In May 2001, Big Lots, Inc. was incorporated in Ohio and was the surviving entity in a merger with Consolidated Stores Corporation. By virtue of the merger, Big Lots, Inc. succeeded to all the businesses, properties, assets, and liabilities of Consolidated Stores Corporation.

Our principal executive offices are located at 4900 E. Dublin-Granville Road, Columbus, Ohio 43081, and our telephone number is (614) 278‑6800.

Merchandise

We focus our merchandise strategy on providing outstandingbeing the authority on price and value to Jennifer in all of our merchandise categories. We utilize traditional sourcing methods and in certain merchandise categories also take advantage of closeout channels to enhance our ability to offer outstanding value. We evaluate our product offerings using a rating process that measures the quality, brand, fashion, and value of each item. This process requires us to focus our product offering decisions based on our customers’customer's expectations and enables us to compare the potential performance of traditionally-sourced merchandise, either domestic or import, to closeout merchandise, which is generally sourced from production overruns, packaging changes, discontinued products, order cancellations, liquidations, returns, and other disruptions in the supply chain of manufacturers. We believe that focusing on our customers’ expectations has improved our ability to provide a desirable assortment of offerings in our merchandise categories.

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:

For additional information about our real estate strategy, see the discussion under the caption “Operating Strategy - Real Estate” in the accompanying “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) in this Form 10-K.

The following table details our U.S. stores by state at February 2, 2019:1, 2020:

Of our 1,4011,404 stores, 33% operate in four states: California, Texas, Florida, and Ohio, and net sales from stores in these states represented 34% of our 20182019 net sales. We have a concentration in these states based on their size, population, and customer base.

Associates

At February 2, 2019,1, 2020, we had approximately 35,60034,000 active associates comprised of 10,90010,500 full-time and 24,70023,500 part‑time associates. Approximately 69% of the associates we employed during 20182019 were employed on a part-time basis. Temporary associates hired for the holiday selling season increased the total number of associates to a peak of approximately 38,40035,900 in 2018.2019. 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. We face strong sales competition from other general merchandise, discount, food, furniture, arts and crafts, and dollar store retailers, which operate in traditional brick and mortar stores and/or online. Additionally, we compete with a number of companies for retail site locations, to attract and retain quality employees, and to acquire our broad merchandising assortment from vendors. We operate an e-commerce platform which faces additional challenges, including fulfillment logistics and technological innovation,competition from a wider range of retailers in a highly competitive market.marketplace, where we compete for customers, fulfillment capabilities, and technological innovation.

Purchasing

The goal of our merchandising strategy is to consistently provide outstandingbe the authority on price and value to our customersJennifer in all of our merchandise categories. We believe thatAccordingly, we have achieved this goal by reducingsource our reliance on sourcing merchandise through both closeout offeringsopportunities and expanding our planned purchases in most merchandise categories. In particular, overto provide Jennifer with both the surprise and delight of closeouts and the consistency of staple product offerings. Over the past few years, we have expanded our planned purchases in ourthe Food, Consumables, Soft Home, and Furniture merchandise categories to provide a merchandise assortment that our customers expect us to consistently offer in our stores at a significant value. In connection with the implementation of our merchandising strategy, we have expanded the role of our global sourcing department, and assessed our overseas vendor relationships. We expect our import partners to responsibly source goods that our merchandising teams identify as having our desired mix of quality, fashion, and value. During 2018, we purchased approximately 25% of our merchandise directly from overseas vendors, including approximately 21% 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 described in “Item 1A. Risk Factors” of this Form 10-K.

Warehouse and Distribution

The majority of our merchandise offerings are processed for retail sale and distributed to our stores from our five regional distribution centers located in Pennsylvania,Alabama, California, Ohio, Alabama, Oklahoma, and California.Pennsylvania. During the fourth quarter of 2019, we operated six distribution centers while we transitioned our Rancho Cucamonga, California distribution center operations to our new Apple Valley, California distribution center. During 2015, we announced our intention to open a new distribution center in California and relocate our existing California distribution operations to this facility. We selectedcompleted construction of the new facility in 2019 and began transitioning our operations to the new distribution center in the fourth quarter of 2019. We completed the transition during early 2020 and subsequently closed our Rancho Cucamonga, California distribution center.

