form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended August 2, 2008
or
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from __________ to __________
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 incorporation or organization)
|
(I.R.S.
Employer 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)
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. Yesþ Noo
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.
|
Large
accelerated filer þ
|
Accelerated
filer o
|
|
Non-accelerated
filer o (Do not check if a smaller
reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o Noþ
The
number of the registrant’s common shares, $0.01 par value, outstanding as of
August 29, 2008, was 82,025,708.
FORM
10-Q
FOR
THE FISCAL QUARTER ENDED AUGUST 2, 2008
TABLE
OF CONTENTS
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Page
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2
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2
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a)
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2
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b)
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3
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c)
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4
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d)
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5
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e)
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6
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13
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19
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20
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20
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20
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20
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20
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20
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21
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21
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21
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22
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Consolidated
Statements of Operations (Unaudited)
(In
thousands, except per share amounts)
|
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
|
August
2, 2008
|
|
|
August
4, 2007
|
|
|
August
2, 2008
|
|
|
August
4, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,105,189 |
|
|
$ |
1,084,891 |
|
|
$ |
2,256,778 |
|
|
$ |
2,213,290 |
|
|
Cost
of sales
|
|
|
670,385 |
|
|
|
663,817 |
|
|
|
1,358,183 |
|
|
|
1,345,303 |
|
|
Gross
margin
|
|
|
434,804 |
|
|
|
421,074 |
|
|
|
898,595 |
|
|
|
867,987 |
|
|
Selling
and administrative expenses
|
|
|
370,885 |
|
|
|
365,823 |
|
|
|
757,741 |
|
|
|
748,509 |
|
|
Depreciation
expense
|
|
|
20,458 |
|
|
|
21,828 |
|
|
|
39,236 |
|
|
|
43,592 |
|
|
Operating
profit
|
|
|
43,461 |
|
|
|
33,423 |
|
|
|
101,618 |
|
|
|
75,886 |
|
|
Interest
expense
|
|
|
(1,106 |
) |
|
|
(105 |
) |
|
|
(2,518 |
) |
|
|
(197 |
) |
|
Interest
and investment income
|
|
|
14 |
|
|
|
1,592 |
|
|
|
26 |
|
|
|
4,602 |
|
|
Income
from continuing operations before income taxes
|
|
|
42,369 |
|
|
|
34,910 |
|
|
|
99,126 |
|
|
|
80,291 |
|
|
Income
tax expense
|
|
|
16,222 |
|
|
|
12,775 |
|
|
|
38,493 |
|
|
|
29,132 |
|
|
Income
from continuing operations
|
|
|
26,147 |
|
|
|
22,135 |
|
|
|
60,633 |
|
|
|
51,159 |
|
|
Income
(loss) from discontinued operations, net of tax expense (benefit) of
$(73), $795, $(59), and $629, respectively
|
|
|
(122 |
) |
|
|
1,249 |
|
|
|
(99 |
) |
|
|
989 |
|
|
Net
income
|
|
$ |
26,025 |
|
|
$ |
23,384 |
|
|
$ |
60,534 |
|
|
$ |
52,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings
per common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.32 |
|
|
$ |
0.21 |
|
|
$ |
0.75 |
|
|
$ |
0.47 |
|
|
Discontinued
operations
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
0.01 |
|
|
|
|
$ |
0.32 |
|
|
$ |
0.22 |
|
|
$ |
0.75 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.32 |
|
|
$ |
0.21 |
|
|
$ |
0.74 |
|
|
$ |
0.47 |
|
|
Discontinued
operations
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
0.01 |
|
|
|
|
$ |
0.32 |
|
|
$ |
0.22 |
|
|
$ |
0.74 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,772 |
|
|
|
106,490 |
|
|
|
80,937 |
|
|
|
108,204 |
|
|
Dilutive
effect of share-based awards
|
|
|
1,196 |
|
|
|
1,262 |
|
|
|
1,027 |
|
|
|
1,497 |
|
|
Diluted
|
|
|
81,968 |
|
|
|
107,752 |
|
|
|
81,964 |
|
|
|
109,701 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Balance Sheets
(In
thousands, except par values)
|
|
|
(Unaudited)
August
2, 2008
|
|
|
February
2,
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
43,521 |
|
|
$ |
37,131 |
|
|
Inventories
|
|
|
698,392 |
|
|
|
747,942 |
|
|
Deferred
income taxes
|
|
|
53,040 |
|
|
|
53,178 |
|
|
Other
current assets
|
|
|
69,956 |
|
|
|
52,859 |
|
|
Total
current assets
|
|
|
864,909 |
|
|
|
891,110 |
|
|
Property
and equipment - net
|
|
|
495,521 |
|
|
|
481,366 |
|
|
Deferred
income taxes
|
|
|
48,034 |
|
|
|
51,524 |
|
|
Other
assets
|
|
|
22,044 |
|
|
|
19,815 |
|
|
Total
assets
|
|
$ |
1,430,508 |
|
|
$ |
1,443,815 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
269,281 |
|
|
$ |
260,272 |
|
|
Property,
payroll, and other taxes
|
|
|
70,153 |
|
|
|
65,260 |
|
|
Accrued
operating expenses
|
|
|
55,115 |
|
|
|
62,978 |
|
|
Insurance
reserves
|
|
|
35,919 |
|
|
|
37,762 |
|
|
Accrued
salaries and wages
|
|
|
32,409 |
|
|
|
37,531 |
|
|
Income
taxes payable
|
|
|
- |
|
|
|
36,541 |
|
|
Total
current liabilities
|
|
|
462,877 |
|
|
|
500,344 |
|
|
Long-term
obligations
|
|
|
147,700 |
|
|
|
163,700 |
|
|
Deferred
rent
|
|
|
31,216 |
|
|
|
35,955 |
|
|
Insurance
reserves
|
|
|
44,550 |
|
|
|
45,092 |
|
|
Unrecognized
tax benefits
|
|
|
27,221 |
|
|
|
25,353 |
|
|
Other
liabilities
|
|
|
35,465 |
|
|
|
34,885 |
|
|
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 81,138 shares and 82,682 shares,
respectively
|
|
|
1,175 |
|
|
|
1,175 |
|
|
Treasury
shares - 36,357 shares and 34,813 shares, respectively, at
cost
|
|
|
(808,498 |
) |
|
|
(784,718 |
) |
|
Additional
paid-in capital
|
|
|
497,055 |
|
|
|
490,959 |
|
|
Retained
earnings
|
|
|
997,971 |
|
|
|
937,571 |
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(6,224 |
) |
|
|
(6,501 |
) |
|
Total
shareholders' equity
|
|
|
681,479 |
|
|
|
638,486 |
|
|
Total
liabilities and shareholders' equity
|
|
|
1,430,508 |
|
|
$ |
1,443,815 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Shareholders’ Equity (Unaudited)
|
|
|
Common
|
|
|
Treasury
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
|
Accumulated
Other 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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
52,148 |
|
|
|
- |
|
|
|
52,148 |
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of pension, net of tax of $(162)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
259 |
|
|
|
259 |
|
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
52,407 |
|
|
Adoption
of FIN No. 48
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,215 |
) |
|
|
- |
|
|
|
(2,215 |
) |
|
Purchases
of common shares
|
|
|
(10,797 |
) |
|
|
- |
|
|
|
10,797 |
|
|
|
(331,119 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(331,119 |
) |
|
Exercise
of stock options
|
|
|
2,526 |
|
|
|
- |
|
|
|
(2,526 |
) |
|
|
41,121 |
|
|
|
(8,092 |
) |
|
|
- |
|
|
|
- |
|
|
|
33,029 |
|
|
Restricted
shares awarded
|
|
|
284 |
|
|
|
- |
|
|
|
(284 |
) |
|
|
6,596 |
|
|
|
(6,596 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Tax
benefit from share-based awards
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,538 |
|
|
|
- |
|
|
|
- |
|
|
|
18,538 |
|
|
Sale
