UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| For the fiscal year ended | February 1, 2020January 29, 2022
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| For the transition period from __________ to __________ | |
Commission File Number 001-08897
BIG LOTS, INCINC.
(Exact name of registrant as specified in its charter)
Ohio06-1119097
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4900 E. Dublin-Granville Road, Columbus, Ohio 43081
(Address (Address of principal executive offices) (Zip Code)
(614) 278-6800
(614) 278-6800
(Registrant'sRegistrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares $0.01 par value | BIG | New York Stock Exchange |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | Yes | ☑ | No | ☐ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | Yes | ☐ | No | ☑ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | Yes | ☑ | No | ☐ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. | |
Large accelerated filer | ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ☐ | | |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | | ☑ | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☑ |
The aggregate market value of the Common Shares held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and directors are “affiliates” of the Registrant) was $960,187,737$1,858,279,426 on August 3, 2019,July 30, 2021, the last business day of the Registrant'sRegistrant’s most recently completed second fiscal quarter (based on the closing price of the Registrant'sRegistrant’s Common Shares on such date as reported on the New York Stock Exchange).
The number of the Registrant’s common shares, $0.01 par value, outstanding as of March 27, 2020,25, 2022, was 39,166,689.28,557,532.
Documents Incorporated by Reference
Portions of the Registrant'sRegistrant’s Proxy Statement for its 20202022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
BIG LOTS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2020JANUARY 29, 2022
TABLE OF CONTENTS
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| Part I | Page |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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| Part I | Page |
Item 1. | | |
Item 1A.5. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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| Part II | |
Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
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Item 9. | | |
Item 9A. | | |
Item 9B. | | |
Item 9C. | | |
| Part III | | |
| Part III | |
Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
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| Part IV | |
Item 15. | | |
Item 16. | | |
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Part I
Item 1. Business
The Company
Big Lots, Inc., an Ohio corporation, through its wholly owned subsidiaries (collectively referred to herein as “we,” “us,” and “our” except as used in the reports of our independent registered public accounting firm included in Item 8 of this Annual Report on Form 10-K (“Form 10-K”)), is a home discount retailer operating in the United States (“U.S.”) (see the discussion below under the caption “Merchandise”). At February 1, 2020,January 29, 2022, we operated a total of 1,4041,431 stores and an e-commerce platform. Our mission is to help people liveLive BIG and saveSave LOTS. Our vision is to be the BIG difference for a better life by delivering unmatchedexceptional value through surprise and delight, byto customers, building a “Best Places“best places to Work”grow” culture, by rewarding shareholders with consistent growth and top tier returns, and by doing good as we do well. in local communities.
Our valuesprincipal executive offices are leading withlocated at 4900 E. Dublin-Granville Road, Columbus, Ohio 43081, and our core customer (whom wetelephone number is (614) 278‑6800.
Unless this Annual Report on Form 10-K (“Form 10-K”) otherwise indicates or the context otherwise requires, the terms the “Company,” “we,” “us,” and “our” refer to as Jennifer), treating all like friends, succeeding together,Big Lots, Inc. and playing to win.its subsidiaries.
Similar to many other retailers, our fiscal year ends on the Saturday nearest to January 31, which results in some fiscal years being comprisedconsisting of 52 weeks and some fiscal years being comprisedconsisting of 53 weeks. Unless otherwise stated, references to years in this Form 10-K relate to fiscal years rather than to calendar years. The following table provides a summary ofsummarizes our fiscal year calendar and the associated number of weeks in each fiscal year:
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Fiscal Year | | Number of Weeks | | Year Begin Date | | Year End Date |
2022 | | 52 | | January 30, 2022 | | January 28, 2023 |
2021 | | 52 | | January 31, 2021 | | January 29, 2022 |
2020 | | 52 | | February 2, 2020 | | January 30, 2021 |
2019 | | 52 | | February 3, 2019 | | February 1, 2020 |
2018 | | 52 | | February 4, 2018 | | February 2, 2019 |
2017 | | 53 | | January 29, 2017 | | February 3, 2018 |
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Fiscal Year | | Number of Weeks | | Year Begin Date | | Year End Date |
2020 | | 52 | | February 2, 2020 | | January 30, 2021 |
2019 | | 52 | | February 3, 2019 | | February 1, 2020 |
2018 | | 52 | | February 4, 2018 | | February 2, 2019 |
2017 | | 53 | | January 29, 2017 | | February 3, 2018 |
2016 | | 52 | | January 31, 2016 | | January 28, 2017 |
2015 | | 52 | | February 1, 2015 | | January 30, 2016 |
We manage our business on the basis of one segment: discount retailing. We evaluateOur seven merchandise categories, which match our internal management and report overallreporting of merchandise net sales are: Food; Consumables; Soft Home; Hard Home; Furniture; Seasonal; and merchandise performance based on the following key merchandising categories: Furniture, Seasonal, Soft Home, Food, Consumables, Hard Home, andApparel, Electronics, Toys, & Accessories. The Furniture category includes our upholstery, mattress, case goods, and ready-to-assemble departments. The Seasonal category includes our Christmas trim, lawn & garden, summer, and other holiday departments. The Soft Home category includes our fashion bedding, utility bedding, bath, window, decorative textile, home organization, area rugs, home décor, and frames departments.Other. The Food category includes our beverage & grocery, candy & snacks,grocery; specialty foods; and specialty foodspet departments. The Consumables category includes our health, beauty and cosmetics, plastics, paper,cosmetics; plastics; paper; and chemical departments. The Soft Home category includes our home décor; frames; fashion bedding; utility bedding; bath; window; decorative textile; and petarea rugs departments. The Hard Home category includes our small appliances,appliances; table top,top; food preparation, stationery, greeting cards,preparation; stationery; home maintenance; home organization; and home maintenancetoys departments. The Electronics, Toys, & AccessoriesFurniture category includes our electronics, toys, jewelry, apparel,upholstery; mattress; ready-to-assemble; and hosierycase goods departments. The Seasonal category includes our lawn & garden; summer; Christmas; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the assortments for The Lot and the Queue Line (see the discussion under the caption “Operating Strategy - Shopping Experience” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding The Lot and Queue Line).
In May 2001, Big Lots, Inc. was incorporated in Ohio2021, we realigned certain departments within select merchandise categories to be consistent with the realignment of our merchandising team and waschanges to our management reporting. In order to provide comparative information, we have reclassified our results into the surviving entity in a merger with Consolidated Stores Corporation. By virtuenew alignment for all periods presented. See the reclassifications section of Note 1 to the merger, Big Lots, Inc. succeeded to all the businesses, properties, assets, and liabilitiesconsolidated financial statements for further discussion.
Merchandising
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 merchandisemerchandising strategy on being(1) the authority on price andbargain hunt, by seeking to deliver unmatched value to Jennifer in all of our merchandise categories.categories; (2) the treasure hunt, by seeking to surprise and delight our customers with our unique product assortment; and (3) convenience, by seeking to offer a reliable assortment of simple to shop essentials. We utilize traditional sourcing methods in purchasing both imported and domestic products and, in certain merchandise categories, we also take advantage of closeout channels to enhance our ability to offer outstanding value. We evaluatevalue and bring surprise and delight into 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 on our customer's expectations and enables us to compare the potential performance of traditionally-sourced merchandise, either domestic or import, to closeout merchandise, which isofferings. Closeouts are generally sourced from production overruns, packaging changes, discontinued products, order cancellations, liquidations, returns, and other disruptions in the supply chain of manufacturers.manufacturers, but can also include engineered closeouts and other sourcing options.
We evaluate our product offerings to ensure we are providing quality and exceptional value, and meeting our customer’s expectations. We believe that focusing on our customers’ expectations has improved our ability to provide a more relevant and desirable assortment of offerings in our merchandise categories.
In 2021, we introduced the concept of “Big Buys” to our merchandising strategy. Big Buys include closeouts and other one-time product offerings that fit into the bargain hunt facet of our merchandising strategy. Real Estate
We curate our assortment by focusing on delivering (1) Big Buys, deals where customers can realize exceptional value; (2) seasonal and trendy items that serve to continually refresh our assortment; and (3) everyday essentials that provide consistency and convenience in our staple product offerings. We have increased our sourcing and purchasing of quality closeout merchandise directly from manufacturers and other vendors, typically at prices lower than those paid by traditional discount retailers, to accelerate our ability to deliver Big Buys. We believe that our strong vendor relationships and our strong credit profile support this sourcing model, and we intend to grow our Big Buys merchandise offerings during 2022.
The following table compares
Our global sourcing team and overseas vendor relationships continue to represent important components of our merchandising strategy. We expect our import partners to responsibly source goods that our merchandising teams identify as having our desired mix of quality and value. During 2021, we purchased approximately 24% of our merchandise, at cost, directly from overseas vendors, including approximately 15% 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.
Advertising and Marketing
We believe that our brand image is an important part of why our customers choose to shop Big Lots. We also believe our brand image is important to the numbervalue proposition that we convey through all of our customer touchpoints. We employ an integrated approach for our marketing touchpoints and investments consisting of (1) paid media, including television, print, digital, social media, internet, e-mail, and payment card-linked marketing; (2) earned media, including public relations and organic social media; and (3) owned media, including our website, customer loyalty programs, and in-store signage. Total advertising expense as a percentage of total net sales was 1.6%, 1.7%, and 1.8% in 2021, 2020, and 2019, respectively.
In 2021, we conducted extensive consumer research to enhance our understanding of why customers shop us and barriers for those individuals that do not shop us. We have used this research to refine our brand positioning and implement changes to our messaging across all marketing touchpoints. Through this research, we learned that our customers believe we excel in four key areas or brand pillars: exceptional value, surprising products, easy shopping, and a delightful experience. Accordingly, our marketing strategy is grounded in these brand pillars. Our marketing tactics are intended to: (1) create a community of bargain hunters and treasure seekers; (2) drive incremental visits from new and existing customers; (3) increase our brand awareness, brand consideration and purchasers; and (4) drive personalized marketing based on our customer data platform. Our consumer research also influences how we merchandise our stores, invest in omnichannel capabilities, design our shopping experience, and invest in our business.
In 2021, we introduced our “Be a BIGionaire” advertising campaign, featuring three household-name celebrities to spread our message, that tells our customers they can feel like a million bucks by finding the best deals at Big Lots and decorating their homes with our products.
Our customer data is an important marketing tool that allows us to communicate with our customers in a cost-effective, personalized, and relevant manner, including through e-mail delivery of our circulars, announcement of flash sales, and product-specific promotions. At January 29, 2022, our customer loyalty program, which we call the “BIG Rewards Program,” included approximately 22 million active members who had made a purchase in our stores in operationthe last 12 months, compared to
approximately 21 million members at January 30, 2021. In addition to the beginningcustomer communications mentioned above, our BIG Rewards Program rewards our customers for making frequent and/or high-ticket purchases and endoffers a special birthday reward. We utilize insights gained through the BIG Rewards Program to evaluate the effectiveness of our promotions, tailor promotions to our customers’ shopping habits, and gain consumer insights. Our research shows that membership in the BIG Rewards Program is a driver of net sales, and we incentivize our store associates to encourage customer enrollment into the program.
We believe our approach to retailing differentiates us from the competition and allows us to make a difference in the communities we serve. Our community-oriented approach to retailing includes “doing good as we do well,” which means supporting both local and national causes that aid the communities in which we do business. In our local markets, we invest in point of sale campaigns in each of our geographic regions, the last five fiscal years:
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| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Stores open at the beginning of the year | 1,401 |
| | 1,416 |
| | 1,432 |
| | 1,449 |
| | 1,460 |
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Stores opened during the year | 54 |
| | 32 |
| | 24 |
| | 9 |
| | 9 |
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Stores closed during the year | (51 | ) | | (47 | ) | | (40 | ) | | (26 | ) | | (20 | ) |
Stores open at the end of the year | 1,404 |
| | 1,401 |
| | 1,416 |
| | 1,432 |
| | 1,449 |
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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 Analysisbeneficiaries 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 1, 2020:
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Alabama | 29 |
| | Maine | 6 |
| | Ohio | 97 |
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Arizona | 34 |
| | Maryland | 26 |
| | Oklahoma | 18 |
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Arkansas | 11 |
| | Massachusetts | 22 |
| | Oregon | 15 |
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California | 151 |
| | Michigan | 45 |
| | Pennsylvania | 68 |
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Colorado | 18 |
| | Minnesota | 1 |
| | Rhode Island | 1 |
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Connecticut | 14 |
| | Mississippi | 14 |
| | South Carolina | 34 |
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Delaware | 5 |
| | Missouri | 23 |
| | Tennessee | 47 |
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Florida | 105 |
| | Montana | 3 |
| | Texas | 112 |
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Georgia | 51 |
| | Nebraska | 3 |
| | Utah | 8 |
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Idaho | 6 |
| | Nevada | 12 |
| | Vermont | 4 |
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Illinois | 33 |
| | New Hampshire | 6 |
| | Virginia | 39 |
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Indiana | 44 |
| | New Jersey | 28 |
| | Washington | 27 |
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Iowa | 3 |
| | New Mexico | 11 |
| | West Virginia | 15 |
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Kansas | 7 |
| | New York | 64 |
| | Wisconsin | 9 |
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Kentucky | 40 |
| | North Carolina | 71 |
| | Wyoming | 2 |
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Louisiana | 21 |
| | North Dakota | 1 |
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| | | | | | Total stores | 1,404 |
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| | | | | | Number of states | 47 |
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Of our 1,404 stores, 33% operate in four states: California, Texas, Florida, and Ohio, and net sales from stores in these states represented 34% of our 2019 net sales. We have a concentration in these stateswhich are selected based on their size, population,impacts on local customers and customer base.
Associates
At February 1, 2020, we had approximately 34,000 active associates comprised of 10,500 full-time and 23,500 part‑time associates. Approximately 69% ofWe serve the associates we employed during 2019 were employedcommunity on a part-time basis. Temporary associates hired for the holiday selling season increased the total number of associates to a peak of approximately 35,900 in 2019. We considernational level through our relationship with our associates to be good,Big Lots Foundation, which focuses on healthcare, housing, hunger, and education. In addition, we are notpleased to support our local community in Columbus, OH through our partnership with Nationwide Children’s Hospital, to which the Company committed $40 million and the Big Lots Foundation committed $10 million to open the Big Lots Behavioral Health Pavilion, a partystate-of-the-art medical facility dedicated to any labor agreements.child and adolescent mental and behavioral health, in 2020.
Competition
We operate in the highly competitive retail industry. We face strong sales competition from other general merchandise, discount, home, 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, for distribution 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 competition from a wider range of retailers in a highly competitive marketplace, where we compete for customers, fulfillment capabilities, and technological innovation.
PurchasingReal Estate
The goalfollowing table compares the number of our merchandisingstores in operation at the beginning and end of each of the last five fiscal years:
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| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Stores open at the beginning of the year | 1,408 | | | 1,404 | | | 1,401 | | | 1,416 | | | 1,432 | |
Stores opened during the year | 50 | | | 24 | | | 54 | | | 32 | | | 24 | |
Stores closed during the year | (27) | | | (20) | | | (51) | | | (47) | | | (40) | |
Stores open at the end of the year | 1,431 | | | 1,408 | | | 1,404 | | | 1,401 | | | 1,416 | |
For additional information regarding our real estate strategy, is to besee the authority on price and value to Jennifer in all of our merchandise categories. Accordingly, we source our merchandise through both closeout opportunities and planned purchases to provide Jennifer with bothdiscussion under the surprise and delight of closeouts and the consistency of staple product offerings. Over the past few years, we have expanded our planned purchasescaption “Operating Strategy - Real Estate” in the Food, Consumables, Soft Home,accompanying “Item 7. Management’s Discussion and Furniture merchandise categories to provide a merchandise assortment that our customers expect us to consistently offerAnalysis of Financial Condition and Results of Operations” (“MD&A”) in our stores at a significant value. In addition, the sourcing and purchasing of quality closeout merchandise directly from manufacturers and other vendors, typically at prices lower than those paid by traditional discount retailers, continues to represent an important element of our business model. We believe that our strong vendor relationships and our strong credit profile support this sourcing model. We expect that the unpredictability of the retail and manufacturing environments coupled with what we believe is our significant purchasing power position will continue to support our ability to source quality closeout merchandise at competitive prices in these categories.
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 2019, we purchased approximately 24% of our merchandise directly from overseas vendors, including approximately 17% 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.
The following table details our U.S. stores by state at January 29, 2022:
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Alabama | 29 | | | Maine | 6 | | | Ohio | 101 | |
Arizona | 34 | | | Maryland | 27 | | | Oklahoma | 18 | |
Arkansas | 11 | | | Massachusetts | 23 | | | Oregon | 15 | |
California | 149 | | | Michigan | 47 | | | Pennsylvania | 71 | |
Colorado | 18 | | | Minnesota | 1 | | | Rhode Island | 1 | |
Connecticut | 14 | | | Mississippi | 14 | | | South Carolina | 36 | |
Delaware | 5 | | | Missouri | 24 | | | Tennessee | 47 | |
Florida | 106 | | | Montana | 3 | | | Texas | 115 | |
Georgia | 50 | | | Nebraska | 3 | | | Utah | 7 | |
Idaho | 6 | | | Nevada | 13 | | | Vermont | 4 | |
Illinois | 34 | | | New Hampshire | 6 | | | Virginia | 42 | |
Indiana | 44 | | | New Jersey | 29 | | | Washington | 27 | |
Iowa | 3 | | | New Mexico | 11 | | | West Virginia | 16 | |
Kansas | 7 | | | New York | 67 | | | Wisconsin | 10 | |
Kentucky | 40 | | | North Carolina | 74 | | | Wyoming | 2 | |
Louisiana | 20 | | | North Dakota | 1 | | | | |
| | | | | | Total stores | 1,431 | |
| | | | | | Number of states | 47 |
Of our 1,431 stores, 33% operate in four states: California, Texas, Florida, and Ohio, and net sales from stores in these states represented 33% of our 2021 net sales. We have a concentration in these states based on their size, population, and customer base.
Warehouse and Distribution
The majority of our merchandise offerings are processed for retail sale and distributed to our stores from five regional distribution centers located in Alabama, California, Ohio, Oklahoma, and 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 completed 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.
The majority of our merchandise offerings are processed for retail sale and distributed to our stores from five regional distribution centers located in Alabama, California, Ohio, Oklahoma, and Pennsylvania.
We selected the locations of our regional distribution centers to help manage transportation costs and to minimize the distance from our distribution centers to our stores.
In addition to our regional distribution centers that handle store merchandise, we operate two other 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 supplementsserves as our fulfillment center for our e-commerce operations. To supplement our e-commerce fulfillment center, we also fulfill direct-ship e-commerce orders from 65 of our store locations, which we strategically selected based on geographic location, size, and other relevant factors. We also fulfill some of our e-commerce orders using supplier direct fulfillment, a process in which the customer purchases merchandise through our e-commerce platform, but the merchandise is shipped directly from the supplier to the customer. Supplier direct fulfillment is primarily used for bulky items that are more costly to warehouse and ship. We continue to evaluate our e-commerce fulfillment capabilities to reduce shipping times.
In 2021, we opened two small-format forward distribution centers to divert processing and logistics for bulk goods out of our regional distribution centers into our forward distribution centers, thereby increasing the efficiency of our regional distribution centers, which were designed to most efficiently process cartons as opposed to bulk goods. Our two forward distribution centers are operated by a third-party logistics services provider and are located in Georgia and Pennsylvania. Our forward distribution centers also diversified our distribution center labor force, which reduced the impact of COVID-19 related absences on our supply chain. We believe further expansion of our distribution network with forward distribution centers is necessary to grow our net sales and store count over the next several years. In 2022, we intend to open two additional forward distribution centers, and we will continue to evaluate whether we need to open additional forward distribution centers in the future.
For additional information regarding our warehouses and distribution facilities and related initiatives, see the discussion under the caption “Warehouse and Distribution” in “Item“Item 2. Properties”Properties” of this Form 10-K.
Advertising and Promotion
Our brand image is an important part of our marketing program. Our principal trademarks, including the Big Lots® family of trademarks, have been registered with the U.S. Patent and Trademark Office. We use a variety of marketing vehicles to promote our brand awareness, including television, internet, social media, e-mail, in-store point-of-purchase, and print media.
Over the past few years, we have refined our brand identity to accentuate our friendly service and community orientation. We focus on serving Jennifer with a friendly approach and positive shopping experience. Our community-oriented approach to retailing includes “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.
In all of our markets, we design and distribute printed advertising circulars, through newspaper insertions and mailings. In 2019, we distributed multi-page circulars representing 29 weeks of advertising coverage, which was one additional circular compared to 2018. We create regional versions of these circulars to tailor our advertising message to market differences caused by product availability, climate, and customer preferences. Our customer database is an important marketing tool that allows us to communicate in a cost-effective manner with our customers, including e-mail delivery of our circulars. In 2017, we rolled out our new rewards program, BIG Rewards, which replaced our former Buzz Club Rewards® program. The BIG Rewards program rewards our customers for making frequent and high-ticket purchases and offers a special birthday surprise. At February 1, 2020, our BIG Rewards program included over 19 million active members who had made a purchase in our stores in the last 12 months.
Another element of our marketing approach focuses on brand management by communicating our message directly to Jennifer through social and digital media outlets, including Facebook®, Instagram®, Twitter®, Pinterest®, and YouTube®. Our marketing program also employs a traditional television campaign, which combines strategic branding and promotional elements used in most of our other marketing media. Our highly-targeted media placement strategy uses strategically selected networks and programs aired by national cable providers as the foundation of our television advertising. In addition, we use in-store promotional materials, including in-store signage, to emphasize special bargains and significant values offered to our customers. Total advertising expense as a percentage of total net sales was 1.8%, 1.8%, and 1.7% in 2019, 2018, and 2017, respectively.
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, ourOur 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.
Our net sales in the second quarter of 2020 as a percentage of full year were disproportionately higher as a result of increased demand arising from the onset of the COVID-19 pandemic and related government stimulus payments. Similarly, our net sales in the first quarter of 2021 as a percentage of full year were disproportionately higher as demand increased due to government stimulus payments related to the COVID-19 pandemic.
While uncertainty related to the COVID-19 pandemic persists, we believe the seasonality of our 2022 results will more closely resemble the historical seasonality of our business, including the seasonality we experienced in 2019 (excluding the one-time gain on sale of distribution center in 2019 discussed in a footnote to the table below).
The following table sets forth the seasonality of net sales and operating profit (loss) for 2019, 2018,2021, 2020, and 20172019 by fiscal quarter:
| | | | | | | | | | | | | | |
| First | Second | Third | Fourth |
Fiscal Year 2021 | | | | |
Net sales as a percentage of full year | 26.4 | % | 23.7 | % | 21.7 | % | 28.2 | % |
Operating profit (loss) as a percentage of full year | 51.1 | | 22.5 | | (1.7) | | 28.1 | |
Fiscal Year 2020 | | | | |
Net sales as a percentage of full year | 23.2 | % | 26.5 | % | 22.2 | % | 28.1 | % |
Operating profit as a percentage of full year (a) | 8.7 | | 71.0 | | 5.0 | | 15.3 | |
Fiscal Year 2019 | | | | |
Net sales as a percentage of full year | 24.3 | % | 23.5 | % | 21.9 | % | 30.3 | % |
Operating profit as a percentage of full year (b) | 7.7 | | 3.9 | | 50.9 | | 37.5 | |
|
| | | | | | | | |
| First | Second | Third | Fourth |
Fiscal Year 2019 | | | | |
Net sales as a percentage of full year | 24.3 | % | 23.5 | % | 21.9 | % | 30.3 | % |
Operating profit as a percentage of full year (a) | 7.7 |
| 3.9 |
| 50.9 |
| 37.5 |
|
Fiscal Year 2018 | | | | |
Net sales as a percentage of full year | 24.2 | % | 23.3 | % | 22.0 | % | 30.5 | % |
Operating profit (loss) as a percentage of full year | 20.8 |
| 15.7 |
| (4.4 | ) | 67.9 |
|
Fiscal Year 2017 | | | | |
Net sales as a percentage of full year | 24.6 | % | 23.2 | % | 21.1 | % | 31.1 | % |
Operating profit as a percentage of full year | 26.5 |
| 15.9 |
| 1.9 |
| 55.7 |
|
(a) The second quarter of 2020 included a gain on sale of distribution centers and related expenses of $459.1 million related to the sale and leaseback of four distribution centers, which significantly increased second quarter operating profit as a percentage of full year in comparison to 2019 and 2021.
(b) The third quarter of 2019 included a gain on sale of distribution center of $178.5 million, which significantly increased third quarter operating profit as a percentage of full year in comparison to 20182020 and 2017.2021.
Human Capital
At January 29, 2022, we had approximately 36,200 active associates comprised of 10,500 full-time and 25,700 part‑time associates. Approximately 71% of the associates we employed during 2021 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 37,200 in 2021. We are not a party to any labor agreements. We require all of our associates to adhere to our code of ethics and workplace safety protocols.
We believe our associates are among our most important resources. We evaluate our human capital management at our stores, distribution centers, and corporate headquarters on the basis of associate engagement, diversity, equity, and inclusion, compensation and benefits, and talent development.
Associate Engagement
We send an associate engagement survey to each of the associates in our corporate headquarters and to our field and distribution center leadership on an annual basis to assess our associate engagement and ask those associates their thoughts on manager effectiveness, performance enablement, and our diversity and inclusion efforts. In 2021, 93% of the associates surveyed responded to the survey with an 82% favorable engagement rate. Based on results of the annual survey, our leaders create action plans to address areas where our associates have told us we can improve.
Diversity, Equity, and Inclusion
We recognize the value of creating a diverse, equitable, and inclusive workplace. As a result, diversity, equity, and inclusion (“DEI”) is a significant component of our human capital management. In 2020, we established our Diversity, Equity, and Inclusion Council (“DEI Council”), which is comprised of associates from our stores, distribution centers, and corporate headquarters who represent various job levels, locations, ages, genders, languages, work shifts, races, sexual orientations, and leadership styles. The DEI Council’s mission is to lead the development and advancement of our DEI strategy. Additionally, we formed a Diversity, Equity, and Inclusion Executive Advisory Committee, which is comprised of senior leaders who provide guidance to the DEI Council, as well as approve our DEI strategy and promote its achievement throughout our organization. In 2021, our corporate associates, field leaders, and distribution center leaders participated in a five-part conscious inclusion program taking place over the course of five months to build awareness, educate our associates on how we can improve DEI, and ultimately engrain DEI in the culture of the Company. This conscious inclusion program has been converted to online training and will be part of our onboarding process for all of our new associates.
