biglots_10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal
year ended January 30, 2010
Commission file number 1-8897
BIG LOTS, INC.
(Exact name of registrant as specified in
its charter)
Ohio |
06-1119097 |
(State or other jurisdiction
of |
(I.R.S. Employer |
incorporation or
organization) |
Identification No.) |
|
300 Phillipi Road, P.O. Box 28512,
Columbus, Ohio |
43228-5311 |
(Address of principal executive
offices) |
(Zip
Code) |
(614) 278-6800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: |
|
Title of each
class |
Name of each exchange on which
registered |
Common Shares $0.01 par value |
New York Stock
Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate by check
mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes x No
o
Indicate by check
mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No x
Indicate by check
mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x
No o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes o No o
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K x
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company o |
Indicate by check
mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the
Act). Yes o No x
The aggregate
market value of the Common Shares held by non-affiliates of the Registrant
(assuming for these purposes that all executive officers and directors are
“affiliates” of the Registrant) was $1,856,547,441 on August 1, 2009, the last
business day of the Registrant’s most recently completed second fiscal quarter
(based on the closing price of the Registrant’s Common Shares on such date as
reported on the New York Stock Exchange).
The number of the
Registrant’s Common Shares outstanding as of March 22, 2010 was
80,406,304.
Documents Incorporated by
Reference
Portions of the
Registrant's Proxy Statement for its 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Annual Report on Form
10-K.
BIG LOTS, INC. |
FORM 10-K |
FOR THE FISCAL YEAR ENDED JANUARY
30, 2010 |
TABLE OF
CONTENTS |
PART I |
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PAGE |
Item 1. |
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Business |
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1 |
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Item 1A. |
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Risk Factors |
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5 |
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Item 1B. |
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Unresolved Staff Comments |
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11 |
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Item 2. |
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Properties |
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11 |
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Item 3. |
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Legal Proceedings |
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12 |
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Item 4. |
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Reserved |
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12 |
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Supplemental Item. Executive
Officers of the Registrant |
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13 |
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PART II |
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Item 5. |
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Market for Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities |
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14 |
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Item 6. |
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Selected Financial Data |
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17 |
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Item 7. |
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Management's Discussion and
Analysis of Financial Condition and Results of Operations |
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18 |
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Item 7A. |
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Quantitative and Qualitative
Disclosures About Market Risk |
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38 |
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Item 8. |
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Financial Statements and
Supplementary Data |
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39 |
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Item 9. |
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Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure |
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74 |
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Item 9A. |
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Controls and Procedures |
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74 |
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Item 9B. |
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Other Information |
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75 |
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PART III |
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Item 10. |
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Directors, Executive Officers and
Corporate Governance |
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75 |
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Item 11. |
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Executive Compensation |
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75 |
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Item 12. |
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Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters |
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76 |
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Item 13. |
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Certain Relationships and Related
Transactions, and Director Independence |
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76 |
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Item 14. |
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Principal Accounting Fees and
Services |
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76 |
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PART IV |
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Item 15. |
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Exhibits, Financial Statement
Schedules |
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77 |
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Signatures |
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81 |
PART I
ITEM 1. BUSINESS
The Company
Big Lots, Inc., an Ohio corporation,
through its wholly owned subsidiaries (collectively referred to herein as “we,”
“us,” and “our” except as used in the reports of our independent registered
public accounting firm included in Item 8 of this Annual Report for Form 10-K
(“Form 10-K”)), is the nation's largest broadline closeout retailer (see the
discussion below under the caption “Closeout Retailing”). At January 30, 2010,
we operated a total of 1,361 stores in 47 states. Our goal is to strengthen and
build upon our leadership position in broadline closeout retailing by providing
our customers with great savings on brand-name closeouts and other value-priced
merchandise. You can locate us on the Internet at www.biglots.com. The contents
of our websites are not part of this report.
Similar to many
other retailers, our fiscal year ends on the Saturday nearest to January 31,
which results in some fiscal years comprised of 52 weeks and some comprised of
53 weeks. Unless otherwise stated, references to years in this report relate to
fiscal years rather than calendar years. Fiscal year 2010 (“2010”) is comprised
of the 52 weeks that began on January 31, 2010 and will end on January 29, 2011.
Fiscal year 2009 (“2009”) was comprised of the 52 weeks that began on February
1, 2009 and ended on January 30, 2010. Fiscal year 2008 (“2008”) was comprised
of the 52 weeks that began on February 3, 2008 and ended on January 31, 2009.
Fiscal year 2007 (“2007”) was comprised of the 52 weeks that began on February
4, 2007 and ended on February 2, 2008. Fiscal year 2006 (“2006”) was comprised
of the 53 weeks that began on January 29, 2006 and ended on February 3,
2007.
We manage our
business on the basis of one segment: broadline closeout retailing. Please refer
to the consolidated financial statements and related notes in this Form 10-K for
our financial information. We evaluate and report overall sales and merchandise
performance based on the following key merchandising categories: Consumables,
Home, Furniture, Hardlines, Seasonal, and Other. The Consumables category
includes the food, health and beauty, plastics, paper, chemical, and pet
departments. The Home category includes the domestics, stationery, and home
decorative departments. The Furniture category includes the upholstery,
mattresses, ready-to-assemble, and case goods departments. Case goods consist of
bedroom, dining room, and occasional furniture. The Hardlines category includes
the electronics, appliances, tools, and home maintenance departments. The
Seasonal category includes the lawn & garden, Christmas, summer, and other
holiday departments. The Other category includes the toy, jewelry, infant
accessories, and apparel departments. Other also includes the results of certain
large closeout deals that are typically acquired through our alternate product
sourcing operations. See note 12 to the accompanying consolidated financial
statements for the net sales results of these categories for 2009, 2008, and
2007.
In May 2001, Big
Lots, Inc. was incorporated in Ohio and was the surviving entity in a merger
with Consolidated Stores Corporation, a Delaware corporation. By virtue of the
merger, Big Lots, Inc. succeeded to all the business, properties, assets, and
liabilities of Consolidated Stores Corporation.
Our principal
executive offices are located at 300 Phillipi Road, Columbus, Ohio 43228, and
our telephone number is (614) 278-6800. All of our operations were located
within the United States of America at the end of each of the last three
years.
Closeout Retailing
Closeout retailers purchase merchandise
that generally results from production overruns, packaging changes, discontinued
products, liquidations, or returns. As a result, closeout retailers generally
can purchase most merchandise at lower costs and offer most merchandise at lower
prices than those paid and offered by traditional discount retailers. We attempt
to maximize the amount of closeout merchandise available in our stores and to
offer merchandise that we believe provides great value to our customers. We work
closely with our vendors to obtain name brand merchandise that is easily
recognizable by our customers. In addition to closeout merchandise, we stock
many products on a consistent basis at our stores. This merchandise may not
always be the same brand or may be off-brand because we attempt to provide our
customers with merchandise at a price that we believe represents a great value.
For net sales by merchandise category and as a percent of total net sales, see
the discussion below under the captions “2009 Compared To 2008” and “2008
Compared To 2007” in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” (“MD&A”) of this Form
10-K.
1
Real Estate
The following table compares the number
of our stores in operation at the beginning and end of each of the last five
fiscal years:
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Stores open at the beginning of the
year |
|
1,339 |
|
|
1,353 |
|
|
1,375 |
|
|
1,401 |
|
|
1,502 |
|
Stores opened during the year |
|
52 |
|
|
21 |
|
|
7 |
|
|
11 |
|
|
73 |
|
Stores closed
during the year |
|
(30 |
) |
|
(35 |
) |
|
(29 |
) |
|
(37 |
) |
|
(174 |
) |
Stores open at the end of the
year |
|
1,361 |
|
|
1,339 |
|
|
1,353 |
|
|
1,375 |
|
|
1,401 |
|
As part of our real
estate strategy initiated in the latter half of 2005, we closed a number of
underperforming locations. During 2006 through 2008, we focused on improving
profitability through managing our existing store base as the commercial real
estate market demanded higher rent charges than our store operating model
enabled us to pay. During 2009, the commercial real estate market softened and
we were able to favorably negotiate renewals for certain store leases which
previously may have resulted in store closures. Also during 2009, we
successfully negotiated a number of new store leases as the availability of
space improved and rental rates eased. For additional information about our real
estate strategy, see the accompanying MD&A.
The following table
details our stores by state at January 30, 2010:
Alabama |
|
26 |
|
Maine |
|
7 |
|
Ohio |
|
101 |
Arizona |
|
35 |
|
Maryland |
|
13 |
|
Oklahoma |
|
16 |
Arkansas |
|
11 |
|
Massachusetts |
|
15 |
|
Oregon |
|
12 |
California |
|
174 |
|
Michigan |
|
40 |
|
Pennsylvania |
|
67 |
Colorado |
|
20 |
|
Minnesota |
|
4 |
|
Rhode Island |
|
1 |
Connecticut |
|
8 |
|
Mississippi |
|
15 |
|
South Carolina |
|
30 |
Delaware |
|
3 |
|
Missouri |
|
24 |
|
Tennessee |
|
46 |
Florida |
|
107 |
|
Montana |
|
1 |
|
Texas |
|
114 |
Georgia |
|
57 |
|
Nebraska |
|
4 |
|
Utah |
|
11 |
Idaho |
|
5 |
|
Nevada |
|
11 |
|
Vermont |
|
4 |
Illinois |
|
33 |
|
New Hampshire |
|
6 |
|
Virginia |
|
36 |
Indiana |
|
43 |
|
New Jersey |
|
13 |
|
Washington |
|
20 |
Iowa |
|
3 |
|
New Mexico |
|
13 |
|
West Virginia |
|
18 |
Kansas |
|
9 |
|
New York |
|
47 |
|
Wisconsin |
|
10 |
Kentucky |
|
40 |
|
North Carolina |
|
63 |
|
Wyoming |
|
2 |
Louisiana |
|
22 |
|
North Dakota |
|
1 |
|
Total stores |
|
1,361 |
|
|
|
|
|
|
|
|
Number of states |
|
47 |
Of our 1,361
stores, 36% operate in four states: California, Texas, Ohio, and Florida, and
net sales from stores in these states represented 38% of our 2009 net
sales.
Associates
At January 30, 2010, we had approximately
35,600 active associates comprised of 13,100 full-time and 22,500 part-time
associates. Temporary associates hired during the fall and winter holiday
selling season increased the number of associates to a peak of 39,200 in 2009.
Approximately 63% of the associates employed throughout the year are employed on
a part-time basis. We consider our relationship with our associates to be good,
and we are not a party to any labor agreements.
Competition
We operate in the highly competitive
retail industry and face strong sales competition from other general
merchandise, discount, food, arts and crafts, and dollar store retailers.
Additionally, we compete with a number of companies for retail site locations,
to attract and retain quality employees, and to acquire our broad assortment of
closeout merchandise from vendors.
2
Purchasing
An integral part of our business is the
sourcing and purchasing of quality brand-name merchandise directly from
manufacturers and other vendors typically at prices substantially below those
paid by traditional retailers. We believe that we have built strong
relationships with many brand-name vendors and we have capitalized on our
purchasing power in the closeout marketplace, including our ability to pay
timely, and to source merchandise that provides exceptional value to our
customers. We have the ability to source and purchase significant quantities of
a vendor’s closeout merchandise in specific product categories and to control
distribution in accordance with vendor instructions. We believe this provides a
high level of service and convenience to our vendors. Our sourcing channels also
include bankruptcies, liquidations, and insurance claims. We supplement our
traditional brand-name closeout purchases with various direct import and
domestically-sourced merchandise, which represents merchandise that our
customers consistently expect us to have in our stores or merchandise that we
believe offers our customers a significant value. We expect that the
unpredictability of the retail and manufacturing environments coupled with our
dominant purchasing power position will continue to support our ability to
source quality closeout merchandise at competitive prices.
We have a buying
team with extensive closeout purchasing experience, which we believe has enabled
us to develop successful long-term relationships with many of the largest and
most recognized vendors in the United States. We believe that, as a result of
these relationships and our experience and reputation in the closeout industry,
many vendors offer buying opportunities to us prior to attempting to dispose of
their merchandise through other channels.
Our merchandise is
purchased from domestic and foreign vendors that provide us with multiple
sources for each product category. In 2009, our top ten vendors accounted for
approximately 14% of total purchases (at cost) while the largest vendor
accounted for approximately 3% of total purchases (at cost).
During 2009, we
purchased approximately 25% of our merchandise directly from overseas vendors,
including approximately 19% from vendors located in China. Additionally, a
significant amount of our domestically-purchased merchandise is manufactured
abroad. As a result, a significant portion of our merchandise supply is subject
to certain risks as described further in Item 1A in this Form 10-K.
Warehouse and
Distribution
The
majority of the merchandise sold by us is received and processed for retail sale
and distributed to the retail locations from our five regional distribution
centers located in Pennsylvania, Ohio, Alabama, Oklahoma and California. Some of
our vendors deliver merchandise directly to our stores. We previously operated
two furniture distribution centers located in Redlands, California and Columbus,
Ohio. During 2009, we integrated the distribution of furniture from our
Redlands, California furniture distribution center into our regional
distribution center in California. During 2008, we integrated the distribution
of furniture from our Columbus, Ohio furniture distribution center into our
regional distribution centers in Pennsylvania, Ohio, Alabama and Oklahoma. We
believe these changes allow us to more efficiently flow furniture to our stores
primarily by reducing the transportation cost from the furniture distribution
centers to the stores because the regional distribution centers are generally
located closer to the stores they service. We manage the inventory levels of
merchandise in our distribution centers so that we can distribute merchandise
quickly and efficiently to our stores in order to maximize sales and our
inventory turnover rate. We selected the locations of our distribution centers
in an attempt to minimize transportation costs and the distance from
distribution centers to our stores.
In addition to the
merchandise distribution centers, we operate a warehouse in Ohio that
distributes store fixtures and supplies. During 2009, we integrated the
distribution of store fixtures and supplies out of our Redlands, California
furniture distribution center into our Ohio warehouse. We believe this change
reduces our fixed overhead and operating costs, and allows us to more
effectively manage store fixtures and supplies inventory.
During the past
three years, we implemented several warehouse, distribution, and outbound
transportation initiatives, including but not limited to a vendor compliance
program in 2006 that imposes strict documentation and packing requirements on
shipments of merchandise that we receive in our distribution centers, an
outbound transportation initiative in 2007 that led to a higher use of one-way
carriers and thus a reduction in round trip miles, the integration in 2008 and
2009 of our former furniture distribution centers into all of our regional
distribution centers, and other transportation initiatives aimed at lowering our
inbound and outbound transportation costs.
3
For additional
information regarding our warehouses and distribution facilities and related
initiatives, see the discussion under the caption “Warehouse and Distribution”
in “Item 2. Properties,” of this Form 10-K and the discussion under the caption
“Operating Strategy – Cost Structure” in the accompanying MD&A in this Form
10-K.
Advertising and
Promotion
Our
brand image is an important part of our marketing program. Our principal
trademarks, including the Big Lots® family of trademarks,
have been registered with the U.S. Patent and Trademark Office. We use a variety
of marketing approaches to promote our brand and retail position through
television, internet, in-store point of purchase, and print media. The
centerpiece of our marketing efforts is our television campaign which combines
elements of strategic branding and promotion. These same elements are then used
in all other consumer touch points. Our highly targeted media placement strategy
uses national cable as the foundation of our television buys which is then
supplemented with local broadcast in key markets. Our marketing program utilizes
printed advertising circulars, which we design, and are distributed in all
markets that are served by our stores. In 2009 and 2008, we distributed
multi-page circulars covering 27 weeks which we will repeat in 2010. We
distribute circulars through a combination of newspaper insertions and mailings.
We create regional versions of these circulars to take advantage of market
differences caused by product availability, climate, and customer preferences.
In addition, we use in-store promotional materials, including in-store signage,
emphasize special bargains and significant values offered to customers. We
continue to use our website (www.biglots.com) as a key touch point for special
catalogs and our online advertising, attracting over 0.7 million unique visitors
each week. In 2006, we overhauled and re-launched our website. Our on-line
customer list, which we refer to as the Buzz Club, has grown from just over one
million members at the end of 2006 to approximately five million members at the
end of 2009. The Buzz Club database is an important marketing tool which allows
us to communicate in a cost effective manner with our customer, including e-mail
delivery of our circulars. In addition to Buzz Club, in August of 2009, we
started our Buzz Club Rewards program (“Rewards”), which has grown to 1.2
million members at the end of fiscal 2009. Members of the Rewards program use a
membership card when making purchases and earn discounts on future purchases
when they meet certain thresholds. Rewards members may also receive other
targeted promotions via e-mail. Total advertising expense as a percentage of
total net sales was 2.0% in 2009 and 2.2% in 2008 and 2007.
Seasonality
We have historically experienced, and
expect to continue to experience, seasonal fluctuations, with a larger
percentage of our net sales and operating profit realized in the fourth fiscal
quarter. In addition, our quarterly net sales and operating profits can be
affected by the timing of new store openings and store closings, the timing of
television and circular advertising, and the timing of certain holidays. We
historically receive a higher proportion of merchandise, carry higher inventory
levels, and incur higher outbound shipping and payroll expenses as a percentage
of sales in the third fiscal quarter in anticipation of increased sales activity
during the fourth fiscal quarter. The fourth fiscal quarter typically includes a
leveraging effect on operating results because net sales are higher and certain
of our costs are fixed such as rent and depreciation.
The seasonality of
our net sales and related merchandise inventory requirements influences our
availability of and demand for cash or access to credit. We historically have
maintained and drawn upon our credit facility to fund our working capital
requirements, which typically peak slightly before or after the end of our third
fiscal quarter. We historically have higher net sales, operating profits, and
cash flow provided by operations in the fourth fiscal quarter which allows us to
substantially repay our seasonal borrowings. In 2009, our total indebtedness
(outstanding borrowings and letters of credit) peaked at approximately $120.8
million in early February 2009 under our $500.0 million unsecured credit
facility entered into in October 2004 (“2004 Credit Agreement”). As of January
30, 2010, we had no borrowings under the $500.0 million unsecured credit
facility entered into in April 2009 (“2009 Credit Agreement”), which replaced
the 2004 Credit Agreement. We expect that borrowings will vary throughout 2010
depending on various factors, including our seasonal need to acquire merchandise
inventory prior to peak selling seasons, the timing and amount of sales to our
customers and the potential impact of shares repurchased under our authorized
share repurchase program. For additional information on our current share
repurchase program, the 2009 Credit Agreement, and a discussion of our sources
and uses of funds, see Item 5, Market for Registrant's Common Equity, Related
stockholder Matters and Issuer Purchases of Equity Securities, and the Capital
Resources and Liquidity section under Item 7, MD&A, in this Form
10-K.
4
Available
Information
We
make available, free of charge, through the “Investor Relations” section of our
website (www.biglots.com) under the “SEC Filings” caption, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as
reasonably practicable after we file such material with, or furnish it to, the
Securities and Exchange Commission (“SEC”).
In this Form 10-K,
we incorporate by reference certain information from parts of our Proxy
Statement for our 2010 Annual Meeting of Shareholders (“2010 Proxy
Statement”).
In the “Investor
Relations” section of our website (www.biglots.com) under the “Corporate
Governance” and “SEC Filings” captions, the following information relating to
our corporate governance may be found: Corporate Governance Guidelines; charters
of our Board of Directors’ Audit, Compensation, Nominating/Corporate Governance,
and Strategic Planning Committees; Code of Business Conduct and Ethics; Code of
Ethics for Financial Professionals; Chief Executive Officer and Chief Financial
Officer certifications related to our SEC filings; the means by which
shareholders may communicate with our Board of Directors; and transactions in
our securities by our directors and executive officers. The Code of Business
Conduct and Ethics applies to all of our associates, including our directors and
our principal executive officer, principal financial officer, and principal
accounting officer. The Code of Ethics for Financial Professionals applies to
our Chief Executive Officer and all other Senior Financial Officers (as that
term is defined therein) and contains provisions specifically applicable to the
individuals serving in those positions. We intend to post amendments to and
waivers from, if any, our Code of Business Conduct and Ethics (to the extent
applicable to our directors and executive officers) and our Code of Ethics for
Financial Professionals in the “Investor Relations” section of our website
(www.biglots.com) under the “Corporate Governance” caption. We will provide any
of the foregoing information without charge upon written request to our
Corporate Secretary. The contents of our websites are not part of this
report.
ITEM 1A. RISK
FACTORS
The
statements in this section describe the major risks to our business and should
be considered carefully. In addition, these statements constitute cautionary
statements under the Private Securities Litigation Reform Act of
1995.
Our disclosure and
analysis in this Form 10-K and in our 2009 Annual Report to Shareholders contain
some forward-looking statements that set forth anticipated results based on
management’s plans and assumptions. From time to time, we also provide
forward-looking statements in other materials we release to the public as well
as oral forward-looking statements. Such statements give our current
expectations or forecasts of future events; they do not relate strictly to
historical or current facts. We have tried, wherever possible, to identify such
statements by using words such as “anticipate,” “estimate,” “expect,”
“objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,”
“may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions in
connection with any discussion of future operating or financial performance. In
particular, forward-looking statements include statements relating to future
actions, future performance, or results of current and anticipated products,
sales efforts, expenses, interest rates, the outcome of contingencies, such as
legal proceedings, and financial results.
We cannot guarantee
that any forward-looking statement will be realized. Should known or unknown
risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could differ materially from past results and those
anticipated, estimated, or projected results set forth in the forward-looking
statements. You should bear this in mind as you consider forward-looking
statements.
You are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date thereof. We undertake no obligation to publicly update
forward-looking statements, whether as a result of new information, future
events, or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects in our Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K filed with the SEC.
5
Also note that we
provide the following cautionary discussion of risks, uncertainties, and
assumptions relevant to our businesses. There can be no assurances that we have
correctly and completely identified, assessed, and accounted for all factors
that do or may affect our business, financial condition, results of operations,
and liquidity. These are factors that, individually or in the aggregate, we
think could cause our actual results to differ materially from expected and
historical results. Additional risks not presently known to us or that we
presently believe to be immaterial also may adversely impact us. Should any
risks or uncertainties develop into actual events, these developments could have
material adverse effects on our business, financial condition, results of
operations, and liquidity. Consequently, all of the forward-looking statements
are qualified by these cautionary statements, and there can be no assurance that
the results or developments we anticipate will be realized or that they will
have the expected effects on our business or operations. We note these factors
for investors as permitted by the Private Securities Litigation Reform Act of
1995. You should understand that it is not possible to predict or identify all
such factors. Consequently, you should not consider the following to be a
complete discussion of all potential risks or uncertainties.
Our ability to
achieve the results contemplated by forward-looking statements is subject to a
number of factors, any one, or a combination, of which could materially affect
our business, financial condition, results of operations, or liquidity. These
factors may include, but are not limited to:
The current economic conditions
(including falling home prices, high levels of unemployment, foreclosures on
mortgages, bankruptcies, and reduced access to credit) give rise to risks and
uncertainties that may adversely affect our capital resources, financial
condition, results of operations, and liquidity including, but not limited to
the following:
- Fluctuating commodity prices,
including but not limited to diesel fuel and other fuels used to generate
power by utilities, may affect our gross profit and operating profit
margins.
- The impact of these
conditions on our vendors’ businesses cannot be predicted. Our vendors may be
negatively impacted due to insufficient availability of credit to fund their
operations or insufficient demand for their products, which may affect their
ability to fulfill their obligations to us.
- Our expectations regarding
the demand for our merchandise may be inaccurate, which could cause us to
under buy or over buy certain categories or departments of merchandise, which
could result in customer dissatisfaction or excessive markdowns required to
sell through the merchandise.
- The reaction of our
competitors to the marketplace, including the level of liquidations occurring
at bankrupt retailers, may drive our competitors, some of whom are better
capitalized than us, to offer significant discounts or promotions on their
merchandise, which could negatively affect our sales and profit
margins.
- A downgrade in our credit
rating could negatively affect our ability to access capital or increase the
borrowing rates we pay.
- A significant decline in the
market value of our qualified defined benefit pension plan’s (“Pension Plan”)
investment portfolios may affect our financial condition, results of
operations, and liquidity.
Additionally, many
of the effects and consequences of the financial market uncertainties and broad
economic downturn are currently unknown and beyond our control; any one or all
of them could potentially have a material adverse impact on our capital
resources, financial condition, results of operations, and
liquidity.
If we are unable to continue to
successfully execute our operating strategies, our operating performance could
be significantly impacted.
There is a risk
that we will be unable to continue to meet or exceed our operating performance
targets and goals in the future if our strategies and initiatives are
unsuccessful. In 2010, we announced operating performance targets and goals as
part of an updated strategic plan, that we intend to use as our roadmap for the
next three years (see the accompanying MD&A for additional information
concerning our operating strategy). The new plan includes a continued focus on
merchandising, real estate, and cost structure.
6
If we are unable to compete effectively
in the highly competitive discount retail industry, our business and results of
operations may be materially adversely affected.
The discount retail
business is highly competitive. As discussed in Item 1 of this Form 10-K, we
compete for customers, employees, products, real estate, and other aspects of
our business with a number of other companies. Certain of our competitors have
greater financial, distribution, marketing, and other resources than us. It is
possible that increased competition or improved performance by our competitors
may reduce our market share, gross margin, and operating margin, and may
materially adversely affect our business and results of operations in other
ways.
Declines in general economic condition,
consumer spending levels, and other conditions could lead to reduced consumer
demand for our merchandise thereby materially adversely affecting our revenues
and gross margin.
Our results of
operations can be directly impacted by the health of the United States’ economy.
Our business and financial performance may be adversely impacted by current and
future economic conditions, including factors that may restrict or otherwise
negatively impact consumer financing, disposable income levels, unemployment
levels, energy costs, interest rates, recession, inflation, the impact of
natural disasters and terrorist activities, and other matters that influence
consumer spending. The economies of four states (Ohio, Texas, California, and
Florida) are particularly important as approximately 36% of our current stores
operate in these states and 38% of our 2009 net sales occurred in these states.
Changes by vendors related to the
management of their inventories may reduce the quantity and quality of
brand-name closeout merchandise available to us or may increase our cost to
acquire brand-name closeout merchandise, either of which may materially
adversely affect our revenues and gross margin.