We select the locations of our distribution centers to help manage transportation costs and to minimize the distance from distribution centers to our stores. While certain of our merchandise vendors deliver directly to our stores, the large majority of our inventory is staged and delivered from our distribution centers to facilitate prompt and efficient distribution and transportation of merchandise to our stores and help maximize our sales and inventory turnover. During 2015, we announced our intention to open a new distribution center in California and relocate our existing California distribution operations to this facility. Construction began on the new facility in 2017 and we expect the transition to begin in the summer of 2019.

In addition to our regional distribution centers that handle store merchandise, we operate two warehouses within our Ohio distribution center. One warehouse distributes fixtures and supplies to our stores and our five regional distribution centers and the other warehouse supplements our fulfillment center for our e-commerce operations.

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.

Over the past few years, we have refined our brand identity to accentuate our friendly service and community orientation. We are focusedfocus on serving Jennifer with a friendly approach and positive shopping experience. Another aspect ofOur community-oriented approach to retailing is our focus onincludes “doing good as we do well”, which means supporting both local and national causes that aid the communities in which we do business. On a local level, we invest and support our associates throughout our geographic regions with our point of sale campaigns, and the positive impacts those campaigns generate for our foundation partners. We serve the community on a national level through our Big Lots Foundation which focuses on healthcare, housing, hunger, and education. We believe our approach to retailing differentiates us from the competition and allows us to make a difference in the communities we serve.

Seasonality

We have historically experienced, and expect to continue to experience, seasonal fluctuations in our sales and profitability, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter, which includes the Christmas holiday selling season. In addition, our quarterly net sales and operating profits can be affected by the timing of new store openings and store closings, advertising, and 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 our third fiscal quarter in anticipation of increased sales activity during our fourth fiscal quarter. Performance during our fourth fiscal quarter typically reflects a leveraging effect which has a favorable impact on our operating results because net sales are higher and certain of our costs, such as rent and depreciation, are fixed and do not vary as sales levels escalate. If our sales performance is significantly better or worse during the Christmas holiday selling season, we would expect a more pronounced impact on our annual financial results than if our sales performance is significantly better or worse in a different season.

The following table sets forth the seasonality of net sales and operating profit (loss) for 2019, 2018, 2017, and 20162017 by fiscal quarter:

Available Information

Item 1A. Risk Factors

The statements in this item describe the material 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.

This Form 10-K and in our 20182019 Annual Report to Shareholders contain 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 and in oral statements that may be made by us. Such forward-looking statements give our current expectations or forecasts of future events. They do not relate strictly to historical or current facts. Such statements are commonly identified by using words such as “anticipate,” “estimate,” “approximate,” “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.actualized. Achievement of future results is subject to risks, uncertainties, and potentially inaccurate assumptions. If known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results or 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 made or to be made by us.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made. 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 future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

The following cautionary discussion of material risks, uncertainties, and assumptions relevant to our businesses describes factors that, individually or in the aggregate, we believe 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 forward-looking statements made or to be made by us 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. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. 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, as 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:

There is a risk that we will be unable to meet or exceed our operating performance targets and goals in the future if our strategies and initiatives are unsuccessful. Our ability to both refine our operating and strategic plans and execute the business activities associated with our refined operating and strategic plans, including cost savings initiatives, could impact our ability to meet our operating performance targets. Additionally, we must be able to effectively continuously adjust our operating and strategic plans over time to adapt to an ever-changing marketplace. See the MD&A in this Form 10-K for additional information concerning our operating strategy.

The discount retail industry, which includes both traditional brick and mortar stores and online marketplaces, is highly competitive. As discussed in Item 1 of this Form 10-K, we compete for customers, products, employees, real estate, and other aspects of our business with a number of other companies. Some of our competitors have broader distribution (e.g., more stores and/or a more established online presence), and/or greater financial, marketing, and other resources than us. It is possible that increased competition, significant discounting, improved performance by our competitors, or an inability to distinguish our brand from our competitors may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations.

We must maintain sufficient inventory levels to successfully operate our business. However, we also must seek to avoid accumulating excess inventory to maintain appropriate in-stock levels tobased on evolving customer demands. We obtain approximately one quarter of our merchandise directly from vendors outside of the U.S. These foreign vendors often require lengthy advance notice of our requirements 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 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, we attempt to maximize our operating profit 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.

