the month of November is finished, and obviously, we know those results. Comps were down in November. Comps were actually down more than what we are guiding for the quarter. And again, in our business, the seasonal nature of our business, the giftable nature of our business, our sales spike significantly when you get to the Thanksgiving weekend and in the weeks of December. So November, in total, was actually down more than what we're guiding to for the quarter. Encouraging though for us was that the week of Thanksgiving on a shifted basis to last year, so Thanksgiving week versus Thanksgiving week was actually flat or slightly up to last year. So we do think we had a good plan in place. We do think the customer responded both in traffic and in what they saw in our promotions and in our ads, and that was encouraging to us. We expect that the compression of the calendar, along with the extra shopping day in December, will lead to positive comps. And we expect that January, based on a difficult January last year and some of the additional promotional activity we're including in our guidance this year, that January should be relatively flat as a comp. Unfortunately, as you might recall, we lost a lot of volume last year in January due to the delay in certain income tax refund activity. It appears to us, based on what's been said and some of the government shutdown activity actually might lead to the refund activity being delayed again this year. So what we thought might be an opportunity for us in January probably is not there, therefore, flattish comps in January.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Okay. And then quick follow-up. As you establish online, how should we think about the timing? What would separate you guys competitively? And what would be the cost around this?

Timothy A. Johnson

Yes. I think I'll take the second part of that question as the cost guy. I don't believe we're in a position right now to communicate what the costs are and the CapEx requirements are. I would characterize it this way, we've done a fair amount of work with one of the leading consultants out there. We presented those findings to the board earlier this week. There's alignment around it's not an if, it's a when. We're moving as quickly as we can going into next year. This is not something that we're going to put up in the quarter and hope it works. There is going to be resources dedicated to this, so there will be costs both in SG&A and in capital. And we'll speak to those in more detail as we go into -- as we go into the March time frame for '14. Again, having been at the focus groups with David, sitting on the other side of the mirror, it's very clear she wants options on how to shop us more frequently and get information about how we compare to others. So it's not an if, it's a when.

Operator

We'll take our next question from Joe Feldman with Telsey Advisory Group.

Joseph I. Feldman - Telsey Advisory Group LLC

I guess 1 question we had was how much of the pressure you're seeing now is a result of already starting to do these changes of the edit and amplify versus just the -- you haven't really changed much yet, but there is weakness in the business. Can you kind of separate that for us?

David J. Campisi

Yes. I would tell you that I don't think it's the pressure of the changes, Joe. I mean I think a lot of it is, candidly, what T.J. has been talking about and what I talked about in the prepared remarks. The businesses that performed well, as I mentioned, food and consumables and seasonal. To a lesser degree, we had some difficulty in furniture, which, candidly, had been outperforming the company for the first 2 quarters of the year. The things that I'm talking about in the editing process, obviously, during that quarter, as we went through the part 2 of the strategic planning process, gets you very, very deep into the details of the businesses and help us understand where we needed to exit. But we haven't begun that process. We're beginning that exit process as we speak, so I don't think that any of the things that we've been working on have had anything to do with the pressure on top line. The business has actually been -- candidly, those businesses have been difficult for a long time. We just haven't -- we weren't able to get the volume on our furniture in the quarter that we had previously.

Timothy A. Johnson

Yes. I think, Joe, kind of building on your point, we don't necessarily see edit to amplify as the reason why comps came in where they did for the third quarter, but we do see it as -- the third quarter as support as to why we need to move quickly to edit to amplify in some of the categories that currently are not helping to drive comps and reallocating investment dollars and resources into the categories that we think can drive a more meaningful comp. But again, unfortunately, that vision becomes more real in the store as we get into the latter part of spring next year, not today.

David J. Campisi

And Joe, I would also add, too, and we haven't mentioned it, but the challenges in the electronics business have been very apparent. And we saw that trend in Q2, and it continued into Q3, specifically in the tablets business for the most part. And the accessory business is not able to drive enough volume to offset the pressure. We've been filling in that category. So that, again, we knew that going in that it was tough in Q2 and it continued to be difficult in Q3. And we recognize that there's a lot of pressure in the industry as the price points have come down significantly year-over-year.

Joseph I. Feldman - Telsey Advisory Group LLC

Got it. And then another follow-up question. It sounds like -- my understanding of what you guys are saying this morning is that you're well on the way of making a lot of these changes and kind of doing things on the fly at the moment. Does it -- I guess what is driving the change now at peak holiday period time? Like, would it make more sense to just wait until January or even February and almost start fresh at that point? Because, like, I wonder how much disruption you're causing this quarter by doing a lot at this peak time.