The products we
sell are sourced from a variety of vendors with approximately half of our
merchandise assortment being pre-planned and made for us and approximately half
of our merchandise sourced on a closeout basis. The portion of our assortment
that is pre-planned and made for us consists of imported merchandise (primarily
furniture, seasonal, and portions of our home categories along with certain
other classifications like toys) or merchandise that is re-orderable upon
demand. For the closeout component of our business, we do not control the
supply, design, function, availability, or cost of many of the products that we
offer for sale. We depend upon the sufficient availability of closeout
merchandise that we can acquire and offer at prices that represent a value to
our customers, in order to meet or exceed our operating performance targets for
gross margin. In addition, we rely on our vendors to provide us with quality
merchandise. To the extent that certain of our vendors are better able to manage
their inventory levels and reduce the amount of their excess inventory, the
amount of closeout merchandise available to us could be materially reduced.
Shortages or disruptions in the availability of closeout merchandise of a
quality acceptable to our customers and us, would likely have a material adverse
effect on our sales and gross margin and may result in customer
dissatisfaction.
We rely on vendors located in foreign
countries for significant amounts of merchandise. Additionally, a significant
amount of our domestically-purchased merchandise is manufactured abroad. Our
business may be materially adversely affected by risks associated with
international trade.
Global sourcing of
many of the products we sell is an important factor in driving higher gross
margin. During 2009, we purchased approximately 25% of our products directly
from overseas vendors including 19% from vendors located in China. Our ability
to find qualified vendors and to access products in a timely and efficient
manner is a significant challenge, especially with respect to goods sourced
outside of the United States. Global sourcing and foreign trade involve numerous
factors and uncertainties beyond our control including increased import duties,
increased shipping costs, more restrictive quotas, loss of "most favored nation"
trading status, currency and exchange rate fluctuations, work stoppages,
transportation delays, economic uncertainties such as inflation, foreign
government regulations, political unrest, natural disasters, war, terrorism,
trade restrictions (including retaliation by the United States against foreign
practices), political instability, the financial stability of vendors,
merchandise quality issues, and tariffs. These and other issues affecting our
international vendors could materially adversely affect our business and
financial performance.
7
Disruption to our distribution network,
the capacity of our distribution centers, and the timely receipt of merchandise
inventory could adversely affect our operating performance.
We rely on the
ability to replenish depleted merchandise inventory through deliveries to our
distribution centers and from the distribution centers to our stores by various
means of transportation, including shipments by sea, rail and truck carriers. A
decrease in the capacity of carriers and/or labor strikes or shortages in the
transportation industry could negatively affect our distribution network, the
timely receipt of merchandise and transportation costs. In addition, long-term
disruptions to the national and international transportation infrastructure from
wars, political unrest, terrorism, natural disasters and other significant
events that lead to delays or interruptions of service could adversely affect
our business. Also, a fire, earthquake, or other disaster at one of our
distribution centers could disrupt our timely receiving, processing and shipment
of merchandise to our stores which could adversely affect our business. As we
continue to grow, we may face increased or unexpected demands on distribution
center operations, as well as unexpected demands on our distribution network. In
addition, new store locations receiving shipments that are increasingly further
away from our distribution centers will increase transportation costs and may
create transportation scheduling strains.
Our inability to properly manage our
inventory levels and offer merchandise that our customers want may materially
adversely impact our business and financial performance.
We must maintain
sufficient inventory levels to operate our business successfully. However, we
also must guard against accumulating excess inventory as we seek to maintain
appropriate in-stock levels. As stated above, we obtain approximately a quarter
of our merchandise from vendors outside of the United States. These foreign
vendors often require lengthy advance notice of our requirements in order to be
able to supply products in the quantities that we request. This usually requires
us to order merchandise and enter into purchase order contracts for the purchase
and manufacture of such merchandise well in advance of the time these products
are offered for sale. As a result, we may experience difficulty in responding to
a changing retail environment, which makes us vulnerable to changes in price and
in consumer preferences. In addition, even though the lead time to obtain
domestically-sourced merchandise is less, we attempt to maximize our gross
margin and operating efficiency by delivering proper quantities of merchandise
to our stores in a timely manner. If we do not accurately anticipate future
demand for a particular product or the time it will take to replenish inventory
levels, our inventory levels may not be appropriate and our results of
operations may be negatively impacted.
Changes in federal or state legislation
and regulations, including the effects of legislation and regulations on product
safety, could increase our cost of doing business and adversely affect our
operating performance.
We are exposed to
the risk that new federal or state legislation, including new product safety
laws and regulations, may negatively impact our operations and adversely affect
our operating performance. For example, the Consumer Product Safety Improvement
Act of 2008 addresses a number of consumer product safety issues, including the
permissible levels of lead and phthalates in certain products. Additional
changes in product safety legislation or regulations may lead to product recalls
and the disposal or write-off of merchandise, as well as fines or penalties and
reputational damage. If our merchandise, including food and consumable products,
do not meet applicable governmental safety standards or our customers’
expectations regarding quality or safety, we could experience lost sales,
increased costs and be exposed to legal and reputational risk. Our inability to
comply on a timely basis with regulatory requirements, or execute product
recalls in a timely manner, could result in fines or penalties which could have
a material adverse effect on our financial results. In addition, negative
customer perceptions regarding the safety of the products we sell could cause us
to lose market share to our competitors. If this occurs, it may be difficult for
us to regain lost sales.
We may be subject to periodic litigation
and regulatory proceedings, including Fair Labor Standards Act and state wage
and hour class action lawsuits, which may adversely affect our business and
financial performance.
From time to time,
we may be involved in lawsuits and regulatory actions, including various
collective or class action lawsuits that are brought against us for alleged
violations of the Fair Labor Standards Act and state wage and hour laws. Due to
the inherent uncertainties of litigation, we may not be able to accurately
determine the impact on us of any future adverse outcome of such proceedings.
The ultimate resolution of these matters could have a material adverse impact on
our financial condition, results of operations, and liquidity. In addition,
regardless of the outcome, these proceedings could result in substantial cost to
us and may require us to devote substantial resources to defend ourselves. For a description of certain
current legal proceedings, see note 10 to the accompanying consolidated
financial statements.
8
We may be subject to risks associated
with changes in laws, regulations, and accounting standards that may adversely
affect our business and financial performance.
Changes in
governmental regulations and accounting standards, including new interpretations
and applications of accounting standards, may have adverse effects on our
financial condition, results of operations, and liquidity.
The bankruptcy of our formerly owned KB
Toys business may adversely affect our business and financial performance.
In December 2000,
we sold the KB Toys business to KB Acquisition Corporation. On January 14, 2004,
KB Acquisition Corporation and certain affiliated entities (collectively “KB-I”)
filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United
States Code. On August 30, 2005, in connection with the acquisition by an
affiliate of Prentice Capital Management of majority ownership of KB-I, KB-I
emerged from their January 14, 2004 bankruptcy (the KB Toys business that
emerged from bankruptcy is hereinafter referred to as “KB-II”). On December 11,
2008, KB-II filed for bankruptcy protection pursuant to Chapter 11 of title 11
of the United States Code. Based on information we have received subsequent to
the December 11, 2008 bankruptcy filing, we believe we may have indemnification
and guarantee obligations (“KB-II Bankruptcy Lease Obligations”) with respect to
31 KB Toys store leases and a lease for a former KB corporate office. Because of
uncertainty inherent in the assumptions used to estimate this liability, our
estimated liability could ultimately prove to be understated and could result in
a material adverse impact on our financial condition, results of operations, and
liquidity. For additional information regarding the KB Toys bankruptcies, see
note 11 to the accompanying consolidated financial statements.
A significant decline in our operating
profit and taxable income may impair our ability to realize the value of our
long-lived assets and deferred tax assets.
We are required by
accounting rules to periodically assess our property and equipment and deferred
tax assets for impairment and recognize an impairment loss or valuation charge,
if necessary. In performing these assessments, we use our historical financial
performance to determine whether we have potential impairments or valuation
concerns and as evidence to support our assumptions about future financial
performance. If our financial performance significantly declines, it could
negatively affect the results of our assessments of the recoverability of our
property and equipment and our deferred tax assets. There is a risk that if our
future operating results significantly decline, it could impair our ability to
recover the value of our property and equipment and deferred tax assets.
Impairment or valuation
charges taken against property and equipment and deferred tax assets could be
material and could have a material adverse impact on our capital resources,
financial condition, results of operations, and liquidity (see the discussion
under the caption “Critical Accounting Policies and Estimates” in the
accompanying MD&A in this Form 10-K for additional information regarding our
accounting policies for long-lived assets and income taxes).
Our inability, if any, to comply with the
terms of the 2009 Credit Agreement may have a material adverse effect on our
capital resources, financial condition, results of operations, and
liquidity.
We have the ability
to borrow funds under the 2009 Credit Agreement and we utilize this ability at
various times depending on operating or other cash flow requirements. The 2009
Credit Agreement contains financial and other covenants, including, but not
limited to, limitations on indebtedness, liens, and investments, as well as the
maintenance of two financial ratios – a leverage ratio and a fixed charge
coverage ratio. A violation of these covenants may permit the lenders to
restrict our ability to further access loans and letters of credit and may
require the immediate repayment of any outstanding loans. If we are not in
compliance with these covenants, it may have a material adverse effect on our
capital resources, financial condition, results of operations, and liquidity.
9
If we are unable to maintain or upgrade
our information systems and software programs or if we are unable to convert to
alternate systems in an efficient and timely manner, our operations may be
disrupted or become less efficient.
We depend on a
variety of information systems for the efficient functioning of our business. We
rely on certain software vendors to maintain and periodically upgrade many of
these systems so that we can continue to support our business. The software
programs supporting many of our systems were licensed to us by independent
software developers. Costs and potential interruptions associated with the
implementation of new or upgraded systems and technology or with maintenance or
adequate support of our existing systems could disrupt or reduce the efficiency
of our business.
If we are unable to successfully execute
our SAP® for
Retail system implementation, our operations may be disrupted or become less
efficient.
In January 2008, we
announced our plans to implement SAP® for Retail solutions
over the next few years. New financial systems, including general ledger,
accounts payable and fixed assets, were developed and tested during 2008 and
2009. The new financial systems have been placed in service in 2010. A new core
merchandising system is planned for development and testing in 2010 and 2011,
with plans to place the new core merchandising system in service when testing
has been completed. The implementation of these systems is expected to have a
pervasive impact on our information systems and across a significant portion of
our general office operations, including merchandising, technology, and finance.
If we are unable to successfully implement SAP® for Retail, it may
have an adverse effect on our capital resources, financial condition, results of
operations, and liquidity.
If we are unable to retain existing and
secure suitable new store locations under favorable lease terms, our financial
performance may be negatively affected.
We lease almost all
of our stores and a significant number of these leases expire or are up for
renewal each year. Our strategy to improve our financial performance includes
sales growth while managing the occupancy cost of each of our stores. A
component of our sales growth strategy is to open new store locations. If we are
not able to negotiate favorable new store leases and lease renewals, our
financial position, results of operations, and liquidity may be negatively
affected.
If we are unable to secure customer,
employee, and company data, our reputation could be damaged and we could be
subject to penalties or lawsuits.
The protection of
our customer, employee, and company data is critical to us. The regulatory
environment surrounding information security and privacy is increasingly
demanding, with frequent imposition of new and constantly changing requirements
across our business. In addition, our customers have a high expectation that we
will adequately protect their personal information. A significant breach of
customer, employee, or company data could damage our reputation and result in
lost sales, fines, and/or lawsuits.
If we lose key personnel, it may have a
material adverse impact on our future results of operations.
We believe that we
benefit substantially from the leadership and experience of our senior
executives. The loss of services of any of these individuals could have a
material adverse impact on our business. Competition for key personnel in the
retail industry is intense and our future success will also depend on our
ability to recruit, train, and retain our senior executives and other qualified
personnel.
The price of our common shares as traded
on the New York Stock Exchange may be volatile.
Our stock price may
fluctuate substantially as a result of factors beyond our control, including but
not limited to, general economic and stock market conditions, risks relating to
our business and industry as discussed above, strategic actions by us or our
competitors, variations in our quarterly operating performance, our future sales
or purchases of our common shares, and investor perceptions of the investment
opportunity associated with our common shares relative to other investment
alternatives.
10
We also may be subject to a number of
other factors which may, individually or in the aggregate, materially or
adversely affect our business. These factors include, but are not limited
to:
- Events or circumstances could
occur which could create bad publicity for us or for types of merchandise
offered in our stores which may negatively impact our business results
including sales;
- Infringement of our
intellectual property, including the Big Lots trademarks, could dilute our
value;
- Our ability to attract and
retain suitable employees;
- Our ability to establish
effective advertising, marketing, and promotional programs;
and
- Other risks described from
time to time in our filings with the SEC.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Retail
Operations
All of
our stores are located in the United States, predominantly in strip shopping
centers, and have an average store size of approximately 29,800 square feet, of
which an average of 21,400 square feet is selling square feet. The average cost
to open a new store in a leased facility during 2009 was approximately $1.0
million, including cost of inventory. Except for 54 owned sites, all of our
stores are leased. In 2008, we acquired, for $8.6 million, two store properties
we were previously leasing. The 54 owned stores are located in the following
states:
State |
|
Stores Owned |
Arizona |
|
3 |
California |
|
39 |
Colorado |
|
3 |
Florida |
|
2 |
Louisiana |
|
1 |
New Mexico |
|
2 |
Ohio |
|
1 |
Texas |
|
3 |
Total |
|
54 |
|
|
|
Store leases
generally obligate us for fixed monthly rental payments plus the payment, in
most cases, of our applicable portion of real estate taxes, common area
maintenance costs (“CAM”), and property insurance. Some leases require the
payment of a percentage of sales in addition to minimum rent. Such payments
generally are required only when sales exceed a specified level. Our typical
store lease is for an initial minimum term of five to 10 years with multiple
five-year renewal options. Sixty-three store leases have sales termination
clauses which can result in our exiting a location at our option if certain
sales volume results are not achieved.
11
The following table
summarizes the number of store lease expirations in each of the next five fiscal
years and the total thereafter. In addition, as stated above, many of our store
leases have renewal options. The table also includes the number of leases that
are scheduled to expire each year that do not have a renewal option. The
information includes stores with more than one lease and leases for stores not
yet open. It excludes 16 month-to-month leases and 54 owned
locations.
Fiscal Year: |
|
Expiring
Leases |
|
Leases Without
Options |
2010 |
|
230 |
|
52 |
2011 |
|
265 |
|
37 |
2012 |
|
216 |
|
23 |
2013 |
|
255 |
|
30 |
2014 |
|
241 |
|
23 |
Thereafter |
|
148 |
|
11 |
Warehouse and
Distribution
At January 30,
2010, we owned or leased approximately 9.7 million square feet of distribution
center and warehouse space. We own and operate five regional distribution
centers strategically placed across the United States. Our regional distribution
centers are owned and located in Ohio, California, Alabama, Oklahoma, and
Pennsylvania. In addition to these merchandise distribution centers, we operate
two leased warehouses in Ohio. The regional distribution centers utilize
warehouse management technology, which enables high accuracy and efficient
processing of merchandise from vendors to our retail stores. The combined output
of our merchandise distribution facilities was approximately 2.5 million cartons
per week in 2009. Certain vendors deliver merchandise directly to our stores. We
attempt to move merchandise from our vendors to the sales floor in the most
efficient manner.
The number of owned
and leased warehouse and distribution facilities and the corresponding square
footage of the facilities by state at January 30, 2010, were as follows:
|
|
|
|
Square Footage |
State |
|
Owned |
|
Leased |
|
Total |
|
Owned |
|
Leased |
|
Total |
|
|
|
|
|
|
|
|
(Square footage in
thousands) |
Ohio |
|
1 |
|
2 |
|
3 |
|
3,559 |
|
731 |
|
4,290 |
California |
|
1 |
|
- |
|
1 |
|
1,423 |
|
- |
|
1,423 |
Alabama |
|
1 |
|
- |
|
1 |
|
1,411 |
|
- |
|
1,411 |
Oklahoma |
|
1 |
|
- |
|
1 |
|
1,297 |
|
- |
|
1,297 |
Pennsylvania |
|
1 |
|
- |
|
1 |
|
1,295 |
|
- |
|
1,295 |
Total |
|
5 |
|
2 |
|
7 |
|
8,985 |
|
731 |
|
9,716
|
Corporate Office
We own the facility in Columbus, Ohio
that serves as our general office for corporate associates.
ITEM 3. LEGAL
PROCEEDINGS
No
response is required under Item 103 of Regulation S-K. For a discussion of
certain litigated matters, please refer to note 10 to the accompanying
consolidated financial statements.
ITEM 4. RESERVED
12
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF
THE REGISTRANT
Our executive
officers at January 30, 2010 were as follows:
Name |
|
Age |
|
Offices Held |
|
Officer Since |
Steven S. Fishman |
|
58 |
|
Chairman, Chief Executive Officer
and President |
|
2005 |
John C. Martin |
|
59 |
|
Executive Vice President, Merchandising |
|
2003 |
Brad A. Waite |
|
52 |
|
Executive Vice
President, Human Resources, Loss Prevention and
Risk
Management
|
|
1998 |
Lisa M. Bachmann |
|
48 |
|
Senior Vice President,
Merchandise Planning/Allocation and
Chief Information
Officer
|
|
2002 |
Christopher T. Chapin |
|
46 |
|
Senior Vice President, Store
Operations |
|
2008 |
Robert C. Claxton |
|
55 |
|
Senior Vice President, Marketing |
|
2005 |
Joe R. Cooper |
|
52 |
|
Senior Vice President and Chief
Financial Officer |
|
2000 |
Charles W. Haubiel II |
|
44 |
|
Senior Vice President,
Legal and Real Estate, General Counsel and
Corporate
Secretary
|
|
1999 |
Norman J. Rankin |
|
53 |
|
Senior Vice President, Big Lots
Capital and Wholesale |
|
1998 |
Robert S. Segal |
|
55 |
|
Senior Vice President, General Merchandise Manager |
|
2005 |
Harold A. Wilson |
|
61 |
|
Senior Vice President, Distribution
and Transportation Services |
|
1995 |
Timothy A. Johnson |
|
42 |
|
Vice President, Strategic Planning and Investor Relations |
|
2004 |
Paul A.
Schroeder |
|
44 |
|
Vice
President, Controller |
|
2005 |
Steven S. Fishman became Chairman, Chief Executive Officer
and President in July 2005. Before joining us, Mr. Fishman was President, Chief
Executive Officer and Chief Restructuring Officer of Rhodes, Inc. (furniture
retailer which filed for bankruptcy on November 4, 2004); Chairman and Chief
Executive Officer of Frank’s Nursery & Crafts, Inc. (lawn and garden
specialty retailer which filed for bankruptcy on September 8, 2004); and
President and Founder of SSF Resources, Inc. (investment and consulting
firm).
John C. Martin is responsible for merchandising. Prior
to joining us in 2003, Mr. Martin was President of Garden Ridge Corporation
(arts and crafts retailer which filed for bankruptcy on February 2, 2004). Mr.
Martin also served as President and Chief Operating Officer of Michaels Stores,
Inc. (arts and crafts retailer) and President, Retail Stores Division of
OfficeMax Incorporated (office supply retailer).
Brad A. Waite is responsible for human resources, loss
prevention, risk management, and administrative services. Mr. Waite joined us in
1988 as Director of Employee Relations and has held various human resources and
senior management positions prior to his promotion to Executive Vice President
in July 2000.
Lisa M. Bachmann is responsible for information
technology, merchandise planning, and merchandise allocation functions. Ms.
Bachmann joined us as Senior Vice President of Merchandise Planning, Allocation
and Presentation in March 2002, and was promoted to her current role in August
2005. Prior to joining us, Ms. Bachmann was Senior Vice President of Planning
and Allocation of Ames Department Stores, Inc. (discount retailer which filed
for bankruptcy on August 20, 2001).
Christopher T. Chapin is responsible for store operations,
including store standards, customer service, personnel development, program
implementation, and execution. Prior to joining us in May 2008, Mr. Chapin was
President and Chief Executive Officer of Facility Source Inc., (retail facility
maintenance and management provider) and Vice President and Director of Store
Operations of Limited Brands, Inc. (retailer).
Robert C. Claxton is responsible for marketing, merchandise
presentation, and sales promotion. Prior to joining us in 2005, Mr. Claxton
served as General Manager and Executive Vice President of Initiative Media
(advertising and communications company) and Chief Marketing Officer and Senior
Vice President of Montgomery Ward (retailer).
13
Joe R. Cooper was promoted to Senior Vice President and
Chief Financial Officer in February 2004, and is responsible for our finance
functions. He oversees treasury, tax, and investor relations, as well as the
reporting, planning, and control functions of the business. Mr. Cooper joined us
as Vice President of Strategic Planning and Investor Relations in May 2000. In
July 2000, he assumed responsibility for the treasury department and was
appointed Vice President, Treasurer.
Charles W. Haubiel II is responsible for our legal and real
estate affairs. He was promoted to his current role and assumed responsibility
for real estate in January 2008. Prior to that, Mr. Haubiel was promoted to
Senior Vice President, General Counsel and Corporate Secretary in November 2004.
Mr. Haubiel joined us in 1997 as Senior Staff Counsel and was promoted to
Director, Corporate Counsel and Assistant Secretary in 1999, and to Vice
President, General Counsel and Corporate Secretary in 2000.
Norman J. Rankin is responsible for our alternative
product sourcing and wholesale operations. He assumed his current role in
January 2008, after serving as Senior Vice President, General Merchandise
Manager with responsibility for consumables and hardware. Mr. Rankin joined us
in 1998 as Vice President, Consumables upon our merger with Mac Frugal’s
Bargains Close-outs, Inc. (discount retailer). In 1999, Mr. Rankin was promoted
to Senior Vice President.
Robert S. Segal is responsible for merchandising in the
furniture and home categories. Mr. Segal joined us in 2004 as Vice President,
Divisional Merchandise Manager, Furniture, and was promoted to his current role
in January 2008. Prior to joining us, Mr. Segal served as Divisional Vice
President, Housewares and Home of Shopko (discount retailer) from 1995 to
2004.
Harold A. Wilson is responsible for warehousing,
distributing, and transporting merchandise. Mr. Wilson joined us in 1995. Prior
to joining us, Mr. Wilson was Vice President of Distribution of Limited Brands,
Inc. (retailer) and held a senior position in the distribution department with
Neiman-Marcus, Inc. (luxury retailer).
Timothy A. Johnson is responsible for our strategic planning
and investor relations functions. He was promoted to Vice President, Strategic
Planning and Investor Relations in February 2004. He joined us in 2000 as
Director of Strategic Planning.
Paul A. Schroeder is responsible for internal and external
financial reporting and accounting operations including payroll, accounts
payable, and inventory control. Mr. Schroeder joined us as Director, Accounting
Operations in April 2005, and was promoted to Vice President, Controller in
September 2005. Prior to joining us, Mr. Schroeder was Director of Finance of
American Signature, Inc. (furniture retailer) and held various finance positions
with Limited Brands, Inc. (retailer).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common shares are listed on the New York Stock Exchange (“NYSE”) under the
symbol “BIG.” The following table reflects the high and low sales prices per
common share for our common shares as reported on the NYSE composite tape for
the fiscal periods indicated:
|
|
2009 |
|
2008 |
|
|
High |
|
Low |
|
High |
|
Low |
First Quarter |
|
$
|
28.36 |
|
$
|
12.62 |
|
$
|
28.65 |
|
$
|
15.00 |
Second Quarter |
|
|
28.50 |
|
|
19.49 |
|
|
34.88 |
|
|
26.03 |
Third Quarter |
|
|
28.18 |
|
|
22.47 |
|
|
35.33 |
|
|
18.99 |
Fourth
Quarter |
|
$ |
31.39 |
|
$ |
23.04 |
|
$ |
24.88 |
|
$ |
12.93 |
14
Our Board of
Directors historically has authorized reinvesting available cash in capital
expenditures for various maintenance and growth opportunities and in share
repurchase programs. We historically have not paid dividends and our Board of
Directors is not currently considering any change in this policy. In the event
that we change our policy, any future cash dividend payments would be determined
by our Board of Directors taking into account business conditions then existing,
including our earnings, financial requirements and condition, opportunities for
reinvesting cash, and other factors.
On December 4,
2009, we announced that our Board of Directors authorized the repurchase of up
to $150.0 million of our common shares, which commenced immediately and will
continue until exhausted. No shares were repurchased under this program in 2009.
On March 2, 2010, our Board of Directors authorized a $250.0 million increase to
our $150.0 million share repurchase program bringing the total authorization to
$400.0 million (collectively the “2010 Repurchase Program”). On March 10, 2010,
we executed a $150.0 million accelerated share repurchase (“ASR”). See note 14
to the accompanying consolidated financial statements for a more detailed
discussion regarding the ASR. We expect the remaining $250.0 million purchases
under the 2010 Repurchase Program to be made from time to time in the open
market and/or in privately negotiated transactions at our discretion, subject to
market conditions and other factors.
In 2007, we
announced our $600.0 million March 2007 and $150.0 million November 2007
Repurchase Programs which we completed in the fourth fiscal quarter 2007 and
first fiscal quarter 2008, respectively. During 2008, as part of these announced
repurchased programs, we purchased 2.2 million common shares having an aggregate
cost of $37.5 million with an average price paid per share of $17.28. During
2007, as part of these announced repurchase programs, we purchased 30.0 million
common shares having an aggregate cost of $712.5 million with an average price
paid per share of $23.76. The repurchased common shares were placed into
treasury and are used for general corporate purposes including the issuance of
shares related to employee benefit plans.
The following table
sets forth information regarding our repurchase of our common shares during the
fourth fiscal quarter of 2009:
(In thousands, except price per
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
(d) Approximate
Dollar |
|
|
|
|
|
|
|
Shares Purchased
as |
|
Value of Shares
that |
|
|
(a)
Total Number |
|
(b) Average |
|
Part of Publicly |
|
May Yet Be
Purchased |
|
|
of Shares |
|
Price Paid per |
|
Announced Plans or |
|
Under the Plans
or |
Period |
|
Purchased |
|
Share |
|
Programs |
|
Programs |
November 1, 2009 - November 28,
2009 |
|
- |
|
$ |
- |
|
- |
|
$ |
150,000 |
November 29, 2009 - December 26, 2009 |
|
- |
|
|
- |
|
- |
|
|
150,000 |
December 27,
2009 - January 30, 2010 |
|
- |
|
|
- |
|
- |
|
|
150,000 |
Total |
|
- |
|
$ |
- |
|
- |
|
$ |
150,000 |
At the close of
trading on the NYSE on March 22, 2010, there were approximately 996 registered
holders of record of our common shares.