Compensation and Benefits
We offer a competitive compensation and benefits package to our eligible associates including, among other benefits, incentive compensation, performance-based merit pay, paid holidays, paid vacation, 401(k) match, and healthcare coverage, including medical, dental, and vision insurance with health savings account and flexible savings account options. Our compensation and benefits packages are designed to attract and retain high-performing talent. Additionally, we provide our associates with a company discount on our merchandise and our associates redeemed over $30 million in corporate discounts in 2021.
Talent Development
Talent development is critical to developing the high-performance culture that we seek to foster. Each of our associates participates in an annual goal-setting process and completes an annual performance review, which is followed by periodic discussions throughout the year to assess progress. Each of our managers also completes an individual development plan on an annual basis to set and track long-term goals. Additionally, our business leaders participate in a succession planning process that serves as a tool for identifying and developing high-potential individuals within our organization as well as ensuring business continuity. We also offer a robust catalog of training and development programs to our associates through our Big Lots University training tool, which covers topics including, but not limited to, workplace harassment, safety, ethics, and job skills.
Health and Safety
The health and safety of our associates is of the utmost importance. We have implemented comprehensive safety protocols in each of our stores, distribution centers, and corporate offices to ensure the safety of associates, customers, and other visitors in each facility. We require each of our associates to complete safety training courses relevant to their jobs, which we track using e-learning tools to ensure compliance. In addition to traditional safety training, we require all of our associates to participate in aggressor/active shooter training and we require our store associates to participate in argumentative and de-escalating conversations training. We reinforce safety standards with re-training requirements and regular, engaging communications. To provide a safe working environment for our associates and customers during the COVID-19 pandemic, we increased sanitization protocols, secured personal protective equipment for our associates, installed plexiglass at all registers, implemented social distancing and mask protocols at our stores and distribution centers, and implemented daily health screens
and temperature checks for all associates. We have adjusted, and continue to adjust, our COVID-19-related safety protocols based on the advice of medical experts and federal, state, and local guidelines.
Available Information
We make available, free of charge, through the “Investor Relations”“Investors” 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 well as our definitive proxy materials filed pursuant to section 14 of the Exchange Act, as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at http://www.sec.gov. In April 2021, we published a Corporate Social Responsibility Report, titled Big Cares, which is available on our website. The contents of our website, including the Big Cares report, are not incorporated into, or otherwise made a part of, this Form 10-K.
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 2019 Annual Report to Shareholders containcontains 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 actualized.realized. 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:
Operational and Supply Chain Risks
If we are unable to successfully refine and execute our operating strategies, our operating performance could be significantly impacted.
There is a risk that we will be unable toWe may not meet or exceed our operating performance targets and goals in the future if our strategies and initiatives are unsuccessful. Our ability to bothexecute and/or refine our operating and strategic plans, and execute the business activities associated with our refined operating and strategic plans,as necessary, including cost savings initiatives, could impact our ability to meet our operating performance targets. Additionally, we must be able to effectively adjust our operating and strategic plans over time to adapt to an ever-changingthe evolving marketplace. See the MD&A in this Form 10-K for additional information concerning our operating strategy.
If we are unableDisruption to compete effectively inour distribution network, the highly competitive discount retail industry, our business and results of operations may be materially adversely affected.
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 aspectscapacity of our business with a numberdistribution centers, and our timely receipt 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 materiallymerchandise inventory could adversely affect our businessoperating performance.
We rely on our ability to replenish depleted merchandise inventory through deliveries to our distribution centers and resultsfrom the distribution centers to our stores by various means of operations.
If we are unable to compete effectively in today’s omnichannel retail marketplace, our businesstransportation, including shipments by sea, rail and results of operations may be materially adversely affected.
With the saturation of mobile computing devices, competition from other retailerstruck carriers. A decrease in the online retail marketplace is very highcapacity of carriers and/or labor strikes, disruptions or shortages in the transportation industry could negatively affect our distribution network, our timely receipt of merchandise and/or our transportation costs. In addition, disruptions to the U.S. and growing. Certaininternational 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 competitors,distribution centers could disrupt our timely receipt, processing and a number of pure online retailers, have established online operations against which we compete for customers and products. It is possible that the competition in the online retail space may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations in other ways. Our operations include an e-commerce platform and a buy online pick up in store service to enhance our omnichannel experience. Operating an e-commerce platform is a complex undertaking and there is no guarantee that the resources we have applied to this effort will result in increased revenues or improved operating performance. If our online retailing initiatives do not meet our customers’ expectations, the initiatives may reduce our customers’ desire to purchase goods from us both online and at our brick and mortar stores and may materially adversely affect our business and results of operations.
Our inability to properly manage our inventory levels and offer merchandise that meets changing customer demands may materially impact our business and financial performance.
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 based 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 quantitiesshipment of merchandise to our stores in a timely manner. Ifwhich could adversely affect our business. Additionally, as we do not accurately anticipate future demand for a particular product or the time it will takeseek to replenish inventory levels,expand our inventory levels may not be appropriateoperation through store count growth, advancement of our online retail capabilities, and our resultsaddition of forward distribution centers to our network, we may face increased or unexpected demands on distribution center operations, may be negatively impacted.as well as new demands on our distribution network. Lastly, global pandemics, such as the COVID-19 pandemic, could lead to the shutdown of parts, or all, of our distribution network and generally disrupt our ability to receive, process, and ship merchandise to our stores and meet the demand of our customers.
We rely on manufacturers located in foreign countries, including China, for significant amounts of merchandise, including a significant amount of our domestically-purchased merchandise. Our business may be materially adversely affected by risks associated with international trade, including the impact of tariffs recentlyand/or sanctions imposed by the U.S. with respect to certain consumer goods imported from China, and the impact of the novel coronavirus outbreak.COVID-19 pandemic.
Global sourcing of many of the products we sell is an important factor in driving higher operating profit. During 2019,2021, we purchased approximately 24% of our products, at cost, directly from overseas vendors, including 17%15% 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, pandemic diseases, 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-changingfrequently changes 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.
On March 22, 2018, President Trump, pursuant to Section 301 of the Trade Act of 1974, directed the U.S. Trade Representative (“USTR”) to impose tariffs on $50 billion worth of imports from China. Incremental tariffs of 25% on products valued at $34 billion (“List 1”) and $16 billion (“List 2”) went into effect on July 6, 2018 and August 23, 2018, respectively. On September 24, 2018, a 10% incremental tariff went into effect with respect to another $200 billion worth of imports from China (“List 3”). On May 10, 2019, the USTR announced that the List 3 tariffs would increase to 25% for all List 3 goods. On August 20, 2019, the USTR published the List 4 tariffs, specifying that 10% duties would be imposed in two stages, with List 4A effective on September 1, 2019 (representing goods worth approximately $110 billion), and List 4B effective on December 15, 2019 (representing goods worth approximately $155 billion). On August 30, 2019, the USTR increased the List 4 tariff rate from 10% to 15% effective on September 1, 2019. On September 3, 2019, the USTR published notice of its intention to increase the incremental tariffs for Lists 1 through 3 from 25% to 30% on October 1, 2019, but on October 11, 2019, it was announced that this increase would be delayed until further notice. On December 15, 2019, tariffs on List 4A were reduced from 15% to 7.5% and tariffs on List 4B were indefinitely delayed.
During the past eleven months, the USTR has granted “exclusions” from the Section 301 tariffs for certain products on Lists 1 through 4; these exclusions have been both product-specific as well as more general. The exclusion request process for Lists 1 through 4 is closed. Some products imported by Big Lots were impacted by exclusions pertaining to Lists 2, 3 and 4. The USTR has indicated that all exclusion requests for Lists 1 and 2 have been reviewed. The List 3 and 4 exclusion requests are still under review by the USTR. While the exclusions grant the importers of record the opportunity to seek the return of the Section 301 tariffs paid with respect to the excluded product retroactively to their effective date, the granted exclusions currently expire approximately eleven to thirteen months after their retroactive effective dates. There has been no definitive indication that the Section 301 tariff exclusions will be extended. Although the USTR has opened up public comment on whether to extend various exclusions, the USTR has yet to formalize any process for extending the current exclusions. The USTR has stated that it continues to review exclusion requests for Lists 3 and 4 and will issue decisions on pending exclusion requests on a periodic basis.
The majority of our products and components of our products imported from China are currently subject to Lists 1 through 4.tariffs and proposed tariffs. As a result, we are continually evaluating the potential impact of the effective and proposed tariffs on our supply chain, costs, sales, and profitability, and are considering strategies to mitigate such impact, including reviewing sourcing options, exploring first sale valuation strategies, filing requests for exclusion from the tariffs with the USTRU.S. Trade Representative for certain product lines, and working with our vendors and merchants. Given the volatility and uncertainty regarding the scope and duration of these tariffs, as well as the potential for additional trade actions by the U.S. or other countries, the impact on our operations and results is uncertain and could be significant. We can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade actions will be successful. To the extent that our supply chain, costs, sales, or profitability are negatively affected by the tariffs or other trade actions, our business, financial condition and results of operations may be materially adversely affected.
In December 2019, Chinese officials reported a novel coronavirus outbreak (COVID-19). The COVID-19 coronavirus has since spread throughout China and internationally, which led to the declaration by the World Health Organization that the COVID-19 coronavirus is a pandemic. Spread of COVID-19pandemic has led to widespread factory shutdownsgeneral manufacturing and general supply chain disruption in China, the U.S., and other parts of the world,globally, including factoriesmanufacturers and supply chains that produce our retail merchandise, supplies, and fixtures. To the extent our manufacturers, supply chain and/orand associated costs are negatively affected by the outbreak,COVID-19 pandemic, including delayed shipment of seasonally sensitive product offerings, our business, financial condition, results of operations, and liquidity may be materially adversely affected.
DisruptionOur inability to properly manage our inventory levels and offer merchandise that meets changing customer demands may materially impact our business and financial performance.
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 based on evolving customer demands. We obtain approximately 24% of our merchandise directly from vendors outside of the U.S. These foreign vendors often require us to order merchandise and enter into purchase order contracts for the purchase of such merchandise well in advance of the time we offer these products for sale. As a result, we may experience difficulty in rapidly 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.
If we are unable to retain existing and/or secure suitable new store locations under favorable lease terms, our financial performance may be negatively affected.
We lease almost all of our stores, and a significant number of these leases expire or are up for renewal each year, 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. A primary component of our sales growth strategy is increasing our comparable store sales, which requires renewing many leases each year. Additional components of our sales growth strategy include opening new store locations, either as an expansion in an existing market or as an entrance into a new market, and relocating certain existing stores to new locations within existing markets. 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.
If we are unable to maintain or upgrade our computer systems or if our information technology or computer systems are damaged or cease to function properly, our operations may be disrupted or become less efficient.
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, including management and distribution network,of our inventory. 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 capacityimplementation 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.
Shareholder activism could result in potential operational disruption, divert our resources and management’s attention and have an adverse effect on our business.
Shareholder activism, which may arise in various forms and situations, could divert management’s attention from its current strategies, require us to incur substantial legal, consulting, and public relations fees, and could result in potential operational disruption. Further, any perceived uncertainties as to our future direction and control could result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified employees, any of which could adversely affect our business and operating results. Any perceived uncertainties could also adversely affect the price and volatility of our stock.
Market and Competitive Risks
If we are unable to compete effectively in the highly competitive discount retail industry, our business and results of operations may be materially adversely affected.
The discount retail 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, an inability to distinguish our brand from our competitors, or failure to effectively promote our brand image to younger generations may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations.
If we are unable to compete effectively in the omnichannel retail marketplace, our business and results of operations may be materially adversely affected.
Competition from other retailers in the online retail marketplace is intense and growing. Certain of our competitors, including several pure online retailers, have established online operations that we compete against for customers and products. It is possible that the competition in the online retail space may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations in other ways. Our operations include an e-commerce platform with multiple fulfillment options to enhance our omnichannel experience. Operating an e-commerce platform is a complex undertaking and there is no guarantee that the resources we have applied to this effort will increase revenues or improve operating performance. If our online retailing initiatives do not meet our customers’ expectations, the initiatives may reduce our customers’ desire to purchase goods from us both online and at our brick and mortar stores and may materially adversely affect our business and results of operations.
Deterioration in general economic conditions, disposable income levels, and other conditions, such as unseasonable weather, pandemic diseases, inflation, or global events, such as the war between Russia and Ukraine, could lead to reduced consumer demand for our merchandise, and materially adversely affect our revenues and gross margin.
Our results of operations can be directly impacted by the health of the U.S. economy. Our business and financial performance may be adversely impacted by current and future economic conditions, including factors that may restrict or otherwise negatively impact consumer financing, disposable income levels, unemployment levels, energy costs, interest rates, recession, and inflation, and other matters, such as tax reform, natural disasters, climate change, pandemic diseases, wars, or terrorist activities, that influence consumer spending. Specifically, our Soft Home, Hard Home, Furniture and Seasonal merchandise categories may be threatened when disposable income levels are negatively impacted by economic conditions. In 2021 and continuing into 2022, the U.S. experienced its highest level of inflation in decades, which we expect to negatively impact disposable income levels and discretionary spending. Additionally, the net sales of cyclical product offerings in our Seasonal category may be threatened when we experience extended periods of unseasonable weather, including unseasonable weather caused by climate change. Inclement weather can also negatively impact our Furniture category, as many customers transport the product home personally. In particular, the economic conditions and weather patterns of four states (California, Texas, Florida, and Ohio) are important as approximately 33% of our current stores operate and 33% of our 2021 net sales occurred in these states.
Fluctuation in commodity prices, including but not limited to diesel fuel and other fuels used by utilities to generate power, could materially adversely impact our gross margin and operating profit.
Transporting merchandise, supplies, fixtures, and other materials to and from our distribution centers and our timely receiptstores requires significant volumes of merchandisediesel fuel and other fuels. As a result, fluctuations in the prices of diesel fuel and other fuels, including increases in fuel prices resulting from the war between Russia and Ukraine, directly impact the carrying cost of inventory, could adversely affectthe cost of outbound transportation from our operating 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, byand the cost to transport other materials and supplies. Additionally, we consume significant volumes of electricity and natural gas to heat, cool, and operate equipment in our stores. Our utility providers depend on various meansfuels to generate and transport electricity and natural gas, the cost of transportation, including shipments by sea, rail and truck carriers.which is typically passed through to us as the consumer. A decreaserise in the capacitycost of carriers (e.g., trans-Pacific freight carrier bankruptcies) and/or labor strikes, disruptions or shortages in the transportation industryfuels used to generate and transport electricity and natural gas could negatively affectmaterially adversely impact 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. Furthermore, as we relocate our distribution center operations in California, we may experience (1) increased selling and administrative expenses associated with the transition during 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.operating profit.
Cybersecurity Risks
If we are unable to secure customer, employee, vendor and company data, our systems could be compromised, our reputation could be damaged, and we could be subject to penalties or lawsuits.
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 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 preventing, containing, or detecting, 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,taken action to mitigate our financial risk, in the
event we experience a material data or information security breach, our insuranceprotection may not be sufficient to cover the impact to our business, or insurance proceeds may not be paid timely. business.
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.
Human Capital Risks
If we are unable to maintain or upgradeattract, train, and retain highly qualified associates while also controlling our computer systems or iflabor costs, our information technology or computer systems are damaged or ceasefinancial performance may be negatively 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. Additionally, our customers expect merchandise to function properly,be in stock in our stores and online, which is partially driven by the timely delivery of merchandise from our distribution centers to our stores. 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 also controlling labor costs. We compete with other retail businesses for many of our associates and many of our store and distribution center positions have historically had high turnover rates, which can increase 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 federal, state, or local minimum wage legislation, the impact of legislation or regulations governing labor relations or benefits, and health insurance costs.
The loss of key personnel may be disrupted or become less efficient.have a material impact on our future business and results of operations.
We depend on a variety of information technologybelieve that we benefit substantially from the leadership and computer systems for the efficient functioningexperience of our business. We rely on certain hardware, telecommunications and software vendors to maintain and periodically upgrade manysenior executives. The loss of the services 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 extensivelyindividuals could have a material adverse impact 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. CostsCompetition for key personnel in the retail industry is intense, and potential interruptions associated with the implementation of new or upgraded systemsour future success will depend on our ability to recruit, train, and technology or with maintenance or adequate support ofretain our existing systems could disrupt or reduce the efficiency of our business.
Declines in general economic conditions, disposable income levels,senior executives and other conditions, such as unseasonable weather or pandemic diseases, could lead to reduced consumer demand for our merchandise, thereby materially affecting our revenuesqualified personnel.
Regulatory and gross margin.
Legal Liability Risks
Our results of operations can be directly impacted by the health of the U.S. economy. Our business and financial performance may be adversely impacted by current and future economic conditions, including factors that may restrict or otherwise negatively impact consumer financing, disposable income levels, unemployment levels, energy costs, interest rates, recession, inflation, tax reform, natural disasters, pandemic diseases, or terrorist activities and other matters that influence consumer spending. Specifically, our Soft Home, Hard Home, Furniture and Seasonal merchandise categories may be threatened when disposable income levels are negatively impacted by economic conditions, such as the significant rise in U.S. unemployment in March 2020 related to the impacts of the COVID-19 coronavirus. The COVID-19 coronavirus has rapidly spread throughout the U.S., which could negatively impact consumer shopping habits for an unknown duration of time.
It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving. Additionally, the net sales of cyclical product offerings in our Seasonal category may be threatened when we experience extended periods of unseasonable weather. Inclement weather can also negatively impact our Furniture category, as many customers transport the product home personally. In particular, the economic conditions and weather patterns of four states (California, Texas, Florida, and Ohio) are important as approximately 33% of our current stores operate and 34% of our 2019 net sales occurred in these states.
Changes in federal or state legislation and regulations, including the effects of legislation and regulations on product safety and hazardous materials, could increase our cost of doing business and adversely affect our operating performance.
We are exposed to the risk that newNew federal or state legislation, including new product safety and hazardous material laws and regulations, may negatively impact our operations, increase our cost of doing business 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, reputational damage, and be exposed toincreased legal and reputational risk.
In addition, if we discard or dispose of our merchandise, particularly thatmerchandise which is non-salable, in a fashion that is inconsistentinconsistently with jurisdictionalapplicable waste management 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.
We are subject to periodic litigation and regulatory proceedings, including Fair Labor Standards Act, state wage and hour, and shareholder class action lawsuits, which may adversely affect our business and financial performance.
From time to time, we are involved in lawsuitslitigation 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 noteNote 9 to the accompanying consolidated financial statements.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance.
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, some natural 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.
If we are unable to attract, train, and retain highly qualified associates while also controlling our labor costs, our financial performance may be negatively affected.Financial Risks
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.
The loss of key personnel may have a material impact on our future results of operations.
We believe that we benefit substantially from the leadership and experience of our senior executives. The loss of 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.
If we are unable to retain existing and/or secure suitable new store locations under favorable lease terms, our financial performance may be negatively affected.
We lease almost all of our stores, and a significant number of these leases expire or are up for renewal each year, 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.
If our investments in our Store of the Future remodel program and other store projects are not favorably received by our customers, our financial performance may be negatively affected.
We have embarked upon a significant capital improvement project to renovate a meaningful portion of our stores 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 these programs and efficiently utilize our capital expenditures, our financial position, results of operations, and liquidity may be negatively affected.
If we are unable to comply with the terms of the 20182021 Credit Agreement, our capital resources, financial condition, results of operations, and liquidity may be materially adversely effected.
We may need to borrow funds under our $700$600 million five-year unsecured credit facility (“20182021 Credit Agreement”) from time to time, depending on operating or other cash flow requirements. The 20182021 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 20182021 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.
A significant decline in our operating profit may impair our ability to realize the value of our long-lived assets.
We are required by accounting rules to periodically assess our property and equipment, operating lease right-of-use assets, and intangible assets for impairment and recognize an impairment loss, 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, operating lease right-of-use assets, deferred tax assets, and our intangible assets and trigger the impairment of these assets. Impairment charges taken against property and equipment, operating lease right-of-use assets, and intangible assets could be material and could have a material adverse impact on our capital resources, financial condition, results of operations, and liquidity.
A potential proxy contest for the election
Other Risks
On March 6, 2020, Macellum Capital Management and Ancora Advisors nominated nine candidates for election to our Board of Directors at our 2020 annual meeting of shareholders. A contested election could require us to incur substantial legal and public relations fees and proxy solicitation expenses and divert management’s attention, and could result in potential operational disruption. Further, any perceived uncertainties as to our future direction and control could result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified employees, any of which could adversely affect our business and operating results. Any perceived uncertainties could also adversely affect the price and volatility of our stock.
We also may be subject to a number of other factors which may, individually or in the aggregate, materially adversely affect our business.business, capital resources, financial condition, results of operations and liquidity. These factors include, but are not limited to:
•Changes in governmental laws, case law and regulations, including changes that increase our effective tax rate, comprehensive tax reform, or other matters related to taxation;
•Changes in accounting standards, including new interpretations and updates to current standards;
A downgrade in our credit rating could negatively affect our ability to access capital or increase our borrowing costs;
•Events or circumstances could occur which could create bad publicity for us or for the types of merchandise offered in our stores which may negatively impact our business results including our sales;
Fluctuating commodity prices, including but not limited to diesel fuel and other fuels used by utilities to generate power, may affect our gross profit and operating profit margins;
•Infringement of our intellectual property, including the Big Lots trademarks, could dilute their value; and
•Other risks described from time to time in our filings with the SEC.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Retail Operations
All of our stores are located in the U.S., predominantly in strip shopping centers, and have an average store size of approximately 32,40032,900 square feet, of which an average of 22,60022,900 is selling square feet. For additional information about the properties in our retail operations, see the discussion under the caption “Real Estate”“Real Estate” in “Item“Item 1. Business”Business” and under the caption “Real Estate”“Operating Strategy - Real Estate” in MD&A in this Form 10-K.
The average costcapital expenditures invested to open a new store in a leased facility during 20192021 was approximately $1.8$1.1 million, includingwhich includes the cost of construction and fixtures, excludes any landlord-provided funding, and inventory.reflects the benefit of lower capital expenditures at certain of our stores where construction was completed by our landlord. All of our stores are leased, except for the 5250 stores we own in the following states:
|
| | | | |
State | Stores Owned |
ArizonaCalifornia | 136 |
|
CaliforniaColorado | 373 |
|
ColoradoFlorida | 3 |
|
FloridaLouisiana | 31 |
|
LouisianaMichigan | 1 |
|
MichiganNew Mexico | 12 |
|
New MexicoOhio | 21 |
|
OhioTexas | 13 |
|
Texas Total | 350 |
|
Total | 52 |
|
Additionally, we own onetwo closed sitesites which we are not currently operating and one of those sites is available for sale. Since thisthese owned site issites are no longer operating as an active store, it hasstores, they have been excluded from our store counts since February 2, 2019.at January 29, 2022.
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 ten years with multiple five-year renewal options. Twenty-nineTwenty 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. An additional thirteen store leases have generic early termination clauses that allow us to exit the location upon providing sufficient notice to the landlord.
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 10eight month-to-month leases and 5250 owned locations.
| | | | | | | | | | | |
Fiscal Year: | Expiring Leases | | Leases Without Options |
2022 | 184 | | 48 |
2023 | 230 | | 47 |
2024 | 197 | | 29 |
2025 | 204 | | 28 |
2026 | 240 | | 42 |
Thereafter | 322 | | 17 |
|
| | | |
Fiscal Year: | Expiring Leases | | Leases Without Options |
2020 | 223 | | 40 |
2021 | 259 | | 57 |
2022 | 202 | | 42 |
2023 | 221 | | 43 |
2024 | 190 | | 26 |
Thereafter | 251 | | 12 |
Warehouse and Distribution
At February 1, 2020,January 29, 2022, we ownedleased and operated approximately 7.69.0 million square feet of distribution center and warehouse space in four distribution facilities and leased approximately 2.8 million square feet of distribution center and warehouse space in two distribution facilities. We typically operate five regional distribution centersfacilities strategically located inacross 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 2.32.4 million merchandise cartons per week in 2019.2021. 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 ouran e-commerce fulfillment center out of our Columbus, OhioOH warehouse. In recent years, to supplement our Columbus, OH e-commerce fulfillment center, we began fulfilling direct-ship e-commerce orders from 65 of our store locations, which we strategically selected based on geographic location, size, and other relevant factors.
Distribution centers and warehouse space, and the corresponding square footage of the facilities,regional distribution centers, by location at February 1, 2020,January 29, 2022, were as follows:
| | | | | | | | | | | |
Location | Year Opened | Total Square Footage | Number of Stores Served |
| | (Square footage in thousands) | |
Columbus, OH | 1989 | 3,559 | 331 |
Montgomery, AL | 1996 | 1,411 | 317 |
Tremont, PA | 2000 | 1,295 | 308 |
Durant, OK | 2004 | 1,297 | 257 |
Apple Valley, CA | 2019 | 1,416 | 218 |
Total | | 8,978 | 1,431 |
|
| | | |
Location | Year Opened | Total Square Footage | Number of Stores Served |
| | (Square footage in thousands) | |
Columbus, OH | 1989 | 3,559 | 321 |
Montgomery, AL | 1996 | 1,411 | 305 |
Tremont, PA | 2000 | 1,295 | 304 |
Durant, OK | 2004 | 1,297 | 220 |
Apple Valley, CA | 2019 | 1,416 | 80 |
Rancho Cucamonga, CA | 1984 | 1,423 | 174 |
Total |
| 10,401 | 1,404 |
On October 30, 2019,At January 29, 2022, we completedalso leased two small-format forward distribution centers, which are operated by a third-party logistics service provider. The forward distribution centers divert processing and logistics for bulk goods from our regional distribution centers into the saleforward distribution centers, thereby increasing the efficiency of our regional distribution center located in Rancho Cucamonga, California. As partcenters, which are designed to most efficiently process cartons as opposed to bulk goods. The locations and respective square footage of our agreement with the purchaser,forward distribution centers at January 29, 2022, were as follows:
| | | | | | | | |
Location | Year Opened | Total Square Footage |
| | (Square footage in thousands) |
McDonough, GA | 2021 | 485 |
Bethel, PA | 2021 | 587 |
Total | | 1,072 |
In 2022, we are leasing the property back from the purchaser for six months whileintend to open two additional forward distribution centers and we wind down our operations at thewill continue to evaluate whether we need to open additional forward distribution center. In February 2020, we completed the wind down of our operationscenters in the Rancho Cucamonga, California distribution centerfuture to support our net store count and terminated our leaseback agreement. For further information onnet sales growth targets over the sale, see note 10 to the accompanying consolidated financial statements.next several years.