David J. Campisi

Actually, it's really the opposite, Joe. And we're not really causing any disruption in the business, and candidly, we're not doing anything on the fly either. We're very, very surgical and methodical in our approach, and it's the reason why it's taking us to this point to get to the area where we understand what we want to exit. And the reason we want to do it now is you want to strike while the iron's hot when you have footsteps in the store in the month of December. We have most traffic of the entire year, so we have an opportunity to move through a lot of this inventory and liquidate it and as well in January, which is a typical clearance month as well. By the time you reach February, the customer's checked out, so we really need to be aggressive at the moment.

Joseph I. Feldman - Telsey Advisory Group LLC

Got it. And just one last point of clarification. David, did I hear you correctly say -- I mean I know you believe you'll -- when you guys will get back to positive comps. But did you say you expect to return to positive comps in the rest of the fourth quarter? Or did you mean at some point down the road?

Timothy A. Johnson

What I was actually laying out for Matt, that's part of this question, Joe, was November was actually down on a comp, and it was down more than what we guided for the quarter. December, we actually expect positive comps in the month of December, and that's the combination of the calendar compression and the extra day. And in January, we expect comps to be relatively flat. Again, with a portion of the activity, we're talking about here in markdowns, helping on the top line, and then obviously, it's just based on trends coming out of December.

Operator

We'll take our next question from Anthony Chukumba with BB&T Capital Markets.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

I had a question. You've talked a lot about the coolers and how successful that test has been. Just wanted to see if you had any updates in terms of some of the other tests that you were previously doing, specifically the full store remodels and the changes to the customer loyalty program.

David J. Campisi

Yes. Anthony, that's a good question. We didn't speak specifically to the remodels. I guess what I would tell you we're now complete. We've got 5 markets essentially or 5 phases of markets that were executed. And I would tell you the results are still mixed. And in a couple of those markets, the results in comps were strong enough that you look at it and say it would be a good investment going forward. In a couple of the markets, the comps have not been as strong or not strong enough to pay for what we're putting into those stores. So currently, I would suggest to you that the market remodel program is neutral or on hold until we get through the balance of the strategic planning process here in the next 3 months. The second part to your question, the rewards program, candidly, that's not a test anymore. We actually rolled with the new program effective in the October time frame. So again, the overarching goal of the rewards program was to move to something that customers -- was easier for them to understand and where most customers will get offers from us more frequently than they were under the prior program. So it's been in effect for a handful of weeks. Given it's the holiday time frame, I don't want to make any broad statement or generalization of it. But to date, we're meeting our goal of getting more offers out to more customers on a more frequent basis, and we'll see how much progress we can make really with that lapsed customer, Anthony. Our core customer loves us and shops us every week, every month, even when we're not always at our best. They like what we offer. It's really that customer that comes in on a more infrequent basis or have lapsed that we're trying to get re-interested in the store. So we'll have a better update on that when we come out of the holiday time frame.

Operator

[Operator Instructions] We'll take our next question from Patrick McKeever with MKM Partners.

Patrick McKeever - MKM Partners LLC, Research Division

So another initiative that you mentioned but just hoping we could get a few additional details, the furniture -- the new furniture or the test furniture financing vehicle. You shared some statistics with us back in September talking about, I think, 3x average ticket furniture transaction in the test stores when the customer used this new financing vehicle. I was just wondering if that has continued to be the case. Has that held up from what you were seeing earlier? And what would the timing be of a rollout? Is this something that you could an do pretty quickly? Could you get it out there in front of tax refund season in 2014? Would it be more of a phased rollout, like coolers or something, that you could push across the entire chain pretty quickly?

David J. Campisi

Yes. Results through the third quarter, Patrick, on the furniture financing test continued to be strong. So some of those metrics we gave on the second quarter call continued on into third quarter. The average size of the basket is very strong. The approval rates continue to be very good, especially compared to our current private label credit card program, where the decline rate is significant. So everything with the furniture financing test read continues to be consistent and continues to be strong. The second part of your question, we will not have this out total company in front of tax time. We will be able to add some level of stores to the program during the first quarter, and we'll move as quickly as we can towards adding other stores over the balance of the company stores to the program. It's not something that we can flip a switch on and it will happen overnight. There is work that needs to be done from a systems standpoint to make it happen. But that work is being done, and there's a cross-functional team that's doing a great job trying to get this to the company as quickly as possible. So it's -- again, it's not an if, it's a when. That's the direction we want to go on. I guess the third part of the equation that we would like to get to, as well as we've focused this effort in on furniture and big-ticket product. Well, as you know from following us, we do have big-ticket product in other parts of the store. So again, once we're more comfortable in terms of the execution and stores have been well trained and are out there actively pushing the program with customers or making them aware of it, somewhere down the line, adding other large-ticket categories to the program could kind of be the second leg of growth, if you want to think about it that way. So very excited about the program. The stores have rallied behind it. The furniture team likes it obviously and so does the company.