of treasury shares used for deferred compensation plan
|
|
|
68 |
|
|
|
- |
|
|
|
(68 |
) |
|
|
693 |
|
|
|
1,311 |
|
|
|
- |
|
|
|
- |
|
|
|
2,004 |
|
|
Share-based
employee compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,707 |
|
|
|
- |
|
|
|
- |
|
|
|
4,707 |
|
|
Balance
- August 4, 2007
|
|
|
101,714 |
|
|
|
1,175 |
|
|
|
15,781 |
|
|
|
(406,891 |
) |
|
|
487,186 |
|
|
|
831,258 |
|
|
|
(5,674 |
) |
|
|
907,054 |
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
106,313 |
|
|
|
- |
|
|
|
106,313 |
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of pension, net of tax of $(766)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
987 |
|
|
|
987 |
|
|
Valuation
adjustment of pension, net of tax of $1,245
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,814 |
) |
|
|
(1,814 |
) |
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
105,486 |
|
|
Purchases
of common shares
|
|
|
(19,262 |
) |
|
|
- |
|
|
|
19,262 |
|
|
|
(383,792 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(383,792 |
) |
|
Exercise
of stock options
|
|
|
216 |
|
|
|
- |
|
|
|
(216 |
) |
|
|
5,825 |
|
|
|
(2,931 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,894 |
|
|
Restricted
shares awarded
|
|
|
2 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
66 |
|
|
|
(66 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Tax
benefit from share-based awards
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,283 |
|
|
|
- |
|
|
|
- |
|
|
|
1,283 |
|
|
Sale
of treasury shares used for deferred compensation plan
|
|
|
12 |
|
|
|
- |
|
|
|
(12 |
) |
|
|
74 |
|
|
|
287 |
|
|
|
- |
|
|
|
- |
|
|
|
361 |
|
|
Share-based
employee compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,200 |
|
|
|
- |
|
|
|
|
|
|
|
5,200 |
|
|
Balance
- February 2, 2008
|
|
|
82,682 |
|
|
|
1,175 |
|
|
|
34,813 |
|
|
|
(784,718 |
) |
|
|
490,959 |
|
|
|
937,571 |
|
|
|
(6,501 |
) |
|
|
638,486 |
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
60,534 |
|
|
|
- |
|
|
|
60,534 |
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of pension, net of tax of $(165)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
237 |
|
|
|
237 |
|
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
60,771 |
|
|
Adoption
of SFAS No. 158 - measurement date
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(134 |
) |
|
|
40 |
|
|
|
(94 |
) |
|
Purchases
of common shares
|
|
|
(2,170 |
) |
|
|
- |
|
|
|
2,170 |
|
|
|
(37,508 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(37,508 |
) |
|
Exercise
of stock options
|
|
|
611 |
|
|
|
- |
|
|
|
(611 |
) |
|
|
13,593 |
|
|
|
(4,938 |
) |
|
|
- |
|
|
|
- |
|
|
|
8,655 |
|
|
Restricted
shares awarded
|
|
|
2 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
40 |
|
|
|
(40 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Tax
benefit from share-based awards
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,367 |
|
|
|
- |
|
|
|
- |
|
|
|
3,367 |
|
|
Sale
of treasury shares used for deferred compensation plan
|
|
|
13 |
|
|
|
- |
|
|
|
(13 |
) |
|
|
95 |
|
|
|
257 |
|
|
|
- |
|
|
|
- |
|
|
|
352 |
|
|
Share-based
employee compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,450 |
|
|
|
- |
|
|
|
- |
|
|
|
7,450 |
|
|
Balance
- August 2, 2008
|
|
|
81,138 |
|
|
$ |
1,175 |
|
|
|
36,357 |
|
|
$ |
(808,498 |
) |
|
$ |
497,055 |
|
|
$ |
997,971 |
|
|
$ |
(6,224 |
) |
|
$ |
681,479 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
|
August
2, 2008
|
|
|
August
4, 2007
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
60,534 |
|
|
$ |
52,148 |
|
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
37,092 |
|
|
|
40,718 |
|
|
Deferred
income taxes
|
|
|
3,525 |
|
|
|
(3,396 |
) |
|
Loss
on disposition of equipment
|
|
|
1,020 |
|
|
|
1,394 |
|
|
KB
Toys matters
|
|
|
- |
|
|
|
(1,342 |
) |
|
Non-cash
share-based compensation expense
|
|
|
7,450 |
|
|
|
4,707 |
|
|
Pension
|
|
|
(197 |
) |
|
|
956 |
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
49,550 |
|
|
|
44,347 |
|
|
Accounts
payable
|
|
|
9,009 |
|
|
|
15,393 |
|
|
Current
income taxes
|
|
|
(49,659 |
) |
|
|
(31,891 |
) |
|
Other
current assets
|
|
|
(3,056 |
) |
|
|
(5,269 |
) |
|
Other
current liabilities
|
|
|
(10,001 |
) |
|
|
(16,476 |
) |
|
Other
assets
|
|
|
(2,450 |
) |
|
|
(1,211 |
) |
|
Other
liabilities
|
|
|
(2,218 |
) |
|
|
(2,398 |
) |
|
Net
cash provided by operating activities
|
|
|
100,599 |
|
|
|
97,680 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(52,848 |
) |
|
|
(19,775 |
) |
|
Purchase
of short-term investments
|
|
|
- |
|
|
|
(436,040 |
) |
|
Redemption
of short-term investments
|
|
|
- |
|
|
|
436,040 |
|
|
Cash
proceeds from sale of equipment
|
|
|
327 |
|
|
|
377 |
|
|
Other
|
|
|
(1 |
) |
|
|
(13 |
) |
|
Net
cash used in investing activities
|
|
|
(52,522 |
) |
|
|
(19,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term obligations
|
|
|
1,066,900 |
|
|
|
- |
|
|
Payment
of long-term obligations
|
|
|
(1,082,900 |
) |
|
|
- |
|
|
Payment
of capital lease obligations
|
|
|
(553 |
) |
|
|
(158 |
) |
|
Proceeds
from the exercise of stock options
|
|
|
8,655 |
|
|
|
33,029 |
|
|
Excess
tax benefit from share-based awards
|
|
|
3,367 |
|
|
|
18,538 |
|
|
Payment
for treasury shares acquired
|
|
|
(37,508 |
) |
|
|
(304,700 |
) |
|
Treasury
shares sold for deferred compensation plan
|
|
|
352 |
|
|
|
2,004 |
|
|
Net
cash used in financing activities
|
|
|
(41,687 |
) |
|
|
(251,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
6,390 |
|
|
|
(173,018 |
) |
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
37,131 |
|
|
|
281,657 |
|
|
End
of period
|
|
$ |
43,521 |
|
|
$ |
108,639 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest, including capital leases
|
|
$ |
2,582 |
|
|
$ |
19 |
|
|
Cash
paid for income taxes, excluding impact of refunds
|
|
$ |
81,264 |
|
|
$ |
45,529 |
|
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
|
Assets
acquired under capital leases
|
|
$ |
1,670 |
|
|
$ |
2,539 |
|
|
Treasury
shares acquired, but not settled
|
|
$ |
- |
|
|
$ |
26,419 |
|
|
Accrued
property and equipment
|
|
$ |
8,119 |
|
|
$ |
9,029 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes
to Consolidated Financial Statements (Unaudited)
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
All
references in this report to “we,” “us,” or “our” are to Big Lots, Inc. and its
subsidiaries. We are the nation’s largest broadline closeout
retailer. At August 2, 2008, we operated 1,355 stores in 47
states. We manage our business on the basis of one segment, broadline
closeout retailing. 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 our fourth fiscal
quarter. 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”). The contents of our websites are not part of this
report.
The
accompanying consolidated financial statements and these notes have been
prepared in accordance with the rules and regulations of the SEC for interim
financial information. The consolidated financial statements reflect all normal
recurring adjustments which management believes are necessary to present fairly
our financial condition, results of operations, and cash flows for all periods
presented. These statements, however, do not include all information necessary
for a complete presentation of financial position, results of operations, and
cash flows in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Interim results may not
necessarily be indicative of results that may be expected for, or actually
result during, any other interim period or for the year as a
whole. The accompanying consolidated financial statements and these
notes should be read in conjunction with the audited consolidated financial
statements and notes included in our Annual Report on Form 10-K for the fiscal
year ended February 2, 2008 (“2007 Form 10-K”).