Corporate Office
In 2018, we movedWe own a facility in Columbus, Ohio that serves as 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.headquarters.
Item 3. Legal Proceedings
Item 103 of SEC Regulation S-K requires that we disclose actual or known contemplatedFor information regarding certain legal proceedings to which a governmental authority and we are eachhave been named 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.
For a discussion of certain litigated matters, alsoare subject, see
noteNote 9 to the accompanying consolidated financial statements.
Item 4. Mine Safety Disclosures
None.
Supplemental Item. Information about our Executive Officers of the Registrant
Our executive officers at March 31, 202029, 2022 were as follows:
| | | | | | | | | | | |
Name | Age | Offices Held | Officer Since |
Bruce K. Thorn | 54 | President and Chief Executive Officer | 2018 |
Gene Eddie Burt | 56 | Executive Vice President, Chief Supply Chain Officer | 2020 |
Andrej Mueller | 45 | Executive Vice President, Strategy and Chief Customer Officer | 2019 |
Nicholas E. Padovano | 58 | Executive Vice President, Chief Stores Officer | 2014 |
Jack A. Pestello | 52 | Executive Vice President, Chief Merchandising Officer | 2020 |
Jonathan E. Ramsden | 57 | Executive Vice President, Chief Financial Officer and Chief Administrative Officer | 2019 |
Ronald A. Robins, Jr. | 58 | Executive Vice President, Chief Legal and Governance Officer, General Counsel and Corporate Secretary | 2015 |
Michael A. Schlonsky | 55 | Executive Vice President, Chief Human Resources Officer | 2000 |
Gurmeet Singh | 53 | Executive Vice President, Chief Technology Officer | 2021 |
|
| | | |
Name | Age | Offices Held | Officer Since |
Bruce K. Thorn | 52 | President and Chief Executive Officer | 2018 |
Lisa M. Bachmann | 58 | Executive Vice President, Chief Merchandising and Operating Officer | 2002 |
Andrej Mueller | 43 | Executive Vice President, Strategy | 2019 |
Jonathan E. Ramsden | 55 | Executive Vice President, Chief Financial Officer and Chief Administrative Officer | 2019 |
Ronald A. Robins, Jr. | 56 | Executive Vice President, General Counsel and Corporate Secretary | 2015 |
Michael A. Schlonsky | 53 | Executive Vice President, Human Resources | 2000 |
Stephen M. Haffer | 54 | Senior Vice President, Chief Customer Officer | 2018 |
Nicholas E. Padovano | 56 | Senior Vice President, Store Operations | 2014 |
Bruce K. Thorn is our President and Chief Executive Officer. Before joining Big Lots in September 2018, he served as President and Chief Operating Officer of Tailored Brands, Inc., a leading specialty retailer of men’s tailored clothing and formalwear. Bruceformalwear, from 2015 to 2018. Mr. Thorn also held various enterprise-level roles with PetSmart, Inc., most recently as Executive Vice President, Store Operations, Services and Supply Chain, as well as leadership positions with Gap, Inc., Cintas Corp, LESCO, Inc. and The United States Army. Mr. Thorn also serves on the board of directors of Caleres, Inc.
Lisa M. BachmannGene Eddie Burt is responsible for merchandising and global sourcing, merchandise presentation,our supply chain and merchandise planning and allocation. Ms. Bachmannlogistics. He was promoted to Executive Vice President, Chief Merchandising and OperatingSupply Chain Officer in August 2015, at which time she assumed responsibility for merchandising and global sourcing. Prior to that, Ms. Bachmann was promoted to Executive Vice President, Chief Operating Officer in August 2012 and ExecutiveJanuary 2021 after serving as our Senior Vice President, Supply Chain Management and Chief Information Officersince joining us in March 2010. Ms. Bachmann joined2019. Prior to joining us, Mr. Burt served as the Executive Vice President of Merchandising and Supply Chain at GNC Holdings, a specialty nutrition retailer. Additionally, Mr. Burt spent eight years with PetSmart, Inc., in multiple Vice President and Senior Vice President Merchandise Planning, Allocationroles focusing on distribution, transportation, supply chain, and Presentation in March 2002.real estate development. His experience also includes logistics and supply chain roles with Tuesday Morning Corporation and Home Depot, Inc. Mr. Burt also serves on the board of directors of Boot Barn Holdings, Inc.
Andrej Mueller is responsible for business strategy.strategy and marketing. Mr. Mueller was promoted to Executive Vice President, Strategy and Chief Customer Officer in May 2020. Mr. Mueller joined us in October 2019 as Executive Vice President, Business Strategy. Prior to joining us, Mr. Mueller spent 18 years at Boston Consulting Group, an international management consulting firm, where he most recently was a partner and managing director at Boston Consulting Group.director. He has over 15 years of experience in the consumer products sector across a broad range of categories including personal care, snacks, beverages, cheese and dairy, and durable goods. He has worked in both developed and developing trade environments in Western and Eastern Europe, Russia, the Middle East, South Africa, and Latin America.
Nicholas E. Padovano is responsible for store operations and customer engagement. He was promoted to Executive Vice President, Chief Stores Officer in March 2021. Mr. Padovano joined us in 2014 as Senior Vice President, Store Operations. Prior to joining us, Mr. Padovano was an executive at the Hudson Bay Company, a department store retailer, where he was responsible for store operations of the Bay and Zellers brands. Additionally, Mr. Padovano served as Head of Stores, Distribution and Supply Chain for Lowes Canada, a home improvement retailer.
Jack A. Pestello is responsible for merchandising and global sourcing, merchandise presentation, and merchandise planning and allocation. Mr. Pestello joined us in July 2020 as Executive Vice President, Chief Merchandising Officer following seven years in leadership roles at Walmart Inc., an international retailer, where he most recently served as Senior Vice President and General Merchandise Manager for Walmart Inc.’s grocery business, after having served as Senior Vice President, Private Brands and Vice President of Walmart Inc’s International Division. Additionally, Mr. Pestello has previously served in leadership roles with Woolworths Group Ltd., an international retailer, and Daymon Worldwide, Inc., an international retail branding and sourcing consultant.
Jonathan E. Ramsden is responsible for financial reporting and controls, financial planning and analysis, treasury, risk management, tax, internal audit, investor relations, real estate, and asset protection. Mr. Ramsden joined us in August 2019 as Executive Vice President, Chief Financial Officer and Chief Administrative Officer. Prior to joining us, Mr. Ramsden served for over seven years with Abercrombie & Fitch Co., an apparel retailer, as Chief Financial Officer and then later Chief
Operating Officer. Additionally, Mr. Ramsden spent 10 years as Chief Financial Officer of TBWA Worldwide, a global marketing services group, after having served as Controller of TBWA'sTBWA’s parent, Omnicom Group Inc.
Ronald A. Robins, Jr. is responsible for legal affairs, corporate governance and compliance.related matters. Mr. Robins was promoted to Executive Vice President General Counsel and Corporate Secretary in September 2019.2019, and now serves as the Chief Legal and Governance Officer. Prior to that, Mr. Robins served as Senior Vice President, General Counsel and Corporate Secretary.Secretary since joining us. Prior to joining us, Mr. Robins was a partner at Vorys, Sater, Seymour and Pease LLP and also previously served as General Counsel, Chief Compliance Officer, and Secretary of Abercrombie & Fitch Co., an apparel retailer.
Michael A. Schlonsky is responsible for talent management and oversight of human resources. He was promoted to Executive Vice President in August 2015.2015, and now serves as the Chief Human Resources Officer. He was promoted to Senior Vice President, Human Resources in August 2012 and promoted to Vice President, Associate Relations and Benefits in 2010. Prior to that, Mr. Schlonsky was promoted to Vice President, Associate Relations and Risk Management in 2005. Mr. Schlonsky joined us in 1993 as Staff Counsel and was promoted to Director, Risk Management in 1998, and to Vice President, Risk Management and Administrative Services in 2000.
Stephen M. Haffer Gurmeet Singhis responsible for customer engagement,technology development, technology platforms, technology infrastructure, and messaging touchpoints, including marketing, advertising, brand development and e-commerce. Mr. Hafferinformation security. Dr. Singh joined us in 20182021 as SeniorExecutive Vice President, Chief CustomerTechnology Officer. Prior to joining us, Mr. Haffer was an executiveDr. Singh served at American Signature,Al-Futtaim Group as President, Group Chief Digital Officer covering Digital, Technology and Data. Additionally, Dr. Singh previously served as Executive Vice President, Chief Digital, Information, and Marketing Officer for 7-Eleven Inc., the parent company for Value City Furniture and American Signature Home stores, where he served in a number of roles over a 25-year career spanning marketing, e-commerce, informationsimilar digital, technology and business development, leading up to his appointment as Chief Innovation Officer in 2016.data roles at BCG, CapitalOne, Intuit Inc. and FedEx. Dr. Singh is also on the board of directors of Focus Brands, LLC.
Part II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “BIG.”
The following table sets forth information regarding our repurchase of common shares during the fourth fiscal quarter of 2019:2021:
| | | | | | | | | | | | | | | | | |
(In thousands, except price per share data) | | | | |
Period | (a) Total Number of Shares Purchased (1)(2) | | (b) Average Price Paid per Share (1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
October 31, 2021 - November 27, 2021 | 4 | | | $ | 48.30 | | — | | $ | — | |
November 28, 2021 - December 25, 2021 | 825 | | | 43.13 | | 825 | | 214,419 | |
December 26, 2021 - January 29, 2022 | 1,239 | | | 44.41 | | 1,239 | | 159,425 | |
Total | 2,068 | | | $ | 43.91 | | 2,064 | | $ | 159,425 | |
|
| | | | | | | | | | | |
(In thousands, except price per share data) | | | | |
Period | (a) Total Number of Shares Purchased (1) | | (b) Average Price Paid per Share (1) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
November 3, 2019 - November 30, 2019 | — |
| | $ | 21.10 |
| — |
| $ | — |
|
December 1, 2019 - December 28, 2019 | — |
| | 23.93 |
| — |
| — |
|
December 29, 2019 - February 1, 2020 | — |
|
| 29.86 |
| — |
| — |
|
Total | — |
| | $ | 22.99 |
| — |
| $ | — |
|
(1) On December 1, 2021, our Board of Directors authorized the repurchase of up to $250.0 million of our common shares (“2021 Repurchase Authorization”). During the fourth quarter of 2021, we purchased 2.1 million of our common shares for $90.6 million under the 2021 Repurchase Authorization. The 2021 Repurchase Authorization has no scheduled termination date.
| |
(1) | In November 2019, December 2019 and January 2020, in connection with the vesting of certain outstanding restricted stock units, we acquired 101, 129, and 10 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings. |
(2) In November 2021 and December 2021, in connection with the vesting of certain outstanding restricted stock units, we acquired 4,072 and 290 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings.
At the close of trading on the NYSE on March 27, 2020,25, 2022, there were approximately 721867 registered holders of record of our common shares.
The following graph and table compares, for the five fiscal years ended February 1, 2020,January 29, 2022, 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 30, 2016, January 28, 2017, February 3, 2018, February 2, 2019, and February 1, 2020.2020, January 30, 2021 and January 29, 2022. The graph and table assume that $100 was invested on January 31, 2015,28, 2017, 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.
| | | | | | | | | | | | | | | | | | | | |
| Indexed Returns |
| Years Ended |
| Base Period | | | | | |
| January | January | January | January | January | January |
Company / Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
Big Lots, Inc. | $ | 100.00 | | $ | 121.05 | | $ | 67.72 | | $ | 61.04 | | $ | 141.38 | | $ | 96.56 | |
S&P 500 Index | 100.00 | | 122.83 | | 122.76 | | 149.23 | | 174.97 | | 211.72 | |
S&P 500 Retailing Index | $ | 100.00 | | $ | 141.30 | | $ | 152.92 | | $ | 184.44 | | $ | 260.77 | | $ | 276.14 | |
|
| | | | | | | | | | | | | | | | | | |
| Indexed Returns |
| Years Ended |
| Base Period | | | | | |
| January | January | January | January | January | January |
Company / Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Big Lots, Inc. | $ | 100.00 |
| $ | 85.92 |
| $ | 109.66 |
| $ | 132.74 |
| $ | 74.27 |
| $ | 66.94 |
|
S&P 500 Index | 100.00 |
| 99.33 |
| 120.06 |
| 147.48 |
| 147.40 |
| 179.17 |
|
S&P 500 Retailing Index | $ | 100.00 |
| $ | 116.80 |
| $ | 138.46 |
| $ | 195.65 |
| $ | 211.74 |
| $ | 255.38 |
|
Item 6. Selected Financial Data[Reserved]
The following statements of operations and balance sheet data have been derived from our consolidated financial statements and should be read in conjunction with MD&A and the consolidated financial statements and related notes included herein.
|
| | | | | | | | | | | | | | | |
| Fiscal Year |
(In thousands, except per share amounts and store counts) | 2019 (a) | 2018 (a) | 2017 (b) | 2016 (a) | 2015 (a) |
Net sales | $ | 5,323,180 |
| $ | 5,238,105 |
| $ | 5,264,362 |
| $ | 5,193,995 |
| $ | 5,190,582 |
|
Cost of sales (exclusive of depreciation expense shown separately below) | 3,208,498 |
| 3,116,210 |
| 3,121,920 |
| 3,094,576 |
| 3,123,442 |
|
Gross margin | 2,114,682 |
| 2,121,895 |
| 2,142,442 |
| 2,099,419 |
| 2,067,140 |
|
Selling and administrative expenses | 1,823,409 |
| 1,778,416 |
| 1,723,996 |
| 1,730,956 |
| 1,708,499 |
|
Depreciation expense | 134,981 |
| 124,970 |
| 117,093 |
| 120,460 |
| 122,854 |
|
Gain on sale of distribution center | (178,534 | ) | — |
| — |
| — |
| — |
|
Operating profit | 334,826 |
| 218,509 |
| 301,353 |
| 248,003 |
| 235,787 |
|
Interest expense | (16,827 | ) | (10,338 | ) | (6,711 | ) | (5,091 | ) | (3,683 | ) |
Other income (expense) | (451 | ) | (558 | ) | 712 |
| 1,387 |
| (5,254 | ) |
Income before income taxes | 317,548 |
| 207,613 |
| 295,354 |
| 244,299 |
| 226,850 |
|
Income tax expense | 75,084 |
| 50,719 |
| 105,522 |
| 91,471 |
| 83,977 |
|
Net income | $ | 242,464 |
| $ | 156,894 |
| $ | 189,832 |
| $ | 152,828 |
| $ | 142,873 |
|
Earnings per common share - basic: | $ | 6.18 |
| $ | 3.84 |
| $ | 4.43 |
| $ | 3.37 |
| $ | 2.83 |
|
Earnings per common share - diluted: | $ | 6.16 |
| $ | 3.83 |
| $ | 4.38 |
| $ | 3.32 |
| $ | 2.80 |
|
| | | | | |
Weighted-average common shares outstanding: | | | | | |
Basic | 39,244 |
| 40,809 |
| 42,818 |
| 45,316 |
| 50,517 |
|
Diluted | 39,351 |
| 40,962 |
| 43,300 |
| 45,974 |
| 50,964 |
|
Cash dividends declared per common share | $ | 1.20 |
| $ | 1.20 |
| $ | 1.00 |
| $ | 0.84 |
| $ | 0.76 |
|
Balance sheet data: | | | | | |
Total assets (c) | $ | 3,189,281 |
| $ | 2,023,347 |
| $ | 1,651,726 |
| $ | 1,607,707 |
| $ | 1,640,370 |
|
Working capital (c) | 193,129 |
| 489,443 |
| 432,365 |
| 315,784 |
| 315,984 |
|
Cash and cash equivalents | 52,721 |
| 46,034 |
| 51,176 |
| 51,164 |
| 54,144 |
|
Long-term debt | 279,464 |
| 374,100 |
| 199,800 |
| 106,400 |
| 62,300 |
|
Shareholders’ equity | $ | 845,464 |
| $ | 693,041 |
| $ | 669,587 |
| $ | 650,630 |
| $ | 720,470 |
|
Cash flow data: | | | | | |
Cash provided by operating activities | $ | 338,970 |
| $ | 234,060 |
| $ | 250,368 |
| $ | 311,925 |
| $ | 342,352 |
|
Cash used in investing activities | $ | (74,480 | ) | $ | (376,473 | ) | $ | (156,508 | ) | $ | (84,701 | ) | $ | (113,193 | ) |
Store data: | | | | | |
Total gross square footage | 45,453 |
| 44,500 |
| 44,638 |
| 44,570 |
| 44,914 |
|
Total selling square footage | 31,705 |
| 31,217 |
| 31,399 |
| 31,519 |
| 31,775 |
|
Stores open at end of the fiscal year | 1,404 |
| 1,401 |
| 1,416 |
| 1,432 |
| 1,449 |
|
| |
(a) | The period presented is comprised of 52 weeks. |
| |
(b) | The period presented is comprised of 53 weeks. |
| |
(c) | In 2019, we adopted Accounting Standards Update 2016-02, Leases (Topic 842). As such, 2019 includes right-of-use assets and operating lease liabilities and is not comparable to the other fiscal years presented.
|
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.
Our fiscal year ends on the Saturday nearest to January 31, which results in some fiscal years with 52 weeks and some with 53 weeks. Fiscal yearyears 2021, 2020, and 2019 and 2018 were comprised of 52 weeks. Fiscal year 2017 was comprised of 53 weeks. Fiscal year 20202022 will also be comprised of 52 weeks.
Operating Results Summary
The following are the results from 20192021 that we believe are key indicators of our financial condition and results of operations when compared to 2018.2020.
•Net sales increased $85.1decreased $48.6 million, or 1.6%0.8%.
•Comparable store sales for stores open at least fifteen months, includingplus our e-commerce increased $17.3operations, decreased $152.2 million, or 0.3%2.5%.
•Gross margin dollars decreased $7.2$100.4 million whileand gross margin rate declined 80decreased 130 basis points to 39.7%39.0% of net sales.
•Selling and administrative expenses increased $45.0 million.$49.1 million, which included $5.0 million of store asset impairment charges. As a percentage of net sales, selling and administrative expenses increased 30110 basis points to 34.3%32.8% of net sales.
We•Operating profit decreased $616.7 million to $239.8 million.
•Diluted earnings per share decreased 66.9% to $5.33 per share, compared to $16.11 per share in 2020.
•In 2020 we recorded a pre-tax gain on sale of distribution centercenters of $178.5$463.1 million and consulting and other expenses of $4.0 million related to the sale and leaseback of our four owned distribution center located in Rancho Cucamonga, California, which increasedcenters. The absence of the gain on sale of distribution centers and associated consulting and other expenses decreased our operating profit in 2021 by $178.5$459.1 million and increaseddecreased our diluted earnings per share by approximately $3.47$8.75 per share.
Operating profit rate increased 210 basis points to 6.3%.
Diluted earnings per share increased 60.8% to $6.16 per share, compared to $3.83 per share in 2018.
•Our return on invested capital increaseddecreased to 21.2%14.9% from 16.3%48.4%.
•Inventory of $921.3$1,237.8 million represented a $48.3$297.5 million decrease,increase, or 5.0%31.6%, from 2018.2020.
•We acquired approximately 1.3a total of 7.7 million of our outstanding common shares for $50.0$417.7 million under our 2019 Repurchase Program (as defined belowshare repurchase authorizations in “Capital Resources and Liquidity”).2021 compared to 3.8 million of our outstanding common shares for $172.8 million under share repurchase authorizations in 2020.
•We declared and paid four quarterly cash dividends in the amount of $0.30 per common share, for a total paid amount of approximately $48.4$41.7 million.
The following table compares components of our consolidated statements of operations as a percentage of net sales:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
Net sales | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales (exclusive of depreciation expense shown separately below) | 61.0 | | 59.7 | | 60.3 | |
Gross margin | 39.0 | | 40.3 | | 39.7 | |
Selling and administrative expenses | 32.8 | | 31.7 | | 34.3 | |
Depreciation expense | 2.3 | | 2.2 | | 2.5 | |
Gain on sale of distribution centers | 0.0 | | (7.5) | | (3.4) | |
Operating profit | 3.9 | | 13.8 | | 6.3 | |
Interest expense | (0.2) | | (0.2) | | (0.3) | |
Other income (expense) | 0.0 | | (0.0) | | (0.0) | |
Income before income taxes | 3.8 | | 13.6 | | 6.0 | |
Income tax expense | 0.9 | | 3.5 | | 1.4 | |
Net income | 2.9 | % | 10.1 | % | 4.6 | % |
|
| | | | | | |
| 2019 | 2018 | 2017 |
Net sales | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales (exclusive of depreciation expense shown separately below) | 60.3 |
| 59.5 |
| 59.3 |
|
Gross margin | 39.7 |
| 40.5 |
| 40.7 |
|
Selling and administrative expenses | 34.3 |
| 34.0 |
| 32.7 |
|
Depreciation expense | 2.5 |
| 2.4 |
| 2.2 |
|
Gain on sale of distribution center | (3.4 | ) | 0.0 |
| 0.0 |
|
Operating profit | 6.3 |
| 4.2 |
| 5.7 |
|
Interest expense | (0.3 | ) | (0.2 | ) | (0.1 | ) |
Other income (expense) | (0.0 | ) | (0.0 | ) | 0.0 |
|
Income before income taxes | 6.0 |
| 4.0 |
| 5.6 |
|
Income tax expense | 1.4 |
| 1.0 |
| 2.0 |
|
Net income | 4.6 | % | 3.0 | % | 3.6 | % |
See the discussion below under the caption “2019“2021 Compared To 2018”2020” for additional details regarding the specific components of our operating results. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the year ended February 2, 2019January 30, 2021 for a comparison of our operating results for 20182020 to our operating results for 2017.2019, which was filed with the SEC on March 30, 2021.
In 2021, we recognized non-cash store asset impairments of $5.0 million related to underperforming stores in our chain, which included impairments of both operating lease right-of-use assets and property and equipment. The store asset impairment charges decreased our operating profit by $5.0 million and decreased our diluted earnings per share by approximately $0.11 per share. See Note 2 and Note 5 to the accompanying consolidated financial statements for additional information on the store asset impairment charges.
In 2020, we recognized a gain on sale of distribution centers of $463.1 million related to the sale and leaseback of four distribution centers. Additionally, our selling and administrative expenses include $4.0 million of consulting and other costs associated with the sale and leaseback transactions. The combined gain on sale of distribution centers and associated consulting and other expenses increased our operating profit by $459.1 million and increased our diluted earnings per share by approximately $8.75 per share. See Note 10 to the accompanying consolidated financial statements for additional information on the sale and leaseback transactions.
In 2019, our cost of sales includesincluded a $6.0 million charge for impairment of inventory in our greeting cards department, which we chose to exit in the first quarter of 2019. Additionally, our selling and administrative expenses includeincluded $38.3 million of costs associated with our transformational restructuring initiative, which we refer to as “Operation North Star”,Star,” announced in the first quarter of 2019 and $7.3 million in estimated costs associated with employee wage and hour claims brought against us in the state of California.
In 2018, our selling and administrative expenses include $7.0 We also recognized a gain on sale of distribution center of $178.5 million
of costs associated withrelated to the
retirementsale of our
former chief executive officerRancho Cucamonga, CA distribution center which increased our 2019 operating profit by $178.5 million and
$3.5 million of costs associated with the settlement of shareholder litigation, which is described in further detail in noteincreased our diluted earnings per share by approximately $3.47 per share. See Note 10 to the accompanying consolidated financial statements.statements for additional information on this sale transaction.
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
In late 2018 into early 2019, the Company conductedcompleted a comprehensive review of its operating strategy. The outcome of the review was a multi-year plan for a strategic transformation, which we refer to as “Operation North Star”.Star.” While the core objectives of Operation North Star have remained the same, Operation North Star continues to evolve as our business progresses.
Operation North Star
Operation North Star has three primary objectives:
•Drive profitable long-term growth;
•Fund the journey; and
•Create long-term shareholder value.
Drive profitable long-term growth
The “drive profitable long-term growth” objective of Operation North Star is focused on a series of initiatives to growgrowing our net sales, including:which includes:
Strengthen our home offerings (“Home”), which spans our Furniture, Seasonal, and Soft Home merchandise categories, as a destination for Jennifer;
Grow store traffic through various traffic driver initiatives;
Continue responsible investment in our “Store of the Future” growth platform and other store presentation initiatives;
Grow•Growing our store count by:
◦Adding at least 50 net new stores in 2022;
◦Accelerating annual net new store growth beyond 2022 to 80 or more per year; and
◦Reducing store closures through our store intervention program for underperforming stores.
•Increasing our sales productivity by:
◦Optimizing our assortments through category discipline and space planning;
◦Introducing a new Furniture associate program, which increasedwe refer to as NextGen Furniture Sales, to accelerate Furniture net sales growth;
◦Growing Furniture net sales with modern Broyhill® brand assortments;
◦Winning with year-round Seasonal assortments;
◦Expanding our rapidly-growing apparel offering;
◦Growing our own brands, especially our Broyhill® and Real Living® brands; and
◦Driving our merchandising innovation pipeline by responsibly investing in 2019 forstore presentation initiatives, including “The Lot,” the first time since 2012;“Queue Line,” and Project Refresh (described below).
Grow•Accelerating our e-commerce sales including buy online pick up in store (“BOPIS”) activities.by:
◦Removing friction points to provide an easier shopping experience;
◦Increasing website personalization with product recommendations;
◦Accelerating supplier direct fulfillment and extending our assortment;
◦Growing site traffic through targeted marketing and brand growth; and
◦Improving shipping options to include nationwide same-day and two-day delivery options.
•Activating our brand and growing our customer base by:
◦Creating a community of bargain hunters and treasure seekers;
◦Driving incremental visits from new and existing customers;
◦Increasing brand awareness, brand consideration, and customers; and
◦Driving personalized marketing based on our customer data platform.