Patrick McKeever - MKM Partners LLC, Research Division

And then what percent of your furniture sales are done on the private label?

David J. Campisi

On the private label credit card program, it's very small. It's -- I don't want to say it's significant, but it's very small. Furniture financing really kind of dwarfs that effort right now. It's pretty meek..

Patrick McKeever - MKM Partners LLC, Research Division

I mean, what could be as a percent of your furniture sales, 20%, 30% of your furniture sales, something like that?

David J. Campisi

I don't think I want to get into forecasting next year just yet. But it's meaningful enough in a business that's close to $1 billion this year. So it's significant to furniture, and it's significant to the store. But we'll have more to say as we give guidance next year.

Patrick McKeever - MKM Partners LLC, Research Division

And then on Canada, just quickly, why didn't you try to sell that business? Or did you try to sell that business? And what will happen to the executive management team for Canada?

David J. Campisi

Yes. Patrick, this was a pretty lengthy process. I know it might seem like something that just kind of happened in the release. But it was a fairly lengthy process, weeks and months of kind of review back and forth, traveling to stores, meeting with management in Canada, discussing it multiple times with the board. And I guess, on each occasion, we kept coming back to having difficulties seeing a profitable path in the near term, and it would be multiple years out. And candidly, the path to profitability is really through the Big Lots stores or new stores or new capital. So the decision to close down the operations was really a function of profitability as many years out can be heavily capital-intensive and along with that, comes execution risk for a longer period of time than we're comfortable with. Having said that, why not sell? Candidly, we solicited some input from experts outside the building in kind of that investment banking world. We also are very well aware of the fact that when we purchased the business 2.5 years ago, candidly, there was not a long line of people interested in it. If you recall, it was struggling at that time. So after considering it internally, after considering the fact there wasn't a long line of suitors back then and after recognizing that to try and move into a sale mode, we'd have to operate a business even longer and continue to buy inventory and continue to invest potentially to not have somebody at the finish line. We just didn't think the risk was worth any potential of that sale. Having said that, obviously, we've got 79 leases on stores. We've got leases on distribution centers, and we'll welcome any calls from anyone who might be out there listening on what their interested in. We've already been in contact with a broker that has been helping us in the Canadian marketplace, one of the biggest and the best. And we'll move expeditiously on trying to move on leases and recoup some of that cost.

Operator

We'll take our next question from Jeff Stein with Northcoast Research.

Jeffrey S. Stein - Northcoast Research

David, I'm wondering if you could talk a little bit about the opportunity that you see in e-commerce. I understand you don't want to talk about the investment you're going to make. But wondering what are you going to do differently this time. Big Lots has tried and failed several times in e-commerce, and I understand your customer is looking for more information online. But do they really want to buy online? And if so, what did they want to buy online that you haven't tried in the past? And I do have a follow-up.

David J. Campisi

Okay. Thanks, Jeff, and it's a good question. And I would tell you -- the first piece of that I'll answer is the first time that Big Lots tried to play in the online space, it was more being done off the corner of someone's desk. It wasn't a full well-thought-out strategy. And we have had, as T.J. mentioned earlier, one of the stronger consulting firms in here since August working very closely with myself and the entire team in this building. And the strategy is very, very well thought out, and some of the things that were discovered that we mentioned this with the focus groups and so on, our customer clearly has told us that -- it was almost, I believe, 82% said -- it was 40% said they would absolutely buy online. 42% said they would consider buying online. And what we've discovered during this process is that the current Big Lots customer is highly digitally engaged. 63% of them are on a smartphone. 95% have a desktop or a laptop computer. And when you look at all the other statistics that we put together from the standpoint of how they want to purchase, how much they use apps and all the different activities that they do from -- everything from checking store availability, order online, pickup in store, we absolutely, positively, were astounded at the results. And again, I can't overemphasize what the current purchasers said to us that they would want to buy from us online. So with that, we've put together a strategy that we presented to the board on Tuesday that talks about our omni-channel strategy, which is actually the bigger size of the prize, okay? And that's the piece that is quite astounding. What is good for Big Lots is that everybody else has already done the heavy-lifting, whether it's guys like Macy's or Wal-Mart or Target and so on, that have learned that the e-commerce business is important. But the volume that you do off of omni-channel because of it is 4 to 5x larger than what you'll do off of the e-commerce site. So we very carefully and methodically walked through this thing and put together lots of different phases. The first 12 months is really a build-out and a ramp-up of everything from relooking at our Buzz Club to accelerating digital and social and SEO. And then the Phase 2 is 12 to 24 and then 24-plus. So we're going to approach this. And as T.J. mentioned the first phase of building out the organization will begin next year as we add a VP of e-commerce and digital and we add some folks in digital marketing, in-store innovation and so on to build this thing out. That will happen -- phase in throughout '14. Our strategy then is to launch sometime in the beginning of the first quarter or the end of the first quarter of 2015. This isn't going to be a Band-aid approach to e-commerce, omni-channel. This is going to be done the correct way, and we're very excited about the opportunity.

