Mac Frugal's merger signals growth trend for discounters.

The area's deep-discount retailers are joining forces.

Last week, Consolidated Stores Corp., the nation's largest retailer of close-out merchandise, agreed to acquire Mac Frugal's Bargains Close-Outs Inc., the Dominguez-based parent of Pic N' Save stores, for stock valued at about $995 million.

The deal would create a chain of more than 1,000 close-out retail stores, and with Consolidated's chain of Kay-Bee toy stores, the company will own a combined total of 2,270 stores in all 50 states.

Late last month in a smaller deal, Commerce-based 99 Cents Only Stores acquired a 48 percent stake in Universal International Inc., a struggling buyer and seller of wholesale close-out merchandise, for $2 million in cash and $2 million in merchandise.

Deals like these, say analysts, are indicative of the effort by discounters to increase their clout with manufactures - and thus get better merchandise.

"This business is really built on relationships with manufacturers," said Ellen Caesar, an analyst with Crowell, Weeden & Co. "If (close-out retailers) get big enough, they can buy better-quality merchandise. The business could pull in decent margins if they run the company well."

Profits at companies like Consolidated and 99 Cents Only stores have been improving in recent years, and are expected to grow.

"Now (close-out retailers) are coming into their own as a retail area that's respected," said David Mann, an analyst with New Orleans-based brokerage Johnson Rice.

One factor driving the growth is an improvement in the merchandise mix carried by the stores, thus leading to increasing popularity among consumers.

Close-out retailers in the past operated primarily by buying damaged goods from manufacturers or from bankrupt retailers and selling them at deep discounts. Today, they are getting better quality goods directly from manufacturers because big retail chains like Wal-Mart are using software that allows them to track sales trends very efficiently, and to forecast inventory needs, Mann said.

"Because of the new technology that a Wal-Mart brings into retailing, when they see a sales trend going against them, they can cancel orders. So now the manufacturers are stuck with the merchandise," said Mann. "They need a relief valve, and the deep-discount retailers are happily buying the merchandise."

Wall Street gave its blessing to the Mac Frugal's acquisition. Stock in Mac Frugal's jumped $3.25 to close at $40.81 on Nov. 5, the day the deal was announced. Consolidated shares rose $4.31 to $45.44.

"It's very much a good thing for Mac Frugal's," said Deborah Lowenthal, an analyst with Oregon-based Red Chip Review. "It has had difficulty competing with some of the other stores in its sector because it doesn't have their wholesale capabilities."

Further reflecting the growing investor interest in the close-out merchandise business, Tuesday Morning Corp., a Dallas-based discount chain, was bought in September by a Chicago investment bank for $325 million.

Mac Frugal's operates 321 close-out retail stores in 18 states and has dominated the closeout retail business on the West Coast. Its stores carry brand-name items at about 40 percent to 70 percent less than discount giants K-Mart and Wal-Mart.

Columbus, Ohio-based Consolidated Stores operates 1,946 stores, primarily Kay-Bee toy stores, in the U.S. and Puerto Rico. Its close-out discount chain Odd Lots and Big Lots is primarily located in the Midwest.

"There's always been talk in the industry of the two companies getting together," said Mann. "It just became the opportune time for Mac Frugal's shareholders."