Fund the journey
The “fund the journey” objective of Operation North Star is focused on a series of initiatives to reducereducing costs so we can invest thosethese savings generated by the cost reduction initiatives in the growth areas of our business. ThoseOur initiatives include:
Restructure•Expanding our fieldgross margin rate;
•Increasing store efficiency and corporate headquarters teams to streamline our leadership structure, reduce overhead costs,productivity;
•Increasing organizational efficiency;
•Encouraging a culture of frugality; and align our resources with Operating North Star objectives;
Restructure our store management structure to better serve Jennifer and optimize overall payroll hours; and
Analyze•Continuously analyzing our purchasing habits and vendor agreements for retail merchandise and other goods and services to ensure we are maximizing our buying power and making cost-effective decisions.
Additionally, we continue to evolve our supply chain capabilities and we have established several enablement workstreams to ensure we have the technology and processes in place to achieve our “drive profitable long-term growth” and “fund the journey” objectives.
Create long-term shareholder value
The “create long-term shareholder value” objective isrepresents the culmination of our “drive profitable long-term growth” and “fund the journey” objectives. If we effectively execute the first two objectives of Operation North Star, we believe that we will deliver value to our shareholders through earnings growth over time. We continue to optimize our capital allocation to support Operation North Star initiatives while returning capital to our shareholders though share repurchases and dividends, when appropriate.
Enablers
In recognition of the importance of having the appropriate technology and processes in place to achieve our “drive profitable long-term growth” and “fund the journey” objectives, we have established several enabler work streams with the following objectives:
•Improve our customer experience;
•Improve and scale our supply chain capabilities;
•Upgrade and enhance our data and technology foundation; and
•Elevate our talent acquisition and performance management.
Operation North Star Progress
In 2021, we successfully completed the following under our Operation North Star strategy:
•Grew our Broyhill® brand offerings to account for over $700 million of net sales in 2021;
•Increased our net store count by 23 stores, which is our third consecutive year of net store growth;
•Expanded our presentation initiatives, The Lot and Queue Line, to nearly all stores in our chain;
•Implemented a space planning tool, which improved our merchandising analytics and insights;
•Launched Project Refresh, a multi-year store investment to update the shopping experience and appearance of our older stores in a cost efficient manner, with approximately 50 stores completed in 2021;
•Opened two small-format forward distribution centers to expand our supply chain capabilities;
•Launched a new transportation management system for outbound shipments;
•Achieved an 82% favorable associate engagement rate, which exceeds our retail industry benchmark;
•Expanded our accepted payment methods to include Apple Pay, Google Pay, PayPal, and Pay in 4;
•Expanded our e-commerce distribution network by implementing ship-from-store capabilities in 18 additional stores;
•Invested in e-commerce analytics tools, which improved our testing capabilities and customer insights; and
•Returned approximately $460 million to shareholders in the form of share repurchases and dividends.
Next Steps
In 2022, we plan to implement the following initiatives to achieve our Operation North Star goals:
•Grow our store count by at least 50 net new stores;
•Execute Project Refresh remodels in approximately 200 additional stores;
•Implement our NextGen Furniture Sales model in approximately 500 additional stores, which is intended to enhance staffing and incentive compensation to grow Furniture sales;
•Implement a new “Lots under $5” presentation initiative, which will provide incremental assortment at a highly-attractive price point;
•Expand shrink reduction programs, including cart locking systems and apparel tagging;
•Open two additional forward distribution centers and assess the need for additional forward distribution centers;
•Launch a multi-year project to overhaul our order management system to enable future growth opportunities;
•Implement buy online, ship to store capabilities; and
•Enhance e-commerce supply chain with last mile carrier capabilities and an improved ship from store network.
Merchandising
We focus our merchandising strategy on being(1) the authority on price andbargain hunt, by seeking to deliver unmatched value to Jennifer in all of our merchandise categoriescategories; (2) the treasure hunt, by seeking to surprise and delight our customers with our unique product assortment; and (3) convenience, by providingseeking to offer a merchandisereliable assortment of simple to shop essentials. In 2021, we introduced the concept of “Big Buys” to our merchandising strategy. Big Buys include closeouts and other one-time product offerings that surprises and delights her. Underfit into the bargain hunt facet of our merchandising strategy.
One of the focuses of Operation North Star our merchandising strategy is also focused on strengthening our Home offerings. Home is an area where we believe Jennifer gives us the right to play and where we believe we can play to win.
Strengthening Home begins withdriving growth ofin our own brands, particularly the Broyhill® brand, an iconic brand that we acquired in 2018. We launched the Broyhill® brand of product offerings in late 2019 with initial product offerings in our Furniture, Seasonal, Soft Home, and Hard Home merchandise categories. We expanded the Broyhill® line in 2021 to also include housewares and kitchen textiles. Available both in-store and online, we believe the Broyhill® assortment strengthens our Home assortment with a high-quality product offering at a value-based price that Jennifer findscustomers find attractive. We planOur Broyhill®-related net sales exceeded $700 million in 2021 compared to launch an expanded assortmentover $400 million in 2020. In 2022, we intend to focus on improving the availability of Broyhill®products merchandise, which was negatively impacted by global supply chain issues in 2020.2021 that, in turn, negatively impacted the growth of our Broyhill®-related net sales.
We believe our merchandising strategies for Furniture, Seasonal, and Soft Home position us to surprise and delight Jenniferour customers with our Homehome product offerings:
•Our Furniture category primarily focuses on being a destination for our core customer’s home furnishing needs, such as upholstery, mattresses, case goods, and ready-to-assemble. In Furniture, we believe our competitive advantage is attributable to our sourcing relationships, our in-store availability, our delivery options, and everyday value offerings. A significant majority of our offerings in this category consist of replenishable products sold under our own brands or sourced from recognized brand-name manufacturers. Within our own brands portfolio, the Broyhill® branded product offerings feature elevated quality and value, which continues to attract new furniture customers as well as provide existing customers with an incentive to step up to the higher-end offering. Our long-standing relationships with certain brand-name manufacturers, most notably in our mattresses and upholstery departments, allow us to work directly with themthe manufacturers to create product offerings specificallyexclusively for us, which enables us to provide a high-quality product at a competitive price. Additionally, we believe our “buy today, take home today” practice of carrying in-stock inventory of our core furniture offerings, which allows Jenniferour customer to take home hertheir purchase at the end of hertheir shopping experience, positively differentiates us from our competition. WeAs an omnichannel retailer, we also encourage Jenniferour customer to shop and buy our products online anytime and anywhere, and we invite hercustomers into our stores to touch and feel the quality and comfort of our products. Additionally, customers can have furniture delivered to their door same-day through PICKUP®, our national delivery partner. We believe that offering a focused assortment, which is displayed in furniture vignettes, provides Jennifercustomers a solution for decorating hertheir home when combined with our home décor offerings. Supplementing our merchandising and presentation strategies, we provide multiple third-party financing options for our customers, including options for those who may be more challenged for approval in traditional credit channels. Our financing partners are solely responsible for the credit approval decisions and carry the financial risk.
•Our Seasonal category strengthens Homeour home offerings with our patio furniture, gazebos, and Christmas trim, and other holiday departments. We believe we have a competitive advantage in this category by offering trend-right products with a strong value proposition in our own brands. We have a large selection of samplesOur stores focus on displaying assembled seasonal product to showcase our quality and displayed throughout the seasonal section of our store and have packaged the boxvalue, with boxed stock located nearby, so that it is very easy for Jenniferour customers to purchase and take home. Much of this merchandise is sourced on an import basis, which allows us to maintain our competitive pricing. Additionally, our Seasonal category offers surprise and delight through a mix of departments and products that complement hermeet our customer’s outdoor experience and holiday decorating desires. We continue tocontinually work with our vendors to expand the product assortment in our Seasonal category to respond to Jennifer’sour customers’ evolving wants and needs.
•Our Soft Home category complements our Furniture and Seasonal categories in making our stores a destination for a broader range of Homehome needs. Over the past fewseveral years, we have enhanced our assortment in Soft Home by allocating more selling space to the category to support a wider range of replenishable, fashion-based products. We
have also grown our assortments of closeouts in Soft Home to bring exceptional value and unique finds to our customers. We believe that we have a competitive advantage in Soft Home as a result of our trend-right, focused assortment with improved quality and perceived value, and our ability to furnish Jennifer’s homeour customers' homes with décor that complements an in-store furniture purchase. We have worked to develop a “solutions” approach to complete a room through our cross-merchandising efforts, particularly color palette coordination, when combining our Soft Home offerings with our Furniture and Seasonal categories. We believe that this approach helps Jenniferour customers envision how the product can work in her hometheir homes and enhances our brand image.
We considerbelieve the Food, Consumables, Hard Home, and Apparel, Electronics, Toys, & Accessories asOther are categories where we offer convenience categories:and exceptional value:
•Our Food and Consumables categories focus primarily on catering to Jennifer’s dailyproviding everyday essentials by providing reliablewith a consistent and convenient assortment and exceptional value consistency,through Big Buys, closeouts, and convenience of productopening price point offerings. We believe we possess a competitive advantage in the Food and Consumables categories based on our sourcing capabilities for closeout merchandise. Manufacturers and vendors have closeout merchandise for a variety of different reasons, including other retailers canceling orders or going out of business, production overruns, or marketing or packaging changes. We believe our vendor relationships, along with our size and financial strength, afford us these opportunities.the opportunity to consistently source and deliver Big Buys. To supplement our closeout business, we have focused
on improving and expanding our brand name, “never out” product assortment to provideoffer more consistency in those convenience areas where Jennifer desiresour customers desire consistently available everyday product offerings, such as over-the-counter medications. We believe that we have added top brands to our “never out” programs in Consumables and that our assortment and value proposition will continue to differentiate us in this highly competitive industry. Our customers have indicated they believe our Consumables assortment provides more value than our Food offerings, and as a result,In 2020, we tested a reallocation of space from the Food category to the Consumables merchandise category during 2019. The results of the test were successful and we plan to reallocatereallocated space from the Food category to the Consumables category inthrough our stores in“Pantry Optimization” initiative, which right-sized our food assortment, including reducing our refrigerated foods, and allowed us to expand the Store of the Future format during 2020. See discussion under the caption “Shopping Experience” below for description of“never out” Consumables assortment that our Store of the Future platform.customer considers an every day essential. In 2021, we focused on providing surprise and delight by expanding our holiday Food and Consumables assortments, as well as launching a one dollar opening price point program, which we promoted as “Onederland.”
•We believe that our Hard Home and Apparel, Electronics, Toys, & AccessoriesOther categories serve as convenient adjacencies to our other merchandise categories. Over the past fewseveral years, with the exception of apparel, we have intentionally narrowed our assortments in these categories and reallocated space from these categories to our Homehome products categories. Our product assortments in theseThese categories focus on value, and savings in comparison to competitors, in areas such as food prep, table top, home maintenance, small appliances, and electronics. In 2021, following a successful test and expansion in 2020, we rolled out apparel to the full chain and tested a successful presentation concept at the front of the store. In 2022, we continue to test and learn in our apparel presentation with a focus on sourcing closeouts and delivering Big Buys.
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”)., which includes stores open at least fifteen months, plus our e-commerce operations. 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 strengthening our Homehome product 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 continuedlong-term comp growth.
Marketing
The top priority of our marketing activities is to increase our net sales and 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, 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.
In an effort to align our messaging withSee the positive aspects of Jennifer’s perception of our brand, we have focused our marketing efforts on driving our value proposition“Advertising and Marketing” discussion in every season and category. We continue to increase our use of social and digital media outlets including conducting entire campaigns through these outlets (specifically on Facebook®Item 1. Business, Instagram®, Pinterest®, Twitter®, and YouTube®), to drive an increased understanding of our value proposition with our core customer and to communicate that message to new potential customers. These outlets enable us to deliver our message directly to Jennifer and provide her with the opportunity to share direct feedback with us, which can enhance our understanding of what is most important to her and how we can improve the shopping experience in our stores.
Given our customer’s proficiency with mobile devices and digital media, we focus on communicating with her through those channels. Our BIG Rewards Program 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 for 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 that growing the membership base of the BIG Rewards Program will provide more opportunities to understand and leverage customer behavior through segmentation. At February 1, 2020, our BIG Rewards Program had over 19 million active members (defined as having made a purchase in the last 12 months) and we are focused on continuing to grow the membership base of our BIG Rewards Program in 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 more deeply and frequently with Jennifer. Our printed advertising circulars and our in-store signage initiatives focus on promoting our value propositiondiscussion on our unique merchandise offerings.Marketing strategy.
Shopping Experience
One of the core objectives of our Operation North Star growth strategy is to drive our merchandising innovation pipeline by responsibly investinvesting 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-storestore presentation initiatives that create an easy shopping experience for our customers.
We have implemented a presentation solution called Store of the Future, which more deeply incorporates our brand identity and seeks to enhance the way Jennifer shops our 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:
Showcasing our most successful merchandise categories by moving our Furniture department to the front center of the prototype store with Seasonal and Soft Home on either side to improve the coordination“The Lot” in nearly all of our home decorating solutions. We moved Food and Consumables tostores over the back of the prototype store, while keeping them visible with clear sight lines from the entrance of the store. We have also added color coordinated way-finding signage to help Jennifer navigate our stores.
Creating a warm and personalized tone throughout the store through improved lighting, new flooring, softening the colors on our walls, and greeting Jennifer with a “Hello” wall as she enters the store. Additionally, we have added furniture vignettes and incorporated lifestyle photography to provide visual solutions for Jennifer.
Highlighting our focus on the community and local events. The wall behind the check-out counter thanks Jennifer for shopping us. We personalized the signage throughout the store and back room to reflect our friendly and community-oriented values.
For 2020, we plan to retrofit our existing fleet of Store of the Future layout stores to include the following new initiatives:
In 2019, we tested traffic driving cross-category presentation opportunities by displaying certain of our product offerings in a solution format we call “The Lot.”past two years. We designed The Lot to add incremental selling space to our store layout and display items from various merchandise categories placed in vignettes to promote life'slife’s occasions, such as fallFall tailgating. The Lot offers surprisea treasure hunt by surprising and delight to Jennifer by demonstratingdelighting our customers with the breadth and value of products that we offer in one convenient experience. Our expectation is to re-introduce Jennifer to the “treasure”The continually rotating product assortment offered by The Lot provides us with a unique testing ground for new products at varying price points that we offer, while removing the challengeshave not historically offered.
We have also implemented a successful test, we plan to expand this concept tostreamlined checkout experience in nearly all of our stores incalled the Store of the Future format during 2020.
In 2019, we also tested a new checkout experience featuring“Queue Line,” which features a reconfigured and streamlined queue designed to enhancecheckout design. The Queue Line both enhances the customer experience buildand builds a bigger basket supportedas our customers walk by new and expanded convenience offerings and createas they check out. The Queue Line’s smaller overall footprint compared to our previous checkout configuration also creates additional selling space for our Furniture merchandise category.
In 2022, we will introduce a supplement to The new checkout experience was well-receivedLot and Queue Line called “Lots Under $5,” which will sit in the front of our stores and is comprised of items priced less than $5 each that we expect will appeal to our bargain hunt and treasure hunt shoppers.
In 2021, we launched a multi-year project called Project Refresh, which is intended to make cosmetic improvements to older stores in our testingfleet and align branding across our stores. The investment for a Project Refresh remodel is expected to be less than $150,000 per store and includes updated exterior signage, vestibules, flooring, bathrooms, interior wall graphics, and paint. We completed approximately 50 Project Refresh remodels in 2021 in a successful test and we planexpect to expand this conceptremodel an additional 200 stores under Project Refresh in 2022. We expect to complete Project Refresh remodels in approximately 800 of our stores over the next several years, including the 50 completed in 2021 and the Store of the Future format during 2020.200 planned in 2022.
See “Real Estate” below for the projected roll-out schedule for the Store of the Future concept.
In addition to our efforts to improve theour in-store shopping experience, Operation North Star is focusedfocuses on improving our e-commerce platform. Our integratedshopping experience and growing e-commerce net sales by removing barriers, creating a fun and easy experience, and expanding the items available for purchase online. Over the last few years, we have increased our “extended aisle” assortments on our e-commerce platform, had offered a narrowed assortment of our in-store offerings. In 2017, we began offering expandedwhich offer additional fabric and color options on select products on our e-commerce platform in our Furniture and Seasonal categories, including items only available online. In 2019, we launched our BOPISbuy online, pick up in store (“BOPIS”) program nationwide, which has allowed for usnearly doubled our merchandise offerings available online. Following the launch of our BOPIS program, we launched curbside pickup to nearly doublesupplement our BOPIS service, reduced shipping times by expanding our distribution network to include ship-from-store capabilities at 65 stores around the country, and introduced same-day delivery of all items available SKUs online. We expectin our stores through our partnerships with Instacart® and PICKUP®. In 2021, we launched new payment types on our website including Apple Pay, Google Pay, PayPal, and “Pay in 4”. In 2022, we plan to continuefurther enhance our e-commerce shopping experience by removing friction at checkout, enhancing personalization with product recommendations, expanding our online offeringsproduct assortment, accelerating our use of supplier direct fulfillment, and implementing buy online, ship to provide a broader assortment of goods and a more complete shopping experience. We also expect to continue improving our online and in-store BOPIS experience during 2020 as our early BOPIS results support our belief that the investment in the program will allow us to capitalize on continued growth in our online traffic.store fulfillment capabilities.
Lastly, we continue to offer a private label credit card and our Easy Leasing lease-to-own solutions for customer financing, as well as protection plans on merchandise across stores and a coverage/warranty program, focused on our Furniture and Seasonal merchandise categories, to round out Jennifer’s experience.online. 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/warrantyprotection plan program provides a method for obtaining multi-year warranty coverage for Furniture purchases.furniture, seasonal, mattresses, small appliances, large area rugs, and electronics purchased in-store or online.
Real Estate
Historically, we have determined that our average store size of approximately 22,000 selling square feetReal estate development 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 sizecritical component of our new stores to accommodate the Furniture vignettes. After studyingOperation North Star strategy, which includes our objective of growing our store design and layout in relation tocount. The following table compares the changing retail landscape and needsnumber 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 converting 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. Atoperation at the end of 2019, we operated 466 stores in the Storeeach of the Future layout. Currently,last five fiscal years, and the associated square footage:
| | | | | | | | | | | | | | | | | |
(In thousands, except store counts and average store size) | 2021 | 2020 | 2019 | 2018 | 2017 |
Stores open at end of the fiscal year | 1,431 | | 1,408 | | 1,404 | | 1,401 | | 1,416 | |
Total gross square footage | 47,120 | | 46,008 | | 45,453 | | 44,500 | | 44,638 | |
Total selling square footage | 32,736 | | 32,016 | | 31,705 | | 31,217 | | 31,399 | |
Average store size - selling square feet | 22,876 | | 22,739 | | 22,582 | | 22,282 | | 22,174 | |
In 2021, we intend to remodel approximately 20grew our net store count by 23 stores, in 2020 aswhich marks our third consecutive year of net store growth. Additionally, the average size of stores that we retrofithave opened or relocated over the past several years exceeds our existing Store ofaverage. As a result, our overall average selling square footage has increased. In 2022, we expect to open at least 50 net new stores. Looking beyond 2022, we anticipate accelerating our net new store growth to 80 or more stores per year. Our real estate team has identified more than 500 location opportunities in markets across the Future stores to include new presentation initiatives and reevaluate our market selection approach so we can focus on the markets and locationsU.S. where we believe we can maximizesuccessfully open stores. Over the next several years, we plan to actively pursue those locations with the goal of significantly increasing our return on investment.net sales and operating profit. Our new store selection process includes a thorough review of proforma estimated results prior to entering a
lease to help ensure the economic quality of our store openings, as well as a post-opening review that we use to improve our proforma development.
Part of our plan to grow net store count includes reducing our store closures. To reduce store closures, we have organized and implemented a store intervention program over the last two years that assesses underperforming stores. The store intervention program reviews various store performance metrics to identify underperforming stores for review, develops action plans for improvement, and then works with various business leaders and teams to implement the action plans. Action plans most often include changes in merchandising, marketing, staffing, and training, but can also include working with landlords and/or local officials to renegotiate rents or improve conditions surrounding the store, such as ingress/egress issues that have materialized since the store opened.
As discussed in “Item“Item 2. Properties,” of this Form 10-K, we have 223184 store leases that will expire in 2020. During 2020, we anticipate opening up to 40 new stores and closing up to 35 of our existing locations.2022. The majority of theseour 2022 closings will involve theresult from relocation of stores to improved locations within the same local market, with the balance of closings resulting from a lack of renewal options or from 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 2020 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.
2019
2021 COMPARED TO 20182020
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 20192021 compared to 20182020 were as follows:
| | (In thousands) | 2019 | | 2018 | | Change | | Comps | (In thousands) | 2021 | | 2020 | | Change | | Comps |
Furniture | $ | 1,427,129 |
| 26.8 | % | | $ | 1,286,995 |
| 24.6 | % | | $ | 140,134 |
| 10.9 | % | | 8.2 | % | Furniture | $ | 1,684,393 | | 27.4 | % | | $ | 1,736,932 | | 28.0 | % | | $ | (52,539) | | (3.0) | % | | (5.2) | % |
Seasonal | | Seasonal | 954,165 | | 15.5 | | | 815,378 | | 13.2 | | | 138,787 | | 17.0 | | | 15.3 | |
Soft Home | 853,434 |
| 16.0 |
| | 828,451 |
| 15.8 |
| | 24,983 |
| 3.0 |
| | 1.7 |
| Soft Home | 822,559 | | 13.4 | | | 887,743 | | 14.3 | | | (65,184) | | (7.3) | | | (9.0) | |
Consumables | 803,593 |
| 15.1 |
| | 799,038 |
| 15.3 |
| | 4,555 |
| 0.6 |
| | 0.3 |
| |
Seasonal | 773,720 |
| 14.6 |
| | 765,619 |
| 14.6 |
| | 8,101 |
| 1.1 |
| | (0.1 | ) | |
Food | 757,351 |
| 14.2 |
| | 782,988 |
| 14.9 |
| | (25,637 | ) | (3.3 | ) | | (3.7 | ) | Food | 746,415 | | 12.1 | | | 823,420 | | 13.3 | | | (77,005) | | (9.4) | | | (10.7) | |
Hard Home | 363,006 |
| 6.8 |
| | 407,596 |
| 7.8 |
| | (44,590 | ) | (10.9 | ) | | (11.4 | ) | Hard Home | 675,041 | | 11.0 | | | 700,186 | | 11.3 | | | (25,145) | | (3.6) | | | (4.9) | |
Electronics, Toys, & Accessories | 344,947 |
| 6.5 |
| | 367,418 |
| 7.0 |
| | (22,471 | ) | (6.1 | ) | | (7.7 | ) | |
Consumables | | Consumables | 665,732 | | 10.8 | | | 737,630 | | 11.9 | | | (71,898) | | (9.7) | | | (10.8) | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | 602,298 | | 9.8 | | | 497,897 | | 8.0 | | | 104,401 | | 21.0 | | | 19.0 | |
Net sales | $ | 5,323,180 |
| 100.0 | % | | $ | 5,238,105 |
| 100.0 | % | | $ | 85,075 |
| 1.6 | % | | 0.3 | % | Net sales | $ | 6,150,603 | | 100.0 | % | | $ | 6,199,186 | | 100.0 | % | | $ | (48,583) | | (0.8) | % | | (2.5) | % |
We periodically assess and make minor adjustments to our product hierarchy, which can impact the roll-up toof our merchandise categories. OurIn 2021, we realigned our merchandise categories and renamed our Electronics, Toys, & Accessories merchandise category as Apparel, Electronics, & Other. See the reclassifications discussion in Note 1 to the accompanying consolidated financial reporting process utilizesstatements for additional information. In order to provide comparative results, we have reclassified our net sales into the most current product hierarchyrevised merchandise category alignment for all periods presented.
Net sales decreased $48.6 million, or 0.8%, to $6,150.6 million in reporting2021, compared to $6,199.2 million in 2020. The decrease in net sales was primarily driven by an overall comp decrease of 2.5%, which decreased net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales$152.2 million. This decrease was partially offset by merchandise category compared to previously reported amounts.
Net sales increased $85.1a $103.6 million or 1.6%, to $5,323.2 million in 2019, compared to $5,238.1 million in 2018. The increase in net sales was principally due tofrom our non-comparable stores, driven by the net increase of 23 stores in 2021 and increased net sales ofin our new and relocated stores compared to our closed stores,stores. Our comps and net sales decreased in 2021 in comparison to 2020 primarily due to a decreased impact of nesting trends and government stimulus funds on consumer behavior, and the net increasenegative impact of three storesglobal and domestic supply chain constraints in 2019,2021.
Net sales and comps in all of our merchandise categories were negatively impacted by global and domestic supply chain issues in 2021. These supply chain challenges impacted both imported products and domestically-sourced products, as our domestic vendors have faced similar supply chain challenges in sourcing raw materials. Domestically, our supply chain has also been impacted by labor challenges in certain of our distribution centers, with the majority of the impact in the northeast U.S. In response to labor challenges in our distribution centers, we increased wages and implemented attendance and retention programs to improve overall productivity. In the third quarter of 2021, we opened two small-format forward distribution centers (“FDCs”), which are designed to process bulky and full-pallet shipments, which have begun to relieve pressure from our regional distribution centers most impacted by labor challenges.
Our Seasonal category experienced increased comps and net sales by $67.8 million. Additionally, there was a 0.3% increase in our comps, which increased net sales by $17.3 million.