15
The following graph
and table compares, for the five fiscal year period ended January 30, 2010, the
cumulative total shareholder return for our common shares, the S&P 500
Index, and the S&P 500 Retailing Index. Measurement points are the last
trading day of each of our fiscal years ended January 28, 2006, February 3,
2007, February 2, 2008, January 31, 2009, and January 30, 2010. The graph and
table assume that $100 was invested on January 29, 2005, in each of our common
shares, the S&P 500 Index, and the S&P 500 Retailing Index and assume
reinvestment of any dividends. The stock price performance on the following
graph and table is not necessarily indicative of future stock price
performance.
|
|
|
|
|
INDEXED RETURNS |
|
|
|
|
|
Years Ended |
|
|
Base |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
January |
|
January |
|
January |
|
January |
|
January |
Company / Index |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
Big Lots, Inc. |
|
$ |
100.00 |
|
$ |
123.12 |
|
$ |
232.97 |
|
$ |
156.90 |
|
$ |
120.52 |
|
$ |
254.57 |
S&P 500 Index |
|
|
100.00 |
|
|
111.63 |
|
|
128.37 |
|
|
126.05 |
|
|
76.43 |
|
|
101.76 |
S&P 500 Retailing
Index |
|
$ |
100.00 |
|
$ |
108.79 |
|
$ |
125.23 |
|
$ |
102.21 |
|
$ |
63.66 |
|
$ |
99.02 |
16
ITEM 6. SELECTED FINANCIAL
DATA
The following
statements of operations and balance sheet data have been derived from our
consolidated financial statements and should be read in conjunction with
MD&A and the consolidated financial statements and related notes included
herein.
|
|
Fiscal Year (a) |
|
|
2009 |
|
2008 (b) |
|
2007 (c) |
|
2006 (b)(d) |
|
2005 |
(In thousands, except per share
amounts and store counts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,726,772 |
|
|
$ |
4,645,283 |
|
|
$ |
4,656,302 |
|
|
$ |
4,743,048 |
|
|
$ |
4,429,905 |
|
Cost of sales (exclusive of depreciation expense |
|
|
2,807,466 |
|
|
|
2,787,854 |
|
|
|
2,815,959 |
|
|
|
2,851,616 |
|
|
|
2,698,239 |
|
shown separately
below) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
1,919,306 |
|
|
|
1,857,429 |
|
|
|
1,840,343 |
|
|
|
1,891,432 |
|
|
|
1,731,666 |
|
Selling and administrative expenses |
|
|
1,532,356 |
|
|
|
1,523,882 |
|
|
|
1,515,379 |
|
|
|
1,622,339 |
|
|
|
1,596,136 |
|
Depreciation expense |
|
|
74,904 |
|
|
|
78,624 |
|
|
|
88,484 |
|
|
|
101,279 |
|
|
|
108,657 |
|
Gain on sale of
real estate |
|
|
(12,964 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating profit |
|
|
325,010 |
|
|
|
254,923 |
|
|
|
236,480 |
|
|
|
167,814 |
|
|
|
26,873 |
|
Interest expense |
|
|
(1,840 |
) |
|
|
(5,282 |
) |
|
|
(2,513 |
) |
|
|
(581 |
) |
|
|
(6,272 |
) |
Interest and
investment income |
|
|
175 |
|
|
|
65 |
|
|
|
5,236 |
|
|
|
3,257 |
|
|
|
313 |
|
Income from continuing operations before income taxes |
|
|
323,345 |
|
|
|
249,706 |
|
|
|
239,203 |
|
|
|
170,490 |
|
|
|
20,914 |
|
Income tax
expense |
|
|
121,975 |
|
|
|
94,908 |
|
|
|
88,023 |
|
|
|
57,872 |
|
|
|
5,189 |
|
Income from continuing operations |
|
|
201,370 |
|
|
|
154,798 |
|
|
|
151,180 |
|
|
|
112,618 |
|
|
|
15,725 |
|
Income (loss)
from discontinued operations, net of tax |
|
|
(1,001 |
) |
|
|
(3,251 |
) |
|
|
7,281 |
|
|
|
11,427 |
|
|
|
(25,813 |
) |
Net income
(loss) |
|
$ |
200,369 |
|
|
$ |
151,547 |
|
|
$ |
158,461 |
|
|
$ |
124,045 |
|
|
$ |
(10,088 |
) |
Earnings per common share -
basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
2.47 |
|
|
$ |
1.91 |
|
|
$ |
1.49 |
|
|
$ |
1.02 |
|
|
$ |
0.14 |
|
Discontinued
operations |
|
|
(0.01 |
) |
|
|
(0.04 |
) |
|
|
0.07 |
|
|
|
0.10 |
|
|
|
(0.23 |
) |
|
|
$ |
2.45 |
|
|
$ |
1.87 |
|
|
$ |
1.56 |
|
|
$ |
1.12 |
|
|
$ |
(0.09 |
) |
Earnings per common share -
diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
2.44 |
|
|
$ |
1.89 |
|
|
$ |
1.47 |
|
|
$ |
1.01 |
|
|
$ |
0.14 |
|
Discontinued
operations |
|
|
(0.01 |
) |
|
|
(0.04 |
) |
|
|
0.07 |
|
|
|
0.10 |
|
|
|
(0.23 |
) |
|
|
$ |
2.42 |
|
|
$ |
1.85 |
|
|
$ |
1.55 |
|
|
$ |
1.11 |
|
|
$ |
(0.09 |
) |
Weighted-average common shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
81,619 |
|
|
|
81,111 |
|
|
|
101,393 |
|
|
|
110,336 |
|
|
|
113,240 |
|
Diluted |
|
|
82,681 |
|
|
|
82,076 |
|
|
|
102,542 |
|
|
|
111,930 |
|
|
|
113,677 |
|
Balance sheet
data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,669,493 |
|
|
$ |
1,432,458 |
|
|
$ |
1,443,815 |
|
|
$ |
1,720,526 |
|
|
$ |
1,625,497 |
|
Working capital (e) |
|
|
580,446 |
|
|
|
355,776 |
|
|
|
390,766 |
|
|
|
674,815 |
|
|
|
557,231 |
|
Cash and cash
equivalents |
|
|
283,733 |
|
|
|
34,773 |
|
|
|
37,131 |
|
|
|
281,657 |
|
|
|
1,710 |
|
Long-term obligations under
bank credit facility |
|
|
- |
|
|
|
- |
|
|
|
163,700 |
|
|
|
- |
|
|
|
5,500 |
|
Shareholders’ equity |
|
$ |
1,001,412 |
|
|
$ |
774,845 |
|
|
$ |
638,486 |
|
|
$ |
1,129,703 |
|
|
$ |
1,078,724 |
|
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities |
|
$ |
392,026 |
|
|
$ |
211,063 |
|
|
$ |
307,932 |
|
|
$ |
381,477 |
|
|
$ |
212,965 |
|
Cash used in investing
activities |
|
$ |
(77,937 |
) |
|
$ |
(88,192 |
) |
|
$ |
(58,764 |
) |
|
$ |
(30,421 |
) |
|
$ |
(66,702 |
) |
Store data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross square
footage |
|
|
40,591 |
|
|
|
39,888 |
|
|
|
40,195 |
|
|
|
40,770 |
|
|
|
41,413 |
|
Total selling square
footage |
|
|
29,176 |
|
|
|
28,674 |
|
|
|
28,902 |
|
|
|
29,376 |
|
|
|
29,856 |
|
Stores opened during the
fiscal year |
|
|
52 |
|
|
|
21 |
|
|
|
7 |
|
|
|
11 |
|
|
|
73 |
|
Stores closed during the
fiscal year |
|
|
(30 |
) |
|
|
(35 |
) |
|
|
(29 |
) |
|
|
(37 |
) |
|
|
(174 |
) |
Stores open at end of the
fiscal year |
|
|
1,361 |
|
|
|
1,339 |
|
|
|
1,353 |
|
|
|
1,375 |
|
|
|
1,401 |
|
(a) |
|
2006 is comprised of 53 weeks. All other periods presented included
52 weeks. |
(b) |
|
We adopted the funding recognition provisions of guidance under
Financial Accounting Standards Board Accounting Standards Codification
(“ASC”) 715-30-25, Defined Benefit Plans-Pension
(Statement of
Financial Accounting Standard (“SFAS”) No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (SFAS No. 158)),
in 2006 which
resulted in accumulated other comprehensive loss of $5,933 ($3,859 net of
tax). We adopted the measurement date provisions of the guidance under ASC
715-30-35 (SFAS No. 158) in 2008, the impacts of which are more fully
described in notes 1 and 8 to the accompanying consolidated financial
statements. |
17
(c) |
|
We adopted
guidance under ASC 740, Income Taxes (FIN No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of SFAS No. 109), in the first fiscal quarter of
2007, on a prospective basis, the impact of which is more fully discussed
in notes 1 and 9 to the accompanying consolidated financial
statements. |
(d) |
|
We adopted
guidance under ASC 718, Compensation – Stock Compensation
and ASC 505-50,
Equity-Based Payments to Non
Employees (SFAS
No. 123(R), Share-Based
Payment), in the first fiscal quarter of
2006, under the modified prospective adoption method. Share-based
compensation expense was $6.6 million in 2006. Share-based compensation
expense was not recognized in the income statement prior to 2006. For
years 2009, 2008 and 2007, the impact is more fully described in notes 1
and 7 to the accompanying consolidated financial
statements. |
(e) |
|
For 2008,
working capital included $61.7 million for current maturities under bank
credit facility because the 2004 Credit Agreement terminated in
2009. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The discussion and analysis presented below should be read in conjunction
with the accompanying consolidated financial statements and related notes.
Please refer to Item 1A of this Form 10-K for a discussion of forward-looking
statements and certain risk factors that may have a material effect on our
business, financial condition, results of operations, and/or liquidity.
Our fiscal year
ends on the Saturday nearest to January 31, which results in some fiscal years
with 52 weeks and some with 53 weeks. Fiscal years 2009, 2008 and 2007 each were
comprised of 52 weeks.
Operating Results Summary
The following are
the results from 2009 that we believe are key indicators of our operating
performance when compared to our operating performance in 2008.
- Net sales increased 1.8%.
Comparable store sales for stores open at least two years at the beginning of
2009 increased 0.7%. We operated an average of 1,354 stores throughout 2009
compared to 1,356 average stores throughout 2008. Sales per selling square
foot were $162 in 2009 and $160 in 2008.
- Gross margin as a percent of
sales increased 60 basis points to 40.6% of sales in 2009 from 40.0% of sales
in 2008. Gross margin dollars were higher by 3.3%.
- Average inventory levels were
slightly lower throughout 2009 compared to 2008 and, combined with the 1.8%
increase in net sales, resulted in a higher inventory turnover rate of 3.7
times in 2009 compared to 3.6 times in 2008.
- Selling and administrative
expenses as a percent of sales decreased 40 basis points to 32.4% of sales
from 32.8% of sales in 2008.
- Depreciation expense as a
percent of sales decreased 10 basis points to 1.6% of sales in 2009 from 1.7%
of sales in 2008.
- Diluted earnings per share
from continuing operations improved to $2.44 per share in 2009 compared to
$1.89 per share in 2008.
- Cash provided by operating
activities was $392.0 million in 2009 compared to $211.1 million in 2008. Our
total inventory per average store was down 2.3% at the end of 2009 compared to
2008. Our accounts payable leverage increased at the end of 2009 as a result
of a shift in our negotiated vendor payment terms towards a longer payment
period which is more consistent with our retail competitors. Additionally, we
paid income taxes of $106.0 million in 2009 compared to $92.4 million in
2008.
- In December of 2009 our Board
of Directors authorized the repurchase of up to $150.0 million of our common
shares. No shares were repurchased under this program in 2009.
18
The following table compares components
of our consolidated statements of operations as a percentage of net
sales:
|
|
2009 |
|
2008 |
|
2007 |
Net sales |
|
100.0 |
|
% |
|
100.0 |
|
% |
|
100.0 |
|
% |
Cost of sales (exclusive of depreciation expense |
|
59.4 |
|
|
|
60.0 |
|
|
|
60.5 |
|
|
shown separately below) |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
40.6 |
|
|
|
40.0 |
|
|
|
39.5 |
|
|
Selling and administrative expenses |
|
32.4 |
|
|
|
32.8 |
|
|
|
32.5 |
|
|
Depreciation expense |
|
1.6 |
|
|
|
1.7 |
|
|
|
1.9 |
|
|
Gain on sale of
real estate |
|
(0.3 |
) |
|
|
0.0 |
|
|
|
0.0 |
|
|
Operating profit |
|
6.9 |
|
|
|
5.5 |
|
|
|
5.1 |
|
|
Interest expense |
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Interest and
investment income |
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
Income from continuing operations before income taxes |
|
6.8 |
|
|
|
5.4 |
|
|
|
5.1 |
|
|
Income tax
expense |
|
2.6 |
|
|
|
2.0 |
|
|
|
1.9 |
|
|
Income from continuing operations |
|
4.3 |
|
|
|
3.3 |
|
|
|
3.2 |
|
|
Income (loss)
from discontinued operations, net of tax |
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Net
income |
|
4.2 |
|
% |
|
3.3 |
|
% |
|
3.4 |
|
% |
See the discussion
below under the captions “2009 Compared To 2008” and “2008 Compared To 2007” for
additional details regarding the specific components of our operating results.
Selling and
administrative expenses in 2009 were increased by $4.0 million (10 basis
points), pretax, for a legal settlement agreement (see note 10 to the
accompanying consolidated financial statements for additional information on
this matter). Gain on sale of real estate in 2009 was $13.0 million (30 basis
points), pretax, for a company-owned and operated store in California sold at a
gain.
Selling and
administrative expenses in 2007 were reduced by $5.2 million (10 basis points),
pretax, for proceeds we received from the KB Toys bankruptcy trust (see note 11
to the accompanying consolidated financial statements for additional
information) and $4.9 million (10 basis points), pretax, for insurance proceeds
we received as recovery for 2005 hurricane insurance claims.
Seasonality
As discussed in Item 1. under the
“Seasonality” caption, our financial results fluctuate from quarter to quarter
depending on various factors such as timing of new or closed stores, timing and
extent of advertisements and promotions, and timing of holidays. We expect that
the Christmas holiday selling season will continue to result in a significant
portion of our sales and operating profits. If our sales performance is
significantly better or worse during this time frame, we would expect a more
pronounced impact on our annual financial results.
19
The following table
sets forth the seasonality of net sales and operating profit for 2009, 2008, and
2007 by fiscal quarter:
|
|
First |
|
Second |
|
Third |
|
Fourth |
Fiscal Year 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales percentage of full year |
|
24.1 |
% |
|
23.0 |
% |
|
21.9 |
% |
|
31.0 |
% |
Operating
profit as a percentage of full year |
|
18.5 |
|
|
14.7 |
|
|
14.6 |
|
|
52.2 |
|
Fiscal Year 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales percentage of full
year |
|
24.8 |
% |
|
23.8 |
% |
|
22.0 |
% |
|
29.4 |
% |
Operating profit
as a percentage of full year |
|
22.8 |
|
|
17.1 |
|
|
7.9 |
|
|
52.2 |
|
Fiscal Year 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales percentage of full year |
|
24.2 |
% |
|
23.3 |
% |
|
22.1 |
% |
|
30.4 |
% |
Operating
profit as a percentage of full year |
|
18.0 |
|
|
14.1 |
|
|
9.6 |
|
|
58.3 |
|
Operating Strategy
Over the past four fiscal years (fiscal
2006 through fiscal 2009), we have successfully repositioned our business by
concentrating our efforts on the implementation of a strategy we refer to as the
What’s Important Now Strategy (“WIN Strategy”). The WIN Strategy focuses on
three key elements of the business: merchandising, real estate, and the cost
structure. The WIN Strategy has been an operating profit growth strategy
designed to expand the operating profit rate of our existing store base. Only
recently, in 2009, as the commercial real estate market softened and rents
declined, did we pursue net new store growth. Due to the implementation of WIN,
our operating profit rate has expanded from 0.6% in 2005 to 6.9% in 2009 with
operating profit dollars growing from $26.9 million to $325.0 million during
that same time period. The growth in operating profit has translated to
significant growth in earnings per share from continuing operations, which has
increased from $0.14 per diluted share in 2005 to $2.44 per diluted share in
2009. Along the way, we generated approximately $1.5 billion of cash of which
approximately $330 million was capital reinvested in our business and $900
million was returned to shareholders (aggregate share repurchases in 2006, 2007
and 2008 under publicly announced share repurchase programs).
In 2010, we
anticipate the key elements of the WIN Strategy will remain consistent and we
are forecasting continued operating profit growth. However, we believe we are
entering the next phase of the WIN Strategy … a growth phase. The commercial
real estate market has softened, thus providing more real estate available for
us at prices that are more appropriate for our financial model and return on
capital requirements. Given the strength of our financial performance we are in
a better position to open new stores and take advantage of the current real
estate market conditions.
In 2010, we expect:
- An operating profit rate of
7.0% to 7.2% based on an estimated comparable store sales increase of 3% to
4%, flat gross margin rate, and expense leverage compared to last
year.
- Earnings per diluted share
from continuing operations to be $2.65 to $2.75.
- Opening 80 new stores and
closing 40 stores, for net growth of 40 stores or 3%.
- Cash provided by operating
activities of approximately $315 million less capital expenditures of
approximately $115 million resulting in $200 million of cash available for
investment or redeployment, and
- The remaining $250.0 million
of purchases under the 2010 Repurchase Program may be made from time to time
in the open market and/or in privately negotiated transactions at our
discretion, subject to market conditions and other factors. On March 10, 2010,
we executed a $150.0 million accelerated share repurchase transaction.
The following
sections provide additional discussion and analysis of our WIN Strategy with
respect to merchandising, real estate, and cost structure. The 2009 Compared To
2008 section below provides additional discussion and analysis of the impact of
these strategies on our financial performance and the assumptions and
expectations upon which we are basing our guidance for our future
results.
20
Merchandising
From a merchandising perspective, our
competitive positioning as the largest broadline closeout retailer affords us a
strategic advantage when sourcing merchandise for our stores. We source our
merchandise in three key ways:
- Closeouts, or excess
inventory, comprise approximately half of the merchandise available for sale
to our customers. Manufacturers and vendors have excess merchandise for a
number of different reasons including retailers canceling orders, retailers
going out of business, marketing or packaging changes, a new product launch
that has failed, or for other various reasons. In these situations, we are
able to source product at a discounted cost and offer significant value
savings to our customers. We currently have thousands of vendor relationships
for excess inventory that have been developed over many years. These
relationships along with the size and financial strength of our company are a
key barrier to entry and minimize the opportunities for other competitors to
enter our retail segment.
- For certain merchandise
categories, there is not always an abundant supply of excess inventory. In
certain merchandise categories under these situations, we will work with
vendors to develop product and import merchandise from overseas. Imports total
approximately 25% to 30% of our merchandise sold in any given year. Categories
with the highest concentration of imports include Seasonal, Furniture, and to
a lesser extent Home and the Toys department.
- The balance of our
merchandise assortment is replenishable type product or the captive label
businesses we operate. The merchandise has a consistency of flow and
availability so that it can be offered in our stores day in and day out. It
has many of the same characteristics as our closeout business but is
replenishable upon demand. Our prices on this merchandise are still positioned
below our competition although to a lesser extent than the closeout component
of our business.
We offer six major
merchandising categories in our store: Consumables, Seasonal, Home, Hardlines,
Furniture, and Other. These categories range in size with Consumables as the
single largest at 30.8% of sales in 2009 and Other as the smallest at 12.0% of
sales in 2009.
In recent years,
our merchandising strategies to increase sales have been predominantly focused
on growing the size of the basket, or average transaction value. There have been
two primary methods to accomplishing this goal: drive more units per
transaction, and grow the average item retail by offering our customers better
quality merchandise, better values, and more prominent brand name products. This
approach is consistent with our customer research which suggests that our core
customer recognizes quality and brands and is willing to pay a higher retail
price, so long as the value or cost savings is significant compared to what
other retailers are offering. This strategy has resulted in fewer cartons
processed by our distribution centers and stores and achieved positive
comparable store sales.
While executing our
WIN Strategy, we have made measurable progress towards our goals of growing
sales per selling square foot (which increased from $146 per square foot in 2005
to $162 per square foot in 2009) and increasing gross margin dollars (which
increased from $1,732 million in 2005 to $1,919 million in 2009).
From a
merchandising perspective in 2010, our goal is to provide extreme value,
improved quality, and continue to increase the presence of recognizable brand
name merchandise in our stores. We expect our major merchandise categories will
remain the same as prior years but the percentage of business by category may
fluctuate from time to time based on customer demand and the availability of
compelling deals that we are able to source and offer in our stores.
Strategically, we anticipate opportunity does exist to continue to grow the
basket, or average transaction value, through the same successful initiatives
that benefitted results over the last few years. Additionally, during 2010 and
in future years, we believe there are specific initiatives in marketing and
store operations designed to begin to grow the number of transactions in our
stores.
21
Our marketing
efforts involve a mix of printed circulars, in-store marketing, television, and
online advertising. Much of our marketing is based on information that we have
learned about our customers, principally through customer surveys. Based on this
information, we believe over 70% of our core customers come to our stores
without a shopping list or without a specific item or brand in mind to purchase.
Value dominates top of mind awareness as our customers look to us for savings.
Nearly one half of the customers surveyed said their shopping trips to our
stores last over 30 minutes, which we interpret as them coming to shop our
stores for the “treasure hunt.” We have improved, and expect to continue to
develop, our in-store signage and merchandising displays and arrangements. We
continue to market to our Buzz Club members, by offering a free online
membership and alerting them to new merchandise and offerings in our stores.
Additionally, in 2009, we launched our Rewards program which is the first true
loyalty card program in the Company’s history. After enrolling in this program,
the customer receives a Rewards card which is to be presented and scanned at the
register at time of purchase. After ten qualifying purchases each of $20 or
more, the Rewards member will receive a coupon for 20%
off a future purchase in our stores. Additionally, members will
receive, via email, our ad circulars and other targeted promotional materials.
Due to the investments made in our store register systems during 2007 and 2008,
each time a Rewards card is scanned we have the technology to record and monitor
purchasing behavior.
From a marketing
perspective in 2010, there are three key initiatives designed to help to build
transactions:
- First, the Rewards program
and building the membership base is a key driver to future transaction growth.
As of March 1, 2010, we have over 1.4 million Rewards members. To date, stores
with the highest amount of Rewards member signups or penetration are seeing
incremental transaction lifts in the low single digits. During 2010, we will be implementing
technology that will enable us to offer our members targeted messages or
promotions based on their specific buying patterns.
- Second, using our ad
circulars and promotional pricing to create more buzzbuilders (excitement)
could help increase transactions. The excitement created by buzzbuilders is
predominantly achieved through price but uniqueness of item can be a factor as
well.
- Lastly, we have expanded the
mix of tender accepted in our stores and effective February 2010, we began
accepting the American Express card. American Express cardholders typically
have higher income demographics than other cardholders and we believe the
marketing efforts and support from the vendor could increase our market share
in that demographic.
From a store
operations perspective, we began the company-wide rollout of our “Ready for
Business” program in 2009. The program has certain performance criteria and
standards aimed at improving the consistency of visual presentation, merchandise
recovery efforts, and overall store cleanliness. Ready for Business also focuses
on improvements in our employee training programs and hiring practices. This
higher level of expectation and accountability within our store operations team
increased the turnover rate of our district managers, store managers, and
assistant store managers in 2009 and required us to recruit new talent to the
organization.
In 2010, we believe
that continued focus on Ready for Business standards and the investment made in
talent in 2009 could help to improve sales through both the size of the average
basket and the number of transactions. Additionally, with a higher level of
confidence in the discipline on store standards and a higher caliber management
team in place, we have identified certain investments in both store layout and
store improvement capital which we will be executing throughout 2010. This
effort will address approximately 120 stores with potential upside sales
opportunities.
Real Estate
From the beginning of fiscal 2006 through
fiscal 2008, we slowed our rate of new store openings based on our belief that
many of the real estate locations available to us in the marketplace were too
expensive and as such the return on investment would not be satisfactory to our
shareholders. During 2006 through 2008, we opened a total of only 39 new stores
(11 in 2006, 7 in 2007, and 21 in 2008). During the same timeframe, we closed
101 existing stores (37 in 2006, 29 in 2007, and 35 in 2008) for various reasons
including lack of profitability, proposed new lease terms where rents were
escalating and landlords were unwilling to renegotiate terms, or relocating the
store to a potentially more productive location.
22
As a result of
improvements in our store productivity and overall profitability over the last
four years and the softening of the real estate market, we were able to grow our
store base in 2009 for the first time in the last five years. We opened 52 new
stores and closed 30 stores in 2009. The majority of our new store openings (41)
were what we refer to as traditional stores, which are secondary or tertiary
real estate normally located in retail strip centers. Additionally, in 2009 we
tested two new store initiatives: “A” locations (8) and a smaller store concept
(3). Generally speaking, new store openings performed very well in 2009 with “A”
locations exceeding our expectations, traditional stores overall meeting our
expectations and our small store test producing mixed results.
We believe we have
opportunities with respect to the lease options included in our existing store
leases. As stated in Item 2. Properties, of this Form 10-K, we have 230 store
leases that expire in 2010. We expect to close approximately 40 of these stores,
some of which have not performed to our expectations, some of which have no more
lease renewal options and we expect the landlord to choose a different tenant,
and some of which we anticipate exiting by our choice in favor of relocating the
store to a new location in a nearby area. For our remaining approximately 190
store locations with 2010 lease expirations, we expect to exercise our renewal
option or negotiate more favorable lease renewal terms sufficient enough to
enable us to achieve an acceptable return on our investment.
Our real estate
strategy has included the following additional investments in our existing fleet
of stores in order to improve operating efficiency:
- In 2007 and 2008, we invested
approximately $38 million to implement our new point-of-sale register system
in all of our existing stores with the expected benefits to include more
timely and accurate sales and inventory information, improved customer service
through faster speed at checkout, lower repair and maintenance costs, and
improved labor efficiency through the use of hand-held
technology.
- In 2007 and 2008, we invested
approximately $7 million in store retrofits and new merchandise fixtures at
approximately 110 of our stores to better feature some of our key merchandise
growth classifications, specifically Furniture.
- In 2009, we tested a new
store layout in approximately 20 locations, predominantly in Columbus, Ohio.