 

Global sourcing of many of the products we sell is an important factor in driving higher operating profit. During 2018,2019, we purchased approximately 25%24% of our products directly from overseas vendors, including 21%17% from vendors located in China. Additionally, a significant amount of our domestically-purchased merchandise is manufactured abroad. Our ability to identify 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 U.S. Global sourcing and foreign trade involve numerous risks and uncertainties beyond our control, including increased shipping costs, increased import duties, 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 and tariffs (including retaliation by the U.S. against foreign practices or by foreign countries against U.S. practices), the financial stability of vendors, or merchandise quality issues. U.S. policy on trade restrictions is ever-changing and may result in new laws, regulations, or treaties that increase the costs of importing goods and/or limit the scope of available foreign vendors. These and other issues affecting our international vendors could materially adversely affect our business and financial performance.

We rely on our 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 (e.g., trans-Pacific freight carrier bankruptcies) and/or labor strikes, disruptions or shortages in the transportation industry could negatively affect our distribution network, our timely receipt of merchandise and/or transportation costs. In addition, long-term disruptions to the U.S. and international transportation infrastructure from wars, political unrest, terrorism, natural disasters, pandemic diseases, governmental budget constraints 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 receipt, processing and shipment of merchandise to our stores which could adversely affect our business. Additionally, as we seek to expand our operation through the implementation of our online retail capabilities, we may face increased or unexpected demands on distribution center operations, as well as new demands on our distribution network. Lastly,Furthermore, as we re-locaterelocate our distribution center operations in California, we may experience (1) increased selling and administrative expenses associated with the transition during 2019.2020, and (2) initial operational challenges as we adopt new automation technologies. Lastly, the COVID-19 coronavirus pandemic could lead to the shutdown of parts, or all, of our distribution network and generally disrupt our ability to receipt, process, and ship merchandise to our stores.

In the normal course of business, we process and collect relevant data about our customers, employees and vendors. The protection of our customer, employee, vendor and company data and information is critical to us.  We have implemented procedures, processes and technologies designed to safeguard our customers’ debit and credit card information and other private data, our employees’ and vendors’ private data, and our records and intellectual property.  We also utilize third-party service providers in connection with certain technology related activities, including credit card processing, website hosting, data encryption and software support.  We require these providers to take appropriate measures to secure such data and information and assess their ability to do so.

Despite our procedures, technologies and other information security measures, we cannot be certain that our information technology systems or the information technology systems of our third-party service providers are or will be able to prevent, contain or detect all cyberattacks, cyberterrorism, or security breaches. As evidenced by other retailers who have suffered serious security breaches, we may be vulnerable to data security breaches and data loss, including cyberattacks. A material breach of our security measures or our third-party service providers’ security measures, the misuse of our customer, employee, vendor and company data or information or our failure to comply with applicable privacy and information security laws and regulations could result in the exposure of sensitive data or information, attract a substantial amount of negative media attention, damage our customer or employee relationships and our reputation and brand, distract the attention of management from their other responsibilities, subject us to government enforcement actions, private litigation, penalties and costly response measures, and result in lost sales and a reduction in the market value of our common shares.  While we have insurance, in the

event we experience a material data or information security breach, our insurance may not be sufficient to cover the impact to our business, or insurance proceeds may not be paid timely. 

In addition, the regulatory environment surrounding data and information security and privacy is increasingly demanding, as new and revised requirements are frequently imposed across our business.  Compliance with more demanding privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.

We depend on a variety of information technology and computer systems for the efficient functioning of our business. We rely on certain hardware, telecommunications and software vendors to maintain and periodically upgrade many of these systems so that we can continue to support our business. Various components of our information technology and computer systems, including hardware, networks, and software, are licensed to us by third party vendors. We rely extensively on our information technology and computer systems to process transactions, summarize results, and manage our business. Our information technology and computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyberattacks or other security breaches, obsolescence, catastrophic events such as fires, floods, earthquakes, tornados, hurricanes, acts of war or terrorism, and usage errors by our employees or our contractors. In recent years, we have begun using vendor-hosted solutions for certain of our information technology and computer systems, which are more exposed to telecommunication failures.

If our information technology or computer systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations as a result. Any material interruption experienced by our information technology or computer systems could negatively affect our business and results of operations. 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.

We are exposed to the risk that new federal or state legislation, including new product safety and hazardous material laws and regulations, may negatively impact our operations and adversely affect our operating performance. 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 and food 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.