Fiscal
Periods
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. Fiscal year 2008 (“2008”)
is comprised of the 52 weeks that began on February 3, 2008 and will end 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. The fiscal
quarters ended August 2, 2008 (“second quarter of 2008”) and August 4, 2007
(“second quarter of 2007”) were both comprised of 13 weeks. The year
to date periods ended August 2, 2008 (“year to date 2008”) and August 4, 2007
(“year to date 2007”) were both comprised of 26 weeks.
Selling
and Administrative Expenses
Selling
and administrative expenses include store expenses (such as payroll and
occupancy costs), costs related to warehousing, distribution and outbound
transportation to our stores, advertising, purchasing, insurance and
insurance-related costs, non-income taxes, and overhead costs. Our
selling and administrative expense rate may not be comparable to the selling and
administrative expense rates 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 $44.9 million and $47.0 million for the second quarter of 2008 and the
second quarter of 2007, respectively, and $95.3 million and $101.4 million for
the year to date 2008 and year to date 2007, respectively.
Advertising
Expense
Advertising
costs, which are expensed as incurred, consist primarily of television,
internet, in-store point of purchase and print media, and are included in
selling and administrative expenses. Advertising expenses were $20.0
million and $19.7 million for the second quarter of 2008 and the second quarter
of 2007, respectively, and $45.3 million and $46.3 million for the year to date
2008 and the year to date 2007, respectively.
Recent
Accounting Pronouncements
Effective
February 3, 2008, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements, for financial assets and liabilities on a prospective
basis. The Financial Accounting Standards Board (“FASB”) deferred the
effective date of SFAS No. 157 for one year for non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis, which we will adopt effective the beginning
of 2009. SFAS No. 157 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 standard provides 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. SFAS No. 157 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 statement for financial assets and
liabilities did not have any impact on our financial condition, results of
operations, or liquidity. The adoption of this statement for
non-financial assets and liabilities in 2009 is not expected to have a material
impact on our financial condition, results of operations, or
liquidity. See note 2 to these consolidated financial statements for
additional information about our adoption of SFAS No. 157.
Effective
February 3, 2008, we adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R), which require us to measure defined benefit
plan assets and obligations as of the date of our year-end consolidated balance
sheet. Previously, our pension plans 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 the first quarter of 2008 per the
transition guidance of SFAS No. 158. We adopted the funding
recognition provisions of SFAS No. 158 in 2006 to reflect on our balance sheet
the funded status of our qualified defined benefit plan and nonqualified
supplemental defined benefit plan. See note 5 to these financial
statements for additional information about our employee benefit
plans.
Effective
February 3, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 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.
NOTE
2 – FAIR VALUE MEASUREMENTS
SFAS No.
157 establishes a fair value hierarchy that 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.
As of
August 2, 2008, we had $13.8 million of mutual fund assets and a $14.9 million
nonqualified deferred compensation plan liability. The fair value of
the mutual fund assets was based on each funds’ quoted market value per share in
an active market and was a Level 1 valuation. Although we are under
no obligation to fund employees’ nonqualified deferred compensation accounts,
the fair value of the related nonqualified deferred compensation plan
liability was based on the fair value of the mutual fund assets and our common
shares, which represent investment account elections made by the plan
participants. We report our common shares held in connection with the
nonqualified deferred compensation plan as treasury shares. The fair
value measurement of the nonqualified deferred compensation plan liability was a
Level 1 valuation because the liability was measured by quoted prices in an
active market.
NOTE
3 – SHAREHOLDERS’ EQUITY
Earnings per
Share
There
were no adjustments required to be made to the weighted-average common shares
outstanding for purposes of computing basic and diluted earnings per share and
there were no securities outstanding at August 2, 2008 or August 4, 2007 which
were excluded from the computation of earnings per share other than antidilutive
stock options and restricted stock awards. For the second quarter of
2008 and the second quarter of 2007, 1.2 million and 1.5 million, respectively,
of our outstanding stock options were antidilutive and excluded from the
computation of diluted earnings per share. For the year to date 2008 and the
year to date 2007, 2.0 million and 1.3 million, respectively, of our outstanding
stock options were antidilutive and excluded from the computation of diluted
earnings per share. Antidilutive stock options are generally
outstanding stock options where the exercise price is greater than the
weighted-average market price of our common shares for the applicable
period. Antidilutive stock options and restricted stock awards are
excluded from the calculation because they decrease the number of diluted shares
outstanding under the treasury share method.
Share
Repurchase Program
In the
first quarter of 2008, we acquired approximately 2.2 million of our outstanding
common shares for $37.5 million, which completed the $150.0 million share
repurchase program previously approved by our Board of Directors that we
announced on November 30, 2007 (collectively with the $600.0 million share
repurchase program approved by our Board of Directors that we announced on March
9, 2007 and completed during the fourth quarter of 2007 referred to as the “2007
Repurchase Programs”). We recorded the shares acquired in the first
quarter of 2008 as treasury shares, at cost, and these shares are available to
meet obligations under our equity compensation plans and for general corporate
purposes.
NOTE
4 – SHARE-BASED PLANS
We have
issued nonqualified stock options and restricted stock awards under our equity
compensation plans approved by our shareholders. Our restricted stock
awards, as described below and in note 7 to the consolidated financial
statements in our 2007 Form 10-K, are expensed over the estimated vesting period
based on the estimated achievement date of the performance objective, and are
reported as nonvested shares as that term is defined in SFAS No.
123(R). We recognized share-based compensation expense of $4.3
million and $2.4 million in the second quarter of 2008 and the second quarter of
2007, respectively and $7.5 million and $4.7 million in the year to date 2008
and the year to date 2007, respectively. The expense in each period
is less than what would have been recognized due to the accelerated vesting of
stock options prior to the adoption of SFAS No. 123(R) (as discussed in more
detail in note 7 to the consolidated financial statements in our 2007 Form
10-K).
The
weighted-average fair value of stock options granted and assumptions used in the
model to estimate the fair value of stock options granted during each of the
respective periods were as follows:
|
|
|
Second
Quarter
|
|
|
Year
to Date
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of stock options granted
|
|
$ |
11.52 |
|
|
$ |
12.63 |
|
|
$ |
8.71 |
|
|
$ |
11.54 |
|
|
Risk-free
interest rate
|
|
|
3.1 |
% |
|
|
4.9 |
% |
|
|
2.2 |
% |
|
|
4.4 |
% |
|
Expected
life (years)
|
|
|
4.2 |
|
|
|
4.4 |
|
|
|
4.3 |
|
|
|
4.4 |
|
|
Expected
volatility
|
|
|
48.9 |
% |
|
|
42.0 |
% |
|
|
48.7 |
% |
|
|
42.5 |
% |
|
Expected
annual forfeiture rate
|
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
A summary
of the stock option activity for the year to date 2008 is as
follows:
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic Value (000's)
|
|
|
Outstanding
stock options at February 2, 2008
|
|
|
4,124,470 |
|
|
$ |
19.20 |
|
|
|
|
|
|
|
|
Granted
|
|
|
930,000 |
|
|
|
21.06 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(85,795 |
) |
|
|
13.20 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(301,540 |
) |
|
|
36.18 |
|
|
|
|
|
|
|
|
Outstanding
stock options at May 3, 2008
|
|
|
4,667,135 |
|
|
$ |
18.58 |
|
|
|
5.6 |
|
|
$ |
46,074 |
|
|
Granted
|
|
|
52,500 |
|
|
|
28.15 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(525,005 |
) |
|
|
14.33 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(15,850 |
) |
|
|
30.11 |
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options at August 2, 2008
|
|
|
4,178,780 |
|
|
$ |
19.20 |
|
|
|
5.6 |
|
|
$ |
50,027 |
|
|
Vested
and expected to vest at August 2, 2008
|
|
|
3,964,401 |
|
|
$ |
19.10 |
|
|
|
5.6 |
|
|
$ |
47,838 |
|
|
Exercisable
at August 2, 2008
|
|
|
1,615,030 |
|
|
$ |
15.67 |
|
|
|
5.0 |
|
|
$ |
25,041 |
|
The stock
options granted in 2008 vest in equal amounts on the first four anniversaries of
the grant date and have a contractual term of seven years. The number
of stock options expected to vest was based on our annual forfeiture rate
assumption.