The layout test was designed to improve the ease of shopping our stores. It
features Consumables more prominently in our store and improves the visual
sight lines within the store. The customer reaction indicated that the store
seemed better organized, cleaner, and has improved lighting, wider aisles, and
generally presents merchandise more effectively. Based on our evaluation of
the test results, we will expand this program to an additional 105 stores in
2010.
- Also in 2009, we made certain
investments, both capital and expense, in a “Food Refresh” program. The
program emphasizes cleanliness and merchandise presentation in our food
departments and it included new or refinished fixtures in approximately one
half of our stores while all stores received new signage and shelf labeling.
Based on feedback from our customers, we believe improved cleanliness, better
fixtures, and dedicated associate staffing to maintain a better merchandise
presentation instills customer confidence in the quality and freshness of our
food merchandise.
In 2010, we plan to
increase the level of new store openings to 80 new stores and expect to close
approximately 40 stores resulting in net store growth of 40 locations, or 3% of
the total store base. In terms of the breakout of what types of stores we expect
to open, the availability of space for our traditional locations remains good,
rents are reasonable, and we estimate we will open approximately 50 traditional
stores in 2010. In regards to “A” locations, we see a meaningful opportunity for
growth in 2010 and estimate that we will open approximately 30 new “A” locations
this year. This is a major step forward for our company and has been made
possible by the softening in the commercial real estate market and the strength
of our financial performance over the last several years. Additionally, a higher
quality and more branded merchandise assortment along with improvements in store
standards and customer service have given us the confidence that we can be
successful in these locations with a new customer base that has a somewhat
higher level of expectations in terms of the in-store shopping experience.
During 2009, we learned a great deal through our small store test about the
operational aspects and the merchandising changes or edits that are critical in
this size of store. We will continue to make modifications to our 3 test stores
and monitor their progress. Along the way in 2010, we may also add a couple of
stores to the test.
23
Cost Structure
Our goal each year
is to continue to generate expense leverage (lower expenses as a percent of net
sales). We believe that several operational changes we have made, which we
continue to refine, have significantly contributed to the achievement of our
leverage goals. Some of the operational changes made include:
- Reduced inventory levels at
our stores and regional distribution centers.
- Purchased and distributed
merchandise to our stores in optimal quantities and pack sizes to minimize
handling in our distribution centers and stores.
- Timed receipt of merchandise
in stores closer to the expected display dates in order to avoid excessive
handling merchandise.
- Increased the percentage of
merchandise that arrives in our stores pre-ticketed and pre-packaged for
efficient display and sale.
- Refined our staffing and
payroll scheduling models in our stores, and
- Implemented several
initiatives which lowered our distribution and outbound transportation
expenses.
As a result of
these operational changes and certain other initiatives in the business, our
overall expenses as a percent of sales have declined by 480 basis points (2009
expense rate of 33.7% versus 2005 expense rate of 38.5%).
For 2010, we are
forecasting an expense rate of 33.4% to 33.6%. Expense dollars are expected to
decline in the areas of advertising, utilities, and insurance based on certain
company specific initiatives developed by management. Store expenses along with
distribution and transportation costs are expected to leverage as dollar growth
in these areas is forecasted to be at a slower rate than our anticipated sales
growth. Partially offsetting this leverage, we believe costs will increase and
deleverage areas such as occupancy, depreciation, and equity related
compensation expense, given the significant increase in our share price over the
last 12 months.
Discontinued
Operations
We
continue to incur exit-related costs for some of the 130 stores we closed in
2005 that we have classified as discontinued operations, specifically on the
stores where lease obligations remain. We also report certain activity related
to our prior ownership of the KB Toys business in discontinued operations. See
note 11 to the accompanying consolidated financial statements for a more
detailed discussion of all of our discontinued operations.
Share Repurchase
Program
In
December 2009, our Board of Directors authorized a share repurchase program
providing for the repurchase of up to $150.0 million of our common shares. No
shares were repurchased under this program in 2009.
On March 2, 2010,
based upon the strength of our operating performance and cash flow generation
during the fourth fiscal quarter of 2009 and our estimated cash flow for fiscal
2010, our Board of Directors authorized a $250.0 million increase to our $150.0
million program bringing the total authorization of the 2010 Repurchase Program
to $400.0 million. On March 10, 2010, we utilized $150.0 million of the
authorization to execute an accelerated share repurchase transaction which
reduced our common shares outstanding by 3.6 million. The total number of shares
repurchased under the ASR will be based upon the volume weighted average price
of our stock over a predetermined period and will not be known until that period
ends and a final settlement occurs. The final settlement could increase or
decrease the 3.6 million shares initially reduced from our outstanding common
shares. The remaining $250.0 million will be utilized to repurchase shares in
the open market and/or in privately negotiated transactions at our discretion,
subject to market conditions and other factors. Common shares acquired through
the 2010 Repurchase Program will be available to meet obligations under equity
compensation plans and for general corporate purposes. The 2010 Repurchase
Program will continue until exhausted and will be funded with cash and cash
equivalents, cash generated during fiscal 2010 or, if needed, by drawing on our
$500.0 million unsecured credit facility.
24
2009 COMPARED TO 2008
Net
Sales
As
previously discussed, we manage our business on the basis of one segment:
broadline closeout retailing. We report net sales information for six
merchandise categories. Net sales by merchandise category, as a percentage of
total net sales, and net sales change in dollars and percentage in 2009 compared
to 2008 were as follows:
|
2009 |
|
2008 |
|
Change |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
$ |
1,456,370 |
|
30.8 |
% |
|
$ |
1,410,383 |
|
30.4 |
% |
|
$ |
45,987 |
|
|
3.3 |
|
% |
Home |
|
717,744 |
|
15.2 |
|
|
|
713,103 |
|
15.4 |
|
|
|
4,641 |
|
|
0.7 |
|
|
Furniture |
|
716,785 |
|
15.2 |
|
|
|
698,276 |
|
15.0 |
|
|
|
18,509 |
|
|
2.7 |
|
|
Hardlines |
|
677,790 |
|
14.3 |
|
|
|
646,563 |
|
13.9 |
|
|
|
31,227 |
|
|
4.8 |
|
|
Seasonal |
|
591,321 |
|
12.5 |
|
|
|
585,025 |
|
12.6 |
|
|
|
6,296 |
|
|
1.1 |
|
|
Other |
|
566,762 |
|
12.0 |
|
|
|
591,933 |
|
12.7 |
|
|
|
(25,171 |
) |
|
(4.3 |
) |
|
Net sales |
$ |
4,726,772 |
|
100.0 |
% |
|
$ |
4,645,283 |
|
100.0 |
% |
|
$ |
81,489 |
|
|
1.8 |
|
% |
Net sales increased
$81.5 million, or 1.8%, to $4,726.8 million in 2009 compared to $4,645.3 million
in 2008. The increase in net sales was principally due to our comparable store
sales increase of 0.7%, or approximately $32 million, and non-comparable store
sales, which increased by approximately $37 million. Our comparable store sales
are calculated by using all stores that were open for at least two fiscal years
as of the beginning of the current fiscal year. This calculation may not be
comparable to other retailers who calculate comparable store sales based on
other methods or criteria. The average number of stores in operation throughout
2009 and 2008 was approximately 1,354 stores and 1,356 stores, respectively.
Following a comparable store sales decrease of 1.5% through the first half of
2009, sales trends improved resulting in a comparable store sales increase of
2.8% in the second half of 2009 thereby producing an annual comparable store
sales increase of 0.7%. Comparable store sales increased in the low to
mid-single digits from September through January due to improvements in our
merchandise offering, and improved discretionary spending trends as we met the
first anniversary of the significant economic turmoil that began to impact us in
our fourth fiscal quarter of 2008. Specifically, comparable store sales
increased 5.1% in the fourth fiscal quarter of 2009. Based on these trends and
sales results of February 2010, we estimate 2010 comparable store sales will
increase in the range of 3% to 4%.
From a merchandise
perspective, sales in most major merchandise categories increased in 2009
compared to 2008. Consumables continued its consistent sales growth throughout
the year. Consumers continued to seek out value when shopping for the everyday
household use items that we offer in our Consumables business. We believe our
strategy of offering name brands at competitive prices led to this consistently
positive net sales performance in the Consumables category. The Home category
net sales consistently underperformed through the second fiscal quarter.
However, accelerating sales trends in the second half of 2009 due to certain
merchandise assortment changes and the improvement experienced in consumer
discretionary spending trends led to a total sales increase for fiscal 2009. The
Furniture category also underperformed through the third fiscal quarter
principally due to lower sales in our mattress department. However, new key
items in upholstery and case goods along with a sales rebound in our mattress
department led to a fourth fiscal quarter comparable store sales increase in the
high single digits leading to our overall sales increase of 2.7% for 2009. The
Hardlines category continued its increase in net sales driven by sales of
electronics, particularly DVDs, cameras and televisions. The Seasonal category
net sales produced positive results in the second half of the year due to a
comparable sales increase of our Christmas merchandise in the fourth fiscal
quarter. The Other category sales decline is primarily due to three large
closeout deals (drugstore merchandise, furniture, and apparel) that occurred in
2008; fewer closeout deals were sold in the Other category in 2009. Partly
offsetting the closeout deals decline was an increase in toy department
sales.
25
Gross Margin
Gross margin dollars increased $61.9
million, or 3.3%, to $1,919.3 million in 2009 compared to $1,857.4 million in
2008. Gross margin as a percentage of net sales was 40.6% in 2009 compared to
40.0% in 2008. The increase in gross margin dollars was due to the higher gross
margin rate and the increase in sales. The increase in gross margin rate
increased gross margin dollars by approximately $29 million. Also contributing
to the increased gross margin dollars was higher net sales of $81.5 million,
which increased gross margin dollars by approximately $33 million. The gross
margin rate increase was principally due to higher initial mark up on
merchandise sold, lower inbound freight costs and a lower shrink accrual rate.
We achieved lower inbound freight costs in 2009 because of lower diesel fuel
costs, lower ocean freight rates, renegotiated carrier rates, and careful review
of the mode of transportation to find the most efficient method to ship goods to
our distribution centers. The gross margin rate also benefitted from favorable
adjustments to the shrink accrual as physical inventories were completed at our
stores. Our inventory turnover improved to 3.7 turns in 2009 compared to 3.6
turns in 2008. Based on historical results and current economic conditions, we
expect our 2010 gross margin rate to be approximately 40.6%, or flat compared to
2009, as strength in initial mark up, lower shrink costs and a slightly lower
markdown rate are expected to be offset by rising freight costs, both import and
domestic. Based on the current general economic trends, our vendors may be
negatively impacted by insufficient availability of credit to fund their
operations or insufficient demand for their products, which may affect their
ability to fulfill their obligations to us. Additionally, the general economic
conditions have caused a higher level of uncertainty of our forecasted sales
results, and thus, demand for our merchandise could differ materially from our
expectation causing us to under or over buy certain merchandise, which may
result in customer dissatisfaction or excessive markdowns required to liquidate
the merchandise.
Selling and Administrative
Expenses
Selling
and administrative expenses increased $8.5 million, or 0.6%, to $1,532.4 million
in 2009 compared to $1,523.9 million in 2008. The increase in selling and
administrative expenses was principally caused by an increase in store occupancy
expenses of $15.5 million, higher employee benefit expenses of $7.7 million,
higher share-based compensation expense of $4.8 million, litigation-related
expenses of $4.6 million, and bonuses of $4.4 million. These items were
partially offset by a $23.4 million decrease in distribution and outbound
transportation costs and a $6.1 million decrease in advertising expenses. The
increase in store occupancy expenses is primarily due to higher rents and real
estate taxes related to the leases of the 73 new stores opened in 2009 and 2008.
The increase in employee benefits is principally due to higher paid health
insurance claims and pension expense. The increase in share-based compensation
is primarily due to our acceleration of vesting of restricted stock grants based
on our profit performance in 2009. In 2009, we accrued $4.0 million for a
certain legal settlement agreement (see note 10 to the accompanying consolidated
financial statements). The $4.4 million increase of bonuses was directly related
to our performance. The decline in distribution and outbound transportation
costs is a result of lower inventory levels, the integration of our Ohio and
California furniture distribution operations into our regional distribution
centers in July 2008 and 2009, respectively, the renegotiation of dedicated
carrier contracts with more favorable rates starting in August 2009, more
efficient operations due to increased volume of cartons, and the impact of
decreased diesel fuel costs. Advertising expenses decreased due to renegotiated
printing contracts with more favorable terms, reduced local advertising, and
reduced newspaper distributions.
Selling and
administrative expenses as a percentage of net sales were 32.4% in 2009 compared
to 32.8% in 2008. The decrease of 0.4% is primarily due to the effect of the
increase in sales of 1.8% as selling and administrative expense dollars
increased 0.6% as discussed above. Our future selling and administrative expense
as a percentage of net sales rate is dependent upon many factors including our
level of net sales, our ability to implement additional efficiencies,
principally in our store and distribution center operations, and fluctuating
commodity prices, such as diesel fuel, which directly affects our outbound
transportation cost. In 2010, we expect expense leverage based on company
specific initiatives to lower costs and the leveraging impact of our estimated
comparable store sales increase of 3% to 4%. We expect expense dollars to
decrease in the areas of advertising, utilities, and health insurance based on
certain company specific initiatives and program changes. We estimate dollars
will increase in store payroll, and distribution and transportation; however,
the increase is forecasted to be at a lower rate than our estimated total sales
growth of 5% to 6%. Additionally, we are forecasting slight deleverage in the
areas of occupancy, depreciation, and equity related compensation
expenses.
26
Depreciation
Expense
Depreciation expense decreased $3.7 million, or 4.7%, to $74.9 million in
2009 compared to $78.6 million for 2008. The decrease in depreciation expense
was principally related to our stores and was due to assets becoming fully
depreciated since the prior year. Many of these fully depreciated assets were
placed in service in 2003 or 2004 and had five-year estimated service lives.
Compared to more recent years, capital expenditures were significantly higher in
2003 and 2004, principally due to store remodels and a higher number of store
openings in 2003 and 2004.
For 2010, we expect
capital expenditures of approximately $115 million. Using this assumption and
the run rate of depreciation on our existing property and equipment, we expect
2010 depreciation expense to be $80 million to $85 million, which would
represent an increase from the $74.9 million of depreciation expense in 2009.
Interest Expense
Interest expense decreased $3.5 million
to $1.8 million in 2009 compared to $5.3 million in 2008. The decrease in
interest expense was principally due to lower average borrowings (including
capital leases) of $8.6 million in 2009 compared to average borrowings of $151.8
million in 2008. The higher average borrowings in 2008 were driven principally
by the acquisition of our common shares under our publicly announced share
repurchase programs which were completed in 2008. In 2009, cash flow provided by
operations was sufficient to repay the borrowings under the 2009 Credit
Agreement in the fourth fiscal quarter. Our average effective interest rate of
1.8% in 2009 was lower than our average effective interest rate of 3.5% in 2008.
The decrease in the average effective interest rate, which resulted from
generally lower rates in the overall short-term interest rate markets, decreased
our interest expense by approximately $0.1 million in 2009.
Interest and Investment Income
Interest and
investment income increased $0.1 million in 2009 to $0.2 million compared to
$0.1 million in 2008. The increase in interest and investment income was caused
by the increase in funds available to invest in 2009 compared to 2008, partly
offset by a decrease in investment yield. Our average invested amount in 2009
was $68.9 million compared to $3.6 million in 2008. In 2009, we invested
primarily in deposits with financial institutions and highly liquid investments,
including money market funds and variable rate demand notes. We held $245.0
million of investments at the end of 2009.
Income Taxes
Our effective income tax rate on income
from continuing operations was 37.7% for 2009 compared to 38.0% for 2008. The
net decrease in 2009 was primarily driven by the release of the valuation
allowance on unrealized capital losses in contrast to an increase in the
valuation allowance in 2008.
We anticipate our
2010 effective income tax rate to be within a range of 38.0% to
39.0%.
Discontinued
Operations
Loss
from discontinued operations was $1.0 million, net of tax, in 2009 compared to
$3.3 million, net of tax, in 2008. The 2009 loss from discontinued operations
was primarily due to the KB-II Bankruptcy Lease Obligations (see note 11 to the
accompanying consolidated financial statements). In the fourth fiscal quarter of
2009, we obtained assignment of a lease for the former KB-II corporate office
and recorded a charge of $0.7 million, net of tax, in loss from discontinued
operations. The remaining $0.3 million loss from discontinued operations, net of
tax, in 2009 pertained to other KB-II Bankruptcy Lease Obligations. KB-II
declared bankruptcy again in December 2008. As a result of this bankruptcy
filing, KB-II rejected 31 store leases for which we believe we have an
indemnification obligation. The 2008 loss from discontinued operations of $3.3
million, net of tax, was comprised of $3.0 million, net of tax, for the KB-II
Bankruptcy Lease Obligations and $0.3 million, net of tax, for exit-related
costs on the remaining 2005 closed stores which met the criteria for
classification as discontinued operations.
27
2008 COMPARED TO 2007
Net
Sales
Net sales by
merchandise category, as a percentage of total net sales, and net sales change
in dollars and percentage in 2008 compared to 2007 were as follows:
|
2008 |
|
2007 |
|
Change |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
$ |
1,410,383 |
|
30.4 |
% |
|
$ |
1,339,433 |
|
28.8 |
% |
|
$ |
70,950 |
|
|
5.3 |
|
% |
Home |
|
713,103 |
|
15.4 |
|
|
|
783,047 |
|
16.8 |
|
|
|
(69,944 |
) |
|
(8.9 |
) |
|
Furniture |
|
698,276 |
|
15.0 |
|
|
|
687,292 |
|
14.8 |
|
|
|
10,984 |
|
|
1.6 |
|
|
Hardlines |
|
646,563 |
|
13.9 |
|
|
|
629,119 |
|
13.5 |
|
|
|
17,444 |
|
|
2.8 |
|
|
Seasonal |
|
585,025 |
|
12.6 |
|
|
|
597,933 |
|
12.8 |
|
|
|
(12,908 |
) |
|
(2.2 |
) |
|
Other |
|
591,933 |
|
12.7 |
|
|
|
619,478 |
|
13.3 |
|
|
|
(27,545 |
) |
|
(4.4 |
) |
|
Net sales |
$ |
4,645,283 |
|
100.0 |
% |
|
$ |
4,656,302 |
|
100.0 |
% |
|
$ |
(11,019 |
) |
|
(0.2 |
) |
% |
Net sales decreased
$11.0 million, or 0.2%, to $4,645.3 million in 2008 compared to $4,656.3 million
in 2007. There were fewer open stores in 2008 which caused a decrease of $34.0
million partially offset by our comparable store sales increase of 0.5%, which
increased sales by $23.0 million. Our comparable store sales are calculated by
using all stores that were open for at least two fiscal years as of the
beginning of 2008. This calculation may not be comparable to other retailers who
calculate comparable store sales based on other methods or criteria. Following a
comparable store sales increase of 3.1% in the first half of 2008, sales trends
softened resulting in a comparable store sales decrease of 1.9% in the second
half of 2008. We believe that our comparable store sales results in the third
and fourth fiscal quarters were in part due to the worsening general economic
trends.
From a merchandise
perspective, the Consumables, Hardlines, and Furniture categories net sales
increased while net sales of Home, Other, and Seasonal declined. Consumables
continued its consistent sales growth throughout the year. As the year
progressed, consumers chose to seek out value when shopping for the everyday
household use items that we offer in our Consumables business. We believe our
strategy of offering name brands at competitive prices has led to this
consistently positive net sales performance in the Consumables category. The
Hardlines category increase in net sales was driven by the availability in the
second half of 2008 of multiple closeout deals containing higher ticket
electronics, highlighted by significant values on items such as popular video
games and personal computer laptops from national brand manufacturers. The
Furniture category increase was driven by sales of mattresses, which were
attributable to the customer response throughout the year especially when
promotional pricing was coupled with holiday events such as the Labor Day
mattress promotion. The Home category net sales consistently underperformed
throughout the year continuing a trend which began in the first half of 2007. We
believe our customers elected to defer purchases of this type of merchandise.
The Other category sales decline is primarily due to lower sales of toys
principally in the latter half of the year, when toys represent a relatively
larger portion of our total net sales. The lower toys sales results were
partially offset within the Other category by higher sales driven by closeout
deals of licensed kids underwear during the first half of the year. The Seasonal
category net sales produced positive results in the first half of the year for
lawn & garden and summer merchandise; however, the second half of the year’s
net sales underperformed due to lower comparable store sales for Christmas,
Halloween, and harvest. Because the Christmas selling season represents a higher
portion of the total year’s sales in this category, the decline in Christmas
merchandise sales drove the category sales lower for the year.
Gross Margin
Gross margin dollars increased $17.1
million, or 0.9%, to $1,857.4 million in 2008 compared to $1,840.3 million in
2007. Gross margin as a percentage of net sales was 40.0% in 2008 compared to
39.5% in 2007. The increase in gross margin dollars was principally due to the
higher gross margin rate, which increased gross margin dollars by approximately
$21 million. Partially offsetting the higher gross margin rate was lower net
sales of $11.0 million, which reduced gross margin dollars by approximately $4
million. The gross margin rate increase of 50 basis points was primarily due to
higher initial markup on merchandise and favorable shrink results partially
offset by higher markdowns and the mix impact of our higher net sales in
merchandise categories, such as Consumables, that have lower gross margin rates.
The improvement in initial markup was due in part to a drugstore liquidation
deal, a furniture closeout from a large national brand, and an overall favorable
deal environment for closeout merchandise. In addition, initial markup was
higher in 2008 due to our Home Event, which we offered in our stores principally
during the first half of the year. The Home Event merchandise was included in
the Furniture category and Home category. Shrink was lower principally due to
favorable physical inventory results. Higher markdowns were attributable in part
to planned markdowns associated with a drugstore liquidation deal, a furniture
closeout from a large national brand, and our Home Event merchandise. Our
inventory turnover improved to 3.6 turns in 2008 compared to 3.5 turns in
2007.
28
Selling and Administrative
Expenses
Selling
and administrative expenses increased $8.5 million, or 0.6%, to $1,523.9 million
in 2008 compared to $1,515.4 million in 2007. The increase in selling and
administrative expenses was principally caused by an increase in medical plan
expenses of $9.7 million, higher share-based compensation expense of $5.5
million, the 2007 partial recovery of the HCC Note investment of $5.2 million
(see note 11 to the accompanying consolidated financial statements for
additional discussion of the HCC Note), the 2007 reduction in selling and
administrative expenses due to the receipt of insurance proceeds for 2005
hurricane claims of $4.9 million, and higher store utilities of $3.4 million.
These items were partially offset by a $17.1 million decrease in distribution
and outbound transportation costs and a $15.8 million decrease in store payroll
costs. The increase in medical plan expenses is principally due to higher paid
claims. The increase in share-based compensation is principally due to our
adoption of SFAS No. 123(R) under the modified prospective method of accounting
in the first fiscal quarter of 2006 and our acceleration of vesting of stock
options in the fourth fiscal quarter of 2005. Higher store utilities costs were
driven by colder weather this winter and higher average commodity rates
throughout the majority of 2008. The decline in distribution and outbound
transportation costs is a result of lower inventory levels, fewer cartons
processed through our distribution centers (as discussed above), more one-way
trips to the stores resulting in higher shipping cost per mile but fewer miles
traveled and, beginning in July 2008, the integration of our Ohio furniture
distribution operation into four of our regional distribution centers. Partially
offsetting these favorable distribution and outbound transportation costs was
the impact of higher diesel fuel prices. Store payroll is lower due to fewer
stores and employees and fewer cartons of merchandise resulting from the $11.0
million decline in net sales and the merchandise strategy that involves offering
merchandise with slightly higher average item retails.
Selling and
administrative expenses as a percentage of net sales were 32.8% in 2008 compared
to 32.5% in 2007. Excluding the impact of the $5.2 million partial recovery of
the HCC Note and the receipt of hurricane insurance proceeds of $4.9 million,
both of which reduced 2007 selling and administrative expenses, selling and
administrative expenses as a percentage of net sales would have been
approximately flat in 2008 compared to 2007.
Depreciation
Expense
Depreciation expense decreased $9.9 million, or 11.2 %, to $78.6 million
in 2008 compared to $88.5 million for 2007. The decrease was principally related
to the five-year service life store remodel program assets that were placed in
service in 2002 and 2003 and a lower level of capital expenditures in 2006 and
2007. The lower capital expenditures in 2006 and 2007 are principally related to
opening seven stores in 2007 and 11 stores in 2006 compared to opening 73, 103,
and 86 stores in 2005, 2004, and 2003, respectively. In addition, in 2006 and
2007, we took a conservative approach to capital investments aimed primarily at
the development and installation of a new point-of-sale register system, which
was installed in approximately 700 stores in 2007 and in all of our remaining
stores in 2008. As a result of the installation of the new point-of-sale
register system, we reduced the estimated remaining service life on our old
register system, effective the fourth fiscal quarter of 2006. The impact of this
service life reduction was to recognize $4.1 million in 2007 and $0.5 million in
2008 as additional depreciation expense associated with the old cash registers.
Interest Expense
Interest expense increased $2.8 million
to $5.3 million in 2008 compared to $2.5 million in 2007. The increase in
interest expense was principally due to higher average borrowings of $151.8
million in 2008 compared to average borrowings of $37.9 million in 2007. The
higher average borrowings caused interest expense to be higher by approximately
$4 million. The higher average borrowings were driven principally by the
acquisition of our common shares under our publicly announced share repurchase
programs. Our average effective interest rate of 3.5% in 2008 was lower than our
average effective interest rate of 6.6% in 2007. The decrease in the average
effective interest rate, which resulted from generally lower rates in the
overall short-term interest rate markets, decreased our interest expense by
approximately $1.0 million in 2008.
29
Interest and Investment
Income
Interest
and investment income decreased $5.1 million in 2008 to $0.1 million compared to
$5.2 million in 2007. The decline in interest and investment income was caused
by the reduction in funds available to invest in 2008 compared to 2007. Our
average invested amount in 2008 was $3.6 million compared to $130.4 million in
2007. The decline in funds available for investment was caused by the $750
million of share repurchases under our 2007 Share Repurchase Programs during the
period March 2007 through February 2008. In 2007, we invested primarily in money
market type investments that were considered cash equivalents and other short
term high grade bond mutual funds. We did not hold any investment balances at
the end of 2008.