Jeffrey S. Stein - Northcoast Research

Okay. So it's sound like the losses that you might otherwise have sustained in Canada for next year, part of that is just going to move over to e-commerce. It also sounds like part of that is going to move over to strengthening the merchant organization. And is that kind of the way we should look at it, you're just kind of moving the ball around, moving it from Canada to the U.S. in terms of what you saw in terms of investment necessary next year?

David J. Campisi

Yes. I -- and T.J. may want to chime in here, but what I -- that's a fairly good analysis, Jeff. What I always say to my guys it what's on Page 1, and candidly, omni-channel, e-commerce needs to be moved to Page 1. And we believe that it's a significant opportunity that requires our folks here in the U.S., which is what I refer to as the mother ship, to stay razor-focused on building our brick-and-mortar business and focusing on e-commerce and omni-channel. And yes, the candid equation came into play. And when you look at how big of an opportunity omni-channel is over the next 5 years, it's significantly higher than Canada.

Jeffrey S. Stein - Northcoast Research

Okay. And one quick...

Timothy A. Johnson

I would just add to that, Jeff, that I think your assessment is certainly fair and appropriate when you think about how we're going to allocate resources, meaning people's time and where do we want them focused. Omni-channel, brick-and-mortar U.S. comes front page. Additional resources and merchandising comes front page in planning and allocation. And obviously, Canada, at this point, moves off the page. I would just reserve any estimates or I would reserve any comments on the dollars and sense of it until we really put the whole package in front of you in terms of what does 2014 in the strategic plan period look like.

Jeffrey S. Stein - Northcoast Research

Understand. What -- can you just elaborate a little bit on what happened during the third quarter in furniture? What changed there? Was it -- was there some kind of execution error, merchandising? What was it that changed?

Timothy A. Johnson

What changed was really, Jeff, we have -- you may recall, last year, we had some pretty significant markdown activity going on in furniture last year in the third quarter. We came out of back-to-school period and had pretty significant markdowns, particularly in upholstery as a category. So we thought we had some plans in place to offset some of that volume, and we did offset some of it, just not enough of it. So actually, when you look at, "Did we make more money in furniture year-over-year?" I think the answer is probably yes, but it's just unfortunate that from a comp perspective, it came up a little bit short. Again, we turn the corner here in the fourth quarter. That liquidation activity from last year is behind us. And I know, David and the merchant team feel very confident in what they have to offer in upholstery and mattresses and also in the fireplace business in terms of quality and value for the customer.

Operator

We'll take our next question from David Mann with Johnson Rice.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

David, I'm curious how you see the role of closeouts in the future of the company, just given a couple of things. I guess you called out that you expect to increase never-outs. And also, it looks like a lot of the merchants that you've added have more regular versus closeout experience.

David J. Campisi

That's a good question. And I would start by saying that the role of closeouts will continue to be a very important part of our company and our business and a critical differentiator from our competition. And the way I would explain that to you, David, is that the never-out program is very, very strong and healthy, and we will continue to add more SKU count into the company throughout some of the businesses as we amplify them. And to give you an example, I'll talk about home for a second. We will continue to buy closeouts in soft home with top of bed and sheets and so on. But the changes will be -- and this is an evolution so it will take time to get there. But my vision is within our values, we'll have never-outs, and it will be very clear, clear assortments on basics, things that Jennifer expects from us every day, whether that's a sheet assortment in the basic colors and so on. And then in the drive aisles and dump-ins, we will continue to buy high-quality closeouts with extreme value. And I think one of the things that's probably important to mention, as we've gone through the new process with our merchant team, what we were teaching our guys to do is to focus on an acronym that is -- we talk about quality, brand, fashion and value, those 4 components and that they need to measure them on a scale of 1 to 4 from -- each area from quality, brand, fashion and value. And candidly, in the home, we've struggled big time with all 4 of those components, where we have been buying closeouts that have had no quality or brand or fashion. And to be quite honest, a lot of the product has been ugly, and so we've really struggled with that. So again, we will continue to focus on that in a different approach with more disciplines. And the comment about some of the folks that we brought in, some of the senior VPs and GMMs -- I have to take you guys back to my early days. All 3 of these guys from Rich and down are schooled in the same retail that I grew up in, and they all understand exactly what I talked about in how to edit and to amplify. But more importantly, they know how to buy closeouts as well. Whether they worked at Wal-Mart or Stein Mart or some of the outlet businesses, Kitchen Collections and so on, they understand closeouts. And I would tell you that people that come from the apparel world understand fashion flow and markdown cadence. And the disciplines that they've put in place are unbelievable. And years and years ago, when I was at Fred Meyer, I moved out a lot of folks in the home that clearly didn't understand that and put apparel people in there and they crushed it because, again, they understand those components and disciplines that are very required. And again, don't ever -- don't forget about how high our penetration is in closeouts in food and consumables. The amount of business that we do with some of the biggest food guys and in -- with guys like P&G and Kimberly-Clark will continue. None of that will change. It's just the approach and discipline and how we deliver that product and exit it in-store will be different. And lastly, I would just tell you that we need to be smart about closeouts and buy things timely. I spent some time this week with the board talking to them about, in some of the areas, particularly in the hardline areas, where we buy closeouts, when you look at a trend curve, we're not buying on the post-peak side. Were buying on the outgoing exit piece of that curve. And that has to stop. And a lot of that is teaching our people what's going on in the business. We want to be aggressive with closeouts, but we want to do it when it's on that post-peak side of the curve so we can maximize the opportunity.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