A summary
of the restricted stock awards activity for the year to date 2008 is as
follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
Restricted
stock awards at February 2, 2008
|
|
|
320,900 |
|
|
$ |
28.72 |
|
|
Granted
|
|
|
370,000 |
|
|
|
21.06 |
|
|
Vested
|
|
|
(1,800 |
) |
|
|
26.43 |
|
|
Forfeited
|
|
|
(7,500 |
) |
|
|
28.73 |
|
|
Restricted
stock awards at May 3, 2008
|
|
|
681,600 |
|
|
$ |
24.57 |
|
|
Granted
|
|
|
37,100 |
|
|
|
29.61 |
|
|
Vested
|
|
|
- |
|
|
|
- |
|
|
Forfeited
|
|
|
(900 |
) |
|
|
23.19 |
|
|
Restricted
stock awards at August 2, 2008
|
|
|
717,800 |
|
|
$ |
24.83 |
|
The
restricted stock awards granted in 2008 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 awards
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 awards
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. The
restricted stock awards will also vest on a prorated basis in the event that the
recipient dies or becomes disabled after we meet the first trigger but before
the lapse of five years. On the grant date, we estimated a three-year
period for vesting of the restricted stock awards granted in 2008 based on the
assumed achievement of the higher financial performance objective. In
the second 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 $0.3 million
of incremental expense in the second quarter of 2008.
The
following activity occurred under our share-based plans during the respective
periods shown:
|
|
|
Second
Quarter
|
|
|
Year
to Date
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intrinsic value of stock options exercised
|
|
$ |
8,871 |
|
|
$ |
3,627 |
|
|
$ |
9,725 |
|
|
$ |
42,508 |
|
|
Total
fair value of restricted stock vested
|
|
|
- |
|
|
|
9,022 |
|
|
|
37 |
|
|
|
11,021 |
|
The total
unearned compensation cost related to all share-based awards outstanding at
August 2, 2008 was approximately $27.9 million. This compensation
cost is expected to be recognized through July 2012 based on existing vesting
terms with the weighted-average remaining expense recognition period being
approximately 2.3 years from August 2, 2008.
NOTE
5 – EMPLOYEE BENEFIT PLANS
We
maintain a qualified defined benefit pension plan and a nonqualified
supplemental defined benefit pension plan covering certain employees whose hire
date was before April 1, 1994.
Weighted-average
assumptions used to determine net periodic pension cost for 2008 and 2007
were:
|
|
|
2008
|
|
|
2007
|
|
|
Discount
rate
|
|
6.5 |
% |
|
5.9 |
% |
|
Rate
of increase in compensation levels
|
|
3.5 |
% |
|
3.5 |
% |
|
Expected
long-term rate of return
|
|
8.5 |
% |
|
8.5 |
% |
|
Measurement
date for plan assets and benefit obligations
|
|
12/31/07
|
|
|
12/31/06
|
|
The
components of net periodic pension cost were as follows:
|
|
|
Second
Quarter
|
|
|
Year
to Date
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost - benefits earned in the period
|
|
$ |
609 |
|
|
$ |
658 |
|
|
$ |
1,219 |
|
|
$ |
1,316 |
|
|
Interest
cost on projected benefit obligation
|
|
|
833 |
|
|
|
788 |
|
|
|
1,666 |
|
|
|
1,575 |
|
|
Expected
investment return on plan assets
|
|
|
(1,005 |
) |
|
|
(1,072 |
) |
|
|
(1,982 |
) |
|
|
(2,144 |
) |
|
Amortization
of actuarial loss
|
|
|
206 |
|
|
|
172 |
|
|
|
412 |
|
|
|
346 |
|
|
Amortization
of prior service cost
|
|
|
(8 |
) |
|
|
34 |
|
|
|
(17 |
) |
|
|
68 |
|
|
Amortization
of transition obligation
|
|
|
4 |
|
|
|
4 |
|
|
|
7 |
|
|
|
7 |
|
|
Net
periodic pension cost
|
|
$ |
639 |
|
|
$ |
584 |
|
|
$ |
1,305 |
|
|
$ |
1,168 |
|
In the
second quarter of 2008 and the year to date 2008, we contributed $0.7 million
and $1.5 million, respectively, to the qualified defined benefit pension
plan. We expect to contribute an additional $1.5 million to the
qualified defined benefit pension plan in the second half of
2008. These contributions are due in part to lower year to date
investment performance than previously expected.
NOTE
6 – INCOME TAXES
The
effective income tax rate for income from continuing operations was 38.3% and
38.8% during the second quarter of 2008 and the year to date 2008,
respectively. The effective income tax rate for income from
continuing operations was 36.6% and 36.3% during the second quarter of 2007 and
the year to date 2007, respectively, and benefited from the settlement of
certain income tax matters, the reduction in a valuation allowance related to a
capital loss carryover, primarily due to realized investment gains and the
effect of nontaxable municipal interest income.
There was
no material change in the net amount of unrecognized tax benefits in the year to
date 2008. We have estimated the reasonably possible expected net
change in unrecognized tax benefits through August 1, 2009 based on 1)
anticipated positions taken in the next 12 months, 2) expected settlements or
payments of uncertain tax positions, and 3) lapses of the applicable statutes of
limitations of unrecognized tax benefits. The estimated net decrease
in unrecognized tax benefits for the next 12 months is approximately $4
million. Actual results may differ materially from this estimate.
NOTE
7 – CONTINGENCIES
In
October 2005, a class action complaint was served upon us for adjudication in
the Superior Court of California, Ventura County, alleging that we violated
certain California wage and hour laws (“Espinosa matter”). The plaintiff seeks
to recover, on her own behalf and on behalf of all other individuals who are
similarly situated, alleged unpaid wages and rest and meal period compensation,
as well as penalties, injunctive and other equitable relief, reasonable
attorneys’ fees and costs. In the third quarter of 2006, we reached a tentative
settlement with the plaintiff concerning the Espinosa matter. On November 6,
2006, the court issued an order granting preliminary approval of the tentative
settlement. On April 30, 2007, the court entered the final order approving the
class action settlement and judgment of dismissal with prejudice. Two
class members whose objections to the settlement were overruled by the court
appealed the final order to the California Court of Appeal, challenging the
settlement. The same two objectors also filed a separate class action
in federal court in the Northern District of California alleging the same class
claims that were tentatively settled through the Espinosa matter. The
federal court stayed the federal action pending resolution of the appeal before
the California Court of Appeal. During the second quarter of 2008,
the objectors dismissed the federal action with prejudice and their
appeal. In the third quarter of 2006, we recorded a pretax charge of
$6.5 million included in selling and administrative expenses for the agreed-upon
settlement amount of the Espinosa matter. We funded the settlement to
the claims administrator in the second quarter of 2008. Administration of the
settlement is ongoing and expected to conclude in the fourth quarter of
2008.
In
November 2004, a civil collective action complaint was filed against us in the
United States District Court for the Eastern District of Louisiana, alleging
that we violated the Fair Labor Standards Act by misclassifying assistant store
managers as exempt employees (“Louisiana matter”). The plaintiffs seek to
recover, on behalf of themselves and all other individuals who are similarly
situated, alleged unpaid overtime compensation, as well as liquidated damages,
attorneys’ fees and costs. On July 5, 2005, the District Court in Louisiana
issued an order conditionally certifying a class of all current and former
assistant store managers who have worked for us since November 23, 2001. As a
result of that order, notice of the lawsuit was sent to approximately 5,500
individuals who had the right to opt-in to the Louisiana matter. As of November
3, 2007, approximately 1,100 individuals had joined the Louisiana matter. We
filed a motion to decertify the class and the motion was denied on August 24,
2007. The trial began on May 7, 2008 and concluded on May 15,
2008. On June 20, 2008, the court issued an Order decertifying the
action and dismissed, without prejudice, the claims of the opt-in plaintiffs.