Income Taxes
Our effective income tax rate on income
from continuing operations was 38.0% for 2008 compared to 36.8% for 2007. The
net increase in 2008 was driven by a decrease in nontaxable municipal interest
income, the increase in the valuation allowance on unrealized capital losses
(versus a net decrease in the valuation allowance in 2007), and a change in the
jurisdictional earnings mix, partially offset by the settlement of certain
income tax matters.
Discontinued
Operations
Loss
from discontinued operations was $3.3 million, net of tax, in 2008 compared to
income from discontinued operations of $7.3 million, net of tax in 2007. The
2008 loss from discontinued operations of $3.3 million, net of tax, was
comprised of $3.0 million, net of tax, for the KB-II Bankruptcy Lease Obligation
(as defined in note 11 to the accompanying consolidated financial statements)
and $0.3 million, net of tax, for exit-related costs on the remaining 2005
closed stores which met the criteria for classification as discontinued
operations. KB Toys declared bankruptcy again in December 2008. As a result of
this bankruptcy filing, KB Toys rejected 31 store leases for which we believe we
have an indemnification obligation. Based on the lease data for these 31 stores
and using our prior experience with these matters, we estimated a KB-II
Bankruptcy Lease Obligation of $3.0 million, net of tax. The income from
discontinued operations in 2007 was principally comprised of 1) the release of
our KB-I Bankruptcy Lease Obligations of $6.6 million, net of tax, 2) the
recognition of $1.1 million of proceeds, net of tax, from the bankruptcy trust
as recovery for prior charges incurred by us for KB-I Bankruptcy Lease
Obligations and the Pittsfield, Massachusetts distribution center (formerly
owned by KB Toys) mortgage guarantee, and 3) exit-related costs on the 130
closed stores of $0.6 million, net of tax, related to expenses on the portion of
the 130 stores where the leases have not been terminated.
CAPITAL RESOURCES AND
LIQUIDITY
On April
28, 2009, we entered into the 2009 Credit Agreement, a new $500 million
three-year unsecured credit facility that replaced the 2004 Credit Agreement.
The 2009 Credit Agreement is scheduled to expire on April 28, 2012. In
connection with our entry into the 2009 Credit Agreement, we paid an aggregate
amount of $5.6 million of bank fees and expenses, which are being amortized over
the term of the agreement. Proceeds from borrowings under the 2009 Credit
Agreement are available for general corporate purposes, working capital, and to
repay certain of our indebtedness. The 2009 Credit Agreement includes a $150
million letter of credit sublimit and a $30 million swing loan sublimit. The
interest rates, pricing and fees under the 2009 Credit Agreement fluctuate based
on our debt rating. The 2009 Credit Agreement allows us to select our interest
rate for each borrowing from two different interest rate options. The interest
rate options are generally derived from the prime rate or LIBOR. We may prepay
revolving loans made under the 2009 Credit Agreement. The 2009 Credit Agreement
contains financial and other covenants, including, but not limited to,
limitations on indebtedness, liens and investments, as well as the maintenance
of two financial ratios – a leverage ratio and a fixed charge coverage ratio. A
violation of any of the covenants could result in a default under the 2009
Credit Agreement that would permit the lenders to restrict our ability to
further access the 2009 Credit Agreement for loans and letters of credit and
require the immediate repayment of any outstanding loans under the 2009 Credit
Agreement. As of January 30, 2010, we were in compliance with the covenants of
the 2009 Credit Agreement.
30
The primary sources
of our liquidity are cash flows from operations and, as necessary, borrowings
under the 2009 Credit Agreement. Our net income and cash provided by operations
are impacted by net sales volume, seasonal sales patterns, and operating profit
margins. Our net sales are typically highest during the Christmas selling season
(during our fourth fiscal quarter). Generally, our working capital requirements
peak late in our third fiscal quarter or early in our fourth fiscal quarter. We
have typically funded those requirements with borrowings under our credit
facility. At January 30, 2010, we had no borrowings outstanding under the 2009
Credit Agreement and, after taking into account the reduction in availability
resulting from outstanding letters of credit totaling $50.1 million, the
borrowings available under the 2009 Credit Agreement were $449.9 million. We
anticipate total indebtedness under the facility will be less than $75.0 million
through the end of June 2010, all of which will be comprised of letters of
credit, excluding any impact from the execution of the 2010 Repurchase Program.
In 2009, our total indebtedness (outstanding borrowings and letters of credit)
peaked at approximately $120.8 million in early February 2009 under our 2004
Credit Agreement. Working capital was $580.4 million at January 30,
2010.
Whenever our
liquidity position requires us to borrow funds under the 2009 Credit Agreement,
we typically repay and/or borrow on a daily basis. The daily activity is a net
result of our liquidity position, which is generally driven by the following
components of our operations: 1) cash inflows such as cash or credit card
receipts collected from stores for merchandise sales and other miscellaneous
deposits; and 2) cash outflows such as check clearings for the acquisition of
merchandise, payroll and other operating expenses, wire and other electronic
transactions for merchandise purchases, income and other taxes, employee
benefits, and other miscellaneous disbursements.
We use the 2009
Credit Agreement, as necessary, to provide funds for ongoing and seasonal
working capital, capital expenditures, share repurchase programs, and other
expenditures. In addition, we use the 2009 Credit Agreement to provide letters
of credit for various operating and regulatory requirements, a significant
portion of which consists of letters of credit required as a result of our
self-funded insurance programs. Given the seasonality of our business, the
amount of borrowings under the 2009 Credit Agreement may fluctuate materially
depending on various factors, including our operating financial performance, the
time of year, and our need to increase merchandise inventory levels prior to the
peak selling season.
Cash provided by
operating activities was $392.0 million, $211.1 million and $307.9 million in
2009, 2008, and 2007, respectively. The 2009 increase in cash provided by
operating activities of $180.9 was principally due to higher net income and
improved accounts payable leverage (accounts payable divided by inventories).
Accounts payable leverage improved due to the lower amount of inventories and
our efforts to continue to work with our import and domestic vendors to further
extend payment terms. The 2008 decrease in cash provided by operating activities
of $96.8 million was primarily due to the decline in accounts payable leverage
as accounts payable decreased more than inventory decreased. Accounts payable
decreased because of a shift in our merchandise mix to purchases from vendors
with shorter payment terms, many of whom offered us cash discounts. Our cash
paid for income taxes was $106.0 million, $92.4 million, and $65.8 million
during 2009, 2008, and 2007, respectively. The increases in income taxes paid
were a direct result of higher operating profits and partly impacted by the
timing of required tax payments relative to the fiscal years in which these
profits were earned. Our total contributions to the Pension Plan were $10.8
million, $11.3 million, and $0.9 million in 2009, 2008, and 2007 respectively.
These contributions were made to increase the funded level of the Pension Plan.
Based on assumptions about our 2010 operating performance that we have discussed
above in MD&A, we expect cash provided by operating activities to be
approximately $315 million in 2010. However, based on the current general
economic conditions, consumers may elect to defer or forego purchases in
response to tighter credit and negative financial news. Reduced consumer
spending may reduce our net sales, which could lower our profitability and limit
our ability to convert merchandise inventories to cash.
Cash used in
investing activities was $77.9 million, $88.2 million, and $58.8 million in
2009, 2008, and 2007, respectively. The 2009 decrease in cash used in investing
activities of $10.3 and the 2008 increase in cash used in investing activities
of $29.4 million was principally due to fluctuations in capital expenditures
year from year. The 2009 capital expenditures were driven by the investments in
52 new store openings and the continued development of our SAP® for Retail
system. The 2008 capital expenditures were driven by the investments in 21 new
store openings, our SAP® for Retail system, which included development costs and
additional payments for hardware and licensing fees, the completion of the
installation of new cash registers in all of our stores, and the acquisition of
two store properties that were previously leased. We expect capital expenditures
to be approximately $115 million in 2010, comprised principally of maintenance
capital of approximately $35 million to $40 million, real estate capital of
approximately $35 million to $40 million driven by our plan to open 80 new
stores, and other investments of approximately $40 million which include, among
other things, capital to refresh 120 stores, investment in energy management
systems for 700 stores, and our continued software development of the SAP® for
Retail system.
31
Cash used in
financing activities was $65.1 million, $125.2 million, and $493.7 million in
2009, 2008, and 2007, respectively. In 2009, cash used in financing activities
was principally due to the repayment of borrowings outstanding under our bank
credit facility of $60.7 million and the payment of bank fees of $5.6 million
associated with our entry into the 2009 Credit Agreement, partially offset by
the proceeds from the exercise of stock options of $4.9 million. In 2008, cash
used in financing activities was principally due to net payments on our prior
bank credit facility of $102.0 million and $37.5 million of payments for
treasury shares acquired under our November 2007 Repurchase Program, partially
offset by proceeds from the exercise of stock options of $10.9 million.
In December 2009,
our Board of Directors authorized a share repurchase program providing for the
repurchase of up to $150 million of our common shares. No shares were
repurchased under this program in 2009.
On March 2, 2010,
our Board of Directors authorized a $250.0 million increase to our $150.0
million program bringing the total authorization of the 2010 Repurchase Program
to $400.0 million. On March 10, 2010, we utilized $150.0 million of the
authorization to execute an accelerated share repurchase transaction which
reduced our common shares outstanding by 3.6 million. The total number of shares
repurchased under the ASR will be based upon the volume weighted average price
of our stock over a predetermined period and will not be known until that period
ends and a final settlement occurs. The final settlement could increase or
decrease the 3.6 million shares initially reduced from our outstanding common
shares. The terms of the ASR restrict us from declaring a dividend prior to its
completion, which is currently scheduled to be no later than January 26, 2011.
The remaining $250 million will be utilized to repurchase shares in the open
market and/or in privately negotiated transactions at our discretion, subject to
market conditions and other factors. Common shares acquired through the 2010
Repurchase Program will be available to meet obligations under equity
compensation plans and for general corporate purposes. The 2010 Repurchase
Program will continue until exhausted and will be funded with cash and cash
equivalents, cash generated during fiscal 2010 or, if needed, by drawing on our
$500.0 million unsecured credit facility.
Based on historical
and expected financial results, we believe that we have or, if necessary, have
the ability to obtain, adequate resources to fund ongoing and seasonal working
capital requirements, proposed capital expenditures, new projects, and currently
maturing obligations.
Contractual
Obligations
The
following table summarizes payments due under our contractual obligations at
January 30, 2010:
|
Payments Due by Period
(1) |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
More than |
|
|
Total |
|
1 year |
|
1 to 3 years |
|
3 to 5 years |
|
5 years |
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under bank credit
facility (2) |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
Operating lease obligations (3) (4) |
|
|
917,454 |
|
|
263,782 |
|
|
386,664 |
|
|
206,795 |
|
|
60,213 |
Capital lease obligations (4) |
|
|
3,707 |
|
|
2,352 |
|
|
1,220 |
|
|
135 |
|
|
- |
Purchase obligations (4) (5) |
|
|
839,587 |
|
|
676,012 |
|
|
113,544 |
|
|
49,354 |
|
|
677 |
Other
long-term liabilities (6) |
|
|
46,652 |
|
|
16,317 |
|
|
7,347 |
|
|
2,371 |
|
|
20,617 |
Total contractual obligations (7) |
|
$ |
1,807,400 |
|
$ |
958,463 |
|
$ |
508,775 |
|
$ |
258,655 |
|
$ |
81,507 |
|
(1) |
|
The
disclosure of contractual obligations in this table is based on
assumptions and estimates that we believe to be reasonable as of the date
of this report. Those assumptions and estimates may prove to be
inaccurate; consequently, the amounts provided in the table may differ
materially from those amounts that we ultimately incur. Variables that may
cause the stated amounts to vary from the actually incurred include, but
are not limited to: the termination of a contractual obligation prior to
its stated or anticipated expiration; fees or damages incurred as a result
of the premature termination or breach of a contractual obligation; the
acquisition of more or less services or goods under a contractual
obligation than are anticipated by us as of the date of this report;
fluctuations in third party fees, governmental charges, or market rates
that we are obligated to pay under contracts we have with certain vendors;
and the exercise of renewal options under, or the automatic renewal of,
contracts that provide for the same. |
32
|
(2) |
|
Obligations
under bank credit facility consist of the borrowings outstanding under the
2009 Credit Agreement. In addition, we had outstanding letters of credit
totaling $50.1 million at January 30, 2010. Approximately $46.8 million of
the outstanding letters of credit represent stand-by letters of credit and
we do not expect to meet conditions requiring significant cash payments on
these letters of credit; accordingly, they have been excluded from this
table. The remaining outstanding letters of credit represent commercial
letters of credit whereby the related obligation is included in Purchase
Obligations. For a further discussion, see note 3 to the accompanying
consolidated financial statements. |
|
|
|
(3) |
|
Operating
lease obligations include, among other items, leases for retail stores,
warehouse space, data center, offices, and certain computer and other
business equipment. The future minimum commitments for retail store, data
center, office, and warehouse space operating leases are $687.6 million.
For a further discussion of leases, see note 5 to the accompanying
consolidated financial statements. Many of the store lease obligations
require us to pay for our applicable portion of CAM, real estate taxes,
and property insurance. In connection with our store lease obligations, we
estimated that future obligations for CAM, real estate taxes, and property
insurance were $221.9 million at January 30, 2010. We have made certain
assumptions and estimates in order to account for our contractual
obligations relative to CAM, real estate taxes, and property insurance.
Those assumptions and estimates include, but are not limited to: use of
historical data to estimate our future obligations; calculation of our
obligations based on comparable store averages where no historical data is
available for a particular leasehold; and assumptions related to average
expected increases over historical data. The remaining lease obligation of
$8.0 million relates primarily to operating leases for computer and other
business equipment. |
|
|
|
(4) |
|
For purposes
of the lease and purchase obligation disclosures, we have assumed that we
will make all payments scheduled or reasonably estimated to be made under
those obligations that have a determinable expiration date, and we
disregarded the possibility that such obligations may be prematurely
terminated or extended, whether automatically by the terms of the
obligation or by agreement between us and the counterparty, due to the
speculative nature of premature termination or extension. Where an
operating lease or purchase obligation is subject to a month-to-month term
or another automatically renewing term, we disclosed in the table our
minimum commitment under such obligation, such as one month in the case of
a month-to-month obligation and the then-current term in the case of
another automatically renewing term, due to the uncertainty of future
decisions to exercise options to extend or terminate any existing
leases. |
|
|
|
(5) |
|
Purchase
obligations include outstanding purchase orders for merchandise issued in
the ordinary course of our business that are valued at $478.5 million, the
entirety of which represents obligations due within one year of January
31, 2010. In addition, we have a purchase commitment for future inventory
purchases totaling $138.5 million at January 31, 2010. While we are not
required to meet any periodic minimum purchase requirements under this
commitment, we have included, for purposes of this tabular disclosure, we
have included the value of the purchases that we anticipate making during
each of the reported periods, as purchases that will count toward our
fulfillment of the aggregate obligation. The remaining $222.6 million of
purchase obligations is primarily related to distribution and
transportation, information technology, print advertising, energy
procurement, and other store security, supply, and maintenance
commitments. |
|
|
|
(6) |
|
Other
long-term liabilities include $15.4 million for expected contributions to
the Pension Plan and our nonqualified, unfunded supplemental defined
benefit pension plan (“Supplemental Pension Plan”), $17.1 million for
obligations related to our nonqualified deferred compensation plan, $13.4
million for unrecognized tax benefits, and $0.8 million for closed store
lease termination costs. Pension contributions are equal to expected
benefit payments for the nonqualified plan plus expected contributions to
the qualified plan using actuarial estimates and assuming that we only
make the minimum required contributions (see note 8 to the accompanying
consolidated financial statements for additional information about our
employee benefit plans). We have estimated the payments due by period for
the nonqualified deferred compensation plan based on an average of
historical distributions. We have included unrecognized tax benefits of
$2.6 million for payments expected in 2010 and $10.8 million of
timing-related income tax uncertainties anticipated to reverse in 2010.
Unrecognized tax benefits in the amount of $20.9 million have been
excluded from the table because we are unable to make a reasonably
reliable estimate of the timing of future payments. Our closed store lease
termination cost payments are based on contractual
terms. |
|
(7) |
|
The
obligations disclosed in this table are exclusive of the contingent
liabilities, guarantees, and indemnities related to the KB Toys business.
For further discussion, see note 11 to the accompanying consolidated
financial statements. |
33
OFF-BALANCE SHEET
ARRANGEMENTS
For a
discussion of the KB Bankruptcy Lease Obligations, see note 11 to the
accompanying consolidated financial statements. Because the KB Toys business
filed for bankruptcy again in December 2008 and liquidated all of its store
operations, we accrued a contingent liability on our balance sheet at January
30, 2010, in the amount of $4.8 million for 31 KB Toys store leases for which we
may have an indemnification or guarantee obligation and a former KB Toys
corporate office lease for which we took an assignment in 2009. Because of
uncertainty inherent in the assumptions used to estimate this liability, our
estimated liability could ultimately prove to be understated and could result in
a material adverse impact on our financial condition, results of operations, and
liquidity.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates, judgments, and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period, as well
as the related disclosure of contingent assets and liabilities at the date of
the financial statements. The use of estimates, judgments, and assumptions
creates a level of uncertainty with respect to reported or disclosed amounts in
our consolidated financial statements or accompanying notes. On an on-going
basis, management evaluates its estimates, judgments, and assumptions, including
those that management considers critical to the accurate presentation and
disclosure of our consolidated financial statements and accompanying notes.
Management bases its estimates, judgments, and assumptions on historical
experience, current trends, and various other factors that management believes
are reasonable under the circumstances.Because of the inherent uncertainty in
using estimates, judgments, and assumptions, actual results may differ from
these estimates.
Our significant
accounting policies, including the recently adopted accounting standards and
recent accounting standards – future adoptions, are described in note 1 to the
accompanying consolidated financial statements. We believe the following
assumptions and estimates are the most critical to understanding and evaluating
our reported financial results. Management has reviewed these critical
accounting estimates and related disclosures with the Audit Committee of our
Board of Directors.
Merchandise
Inventories
Merchandise inventories are valued at the lower of cost or market using
the average cost retail inventory method. Market is determined based on the
estimated net realizable value, which generally is the merchandise selling price
at or near the end of the reporting period. The average cost retail inventory
method requires management to make judgments and contains estimates, such as the
amount and timing of markdowns to clear slow-moving inventory, the estimated
allowance for shrinkage, and the estimated amount of excess or obsolete
inventory, which may impact the ending inventory valuation and prior or future
gross margin. These estimates are based on historical experience and current
information.
When management
determines the salability of merchandise inventories is diminished, markdowns
for clearance activity and the related cost impact are recorded at the time the
price change decision is made. Factors considered in the determination of
markdowns include current and anticipated demand, customer preferences, the age
of merchandise, and seasonal trends. Timing of holidays within fiscal periods,
weather, and customer preferences could cause material changes in the amount and
timing of markdowns from year to year.
The inventory
allowance for shrinkage is recorded as a reduction to inventories, charged to
cost of sales, and calculated as a percentage of sales for the period from the
last physical inventory date to the end of the reporting period. Such estimates
are based on our historical and current year inventory results. Independent
physical inventory counts are taken at each store once a year. During 2010, the
majority of these counts occur between January and September. As physical
inventories are completed, actual results are recorded and new go-forward shrink
accrual rates are established based on individual store historical results.
Thus, the shrink accrual rate will be adjusted throughout the January through
September inventory cycle based on actual results. At January 30, 2010, a 10%
difference in our shrink reserve would have affected gross margin, operating
profit and income from continuing operations before income taxes by
approximately $4 million. While it is not possible to quantify the impact from
each cause of shrinkage, we have loss prevention programs and policies aimed at
minimizing shrinkage.
34
Long-Lived Assets
Our long-lived assets primarily consist
of property and equipment. We perform annual impairment reviews of our
long-lived assets at the store level. When we perform the annual impairment
reviews, we first determine which stores had impairment indicators present. We
use actual historical cash flows to determine which stores had negative cash
flows in each of the past two years (on a rolling basis). For each store with
two years of negative cash flows, we obtain future cash flow estimates based on
operating performance estimates specific to each store’s operations that are
based on assumptions currently being used to develop our company level operating
plans. If the net book value of a store’s long-lived assets is not recoverable
by the expected future cash flows of the store, we estimate the fair value of
the store’s assets and recognize an impairment charge for the excess net book
value of the store’s long-lived assets over their fair value. The fair value of
store assets is estimated based on information available in the marketplace for
similar assets.
We recognized
impairment charges of $0.4 million, $0.1 million, and $0.8 million in 2009,
2008, and 2007, respectively. We believe that our impairment charges are
trending lower because we closed a number of underperforming stores at the end
of 2005, and continued to close (primarily through non-renewal of leases)
underperforming stores in 2007, 2008, and 2009. We only identified four stores
with impairment indicators as a result of our annual store impairment tests in
2009 and we recognized impairment charges on those stores. Therefore, we do not
believe that varying the assumptions used to test for recoverability to estimate
fair value of our long-lived assets would have a material impact on the
impairment charges we incurred in 2009. However, if our future operating results
decline significantly, we may be exposed to impairment losses that could be
material (for additional discussion of this risk, see “Item 1A. Risk Factors – A
significant decline in our operating profit and taxable income may impair our
ability to realize the value of our long lived assets and deferred tax
assets.”).
In addition to our
annual store impairment reviews, we evaluate our long-lived assets at each
reporting period to determine whether impairment indicators are present. In
2008, we recorded impairment to the assets of one store as a result of a
casualty loss due to hurricane damage. The amount of this impairment is included
in the $0.1 million 2008 impairment charge discussed above.
Share-Based
Compensation
We
grant stock options and performance-based non-vested restricted stock to our
employees under shareholder approved incentive plans. Share-based compensation
expense was $20.3 million, $15.5 million, and $9.9 million in 2009, 2008, and
2007, respectively. The increase in share-based compensation is primarily due to
our acceleration of vesting of restricted stock grants based on our profit
performance in 2009, 2008 and 2007. Future share-based compensation expense for
performance-based non-vested restricted stock is dependent upon the future
number of awards, fair value of our common shares on the grant date, and the
estimated vesting period. Future share-based compensation expense for stock
options is dependent upon the number and terms of future stock option awards and
many estimates, judgments and assumptions used in arriving at the fair value of
stock options. Future share-based compensation expense related to
performance-based non-vested restricted stock and stock options may vary
materially from the currently amortizing awards.
We estimate the
fair value of our stock options using a binomial model. The binomial model takes
into account estimates, assumptions, and judgments about our stock price
volatility, our dividend yield rate, the risk-free rate of return, the
contractual term of the option, the probability that the option will be
exercised prior to the end of its contractual life, and the probability of
retirement of the option holder in computing the value of the option. Expected
volatility is based on historical and current implied volatilities from traded
options on our common shares. The dividend yield rate on our common shares is
assumed to be zero since we have not paid dividends and have no immediate plans
to do so. The risk-free rate is based on U.S. Treasury security yields at the
time of the grant. The expected life is determined from the application of the
binomial model and includes assumptions such as the expected employee exercise
behavior and our expected turnover rate, which is based on analysis of
historical data.
35
Compensation
expense for performance-based non-vested restricted stock awards is recorded
over the estimated vesting period based on the estimated achievement date of the
performance criteria. An estimated target achievement date is determined at the
time of the award based on historical and forecasted performance of similar
measures. We monitor the achievement of the performance targets at each
reporting period and make adjustments to the estimated vesting period when our
internal models indicate that the estimated achievement date differs from the
date being used to amortize expense. Any change in the estimated vesting date
results in a prospective change to the related expense by charging the remaining
unamortized expense over the remaining expected vesting period at the date the
estimate was changed.
Income Taxes
The determination of our income tax
expense, refunds receivable, income taxes payable, deferred tax assets and
liabilities and financial statement recognition, de-recognition and/or
measurement of uncertain tax benefits (for positions taken or to be taken on
income tax returns) requires significant judgment, the use of estimates, and the
interpretation and application of complex accounting and multi-jurisdictional
income tax laws.
The effective
income tax rate in any period may be materially impacted by the overall level of
income (loss) before income taxes, the jurisdictional mix and magnitude of
income (loss), changes in the income tax laws (which may be retroactive to the
beginning of the fiscal year), subsequent recognition, de-recognition and/or
measurement of an uncertain tax benefit, changes in deferred tax asset valuation
allowances and adjustments of a deferred tax asset or liability for enacted
changes in tax laws or rates. Although we believe that our estimates are
reasonable, actual results could differ from these estimates resulting in a
final tax outcome that may be materially different from that which is reflected
in our consolidated financial statements.
We evaluate our
ability to recover our deferred tax assets within the jurisdiction from which
they arise. We consider all available positive and negative evidence including
recent financial results, projected future pretax accounting income from
continuing operations and tax planning strategies (when necessary). This
evaluation requires us to make assumptions that require significant judgment
about the forecasts of future pretax accounting income. The assumptions that we
use in this evaluation are consistent with the assumptions and estimates used to
develop our consolidated operating financial plans. If we determine that a
portion of our deferred tax assets, which principally represent expected future
deductions or benefits, are not likely to be realized, we recognize a valuation
allowance for our estimate of these benefits which we believe are not likely
recoverable. Additionally, changes in tax laws, apportionment of income for
state tax purposes, and rates could also affect recorded deferred tax
assets.
We evaluate the
uncertainty of income tax positions taken or to be taken on income tax returns.
When a tax position meets the more-likely-than-not threshold, we recognize
economic benefits associated with the position on our consolidated financial
statements. The more-likely-than-not recognition threshold is a positive
assertion that an enterprise believes it is entitled to economic benefits
associated with a tax position. When a tax position does not meet the
more-likely-than-not threshold, or in the case of those positions that do meet
the threshold but are measured at less than the full benefit taken on the
return, we recognize tax liabilities (or de-recognize tax assets, as the case
may be). A number of years may elapse before a particular matter, for which we
have derecognized a tax benefit, is audited and fully resolved or clarified. We
adjust unrecognized tax benefits and income tax provision in the period in which
an uncertain tax position is effectively or ultimately settled, the statute of
limitations expires for the relevant taxing authority to examine the tax
position, or as a result of the evaluation of new information that becomes
available.