In addition, if we discard or dispose of our merchandise, particularly that which is non-salable, in a fashion that is inconsistent with jurisdictional standards, we could expose ourselves to certain fines and litigation costs related to hazardous material regulations. Our inability to comply on a timely basis with regulatory requirements, execute product recalls in a timely manner, or consistently implement waste management standards, 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.

From time to time, we are involved in lawsuits and regulatory actions, including various collective, class action or shareholder derivative lawsuits that are brought against us for alleged violations of the Fair Labor Standards Act, state wage and hour laws, sales tax and consumer protection laws, False Claims Act, federal securities laws and environmental and hazardous waste regulations. 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 attention and resources to defend ourselves. For a description of certain current legal proceedings, see note 109 to the accompanying consolidated financial statements.

Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our overall operations. We may incur certain types of losses that we cannot insure or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime, and some natural disasters.disasters, and pandemic diseases. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative cost trends in the insurance market, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, general liability, including automobile, and group health insurance programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these self-insured losses, including potential increases in medical and indemnity costs, could result in significantly different expenses than expected under these programs, which could have a material adverse effect on our financial condition and results of operations. Although we continue to maintain property insurance for catastrophic events, we are self-insured for losses up to the amount of our deductibles. If we experience a greater number of self-insured losses than we anticipate, our financial performance could be adversely affected.

Our customers expect a positive shopping experience, which is driven by a high level of customer service from our associates and a quality presentation of our merchandise. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of highly qualified associates, while at the same time control labor costs. We compete with other retail businesses for many of our associates in hourly and part-time positions. These positions have historically had high turnover rates, which can lead to increased training and retention costs. In addition, our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing labor relations or benefits, and health insurance costs.

We believe that we benefit substantially from the leadership and experience of our senior executives. The loss of the services 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 depend on our ability to recruit, train, and retain our senior executives and other qualified personnel.

We lease almost all of our stores, and a significant number of these leases expire or are up for renewal each year, as noted below in “Item 2. Properties” and in MD&A in this Form 10-K. Our strategy to improve our financial performance includes increasing sales while managing the occupancy cost of each of our stores. The primary component of our sales growth strategy is increasing our comparable store sales, which will require renewing many leases each year. Additional components of our sales growth strategy include relocating certain existing stores to new locations within existing markets and opening new store locations, either as an expansion in an existing market or as an entrance into a new market. If the commercial real estate market does not allow us to negotiate favorable lease renewals and new store leases, our financial position, results of operations, and liquidity may be negatively affected.

We have embarked upon a significant capital improvement project to renovate a significantmeaningful portion of our stores during the coming three to five years through our Store of the Future remodel program. This multi-year program could be the largest capital improvement program in our corporate history. Additionally, our operating strategies include other store fixturing projects that require significant capital investments to execute. If we are unable to effectively manage the execution of this programthese programs and efficiently utilize our capital expenditures, our financial position, results of operations, and liquidity may be negatively affected.

We may need to borrow funds under our $700 million five-year unsecured credit facility (“2018 Credit Agreement”) from time to time, depending on operating or other cash flow requirements. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens, and investments, as well as the maintenance of a leverage ratio and a fixed charge coverage ratio. A severe short-term economic downturn, potentially brought on by the COVID-19 coronavirus, may challenge our ability to maintain compliance with these covenants. Additionally, we are subject to cross-default provisions under the synthetic lease agreement (the “Synthetic Lease”) that we entered in connection with our new distribution center in California. A violation of any of these covenants may permit the lenders to restrict our ability to borrow additional funds, provide letters of credit under the 2018 Credit Agreement and may require us to immediately repay any outstanding loans. Our failure to comply with these covenants may have a material adverse effect on our capital resources, financial condition, results of operations, and liquidity.

We are required by accounting rules to periodically assess our property and equipment and deferred taxintangible 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. A significant decline in our financial performance could negatively affect the results of our assessments of the recoverability of our property and equipment, deferred tax assets, and our deferred taxintangible assets and trigger the impairment of these assets. Impairment or valuation charges taken against property and equipment and deferred taxintangible assets could be material and could have a material adverse impact on our capital resources, financial condition, results of operations, and liquidity (seeliquidity.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Retail Operations

All of our stores are located in the U.S., predominantly in strip shopping centers, and have an average store size of approximately 31,80032,400 square feet, of which an average of 22,30022,600 is selling square feet. For additional information about the properties in our retail operations, see the discussion under the caption “Real Estate” in “Item 1. Business” and under the caption “Real Estate” in MD&A in this Form 10-K.