Remaining before the court are individual claims of approximately 20
named-plaintiffs. We cannot make a determination as to the probability of a loss
contingency resulting from the Louisiana matter or the estimated range of
possible loss; however, the ultimate resolution of this matter could have a
material adverse effect on our financial condition, results of operations, and
liquidity.
In
September 2006, a class action complaint was filed against us in the Superior
Court of California, Los Angeles County, alleging that we violated certain
California wage and hour laws by misclassifying California store managers as
exempt employees ("Seals matter"). The plaintiffs seek to recover, on their own
behalf and on behalf of all other individuals who are similarly situated,
damages for alleged unpaid overtime, unpaid minimum wages, wages not paid upon
termination, improper wage statements, missed rest breaks, missed meal periods,
reimbursement of expenses, loss of unused vacation time, and attorneys’ fees and
costs. The court has not determined whether the case may proceed as a
class action, and has not set any deadlines for class certification or
trial. We cannot make a determination as to the probability of a loss
contingency resulting from this lawsuit or the estimated range of possible loss,
if any. We intend to vigorously defend ourselves against the
allegations levied in this lawsuit; however, the ultimate resolution of this
matter could have a material adverse effect on our financial condition, results
of operations, and liquidity.
In May
2007, two class action complaints were filed against us, one in the Superior
Court of California, Orange County (“Stary matter”), and one in the Superior
Court of California, San Diego County (“Christopher matter”), alleging that we
violated California law by requesting certain customer information in connection
with the return of merchandise for which the customer sought to receive a refund
to a credit card. The plaintiffs seek to recover, on their own behalf
and on behalf of a California statewide class of all other individuals who are
similarly situated, statutory penalties, costs and attorneys' fees and seek
injunctive relief. We believe that substantially all of the purported
class members of the Christopher matter are within the purported class of the
Stary matter. The Stary matter has been transferred to the Superior Court of
California, San Diego County, where it is being coordinated with the
Christopher matter before the same judge. Both matters were stayed
pending the ruling of the California Court of Appeals, Fourth Appellate Division
Three in a similar case involving another retailer. The appellate
court recently ruled in favor of the other retailer, holding that the California
law at issue does not apply to merchandise return transactions. After
the opinion in that matter becomes final and the remittitur issues, which may
not occur for some time, we anticipate seeking the dismissal of the Stary and
Christopher matters based on the appellate court ruling. In the
interim, we will request that both matters remain stayed pending finality and
the remittitur issuing. We cannot make a determination as to the
probability of a loss contingency resulting from these lawsuits or the estimated
range of possible loss, if any. We intend to vigorously defend
ourselves against the allegations levied in these lawsuits; however, the
ultimate resolution of these matters could have a material adverse effect on our
financial condition, results of operations, and liquidity.
In
February 2008, three alleged class action complaints were filed against us by a
California resident (the “Caron matters”). The first was filed in the Superior
Court of California, Orange County. This action is similar in nature to the
Seals matter, which allowed us to successfully coordinate this matter with the
Seals matter in the Superior Court of California, Los Angeles County. The
second and third matters, filed in the United States District Court, Central
District of California, and the Superior Court of California,
Riverside County, respectively, allege that we violated certain California
wage and hour laws for missed meal and rest periods and other wage and hour
claims. The plaintiff seeks to recover, on her own behalf and on
behalf of a California statewide class of all other individuals who are
similarly situated, damages resulting from improper wage statements, missed rest
breaks, missed meal periods, non-payment of wages at termination, reimbursement
of expenses, loss of unused vacation time, and attorneys’ fees and costs. We
believe these two matters overlap and we intend to consolidate the two cases
before one court. The allegations also overlap some portion of the
claims released through the class action settlement in the Espinosa
matter. We cannot make a determination as to the probability of a
loss contingency resulting from this lawsuit or the estimated range of possible
loss, if any. We intend vigorously to defend ourselves against the
allegations levied in this lawsuit; however, the ultimate resolution of this
matter could have a material adverse effect on our financial condition, results
of operations, and liquidity.
We are
involved in other legal actions and claims, including various additional
employment-related matters, arising in the ordinary course of business. We
currently believe that such actions and claims, both individually and in the
aggregate, will be resolved without material adverse effect on our financial
condition, results of operations, or liquidity. However, litigation involves an
element of uncertainty. Future developments could cause these actions
or claims to have a material adverse effect on our financial condition, results
of operations, and liquidity.
NOTE
8 – DISCONTINUED OPERATIONS
In the
second quarter of 2008 and year to date 2008, we recorded $0.2 million, pretax,
as loss from discontinued operations principally due to continuing costs
associated with the stores we closed in 2005 that have lease terms remaining,
which we continue to classify in discontinued operations.
In the
second quarter of 2007, we recorded $2.0 million, pretax, as income from
discontinued operations to reflect favorable settlements of KB Toys lease
obligations. We sold the KB Toys business to KB Acquisition
Corporation in December 2000, but we have certain continuing indemnification and
guarantee obligations with respect to the KB Toys business. See note
11 to the consolidated financial statements and Risk Factors in our 2007 Form
10-K for further discussion of KB Toys matters.
NOTE
9 – BUSINESS SEGMENT DATA
We manage
our business based on one segment, broadline closeout retailing. We
report the following six merchandise categories: Consumables, Home,
Furniture, Hardlines, Seasonal, and Other. The Consumables category
includes the food, health and beauty, plastics, paper, 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.
The
following is net sales data by category:
|
|
|
Second
Quarter
|
|
|
Year
to Date
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
347,805 |
|
|
$ |
320,027 |
|
|
$ |
685,968 |
|
|
$ |
637,228 |
|
|
Home
|
|
|
171,327 |
|
|
|
180,405 |
|
|
|
341,604 |
|
|
|
367,588 |
|
|
Furniture
|
|
|
160,755 |
|
|
|
153,587 |
|
|
|
363,012 |
|
|
|
342,266 |
|
|
Hardlines
|
|
|
152,454 |
|
|
|
154,836 |
|
|
|
288,623 |
|
|
|
299,503 |
|
|
Seasonal
|
|
|
159,063 |
|
|
|
148,704 |
|
|
|
328,617 |
|
|
|
318,905 |
|
|
Other
|
|
|
113,785 |
|
|
|
127,332 |
|
|
|
248,954 |
|
|
|
247,800 |
|
|
Net
sales
|
|
$ |
1,105,189 |
|
|
$ |
1,084,891 |
|
|
$ |
2,256,778 |
|
|
$ |
2,213,290 |
|
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF
THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
The
Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor
for forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the statements. We wish to take advantage of the “safe harbor”
provisions of the Act.
Certain
statements in this report are forward-looking statements within the meaning of
the Act, and such statements are intended to qualify for the protection of the
safe harbor provided by the Act. The words "anticipate," "estimate," "expect,"
"objective," "goal," "project," "intend," "plan," "believe," "will," “should,”
“may,” "target," "forecast," “guidance,” “outlook,” and similar expressions
generally identify forward-looking statements. Similarly, descriptions of our
objectives, strategies, plans, goals or targets are also forward-looking
statements. Forward-looking statements relate to the expectations of management
as to future occurrences and trends, including statements expressing optimism or
pessimism about future operating results or events and projected sales,
earnings, capital expenditures and business strategy. Forward-looking statements
are based upon a number of assumptions concerning future conditions that may
ultimately prove to be inaccurate. Forward-looking statements are and will be
based upon management's then-current views and assumptions regarding future
events and operating performance, and are applicable only as of the dates of
such statements. Although we believe the expectations expressed in
forward-looking statements are based on reasonable assumptions within the bounds
of our knowledge, forward-looking statements, by their nature, involve risks,
uncertainties and other factors, any one or a combination of which could
materially affect our business, financial condition, results of operations or
liquidity.
Forward-looking
statements that we make herein and in other reports and releases are not
guarantees of future performance and actual results may differ materially from
those discussed in such forward-looking statements as a result of various
factors, including, but not limited to, the cost of goods, our inability to
successfully execute strategic initiatives, competitive pressures, economic
pressures on our customers and us, the availability of brand name closeout
merchandise, trade restrictions, freight costs, the risks discussed in the Risk
Factors section of our most recent Annual Report on Form 10-K, and other factors
discussed from time to time in our other filings with the SEC, including
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report
should be read in conjunction with such filings, and you should consider all of
these risks, uncertainties and other factors carefully in evaluating
forward-looking statements.