That's very helpful. I'm curious when you're looking out to next year as you're editing and amplifying, are you envisioning a layout change of the store? Any major planogram change that you think will be helpful? And would there be any disruption associated with that?

David J. Campisi

Yes. It's a good question. And we don't necessarily planogram store, we plana-guide it. But we are looking at some different layouts and for spring, in fact, repositioning furniture. We'll be doing some testing. We're going to bring it to the front of the store on the right-hand side. We're working very hard at how you enter our stores and have the ability to navigate a racetrack as you turn right. So it's kind of, again, be an evolutionary process of how we reallocate space, David. But certainly, we're relooking at all of those things. And my hope, as we reorganized merchandising and created a general merchandise manager for home and furniture, there's a reason we did that. We moved the home decor buyer into furniture as well, so we can bring to life a furniture department that includes home decor, wall art, framed art and create more of a living environment. So my hope there and belief is that our transactions will increase as we merchandise by lifestyle. In other words, when somebody is selling a sofa, it's my hope that our guys can get 1 more item in that basket, like an area rug from the home or some wall art from the home. We haven't been doing that. Candidly, the way we've been merchandising our stores is in silos. We've been merchandising by the way we buy it, not by the way she shops. That's the significant change, and it will happen over time and so will the navigation and signing as well.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

And one last question. I think, on the last call, we talked a little bit about longer-term gross margin, the ability to keep that somewhat stable. Do you feel like -- with what you've seen over the last quarter, with your new initiatives, is that still your expectation?

David J. Campisi

Yes, it is still my expectation. I think that we talk a lot about margin mix. And certainly, as we know, when we continue to add the freezer/cooler program, and we know the margins there aren't certainly as high as they are in other areas. But simultaneously, I believe we are owed serious, serious sales volume in the home area, which, as you well know, is a high-margin area. And we believe that we can ramp that business up rather quickly in 2014 and get the right merchandise mix. And again, furnitures, high margin. Seasonal outperforms the company's total margin. So all the areas that we're heavily focused on, we believe will offset the growth of food and consumables. And I don't believe we're going to see the pressure on the rate.

Timothy A. Johnson

Yes. The only thing I would remind you of, David, and others on the call, we mentioned earlier the edit to amplify. This is the beginning of it, and it will last through the spring time frame. So I don't want anyone to walk away thinking, going into 2014, margins quarter by quarter are going to be similar to where they were in the prior year. We will be taking markdowns here in the fourth quarter. We will be taking markdowns in spring. So not all quarters will be created equal. But certainly, the commentary on, "Can we maintain our margin in the strategic plan period?" That's really where we're more focused, not quarter by quarter.

Operator

We'll take our next question from Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

Just 1 question I had, David, if you could address some of the changes that we might expect to see with regard to advertising. Really, I think it's an important adjustment to drive traffic. So it sounds like you, with the addition of Andrew, maybe want to cut back on television circular. I guess, maybe a 2-part question would be, should we expect that the total ad budget is going to increase or is it just the mix is going to shift around? And then when might we, as consumers, begin to see some of these changes evolve in 2014?

David J. Campisi

Well, Peter, I would tell you that it's a good question. And Andy has been hard at it the last 4 weeks, and it's pretty early in the game here to be real specific on what he's planning on doing. But I would tell you that, certainly, as we navigate through '14 and we start to push the social piece of omni-channel and the digital piece, and as you well know, he's very experienced in that space, we'll shift some of those marketing dollars from print and advertising. And we don't see us increasing the advertising budget for '14. Quite honestly, we think we've got plenty of dollars there to run our marketing strategy. If anything, he's really looking at his organization the same way I did with our merchandising group and looking to add a few folks in there and streamline a few of the things that we do and improve the processes and disciplines there as well. But Andy's stamp will be on our marketing as we move into Q1 and make some changes with who we're working with on the outside as well from an agency point of view. But it's very, very early in the game to share any specifics with you guys, but more to come. He's got some great ideas. He's already made some significant changes in our TV campaign and so on for the fourth quarter.