The average cost to open a new store in a leased facility during 20182019 was approximately $1.7$1.8 million, including the cost of constructions,construction, fixtures, and inventory. All of our stores are leased, except for the 5352 stores we own in the following states:

Additionally, in 2017, we closedown one ownedclosed site which we are not operating and remainsis available for sale. Since this owned site is no longer operating as an active store, it has been excluded from our store counts atsince February 2, 2019.

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 approximately five to ten years with multiple five-year renewal options. FortyTwenty-nine store leases have sales termination clauses that allow us to exit the location at our option if we do not achieve certain sales volume results.

The following table summarizes the number of store lease expirations in each of the next five fiscal years and the total thereafter. 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 table includes leases for stores with more than one lease and leases for stores not yet open and excludes 1410 month-to-month leases and 5352 owned locations.

Warehouse and Distribution

At February 2, 2019,1, 2020, we owned approximately 9.07.6 million square feet of distribution center and warehouse space.space in four distribution facilities and leased approximately 2.8 million square feet of distribution center and warehouse space in two distribution facilities. We own andtypically operate five regional distribution centers strategically located acrossin the United States. At February 1, 2020, we occupied and operated six regional distribution centers while we transitioned our Rancho Cucamonga, California distribution center operations to our new Apple Valley, California distribution center. The regional distribution centers utilize warehouse management technology, which we believe enables highly accurate and efficient processing of merchandise from vendors to our retail stores. The combined output of our regional distribution centers was approximately 2.42.3 million merchandise cartons per week in 2018.2019. Certain vendors deliver merchandise directly to our stores when it supports our operational goal to deliver merchandise from our vendors to the sales floor in the most efficient manner. We operate our e-commerce fulfillment center out of our Columbus, Ohio warehouse.

Distribution centers and warehouse space, and the corresponding square footage of the facilities, by location at February 2, 2019,1, 2020, were as follows:

During 2015,On October 30, 2019, we announcedcompleted the sale of our intention to open a new distribution center located in California and relocateRancho Cucamonga, California. As part of our existingagreement with the purchaser, we are leasing the property back from the purchaser for six months while we wind down our operations at the distribution center. In February 2020, we completed the wind down of our operations in the Rancho Cucamonga, California distribution operations to this facility. Construction begancenter and terminated our leaseback agreement. For further information on the new facility in late 2017 and we expectsale, see note 10 to the transition to begin in the summer of 2019.accompanying consolidated financial statements.

Corporate Office

In 2018, we moved our corporate headquarters to a new leased facility within Columbus, Ohio. In 2019, we exercised our purchase option to acquire our headquarters facility and completed the purchase transaction in October 2019.

Item 3. Legal Proceedings

Item 103 of SEC Regulation S-K requires that we disclose actual or known contemplated legal proceedings to which a governmental authority and we are each a party and that arise under laws dealing with the discharge of materials into the environment or the protection of the environment, if the proceeding reasonably involves potential monetary sanctions of $100,000 or more.

Item 4. Mine Safety Disclosures

Supplemental Item. Executive Officers of the Registrant

Our executive officers at April 2, 2019March 31, 2020 were as follows:

Our common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “BIG.”

The following table sets forth information regarding our repurchase of common shares during the fourth fiscal quarter of 2018:2019:

The following graph and table compares, for the five fiscal years ended February 2, 2019,1, 2020, 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 31, 2015, January 30, 2016, January 28, 2017, February 3, 2018, February 2, 2019 and February 2, 2019.1, 2020. The graph and table assume that $100 was invested on February 1, 2014,January 31, 2015, in each of our common shares, the S&P 500 Index, and the S&P 500 Retailing Index and reinvestment of any dividends. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance.

 

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.

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. Risk Factors” of this Form 10-K for a discussion of forward-looking statements and certain risk factors that may have a material adverse effect on our business, financial condition, results of operations, and/or liquidity.

Operating Results Summary

The following are the results from 20182019 that we believe are key indicators of our operating performancefinancial condition and results of operations when compared to 2017.2018.

The following table compares components of our consolidated statements of operations as a percentage of net sales:

See the discussion below under the captions “2018caption “2019 Compared To 2017” and “2017 Compared To 2016”2018” for additional details regarding the specific components of our operating results. See our Form 10-K for the year ended February 2, 2019 for a comparison of operating results for 2018 to operating results for 2017.