Readers
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. Readers are advised, however, to consult any further disclosures
we make on related subjects in our public announcements and SEC
filings.
OVERVIEW
The
discussion and analysis presented below should be read in conjunction with the
accompanying consolidated financial statements and related
notes. Each term defined in the notes has the same meaning in this
item and the balance of this report.
The
following are the results from the second quarter of 2008 that we believe are
key indicators of our operating performance when compared to the operating
performance from the second quarter of 2007:
|
|
·
|
Comparable
store sales for stores open at least two years at the beginning of 2008
increased 2.8%.
|
|
|
·
|
Gross
margin dollars increased $13.7
million.
|
|
|
·
|
Selling
and administrative expenses as a percent of sales decreased 10 basis
points to 33.6% of sales versus 33.7% of
sales.
|
|
|
·
|
Depreciation
expense as a percent of sales decreased 10 basis points to 1.9% of sales
versus 2.0% of sales.
|
|
|
·
|
Interest
expense increased to $1.1 million from $0.1 million. Interest
and investment income decreased to less than $0.1 million from $1.6
million.
|
|
|
·
|
Diluted
earnings per share from continuing operations improved to $0.32 per share
compared to $0.21 per share. The $0.11 per share increase was
driven by an increase of income from continuing operations of $4.0 million
and a decrease of 25.8 million in outstanding weighted-average diluted
shares due to share repurchases under the 2007 Repurchase
Programs.
|
|
|
·
|
Net
cash provided by operating activities declined in the second quarter of
2008 primarily due to higher receipts of merchandise inventory and higher
income taxes paid in the second quarter of
2008.
|
|
|
·
|
Average
inventory levels were lower throughout the second quarter of 2008 compared
to the second quarter of 2007 and, combined with the 2.8% increase in
comparable store sales, resulted in a higher inventory turnover rate in
the second quarter of 2008 than the second quarter of
2007.
|
See the
discussion and analysis below for additional details of our operating
results.
STORES
The
following table presents stores opened and closed during the year to date 2008
and the year to date 2007:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Stores
open at the beginning of the fiscal year
|
|
|
1,353 |
|
|
|
1,375 |
|
|
Stores
opened during the period
|
|
|
5 |
|
|
|
3 |
|
|
Stores
closed during the period
|
|
|
(3 |
) |
|
|
(9 |
) |
|
Stores
open at the end of the period
|
|
|
1,355 |
|
|
|
1,369 |
|
RESULTS
OF OPERATIONS
The
following table compares components of our consolidated statements of operations
as a percentage of net sales at the end of each period:
|
|
|
Second
Quarter
|
|
|
Year
to Date
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
|
Cost
of sales
|
|
|
60.7 |
|
|
|
61.2 |
|
|
|
60.2 |
|
|
|
60.8 |
|
|
Gross
margin
|
|
|
39.3 |
|
|
|
38.8 |
|
|
|
39.8 |
|
|
|
39.2 |
|
|
Selling
and administrative expenses
|
|
|
33.6 |
|
|
|
33.7 |
|
|
|
33.6 |
|
|
|
33.8 |
|
|
Depreciation
expense
|
|
|
1.9 |
|
|
|
2.0 |
|
|
|
1.7 |
|
|
|
2.0 |
|
|
Operating
profit
|
|
|
3.9 |
|
|
|
3.1 |
|
|
|
4.5 |
|
|
|
3.4 |
|
|
Interest
expense
|
|
|
(0.1 |
) |
|
|
0.0 |
|
|
|
(0.1 |
) |
|
|
0.0 |
|
|
Interest
and investment income
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.2 |
|
|
Income
from continuing operations before income taxes
|
|
|
3.8 |
|
|
|
3.2 |
|
|
|
4.4 |
|
|
|
3.6 |
|
|
Income
tax expense
|
|
|
1.5 |
|
|
|
1.2 |
|
|
|
1.7 |
|
|
|
1.3 |
|
|
Income
from continuing operations
|
|
|
2.4 |
|
|
|
2.0 |
|
|
|
2.7 |
|
|
|
2.3 |
|
|
Discontinued
operations
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
Net
income
|
|
|
2.4 |
% |
|
|
2.2 |
% |
|
|
2.7
|
% |
|
|
2.4
|
% |
SECOND
QUARTER OF 2008 COMPARED TO SECOND QUARTER OF 2007
Net
Sales
Net sales
increased 1.9% to $1,105.2 million for the second quarter of 2008, compared to
$1,084.9 million for the second quarter of 2007. The $20.3 million
increase in net sales was due to the comparable store sales increase of 2.8% for
stores open at least two years at the beginning of 2008, partially offset by
fewer open stores. Comparable store sales in the second quarter of
2008 were primarily driven by an increase in the value of the average basket as
our “raise the ring” strategy continued to deliver positive
results. From a merchandising perspective, Consumables, Seasonal, and
Furniture were the best performing categories. The Consumables
category comparable store sales increased in the low-double digits with strong
performance in each of its departments. The Seasonal category,
primarily the lawn & garden and summer departments, experienced comparable
store sales increases in the high-single digits. The Furniture
category continued to be a leading category driven by comparable store sales
increases in the mid-single digits with particular strength in the mattress
department. Additionally, sales from a drugstore liquidation deal and
our home event during the second quarter of 2008 essentially offset a large
closeout deal from a major home furnishings retailer during the second quarter
of 2007. Sales and comparable store sales declined in the Home and
Hardlines categories.
Net sales
by merchandise category, net sales by merchandise category as a percentage of
total net sales, and net sales change in dollars and percentage from the second
quarter of 2008 to the second quarter of 2007 were as follows:
|
|
|
Second
Quarter
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
347,805 |
|
|
|
31.5
|
% |
|
$ |
320,027 |
|
|
|
29.5
|
% |
|
$ |
27,778 |
|
|
|
8.7
|
% |
|
Home
|
|
|
171,327 |
|
|
|
15.5 |
|
|
|
180,405 |
|
|
|
16.6 |
|
|
|
(9,078 |
) |
|
|
(5.0 |
) |
|
Furniture
|
|
|
160,755 |
|
|
|
14.5 |
|
|
|
153,587 |
|
|
|
14.2 |
|
|
|
7,168 |
|
|
|
4.7 |
|
|
Hardlines
|
|
|
152,454 |
|
|
|
13.8 |
|
|
|
154,836 |
|
|
|
14.3 |
|
|
|
(2,382 |
) |
|
|
(1.5 |
) |
|
Seasonal
|
|
|
159,063 |
|
|
|
14.4 |
|
|
|
148,704 |
|
|
|
13.7 |
|
|
|
10,359 |
|
|
|
7.0 |
|
|
Other
|
|
|
113,785 |
|
|
|
10.3 |
|
|
|
127,332 |
|
|
|
11.7 |
|
|
|
(13,547 |
) |
|
|
(10.6 |
) |
|
Net
sales
|
|
$ |
1,105,189 |
|
|
|
100.0
|
% |
|
$ |
1,084,891 |
|
|
|
100.0
|
% |
|
$ |
20,298 |
|
|
|
1.9
|
% |
Gross
Margin
Gross
margin increased to $434.8 million for the second quarter of 2008, compared to
$421.1 million for the second quarter of 2007, an increase of $13.7 million or
3.3%. The increase in gross margin was principally due to increased net sales of
$20.3 million and a higher gross margin rate. Gross margin as a
percentage of net sales increased to 39.3% in the second quarter of 2008
compared to 38.8% in the second quarter of 2007. The gross margin rate increase
was principally due to higher initial markup on merchandise.