Operator

We'll take our next question from Brad Thomas with KeyBanc Capital Markets.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Wanted to add a follow-up question on the edit to amplify strategy. Just as you're thinking about the editing, you referenced kitchen faucets, plumbing. As you think about the business, I mean what percentage of SKUs or square footage, I mean, really needs to be pared back to give you some opportunity to have more merchandise that Jennifer really wants to see?

David J. Campisi

Brad, this is David. It's pretty difficult at this point in time to give you specifics on what lineal footage or -- and/or square footage we're going to reallocate. I would tell you that I've been very clearly that the strategic planning process has candidly been something that Big Lots has not been through for at least the last 10 years. So we're very, very surgical and methodical on our approach. And as we took the board through Part 2 this week, we are now moving to Part 3, which is the heavy-lifting, and Part 3 is the execution. So we have landed on the growth categories to maintain, again, as I've said in the down trend, and all the exit categories we've agreed to and landed on. And we're rolling up those numbers, and then we will be handing them off to all of our SMEs or the people that are the key folks in our building, the VP, DMMs and downward to put together the exit strategies and what does that look like, how long is it going to take. Because some of these categories, quite honestly, we know we can move through the inventory relatively quickly in some of them. In some of those categories, in hardlines, it's going to take longer to move through. So over the next 3 months is now Part 3. So by the time we get to the next call with you guys, I'll be able to clearly answer that question. But today, I'd be throwing a number out there that I couldn't validate.

Operator

We'll take our next question from Laura Champine with Canaccord.

Laura A. Champine - Canaccord Genuity, Research Division

On the -- if I understand the furniture financing program correctly, is the really high interest rate probably best suited to a sub-prime customer? And coupling that with what you said about differentiating in consumables through closeouts, makes me wonder if Jennifer is a little lower in than she used to be. Is that true? Who exactly -- what's the demographic that you're targeting with the new strategies?

David J. Campisi

You want me to take this, T.J. on the demographic piece? And T.J. can talk about the financing piece. And before I go into that financing thing, the 1 thing I would tell you is yes, it's a very high interest rate, and those things sometimes are difficult to digest. But candidly, most of the folks in the room with me here today and most of the guys on the call clearly don't understand that this is actually a service to this customer. They absolutely need to have a mattress or a sofa, and they don't have the cash, but they need it. So you're giving them a service that they actually are demanding. But to answer your question, Laura, on our core customer, as we did all the research and dug into the Buzz Club and went externally as well, what we discovered was -- and why we landed on Jennifer, as I said on the last call is, she is a female aged 25 to 54 with an average age of 42. 56% of them are married, 51% of them have kids at home. And that annual household income range is between $30,000, so obviously, that would be more of a SNAP, EBT consumer, but they also range up to the $100,000 household income. So the average household income is $54,000. And we think, when we did this original research, we had the Caucasian mix at 70%. We think it's probably a little high. We think we're 60% Caucasian, 13% African-American and probably somewhere in the 18% Hispanic. But -- so again, that average household income of $54,000, I believe the average annual household income in the U.S., T.J., I think is probably -- it's pretty close to the average for the U.S. So again, as T.J. said earlier, the customer that shops us, she loves us and she understands that value that we deliver in that food area and in the consumables area, too. And T.J., I don't know if you want to add to that on the financing.

Timothy A. Johnson

No. I think you hit most of it. I would just suggest that our experience to date is -- we started this program back in June, so we have a handful of months under our belt. But a surprising number of people, candidly, who have used this almost is 90 days same as cash, in that they'll pay it off over the first 90-day period or shortly thereafter. And then that's an area really what they're out is their initial payment, which we actually tested a couple of different initial payment amounts. But on $1,000 purchase, as an example, they might be out either $60 or $100. And if they pay it off in the first 90 days, that's because there's program for them. So it doesn't necessarily get into some of the higher rates. I think to David's point though, that service taking down the barrier to shopping is in that part of the store that might have been there for a certain part of our customer base. They're buying furniture somewhere, and chances are they could be paying even higher interest rate than what we're offering if they're really running it month-to-month. So we really received very little pushback on the program. That's all been positive at store level. It's all been positive with the customer, and we're going to move forward as expeditiously as we can.

Laura A. Champine - Canaccord Genuity, Research Division

The question is more of a vision question. Can you maintain a healthy business with a store that makes sense, that has customers coming in who can't afford to buy a mattress unless you give them help and are purchasing consumables close to expiration in some cases? And can you have that kind of a customer base and $100,000 income customer base in for higher-end home goods without looking really schizophrenic?