Our Furniture, Soft Home, and Consumables merchandise categories generated increased net sales and positive comps in 2019 compared to 2018:
| |
• | Our Furniture category experienced increased net sales and positive comps during 2019, primarily driven by the upholstery, mattresses, and case goods departments. We believe that the increases in these departments is attributable to the continued positive response of our core customer, Jennifer, to our newness of trend-right products and our lease-to-own finance offering. The new and expanded assortment of brand-name mattresses that we introduced in the third quarter of 2019 improved net sales and comps for our mattresses department. In addition, the new Broyhill® assortment that we launched in the fourth quarter of 2019 received a favorable response during late 2019.
|
| |
• | Soft Home experienced increased net sales and positive comps principally2021 due to continued improvement in quality, assortment, and value, and an increased allocation of selling space, which resulted in increases in the home décor, bath, home organization, and flooring departments.
|
| |
• | The increase in net sales and comps in the Consumables category was driven by the housekeeping and pet departments. The increases were attributable to our new branded everyday Consumables assortments, particularly in our housekeeping department.
|
Our Seasonal category experienced an increase in net sales and a decrease in comps in 2019. The increase in net salesdemand for our Seasonal category which we believe was initially driven by our summergovernment stimulus and lawn & garden departments,unemployment funds in the first quarter of 2021, together with the continuation of similar nesting trends to those we experienced in 2020 as a result of customers investing more time and discretionary funds in their home. Nesting trends in 2021 were skewed toward patio furniture, outdoor products, and seasonal decor, which drove increased net sales and comps in thesethe lawn & garden and summer departments of our Seasonal merchandise category. Nesting trends abated in the second quarter of 2021 as COVID-19 vaccines became widely available and benefited from enhanced quality and assortment range, and increased promotional activities during 2019. Themore consumers began traveling or spending more time outside their home compared to 2020. Despite the decrease in overall nesting behaviors, our Seasonal comps was duecategory continued to a decreasebenefit from high demand in the third quarter of 2021 for outdoor furniture and seasonal decor late into the summer season and fall, which we were able to meet with higher inventory levels compared to 2020. The positive Seasonal trends continued into the fourth quarter as we experienced an increase in net sales and comps in our Christmas trim department, which was impactedprimarily driven by a compressed holiday calendarincreased inventory levels in 2019.our Christmas products in 2021 compared to 2020. During the early phases of the COVID-19 pandemic in 2020, we intentionally reduced our Christmas inventory purchases due to demand uncertainty, which led to lower Christmas inventory levels in the fourth quarter of 2020. Despite the increased performance of our Seasonal category in 2021 compared to 2020, the Seasonal category was challenged by global and domestic supply chain issues throughout 2021 (discussed above), which resulted in delayed receipts of seasonally-sensitive merchandise.
Our Apparel, Electronics, & Other category also experienced increased comps and net sales in 2021 driven by our strategic initiatives, particularly The Lot and Queue Line, the product assortments of which fall into the Apparel, Electronics, & Other
category. We believe our product assortment in the Apparel, Electronics, & Other category is aligned with customer demand and that this category is a significant growth opportunity for us.
Our Furniture, Soft Home, and Hard Home categories experienced decreased net sales and positive comps in 2021 compared to 2020. While these categories benefited from government stimulus funds released in the first quarter of 2021, decreased nesting trends and supply chain impacts caused the decline in net sales and comps in the balance of 2021 compared to 2020. In the second half of 2021, our Furniture, Soft Home, and Consumables merchandiseHard Home categories were partially offsetsignificantly impacted by out-of-stocks and low inventory levels in certain historically popular items due to global and domestic supply chain constraints. In particular, temporary factory shutdowns were a significant contributor to out-of-stocks that drove the decreaseddecrease in our Furniture net sales and negative comps in 2021 compared to 2020. While our customers continue to respond well to our Broyhill® branded products and we grew our net sales and comps in the Broyhill® brand, these higher-price point items were impacted by supply chain challenges and low inventory levels.
Our Food and Consumables categories experienced decreases in net sales and comps in 2021 compared to 2020, due to a decrease in demand for essential products (which we define as food, consumables, health products, and pet supplies) and lower availability of name-brand product and closeout merchandise. Demand for essential products surged in the first quarter of 2020 as customers stocked up on these products at the onset of the COVID-19 pandemic. Our customers did not stock up on these products to the same extent in 2021. Due to the aforementioned supply chain challenges, the availability of name-brand merchandise that drives our Food Hard Home, and Electronics, Toys, & Accessories merchandise categories:Consumables net sales and comps was limited and there were fewer closeout opportunities. In addition, we reallocated linear square footage from our Food category to our Consumables category in the third quarter of 2020 as part of our Pantry Optimization initiative. We continue to refine and adjust our Food and Consumables assortments to provide convenience and consistency to our customers.
| |
• | Our
Food category experienced decreased net sales and negative comps driven by competitive pressures on our staple food offerings and the impact of our Store of the Future conversions, which places our Food merchandise at the back of the store.
|
| |
• | The decrease in net sales and comps in the Electronics, Toys, & Accessories category was due to an intentionally narrowed assortment, specifically in our electronics department, as part of the reduction in the allocation of square footage to this category due to our Store of the Future conversions.
|
| |
• | Hard Home experienced decreased net sales and negative comps as a result of gradual space reduction, as we convert stores to our Store of the Future concept, and the exit from our greeting card offering during the second quarter of 2019.
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Gross Margin
Gross margin dollars decreased $7.2$100.4 million, or 0.3%4.0%, to $2,114.7$2,397.0 million in 2019,2021, compared to $2,121.9$2,497.4 million in 2018.2020. The decrease in gross margin dollars was primarily due to a lowerdecrease in gross margin rate, which decreased gross margin dollars by approximately $41.7$80.8 million, partially offset by an increaseand a decrease in net sales, which increaseddecreased gross margin dollars by approximately $34.5$19.6 million. Gross margin as a percentage of net sales or gross margin rate, decreased 80approximately 130 basis points to 39.7%39.0% in 20192021 compared to 40.5%40.3% in 2018.2020. The gross margin rate decrease was primarily due to a $6.0 million impairment of inventory in our greeting cards department, which we chose to exit in the first quarter of 2019, a higher markdown rate from increased promotional activities, particularly in the fourth quarter of 2019, andinbound freight costs, a higher shrink rate, and a lower initial markup compared to 2018.2020. The decrease in gross margin rate was partially offset by lower markdowns. Freight costs increased primarily due to higher ocean carriage rates, domestic transportation rates, and fuel costs, and detention and demurrage charges resulting from delayed receipt of inventory related to supply chain constraints. The shrink rate increased as a higher initial mark-upresult of an increase in theft in our stores and the decreased sales compared to 2018.2020. The lower initial markup compared to 2020 was due primarily to the aforementioned increase in freight costs. The lower markdowns was driven by less promotional activity in 2021 compared to 2020.
Selling and Administrative Expenses
Selling and administrative expenses were $1,823.4$2,014.7 million in 2019,2021, compared to $1,778.4$1,965.6 million in 2018.2020. The increase of $45.0$49.1 million, or 2.5%, was primarily due to $38.3 million in costs associated with our transformational restructuring initiative, “Operation North Star,” that we announced in the first quarter of 2019, store-related occupancy costs of $23.9 million, $12.7 million in accrued bonus expense, $11.3 millionincreases in distribution and transportation expense, $7.3 million in estimated costs associated with employee wage and hour claims brought against us in the state of California, and an increase in advertising expense of $2.5 million, partially offset by store-related payroll of $10.9$59.4 million, share-based compensation expense of $9.1$13.4 million, store repairs and maintenanceoccupancy costs of $8.3 million, the 2018 impact of both the retirement of our former chief executive officer of $7.0$9.4 million, and the $3.5health benefit costs of $9.3 million, inas well as store asset impairment charges incurred related to the settlement of shareholder and derivative litigation matters filed in 2012, and$5.0 million, partially offset by decreases in self-insurance costsbonus expense of $3.7 million. The costs associated with our transformational restructuring initiative consisted$26.2 million, store-related payroll of consulting$13.7 million, and advertising expense of $5.1 million, as well as the absence of $4.0 million of sale and leaseback related expenses and employee separation$3.7 million of proxy contest-related costs. The increase in distribution and transportation costs was driven by higher transportation costs, higher labor costs in our corporate headquartersregional distribution centers, higher inbound and outbound volume as we worked to increase our inventory levels from the end of 2020 to the end of 2021, rent on our leased distribution centers, four of which were sold and leased back in the second quarter of 2020, the addition of two FDCs, and the addition of “pop-up” bypass distribution centers in the fourth quarter of 2021, partially offset by the absence of a $2 per hour wage increase that was implemented for most of our non-exempt workforce beginning in March 2020 through June 2020 in the early stages of the COVID-19 pandemic. The increase in share-based compensation expense was primarily due to a higher grant date fair value on the 2019 performance share units for which the grant date was established in 2021 compared to the 2018 performance share units for which the grant date was established in 2020 and performance share units granted in 2020. Our store organization incurred during 2019. Store-related occupancy costs increased in 2019 primarily due to the impact of the adoption of aan increased store count in 2021, new lease accounting standard in conjunction with our Store of the Future remodel program, the impact of rent associated with leases acquired in 2018 through bankruptcy proceedings in locations that generated rent expense beginningstores opened in the first quarter of 2019, but did not open untillast twelve months, which have higher rents than the secondstores closed, and third quarters of 2019, normal rent increases forresulting from lease renewals, andrenewals. Health benefit expense increased driven by an increase in health benefit claims in 2021 compared to the impact2020, as many medical providers postponed elective care procedures in 2020 during the height of the COVID-19 pandemic. The store asset impairment charges are comprised of operating lease right-of-use asset and property and equipment impairments onfor eight underperforming stores as a few earlyresult of our store closings.impairment review. The increasedecrease in accrued bonus expense was driven by strongerdecreased performance in 20192021 relative to our quarterly and annual operating plansbonus targets as compared to our performance in 20182020 relative to our quarterly and annual operating plans. Distribution and transportation expense was higher than 2018 due to occupancy and pre-opening costs associated with our new California distribution center,bonus targets, as well as higher transportation rates. The increasethe absence of a one-time discretionary bonus granted in advertising cost was primarily a resultthe second quarter of higher spend on video media advertising2020 to recognize our non-exempt associates in our stores and social media marketing.distribution
centers during the COVID-19 pandemic. The decrease in store-related payroll was primarily due to the strategic reorganizationabsence of the aforementioned $2 per hour wage increase. Advertising expense decreased due to decreased investments in video media as we have taken a more targeted approach to our advertising spend. The sale and leaseback transaction-related expenses, which included consulting costs, were incurred in completing the sale and leaseback of our store workforce at the end ofdistribution centers in the second quarter of 2019, which optimized our store management structure2020. The proxy contest-related costs were comprised of legal, public relations, and advisory fees, and settlement costs incurred to better serve our customers and resulted inresolve a lower average wage rate and a reduction in total payroll hours. Our share-based compensation expense decreased as a result of lower attainment of the long-term target on our 2017 performance share units (“PSUs”) expensed in 2019, relative to the attainment of the 2016 PSUs expensed in 2018. Our share-based compensation expense also decreased due to the lower average grant date fair value on awards expensed in 2019 compared to those recorded in 2018. The lower expense in store repairs and maintenance was driven by improved expense management. The decrease in our self-insurance costs resulted from favorable actuarial trends realized in 2019, partially offset by a decreaseproxy contest in the discount rate for our self-insurance reserves.first quarter of 2020.
As a percentage of net sales, selling and administrative expenses increased by 30110 basis points to 34.3%32.8% in 20192021 compared to 34.0%31.7% in 2018. Our future selling and administrative expense as a percentage of net sales depends on many factors, including our level of net sales, and our ability to implement additional efficiencies, principally in our store and distribution center operations.2020.
Depreciation Expense
Depreciation expense increased $10.0$4.3 million to $135.0$142.6 million in 20192021 compared to $125.0$138.3 million in 2018.2020. The increase was primarily driven by the continued roll-out of our Store of the Future concept, our acquisition of our new corporate headquarters, and our investmentinvestments in our strategic initiatives, new Californiastores, and supply chain improvements, partially offset by a decrease resulting from the sale of four distribution center. In 2019, we extended our estimated service lives on assetscenters in stores that we have converted to our Storethe second quarter of the Future concept to more accurately reflect our expected usage period and their average remaining lease term, which impacted depreciation expense. 2020.
Depreciation expense as a percentage of net sales increased by 10 basis points compared to 2018.2020.
Gain on Sale of Distribution CenterCenters
Gain on sale of distribution centers decreased $463.1 million to $0 in 2021. The gain on sale of distribution centercenters in 2019 was $178.5 million, which2020 was attributable to the sale and leaseback of our distribution centercenters in Rancho Cucamonga, California in the third quarter of 2019 in preparation for the opening of our Apple Valley, California distribution center. Proceeds from the sale were utilized to pay down outstanding debt under the 2018 Credit AgreementDurant, OK; Tremont, PA; Montgomery, AL; and to pay the remainder of the finance lease obligation, which was triggered by the exercise of our purchase option inColumbus, OH during the second quarter of 2019, of our corporate headquarters facility using a tax-deferred transaction in the third quarter of 2019.2020.
Operating Profit
Operating profit was $334.8$239.8 million in 20192021 compared to $218.5$856.5 million in 2018.2020. The increasedecrease in operating profit was primarily driven by the items discussed in the “Net Sales,” “Gross Margin,” “Selling and Administrative Expenses,” “Depreciation Expense,” and “Gain on Sale of Distribution Center”Centers” sections above. In summary, the decrease in operating profit was driven by the absence of a gain on the sale of our distribution center and an increasecenters, a decrease in net sales partially offset by a decrease inand gross margin rate, and increases in selling and administrative expenses and depreciation expense.
Interest Expense
Interest expense increased $6.5decreased $1.7 million, to $16.8$9.3 million in 20192021 compared to $10.3$11.0 million in 2018.2020. The increasedecrease in interest expense was primarily driven by an increase inlower total average borrowings (including finance leases and a slight increase in our average interest rate on our revolving debt under our 2018 Credit Agreement.the sale and leaseback financing liability). We had total average borrowings (including finance leases) of $461.6$148.5 million in 20192021 compared to total average borrowings of $320.1$257.6 million in 2018.2020. The increasedecrease in total average borrowings (including finance leases) was driven by an increaseour repayment of $106.4 million in our average revolvingall outstanding debt balance under our 2018 Credit Agreementrevolving credit facility following the sale and leaseback transactions completed in 2019 as compared to 2018, which was driven by elevated capital expenditures to supportthe second quarter of 2020, and our Storeprepayment of the Future concept and the equipment purchases for our new California distribution center. Additionally, our total average borrowings increased due to our entry into a $70 million term note agreement (the “2019 Term Note”) in the thirdsecond quarter of 2019 (“2019 Term Note”), which increased our total2021, partially offset by the establishment of the financing liability in connection with the sale and leaseback transactions in the second quarter of 2020. In 2021, we experienced a higher average borrowings by $33.6 million. The average interest rate on our revolving debt, which is variable based on LIBOR and our credit rating, was impacted by a slight increase in our total interest rate due to a decrease in our credit rating in the fourth quarter of 2018.higher rate on the sale and leaseback financing liability.
Other Income (Expense)
Other income (expense) was $(0.5)$1.3 million in 2019,2021, compared to $(0.6)$(0.9) million in 2018.2020. The change from 2018 to 2019 was related toprimarily driven by gains on our diesel fuel hedging contracts, drivenderivatives in 2021 compared to losses on diesel fuel derivatives in 2020. The gains on diesel fuel derivatives in 2021 were partially offset by a change$0.5 million loss on debt extinguishment recognized in pricing trends for diesel fuel forward contracts.2021 related to the prepayment of the 2019 Term Note.
Income Taxes
Our effective income tax rate in 20192021 and 20182020 was 23.6%23.3% and 24.4%25.5%, respectively. The effective income tax rate comparisons were significantly impacted by higher income before income taxes for 2019 compared to 2018. The decrease in the effective income tax rate was principally drivenprimarily attributable to the net tax benefit associated with settlement of share-based payment awards during 2021, partially offset by an increase in nondeductible executive compensation compared to 2020.
Known Trends and 2022 Guidance
We continue to face significant challenges as the gain onglobal supply chain works to recover from the salefactory and port shutdowns in 2021 and as domestic labor shortages persist. We are facing a highly competitive domestic labor market, which we expect to result in increased payroll expenses for our stores and distribution centers in 2022. Additionally, in late 2021 and early 2022, the U.S. economy experienced its highest inflationary period in decades, which has adversely impacted costs in our business and adversely impacted the buying power of our Rancho Cucamonga, California distribution center being taxed at a lower effective ratecustomers. However, the U.S. has started to resume more normal day-to-day life as that gain does not attract certain state income taxes that do not tax on a consolidated or combined basis, and lower derecognitionCOVID-19 cases have subsided, which we expect will result in improved traffic in our stores. We have incorporated the expected impact of current year uncertain positions. Thethese trends into our guidance below.
At March 3, 2022, excluding consideration of potential share repurchase activity, we expected the following in the first quarter of 2022 as compared to the first quarter of 2021:
•Comparable sales decrease in the effective income taxlow double digits;
•Gross margin rate was offset bydecrease of approximately 50 bps;
•Selling and administrative expenses slightly above last year; and
•Diluted earnings per share in the effectrange of hiring-based tax credits and the absence of a favorable adjustment recognized in 2018$1.10 to the provisional amounts that we recorded for the Tax Cuts and Jobs Act of 2017.$1.20.
2020 Guidance
In March 2020, the World Health Organization declared the COVID-19 coronavirus a pandemic and the rapid spread of the disease throughout the U.S. has negatively impacted the U.S. economy. Due to the lack of business visibility resulting from the COVID-19 coronavirus pandemic, we are unable to reasonably estimate our 2020 financial results and cash flows at this time. During the first part of 2020, we have experienced varying levels of customer demand and uncertainty in our supply chains. Additionally, in March 2020, we began incurring incremental expenses, such as temporary store and distribution wage increases, additional store cleaning costs, and other items, and we expect to incur additional expenses through the duration of the pandemic. We believe our position as an essential retailer, which sells food, consumables, health products, and pet supplies, will allow our stores to remain open during this pandemic, and we believe our current liquidity position is strong.
Capital Resources and Liquidity
On August 31, 2018,September 22, 2021, we entered into the 20182021 Credit Agreement, which provides for a $700$600 million five-year unsecured credit facility. The 20182021 Credit Agreement expires on August 31, 2023. Borrowings underSeptember 22, 2026. The 2021 Credit Agreement replaced the 2018 Credit Agreement, are available for general corporate purposesa $700 million five-year unsecured credit facility which we entered into on August 31, 2018 and working capital.was scheduled to expire on August 31, 2023, but was terminated concurrent with our entry into the 2021 Credit Agreement. The 20182021 Credit Agreement includes a $30$50 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The 2021 Credit Agreement also contains an environmental, social and governance (“ESG”) provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the 2021 Credit Agreement. Under the 2021 Credit Agreement, we have the option to establish incremental term loans and/or increases in the revolving credit limits in an aggregate amount of up to $300 million, subject to the lenders agreeing to increase their commitments. Additionally, the 2021 Credit Agreement includes two options to extend the maturity date of the 2021 Credit Agreement by one year each, subject to each lender agreeing to extend the maturity date of its respective loans. The interest rates, pricing and fees under the 20182021 Credit Agreement fluctuate based on our debt rating.rating or leverage ratio, whichever results in more favorable pricing to us. The 20182021 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolvingLIBOR for loans denominated in U.S. dollars or the Euro Short Term Rate (€STR) for loans denominated in Euros. The 2021 Credit Agreement updated the LIBOR fallback language to implement fallback provisions, pursuant to which the interest rate on the loans will transition to an alternative rate upon the occurrence of certain LIBOR cessation events. Loans made under the 20182021 Credit Agreement.Agreement may be prepaid without penalty. The 20182021 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio. The covenants of the 2021 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with any default on indebtedness that is greater than $50 million, including with respect to our synthetic lease for our distribution center in Apple Valley, CA, which was also amended concurrent with our entry into the Synthetic Lease.2021 Credit Agreement to conform to the covenants of the 2021 Credit Agreement. A violation of any of the covenants could result in a default under the 20182021 Credit Agreement that would permit the lenders to restrict our ability to further access the 20182021 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 20182021 Credit Agreement. At February 1, 2020,January 29, 2022 we were in compliance with the covenants of the 20182021 Credit Agreement.
We use the 2018 Credit Agreement, as necessary, to provide funds for ongoing and seasonal working capital, capital expenditures, dividends, share repurchase programs, and other expenditures. In addition, At January 29, 2022, we use the 2018 Credit Agreement to provide letters of credit for various operating and regulatory requirements, and if needed, letters of credit required to cover our self-funded insurance programs. Given the seasonality of our business, the amounthad $3.5 million of borrowings outstanding under the 2018 Credit Agreement may fluctuate materially depending on various factors, including our operating financial performance, the time of year, and our need to increase merchandise inventory levels prior to the peak selling season. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have typically funded those requirements with borrowings under our credit facility. In 2019, our total indebtedness (outstanding borrowings and letters of credit) under the 2018 Credit Agreement peaked at approximately $555 million in October. At February 1, 2020, we had $229.2 million in outstanding borrowings under the 20182021 Credit Agreement, and $467.9 million inthe borrowings available under the 20182021 Credit Agreement were $594.1 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $2.9$2.4 million. Working capital
On August 7, 2019, we entered into the 2019 Term Note, a $70 million term note agreement, which was $193.1secured by the equipment at our Apple Valley, CA distribution center and carried a fixed interest rate of 3.3%. In light of our strong liquidity and market conditions at the time, we prepaid the remaining $44.3 million at February 1, 2020.principal balance under the 2019 Term Note in the second quarter of 2021. In connection with the prepayment, we incurred a $0.4 million prepayment fee and recognized a $0.5 million loss on debt extinguishment in the second quarter of 2021.
The primary source of our liquidity is cash flows from operations and as necessary, borrowings under the 2018 Credit Agreement.our credit facility, as necessary. Our net income and, consequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our cash provided by operations typically peaks in the fourth quarter of each fiscal year due to net sales are typically highestgenerated during the nine-week Christmasholiday selling seasonseason. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter.
Wheneverquarter as we build our liquidity position requires usinventory levels prior to the holiday selling season. We have historically funded those requirements with cash provided by operations and borrowings under our credit facility. We expect to periodically borrow funds under the 20182021 Credit Agreement we typically repay and/or borrow on a daily basis. The daily activity is a net result ofduring 2022 to fund our liquidity position, which is generally driven by the following components of our operations: (1) cash inflows such as cash or credit card receipts collected from stores for merchandise salesrequirements. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other miscellaneous deposits;contractual commitments.
At January 29, 2022 our material cash requirements, which are comprised of written purchase orders, cancellable and (2) cash outflows such as check clearings, wire transfersnoncancellable contractual commitments, and other electronic transactionsobligations, were $1,683.7 million for the acquisitionupcoming fiscal year and $4,654.7 million in total. Excluding operating lease and finance lease obligations disclosed in the Note 5 to the accompanying consolidated financial statements, our material cash requirements at January 29, 2022 were $1,359.3 million for the upcoming fiscal year and $2,408.5 million in total. The material cash requirements disclosed above include merchandise purchase orders
of capital expenditures,$769.0 million. The cancellable and payment of payrollnoncancellable contractual commitments include purchase commitments related to distribution and other operating expenses, incometransportation, information technology, advertising, energy procurement, and other taxes, employee benefits,store security, supply, and other miscellaneous disbursements.maintenance commitments. At January 29, 2022, our noncancellable commitments were immaterial.
OnIn August 7, 2019, we entered into the 2019 Term Note, a $70 million term note agreement, which is secured by the equipment at our new California distribution center. The 2019 Term Note will expire on May 7, 2024. We are required to make monthly payments over the term of the 2019 Term Note and are permitted to prepay the note, subject to penalties, at any time. The interest rate on the 2019 Term Note is fixed at 3.3%. We utilized the proceeds from the 2019 Term Note to pay down outstanding borrowings under the 2018 Credit Agreement.
On March 6, 2019,2020, our Board of Directors authorized a share repurchase program providing for the repurchase of $50up to $500 million of our common shares (“20192020 Repurchase Program”Authorization”). The 2020 Repurchase Authorization was exhausted in the third quarter of 2021. During 2019,2021, we exhausted this program by purchasing approximately 1.3purchased 5.6 million of our outstandingcommon shares for $327.2 million under the 2020 Repurchase Authorization, at an average price of $58.48.
In December 2021, our Board of Directors authorized the 2021 Repurchase Authorization, which provides for the repurchase of $250 million of our common shares. Pursuant to the 2021 Repurchase Authorization, we are authorized to repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. The 2021 Repurchase Authorization has no scheduled termination date. During 2021, we purchased 2.1 million of our common shares for $90.6 million under the 2021 Repurchase Authorization, at an average price of $43.90.
Common shares acquired through share repurchase authorizations are available to meet obligations under our equity compensation plans and for general corporate purposes.
In 2019,2021, we declared and paid four quarterly cash dividends of $0.30 per common share for a total paid amount of approximately $48.4$41.7 million. While the per-share cash dividends declared and paid in 2021 were consistent with the per-share cash dividends declared and paid in 2020, dividends declared decreased $6.5 million and dividends paid decreased $5.3 million to $41.5 million and $41.7 million, respectively, in 2021. The decrease in both was driven by a lower number of common shares outstanding as a result of our share repurchases.
In February 2020,On March 1, 2022, our Board declared a quarterly cash dividend of $0.30 per common share payable on April 3, 20201, 2022 to shareholders of record as of the close of business on March 20, 2020.18, 2022.
In March 2020, we chose to draw approximately $200 million of additional debt under the 2018 Credit Agreement as a safeguard due to uncertainty caused by the COVID-19 coronavirus. Additionally, we are reviewing potential sources of additional external financing to augment our liquidity position.