In 2018, our selling and administrative expenses include $7.0 million of costs associated with the retirement of our former chief executive officer and $3.5 million of costs associated with the settlement of our shareholder litigation, matter, which is described in further detail in note 10 to the accompanying consolidated financial statements.

In 2017, our selling and administrative expenses include recoveries of $3.0 million from our insurance carriers related to a legal matter. Additionally, our income tax expense reflects a $4.5 million charge for the impact of the Tax Cuts and Jobs Act of 2017 related to our net deferred tax position and a $3.5 million benefit for the reduction in our federal tax rate.

Operating Strategy

The core principle“drive profitable long-term growth” objective of our operating strategy has beenOperation North Star is focused on a series of initiatives to consistently re-evaluate the regularly shifting needs and wants of our core customer, Jennifer, to ensure that our customer value proposition stays current and relevant to her. This core principle applies to all aspects of our business, but particularly focuses on merchandising, marketing, and our customers’ shopping experience, which we believe represent the key drivers ofgrow our net sales. As a result of the continual re-evaluation process ofsales, including:

The “fund the journey” objective of Operation North Star is focused on a series of initiatives to offerreduce costs so we can invest those savings in the growth areas of our business. Those initiatives include:

Additionally, we intend to drive discretionary purchases.

The “create long-term shareholder value” objective is the culmination of exceeding Jennifer’s expectations by offering quality product assortmentsour “drive profitable long-term growth” and friendly solutions“fund the journey” objectives. If we effectively execute the first two objectives of Operation North Star, we believe that align withwe will deliver value to our understandingshareholders through earnings growth over time.

Our merchandising management team is aligned with our merchandise categories, and their primary goal is to increase our total company comparable store sales (“comp” or “comps”). Our review of the performance of the members of our merchandise management team focuses on comps by merchandise category, as we believe it is the key metric that will drive our long-term net sales. By focusing on growingstrengthening our “ownable” and “winnable” merchandise categories,Home offerings, and managing contraction in our convenience categories, we believe our merchandise management team can effectively address the changing shopping behaviors of our customers and implement more focused offerings within each merchandise category, which we believe will lead to continued comp growth.

The top priority of our marketing activities is to increase our net sales and comps.comps by developing our brand identity as the authority on price and value for Jennifer. Over the past few years, we have reviewed our brand identity to gain further insights into Jennifer’s perception of us and how best to improve the overall effectiveness of our marketing efforts. Our research has affirmed that Jennifer is deal-driven and comes to us for our value-priced merchandise assortment. Sheassortment, and that she appreciates our ability to assist her in fashioning and furnishing her home so that she can enjoy the space with family and friends. We believe our strong price value perception and the surprise and delight factor in our stores enhances our ability to effectively connect with Jennifer in a way that lets her understand when shopping at Big Lots, she can afford to live Big, while saving Lots.

Given our customer’s proficiency with mobile devices and digital media, we focus on communicating with her through those channels. We launched a new loyalty program, theOur BIG Rewards Program in November of 2017,allows us to more effectively incentivize our loyal customers and encourage new membership by highlighting the significant features and benefits. Our new loyalty program rewards Jennifer with a coupon after every third purchase, a birthday surprise offer, and special rewards after large-ticket furniture purchases. Research has shown there is a direct correlation between loyal, frequent shoppers and a larger basket. We believe ourthat growing the membership base of the BIG Rewards Program will help increase engagement with Jenniferprovide more opportunities to understand and clearly communicate our offerings.leverage customer behavior through segmentation. At February 2, 2019,1, 2020, our BIG Rewards Program had over 1719 million active members (defined as having made a purchase in the last 12 months) and we have aare focused concerted effortson continuing to grow the membership base inof our BigBIG Rewards Program in 2019.2020.

In addition to electronic, social and digital media, our marketing communication efforts involve a mix of television advertising, printed ad circulars, and in-store signage. The primary goals of our television advertising are to promote our brand and, from time to time, promote products or special discounts in our stores. We have also shifted towards using more digital streaming media in concentrated markets of our stores, which allows us to connect deepermore deeply and more frequently with Jennifer. Our printed advertising circulars and our in-store signage initiatives focus on promoting our value proposition on our unique merchandise offerings.