Timothy A. Johnson

Yes. And I think, candidly, the variation in customer base in terms of household income is, I think, probably largely due to where our stores are located. So said another way, a customer who is $100,000 shops who on various stores, more likely than not, may not be making the trip 5 or 10 miles down the road to a B or C location, where that customer demographic is a little closer to $30,000, if that makes sense. So I think real estate drives a lot of the variability in our household demographics. But having said that, candidly, there are locations here in Columbus that have freezers and coolers that have done quite well, and I would certainly put them towards the upper end of the household demographics in our area. So I think the answer to your question is it really does vary store to store. We've received very little pushback. Actually, some of the focus groups we had that were face to face or through a 2-way mirror where in some of these test markets, and that specific topic didn't necessarily come up as a reason for them not shopping us anymore. So I understand the question, but all of our data points to date certainly don't suggest that we're turning people away or disincenting a higher-income customer to shopping our stores.

David J. Campisi

And Laura, this is David. I would just add to that. When you talk about a schizophrenic assortment or a shopping experience, part of the whole strategy, big time, editing and amplifying is to absolutely do the opposite of that. Today, I would say that our shopping experience is schizophrenic depending on where you go in the store. My vision is completely the opposite of that. It is we need to have those unique things that Jennifer expects every day, like the freezer/cooler assortment will be her favorite everyday basics that will enable SNAP and EBT, but will also expand our everyday relevance to go along with our outstanding closeout value. And trust me, when you talk about expiration dates and things like that, we really don't have problems with expiration dates. It's a very, very small part of our mark-out-of-stock program. And when you shop our stores, it is unbelievable to see some of the value that we have not only in food but also in the paper products area, and our customer responds to that in a very positive away. And lastly I would just add to that is, as we continue to add the things that aren't important that do cause us to have a schizophrenic doesn't-make-sense shopping experience for her and we amplify things. We are very close to launching a product in food into next year that will be an exclusive offering of a product that we will manage in a way that will create exclusivity in the food business for Big Lots to be the only channel of distribution for this product. Very exciting opportunity. We've been working on it for the last 3.5 months. So more to come on that. And when you talk about the quality, brand, value component, this is a high-quality brand at a high-quality value. And we will have the pricing and the distribution exclusive in our -- in the U.S. So again, we're working diligently to become a nonschizophrenic retailer.

Operator

We'll take our next question from Dan Wewer with Raymond James.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

David, in the previous quarter when you were laying out the guidance for calendar year 2013, where you, at that time, already anticipating about $0.15 to $0.20 of costs associated with the initial stages of the editing program?

David J. Campisi

No, I wasn't, Dan. And quite honestly, and T.J. may want to expand on this, during Part 2 of the strategic planning process, we dug very, very deep into each and every business, and when I say mean deep, all the way down to the subclass level. And we started looking at the areas that we needed to exit that weren't meaningful, that weren't turning, that were tying up precious inventory dollars and working capital that Jennifer had absolutely no -- wasn't on here shopping list, we weren't a destination for. When we started to roll those numbers up is when we came to the conclusion here recently. And as we took the board through it again this week and showed them what the cost of the markdowns were to clear these areas so that we can amplify the businesses that Jennifer wants from us and we excel in is we really didn't know that when we talked in the last call.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Okay. Second question, on the guidance, I think this time it's a surprise that you're expecting same-store sales to turn flat or positive for the balance of the fourth quarter, given how choppy the business is in the industry. And it sounds like you're down double digits in the month of November. I mean is this just the enthusiasm coming out of the Black Friday weekend that's led to this more upbeat outlook?

Timothy A. Johnson

It's based on 2 things. And really, you're speaking to the month of December as being a positive comp. It's a compression of the calendar. So 6 fewer shopping days in both examples of history in the last 12 years resulted in a build in December and then positive comps along with the extra day that you get in the month of December. The third thing I would add in there is, obviously, when we put a significant -- significantly more markdowns into the forecast in some areas that we weren't originally anticipating, our hope will be you drive some additional sales there, too. So regardless of the forecast for the overall quarter, our intention or our plan all along has been that November would be the most difficult month. December would be a positive month. I guess, a change to the forecast in last 90 days would be, 90 days ago, we would have thought we had upside actually in January, if you recall how bad it was in January last year in our furniture business because of the tax refund activity that shifted into the first quarter. We don't see that opportunity anymore based on what the government is now saying about timing of refunds. So the change to the forecast from 90 days ago is recognizing November and recognizing the January opportunity more than likely is not there. Thanksgiving week on a shifted basis was essentially on our plan and gave us confidence that, heading into December -- our business ramps significantly different than a lot of the other companies that you follow. The seasonal and giftable part of our store becomes the overpowering strength in December, where it is not there the rest of the year to that degree.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

I guess the other final question I have, David, I think we're still -- some of us are a bit confused as to the furniture strategy and the financing program. Is Big Lots now thinking that Conn's is a big competitor in that part of your business and that's the reason that you're having to develop a similar type financing program?