The following table compares the primary components of our cash flows from 20192021 to 2018:2020:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | Change |
Net cash provided by operating activities | $ | 193,762 | | | $ | 399,349 | | | $ | (205,587) | |
Net cash (used in) provided by investing activities | (159,686) | | | 452,987 | | | (612,673) | |
Net cash used in financing activities | $ | (539,910) | | | $ | (345,501) | | | $ | (194,409) | |
|
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 | | Change |
Net cash provided by operating activities | $ | 338,970 |
| | $ | 234,060 |
| | $ | 104,910 |
|
Net cash used in investing activities | (74,480 | ) | | (376,473 | ) | | 301,993 |
|
Net cash (used in) provided by financing activities | $ | (257,803 | ) | | $ | 137,271 |
| | $ | (395,074 | ) |
Cash provided by operating activities increaseddecreased by $104.9$205.6 million to $339.0$193.8 million in 20192021 compared to $234.1$399.3 million in 2018.2020. The increasedecrease was primarily due to a $145.1 million increase in 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 offsetdriven by the add-back of $178.7 million for gain on disposition of property and equipment and a $64.4 millioncombined increase in cash outflows for accounts payable. The increase in cash inflows from inventories was primarilyand decrease in accounts payable, which were driven by our decision to accelerate the receipt ofincreased inventory late in 2018 to mitigate tariff concerns, which increased our inventory positionlevels 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 generated2021 compared to 2020, an increase in cash inflowsoutflows from inventory sales. The netcurrent income increase was principally due totaxes, driven by the payment of taxes on the sale of our distribution center in Rancho Cucamonga, California as well as a $85.1 millioncenters since the end of 2020, and an increase in net sales in 2019 compared to 2018. Thecash outflows from current liabilities, which was driven by bonus accruals and payment of FICA taxes that were deferred under the CARES Act of 2020. These decreases were partially offset by an increase in net income was partially offset by a reductionafter accounting for non-cash activities such as non-cash share-based compensation expense, non-cash lease expense, and the add-back of thefor (loss) gain on disposition of propertyequipment and equipment, which was primarily relatedproperty.
Cash (used in) provided by investing activities decreased $612.7 million 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 liabilities was primarily the result of the gain on the sale of our Rancho 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 a tax-deferred exchange through a qualified intermediary. The cash outflows for accounts payable were directly related to our inventory levels, discussed previously, and the timing of receipts.
Cash used in investing activities decreased by $302.0 million to $74.5of $159.7 million in 20192021 compared to $376.5cash provided by investing activities of $453.0 million in 2018.2020. The decrease was primarily attributed to an increasedriven by the decrease in cash proceeds from sale of property and equipment, of $190.2 million resulting fromdue to the sale and leaseback transactions completed in the second quarter of our Rancho Cucamonga, California distribution center, decreases in assets acquired under Synthetic Lease of $128.9 million for our new California distribution center, and payments for purchase of intangible assets of $15.8 million, partially offset by a $32.8 million2020, as well as an increase in capital expenditures. The decrease in assets acquired under the synthetic lease was driven by the impact of the adoption of a new lease accounting standard, which changed the construction period considerations for the Synthetic Lease. The increase in capital expenditures was driven by continued investments in new store growth, our Store of the Future remodels, and equipment for our new California distribution center. The decrease in payments for purchase of intangible assets is due to our purchase of the Broyhill® trademark in 2018 for $15.8 million.
Cash used in financing activities increased by $395.1$194.4 million to $257.8$539.9 million in 20192021 compared to $137.3$345.5 million in cash provided by financing activities in 2018. The increase in cash used in financing activities in 2020. The increase was attributable todriven by the repurchase of a $254.9total of $417.7 million change in cash usage for net long-term debt in 2019 compared to 2018, a decrease of $128.9 million in proceeds from the Synthetic Lease for our California distribution center in 2018, and 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 repurchase common shares under our share repurchase programs.authorizations during 2021 compared to the repurchase of $172.8 million of our common shares under share repurchase authorizations during 2020. Additionally, the increase was driven by the absence of financing proceeds from sale and leaseback transactions completed in the second quarter of 2020. The increase was partially offset by a decrease in net repayments of long-term debt was primarily due to the proceeds from the salerepayment of the Rancho Cucamonga, California distribution center, a portion of which was utilized to pay downall outstanding debtborrowings under the 2018 Credit Agreement. The decreaseAgreement in proceeds from our Synthetic Lease was driven by2020 compared to repayment of all outstanding borrowings under the impact2019 Term Note in 2021, which carried a lower balance at the time of repayment compared to the adoption2018 Credit Agreement at the time of a new lease accounting standard. The increase in paymentsrepayment.
Based on historical and expected financial results, we believe that we have or, if necessary, have the ability to obtain, adequate resources to fund our cash requirements, including ongoing and seasonal working capital requirements, proposed capital expenditures, new projects, and currently maturing obligations.
Contractual Obligations
The following table summarizes payments due under our contractual obligations at February 1, 2020:
|
| | | | | | | | | | | | | | | |
| Payments Due by Period (1) |
| | Less than | | | More than |
(In thousands) | Total | 1 year | 1 to 3 years | 3 to 5 years | 5 years |
Long-term debt (2) | $ | 298,846 |
| $ | 16,479 |
| $ | 31,900 |
| $ | 250,467 |
| $ | — |
|
Operating lease obligations (3) (4) | 1,784,103 |
| 344,290 |
| 617,727 |
| 412,737 |
| 409,349 |
|
Finance lease obligations (4) | 8,909 |
| 4,664 |
| 3,991 |
| 234 |
| 20 |
|
Purchase obligations (4) (5) | 856,517 |
| 706,675 |
| 106,909 |
| 33,810 |
| 9,123 |
|
Other long-term liabilities (6) | 59,428 |
| 10,163 |
| 8,952 |
| 8,702 |
| 31,611 |
|
Total contractual obligations | $ | 3,007,803 |
| $ | 1,082,271 |
| $ | 769,479 |
| $ | 705,950 |
| $ | 450,103 |
|
| |
(1) | The disclosure of contractual obligations in this table is based on assumptions and estimates that we believe to be reasonable as of the date of this report. Those assumptions and estimates may prove to be inaccurate; consequently, the amounts provided in the table may differ materially from those amounts that we ultimately incur. Variables that may cause the stated amounts to vary from the amounts actually incurred include, but are not limited to: the termination of a contractual obligation prior to its stated or anticipated expiration; fees or damages incurred as a result of the premature termination or breach of a contractual obligation; the acquisition of more or less services or goods under a contractual obligation than are anticipated by us as of the date of this report; fluctuations in third party fees, governmental charges, or market rates that we are obligated to pay under contracts we have with certain vendors; and the exercise of renewal options under, or the automatic renewal of, contracts that provide for the same. |
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(2) | Long-term debt consists of the borrowings outstanding under the 2018 Credit Agreement, the 2019 Term Note, expected interest on the 2019 Term Note, and the associated accrued interest of $0.5 million. Long-term debt excludes estimated future interest on variable rate borrowings under the 2018 Credit Agreement, which had an interest rate of approximately 3.0% as of February 1, 2020. In addition, we had outstanding letters of credit totaling $41.3 million at February 1, 2020. Approximately $38.4 million of the outstanding letters of credit represent stand-by letters of credit and we do not expect to meet the conditions requiring significant cash payments on these letters of credit; accordingly, they have been excluded from this table. For a further discussion, see note 3 to the accompanying consolidated financial statements. The remaining $2.9 million of outstanding letters of credit represent commercial letters of credit whereby the related obligation is included in the purchase obligation. |
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(3) | Operating lease obligations include, among other items, leases for retail stores, distribution centers, and certain computer and other business equipment. The future minimum commitments for retail store and distribution center leases are $1,428.3 million. For a further discussion of leases, see note 5 to the accompanying consolidated financial statements. Many of the store lease obligations require us to pay for our applicable portion of CAM, real estate taxes, and property insurance. In connection with our store lease obligations, we estimated that future obligations for CAM, real estate taxes, and property insurance were $355.8 million at February 1, 2020. We have made certain assumptions and estimates in order to account for our contractual obligations relative to CAM, real estate taxes, and property insurance. Those assumptions and estimates include, but are not limited to: use of historical data to estimate our future obligations; calculation of our obligations based on comparable store averages where no historical data is available for a particular leasehold; and assumptions related to average expected increases over historical data. |
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(4) | For purposes of the purchase obligation disclosures, we have assumed that we will make all payments scheduled or reasonably estimated to be made under those obligations that have a determinable expiration date, and we disregarded the possibility that such obligations may be prematurely terminated or extended, whether automatically by the terms of the obligation or by agreement between us and the counterparty, due to the speculative nature of premature termination or extension. Where a purchase obligation is subject to a month-to-month term or another automatically renewing term, we included in the table our minimum commitment under such obligation, such as one month in the case of a month-to-month obligation and the then-current term in the case of another automatically renewing term, due to the uncertainty of future decisions to exercise options to extend or terminate any existing leases. |
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(5) | Purchase obligations include outstanding purchase orders for merchandise issued in the ordinary course of our business that are valued at $492.8 million, the entirety of which represents obligations due within one year of February 1, 2020. The remaining $363.7 million of purchase obligations is primarily related to distribution and transportation, information technology, print advertising, energy procurement, and other store security, supply, and maintenance commitments. |
| |
(6) | Other long-term liabilities include $33.9 million for obligations related to our nonqualified deferred compensation plan, $19.5 million for a charitable commitment, and $5.4 million for unrecognized tax benefits. We have estimated the payments due by period for the nonqualified deferred compensation plan based on an average of historical distributions. We have committed to make a $40.0 million charitable donation over a 10-year period, and we have a remaining obligation of $19.5 million over the next seven years. We have included unrecognized tax benefits of $4.2 million for payments expected in 2020 and $1.2 million of timing-related income tax uncertainties anticipated to reverse in 2020. Unrecognized tax benefits in the amount of $9.5 million have been excluded from the table because we are unable to make a reasonably reliable estimate of the timing of future payments. |
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 noteNote 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 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 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 typically taken at each store once a year. During calendar 2020,2021, the majority of thesephysical counts will occuroccurred between January and June.June and we expect a similar cadence to physical counts during calendar 2022. As physical inventories are completed, actual results are recorded and new go-forward allowance for shrinkage rates are established based on historical
results at the individual store level. Thus, the allowance for shrinkage rates will beis adjusted throughout the January to June inventory cycle based on actual results. The allowance for shrinkage at January 29, 2022 and January 30, 2021 was $53.7 million and $40.7 million, respectively. The increase of $13.0 million was driven by a higher estimated shrinkage rate for 2021 compared to 2020, partially offset by lower aggregate sales since the last physical inventory count for each store. At February 1, 2020,January 29, 2022, a 10% difference in our shrink accrual would have affected gross margin, operating profit and income before income taxes by approximately $3.4$5.4 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.
Insurance and Insurance-Related Reserves
We are self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical, dental, and prescription drug benefit claims, a portion of which is funded by employees. We purchase stop-loss coverage from third party insurance carriers to limit individual or aggregate loss exposures in these areas. Accrued insurance liabilities and related expenses are based on actual claims reported and estimates of claims incurred but not reported. The estimated loss accruals for claims incurred but not paid are determined by applying actuarially-based calculations taking into account historical claims payment results and known trends such as claims frequency and claims severity. Management makes estimates, judgments, and assumptions with respect to the use of these actuarially-based calculations, including but not limited
to, estimated health care cost trends, estimated lag time to report and pay claims, average cost per claim, network utilization rates, network discount rates, and other factors. Our insurance and insurance-related reserves at January 29, 2022 and January 30, 2021 were $99.3 million and $92.1 million, respectively. The increase of $7.2 million was driven by workers' compensation reserves due to rising medical costs and our reserve for self-insured matters that have exceeded stop-loss thresholds, for which we carry an equal receivable from our stop-loss insurers. A 10% change in our self-insured liabilities at February 1, 2020January 29, 2022 would have affected selling and administrative expenses, operating profit, and income before income taxes by approximately $8$8.2 million.
General liability and workers’ compensation liabilities are recorded at our estimate of their net present value using a 2.5% discount rate, which was reduced from 3.5% in the fourth quarter of 2019. Other liabilities for insurance reserves are not discounted. A 1.0% change in the discount rate on these liabilities would have affected selling and administrative expenses, operating profit, and income before income taxes by approximately $2.1 million.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are subject to market risk from exposure to changes in interest rates on investments and on borrowings under the 20182021 Credit Agreement that we make from time to time. We had $3.5 million in borrowings of $229.2 million under the 20182021 Credit Agreement at February 1, 2020.January 29, 2022. An increase of 1% in our variable interest rate on our investments and estimated future borrowings couldwould not materially affect our financial condition, results of operations, or liquidity through higher interest expense by approximately $4.1 million. Additionally, we are subject to cross-default provisions associated with the Synthetic Lease for our new distribution center in California. An increase of 1% in this leasing instrument could affect our financial condition, results of operations, or liquidity through higher rent expense by approximately $1.5 million.liquidity.
Risks Associated with Derivative Instruments
We are subject to market risk from exposure to changes in our derivative instruments, associated with diesel fuel. At February 1, 2020,January 29, 2022, we had outstanding derivative instruments, in the form of collars, covering 3.61.2 million gallons of diesel fuel. The below table provides further detail related to our current derivative instruments, associated with diesel fuel.
| | | | | | | | | | | | | | | | | | | | |
Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value |
| Puts | | Calls | | Asset (Liability) |
| | (Gallons, in thousands) | | (In thousands) |
2022 | | 1,200 | | | 1,200 | | | $ | 856 | |
Total | | 1,200 | | | 1,200 | | | $ | 856 | |
|
| | | | | | | | | | |
Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value |
| Puts | | Calls | | Asset (Liability) |
| | (Gallons, in thousands) | | (In thousands) |
2020 | | 2,400 |
| | 2,400 |
| | $ | (747 | ) |
2021 | | 1,200 |
| | 1,200 |
| | (284 | ) |
Total | | 3,600 |
| | 3,600 |
| | $ | (1,031 | ) |
Additionally, at February 1, 2020,January 29, 2022, a 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $1.0$0.5 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Big Lots, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Big Lots, Inc. and subsidiaries (the “Company”) as of February 1, 2020,January 29, 2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020,January 29, 2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated financial statements as of and for the year ended February 1, 2020,January 29, 2022, of the Company and our report dated March 31, 2020,29, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control overOver Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
March 31, 202029, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Big Lots, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Big Lots, Inc. and subsidiaries (the “Company”) as of February 1, 2020January 29, 2022 and February 2, 2019,January 30, 2021, the related consolidated statements of operations and comprehensive income, shareholders’shareholders' equity, and cash flows, for each of the three years in the period ended February 1, 2020,January 29, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020January 29, 2022 and February 2, 2019,January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020,January 29, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of February 1, 2020,January 29, 2022, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2020,29, 2022, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective February 3, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the optional transition method, as allowed by ASU 2018-11, Leases (Topic 842), Targeted Improvements, to apply the new standard as of the effective date.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Measurement of Inventory Valuation Reserves - Refer to Note 1 to the financial statements
Critical Audit Matter Description
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. The average cost retail inventory method requires management to make judgments and contains estimates, including the amount and timing of markdowns to clear slow-moving inventory and an estimated allowance for shrinkage, which may impact ending inventory valuation. The balance of ending inventory was $921.3$1,237.8 million at February 1, 2020.January 29, 2022.
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, and customer preferences.
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.
Given the significant estimates and assumptions management utilizes to quantify inventory reserves which includes markdowns and the allowance for shrinkage, a high degree of auditor judgment and an increased extent of effort is required when performing audit procedures to evaluate the methodology and reasonableness of the estimates and assumptions. For markdowns, such estimates are based on the timing and completeness of recorded markdowns. For the allowance for shrinkage, such estimates are based on a combination of historical shrinkage experience and current year physical inventory results.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the measurement of the valuation of inventory reserves included the following, among others:
•We tested the effectiveness of controls over the completeness and measurement of inventory reserves.
•We evaluated the methods and assumptions used by management to estimate markdowns by:
| |
◦ | Evaluating management’s estimate for markdowns by comparing markdowns recorded after period end to the markdowns reserve at year end. |
| |
◦ | Performing an analysis comparing the markdown reserve to historical results. |
| |
◦ | Comparing inventory sell through for the first period subsequent to year end to historical sell through results to evaluate the salability of merchandise inventories at year end. |
◦Evaluating management’s estimate for markdowns by reviewing management’s approved permanent markdowns at year end and comparing markdowns recorded after period end to the markdowns reserve at year end.
◦Performing an analysis comparing monthly markdown expense and the markdown reserve to historical results.
◦Comparing inventory sell through for the first period subsequent to year end to historical sell through results to evaluate the salability of merchandise inventories at year end.
•We evaluated the methods and assumptions used by management to estimate the allowance for shrinkage by:
| |
◦ | Attending a selection of store physical inventories and recalculating the shrink for locations using the results of the store physical inventory. |
| |
◦ | Performing an analysis comparing the methodology and inputs used by management to historical results, trends in the prior years and current year, and industry averages. |
| |
◦ | Comparing management’s prior-year assumptions of expected shrink activity to actual activity incurred during the current year to determine the appropriateness of the shrinkage inventory allowance. |
◦Attending a selection of store physical inventories and recalculating the shrink for locations using the results of the store physical inventory.
◦Performing an analysis comparing the methodology and inputs used by management to historical results and trends in the prior years and current year.
◦Comparing management’s prior-year assumptions of expected shrink activity to actual activity incurred during the current year to evaluate the appropriateness of the shrinkage inventory allowance.
Measurement of Insurance Valuation Reserves - Refer to Notes 1 and 9 to the financial statements
Critical Audit Matter Description
The Company is self-insured for certain losses relating to general liability and workers’ compensation. Accrued insurance liabilities, $93.7$99.3 million at February 1, 2020,January 29, 2022, are based on actual claims reported and estimates of claims incurred but not reported. The estimated loss accruals for claims incurred but not paid are determined by applying actuarially-based calculations taking into account historical claims payment results and known trends such as claims frequency and claims severity.
Given the significant estimates and assumptions in determination of the selected actuarial models management utilizes to quantify insurance reserves, a high degree of auditor judgment and increased extent of effort is required, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether insurance reserves were appropriately valued.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the general liability and workers’ compensation self-insurance reserves included the following, among others:
•We tested the effectiveness of controls related to general liability and workers’ compensation self-insurance reserves.
•We evaluated the methods and assumptions used by management to estimate the self-insurance reserves by:
| |
◦ | Testing the underlying data that served as the basis of the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were reasonable. |
| |
◦ | Comparing management’s prior-year assumptions of expected loss to actuals incurred during the current year to evaluate the appropriateness of assumptions used to determine the insurance reserves. |
◦Testing the underlying data that served as the basis of the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were reasonable.
◦Comparing management’s prior-year assumptions of expected loss to actuals incurred during the current year to evaluate the appropriateness of assumptions used to determine the insurance reserves.
•With the assistance of our actuarial specialists, we developed independent estimates of the insurance reserves, including loss and industry claim development factors, and compared our estimates to management’s estimates. Further, the actuarial specialists:
| |
◦ | Assessed the actuarial models used by the Company for consistency with the generally accepted actuarial standards; |
| |
◦ | Evaluated the Company’s ability to estimate the insurance liabilities by comparing its historical estimates with actual loss payments; |
| |
◦ | Evaluated the key assumptions underlying the Company’s actuarial estimates used to determine the insurance reserves. |
◦Assessed the actuarial models used by the Company for consistency with the generally accepted actuarial standards;
◦Evaluated the Company’s ability to estimate the insurance liabilities by comparing its historical estimates with actual loss payments;
◦Evaluated the key assumptions underlying the Company’s actuarial estimates used to determine the insurance reserves.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
March 31, 202029, 2022
We have served as the Company’s auditor since 1989.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (In (In thousands, except per share amounts) |
| | | 2019 | 2018 | 2017 | | 2021 | 2020 | 2019 |
Net sales | $ | 5,323,180 |
| $ | 5,238,105 |
| $ | 5,264,362 |
| Net sales | $ | 6,150,603 | | $ | 6,199,186 | | $ | 5,323,180 | |
Cost of sales (exclusive of depreciation expense shown separately below) | 3,208,498 |
| 3,116,210 |
| 3,121,920 |
| Cost of sales (exclusive of depreciation expense shown separately below) | 3,753,596 | | 3,701,800 | | 3,208,498 | |
Gross margin | 2,114,682 |
| 2,121,895 |
| 2,142,442 |
| Gross margin | 2,397,007 | | 2,497,386 | | 2,114,682 | |
Selling and administrative expenses | 1,823,409 |
| 1,778,416 |
| 1,723,996 |
| Selling and administrative expenses | 2,014,682 | | 1,965,555 | | 1,823,409 | |
Depreciation expense | 134,981 |
| 124,970 |
| 117,093 |
| Depreciation expense | 142,572 | | 138,336 | | 134,981 | |
Gain on sale of distribution center | (178,534 | ) | — |
| — |
| |
Gain on sale of distribution centers | | Gain on sale of distribution centers | — | | (463,053) | | (178,534) | |
Operating profit | 334,826 |
| 218,509 |
| 301,353 |
| Operating profit | 239,753 | | 856,548 | | 334,826 | |
Interest expense | (16,827 | ) | (10,338 | ) | (6,711 | ) | Interest expense | (9,281) | | (11,031) | | (16,827) | |
Other income (expense) | (451 | ) | (558 | ) | 712 |
| Other income (expense) | 1,339 | | (911) | | (451) | |
Income before income taxes | 317,548 |
| 207,613 |
| 295,354 |
| Income before income taxes | 231,811 | | 844,606 | | 317,548 | |
Income tax expense | 75,084 |
| 50,719 |
| 105,522 |
| Income tax expense | 54,033 | | 215,415 | | 75,084 | |
Net income and comprehensive income | $ | 242,464 |
| $ | 156,894 |
| $ | 189,832 |
| Net income and comprehensive income | $ | 177,778 | | $ | 629,191 | | $ | 242,464 | |
| | |
Earnings per common share: | |
| |
| |
| Earnings per common share: | |
Basic | $ | 6.18 |
| $ | 3.84 |
| $ | 4.43 |
| Basic | $ | 5.43 | | $ | 16.46 | | $ | 6.18 | |
Diluted | $ | 6.16 |
| $ | 3.83 |
| $ | 4.38 |
| Diluted | $ | 5.33 | | $ | 16.11 | | $ | 6.16 | |
| | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except par value)
|
| | | February 1, 2020 | | February 2, 2019 | | January 29, 2022 | | January 30, 2021 |
ASSETS | | | | ASSETS | | | |
Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | $ | 52,721 |
| | $ | 46,034 |
| Cash and cash equivalents | $ | 53,722 | | | $ | 559,556 | |
Inventories | 921,266 |
| | 969,561 |
| Inventories | 1,237,797 | | | 940,294 | |
Other current assets | 89,962 |
| | 112,408 |
| Other current assets | 119,449 | | | 85,939 | |
Total current assets | 1,063,949 |
| | 1,128,003 |
| Total current assets | 1,410,968 | | | 1,585,789 | |
Operating lease right-of-use assets | 1,202,252 |
| | — |
| Operating lease right-of-use assets | 1,731,995 | | | 1,649,009 | |
Property and equipment - net | 849,147 |
| | 822,338 |
| Property and equipment - net | 735,826 | | | 717,216 | |
Deferred income taxes | 4,762 |
| | 8,633 |
| Deferred income taxes | 10,973 | | | 16,329 | |
Other assets | 69,171 |
| | 64,373 |
| Other assets | 37,491 | | | 68,914 | |
Total assets | $ | 3,189,281 |
| | $ | 2,023,347 |
| Total assets | $ | 3,927,253 | | | $ | 4,037,257 | |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | |
| | |
| Current liabilities: | | | |
Accounts payable | $ | 378,241 |
| | $ | 396,903 |
| Accounts payable | $ | 587,496 | | | $ | 398,433 | |
Current operating lease liabilities | 212,144 |
| | — |
| Current operating lease liabilities | 242,275 | | | 226,075 | |
Property, payroll, and other taxes | 82,109 |
| | 75,317 |
| Property, payroll, and other taxes | 90,728 | | | 109,694 | |
Accrued operating expenses | 118,973 |
| | 99,422 |
| Accrued operating expenses | 120,684 | | | 138,331 | |
Insurance reserves | 36,131 |
| | 38,883 |
| Insurance reserves | 36,748 | | | 34,660 | |
Accrued salaries and wages | 39,292 |
| | 26,798 |
| Accrued salaries and wages | 45,762 | | | 49,830 | |
Income taxes payable | 3,930 |
| | 1,237 |
| Income taxes payable | 894 | | | 43,601 | |
Total current liabilities | 870,820 |
| | 638,560 |
| Total current liabilities | 1,124,587 | | | 1,000,624 | |
Long-term debt | 279,464 |
| | 374,100 |
| Long-term debt | 3,500 | | | 35,764 | |