Pension
Actuarial valuations are used to
calculate the estimated expenses and obligations for our Pension Plan and
Supplemental Pension Plan. Inherent in the actuarial valuations are several
assumptions including discount rate and expected return on plan assets. We
review external data and historical trends to help determine the discount rate
and expected long-term rate of return. Our objective in selecting a discount
rate is to identify the best estimate of the rate at which the benefit
obligations would be settled on the measurement date. In making this estimate,
we review rates of return on high-quality, fixed-income investments available at
the measurement date and expected to be available during the period to maturity
of the benefits. This process includes a review of the bonds available on the
measurement date with a quality rating of Aa or better. The expected long-term
rate of return on assets is derived from detailed periodic studies, which
include a review of asset allocation strategies, anticipated future long-term
performance of individual asset classes, risks (standard deviations) and
correlations of returns among the asset classes that comprise the plan’s asset
mix. While the studies give appropriate consideration to recent plan performance
and historical returns, the assumption is primarily a long-term, prospective
rate of return. The weighted average discount rate used to determine the net
periodic pension cost for 2009 was 7.3%. A 1.0% decrease in the discount rate
would increase net periodic pension cost by $0.2 million. The long-term rate of
return on assets used to determine net periodic pension cost in 2009 was 8.0%. A
1.0% decrease in the expected long-term rate of return on plan assets would
increase the net periodic pension cost by $0.6 million.
36
During 2009, we
reclassified $1.7 million, net of tax, from other comprehensive income to
expense in our consolidated statement of operations. We recognized a benefit of
$0.4 million, net of tax, to other comprehensive income in 2009, principally as
a result of the increase in value of investments held by the pension trust. As
of January 30, 2010, the accumulated other comprehensive income amount, which
was principally unrealized actuarial loss, was $13.1 million loss, net of tax.
During 2010, and in future periods, we expect to reclassify approximately $2.0
million from other comprehensive income to expense, assuming we achieve our
estimated rate of return on pension plan investments in future periods.
Additionally, in the event that we have future settlement events, as occurred in
2009 and 2007, we would expect that the expense related to future settlements
would be greater than the $0.2 million and $1.3 million charges in 2009 and
2007, respectively.
Insurance and Insurance-related
Reserves
We are
self-insured for certain losses relating to property, general liability,
workers’ compensation, and employee medical and dental benefit claims, a portion
of which is funded by employees. We purchase stop-loss coverage from third party
insurance carriers to limit individual or aggregate loss exposure in these
areas. Accrued insurance liabilities and related expenses are based on actual
claims reported and estimates of claims incurred but not reported. The estimated
loss accruals for claims incurred but not paid are determined by applying
actuarially-based calculations taking into account historical claims payment
results and known trends such as claims frequency and claims severity.
Management makes estimates, judgments, and assumptions with respect to the use
of these actuarially-based calculations, including but not limited to, estimated
health care cost trends, estimated lag time to report and pay claims, average
cost per claim, network utilization rates, network discount rates, and other
factors. A 10% change in our self-insured liabilities at January 30, 2010 would
have affected selling and administrative expenses, operating profit, and income
from continuing operations before income taxes by approximately $8 million.
General liability
and workers’ compensation liabilities are recorded at our estimate of their net
present value, using a 4.0% discount rate, while other liabilities for insurance
reserves are not discounted. A 1.0% change in the discount rate on these
liabilities would have affected selling and administrative expenses, operating
profit, and income from continuing operations before income taxes by
approximately $1.5 million.
Lease Accounting
In order to recognize rent expense on our
leases, we evaluate many factors to identify the lease term such as the
contractual term of the lease, our assumed possession date of the property,
renewal option periods, and the estimated value of leasehold improvement
investments that we are required to make. Based on this evaluation, our lease
term is typically the minimum contractually obligated period over which we have
control of the property. This term is used because although many of our leases
have renewal options, we typically do not incur an economic or contractual
penalty in the event of non-renewal. Therefore, we typically use the initial
minimum lease term for purposes of calculating straight-line rent, amortizing
deferred rent, and recognizing depreciation expense on our leasehold
improvements.
COMMITMENTS
For a discussion of commitments, refer to
note 3, note 5, note 10, and note 11 to the accompanying consolidated financial
statements.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are subject to market risk from
exposure to changes in interest rates on investments and on borrowings under the
2009 Credit Agreement that we make from time to time. We had no borrowings at
January 30, 2010 under the 2009 Credit Agreement. An increase of 1.0% in our
variable interest rate on our investments and expected future borrowings would
not have a material effect on our financial condition, results of operations, or
liquidity.
38
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of Big Lots, Inc.
Columbus, Ohio
We have audited the
internal control over financial reporting of Big Lots, Inc. and subsidiaries
(the "Company") as of January 30, 2010, based on criteria established in
Internal Control — Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting in Item 9A. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's
internal control over financial reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 30, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended January 30, 2010, of
the Company, and our report dated March 30, 2010, expressed an unqualified
opinion on those financial statements and financial statement schedule.
/s/
DELOITTE & TOUCHE LLP
Dayton,
Ohio
March 30, 2010
39
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of
Directors and Shareholders of Big Lots, Inc.
Columbus, Ohio
We have audited the
accompanying consolidated balance sheets of Big Lots, Inc. and subsidiaries (the
"Company") as of January 30, 2010 and January 31, 2009, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended January 30, 2010. Our audits also
included the financial statement schedule listed in the Index at Item 15. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion,
such consolidated financial statements present fairly, in all material respects,
the financial position of Big Lots, Inc. and subsidiaries at January 30, 2010
and January 31, 2009, and the results of their operations and their cash flows
for each of the three years in the period ended January 30, 2010 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of January 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 30, 2010,
expressed an unqualified opinion on the Company’s internal control over
financial reporting.
/s/
DELOITTE & TOUCHE LLP
Dayton,
Ohio
March 30, 2010
40
BIG LOTS, INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
2009 |
|
2008 |
|
2007 |
Net sales |
|
$ |
4,726,772 |
|
|
$ |
4,645,283 |
|
|
$ |
4,656,302 |
|
Cost of sales (exclusive of depreciation expense |
|
|
|
|
|
|
|
|
|
|
|
|
shown separately below) |
|
|
2,807,466
|
|
|
|
2,787,854
|
|
|
|
2,815,959
|
|
Gross margin |
|
|
1,919,306 |
|
|
|
1,857,429 |
|
|
|
1,840,343 |
|
Selling and administrative expenses |
|
|
1,532,356 |
|
|
|
1,523,882 |
|
|
|
1,515,379 |
|
Depreciation expense |
|
|
74,904 |
|
|
|
78,624 |
|
|
|
88,484 |
|
Gain on sale of
real estate |
|
|
(12,964 |
) |
|
|
- |
|
|
|
- |
|
Operating profit |
|
|
325,010 |
|
|
|
254,923 |
|
|
|
236,480 |
|
Interest expense |
|
|
(1,840 |
) |
|
|
(5,282 |
) |
|
|
(2,513 |
) |
Interest and
investment income |
|
|
175
|
|
|
|
65 |
|
|
|
5,236
|
|
Income from continuing operations before income taxes |
|
|
323,345 |
|
|
|
249,706 |
|
|
|
239,203 |
|
Income tax
expense |
|
|
121,975 |
|
|
|
94,908
|
|
|
|
88,023
|
|
Income from continuing operations |
|
|
201,370 |
|
|
|
154,798 |
|
|
|
151,180 |
|
Income (loss) from discontinued
operations, net of tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
(benefit) of ($656), ($2,116), and
$4,726 in fiscal |
|
|
|
|
|
|
|
|
|
|
|
|
years 2009, 2008, and 2007,
respectively |
|
|
(1,001
|
) |
|
|
(3,251
|
) |
|
|
7,281
|
|
Net
income |
|
$ |
200,369 |
|
|
$ |
151,547 |
|
|
$ |
158,461 |
|
|
Earnings per common share -
basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.47 |
|
|
$ |
1.91 |
|
|
$ |
1.49 |
|
Discontinued operations |
|
|
(0.01
|
) |
|
|
(0.04
|
) |
|
|
0.07
|
|
|
|
$ |
2.45 |
|
|
$ |
1.87 |
|
|
$ |
1.56 |
|
|
Earnings per common share -
diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.44 |
|
|
$ |
1.89 |
|
|
$ |
1.47 |
|
Discontinued operations |
|
|
(0.01
|
) |
|
|
(0.04
|
) |
|
|
0.07
|
|
|
|
$ |
2.42 |
|
|
$ |
1.85 |
|
|
$ |
1.55 |
|
The accompanying
notes are an integral part of these consolidated financial statements.
41
BIG LOTS, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value)
|
|
January 30, |
|
January 31, |
|
|
2010 |
|
2009 |
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
283,733 |
|
|
$ |
34,773 |
|
Inventories |
|
|
731,337 |
|
|
|
736,616 |
|
Deferred income taxes |
|
|
51,012 |
|
|
|
45,275 |
|
Other current assets |
|
|
56,884 |
|
|
|
54,207 |
|
Total
current assets |
|
|
1,122,966 |
|
|
|
870,871 |
|
Property and equipment - net |
|
|
491,256 |
|
|
|
490,041 |
|
Deferred income taxes |
|
|
28,136 |
|
|
|
53,763 |
|
Other
assets |
|
|
27,135 |
|
|
|
17,783 |
|
Total
assets |
|
$ |
1,669,493 |
|
|
$ |
1,432,458 |
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities under bank credit
facility |
|
$ |
- |
|
|
$ |
61,700 |
|
Accounts payable |
|
|
309,862 |
|
|
|
235,973 |
|
Property, payroll, and other
taxes |
|
|
69,388 |
|
|
|
66,525 |
|
Accrued operating expenses |
|
|
52,519 |
|
|
|
45,693 |
|
Insurance reserves |
|
|
39,570 |
|
|
|
38,303 |
|
KB bankruptcy lease
obligation |
|
|
4,786 |
|
|
|
5,043 |
|
Accrued salaries and wages |
|
|
47,402 |
|
|
|
40,460 |
|
Income taxes payable |
|
|
18,993 |
|
|
|
21,398 |
|
Total
current liabilities |
|
|
542,520 |
|
|
|
515,095 |
|
Deferred rent |
|
|
31,490 |
|
|
|
29,192 |
|
Insurance reserves |
|
|
44,695 |
|
|
|
45,197 |
|
Unrecognized tax benefits |
|
|
28,577 |
|
|
|
28,852 |
|
Other liabilities |
|
|
20,799 |
|
|
|
39,277 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred shares - authorized 2,000
shares; $0.01 par value; none issued |
|
|
- |
|
|
|
- |
|
Common shares - authorized 298,000
shares; $0.01 par value; |
|
|
|
|
|
|
|
|
issued
117,495 shares; outstanding 81,922 shares and |
|
|
|
|
|
|
|
|
81,315
shares, respectively |
|
|
1,175 |
|
|
|
1,175 |
|
Treasury shares - 35,573 shares and
36,180 shares, respectively, at cost |
|
|
(791,042 |
) |
|
|
(804,561 |
) |
Additional paid-in capital |
|
|
515,061 |
|
|
|
504,552 |
|
Retained earnings |
|
|
1,289,353 |
|
|
|
1,088,984 |
|
Accumulated other comprehensive
loss |
|
|
(13,135 |
) |
|
|
(15,305 |
) |
Total
shareholders' equity |
|
|
1,001,412
|
|
|
|
774,845 |
|
Total
liabilities and shareholders' equity |
|
$ |
1,669,493 |
|
|
$ |
1,432,458 |
|
The accompanying
notes are an integral part of these consolidated financial statements.
42
BIG LOTS, INC. AND
SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
Treasury |
|
|
Paid-In |
|
Retained |
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Total |
Balance - February 3,
2007 |
|
109,633 |
|
|
|
1,175 |
|
7,862 |
|
|
|
(124,182 |
) |
|
|
477,318 |
|
|
|
781,325 |
|
|
|
(5,933 |
) |
|
|
1,129,703 |
|
Net income |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
158,461 |
|
|
|
- |
|
|
|
158,461 |
|
Other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension, net
of tax of $(855) |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,246 |
|
|
|
1,246 |
|
Valuation adjustment of
pension, net of tax of $1,245 |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,814 |
) |
|
|
(1,814 |
) |
Comprehensive income |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
157,893 |
|
Adoption of guidance under FASB ASC
740 |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,215 |
) |
|
|
- |
|
|
|
(2,215 |
) |
Purchases of common shares |
|
(30,059 |
) |
|
|
- |
|
30,059 |
|
|
|
(714,911 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(714,911 |
) |
Exercise of stock options |
|
2,742 |
|
|
|
- |
|
(2,742 |
) |
|
|
46,946 |
|
|
|
(11,023 |
) |
|
|
- |
|
|
|
- |
|
|
|
35,923 |
|
Restricted shares awarded |
|
286 |
|
|
|
- |
|
(286 |
) |
|
|
6,662 |
|
|
|
(6,662 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net tax benefit from share-based
awards |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
19,821 |
|
|
|
- |
|
|
|
- |
|
|
|
19,821 |
|
Sale of treasury shares used for deferred compensation
plan |
|
80 |
|
|
|
- |
|
(80 |
) |
|
|
767 |
|
|
|
1,598 |
|
|
|
- |
|
|
|
- |
|
|
|
2,365 |
|
Share-based
employee compensation expense |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
9,907 |
|
|
|
- |
|
|
|
- |
|
|
|
9,907 |
|
Balance - February 2, 2008 |
|
82,682 |
|
|
|
1,175 |
|
34,813 |
|
|
|
(784,718 |
) |
|
|
490,959 |
|
|
|
937,571 |
|
|
|
(6,501 |
) |
|
|
638,486 |
|
Net income |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
151,547 |
|
|
|
- |
|
|
|
151,547 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension, net
of tax of $(316) |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
487 |
|
|
|
487 |
|
Valuation adjustment of
pension, net of tax of $6,102 |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,331 |
) |
|
|
(9,331 |
) |
Comprehensive income |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
142,703 |
|
Adoption of guidance under FASB ASC
715, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $88 and $(26),
respectively |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(134 |
) |
|
|
40 |
|
|
|
(94 |
) |
Purchases of common
shares |
|
(2,170 |
) |
|
|
- |
|
2,170 |
|
|
|
(37,508 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(37,508 |
) |
Exercise of stock options |
|
788 |
|
|
|
- |
|
(788 |
) |
|
|
17,530 |
|
|
|
(6,670 |
) |
|
|
- |
|
|
|
- |
|
|
|
10,860 |
|
Restricted shares awarded |
|
2 |
|
|
|
- |
|
(2 |
) |
|
|
40 |
|
|
|
(40 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net tax benefit from share-based awards |
|
- |
|
|
|
- |
|
- |
|
|
|
|
|
|
|
4,590 |
|
|
|
- |
|
|
|
- |
|
|
|
4,590 |
|
Sale of treasury shares used for
deferred compensation plan |
|
13 |
|
|
|
- |
|
(13 |
) |
|
|
95 |
|
|
|
257 |
|
|
|
- |
|
|
|
- |
|
|
|
352 |
|
Share-based
employee compensation expense |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
15,456 |
|
|
|
- |
|
|
|
- |
|
|
|
15,456 |
|
Balance - January 31,
2009 |
|
81,315 |
|
|
|
1,175 |
|
36,180 |
|
|
|
(804,561 |
) |
|
|
504,552 |
|
|
|
1,088,984 |
|
|
|
(15,305 |
) |
|
|
774,845 |
|
Net income |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
200,369 |
|
|
|
- |
|
|
|
200,369 |
|
Other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension, net
of tax of $(1,105) |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,740 |
|
|
|
1,740 |
|
Valuation adjustment of
pension, net of tax of $(273) |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
430 |
|
|
|
430 |
|
Comprehensive income |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
202,539 |
|
Purchases of common
shares |
|
(87 |
) |
|
|
- |
|
87 |
|
|
|
(1,849 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,849 |
) |
Exercise of stock options |
|
362 |
|
|
|
- |
|
(362 |
) |
|
|
8,045 |
|
|
|
(3,114 |
) |
|
|
- |
|
|
|
- |
|
|
|
4,931 |
|
Restricted shares awarded |
|
328 |
|
|
|
- |
|
(328 |
) |
|
|
7,291 |
|
|
|
(7,291 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net tax benefit from share-based awards |
|
- |
|
|
|
- |
|
- |
|
|
|
|
|
|
|
559 |
|
|
|
- |
|
|
|
- |
|
|
|
559 |
|
Sale of treasury shares used for
deferred compensation plan |
|
4 |
|
|
|
- |
|
(4 |
) |
|
|
32 |
|
|
|
80 |
|
|
|
- |
|
|
|
- |
|
|
|
112 |
|
Share-based
employee compensation expense |
|
- |
|
|
|
- |
|
- |
|
|
|
- |
|
|
|
20,275 |
|
|
|
- |
|
|
|
- |
|
|
|
20,275 |
|
Balance -
January 30, 2010 |
|
81,922 |
|
|
$ |
1,175 |
|
35,573 |
|
|
$ |
(791,042 |
) |
|
$ |
515,061 |
|
|
$ |
1,289,353 |
|
|
$ |
(13,135 |
) |
|
$ |
1,001,412 |
|
The accompanying
notes are an integral part of these consolidated financial statements.
43
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows
(In thousands)
|
|
2009 |
|
2008 |
|
2007 |
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
200,369 |
|
|
$ |
151,547 |
|
|
$ |
158,461 |
|
Adjustments to reconcile net
income to net cash |
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense |
|
|
71,501 |
|
|
|
73,787 |
|
|
|
83,103 |
|
Deferred income
taxes |
|
|
18,014 |
|
|
|
13,518 |
|
|
|
457 |
|
KB Toys matters |
|
|
409 |
|
|
|
3,119 |
|
|
|
(6,108 |
) |
Non-cash share-based
compensation expense |
|
|
20,275 |
|
|
|
15,456 |
|
|
|
9,907 |
|
Non-cash impairment
charges |
|
|
358 |
|
|
|
137 |
|
|
|
757 |
|
Loss on disposition of
property and equipment |
|
|
1,072 |
|
|
|
1,626 |
|
|
|
2,919 |
|
Gain on sale of real
estate |
|
|
(12,964 |
) |
|
|
- |
|
|
|
- |
|
Pension |
|
|
(5,193 |
) |
|
|
(8,734 |
) |
|
|
2,901 |
|
Change in assets and
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
5,279 |
|
|
|
11,326 |
|
|
|
10,243 |
|
Accounts payable |
|
|
73,889 |
|
|
|
(24,299 |
) |
|
|
66,276 |
|
Current income taxes |
|
|
(4,359 |
) |
|
|
(12,362 |
) |
|
|
6,010 |
|
Other current assets |
|
|
(2,177 |
) |
|
|
(1,258 |
) |
|
|
(1,653 |
) |
Other current liabilities |
|
|
18,064 |
|
|
|
(9,590 |
) |
|
|
(25,414 |
) |
Other assets |
|
|
(5,285 |
) |
|
|
1,595 |
|
|
|
(2,491 |
) |
Other Iiabilities |
|
|
12,774 |
|
|
|
(4,805 |
) |
|
|
2,564 |
|
Net cash provided by operating activities |
|
|
392,026 |
|
|
|
211,063 |
|
|
|
307,932 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(78,708 |
) |
|
|
(88,735 |
) |
|
|
(60,360 |
) |
Proceeds from HCC
Note |
|
|
- |
|
|
|
- |
|
|
|
235 |
|
Purchases of short-term
investments |
|
|
- |
|
|
|
- |
|
|
|
(436,040 |
) |
Redemptions of short-term
investments |
|
|
- |
|
|
|
- |
|
|
|
436,040 |
|
Cash proceeds from sale of
property and equipment |
|
|
861 |
|
|
|
550 |
|
|
|
1,394 |
|
Other |
|
|
(90 |
) |
|
|
(7 |
) |
|
|
(33 |
) |
Net cash used in investing activities |
|
|
(77,937 |
) |
|
|
(88,192 |
) |
|
|
(58,764 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under
bank credit facility |
|
|
280,000 |
|
|
|
2,918,600 |
|
|
|
821,100 |
|
Payment of borrowings under
bank credit facility |
|
|
(341,700 |
) |
|
|
(3,020,600 |
) |
|
|
(657,400 |
) |
Payment of capital lease
obligations |
|
|
(2,612 |
) |
|
|
(1,523 |
) |
|
|
(592 |
) |
Proceeds from the exercise of
stock options |
|
|
4,931 |
|
|
|
10,860 |
|
|
|
35,923 |
|
Excess tax benefit from
share-based awards |
|
|
1,568 |
|
|
|
4,590 |
|
|
|
19,821 |
|
Payment for treasury shares
acquired |
|
|
(1,849 |
) |
|
|
(37,508 |
) |
|
|
(714,911 |
) |
Deferred bank credit facility
fees paid |
|
|
(5,579 |
) |
|
|
- |
|
|
|
- |
|
Treasury shares sold for
deferred compensation plan |
|
|
112 |
|
|
|
352 |
|
|
|
2,365 |
|
Net cash used in financing activities |
|
|
(65,129 |
) |
|
|
(125,229 |
) |
|
|
(493,694 |
) |
Increase (decrease) in cash and
cash equivalents |
|
|
248,960 |
|
|
|
(2,358 |
) |
|
|
(244,526 |
) |
Cash and cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
34,773 |
|
|
|
37,131 |
|
|
|
281,657 |
|
End of year |
|
$ |
283,733 |
|
|
$ |
34,773 |
|
|
$ |
37,131 |
|
|
Supplemental disclosure of cash
flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, including
capital leases |
|
$ |
277 |
|
|
$ |
5,568 |
|
|
$ |
1,732 |
|
Cash paid for income taxes, excluding impact of refunds |
|
$ |
105,961 |
|
|
$ |
92,433 |
|
|
$ |
65,767 |
|
Non-cash activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital
leases |
|
$ |
- |
|
|
$ |
5,525 |
|
|
$ |
3,089 |
|
Accrued property and
equipment |
|
$ |
3,901 |
|
|
$ |
3,588 |
|
|
$ |
7,930 |
|
The accompanying
notes are an integral part of these consolidated financial statements.
44
BIG LOTS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business
We are the nation's largest broadline
closeout retailer. At January 30, 2010, we operated a total of 1,361 stores in
47 states. Our goal is to strengthen and build upon our leadership position in
broadline closeout retailing by providing our customers with great savings on
brand-name closeouts and other value-priced merchandise. You can locate us on
the Internet at www.biglots.com. The contents of our websites are not part of
this report.
Basis of
Presentation
The
consolidated financial statements include Big Lots, Inc. and all of its
subsidiaries, have been prepared in accordance with Generally Accepted
Accounting Principles (“GAAP”) in the United States of America, and include all
of our accounts. We consolidate all majority-owned and controlled subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Fiscal Year
We follow the concept of a 52-53 week
fiscal year, which ends on the Saturday nearest to January 31. Unless otherwise
stated, references to years in this report relate to fiscal years rather than
calendar years. 2009 was comprised of the 52 weeks that began on February 1,
2009 and ended on January 30, 2010. 2008 was comprised of the 52 weeks that
began on February 3, 2008 and ended on January 31, 2009. 2007 was comprised of
the 52 weeks that began on February 4, 2007 and ended on February 2,
2008.
Segment Reporting
We manage our business based on one
segment, broadline closeout retailing. At the end of 2009, 2008, and 2007, all
of our operations were located within the United States of America.
Management
Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates, judgments, and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period, as well
as the related disclosure of contingent assets and liabilities at the date of
the financial statements. The use of estimates, judgments, and assumptions
creates a level of uncertainty with respect to reported or disclosed amounts in
our consolidated financial statements or accompanying notes. On an ongoing
basis, management evaluates its estimates, judgments, and assumptions, including
those that management considers critical to the accurate presentation and
disclosure of our consolidated financial statements and accompanying notes.
Management bases its estimates, judgments, and assumptions on historical
experience, current trends, and various other factors that it believes are
reasonable under the circumstances. Because of the inherent uncertainty in using
estimates, judgments, and assumptions, actual results may differ from these
estimates.
Cash and Cash
Equivalents
Cash
and cash equivalents primarily consist of amounts on deposit with financial
institutions, outstanding checks, credit and debit card receivables, and highly
liquid investments, including money market funds and variable rate demand notes,
which are unrestricted to withdrawal or use and which have an original maturity
of three months or less. We review cash and cash equivalent balances on a bank
by bank basis in order to identify book overdrafts. Book overdrafts occur when
the amount of outstanding checks exceed the cash deposited at a given bank. We
reclassify book overdrafts, if any, to accounts payable on our consolidated
balance sheets. Amounts due from banks for credit and debit card transactions
are typically settled in less than seven days. Amounts due from banks for these
transactions totaled $24.0 million and $21.5 million at January 30, 2010 and
January 31, 2009, respectively.
Investments
Investment securities are classified as
available-for-sale, held-to-maturity, or trading at the date of purchase.
Investments are recorded at fair value as either current assets or non-current
assets based on the stated maturity or our plans to either hold or sell the
investment. Unrealized holding gains and losses on trading securities are
recognized in earnings. Unrealized holding gains and losses on
available-for-sale securities are recognized in other comprehensive income,
until realized. We did not own any held-to-maturity or available-for-sale
securities as of January 30, 2010 or January 31, 2009.
45
Merchandise
Inventories
Merchandise inventories are valued at the lower of cost or market using
the average cost retail inventory method. Cost includes any applicable inbound
shipping and handling costs associated with the receipt of merchandise into our
distribution centers (See the discussion below under the caption “Selling and
Administrative Expenses” for additional information regarding outbound shipping
and handling costs to our stores). Market is determined based on the estimated
net realizable value, which generally is the merchandise selling price. Under
the average cost retail inventory method, inventory is segregated into
departments of merchandise having similar characteristics at its current retail
selling value. Current retail selling values are converted to a cost basis by
applying an average cost factor to each specific merchandise department’s retail
selling value. Cost factors represent the average cost-to-retail ratio computed
using beginning inventory and all fiscal year-to-date purchase activity specific
to each merchandise department.
Under the average
cost retail inventory method, permanent sales price markdowns result in cost
reductions in inventory. Our permanent sales price markdowns are typically
related to end of season clearance events and are recorded as a charge to cost
of sales in the period of management’s decision to initiate sales price
reductions with the intent not to return the price to regular retail.
Promotional markdowns are recorded as a charge to net sales in the period the
merchandise is sold. Promotional markdowns are typically related to specific
marketing efforts with respect to products maintained continuously in our stores
or products that are only available in limited quantities but represent
substantial value to our customers. Promotional markdowns are principally used
to drive higher sales volume during a defined promotional period.
We record a
reduction to inventories and charge to cost of sales for a shrinkage inventory
allowance. The shrinkage allowance is calculated as a percentage of sales for
the period from the last physical inventory date to the end of the reporting
period. Such estimates are based on our historical and current year experience
based on physical inventory results.