David J. Campisi

Not at all, I would tell you. And again, T.J. is closer to the company we're working with on the financing side and the roll-up. But I would tell you that absolutely not. I mean when you think about this is a $1 billion business today, one of the healthiest businesses we have, and we've built that without any furniture financing. What we see is an incremental opportunity to gain new customers. And I think the last time we talked, I said -- made this comment and it was a little bit anecdotal, but we do think that there is somewhat of tie, and then T.J. could add to this. But as we continue to grow our cooler/freezer business with the SNAP and EBT, that brings in a different consumer than we've had in the box before, which we believe is also an incremental opportunity. While we're servicing that customer with freezer/cooler assortments that are SNAP- and EBT-qualified, we think it's an opportunity for us to move them over to the other side of the building and sell them more furniture that maybe they were buying from those other folks you mentioned and get that ring as well. That's really the whole strategy. And again, as I said before, it's a service, and we have to look at that with clarity. There shouldn't be any confusion. This is something that is a service to this customer. I can't overemphasize how difficult it is for them in this economic environment, where they don't have the cash in pocket, but they need a mattress to sleep on or a sofa to sit on, and all we're doing is offering them the assistance from a financing point of view. And the early results that Tim mentioned was a lot of them are paying off in 90 days. I don't know if you want to add to that, but that's really where we're going with that strategy.

Operator

We'll take our next question from Joan Storms with Wedbush.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

So -- and I apologize because I'm traveling today so I missed part of it, but -- so in the strategy of coordinating different sections of the store, including the home furnishings and the furniture areas and things like that, are you going to be developing sort of a new store prototype and strategy about sort of a better shopping experience as far as cleaning up the stores a little bit more and things like that? And will that involve more CapEx?

David J. Campisi

Not necessarily. There'll be a repositioning or relaying of how we look at the store. But I would tell you that in -- for 2014, I think we've been pretty clear on a number of new stores, but more importantly, relos. There is definitely a new approach to our thinking on how we navigate a store and how we lay it out. As recently as 2 weeks ago, I think T.J. -- I met with T.J.'s real estate team on the stores that we were opening or relocating for the first half of this year and worked very hard to get our doors positioned in the proper area, our cash registers positioned in the proper area so that you can walk in the store, see a drive via turn right and some of those things, Joan. But this isn't a complete overhaul. And quite frankly, our stores organization has really embraced this thinking behind how to shop through the eyes of Jennifer, and they're doing a lot of things on their own of relaying parts of the business through the lens of her without spending any CapEx. And if there are some spends that we need to make to adjust flow and -- at the racetrack, it's minimal at best. And again, evolutionary process. Over time, we'll get the right adjacencies together, but it's not a complete cutting of the box and a complete redo of the prototype. However, I did mention earlier, as I worked with the real estate group, in some of these stores, I want to test bringing furniture to the front right-hand side of the store rather than having us walk smack into a bunch of gondola. I'm very, very much a believer in low to high profiling so with furniture being low in the front and then moving to the gondola section towards the back of soft and hard home, I believe we're going to get a much more exciting shopping experience. But again, just cautionary, this is in early stages of thinking and testing.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. And then just a follow-up on -- it seems like the guidance for the fourth quarter, obviously, you get a lot of traffic. And then heading into the first quarter, you have some of the Canadians write-offs, too. But -- so do you feel like, from an inventory perspective, at this point, because you've done a little bit of the more deep dive that by the time we get through sort of the first quarter and then you'll have your new merchants in place, they'll have an impact by springtime, that would be -- that should be sort of a cutoff point for any other big inventory write-downs or markdowns?

Timothy A. Johnson

Joan, it's T.J. In the prepared remarks, we talked about really edit to amplify, the markdowns associated with the edit part of that and to amplify is starting in the fourth quarter here and likely lasting through the spring season. So I guess I would just adjust your comment slightly to say lasting on through the spring season, giving the new merchant teams, particularly in the seasonal and home and furnitures parts of the business, a little more time than that. And as we kind of come out of spring, we should see something much closer to what David's vision is for the future than where we are today or where are we in the first quarter.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Should we say second quarter, third or second half?

Timothy A. Johnson

When we were speaking of spring, we're really speaking of first and second quarter. So coming out of spring -- or coming out of second quarter going into fall, obviously, will be much closer to the vision than where we are today.

Andrew D. Regrut

Thanks, everyone. That concludes today's call.

David J. Campisi

Thank you.

Operator

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 Friday, December 20, 2013. You can access the replay by dialing toll-free U.S.A and Canada (888) 203-1112 and entering replay pass code 2138376, international (719) 457-0820 and entering replay pass code 2138376.

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect.

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