Selling
and Administrative Expenses
Selling
and administrative expenses increased to $370.9 million for the second quarter
of 2008, compared to $365.8 million for the second quarter of 2007, an increase
of $5.1 million or 1.4%. As a percentage of net sales, selling and
administrative expenses were 33.6% for the second quarter of 2008 compared to
33.7% for the second quarter of 2007. The increase in selling and
administrative expenses was principally due to higher insurance and
insurance-related costs, share-based compensation expense, and
utilities. Partially offsetting these items were lower store payroll,
lower distribution and outbound transportation costs, and amortization of
proceeds related to an early lease termination buy out. Distribution
and outbound transportation costs, which are included in selling and
administrative expenses, decreased to $44.9 million for the second quarter of
2008 compared to $47.0 million for the second quarter of 2007. As a percentage
of net sales, distribution and outbound transportation costs decreased by 20
basis points to 4.1% of net sales in the second quarter of 2008 as compared to
4.3% for the second quarter of 2007. The rate decrease was primarily a result of
lower inventory levels, fewer cartons processed through our distribution centers
due to the “raise the ring” merchandising strategy, and more one-way trips to
the stores resulting in a higher shipping cost per mile but fewer miles
traveled. During the second quarter of 2008, we completed the
integration of our Ohio furniture distribution operations into our regional
distribution centers, which, beginning in July 2008, is expected to result in
distribution and outbound transportation savings when compared to the results of
prior periods. Partially offsetting these favorable distribution and outbound
transportation items was the impact of higher fuel prices.
Depreciation
Expense
Depreciation
expense for the second quarter of 2008 was $20.5 million compared to $21.8
million for the second quarter of 2007. The $1.3 million decrease in
depreciation expense was primarily due to the low level of capital expenditures
in 2006 and 2007 and a decrease in depreciation expense related to the 5-year
service life store remodel program assets, which were placed in service in 2002
and 2003. Capital expenditures in 2006 and 2007 were lower than
previous years principally because of fewer new store openings. In
2008 the increase in capital expenditures partially offsets these items and was
driven by the completion of installation of our new point-of-sale register
system, hardware, development and licensing cost associated with our SAP for
Retail system implementation, and the acquisition of two store properties we
were previously leasing.
Interest
Expense
Interest
expense increased to $1.1 million for the second quarter of 2008, compared to
$0.1 million for the second quarter of 2007. The increase was
principally due to increased weighted-average borrowings, which were $131.6
million in the second quarter of 2008 and zero in the second quarter of
2007. Higher borrowings in the current year were the result of
the $750 million of common share repurchases under our 2007 Repurchase
Programs.
Interest
and Investment Income
Interest
and investment income was less than $0.1 million for the second quarter of 2008,
compared to $1.6 million for the second quarter of 2007. The decrease
in interest and investment income was principally due to lower levels of cash
and cash equivalents available for investment in the second quarter of 2008
resulting from the $750 million of common share repurchases under our 2007
Repurchase Programs.
Income
Taxes
The
effective income tax rate for the second quarter of 2008 for income from
continuing operations was 38.3%. The effective income tax rate for
the second quarter of 2007 for income from continuing operations was 36.6%, and
was comparably lower due to more favorable settlement of certain income tax
matters and the effect of nontaxable municipal interest income.
YEAR
TO DATE 2008 COMPARED TO YEAR TO DATE 2007
Net
Sales
Net sales
increased 2.0% to $2,256.8 million for the year to date 2008, compared to
$2,213.3 million for the year to date 2007. The $43.5 million
increase in net sales was due to an increase of 3.1% in comparable store sales
for stores open at least two years at the beginning of 2008, partially offset by
fewer open stores. Comparable store sales for the year to date 2008
were driven by an increase in the value of the average basket as our “raise the
ring” merchandise strategy continued to deliver positive
results. From a merchandising perspective, Consumables, Furniture and
Seasonal were the best performing categories with comparable store sales for
these categories increasing in the mid-single digits to high-single
digits. The Consumables category sales performance produced positive
results across most of its departments. The Furniture category sales
performance was driven by the mattress and casegoods departments. The
Seasonal category was strongest in the lawn & garden and summer
departments. Sales and comparable store sales declined in the Home
and Hardlines categories.
Net sales
by merchandise category, net sales by merchandise category as a percentage of
total net sales, and net sales change in dollars and percentage from the year to
date 2008 to the year to date 2007 were as follows:
|
|
|
Year
to Date
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
685,968 |
|
|
|
30.4
|
% |
|
$ |
637,228 |
|
|
|
28.8
|
% |
|
$ |
48,740 |
|
|
|
7.6
|
% |
|
Home
|
|
|
341,604 |
|
|
|
15.1 |
|
|
|
367,588 |
|
|
|
16.6 |
|
|
|
(25,984 |
) |
|
|
(7.1 |
) |
|
Furniture
|
|
|
363,012 |
|
|
|
16.1 |
|
|
|
342,266 |
|
|
|
15.5 |
|
|
|
20,746 |
|
|
|
6.1 |
|
|
Hardlines
|
|
|
288,623 |
|
|
|
12.8 |
|
|
|
299,503 |
|
|
|
13.5 |
|
|
|
(10,880 |
) |
|
|
(3.6 |
) |
|
Seasonal
|
|
|
328,617 |
|
|
|
14.6 |
|
|
|
318,905 |
|
|
|
14.4 |
|
|
|
9,712 |
|
|
|
3.0 |
|
|
Other
|
|
|
248,954 |
|
|
|
11.0 |
|
|
|
247,800 |
|
|
|
11.2 |
|
|
|
1,154 |
|
|
|
0.5 |
|
|
Net
sales
|
|
$ |
2,256,778 |
|
|
|
100.0
|
% |
|
$ |
2,213,290 |
|
|
|
100.0
|
% |
|
$ |
43,488 |
|
|
|
2.0
|
% |
Gross
Margin
Gross
margin increased to $898.6 million for the year to date 2008, compared to $868.0
million for the year to date 2007, an increase of $30.6 million or 3.5%. The
increase in gross margin was principally due to increased net sales of $43.5
million and a higher gross margin rate. Gross margin as a percentage
of net sales increased to 39.8% in the year to date 2008 compared to 39.2% in
the year to date 2007. The gross margin rate increase was principally due to
higher initial markup on merchandise and favorable shrink results related to
physical inventories taken in 2008.
Selling
and Administrative Expenses
Selling
and administrative expenses increased to $757.7 million for the year to date
2008, compared to $748.5 million for the year to date 2007, an increase of $9.2
million or 1.2%. As a percentage of net sales, selling and
administrative expenses were 33.6% for the year to date 2008 compared to 33.8%
for the year to date 2007. The increase in selling and administrative
expenses was primarily due to higher bonus expense, insurance proceeds we
received in 2007 relating to hurricanes occurring in 2005, legal fees related to
the Louisiana matter (see note 7 to the accompanying consolidated financial
statements for further discussion of the Louisiana matter), higher insurance and
insurance-related costs, higher utilities, and higher share-based compensation
expense. Partially offsetting these items were lower store
payroll, lower distribution and outbound transportation costs, and amortization
of proceeds related to an early lease termination buy
out. Distribution and outbound transportation costs, which are
included in selling and administrative expenses, decreased to $95.3 million for
the year to date 2008 compared to $101.4 million for the year to date 2007. As a
percentage of net sales, distribution and outbound transportation costs
decreased by 40 basis points to 4.2% of net sales for the year to date 2008 as
compared to 4.6% of net sales for the year to date 2007. The rate decrease was
primarily a result of lower inventory levels, fewer cartons processed through
the system due to the “raise the ring” merchandising strategy, and more one-way
trips to the stores resulting in a higher shipping cost per mile but fewer miles
traveled. During the second quarter of 2008, we completed the
integration of our Ohio furniture distribution operations into our regional
distribution centers, which, beginning in July 2008, is expected to result in
distribution and outbound transportation savings when compared to the results of
prior periods. Partially offsetting these favorable distribution and
outbound transportation items was the impact of higher fuel prices.
Depreciation
Expense
Depreciation
expense for the year to date 2008 was $39.2 million compared to $43.6 million
for the year to date 2007. The $4.4 million decrease in depreciation expense was
primarily due to the low level of capital expenditures in 2006 and 2007 and a
decrease in depreciation expense related to the 5-year service life store
remodel program assets, which were placed in service in 2002 and 2003. Capital
expenditures in 2006 and 2007 were lower than previous years principally because
of fewer new store openings. In 2008, the increase in capital
expenditures partially offsets these items and was driven by the completion of
installation of our new point-of-sale register system, hardware, development and
licensing cost associated with our SAP for Retail system implementation, and the
acquisition of two store properties we were previously leasing.