We record a
reduction to inventories and charge to cost of sales for an excess or obsolete
inventory allowance. The excess or obsolete inventory allowance is estimated
based on a review of our aged inventory and takes into account any items that
have already received a cost reduction as a result of the permanent markdown
process discussed above. We estimate an allowance for excess or obsolete
inventory based on historical sales trends, age and quantity of product on hand,
and anticipated future sales.
Payments Received from
Vendors
Payments received from vendors
relate primarily to rebates and reimbursement for markdowns and are recognized
in our consolidated statements of operations as a reduction to cost of inventory
purchases in the period that the rebate or reimbursement is earned or realized
and, consequently, result in a reduction in cost of sales when the related
inventory is sold.
Store Supplies
When opening a new store, a portion of
the initial shipment of supplies (including primarily display materials,
signage, security-related items, and miscellaneous store supplies) is
capitalized at the store opening date. These capitalized supplies represent more
durable types of items for which we expect to receive future economic benefit.
Subsequent replenishments of capitalized store supplies are expensed. The
consumable/non-durable type items for which the future economic benefit is less
measurable are expensed upon shipment to the store. Capitalized store supplies
are adjusted periodically for changes in estimated quantities or costs and are
included in other current assets in our consolidated balance sheets.
46
Property and Equipment -
Net
Depreciation
and amortization expense of property and equipment are recorded on a
straight-line basis using estimated service lives. The estimated service lives
of our property and equipment by major asset category were as
follows:
Land
improvements |
15
years |
Buildings |
40 years |
Leasehold improvements |
5 years |
Store fixtures and equipment |
5 years |
Distribution and transportation
fixtures and equipment |
5 - 15 years |
Office and computer equipment |
5 years |
Computer software costs |
3 - 7 years |
Company
vehicles |
3
years |
Leasehold
improvements are amortized on a straight-line basis using the shorter of their
estimated service lives or the lease term. Because the majority of our leasehold
improvements are placed in service at the time we open a store and our typical
initial lease term is five years, we estimate the useful life of leasehold
improvements at five years. This amortization period is consistent with the
amortization period for any lease incentives that we would typically receive
when initially entering into a new lease that are recognized as deferred rent
and amortized over the initial lease term.
Depreciation
estimates are revised prospectively to reflect the remaining depreciation or
amortization of the asset over the shortened estimated service life when a
decision is made to dispose of property and equipment prior to the end of its
previously estimated service life. The cost of assets sold or retired and the
related accumulated depreciation are removed from the accounts with any
resulting gain or loss included in selling and administrative expenses. Major
repairs that extend service lives are capitalized. Maintenance and repairs are
charged to expense as incurred. Capitalized interest was not significant in any
period presented.
Long-Lived Assets
Our long-lived assets primarily consist
of property and equipment, net. In order to determine if impairment indicators
are present on store property and equipment, we annually review historical
operating results at the store level. Generally, all other property and
equipment is reviewed for impairment at the enterprise level. If the net book
value of a store’s long-lived assets is not recoverable by the expected future
cash flows of the store, we estimate the fair value of the store’s assets and
recognize an impairment charge for the excess net book value of the store’s
long-lived assets over their fair value. Our assumptions related to estimates of
future cash flows are based on historical results of cash flows adjusted for
management projections for future periods. We estimate the fair value of our
long-lived assets using readily available market information for similar assets.
Closed Store
Accounting
We
recognize an obligation for the fair value of lease termination costs when we
cease using the leased property in our operations. In measuring fair value of
these lease termination obligations, we consider the remaining minimum lease
payments, estimated sublease rentals that could be reasonably obtained, and
other potentially mitigating factors. We discount the estimated obligation using
the applicable credit adjusted interest rate, resulting in accretion expense in
periods subsequent to the period of initial measurement. We monitor the
estimated obligation for lease termination liabilities in subsequent periods and
revise any estimated liabilities, if necessary. Severance and benefits
associated with terminating employees from employment are recognized ratably
from the communication date through the estimated future service period, unless
the estimated future service period is less than 60 days, in which case we
recognize the impact at the communication date. Generally all other store
closing costs are recognized when incurred.
47
We classify the
results of operations of closed stores to discontinued operations when the
operations and cash flows of the stores have been (or will be) eliminated from
ongoing operations and we no longer have any significant continuing involvement
in the operations associated with the stores after closure. We generally meet
the second criteria on all closed stores as, upon closure, operations cease and
we have no continuing involvement. To determine if cash flows have been (or will
be) eliminated from ongoing operations, we evaluate a number of qualitative and
quantitative factors, including, but not limited to, proximity of a closing
store to any remaining open stores and the estimated sales migration from the
closed store to any stores remaining open. The estimated sales migration is
based on historical estimates of our sales migration upon opening or closing a
store in a similar market. For purposes of reporting closed stores as
discontinued operations, we report net sales, gross margin, and related
operating costs that are directly related to and specifically identifiable with
respect to the stores’ operations identified as discontinued operations. Certain
corporate-level charges, such as general office cost, field operations, national
advertising, fixed distribution costs, and interest cost are not allocated to
closed stores discontinued operations because we believe that these costs are
not specific to the stores’ operations.
Share-Based
Compensation
Share-based compensation expense is recognized in selling and
administrative expense in our consolidated statements of operations for all
options that we expect to vest. We estimate forfeitures based on historical
information. We value and expense stock options with graded vesting as a single
award with an average estimated life over the entire term of the award. The
expense for options with graded vesting is recorded straight-line over the
vesting period. We estimate the fair value of stock options using a binomial
model. The binomial model takes into account variables such as volatility,
dividend yield rate, risk-free rate, contractual term of the option, the
probability that the option will be exercised prior to the end of its
contractual life, and the probability of retirement of the option holder in
computing the value of the option. Expected volatility is based on historical
and current implied volatilities from traded options on our common shares. The
dividend yield on our common shares is assumed to be zero since we have not paid
dividends and have no current plans to do so in the future. The risk-free rate
is based on U.S. Treasury security yields at the time of the grant. The expected
life is determined from the binomial model, which incorporates exercise and
post-vesting forfeiture assumptions based on analysis of historical
data.
Compensation
expense for performance-based non-vested restricted stock awards is recorded
based on fair value of the award on the grant date and the estimated achievement
date of the performance criteria. An estimated target achievement date is
determined at the time of the award based on historical and forecasted
performance of similar measures. We monitor the projected achievement of the
performance targets at each reporting period and make prospective adjustments to
the estimated vesting period when our internal models indicate that the
estimated achievement date differs from the date being used to amortize
expense.
Income Taxes
We account for income taxes under the
asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statement basis and tax basis of assets and liabilities using enacted
law and tax rates in effect for the year in which the differences are expected
to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
We assess the
adequacy and need for a valuation allowance for deferred tax assets. In making
such determination, we consider all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies and recent financial operations. We have
established a valuation allowance to reduce our deferred tax assets to the
balance that is more likely than not to be realized.
We recognize
interest and penalties related to unrecognized tax benefits within the income
tax expense line in the accompanying consolidated statement of operations.
Accrued interest and penalties are included within the related tax liability
line in the accompanying consolidated balance sheet.
The effective
income tax rate in any period may be materially impacted by the overall level of
income (loss) before income taxes, the jurisdictional mix and magnitude of
income (loss), changes in the income tax laws (which may be retroactive to the
beginning of the fiscal year), subsequent recognition, de-recognition and/or
measurement of an uncertain tax benefit, changes in a deferred tax valuation
allowance, and adjustments of a deferred tax asset or liability for enacted
changes in tax laws or rates.
48
In July 2006, the
Financial Accounting Standards Board (“FASB”) issued guidance under ASC 740,
Income Taxes (FIN No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of SFAS No. 109) which was effective at the beginning of
2007, and clarifies the accounting for
uncertainty in income tax positions. This guidance requires us to recognize in
our financial statements the impact of a tax position, if that position is more
likely than not of being sustained, based on the technical merits of the
position. The recognition and measurement guidelines were applied to all of our
material income tax positions as of the beginning of 2007, resulting in an
increase in our tax liabilities of $2.2 million with a corresponding decrease to
beginning retained earnings for the cumulative effect of a change in accounting
principle.
In May 2007, the
FASB issued guidance under ASC 740, Income Taxes (FASB Staff Position (“FSP”) FIN
48-1, Definition of Settlement in FASB
Interpretation No. 48) which was effective retroactively to February 4, 2007. This guidance
provides direction on how to determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits. The
implementation of this standard did not have a material impact on our financial
condition, results of operations, or liquidity.
Pension
Effective in 2008, we adopted guidance
under ASC 715, Compensation – Retirement
Benefits (SFAS No.
158 Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans). This guidance requires us to measure
defined benefit plan assets and obligations as of the date of our year-end
consolidated balance sheet. Previously, our Pension Plan and Supplemental
Pension Plan each had a measurement date of December 31. Switching to the new
measurement date required one-time adjustments of $0.1 million to retained
earnings and less than $0.1 million to accumulated other comprehensive income in
2008 per the transition guidance.
Pension assumptions
are evaluated each year. Actuarial valuations are used to provide assistance in
calculating the estimated obligations related to our pension plans. We review
external data and historical trends to help determine the discount rate and
expected long-term rate of return. Our objective in selecting a discount rate is
to identify the best estimate of the rate at which the benefit obligations would
be settled on the measurement date. In making this estimate, we review rates of
return on high-quality, fixed-income investments available at the measurement
date and expected to be available during the period to maturity of the benefits.
This process includes a review of the bonds available on the measurement date
with a quality rating of Aa or better. The expected long-term rate of return on
assets is derived from detailed periodic studies, which includes a review of
asset allocation strategies, anticipated future long-term performance of
individual asset classes, risks (standard deviations), and correlations of
returns among the asset classes that comprised the plan’s asset mix. While the
studies give appropriate consideration to recent plan performance and historical
returns, the assumption for the expected long-term rate of return is primarily
based on our expectation of a long-term, prospective rate of
return.
Insurance and Insurance-Related
Reserves
We are
self-insured for certain losses relating to property, general liability,
workers’ compensation, and employee medical and dental benefit claims, a portion
of which is paid by employees. We purchase stop-loss coverage to limit
significant exposure in these areas. Accrued insurance-related liabilities and
related expenses are based on actual claims filed and estimates of claims
incurred but not reported. The estimated accruals are determined by applying
actuarially-based calculations. General liability and workers’ compensation
liabilities are recorded at our estimate of their net present value, using a 4%
discount rate, while other liabilities for insurance-related reserves are not
discounted.
Fair Value of Financial
Instruments
The
fair value hierarchy prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy, as defined below, gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs.
Level 1, defined as observable inputs such as unadjusted quoted prices in
active markets for identical assets or liabilities.
Level 2, defined as observable inputs other than Level 1 inputs. These
include quoted prices for similar assets or liabilities in an active market,
quoted prices for identical assets and liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions.
49
In connection with
our nonqualified deferred compensation plan, we had mutual fund investments of
$16.2 million and $10.5 million at January 30, 2010 and January 31, 2009,
respectively, which were recorded in other assets. These investments were
classified as trading securities and were recorded at their fair value. The fair
value of mutual fund investments was a Level 1 valuation under the fair value
hierarchy because each fund’s quoted market value per share was available in an
active market.
Included in cash
and cash equivalents were amounts on deposit with financial institutions
totaling $123.0 million and $9.2 million at January 30, 2010 and January 31,
2009, respectively, stated at cost, which approximates fair value. At January
30, 2010, cash and cash equivalents carried at fair value was comprised of the
following:
(In thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Money market funds |
|
$ |
76,350 |
|
$ |
76,350 |
|
$ |
- |
|
$ |
- |
Variable rate demand notes |
|
|
56,152 |
|
|
- |
|
|
56,152 |
|
|
- |
Total |
|
$ |
132,502 |
|
$ |
76,350 |
|
$ |
56,152 |
|
$ |
-
|
Variable rate
demand note securities are issued by various corporate, non-profit and
governmental entities that are of high credit quality with many being secured by
direct-pay letters of credit from a major financial institution. Also, variable
demand note securities can be tendered for sale upon notice (generally no longer
than seven days) to the original issuer.
The carrying value
of accounts receivable, accounts payable, and accrued expenses approximates fair
value because of the relatively short maturity of these items. The carrying
value of our obligations under our bank credit facility at January 31, 2009,
approximates fair value because the interest rates were variable and
approximated current market rates.
Effective February
3, 2008, we adopted guidance under ASC 820, Fair Value Measurements and
Disclosures (SFAS No.
157, Fair Value Measurements
(“SFAS No. 157”)),
for financial assets and liabilities on a prospective basis. This guidance addresses how companies
should approach measuring fair value and expands disclosures about fair value
measurements under other accounting pronouncements that require or permit fair
value measurements. The guidance provides a single definition of fair value that
is to be applied consistently for most accounting applications and also
generally describes and prioritizes according to reliability the methods and
inputs used in valuations. This guidance prescribes additional disclosures
regarding the extent of fair value measurements included in a company’s
financial statements and the methods and inputs used to arrive at these values.
The adoption of this guidance for financial assets and liabilities did not have
any impact on our financial condition, results of operations, or liquidity.
Effective February
3, 2008, we adopted guidance under ASC 825, Financial Instruments (SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities).
This guidance permits
us to choose to measure certain financial instruments and other items at fair
value. We did not elect to measure any additional financial assets or
liabilities at fair value. The adoption of this guidance for financial assets
and liabilities did not have any impact on our financial condition, results of
operations, or liquidity.
Commitments and
Contingencies
We
are subject to various claims and contingencies including legal actions and
other claims arising out of the normal course of business. In connection with
such claims and contingencies, we estimate the likelihood and amount of any
potential obligation, where it is possible to do so, using management’s
judgment. Management used various internal and external specialists to assist in
the estimating process. We accrue, if material, a liability if the likelihood of
an adverse outcome is probable and the amount is estimable. If the likelihood of
an adverse outcome is only reasonably possible (as opposed to probable), or if
it is probable but an estimate is not determinable, disclosure of a material
claim or contingency is made in the notes to our consolidated financial
statements.
50
Revenue
Recognition
We
recognize sales at the time the customer takes possession of the merchandise.
Sales are recorded net of discounts and estimated returns and exclude any sales
tax. The reserve for merchandise returns is estimated based on our prior return
experience.
We sell gift cards
in our stores and issue merchandise credits, typically as a result of customer
returns, on store value cards. We do not charge administrative fees on unused
gift card or merchandise credit balances and our gift cards and merchandise
credits do not expire. We recognize sales revenue from gift cards and
merchandise credits when (1) the gift card or merchandise credit is redeemed in
a sales transaction by the customer or (2) breakage occurs. We recognize gift
card and merchandise credit breakage when we estimate that the likelihood of the
card or credit being redeemed by the customer is remote and we determine that we
do not have a legal obligation to remit the value of unredeemed cards or credits
to the relevant regulatory authority. We estimate breakage based upon historical
redemption patterns. For 2009 and 2008, we recognized in net sales on our
consolidated statements of operations breakage of $0.6 million and $0.4 million,
respectively, related to unredeemed gift card and merchandise credit balances
that had aged at least four years beyond the end of their original issuance
month. The liability for the unredeemed cash value of gift cards and merchandise
credits is recorded in accrued operating expenses.
We offer price hold
contracts on merchandise. Revenue for price hold contracts is recognized when
the customer makes the final payment and takes possession of the merchandise.
Amounts paid by customers under price hold contracts are recorded in accrued
operating expenses until a sale is consummated.
Cost of Sales
Cost of sales includes the cost of
merchandise, net of cash discounts and rebates, markdowns, and inventory
shrinkage. Cost of merchandise includes related inbound freight to our
distribution centers, duties, and commissions. We classify warehousing and
outbound distribution and transportation costs as selling and administrative
expenses. Due to this classification, our gross margin rates may not be
comparable to those of other retailers that include warehousing and outbound
distribution and transportation costs in cost of sales.
Selling and Administrative
Expenses
We
include store expenses (such as payroll and occupancy costs), warehousing,
distribution, outbound transportation costs to our stores, advertising,
purchasing, insurance, non-income taxes, and overhead costs in selling and
administrative expenses. Selling and administrative expense rates may not be
comparable to those of other retailers that include distribution and outbound
transportation costs in cost of sales. Distribution and outbound transportation
costs included in selling and administrative expenses were $158.4 million,
$181.2 million, and $198.3 million for 2009, 2008, and 2007, respectively.
Rent Expense
Rent expense is recognized over the term
of the lease and is included in selling and administrative expenses. We
recognize minimum rent starting when possession of the property is taken from
the landlord, which normally includes a construction period prior to store
opening. When a lease contains a predetermined fixed escalation of the minimum
rent, we recognize the related rent expense on a straight-line basis and record
the difference between the recognized rental expense and the amounts payable
under the lease as deferred incentive rent. We also receive tenant allowances,
which are recorded in deferred incentive rent and are amortized as a reduction
to rent expense over the term of the lease.
Our leases
generally obligate us for our applicable portion of real estate taxes, CAM, and
property insurance that has been incurred by the landlord with respect to the
leased property. We maintain accruals for our estimated applicable portion of
real estate taxes, CAM, and property insurance incurred but not settled at each
reporting date. We estimate these accruals based on historical payments made and
take into account any known trends. Inherent in these estimates is the risk that
actual costs incurred by landlords and the resulting payments by us may be
higher or lower than the amounts we have recorded on our books.
Certain of our
leases provide for contingent rents that are not measurable at the lease
inception date. Contingent rent includes rent based on a percentage of sales
that are in excess of a predetermined level. Contingent rent is excluded from
minimum rent and is included in the determination of total rent expense when it
is probable that the expense has been incurred and the amount is reasonably
estimable.
51
Advertising
Expense
Advertising costs are expensed as incurred, consist primarily of print
and television advertisements, and are included in selling and administrative
expenses. Advertising expenses were $96.2 million, $102.3 million, and $104.1
million for 2009, 2008, and 2007, respectively.
Earnings per Share
Basic earnings per share is based on the
weighted-average number of shares outstanding during each period. Diluted
earnings per share is based on the weighted-average number of shares outstanding
during each period and the additional dilutive effect of stock options and
non-vested restricted stock awards, calculated using the treasury stock method.
Store Pre-opening
Costs
Pre-opening
costs incurred during the construction periods for new store openings are
expensed as incurred.
Guarantees
We have lease guarantees which were
issued prior to January 1, 2003. We record a liability for these lease
guarantees in the period when it becomes probable that the obligor will fail to
perform its obligation and if the amount of our guarantee obligation is
estimable.
Other Comprehensive
Income
Our Other
Comprehensive Income includes principally the impact of the amortization of our
pension actuarial loss, net of tax, and the revaluation of our pension actuarial
loss, net of tax.
Recently Adopted Accounting
Standards
FASB Codification
In the third fiscal quarter of 2009, we
adopted ASC (SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of SFAS
No. 162). This guidance is the source of authoritative GAAP for nongovernmental
entities. The ASC does not change GAAP but rather takes the numerous individual
pronouncements that previously constituted GAAP and reorganizes them into
approximately 90 accounting topics, and displays all topics using a consistent
structure. The adoption of the ASC did not have a material effect on our
financial condition, results of operations, or liquidity.
Subsequent Events
In the second fiscal quarter of 2009, we
adopted guidance under ASC 855, Subsequent Events, (SFAS No. 165, Subsequent Events). This guidance established general
standards of accounting for, and disclosure of, events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The guidance prescribes accounting practices that are similar to
those previously prescribed in auditing literature. However, under this
guidance, we were required to provide in each of our periodic filings with the
SEC the date through which we had evaluated subsequent events. The adoption of
this guidance did not have a material effect on our financial condition, results
of operations, or liquidity.
In February 2010,
the FASB issued Accounting Standard Update (“ASU”) 2010-09, Amendments to Certain Recognition and
Disclosure Requirements, which amends ASC 855, Subsequent Events. This guidance, effective upon issuance,
requires an entity that is an SEC filer to evaluate subsequent events through
the date that the financial statements were issued. For an SEC filer, this
guidance also eliminates the required disclosure of the date through which
subsequent events were evaluated. The adoption of this guidance did not have a
material effect on our financial condition, results of operations, or liquidity.
See note 14, “Subsequent Events.”
Fair Value
Effective February 1, 2009, we adopted
guidance under ASC 820, Fair Value Measurements and
Disclosures, (FSP
SFAS 157-2, Effective Date of SFAS No. 157, Fair
Value Measurements).
This guidance relates to the fair value of non-financial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a
non-recurring basis. This guidance addresses how companies should approach
measuring fair value and expands the disclosure requirements applicable to fair
value measurements under other accounting pronouncements that require or permit
fair value measurements. The guidance establishes a single definition of fair
value that is to be applied consistently for all accounting applications and
also generally describes, and prioritizes according to reliability, the methods
and inputs used in fair value measurements. The guidance prescribes additional
disclosures regarding the extent to which a company includes fair value
measurements in its financial statements and the methods and inputs used to
arrive at these values. The adoption of this guidance relating to fair value of
non-financial assets and liabilities did not have a material effect on our
financial condition, results of operations, or liquidity.
52
In the second
fiscal quarter of 2009, we adopted guidance under ASC 820-10, Fair Value Measurements and
Disclosures, (FSP
SFAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly). This guidance provides guidelines for
making fair value measurements more consistent with the principles presented in
the previous standard SFAS No. 157, Fair Value
Measurements. The
adoption of this guidance did not have a material effect on our financial
condition, results of operations, or liquidity.
In the second
fiscal quarter of 2009, we adopted guidance under ASC 825-10, Financial Instruments (FSP FAS 107-1 and Accounting Principles
Bulletin (APB) 28-1, Interim Disclosures about Fair Value of
Financial Instruments). The guidance amended SFAS No. 107, Disclosures about Fair Value of Financial
Instruments (SFAS
107), to require disclosures about fair value of financial instruments within
the scope of SFAS 107 for interim reporting periods of publicly traded companies
as well as in annual financial statements. See “Fair Value of Financial
Instruments” within note 1 for this disclosure. The adoption of this guidance
did not have a material effect on our financial condition, results of
operations, or liquidity.
Other-Than-Temporary
Impairments
In the
second fiscal quarter of 2009, we adopted guidance under ASC 320, Investments – Debt and Equity
Securities (FSP SFAS
115-2 and FSP SFAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments). This guidance is designed to create
greater clarity and consistency in accounting for and presentation of impairment
losses on debt and equity securities. As of the beginning of the interim period
of adoption, this guidance requires a cumulative-effect adjustment to reclassify
the non-credit component of previously recognized other-than-temporary
impairment losses from retained earnings to the beginning balance of accumulated
other comprehensive income. The adoption of this guidance did not have a
material effect on our financial condition, results of operations, or liquidity.
Employee Benefit
Plans
Effective
January 30, 2010, we adopted guidance under ASC 715, Compensation-Retirement
Benefits (FSP SFAS
132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets). This guidance requires the disclosure
of additional information about an employer’s defined benefit pension plans. The
required disclosures include the major categories of plan assets, fair value
measurements for each major category of plan assets segregated by fair value
hierarchy level, investment policies and strategies, significant concentrations
of credit risk, and the effect of fair value measurements, determined by
financial models or using unobservable inputs, on changes in plan assets for the
period. The required disclosures under this guidance are included in note 8. The
adoption of this guidance did not have a material effect on our financial
condition, results of operations, or liquidity.
Recent Accounting Standards – Future
Adoptions
In
January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements, which
amends ASC 820, Fair Value Measurements and
Disclosures, to add
new requirements for disclosures about transfers into and out of Levels 1 and 2
and separate disclosures about purchases, sales, issuances, and settlements
relating to Level 3 measurements. The ASU also clarifies existing fair value
disclosures about the level of disaggregation and about inputs and valuation
techniques used to measure the fair value. Further, the ASU amends guidance on
employers’ disclosures about postretirement benefit plan assets under ASC 715,
Compensation-Retirement
Benefits, to require
that disclosures be provided by classes of assets instead of by major categories
of assets. The ASU is effective for us in the first fiscal quarter of 2010 and
is not expected to have a material effect on our financial condition, results of
operations, or liquidity.
53
NOTE 2 – PROPERTY AND EQUIPMENT –
NET
Property and
equipment – net consist of:
|
January 30, 2010 |
|
January 31,
2009 |
(In thousands) |
|
|
|
|
|
Land and land
improvements |
$ |
44,818 |
|
$ |
44,952 |
Buildings and leasehold improvements |
|
698,988 |
|
|
675,787 |
Fixtures and equipment |
|
635,377 |
|
|
621,617 |
Computer software costs |
|
68,175 |
|
|
67,166 |
Transportation equipment |
|
29,192 |
|
|
22,567 |
Construction-in-progress |
|
28,563 |
|
|
20,860 |
Property
and equipment - cost |
|
1,505,113 |
|
|
1,452,949 |
Less accumulated depreciation and
amortization |
|
1,013,857 |
|
|
962,908 |
Property and equipment - net |
$ |
491,256 |
|
$ |
490,041 |
In 2008, we
acquired, for $8.6 million, two store properties we were previously leasing. The
cost of these properties was included in land and land improvements and
buildings and leasehold improvements at January 30, 2010 and January 31, 2009.
In prior periods, these leased properties were accounted for as operating
leases.
Property and
equipment - cost includes $7.8 million and $8.3 million at January 30, 2010 and
January 31, 2009, respectively, to recognize assets from capital leases.
Accumulated depreciation and amortization includes $4.3 million and $2.0 million
at January 30, 2010 and January 31, 2009, respectively, related to capital
leases.
We incurred $0.4
million, $0.1 million, and $0.8 million in asset impairment charges in 2009,
2008, and 2007, respectively. These charges principally related to the
write-down of long-lived assets at four, six, and three stores identified as
part of our annual store impairment review in 2009, 2008, and 2007,
respectively. Asset impairment charges are included in selling and
administrative expenses in our accompanying consolidated statements of
operations. We perform annual impairment reviews of our long-lived assets at the
store level. When we perform the annual impairment reviews, we first determine
which stores had impairment indicators present. We use actual historical cash
flows to determine which stores had negative cash flows in each of the past two
years (on a rolling basis). For each store with two years of negative cash
flows, we obtain future cash flow estimates based on operating performance
estimates specific to each store’s operations that are based on assumptions
currently being used to develop our company level operating plans. If the net
book value of a store’s long-lived assets is not recoverable by the expected
future cash flows of the store, we estimate the fair value of the store’s assets
and recognize an impairment charge for the excess net book value of the store’s
long-lived assets over their fair value. The fair value of store assets is
estimated based on information available in the marketplace for similar
assets.