Noncurrent operating lease liabilities | 1,035,377 |
| | — |
| Noncurrent operating lease liabilities | 1,569,713 | | | 1,465,433 | |
Deferred income taxes | 48,610 |
| | — |
| Deferred income taxes | 21,413 | | | 7,762 | |
Deferred rent | — |
| | 60,700 |
| |
Insurance reserves | 57,567 |
| | 54,507 |
| Insurance reserves | 62,591 | | | 57,452 | |
Unrecognized tax benefits | 10,722 |
| | 14,189 |
| Unrecognized tax benefits | 10,557 | | | 11,304 | |
Synthetic lease obligation | — |
| | 144,477 |
| |
Other liabilities | 41,257 |
| | 43,773 |
| Other liabilities | 127,529 | | | 181,187 | |
Shareholders’ equity: | |
| | |
| Shareholders’ equity: | | | |
Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | — |
| | — |
| 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 39,037 shares and 40,042 shares, respectively | 1,175 |
| | 1,175 |
| |
Treasury shares - 78,458 shares and 77,453 shares, respectively, at cost | (2,546,232 | ) | | (2,506,086 | ) | |
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 28,476 shares and 35,535 shares, respectively | | Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 28,476 shares and 35,535 shares, respectively | 1,175 | | | 1,175 | |
Treasury shares - 89,019 shares and 81,960 shares, respectively, at cost | | Treasury shares - 89,019 shares and 81,960 shares, respectively, at cost | (3,121,602) | | | (2,709,259) | |
Additional paid-in capital | 620,728 |
| | 622,685 |
| Additional paid-in capital | 640,522 | | | 634,813 | |
Retained earnings | 2,769,793 |
| | 2,575,267 |
| Retained earnings | 3,487,268 | | | 3,351,002 | |
Total shareholders’ equity | 845,464 |
| | 693,041 |
| Total shareholders’ equity | 1,007,363 | | | 1,277,731 | |
Total liabilities and shareholders’ equity | $ | 3,189,281 |
| | $ | 2,023,347 |
| Total liabilities and shareholders’ equity | $ | 3,927,253 | | | $ | 4,037,257 | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity (In thousands) |
| | | | | | | | | | | | | | | | | Common | Treasury | Additional Paid-In Capital | Retained Earnings | |
| Common | Treasury | Additional Paid-In Capital | Retained Earnings | | | Shares | Amount | Shares | Amount | Total |
| Shares | Amount | Shares | Amount | Total | |
Balance - January 28, 2017 | 44,259 |
| $ | 1,175 |
| 73,236 |
| $ | (2,291,379 | ) | $ | 617,516 |
| $ | 2,323,318 |
| $ | 650,630 |
| |
Comprehensive income | — |
| — |
| — |
| — |
| — |
| 189,832 |
| 189,832 |
| |
Dividends declared ($1.00 per share) | — |
| — |
| — |
| — |
| — |
| (44,746 | ) | (44,746 | ) | |
Adjustment for ASU 2016-09 | — |
| — |
| — |
| — |
| 241 |
| (146 | ) | 95 |
| |
Purchases of common shares | (3,437 | ) | — |
| 3,437 |
| (165,757 | ) | — |
| — |
| (165,757 | ) | |
Exercise of stock options | 304 |
| — |
| (304 | ) | 9,659 |
| 2,053 |
| — |
| 11,712 |
| |
Restricted shares vested | 368 |
| — |
| (368 | ) | 11,562 |
| (11,562 | ) | — |
| — |
| |
Performance shares vested | 431 |
| — |
| (431 | ) | 13,523 |
| (13,523 | ) | — |
| — |
| |
Other | — |
| — |
| — |
| (4 | ) | — |
| — |
| (4 | ) | |
Share-based employee compensation expense | — |
| — |
| — |
| — |
| 27,825 |
| — |
| 27,825 |
| |
Balance - February 3, 2018 | 41,925 |
| 1,175 |
| 75,570 |
| (2,422,396 | ) | 622,550 |
| 2,468,258 |
| 669,587 |
| |
Comprehensive income | — |
| — |
| — |
| — |
| — |
| 156,894 |
| 156,894 |
| |
Dividends declared ($1.20 per share) | — |
| — |
| — |
| — |
| — |
| (49,885 | ) | (49,885 | ) | |
Purchases of common shares | (2,635 | ) | — |
| 2,635 |
| (107,830 | ) | (3,920 | ) | — |
| (111,750 | ) | |
Exercise of stock options | 43 |
| — |
| (43 | ) | 1,395 |
| 464 |
| — |
| 1,859 |
| |
Restricted shares vested | 413 |
| — |
| (413 | ) | 13,271 |
| (13,271 | ) | — |
| — |
| |
Performance shares vested | 296 |
| — |
| (296 | ) | 9,475 |
| (9,475 | ) | — |
| — |
| |
Other | — |
| — |
| — |
| (1 | ) | 2 |
| — |
| 1 |
| |
Share-based employee compensation expense | — |
| — |
| — |
| — |
| 26,335 |
| — |
| 26,335 |
| |
Balance - February 2, 2019 | 40,042 |
| 1,175 |
| 77,453 |
| (2,506,086 | ) | 622,685 |
| 2,575,267 |
| 693,041 |
| Balance - February 2, 2019 | 40,042 | | $ | 1,175 | | 77,453 | | $ | (2,506,086) | | $ | 622,685 | | $ | 2,575,267 | | $ | 693,041 | |
Comprehensive income | — |
| — |
| — |
| — |
| — |
| 242,464 |
| 242,464 |
| Comprehensive income | — | | — | | — | | — | | — | | 242,464 | | 242,464 | |
Dividends declared ($1.20 per share) | — |
| — |
| — |
| — |
| — |
| (48,286 | ) | (48,286 | ) | Dividends declared ($1.20 per share) | — | | — | | — | | — | | — | | (48,286) | | (48,286) | |
Adjustment for ASU 2016-02 | — |
| — |
| — |
| — |
| — |
| 348 |
| 348 |
| Adjustment for ASU 2016-02 | — | | — | | — | | — | | — | | 348 | | 348 | |
Purchases of common shares | (1,474 | ) | — |
| 1,474 |
| (55,347 | ) | — |
| — |
| (55,347 | ) | Purchases of common shares | (1,474) | | — | | 1,474 | | (55,347) | | — | | — | | (55,347) | |
Exercise of stock options | 6 |
| — |
| (6 | ) | 202 |
| (2 | ) | — |
| 200 |
| Exercise of stock options | 6 | | — | | (6) | | 202 | | (2) | | — | | 200 | |
Restricted shares vested | 202 |
| — |
| (202 | ) | 6,545 |
| (6,545 | ) | — |
| — |
| Restricted shares vested | 202 | | — | | (202) | | 6,545 | | (6,545) | | — | | — | |
Performance shares vested | 261 |
| — |
| (261 | ) | 8,459 |
| (8,459 | ) | — |
| — |
| Performance shares vested | 261 | | — | | (261) | | 8,459 | | (8,459) | | — | | — | |
Other | — |
| — |
| — |
| (5 | ) | (2 | ) | — |
| (7 | ) | Other | — | | — | | — | | (5) | | (2) | | — | | (7) | |
Share-based employee compensation expense | — |
| — |
| — |
| — |
| 13,051 |
| — |
| 13,051 |
| Share-based employee compensation expense | — | | — | | — | | — | | 13,051 | | — | | 13,051 | |
Balance - February 1, 2020 | 39,037 |
| $ | 1,175 |
| 78,458 |
| $ | (2,546,232 | ) | $ | 620,728 |
| $ | 2,769,793 |
| $ | 845,464 |
| Balance - February 1, 2020 | 39,037 | | 1,175 | | 78,458 | | (2,546,232) | | 620,728 | | 2,769,793 | | 845,464 | |
Comprehensive income | | Comprehensive income | — | | — | | — | | — | | — | | 629,191 | | 629,191 | |
Dividends declared ($1.20 per share) | | Dividends declared ($1.20 per share) | — | | — | | — | | — | | — | | (47,982) | | (47,982) | |
Purchases of common shares | | Purchases of common shares | (3,890) | | — | | 3,890 | | (175,642) | | — | | — | | (175,642) | |
Exercise of stock options | | Exercise of stock options | 13 | | — | | (13) | | 429 | | 64 | | — | | 493 | |
Restricted shares vested | | Restricted shares vested | 309 | | — | | (309) | | 10,034 | | (10,034) | | — | | — | |
Performance shares vested | | Performance shares vested | 65 | | — | | (65) | | 2,107 | | (2,107) | | — | | — | |
Other | | Other | 1 | | — | | (1) | | 45 | | 7 | | — | | 52 | |
Share-based employee compensation expense | | Share-based employee compensation expense | — | | — | | — | | — | | 26,155 | | — | | 26,155 | |
Balance - January 30, 2021 | | Balance - January 30, 2021 | 35,535 | | 1,175 | | 81,960 | | (2,709,259) | | 634,813 | | 3,351,002 | | 1,277,731 | |
Comprehensive income | | Comprehensive income | — | | — | | — | | — | | — | | 177,778 | | 177,778 | |
Dividends declared ($1.20 per share) | | Dividends declared ($1.20 per share) | — | | — | | — | | — | | — | | (41,512) | | (41,512) | |
Purchases of common shares | | Purchases of common shares | (8,076) | | — | | 8,076 | | (446,374) | | — | | — | | (446,374) | |
Restricted shares vested | | Restricted shares vested | 482 | | — | | (482) | | 16,140 | | (16,140) | | — | | — | |
Performance shares vested | | Performance shares vested | 535 | | — | | (535) | | 17,879 | | (17,879) | | — | | — | |
Other | | Other | — | | — | | — | | 12 | | 127 | | — | | 139 | |
Share-based employee compensation expense | | Share-based employee compensation expense | — | | — | | — | | — | | 39,601 | | — | | 39,601 | |
Balance - January 29, 2022 | | Balance - January 29, 2022 | 28,476 | | $ | 1,175 | | 89,019 | | $ | (3,121,602) | | $ | 640,522 | | $ | 3,487,268 | | $ | 1,007,363 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
|
BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Operating activities: | | | | | |
Net income | $ | 177,778 | | | $ | 629,191 | | | $ | 242,464 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization expense | 143,713 | | | 138,848 | | | 135,686 | |
Non-cash lease expense | 265,401 | | | 246,442 | | | 229,143 | |
Deferred income taxes | 19,007 | | | (52,415) | | | 52,374 | |
Non-cash share-based compensation expense | 39,601 | | | 26,155 | | | 13,051 | |
Non-cash impairment charge | 6,096 | | | 1,792 | | | 3,986 | |
Loss (gain) on disposition of property and equipment | 342 | | | (462,916) | | | (177,996) | |
Unrealized (gain) loss on fuel derivatives | (1,593) | | | (294) | | | 346 | |
Loss on extinguishment of debt | 535 | | — | | | — | |
Change in assets and liabilities: | | | | | |
Inventories | (297,503) | | | (19,028) | | | 48,295 | |
Accounts payable | 189,063 | | | 20,193 | | | (18,662) | |
Operating lease liabilities | (233,057) | | | (250,131) | | | (215,956) | |
Current income taxes | (76,429) | | | 56,564 | | | (4,442) | |
Other current assets | 32,154 | | | (10,238) | | | (5,836) | |
Other current liabilities | (56,220) | | | 55,775 | | | 36,962 | |
Other assets | (785) | | | (90) | | | (5,499) | |
Other liabilities | (14,341) | | | 19,501 | | | 5,054 | |
Net cash provided by operating activities | 193,762 | | | 399,349 | | | 338,970 | |
Investing activities: | | | | | |
Capital expenditures | (160,804) | | | (135,220) | | | (265,203) | |
Cash proceeds from sale of property and equipment | 1,155 | | | 588,258 | | | 190,741 | |
Other | (37) | | | (51) | | | (18) | |
Net cash (used in) provided by investing activities | (159,686) | | | 452,987 | | | (74,480) | |
Financing activities: | | | | | |
Net repayments of long-term debt | (46,764) | | | (243,227) | | | (80,609) | |
Net financing proceeds from sale and leaseback | — | | | 123,435 | | | — | |
Payment of finance lease obligations | (3,654) | | | (3,648) | | | (73,469) | |
Dividends paid | (41,653) | | | (46,964) | | | (48,421) | |
Proceeds from the exercise of stock options | — | | | 493 | | | 200 | |
Payment for treasury shares acquired | (446,374) | | | (175,642) | | | (55,347) | |
Payments for debt issuance costs | (1,167) | | | — | | | (150) | |
Payments to extinguish debt | (438) | | | — | | | — | |
Other | 140 | | | 52 | | | (7) | |
Net cash used in financing activities | (539,910) | | | (345,501) | | | (257,803) | |
(Decrease) increase in cash and cash equivalents | (505,834) | | | 506,835 | | | 6,687 | |
Cash and cash equivalents: | | | | | |
Beginning of year | 559,556 | | | 52,721 | | | 46,034 | |
End of year | $ | 53,722 | | | $ | 559,556 | | | $ | 52,721 | |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Operating activities: | | | | | |
Net income | $ | 242,464 |
| | $ | 156,894 |
| | $ | 189,832 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | |
|
Depreciation and amortization expense | 135,686 |
| | 114,025 |
| | 106,004 |
|
Non-cash lease expense | 229,143 |
| | — |
| | — |
|
Deferred income taxes | 52,374 |
| | 5,353 |
| | 32,578 |
|
Non-cash share-based compensation expense | 13,051 |
| | 26,335 |
| | 27,825 |
|
Non-cash impairment charge | 3,986 |
| | 141 |
| | — |
|
(Gain) loss on disposition of property and equipment | (177,996 | ) | | 732 |
| | 483 |
|
Unrealized loss (gain) on fuel derivatives | 346 |
| | 1,075 |
| | (1,398 | ) |
Change in assets and liabilities: | |
| | | | |
|
Inventories | 48,295 |
| | (96,772 | ) | | (14,100 | ) |
Accounts payable | (18,662 | ) | | 45,677 |
| | (49,269 | ) |
Operating lease liabilities | (215,956 | ) | | — |
| | — |
|
Current income taxes | (4,442 | ) | | (14,108 | ) | | (26,368 | ) |
Other current assets | (5,836 | ) | | (7,055 | ) | | (12,144 | ) |
Other current liabilities | 36,962 |
| | (11,637 | ) | | (15,342 | ) |
Other assets | (5,499 | ) | | 1,985 |
| | (9,335 | ) |
Other liabilities | 5,054 |
| | 11,415 |
| | 21,602 |
|
Net cash provided by operating activities | 338,970 |
| | 234,060 |
| | 250,368 |
|
Investing activities: | |
| | |
| | |
|
Capital expenditures | (265,203 | ) | | (232,402 | ) | | (142,745 | ) |
Cash proceeds from sale of property and equipment | 190,741 |
| | 519 |
| | 1,854 |
|
Assets acquired under synthetic lease | — |
| | (128,872 | ) | | (15,606 | ) |
Payments for purchase of intangible assets | — |
| | (15,750 | ) | | — |
|
Other | (18 | ) | | 32 |
| | (11 | ) |
Net cash used in investing activities | (74,480 | ) | | (376,473 | ) | | (156,508 | ) |
Financing activities: | |
| | |
| | |
|
Net (repayments of) proceeds from long-term debt | (80,609 | ) | | 174,300 |
| | 93,400 |
|
Payment of finance lease obligations | (73,469 | ) | | (3,908 | ) | | (4,134 | ) |
Dividends paid | (48,421 | ) | | (50,608 | ) | | (44,671 | ) |
Proceeds from the exercise of stock options | 200 |
| | 1,859 |
| | 11,712 |
|
Payment for treasury shares acquired | (55,347 | ) | | (111,750 | ) | | (165,757 | ) |
Proceeds from synthetic lease | — |
| | 128,872 |
| | 15,606 |
|
Payments for debt issuance costs | (150 | ) | | (1,495 | ) | | — |
|
Other | (7 | ) | | 1 |
| | (4 | ) |
Net cash (used in) provided by financing activities | (257,803 | ) | | 137,271 |
| | (93,848 | ) |
Increase (decrease) in cash and cash equivalents | 6,687 |
| | (5,142 | ) | | 12 |
|
Cash and cash equivalents: | |
| | |
| | |
|
Beginning of year | 46,034 |
| | 51,176 |
| | 51,164 |
|
End of year | $ | 52,721 |
| | $ | 46,034 |
| | $ | 51,176 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements |
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
We are a home discount retailer in the United States (“U.S.”). At February 1, 2020,January 29, 2022, we operated 1,4041,431 stores in 47 states and an e-commerce platform. Our mission is to help people liveLive BIG and saveSave LOTS. Our vision is to be the BIG difference for a better life by delivering unmatchedexceptional value through surprise and delight, byto customers, building a “Best Places“best places to Work”grow” culture, by rewarding shareholders with consistent growth and top tier returns, and by doing good as we do well. Our values are leading with our core customer (whom we refer to as Jennifer), treating all like friends, succeeding together, and playing to win.in local communities.
Basis of Presentation
The consolidated financial statements include Big Lots, Inc. and all of its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and include all of our accounts. We consolidate all majority-owned and controlled subsidiaries. All intercompany accounts and transactions have been eliminated.
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. The use of estimates, judgments, and assumptions creates a level of uncertainty with respect to reported or disclosed amounts in our consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, including those that management considers critical to the accurate presentation and disclosure of our consolidated financial statements and accompanying notes. Management bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that it believes are reasonable under the circumstances. Because of the inherent uncertainty in using estimates, judgments, and assumptions, actual results may differ from these estimates.
Fiscal Periods
Our fiscal year ends on the Saturday nearest to January 31, which results in fiscal years consisting of 52 or 53 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years. Fiscal year 2021 (“2021”) was comprised of the 52 weeks that began on January 31, 2021 and ended on January 29, 2022. Fiscal year 2020 (“2020”) was comprised of the 52 weeks that began on February 2, 2020 and ended on January 30, 2021. Fiscal year 2019 (“2019”) was comprised of the 52 weeks that began on February 3, 2019 and ended on February 1, 2020. Fiscal year 2018 (“2018”) was comprised of the 52 weeks that began on February 4, 2018 and ended on February 2, 2019. Fiscal year 2017 (“2017”) was comprised of the 53 weeks that began on January 29, 2017 and ended on February 3, 2018.
Segment Reporting
We manage our business based on one segment, discount retailing. Our entire operation is located in the U.S.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of amounts on deposit with financial institutions, outstanding checks, credit and debit card receivables, and highly liquid investments, includingsuch as money market funds, treasury bills, and commercial paper, which are unrestricted to withdrawal or use and which have an original maturity of three months or less. We review cash and cash equivalent balances on a bank by bank basis in order to identify book overdrafts. Book overdrafts occur when the aggregate amount of outstanding checks and electronic fund transfers exceed the cash deposited at a given bank. We reclassify book overdrafts, if any, to accounts payable on our consolidated balance sheets. Amounts due from banks for credit and debit card transactions are typically settled in less than three days, and at February 1, 2020January 29, 2022 and February 2, 2019,January 30, 2021, totaled $28.8$30.3 million and $23.6$34.7 million, respectively.
Investments
Investment securities are classified as available-for-sale, held-to-maturity, or trading at the date of purchase. Investments are recorded at fair value as either current assets or non-current assets based on the stated maturity or our plans to either hold or sell the investment. Unrealized holding gains and losses on trading securities are recognized in earnings. Unrealized holding gains and losses on available-for-sale securities are recognized in other comprehensive income until realized. We did not own any held-to-maturity or available-for-sale securities as of February 1, 2020January 29, 2022 and February 2, 2019.January 30, 2021.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Cost includes any applicable inbound shipping and handling costs associated with the receipt of merchandise into our distribution centers (see the discussion below under the caption “Selling and Administrative Expenses” for additional information regarding outbound shipping and handling costs to our stores). Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. Under the average cost retail inventory method, inventory is segregated into classes of merchandise having similar characteristics at its current retail selling value. Current retail selling values are converted to a cost basis by applying an average cost factor to each specific merchandise class’s retail selling value. Cost factors represent the average cost-to-retail ratio computed using beginning inventory and all fiscal year-to-date purchase activity specific to each merchandise class.
Under the average cost retail inventory method, permanent sales price markdowns result in cost reductions in inventory. Our permanent sales price markdowns are typically related to end of season clearance events and are recorded as a charge to cost of sales in the period of management’s decision to initiate sales price reductions with the intent not to return the price to regular retail. Promotional markdowns are recorded as a charge to net sales in the period the merchandise is sold. Promotional markdowns are typically related to specific marketing efforts with respect to products maintained continuously in our stores or products that are only available in limited quantities but represent substantial value to our customers. Promotional markdowns are principally used to drive higher sales volume during a defined promotional period.
We record a reduction to inventories and charge to cost of sales for an allowance for shrinkage. The allowance for shrinkage is calculated as a percentage of sales for the period from the last physical inventory date to the end of the reporting period. Such estimates are based on a combination of our historical experience and current year physical inventory results.
We record a reduction to inventories and charge to cost of sales for any excess or obsolete inventory. The excess or obsolete inventory is estimated based on a review of our aged inventory and takes into account any items that have already received a cost reduction as a result of the permanent markdown process discussed above. We estimate the reduction for excess or obsolete inventory based on historical sales trends, age and quantity of product on hand, and anticipated future sales.
Payments Received from Vendors
Payments received from vendors relate primarily to rebates and reimbursement for markdowns and are generally recognized in our consolidated statements of operations and comprehensive income as a reduction to cost of inventory purchases in the period that the rebate or reimbursement is earned or realized and, consequently, result in a reduction in cost of sales when the related inventory is sold.
Store Supplies
When opening a new store, a portion of the initial shipment of supplies (which primarily includes display materials, signage, security-related items, and miscellaneous store supplies) is capitalized at the store opening date. These capitalized supplies represent more durable types of items for which we expect to receive future economic benefit. Subsequent replenishments of capitalized store supplies are expensed. The consumable/non-durable type items for which the future economic benefit is less measurable are expensed upon shipment to the store. Capitalized store supplies are adjusted periodically for changes in estimated quantities or costs and are included in other current assets in our consolidated balance sheets.
Property and Equipment - Net
Depreciation and amortization expense of property and equipment are recorded on a straight‑line basis using estimated service lives. The estimated service lives of our depreciable property and equipment by major asset category were as follows:
|
| | | | |
Land improvements | 15 years |
Buildings | 40 years |
Leasehold improvements | 5 - 10 years |
Store fixtures and equipment | 2 - 7 years |
Distribution and transportation fixtures and equipment | 5 - 15 years |
Office and computer equipment | 3 - 5 years |
Computer software costs | 53 - 8 years |
Company vehicles | 3 years |
Leasehold improvements are amortized on a straight-line basis using the shorter of their estimated service lives or the lease term. We began a significant capital investment program in our Store of the Future concept in 2018, which resulted in us reviewing the estimated service lives of our leasehold improvements and fixtures and equipment at both our renovated stores and newly opened stores. During 2019, in connection with analysis of our remaining lease terms under ASC 842 and our Store of the Future remodel program, we changed the estimated service lives on leasehold improvements for new stores in the Store of the Future format from 5 years to 10 years and for renovated stores in the Store of the Future format from 5 years to 7 years, both of which more appropriately reflect the reasonably certain remaining lease term on these stores. Leasehold improvements for the balance of the stores in our chain have an estimated service life of 5 years. Additionally, we changed the estimated service lives on fixtures and certain equipment from 5 years to 7 years for both new stores and renovated stores to reflect our revised expectation on our renovation cycle, while taking into consideration our remaining lease term.
Assets acquired under leases which meet the criteria of a finance lease are capitalized in property and equipment - net and amortized over the estimated service life of the asset or the applicable lease term, whichever is shorter.
Depreciation estimates are revised prospectively to reflect the remaining depreciation or amortization of the asset over the shortened estimated service life when a decision is made to dispose of property and equipment prior to the end of its previously estimated service life. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in selling and administrative expenses. Major repairs that extend service lives are capitalized. Maintenance and repairs are charged to expense as incurred. Capitalized interest was not significant in any period presented.
Long-Lived Assets
Our long-lived assets primarily consist of property and equipment - net and operating lease right-of-use assets. In order to determine if impairment indicators are present for store property and equipment and operating lease right-of-use assets, we review historical operating results at the store level on an annual basis, or when other impairment indicators are present.level. Generally, all other property and equipment and operating lease right-of-use assets are reviewed for impairment at the enterprise level. If the net book value of a store’s long-lived assets is not recoverable by the expected undiscounted future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over their fair value. Our assumptions related to estimates of undiscounted future cash flows are based on historical results of cash flows adjusted for management projections for future periods. We estimate the fair value of our long-lived assets using expected cash flows, including salvage value, which is based on readily available market information for similar assets.
Intangible Assets
DuringIn 2018, we acquired the Broyhill® trademark and trade name. This trademark and trade name have indefinite lives. We test the trademark and trade name for impairment annually or whenever circumstances indicate that the carrying value of the asset may not be recoverable. We estimate the fair value of these intangible assets based on an income approach. We perform our annual impairment testing during our fourth fiscal quarter of each year.
Closed Store Accounting
We recognize impairment of our right-of-use assets when we cease using leased property in our operations. In measuring the impairment, we consider sublease rentals that could be reasonably obtained and other potentially mitigating factors. We monitor the right-of-use assets for impairment indicators if the right-of-use assets were not impaired at the cease-use date. We recognize an obligation for the fair value of the nonlease components of our lease agreements when we cease using a leased property in our operations. In measuring fair value of the obligation for nonlease components, we consider the minimum payments and other potentially mitigating factors. We discount the estimated obligation using the applicable credit adjusted interest rate, which results in accretion expense in periods subsequent to the period of initial measurement. We monitor the obligation in subsequent periods and revise our estimated liabilities, if necessary. Severance and benefits associated with terminating employees from employment are recognized ratably from the communication date through the estimated future service period, unless the estimated future service period is less than 60 days, in which case we recognize the impact at the communication date. Generally all other store closing costs are recognized when incurred.
Savings Plans
We have a savings plan with a 401(k) deferral feature and we provide matching contributions, which are subject to Internal Revenue Service (“IRS”) regulations, based on a percentage of employee contributions. For 2021, 2020, and 2019, we expensed $9.2 million, $9.2 million, and $8.3 million, respectively, related to our matching contributions. We previously had a nonqualified deferred compensation plan with a similar deferral feature for eligible employees. We provide a matching contribution based on a percentage of employee contributions. Our matching contributions are subjectIn 2021, we terminated the nonqualified deferred compensation plan and distributed all account balances to Internal Revenue Service (“IRS”) regulations. For 2019, 2018, and 2017, we expensed $8.3 million, $8.5 million, and $7.7 million, respectively, related to our matching contributions.plan participants. In connection with our nonqualified deferred compensation plan, we had liabilities of $33.9 million$0.0 and $31.8$33.0 million at February 1, 2020January 29, 2022 and February 2, 2019,January 30, 2021, respectively, which arewere recorded in other liabilities.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement basis and tax basis of assets and liabilities using enacted law and tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We assess the adequacy and need for a valuation allowance for deferred tax assets. In making such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. We have established a valuation allowance to reduce our deferred tax assets to the balance that is more likely than not to be realized.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations and comprehensive income. Accrued interest and penalties are included within the related tax liability line in the accompanying consolidated balance sheets.
The effective income tax rate in any period may be materially impacted by the overall level of income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws (which may be retroactive to the beginning of the fiscal year), subsequent recognition, de-recognition and/or measurement of an uncertain tax benefit, changes in a deferred tax valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates.
Insurance and Insurance-Related Reserves
We are self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical, dental, and prescription drug benefit claims, a portion of which is paid by employees. We purchase stop-loss coverage to limit significant exposure in these areas. Accrued insurance-related liabilities and related expenses are based on actual claims filed and estimates of claims incurred but not reported and are reliably determinable. The accruals are determined by applying actuarially-based calculations. General liability and workers’ compensation liabilities are recorded at our estimate
Fair Value of Financial Instruments
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Level 1, defined as observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2, defined as observable inputs other than Level 1 inputs. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Commitments and Contingencies
We are subject to various claims and contingencies including legal actions and other claims arising out of the normal course of business. In connection with such claims and contingencies, we estimate the likelihood and amount of any potential obligation, where it is possible to do so, using management's judgment. Management uses various internal and external specialists to assist in the estimating process. We accrue a liability if the likelihood of a loss is probable and the amount is estimable. If the likelihood of a loss is only reasonably possible (as opposed to probable), or if it is probable but an estimate is not determinable, disclosure of a material claim or contingency is made in the notes to our consolidated financial statements and no accrual is made.