Interest
Expense
Interest
expense increased to $2.5 million for the year to date 2008, compared to $0.2
million for the year to date 2007. The increase was principally
due to increased weighted-average borrowings, which were $135.4 million in the
year to date 2008 and zero in the year to date 2007. Higher
borrowings in the current year were the result of the $750 million of common
share repurchases under our 2007 Repurchase Programs.
Interest
and Investment Income
Interest
and investment income was less than $0.1 million for the year to date 2008,
compared to $4.6 million for the year to date 2007. The decrease in
interest and investment income was principally due to lower levels of cash and
cash equivalents available for investment in the year to date 2008 driven by the
$750 million of common share repurchases under our 2007 Repurchase
Programs.
Income
Taxes
The
effective income tax rate for the year to date 2008 for income from continuing
operations was 38.8%. The effective income tax rate for the year to
date 2007 for income from continuing operations was 36.3%, and was comparably
lower due to more favorable settlement of certain income tax matters and the
reduction in a valuation allowance related to a capital loss carryover,
primarily due to realized investment gains, and the effect of nontaxable
municipal interest income.
Capital
Resources and Liquidity
The
primary source of our liquidity is cash flows from operations and, as necessary,
borrowings under our $500.0 million unsecured credit facility entered into in
2004 (“Credit Agreement”). We use the Credit Agreement, as necessary,
to provide funds for ongoing and seasonal working capital, capital expenditures,
share repurchase programs, and other expenditures. At August 2, 2008,
borrowings available under the Credit Agreement were $299.4 million, after
taking into account outstanding borrowings of $147.7 million and the reduction
in availability resulting from outstanding letters of credit totaling $52.9
million. The weighted-average interest rate on our outstanding
borrowings at August 2, 2008 was 3.12%. We anticipate that total
indebtedness under the Credit Agreement will be less than $400 million through
the end of the third quarter of 2008. Our borrowings have
historically peaked in the third fiscal quarter as we build inventory levels
prior to the Christmas holiday selling season. Given the seasonality of our
business, the amount of borrowings under the 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 our peak-selling season. For additional information
about the Credit Agreement, see note 3 to the consolidated financial statements
in our 2007 Form 10-K.
Net cash
provided by operating activities was $100.6 million for the year to date 2008
compared to net cash provided by operating activities of $97.7 million for the
year to date 2007. The increase in cash provided by operating
activities was driven by higher net income and a higher inventory turnover
rate. We paid income taxes of $81.2 million and $45.4 million, net of
refunds, in the year to date 2008 and the year to date 2007,
respectively. The increase in the year to date 2008 income taxes paid
was caused by improved operating performance and a lower current year tax
deduction due to a decline in stock option exercises during 2008.
Net cash
used in investing activities, which was principally comprised of capital
expenditures, was $52.5 million for the year to date 2008 compared to $19.4
million for the year to date 2007. The increase in capital
expenditures was driven by the completion of installation of our new
point-of-sale register system, hardware, development and licensing cost
associated with our SAP for Retail system implementation, and the acquisition of
two store properties we were previously leasing.
Net cash
used in financing activities was $41.7 million for the year to date 2008,
compared to $251.3 million for the year to date 2007. In the year to
date 2008, we acquired approximately 2.2 million of our common shares for $37.5
million completing the 2007 Repurchase Programs. In the year to date
2007, we disbursed $302.3 million for the acquisition of our common shares under
our 2007 Repurchase Programs, partially offset by $33.0 million of proceeds from
the exercise of stock options and $18.5 million for the excess tax benefit on
share-based awards.
We
continue to believe that we have, or, if necessary, have the ability to obtain,
adequate resources to fund ongoing and seasonal working capital requirements,
future capital expenditures, development of new projects, and currently maturing
obligations. Additionally, management is not aware of any current trends,
events, demands, commitments, or uncertainties which reasonably can be expected
to have a material impact on our capital resources or liquidity.
CRITICAL
ACCOUNTING POLICIES AND 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. On an ongoing
basis, management evaluates its estimates, judgments, and assumptions, and bases
its estimates, judgments, and assumptions on historical experience, current
trends, and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates,
judgments, and assumptions. See note 1 to our consolidated financial
statements included in the 2007 Form 10-K for additional information about our
accounting policies.
The
estimates, judgments, and assumptions that have a higher degree of inherent
uncertainty and require the most significant judgments are outlined in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contained in our 2007 Form 10-K. Had we used estimates,
judgments, and assumptions different from any of those discussed in our 2007
Form 10-K, our financial condition, results of operations, and liquidity for the
current period could have been materially different from those
presented.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
We are
subject to market risk from exposure to changes in interest rates on investments
that we make from time to time and on borrowings under the Credit
Agreement. We had no fixed rate long-term debt at August 2, 2008.
An increase of 1% in our variable interest rate on our outstanding
debt would not have a material effect on our financial condition, results of
operations, or liquidity.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of
the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have each concluded that
such disclosure controls and procedures were effective as of the end of the
period covered by this report.
Changes
in Internal Control over Financial Reporting
During
the second quarter of 2008, we completed the implementation of a new
point-of-sale register system in all of our stores. The
implementation of the new system required us to modify our internal control over
financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act). There were no other changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
No
response is required under Item 103 of Regulation S-K. For a discussion of
certain litigated matters, see note 7 to the accompanying consolidated financial
statements.
During
the second quarter of 2008, there were no material changes to the risk factors
previously disclosed in our 2007 Form 10-K.
None.
Item 3. Defaults Upon Senior Securities
None.
We held
our 2008 Annual Meeting of Shareholders (“2008 Annual Meeting”) on May 29,
2008. Our shareholders elected to the Board of Directors each of the
nine nominees identified in our 2008 proxy statement, with votes cast as
follows:
|
Director
|
|
For
|
|
|
Withheld
|
|
|
Jeffrey
P. Berger
|
|
|
69,290,586 |
|
|
|
1,189,858 |
|
|
Sheldon
M. Berman
|
|
|
69,048,753 |
|
|
|
1,431,691 |
|
|
Steven
S. Fishman
|
|
|
68,678,466 |
|
|
|
1,801,978 |
|
|
David
T. Kollat
|
|
|
66,012,183 |
|
|
|
4,468,261 |
|
|
Brenda
J. Lauderback
|
|
|
68,843,808 |
|
|
|
1,636,636 |
|
|
Philip
E. Mallott
|
|
|
69,308,454 |
|
|
|
1,171,990 |
|
|
Russell
Solt
|
|
|
64,985,029 |
|
|
|
5,522,415 |
|
|
James
R. Tener
|
|
|
64,957,239 |
|
|
|
5,523,205 |
|
|
Dennis
B. Tishkoff
|
|
|
64,728,572 |
|
|
|
5,751,872 |
|
At our
2008 Annual Meeting, our shareholders also approved amendments to the Big Lots
2005 Long-Term Incentive Plan, with votes cast as follows:
|
For
|
|
|
54,467,300 |
|
|
Against
|
|
|
10,003,386 |
|
|
Abstentions
|
|
|
713,810 |
|
Also at
our 2008 Annual Meeting, our shareholders ratified the appointment of Deloitte
& Touche LLP as our independent auditor for 2008, with votes cast as
follows:
|
For
|
|
|
69,191,802 |
|
|
Against
|
|
|
615,170 |
|
|
Abstentions
|
|
|
673,471 |
|
|
Broker
Non-Votes
|
|
|
5,295,948 |
|
No other
matters were submitted to a vote of our shareholders at our 2008 Annual Meeting.
None.
Exhibits
marked with an asterisk (*) are filed herewith.
| |
Exhibit
No.
|
|
Document
|
| |
|
|
|
| |
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
| |
|
|
|
| |
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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Dated:
September 9, 2008
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BIG
LOTS, INC.
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By: /s/ Joe R.
Cooper
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Joe
R. Cooper
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Senior
Vice President and
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Chief
Financial Officer
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(Principal
Financial Officer, Principal Accounting Officer
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and
Duly Authorized Officer)
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