Upon the successful
completion of a pilot program in 32 of our stores in 2006 and the decision to
move forward with the implementation of a new point-of-sale register system in
all of our stores, we reduced the remaining estimated service life on
approximately $6.9 million of certain point-of-sale equipment. This service life
reduction resulted in the recognition of depreciation expense of approximately
$4.1 million in 2007, and $0.5 million in 2008.
NOTE 3 - BANK CREDIT
FACILITY
On April
28, 2009, we entered into our 2009 Credit Agreement, a $500 million three-year
unsecured credit facility. The 2009 Credit Agreement replaced our 2004 Credit
Agreement, a $500 million five-year unsecured credit facility we entered into on
October 29, 2004. The 2004 Credit Agreement was scheduled to expire on October
28, 2009, but was terminated concurrently with the 2009 Credit Agreement
becoming effective on April 28, 2009. We did not incur any material early
termination penalties in connection with the termination of the 2004 Credit
Agreement.
54
The 2009 Credit
Agreement expires on April 28, 2012. In connection with our entry into the 2009
Credit Agreement, we paid bank fees and other expenses in the aggregate amount
of $5.6 million, which are being amortized over the term of the agreement.
Proceeds from borrowings under the 2009 Credit Agreement are available for
general corporate purposes, working capital, and to repay certain of our
indebtedness. The 2009 Credit Agreement includes a $150 million letter of credit
sublimit and a $30 million swing loan sublimit. The interest rates, pricing and
fees under the 2009 Credit Agreement fluctuate based on our debt rating. The
2009 Credit Agreement allows us to select our interest rate for each borrowing
from two different interest rate options. The interest rate options are
generally derived from the prime rate or LIBOR. We may prepay revolving loans
made under the 2009 Credit Agreement. The 2009 Credit Agreement contains
financial and other covenants, including, but not limited to, limitations on
indebtedness, liens and investments, as well as the maintenance of two financial
ratios – a leverage ratio and a fixed charge coverage ratio. A violation of any
of the covenants could result in a default under the 2009 Credit Agreement that
would permit the lenders to restrict our ability to further access the 2009
Credit Agreement for loans and letters of credit and require the immediate
repayment of any outstanding loans under the 2009 Credit Agreement. As of
January 30, 2010, we were in compliance with the covenants of the 2009 Credit
Agreement.
NOTE 4 – SALES OF REAL
ESTATE
In
September 2006, to avoid litigation under the threat of eminent domain, we sold
a company-owned and operated store in California for an approximate gain of
$12.8 million. As part of the sale, we entered into a lease which permitted us
to occupy and operate the store through January 2009 in exchange for $1 per year
rent plus the cost of taxes, insurance, and common area maintenance.
Subsequently, this lease was modified to allow us to occupy this space through
September 2009 under substantially the same terms. Because of the favorable
lease terms, we deferred recognition of the gain until we no longer held a
continuing involvement in the property. As a result, the gain on the sale was
deferred until the end of the lease and the net sales proceeds of approximately
$13.3 million were recorded as a long-term real estate liability included in
other liabilities on our consolidated balance sheet as of January 31, 2009. In
the third fiscal quarter of 2009, after attempts to further extend the lease
term were unsuccessful, we closed the store, ending our continuing involvement
with this property, and recognized a pretax gain on sale of real estate of $13.0
million.
NOTE 5 - LEASES
Leased property consisted primarily of
1,307 of our retail stores, 0.7 million square feet of warehouse space, and
certain transportation equipment, and information technology and other office
equipment. Many of the store leases obligate us to pay for our applicable
portion of real estate taxes, CAM, and property insurance. Certain store leases
provide for contingent rents, have rent escalations, and have tenant allowances
or other lease incentives. Many of our leases contain provisions for options to
renew or extend the original term for additional periods.
Total rent expense,
including real estate taxes, CAM, and property insurance, charged to continuing
operations for operating leases consisted of the following:
|
2009 |
|
2008 |
|
2007 |
(In thousands) |
|
|
|
|
|
|
|
|
Minimum leases |
$ |
254,054 |
|
$ |
236,865 |
|
$ |
234,891 |
Contingent
leases |
|
313 |
|
|
491 |
|
|
409 |
Total rent expense |
$ |
254,367 |
|
$ |
237,356 |
|
$ |
235,300 |
55
Future minimum
rental commitments for leases, excluding closed store leases, real estate taxes,
CAM, and property insurance, at January 30, 2010, were as follows:
Fiscal Year |
|
|
(In thousands) |
|
|
2010 |
$ |
195,739 |
2011 |
|
163,908 |
2012 |
|
128,004 |
2013 |
|
96,643 |
2014 |
|
57,861 |
Thereafter |
|
45,449 |
Total leases |
$ |
687,604 |
We have obligations
for capital leases for office equipment, included in accrued operating expenses
and other liabilities on our consolidated balance sheet. Scheduled payments for
all capital leases at January 30, 2010, were as follows:
Fiscal Year |
|
|
|
(In thousands) |
|
|
|
2010 |
$ |
2,352 |
|
2011 |
|
984 |
|
2012 |
|
236 |
|
2013 |
|
135 |
|
2014 |
|
- |
|
Thereafter |
|
- |
|
Total
lease payments |
$ |
3,707 |
|
Less amount to discount to present
value |
|
(223 |
) |
Capital lease obligation per balance
sheet |
$ |
3,484 |
|
NOTE 6 - SHAREHOLDERS’ EQUITY
Earnings
per Share
There
were no adjustments required to be made to weighted-average common shares
outstanding for purposes of computing basic and diluted earnings per share and
there were no securities outstanding in any year presented, which were excluded
from the computation of earnings per share other than antidilutive employee and
director stock options and non-vested restricted stock awards. At the end of
2009, 2008, and 2007, stock options outstanding of 2.9 million, 2.0 million, and
1.4 million, respectively, were excluded from the diluted share calculation
because their impact was antidilutive. Antidilutive options are excluded from
the calculation because they decrease the number of diluted shares outstanding
under the treasury stock method. Antidilutive options are generally outstanding
options where the exercise price per share is greater than the weighted-average
market price per share for our common shares for each period. The number of
shares of non-vested restricted stock that were antidilutive, as determined
under the treasury stock method, is immaterial for all years presented.
56
A reconciliation of
the number of weighted-average common shares outstanding used in the basic and
diluted earnings per share computations is as follows:
|
2009 |
|
2008 |
|
2007 |
(In thousands) |
|
|
|
|
|
Weighted-average common shares
outstanding: |
|
|
|
|
|
Basic |
81,619 |
|
81,111 |
|
101,393 |
Dilutive effect of stock options and
restricted common shares |
1,062 |
|
965 |
|
1,149 |
Diluted |
82,681 |
|
82,076 |
|
102,542 |
Share Repurchase Programs
On December 4,
2009, we announced that our Board of Directors authorized the repurchase of up
to $150.0 million of our common shares, which commenced immediately and will
continue until exhausted. The purchases may be made from time to time in the
open market and/or in privately negotiated transactions at our discretion,
subject to market conditions and other factors. No shares were repurchased under
this program in 2009. See note 14, “Subsequent Events” for a discussion of the
March 2, 2010 increase in the 2010 Repurchase Program from $150.0 million to
$400.0 million and the March 10, 2010 $150.0 million accelerated share
repurchase transaction.
On March 9, 2007,
we announced that our Board of Directors authorized a $600.0 million share
repurchase program (“March 2007 Repurchase Program”). On November 30, 2007, we
announced that our Board of Directors authorized the $150.0 million November
2007 share repurchase program commencing with the completion of the March 2007
Repurchase Program, which we completed on December 3, 2007. As part of the March
2007 Repurchase Program, we received 2.8 million of our outstanding common
shares during the first fiscal quarter of 2007, representing the minimum number
of shares purchased under a $100.0 million guaranteed share repurchase
transaction (“GSR”). Upon receipt, the 2.8 million shares were removed from our
basic and diluted weighted-average common shares outstanding. The GSR included a
forward contract indexed to the average market price of our common shares that
subjected the GSR to a future share settlement based on the average share price
between the contractually specified price inception date of the GSR and the
final settlement date. The forward contract effectively placed a collar around
the minimum and maximum number of our common shares that we purchased under the
GSR. We were not required to make any additional payments to the counterparty
under the GSR. In the fourth fiscal quarter of 2007, we received 0.4 million
additional common shares from the counterparty in settlement of the GSR. In
addition to the GSR, we repurchased approximately 26.8 million of our
outstanding common shares in 2007 in open market transactions at an aggregate
cost of $612.5 million under the March 2007 Repurchase Program and the November
2007 share repurchase program.
In the first fiscal
quarter of 2008, we acquired 2.2 million of our outstanding common shares for
$37.5 million, which completed the November 2007 Repurchase
Program.
Common shares
acquired through these repurchase programs are held in treasury, at cost and are
available to meet obligations under equity compensation plans and for general
corporate purposes.
57
NOTE 7 – SHARE-BASED
PLANS
Our
shareholders initially approved our existing equity compensation plan, the Big
Lots 2005 Long-Term Incentive Plan (“2005 Incentive Plan”) in May 2005, and
approved an amendment in May 2008. The 2005 Incentive Plan authorizes the
issuance of incentive and nonqualified stock options, restricted stock,
restricted stock units, performance units, and stock appreciation rights. We
have not issued incentive stock options, restricted stock units, performance
units, or stock appreciation rights under the 2005 Incentive Plan. The number of
common shares available for issuance under the 2005 Incentive Plan consists of:
1) an initial allocation of 1,250,000 common shares; 2) 2,001,142 common shares,
the number of common shares that were available under the predecessor Big Lots,
Inc. 1996 Performance Incentive Plan (“1996 Incentive Plan”) upon its
expiration; 3) 2,100,000 common shares approved by our shareholders in May 2008;
and 4) an annual increase equal to 0.75% of the total number of issued common
shares (including treasury shares) as of the start of each of our fiscal years
during which the 2005 Incentive Plan is in effect. The Compensation Committee of
our Board of Directors (“Committee”), which is charged with administering the
2005 Incentive Plan, has the authority to determine the terms of each award.
Nonqualified stock options granted to employees under the 2005 Incentive Plan,
the exercise price of which may not be less than the fair market value of the
underlying common shares on the grant date, generally expire on the earlier of:
1) the seven year term set by the Committee; or 2) one year following
termination of employment, death, or disability. The nonqualified stock options
generally vest ratably over a four-year period; however, upon a change in
control, all awards outstanding automatically vest.
In addition to the
2005 Incentive Plan, we previously maintained the Big Lots Director Stock Option
Plan ("Director Stock Option Plan") for non-employee directors. The Director
Stock Option Plan was administered by the Committee pursuant to an established
formula. Neither the Board of Directors nor the Committee exercised any
discretion in administration of the Director Stock Option Plan. Grants were made
annually at an exercise price equal to the fair market value of the underlying
common shares on the date of grant. The annual grants to each outside director
of an option to acquire 10,000 of our common shares became fully exercisable
over a three-year period: 20% of the shares on the first anniversary, 60% on the
second anniversary, and 100% on the third anniversary. Stock options granted to
non-employee directors expire on the earlier of: 1) 10 years plus one month; 2)
one year following death or disability; or 3) at the end of our next trading
window one year following termination. In connection with the amendment to the
2005 Incentive Plan in May 2008, our Board of Directors amended the Director
Stock Option Plan so that no additional awards may be made under that plan. Our
non-employee directors did not receive any stock options in 2008 or 2009, but
did, as discussed below, receive restricted stock awards under the 2005
Incentive Plan.
Share-based
compensation expense was $20.3 million, $15.5 million, and $9.9 million in 2009,
2008, and 2007, respectively. We use a binomial model to estimate the fair value
of stock options on the grant date. The binomial model takes into account
variables such as volatility, dividend yield rate, risk-free rate, contractual
term of the option, the probability that the option will be exercised prior to
the end of its contractual life, and the probability of retirement of the option
holder in computing the value of the option. Expected volatility is based on
historical and current implied volatilities from traded options on our common
shares. The dividend yield on our common shares is assumed to be zero since we
have not paid dividends and have no current plans to do so in the future. The
risk-free rate is based on U.S. Treasury security yields at the time of the
grant. The expected life is determined from the binomial model, which
incorporates exercise and post-vesting forfeiture assumptions based on analysis
of historical data.
The
weighted-average fair value of options granted and assumptions used in the
option pricing model for each of the respective periods were as follows:
|
2009 |
|
2008 |
|
2007 |
Weighted-average fair value of
options granted |
$ |
7.89 |
|
|
$ |
8.74 |
|
|
$ |
11.59 |
|
Risk-free interest rates |
|
1.7 |
% |
|
|
2.2 |
% |
|
|
4.4 |
% |
Expected life (years) |
|
4.3 |
|
|
|
4.3 |
|
|
|
4.4 |
|
Expected volatility |
|
56.0 |
% |
|
|
48.8 |
% |
|
|
42.6 |
% |
Expected
annual forfeiture |
|
1.5 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
58
The following table
summarizes information about our stock options outstanding and exercisable at
January 30, 2010:
Range of Prices |
|
Options
Outstanding |
|
Options
Exercisable |
|
Greater |
|
Less Than |
|
Options |
|
Weighted-Average |
|
Weighted-Average |
|
Options |
|
Weighted-Average |
Than |
|
or Equal to |
|
Outstanding |
|
Remaining Life
(Years) |
|
Exercise Price |
|
Exercisable |
|
Exercise Price |
$ |
- |
|
$ |
10.00 |
|
5,000 |
|
1.7 |
|
$ |
10.00 |
|
5,000 |
|
$ |
10.00 |
|
10.01 |
|
|
20.00 |
|
2,482,258 |
|
4.5 |
|
|
14.82 |
|
1,308,883 |
|
|
13.30 |
|
20.01 |
|
|
30.00 |
|
1,989,375 |
|
4.7 |
|
|
25.15 |
|
754,624 |
|
|
26.41 |
$ |
30.01 |
|
$ |
40.00 |
|
20,000 |
|
5.0 |
|
|
31.10 |
|
7,500 |
|
|
31.15 |
|
|
|
|
|
|
4,496,633 |
|
4.6 |
|
$ |
19.46 |
|
2,076,007 |
|
$ |
18.12 |
A summary of the
annual stock option activity for fiscal years 2007, 2008, and 2009 is as
follows:
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
|
|
|
|
|
|
|
Contractual |
|
Value |
|
Options |
|
Price(a) |
|
Term (Years) |
|
(000's) |
Outstanding at February 3,
2007 |
6,644,990 |
|
|
$ |
15.78 |
|
|
|
|
|
Granted |
1,156,000 |
|
|
|
28.69 |
|
|
|
|
|
Exercised |
(2,742,055 |
) |
|
|
13.10 |
|
|
|
|
|
Forfeited |
(934,465 |
) |
|
|
24.52 |
|
|
|
|
|
Outstanding at February 2,
2008 |
4,124,470 |
|
|
|
19.20 |
|
|
|
|
|
Granted |
985,000 |
|
|
|
21.45 |
|
|
|
|
|
Exercised |
(787,712 |
) |
|
|
13.79 |
|
|
|
|
|
Forfeited |
(361,190 |
) |
|
|
34.77 |
|
|
|
|
|
Outstanding at January 31,
2009 |
3,960,568 |
|
|
|
19.42 |
|
|
|
|
|
Granted |
967,500 |
|
|
|
17.62 |
|
|
|
|
|
Exercised |
(361,560 |
) |
|
|
13.64 |
|
|
|
|
|
Forfeited |
(69,875 |
) |
|
|
21.80 |
|
|
|
|
|
Outstanding
at January 30, 2010 |
4,496,633 |
|
|
$ |
19.46 |
|
4.6 |
|
$ |
40,610 |
Vested and
expected to vest at January 30, 2010 |
4,389,716 |
|
|
$ |
19.42 |
|
4.6 |
|
$ |
39,789 |
Exercisable
at January 30, 2010 |
2,076,007 |
|
|
$ |
18.12 |
|
3.9 |
|
$ |
21,531 |
(a)
Weighted-average per share exercise price.
The number of stock
options expected to vest was based on our annual forfeiture rate assumption.
59
A summary of the
non-vested restricted stock activity for fiscal years 2007, 2008, and 2009 is as
follows:
|
|
|
|
Weighted |
|
|
|
|
Average |
|
Number of |
|
Grant Date |
|
Shares |
|
Fair Value |
Nonvested restricted stock at
February 3, 2007 |
408,671 |
|
|
$ |
12.37 |
Granted |
325,400 |
|
|
|
28.73 |
Vested |
(406,871 |
) |
|
|
12.34 |
Forfeited |
(6,300 |
) |
|
|
26.45 |
Nonvested restricted stock at
February 2, 2008 |
320,900 |
|
|
|
28.72 |
Granted |
408,000 |
|
|
|
21.84 |
Vested |
(1,800 |
) |
|
|
26.43 |
Forfeited |
(10,825 |
) |
|
|
28.76 |
Nonvested restricted stock at
January 31, 2009 |
716,275 |
|
|
|
24.81 |
Granted |
471,688 |
|
|
|
17.91 |
Vested |
(327,675 |
) |
|
|
28.85 |
Forfeited |
(10,800 |
) |
|
|
20.50 |
Nonvested
restricted stock at January 30, 2010 |
849,488 |
|
|
$ |
19.48 |
The non-vested
restricted stock awards granted to employees in 2009, 2008, and 2007 vest if
certain financial performance objectives are achieved. If we meet a threshold
financial performance objective and the grantee remains employed by us, the
restricted stock will vest on the opening of our first trading window five years
after the grant date of the award. If we meet a higher financial performance
objective and the grantee remains employed by us, the restricted stock will vest
on the first trading day after we file our Annual Report on Form 10-K with the
SEC for the fiscal year in which the higher objective is met.
On the grant date
of the 2007 awards, we estimated a three-year period for vesting based on the
assumed achievement of the higher financial performance objective. In the second
fiscal quarter of 2007, we changed the estimated achievement date from three
years to two years as a result of our performance being better than expected,
resulting in $1.6 million and $1.1 million of incremental expense in 2008 and
2007, respectively. We achieved the higher financial performance objective for
the 2007 awards based on the 2008 results, and accordingly these awards vested
on March 30, 2009, the first trading date following the filing of our Annual
Report on Form 10-K for 2008.
On the grant date
of the 2008 awards, we estimated a three-year period for vesting based on the
assumed achievement of the higher financial performance objective. In the second
fiscal quarter of 2008, we changed the estimated achievement date for the higher
financial performance objective from three years to two years due to better
operating results than initially anticipated, resulting in $0.8 million of
incremental expense in 2008. In the fourth fiscal quarter of 2008, we changed
the estimated achievement date for the higher financial performance objective
from two years to three years due to our declining net sales results which were
in part due to the general economic conditions in the United States. In the
third fiscal quarter of 2009, we changed the estimated achievement date for the
higher financial performance objective for the restricted stock awards granted
during 2008 from three years to two years. Based on our 2009 results, we
achieved the higher financial performance objective for restricted stock awards
granted in 2008, and accordingly these awards will vest on the trading date
following the filing of this Form 10-K. As a result of this change, we recorded
incremental expense of $0.5 million and $1.3 million in the third and fourth
fiscal quarters of 2009, respectively.
60
On the grant date
of the 2009 awards, we estimated a three-year period for vesting based on the
assumed achievement of the higher financial performance objective. In the third
fiscal quarter of 2009, we changed the estimated achievement date for the higher
financial performance objective from three years to two years due to better
operating results than initially anticipated, resulting in $0.1 million of
incremental expense in the third fiscal quarter of 2009. In the fourth fiscal
quarter of 2009, we changed the estimated achievement date for the higher
financial performance objective from two years to one year due to better
operating results than initially anticipated, and accordingly these awards will
vest on the trading date following the filing of this Form 10-K . As a result of
this change, we recorded incremental expense of $3.2 million in the fourth
fiscal quarter of 2009.
In 2009 and 2008,
we granted restricted stock awards having a fair value on the grant date of
approximately $75,000 to each of the non-employee members of our Board of
Directors. These awards vest on the earlier of 1) the trading day immediately
preceding the next annual meeting of our shareholders; 2) the death of the
grantee; or 3) the disability of the grantee; provided, however, the director’s
restricted stock award will be forfeited if he or she ceases to serve on our
Board of Directors before the first of such vesting events occurs.
The non-vested
restricted stock awarded to Mr. Fishman upon the commencement of his employment
as our Chairman, Chief Executive Officer and President in 2005 vested in
one-third increments upon the attainment of mutually agreed common share price
targets. In 2006, the first common share price target was achieved and one-third
of this award vested. During the first fiscal quarter of 2007, the second and
third common share price targets of this award were met, resulting in the
vesting of the remaining 66,667 common shares underlying this restricted stock
award and related expense of $0.7 million.
The non-vested
restricted stock awarded in 2004 to certain of our officers as a retention
package upon the transition of the former Chief Executive Officer and President
to a different position vested equally over three years. The 2004 restricted
stock grants were forfeited, in whole or in part, as applicable, if the employee
voluntarily terminated his or her employment or if the employee was terminated
for cause. Of the 172,000 shares originally underlying these restricted stock
awards, 10,000 were forfeited in 2005 and the remaining 162,000 vested equally
in January 2006, 2007 and 2008.
During 2009, 2008,
and 2007, the following activity occurred under our share-based compensation
plans:
|
2009 |
|
2008 |
|
2007 |
(In thousands) |
|
|
|
|
|
|
|
|
Total intrinsic value of stock
options exercised |
$ |
5,079 |
|
$ |
13,510 |
|
$ |
45,987 |
Total fair value
of restricted stock vested |
$ |
6,954 |
|
$ |
37 |
|
$
|
11,822 |
The total unearned
compensation cost related to share-based awards outstanding at January 30, 2010,
is approximately $17.8 million. This compensation cost is expected to be
recognized through January 2014 based on existing vesting terms with the
weighted average remaining expense recognition period being approximately 1.8
years from January 30, 2010.
61
NOTE 8 - EMPLOYEE BENEFIT
PLANS
Pension Benefits
We maintain the
Pension Plan and Supplemental Pension Plan covering certain employees whose hire
date was on or before April 1, 1994. Benefits under each plan are based on
credited years of service and the employee’s compensation during the last five
years of employment. The Supplemental Pension Plan is maintained for certain
highly compensated executives whose benefits were frozen in the Pension Plan in
1996. The Supplemental Pension Plan is designed to pay benefits in the same
amount as if the participants continued to accrue benefits under the Pension
Plan. We have no obligation to fund the Supplemental Pension Plan, and all
assets and amounts payable under the Supplemental Pension Plan are subject to
the claims of our general creditors.
The components of
net periodic pension expense were comprised of the following:
|
2009 |
|
2008 |
|
2007 |
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Service cost - benefits earned in
the period |
$ |
2,261 |
|
|
$ |
2,438 |
|
|
$ |
2,632 |
|
Interest cost on projected benefit obligation |
|
3,726 |
|
|
|
3,332 |
|
|
|
3,150 |
|
Expected investment return on plan
assets |
|
(3,172 |
) |
|
|
(3,963 |
) |
|
|
(4,289 |
) |
Amortization of prior service cost |
|
(34 |
) |
|
|
(34 |
) |
|
|
135 |
|
Amortization of transition
obligation |
|
13 |
|
|
|
13 |
|
|
|
13 |
|
Amortization of actuarial loss |
|
2,691 |
|
|
|
824 |
|
|
|
694 |
|
Settlement
loss |
|
175 |
|
|
|
- |
|
|
|
1,259 |
|
Net periodic pension expense |
$
|
5,660 |
|
|
$ |
2,610 |
|
|
$ |
3,594 |
|
In 2009 and 2007,
we incurred pretax non-cash settlement charges of $0.2 million and $1.3 million,
respectively. The settlement charges were caused by lump sum benefit payments
made to plan participants in excess of combined annual service cost and interest
cost for each year.
Weighted-average
assumptions used to determine net periodic pension expense were:
|
|
2009 |
|
2008 |
|
2007 |
Discount rate |
|
7.3% |
|
6.5% |
|
5.9% |
Rate of increase in compensation levels |
|
3.5% |
|
3.5% |
|
3.5% |
Expected long-term rate of
return |
|
8.0% |
|
8.5% |
|
8.5% |
Measurement date
for plan assets and benefit obligations |
|
01/31/09 |
|
12/31/07 |
|
12/31/06 |
Weighted-average
assumptions used to determine benefit obligations were:
|
|
2009 |
|
2008 |
Discount rate |
|
5.7% |
|
7.3% |
Rate of increase in compensation levels |
|
3.5% |
|
3.5% |
Measurement
date for plan assets and benefit obligations |
|
01/30/10 |
|
01/31/09 |
62
The following
schedule provides a reconciliation of projected benefit obligations, plan
assets, funded status, and amounts recognized for the Pension Plan and
Supplemental Pension Plan at January 30, 2010 and January 31, 2009:
|
January 30, 2010 |
|
January 31,
2009 |
(In thousands) |
|
|
|
|
|
|
|
Change in projected benefit
obligation: |
|
|
|
|
|
|
|
Projected benefit obligation
at beginning of year |
$ |
53,600 |
|
|
$ |
53,459 |
|
Service cost |
|
2,261 |
|
|
|
2,438 |
|
Interest cost |
|
3,726 |
|
|
|
3,332 |
|
Service and interest cost
during gap period |
|
- |
|
|
|
480 |
|
Benefits and settlements
paid |
|
(6,165 |
) |
|
|
(5,614 |
) |
Actuarial loss
(gain) |
|
6,104 |
|
|
|
(495 |
) |
Projected benefit obligation
at end of year |
$ |
59,526 |
|
|
$ |
53,600 |
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
Fair market value at beginning
of year |
$ |
42,297 |
|
|
$ |
48,208 |
|
Actual return on plan
assets |
|
9,979 |
|
|
|
(11,641 |
) |
Employer
contributions |
|
10,754 |
|
|
|
11,344 |
|
Benefits and settlements
paid |
|
(6,165 |
) |
|
|
(5,614 |
) |
Fair market value at end of
year |
$ |
56,865 |
|
|
$ |
42,297 |
|
|
|
Under funded
and net amount recognized |
$ |
(2,661 |
) |
|
$ |
(11,303 |
) |
|
|
Amounts recognized in the
consolidated balance sheets consist of: |
|
|
|
|
|
|
|
Noncurrent assets |
$ |
3,383 |
|
|
$ |
- |
|
|