Revenue Recognition
We recognize sales revenue at the time the customer takes possession of the merchandise (i.e., the point at which we transfer the goods). Sales are recorded net of discounts (i.e., the amount of consideration we expect to receive for the goods) and estimated returns and exclude any sales tax. The reserve for merchandise returns is estimated based on our prior return experience.
We sell gift cards in our stores, online, and through third-party retailers, and issue merchandise credits, typically as a result of customer returns, on stored value cards. We do not charge administrative fees on unused gift card or merchandise credit balances and our gift cards and merchandise credits do not expire. We recognize sales revenue related to gift cards and merchandise credits (1) when the gift card or merchandise credit is redeemed in a sales transaction by the customer or (2) as breakage occurs. We recognize gift card and merchandise credit breakage when we estimate that the likelihood of the card or credit being redeemed by the customer is remote and we determine that we do not have a legal obligation to remit the value of unredeemed cards or credits to the relevant regulatory authority. We estimate breakage based upon historical redemption patterns. The liability for the unredeemed cash value of gift cards and merchandise credits is recorded in accrued operating expenses in our consolidated balance sheets.
We offer price hold contracts and buy now pick up later arrangements on merchandise. Revenue for price hold contracts and buy now pick up later arrangements is recognized when the customer makes the final payment and takes possession of the merchandise. Amounts paid by customers under price hold contracts and buy now pick up later arrangements are recorded in accrued operating expenses in our consolidated balance sheets until a sale is consummated.
We recognize sales revenue for direct-to-customer transactions on our e-commerce platform at the time the merchandise is shipped (i.e., the point at which we transfer the goods). We also offer buy online, pick up in store services on our e-commerce platform. Revenue for buy online, pick up in store transactions is recognized when the customer takes possession of the merchandise at the store.
Cost of Sales
Cost of sales includes the cost of merchandise, net of cash discounts and rebates, markdowns, and inventory shrinkage.shrinkage, and the cost of shipping direct-to-customer e-commerce orders. Cost of merchandise includes related inbound freight to our distribution centers, duties, and commissions. We classify warehousing, distribution and outbound transportation costs to our stores as selling and administrative expenses. Due to this classification, our gross margin rates may not be comparable to those of other retailers that include warehousing, distribution and outbound transportation costs to stores in cost of sales.
Selling and Administrative Expenses
Selling and administrative expenses include store expenses (such as payroll and occupancy costs) and costs related to warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance, non-income taxes, accepting credit/debit cards, and overhead. SellingOur selling and administrative expense rates may not be comparable to those of other retailers that include warehousing, distribution, and outbound transportation costs to stores in cost of sales. Distribution and outbound transportation costs included in selling and administrative expenses were $310.4 million, $251.0 million, and $191.8 million $180.5 million,for 2021, 2020, and $161.5 million for 2019, 2018, and 2017, respectively.
Leases and Rent Expense
We determine if an arrangement contains a lease at inception of the agreement. Our leased property consists of our retail stores, distribution centers, in California, store security, and other office equipment. Certain of our store and distribution center leases have rent escalations and/or have tenant allowances or other lease incentives, which are fixed in nature and included in our calculation of right-of-use assets and lease liabilities. Certain of our store leases provide for contingent rents, which are recorded as variable
costs and not included in our calculation of right-of-use assets and lease liabilities. Many of our store leases obligate us to pay for our applicable portion of real estate taxes, common area maintenance costs (“CAM”), and property insurance, which are recorded as variable costs and not included in our calculation of right-of-use assets and lease liabilities, except for certain fixed CAM and insurance charges that are not variable. Many of our leases contain provisions for options to renew, extend the original term for additional periods, or terminate the lease if certain sales thresholds are not attained. We have assessed the reasonable certainty of these provisions to determine the appropriate lease term. Our lease agreements do not contain material residual value guarantees, (excluding the Synthetic Lease discussed in note 5), restrictions, or covenants.
We have established a short-term lease exception policy, permitting us to not apply lease recognition requirements to leases with terms of 12 months or less. We recognize a lease liability and right-of-use asset at commencement of the lease when possession of the property is taken from the lessor, which, for stores, normally includes a construction or set-up period prior to store opening. We begin recognizing rent expense at commencement of the lease. Rent expense for operating leases is recognized on a straightlinestraight-line basis over the lease term and is included in selling and administrative expenses. We account for lease and non-lease components as a single component for our real estate class of assets.
Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, digital, social media, internet and social mediae-mail marketing and advertising, e-mail,payment card-linked marketing and in-store point-of-purchase signage and presentations. Advertising expenses are included in selling and administrative expenses. Advertising expenses were $97.7 million, $102.8 million, and $95.2 million $93.6 million,for 2021, 2020, and $92.0 million for 2019, 2018, and 2017, respectively.
Store Pre-opening Costs
Pre-opening costs incurred during the construction periods for new store openings are expensed as incurred and included in selling and administrative expenses in our consolidated statements of operations and comprehensive income.
Share-Based Compensation
Share-based compensation expense is recognized in selling and administrative expense in our consolidated statements of operations and comprehensive income for all awards that we expect to vest.
Non-vested Restricted Stock Units
We expense our non-vested restricted stock units (“RSUs”) with graded vesting as a single award with an average estimated life over the entire term of the award. The expense for the non-vested restricted stock units is recorded on a straight-line basis over the vesting period.
Performance Share Units
Compensation expense for performance share units (“PSUs”) is recorded based on fair value of the award on the grant date and the estimated achievement of financial performance objectives. From an accounting perspective, the grant date is established once all financial performance targets have been set. We monitor the estimated achievement of the financial performance objectives at each reporting period and will potentially adjust the estimated expense on a cumulative basis. The expense for the PSUs is recorded on a straight-line basis from the grant date through the end of the performance period.
In 2020, we awarded performance share units with a restriction feature to certain members of senior management, which vested based on the achievement of share price performance goals and a minimum service requirement of one year (“PRSUs”). The PRSUs had a contractual term of three years. The grant date fair value and estimated vesting period of the PRSUs was determined by a third party using a Monte Carlo simulation. The awards were expensed over their estimated vesting period on a straight-line basis.
Earnings per Share
Basic earnings per share is based on the weighted-average number of shares outstanding during each period. Diluted earnings per share is based on the weighted-average number of shares outstanding during each period and the additional dilutive effect of stock options, restricted stock awards, restricted stock units,RSUs, PRSUs, and PSUs, calculated using the treasury stock method.
Derivative Instruments
We use derivative instruments to mitigate the risk of market fluctuations in diesel fuel prices. We do not enter into derivative instruments for speculative purposes. Our derivative instruments may consist of collar or swap contracts. Our current derivative instruments do not meet the requirements for cash flow hedge accounting. Instead, our derivative instruments are marked-to-market to determine their fair value and any gains or losses are recognized currently in other income (expense) on our consolidated statements of operations and comprehensive income.
Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for 2019, 2018,2021, 2020, and 2017:2019:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | 2019 |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid for interest | $ | 8,066 | | | $ | 6,366 | | | $ | 17,446 | |
Cash paid for income taxes, excluding impact of refunds | 111,206 | | | 217,308 | | | 29,375 | |
Gross proceeds from long-term debt | 55,600 | | | 514,500 | | | 1,811,000 | |
Gross payments of long-term debt | 102,364 | | | 757,727 | | | 1,891,609 | |
Gross financing proceeds from sale and leaseback | — | | | 133,999 | | | — | |
Gross repayments of financing from sale and leaseback | — | | | 10,564 | | | — | |
Cash paid for operating lease liabilities | 341,341 | | | 340,747 | | | 292,048 | |
Non-cash activity: | | | | | |
Assets acquired under finance leases | 1,080 | | | — | | | 70,831 | |
Accrued property and equipment | 19,303 | | | 17,791 | | | 17,632 | |
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 354,066 | | | $ | 694,811 | | | $ | 1,493,888 | |
|
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 | | 2017 |
Supplemental disclosure of cash flow information: | |
| | |
| | |
|
Cash paid for interest, including finance or capital leases | $ | 17,446 |
| | $ | 10,292 |
| | $ | 5,991 |
|
Cash paid for income taxes, excluding impact of refunds | $ | 29,375 |
| | $ | 59,691 |
| | $ | 99,693 |
|
Gross proceeds from long-term debt | $ | 1,811,000 |
| | $ | 1,861,900 |
| | $ | 1,656,100 |
|
Gross payments of long-term debt | $ | 1,891,609 |
| | $ | 1,687,600 |
| | $ | 1,562,700 |
|
Cash paid for operating lease liabilities | $ | 292,048 |
| | $ | — |
| | $ | — |
|
Non-cash activity: | |
| | |
| | |
|
Assets acquired under finance or capital leases | $ | 70,831 |
| | $ | 902 |
| | $ | 238 |
|
Accrued property and equipment | $ | 17,632 |
| | $ | 32,264 |
| | $ | 11,236 |
|
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,493,888 |
| | $ | — |
| | $ | — |
|
Reclassifications
In 2021, we realigned select merchandise categories to be consistent with the realignment of our merchandising team and changes to our management reporting. To better suit the new alignment, we renamed our Electronics, Toys, & Accessories category as Apparel, Electronics, & Other. We moved our pet department from our Consumables category to our Food category; our home organization department from our Soft Home category to our Hard Home category; our toys department from our Apparel, Electronics, & Other category to our Hard Home category; our candy & snacks from our Food category to our Apparel, Electronics, & Other category; and added new departments for the merchandise assortments for The Lot, our cross-category presentation solution, and the Queue Line, our streamlined checkout experience, to the Apparel, Electronics, & Other category.
Our seven merchandise categories, which match our internal management and reporting of merchandise net sales are now as follows: Food; Consumables; Soft Home; Hard Home; Furniture; Seasonal; and Apparel, Electronics, & Other. The Food category includes our beverage & grocery; specialty foods; and pet departments. The Consumables category includes our health, beauty and cosmetics; plastics; paper; and chemical departments. The Soft Home category includes our home décor; frames; fashion bedding; utility bedding; bath; window; decorative textile; and area rugs departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; home maintenance; home organization; and toys departments. The Furniture category includes our upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden; summer; Christmas; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the assortments for The Lot and the Queue Line.
In order to provide comparative information, we have reclassified our results into the new alignment for all periods presented.
Recently Adopted Accounting Standards
In the third quarter of 2021, the Company adopted Accounting Standards Update (“ASU”) 2020-04 Reference Rate Reform. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, leases, and other transactions affected by the potential fallback of LIBOR. The Company adopted ASU 2020-04 in connection with its entry into a new credit facility (see Note 3 to the consolidated financial statements) that includes language to address LIBOR fallback and in connection with an amendment to the lease for our Apple Valley, CA distribution center including similar LIBOR fallback language. The impact of the adoption was immaterial to the consolidated financial statements.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15 Intangibles - Goodwill and Other - Internal-Use Software. This update evaluates the accounting for costs paid by a customer to implement a cloud computing arrangement. The new guidance aligns cloud computing arrangement implementation cost accounting with the capitalization requirements for internal-use software development, while leaving the accounting for service elements unchanged. On February 2, 2020, we adopted ASU 2018-15 on a prospective basis. The impact of the adoption was immaterial to the consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update (“ASU”)ASU 2016-02, Leases (Topic 842). The update requires a lessee to recognize, on the balance sheet, a liability to make lease payments and a right-of-use asset representing a right to use the underlying asset for the lease term. Additionally, this guidance expanded related disclosure requirements. On February 3, 2019, we adopted the new standard and elected the optional transition method, as allowed by ASU 2018-11, Leases (Topic 842), Targeted Improvements, to apply the new standard as of the effective date. Therefore, we have not applied the new standard to the comparative prior periods presented in the consolidated financial statements. We elected to apply the following practical expedients and policy elections at adoption:
|
| | |
Practical expedient package | | We have not reassessed whether any expired or existing contracts are, or contain, leases. |
We have not reassessed the lease classification for any expired or existing leases. |
We have not reassessed initial direct costs for any expired or existing leases. |
Hindsight practical expedient | | We have not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. |
Separation of lease and non-lease components | | We have elected to establish an accounting policy to account for lease and non-lease components as a single component for our real estate class of assets. |
Short-term policy | | We have elected to establish a short-term lease exception policy, permitting us to not apply the recognition requirements of the new standard to short-term leases (i.e., leases with terms of 12 months or less). |
Adoption of this ASU 2016-02, in the first quarter of 2019, resulted in the recognition of right-of-use assets and lease liabilities for operating leases of $1,110 million and $1,138 million, respectively, with difference in amounts being primarily comprised of pre-existing deferred rent and prepaid rent. The impact of the adoption was immaterial to the consolidated statements of
shareholders'shareholders’ equity. For further discussion on our leases, see
note 5.Note 5 to the accompanying consolidated financial statements.
There are currently no new accounting pronouncements with a future effective date that are of significance, or potential significance, to us.
Subsequent Events
We have evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, we are not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in our consolidated financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT - NET
Property and equipment - net consist of:
| | | | | | | | |
(In thousands) | January 29, 2022 | January 30, 2021 |
Land and land improvements | $ | 48,849 | | $ | 48,862 | |
Buildings and leasehold improvements | 828,179 | | 779,104 | |
Fixtures and equipment | 940,921 | | 870,074 | |
Computer software costs | 187,190 | | 213,042 | |
Construction-in-progress | 25,394 | | 27,455 | |
Property and equipment - cost | 2,030,533 | | 1,938,537 | |
Less accumulated depreciation and amortization | 1,294,707 | | 1,221,321 | |
Property and equipment - net | $ | 735,826 | | $ | 717,216 | |
|
| | | | | | |
(In thousands) | February 1, 2020 | February 2, 2019 |
Land and land improvements | $ | 63,691 |
| $ | 61,200 |
|
Buildings and leasehold improvements | 1,034,458 |
| 1,078,142 |
|
Fixtures and equipment | 884,051 |
| 784,170 |
|
Computer software costs | 196,449 |
| 179,071 |
|
Construction-in-progress | 22,038 |
| 78,580 |
|
Property and equipment - cost | 2,200,687 |
| 2,181,163 |
|
Less accumulated depreciation and amortization | 1,351,540 |
| 1,358,825 |
|
Property and equipment - net | $ | 849,147 |
| $ | 822,338 |
|
Property and equipment - cost includes $27.5$25.3 million and $29.5$25.8 million at February 1, 2020January 29, 2022 and February 2, 2019,January 30, 2021, respectively, to recognize assets from finance or capital leases. Accumulated depreciation and amortization includes $20.1$23.6 million and $17.9$22.2 million at February 1, 2020January 29, 2022 and February 2, 2019,January 30, 2021, respectively, related to finance or capital leases. Additionally, we had 0 and $144.5 million in assets from a synthetic lease for our new distribution center in Apple Valley, California at February 1,
During 2021, 2020, and February 2, 2019, respectively.
During 2019, 2018, and 2017, respectively, we invested $265.2$160.8 million, $232.4$135.2 million, and $142.7$265.2 million of cash in capital expenditures and we recorded $135.0$142.6 million, $125.0$138.3 million, and $117.1$135.0 million of depreciation expense.
In 2020, we disposed of $123.8 million of property and equipment - cost in connection with the sale of four distribution centers in sale and leaseback transactions (see Note 10 to the accompanying consolidated financial statements for additional information on the sale and leaseback transactions).
We incurred $0.4$0.9 million, $0.1$0.9 million, and 0$0.4 million in asset impairment charges, excluding impairment of right-of-use assets (see note 5)Note 5 to the accompanying consolidated financial statements), in 2021, 2020, and 2019, 2018,respectively. In 2021, we impaired the value of property and 2017, respectively.equipment assets at 8 stores as a result of our store impairment review, of which the majority of the impairment value was attributable to five stores. In 2020, we impaired the value of property and equipment assets at 4 stores as a result of our store impairment review. In 2019, we impaired the value of property and equipment assets at 2 stores as a result of our annual store impairment review. During 2018, we wrote down the value of an asset held for sale. In 2017, we did 0t impair the value of long-lived assets at any stores as a result of our annual store impairment review.
Asset impairment charges are included in selling and administrative expenses in our accompanying consolidated statements of operations and comprehensive income. We perform annual impairment reviews of our long-lived assets at the store level. When we perform the annual impairment reviews, we first determine which stores had impairment indicators present. We generally use actual historical cash flows to determine if stores had negative cash flows within the past two years. For each store with negative cash flows, we estimate future cash flows based on operating performance estimates specific to each store’s operations that are based on assumptions currently being used to develop our company level operating plans. If the net book value of a store’s long-lived
assets is not recoverable by the expected future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over their fair value.
NOTE 3 – DEBT
Bank Credit Facility
On August 31, 2018,September 22, 2021, we entered into a $700$600 million five-yearfive-year unsecured credit facility (“20182021 Credit Agreement”) that expires on September 22, 2026. The 2021 Credit Agreement replaced our priorthe $700 million five-year unsecured credit facility entered into in July 2011 and most recently amended in May 2015on August 31, 2018 (“20112018 Credit Agreement”) and, among other things, amended certain of the representations and covenants applicable to the facility.. The 2018 Credit Agreement expireswas scheduled to expire on August 31, 2023.2023, but was terminated concurrent with our entry into the 2021 Credit Agreement. We did not incur any early termination penalties in connection with the termination of the 2018 Credit Agreement. In connection with our entry into the 20182021 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $1.5$1.2 million, which are being amortized over the term of the agreement.2021 Credit Agreement.
Borrowings under the 20182021 Credit Agreement are available for general corporate purposes, working capital, and repayment ofto repay certain of our indebtedness. The 20182021 Credit Agreement includes a $30$50 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The 2021 Credit Agreement also contains an environmental, social and governance (“ESG”) provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the 2021 Credit Agreement. Under the 2021 Credit Agreement, we have the option to establish incremental term loans and/or increases in the revolving credit limits in an aggregate amount of up to $300 million, subject to the lenders agreeing to increase their commitments. Additionally, the 2021 Credit Agreement includes two options to extend the maturity date of the 2021 Credit Agreement by one year each, subject to each lender agreeing to extend the maturity date of its respective loans. The interest rates, pricing and fees under the 20182021 Credit Agreement fluctuate based on our debt rating.rating or leverage ratio, whichever results in more favorable pricing to us. The 20182021 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolvingLIBOR for loans denominated in U.S. dollars or the Euro Short Term Rate (€STR) for loans denominated in Euros. The 2021 Credit Agreement updated the LIBOR fallback language to implement fallback provisions, pursuant to which the interest rate on the loans will transition to an alternative rate upon the occurrence of certain LIBOR cessation events. Loans made under the 20182021 Credit Agreement.Agreement may be prepaid without penalty. The 20182021 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios -– a leverage ratio and a fixed charge coverage ratio. The covenants of the 2021 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with any default on indebtedness that is greater than $50 million, including with respect to the synthetic lease for the distribution center in Apple Valley, CA, which was amended concurrent with our entry into the 2021 Credit Agreement to conform to the covenants of the 2021 Credit Agreement. A violation of any of the covenants could result in a default under the 20182021 Credit Agreement that would permit the lenders to restrict our ability to further access the 20182021 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 20182021 Credit Agreement. At February 1, 2020,January 29, 2022, we had $229.2$3.5 million of borrowings outstanding under the 20182021 Credit Agreement, and $2.9while $2.4 million was committed to outstanding letters of credit, leaving $467.9$594.1 million available under the 20182021 Credit Agreement.
Secured Equipment Term Note
On August 7, 2019, we entered into a $70 million term note agreement (“2019 Term Note”), which iswas secured by the equipment at our new CaliforniaApple Valley, CA distribution center. The 2019 Term Note will expire on May 7, 2024. We are required to make monthly payments over the term of the 2019 Term Notecenter and are permitted to prepay, subject to penalties, at any time. Thecarried an interest rate on the 2019 Term Note isof 3.3%. In connection with our entry into the 2019 Term Note, we paid debt issuance costs of $0.2 million. In light of our strong liquidity and market conditions, on June 7, 2021, we prepaid the remaining $44.3 million principal balance under the 2019 Term Note. In connection with the prepayment, we incurred a $0.4 million prepayment fee and recognized a $0.5 million loss on debt extinguishment, which was recorded in Other income (expense) in the consolidated statements of operations and comprehensive income, in the second quarter of 2021.
Debt was recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
Instrument (In thousands) | | January 29, 2022 | | January 30, 2021 |
2019 Term Note | | $ | — | | | $ | 50,264 | |
2018 Credit Agreement & 2021 Credit Agreement | | 3,500 | | | — | |
Total debt | | $ | 3,500 | | | $ | 50,264 | |
Less current portion of long-term debt (included in Accrued operating expenses) | | $ | — | | | $ | (14,500) | |
Long-term debt | | $ | 3,500 | | | $ | 35,764 | |
|
| | | | | | | | |
Instrument (In thousands) | | February 1, 2020 | | February 2, 2019 |
2019 Term Note | | $ | 64,291 |
| | $ | — |
|
2018 Credit Agreement | | 229,200 |
| | 374,100 |
|
Total debt | | $ | 293,491 |
| | $ | 374,100 |
|
Less current portion of long-term debt (included in Accrued operating expenses) | | $ | (14,027 | ) | | $ | — |
|
Long-term debt | | $ | 279,464 |
| | $ | 374,100 |
|
The carrying value of accounts receivable and accounts payable approximates fair value because of the relatively short maturity of these items.
Our weighted average discount rate represents our estimated incremental borrowing rate, assuming a secured borrowing, based on the remaining lease term at the time of adoption of the standard, lease commencement, or the period in which the lease term expectation was modified. Our finance leases, and the associated remaining lease term and discount rate, are insignificant.
There were no adjustments required to be made to weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share and there were no securities outstanding in any year presented, which were excluded from the computation of earnings per share other than antidilutive stock options, restricted stock awards, restricted stock units,RSUs, PSUs, and PSUs. Stock options outstanding that were excluded from the diluted share calculation because their impact was antidilutive at the end of 2019, 2018,PRSUs. The RSUs, PSUs, and 2017 were insignificant.
A reconciliation of the number of weighted-average common shares outstanding used in the basic and diluted earnings per share computations is as follows:
The Company declared and paid cash dividends per common share during the periods presented as follows:
The following table summarizes the non-vested restricted stock awards and restricted stock units activity for fiscal years 2017, 2018,2019, 2020, and 2019:2021:
As a result of the process used to establish the financial performance objectives, we will only meet the requirements of establishing a grant date for the PSUs when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.
We have begun, or expect to begin, recognizing expense related to PSUs as follows:
The number of shares to be distributed upon vesting of the PSUs depends on our average performance attained during the three-year performance period as compared to the targets defined by the Committee, and may result in the distribution of an amount of shares that is greater or less than the number of PSUs granted, as defined in the award agreement. At February 1, 2020,January 29, 2022, we estimate the attainment of an average performance that is substantially lessgreater than the average targets established for the PSUs issued in 2017.2019. In 2019, 2018,2021, 2020, and 2017,2019, we recognized $1.2$25.2 million, $14.9$14.2 million and $15.4$1.2 million, respectively, in share-based compensation expense related to PSUs.PSUs and PRSUs.
The total unearned compensation cost related to all share-based awards outstanding, excluding PSUs issued in 2018 and 2019,2021, at February 1, 2020January 29, 2022 was approximately $13.2$17.4 million. This compensation cost is expected to be recognized through October 2022January 2025 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 1.91.8 years from February 1, 2020.January 29, 2022.
Reconciliation between the statutory federal income tax rate and the effective income tax rate was as follows:
Deferred taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax, including income tax uncertainties. Significant components of our deferred tax assets and liabilities were as follows:
Our deferred tax assets and deferred tax liabilities, netted by tax jurisdiction, are summarized in the table below:
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for 2019, 2018,2021, 2020, and 2017:2019:
We are subject to U.S. federal income tax, and income tax of multiple state and local jurisdictions. The statute of limitations for assessments on our federal income tax returns for periods prior to 20162018 has lapsed. In addition, the state income tax returns filed by us are subject to examination generally for periods beginning with 2006, although state income tax carryforward attributes generated prior to 2006 and non-filing positions may still be adjusted upon examination. We have various state returns in the process of examination or administrative appeal.
We have estimated the reasonably possible expected net change in unrecognized tax benefits through January 30, 2021,28, 2023, based on expected cash and noncash settlements or payments of uncertain tax positions and lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0 million. Actual results may differ materially from this estimate.
We are involved in other legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material 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 effect on our financial condition, results of operations, and liquidity.
claims filed and estimates of claims incurred but not reported. We use letters of credit, which amounted to $41.3$31.5 million at February 1, 2020,January 29, 2022, as collateral to back certain of our self-insured losses with our claims administrators.
We use the following seven merchandise categories, which are consistent with our internal management and reporting of merchandise net sales: Food, Consumables,Food; Consumables; Soft Home,Home; Hard Home, Furniture, Seasonal,Home; Furniture; Seasonal; and Apparel, Electronics, Toys, & Accessories.Other. The Food category includes our beverage & grocery, candy & snacks,grocery; specialty foods; and specialty foodspet departments. The Consumables category includes our health, beauty and cosmetics, plastics, paper,cosmetics; plastics; paper; and chemical and pet departments. The Soft Home category includes theour home décor, frames,cor; frames; fashion bedding,bedding; utility bedding, bath, window,bedding; bath; window; decorative textile, home organizationtextile; and area rugs departments. The Hard Home category includes our small appliances,appliances; table top,top; food preparation, stationery, greeting cards,preparation; stationery; home maintenance; home organization; and home maintenancetoys departments. The Furniture category includes our upholstery, mattress, ready-to-assemble,upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden, summer, Christmas,garden; summer; Christmas; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the assortments for The Lot and Queue Line.
In March 2019, we announced a transformational restructuring initiative, referred to as “Operation North Star,” to both drive growth in our net sales and reduce costs within our business. We intendThe goal of the initiative was to generate costs savings from this initiative through improved markdown and merchandise management, reduced management layers, optimization of store labor, improved efficiencies in our supply chain, and reduced central and other costs. With the initial implementation of this initiative in 2019, we incurred upfront costs, including employee severance costs and consultancy fees, and made payments to execute the initiative.initiative of $38.3 million.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Our management, with the participation of our Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for us. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on our internal control over financial reporting. The report appears in the Financial Statements and Supplementary Data section of this Form 10-K.
There were no 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.
Item 9B. Other Information