One of the objectives of our Operation North Star growth strategy is to responsibly invest in our “Store of the Future” growth platform in markets and locations where we believe we will maximize our return on investment. In 2017, we introduced a new in-store shopping experience with our “Storecalled Store of the Future” concept,Future, which more deeply incorporates our brand identity and seeks to enhance the way Jennifer shops our stores, including:stores. We believe the Store of the Future concept provides a platform on which to continuously evolve our store presentation through implementation of new initiatives to drive sales growth. Staple elements of the Store of the Future platform include:

Lastly, we continue to offer a private label credit card and our Easy Leasing lease-to-own solutions for customer financing and a coverage/warranty program, focused on our Furniture and Seasonal merchandise categories, to round out Jennifer’s experience. Our private label credit card provides access to revolving credit, through a third party, for use on both larger ticket items and daily purchases. Our Easy Leasing lease-to-own program provides a single use opportunity for access to third-party financing. Our coverage/warranty program provides a method for obtaining multi-year warranty coverage for furniture and our livingFurniture purchases.

Historically, we have determined that our average store size of approximately 22,000 selling square feet is appropriate for us to provide our core customer with a positive shopping experience and properly present a representative assortment of merchandise categories that our core customer finds meaningful. As we have shifted our net sales to a higher proportion of Furniture, we have chosen to gradually expand the size of our new stores to accommodate the Furniture vignettes. After studying our store design and layout in relation to the changing retail landscape and needs of our core customers and testing certain design and layout revisions, we rolled-out our Store of the Future layout to two geographic test markets in 2017. In 2018, we began the chain-wide conversionconverting additional stores to our Store of the Future layout and converted 164 stores through either remodels or new openings. In 2019, we remodeled an additional 207 stores and opened 54 stores in the Store of the Future layout. At the end of 2019, we operated 466 stores in the Store of the Future layout. Currently, we intend to convert the majorityremodel approximately 20 stores in 2020 as we retrofit our existing Store of the remainder ofFuture stores to include new presentation initiatives and reevaluate our store fleet over approximatelymarket selection approach so we can focus on the next three years. Asmarkets and locations where we increasebelieve we can maximize our capital investment in our stores, we have collaborated with our landlords to negotiate longer lease terms and renewal options.return on investment.

As discussed in “Item 2. Properties,” of this Form 10-K, we have 224223 store leases that will expire in 2019.2020. During 2019,2020, we anticipate opening approximately 50up to 40 new stores and closing up to 4535 of our existing locations. The majority of these closings will involve the relocation of stores to improved locations within the same local market, with the balance resulting from a lack of renewal options or our belief that a location’s sales and operating profit volume are not strong enough to warrant additional investment in the location. As part of our evaluation of potential store closings, we consider our ability to transfer sales from a closing store to other nearby locations and generate a better overall financial result for the geographic market. For our remaining store locations with fiscal 20192020 lease expirations, we expect to exercise our renewal option or negotiate lease renewal terms sufficient to allow us to continue operations and achieve an acceptable return on our investment. As we increase our capital investment in our stores, we have collaborated with our landlords to negotiate longer lease terms and renewal options.

Net Sales

Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comps in 20182019 compared to 20172018 were as follows:

 

We periodically assess and make minor adjustments to our product hierarchy, which can impact the roll-up to our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.

Net sales decreased $26.3increased $85.1 million, or 0.5%1.6%, to $5,323.2 million in 2019, compared to $5,238.1 million in 2018, compared to $5,264.4 million in 2017.2018.  The decreaseincrease in net sales was principally due to fiscal 2017 consistingthe increased net sales of 53 weeksour new and fiscal 2018 consistingrelocated stores compared to closed stores, and the net increase of 52 weeks,three stores in 2019, which decreasedincreased net sales by $69.1$67.8 million. The fiscal week differenceAdditionally, there was partially offset by a 1.2%0.3% increase in our comps, which increased net sales by $62.3$17.3 million.

Cash provided by operating activities decreasedincreased by $16.3$104.9 million to $339.0 million in 2019 compared to $234.1 million in 2018 compared2018.  The increase was primarily due to $250.4a $145.1 million increase in 2017.cash inflows from inventories, a $85.6 million increase in net income, a $48.6 million increase in other current liabilities, and a $47.0 million increase in our net deferred tax liabilities, partially offset by the add-back of $178.7 million for gain on disposition of property and equipment and a $64.4 million increase in cash outflows for accounts payable. The decreaseincrease in cash inflows from inventories was primarily driven by our decision to accelerate ourthe receipt of inventory purchaseslate in 2018 to mitigate tariff cost exposureconcerns, which resulted inincreased our inventory position at the end of 2018. As of the end of 2019, we have normalized our inventory position as we decreased our receipt of inventory throughout 2019, which generated an increase in cash outflow associated with inventoriesinflows from inventory sales. The net income increase was principally due to the sale of $82.7 million,our distribution center in Rancho Cucamonga, California as well as a decrease$85.1 million increase in net sales in 2019 compared to 2018. The increase in net income was partially offset by a reduction for the add-back of $32.9 millionthe gain on disposition of property and a decrease in deferred income taxes of $27.2 million. The decrease in conversionequipment, which was primarily related to the sale of our Rancho Cucamonga, California distribution center. The increase in other current liabilities was driven by an increase in accrued bonus expense. The increase in our net deferred tax asset to offset cash tax paymentsliabilities was a byproductprimarily the result of the gain on the sale of our effortRancho Cucamonga, California distribution center, as we utilized a portion of the proceeds on the sale to pay the remainder of the finance lease obligation for our corporate headquarters facility, which we acquired in 2017a tax-deferred exchange through a qualified intermediary. The cash outflows for accounts payable were directly related to utilize as much of our deferred tax assets as possible prior to the federal income tax rate change associated with the TCJA,inventory levels, discussed previously, and the absencetiming of the write-off of deferred tax assets associated with the change in federal tax rate. Partially offsetting this decrease was a change in our accounts payable, which increased our cash provided by operating activities by $95.0 million.receipts.

Cash used in financing activities increased by $395.1 million to $257.8 million in 2019 compared to $137.3 million in cash provided by financing activities increased by $231.1 million to $137.3 million in 2018 compared to $93.8 million2018. The increase in cash used in financing activities was attributable to a $254.9 million change in 2017. The increase was primarily driven bycash usage for net long-term debt in 2019 compared to 2018, a $113.3 million increase in the proceeds from synthetic lease todecrease of $128.9 million in 2018 from $15.6 million in 2017, an increase in net borrowings under our bank credit facility of $80.9 million to $174.3 million in 2018 compared to $93.4 million in 2017, and a $54.0 million decrease in payments for treasury shares acquired to $111.8 million in 2018 from $165.8 million in 2017. In addition, we received $9.9 million less in proceeds from the exercise of stock optionsSynthetic Lease for our California distribution center in 2018, comparedand a $69.6 million increase in payments of finance lease obligations. Partially offsetting the increase in cash used in financing activities was a decrease of $50.0 million in cash used to 2017.repurchase common shares under our share repurchase programs. The decrease in net long-term debt was primarily due to the proceeds from the sale of the Rancho Cucamonga, California distribution center, a portion of which was utilized to pay down outstanding debt under the 2018 Credit Agreement. The decrease in proceeds from our Synthetic Lease was driven by the impact of the adoption of a new lease accounting standard. The increase in payments of finance lease obligations was due to our payment of the remainder of the finance lease obligation for our corporate headquarters facility in the third quarter of 2019.

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. On a consolidated basis, we expect cash provided by operating activities less capital expenditures to be approximately $95 to $105 million in 2019; and we intend to distribute approximately $100 million to shareholders through the 2019 Repurchase Program and quarterly dividend payments.

Contractual Obligations

The following table summarizes payments due under our contractual obligations at February 2, 2019:1, 2020:

Off-Balance Sheet Arrangements

Not applicable.

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 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 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, if any, are described in note 1 to the accompanying consolidated financial statements. We believe the following estimates, assumptions, and judgments 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 and the estimated allowance for shrinkage, which may impact the ending inventory valuation and current 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 both our current year and historical inventory results. Independent physical inventory counts are taken at each store once a year. During calendar 2019,2020, the majority of these counts will occur between January and June. As physical inventories are completed, actual results are recorded and new go-forward shrink accrualallowance for shrinkage rates are established based on historical

results at the individual store level. Thus, the shrink accrualallowance for shrinkage rates will be adjusted throughout the January to June inventory cycle based on actual results. At February 2, 2019,1, 2020, a 10% difference in our shrink reserveaccrual would have affected gross margin, operating profit and income before income taxes by approximately $3.0$3.4 million. While it is not possible to quantify the impact from each cause of shrinkage, we have asset protection programs and policies aimed at minimizing shrinkage.