UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the fiscal year ended | |||||||||||
| or | |||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the transition period from __________ to __________ | |||||||||||
Commission File Number 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
(614) 278-6800
(Registrant'sRegistrant’s telephone number, including area code)
| 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 | ||||||
| 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 | ☐ | ||||||||||
| 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 | ☐ | ||||||||||||||||||||
| 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$572,171,828 on August 3, 2019,July 29, 2022, 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, 2020,24, 2023, was 39,166,689.29,028,711.
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 28, 2023
TABLE OF CONTENTS
| Part I | Page | ||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 1B. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item | |||||||||||
| Item 6. | |||||||||||
| Item 7. | |||||||||||
| Item 7A. | |||||||||||
| Item 8. | |||||||||||
| Item 9. | |||||||||||
| Item 9A. | |||||||||||
| Item 9B. | |||||||||||
| Item 9C. | |||||||||||
| Part III | |||||||||||
| Item 10. | |||||||||||
| Item 11. | |||||||||||
| Item 12. | |||||||||||
| Item 13. | |||||||||||
| Item 14. | |||||||||||
| Part IV | |||||||||||
| Item 15. | |||||||||||
| Item 16. | |||||||||||
1
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 28, 2023, we operated a total of 1,4041,425 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 unmatchedunmistakable value through surprise and delight, byto customers, building a “Best Places“best places to Work”grow” culture, by rewarding shareholders with consistenttop tier 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:
| Fiscal Year | Number of Weeks | Year Begin Date | Year End Date | |||||||||||||||||
| 2023 | 53 | January 29, 2023 | February 3, 2024 | |||||||||||||||||
| 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 | |||||||||||||||||
| 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 evaluate and report overall sales and merchandise performance based onuse the following key merchandising categories: Furniture, Seasonal,seven merchandise categories, which are consistent with our internal management and reporting of merchandise net sales: Food; Consumables; Soft Home, Food, Consumables,Home; Hard Home,Home; Furniture; Seasonal; and Apparel, 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, our cross-category presentation solution, and the Queue Line, our streamlined checkout experience.
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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 through high quality closeouts on name brand items, affordable opening price points and low prices on our own brand assortment; (2) the treasure hunt, by seeking to surprise and delight our customers with a fresh, unique, quirky, trendy and seasonal product assortment; and (3) essentials, by seeking to offer a reliable assortment of simple to shop staple products that bring consistency to our product mix. We evaluate our product offerings to ensure we are providing high quality and unmistakable 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.
We utilize traditional sourcing methods in purchasing both imported and indomestic products. In certain merchandise categories, we also take advantage of closeout channels to enhance our ability to offer outstanding value.products that provide unmistakable value and surprise and delight our customers. We evaluate our product offerings using a rating process that measures the quality, brand, fashion, and value of each item. This process requires us to focus our product offering decisions 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 is generally sourcedsource closeouts from production overruns, packaging changes, discontinued products, order cancellations, liquidations, returns, and other disruptions in the supply chainchains of manufacturers. We believe that focusing on our customers’ expectations has improved our ability to provide a desirable assortment of offerings in our merchandise categories.
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Stores open at the beginning of the year | 1,401 | 1,416 | 1,432 | 1,449 | 1,460 | |||||||||
| Stores opened during the year | 54 | 32 | 24 | 9 | 9 | |||||||||
| 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 | |||||||||
| Alabama | 29 | Maine | 6 | Ohio | 97 | |||||
| Arizona | 34 | Maryland | 26 | Oklahoma | 18 | |||||
| Arkansas | 11 | Massachusetts | 22 | Oregon | 15 | |||||
| California | 151 | Michigan | 45 | Pennsylvania | 68 | |||||
| Colorado | 18 | Minnesota | 1 | Rhode Island | 1 | |||||
| Connecticut | 14 | Mississippi | 14 | South Carolina | 34 | |||||
| Delaware | 5 | Missouri | 23 | Tennessee | 47 | |||||
| Florida | 105 | Montana | 3 | Texas | 112 | |||||
| Georgia | 51 | Nebraska | 3 | Utah | 8 | |||||
| Idaho | 6 | Nevada | 12 | Vermont | 4 | |||||
| Illinois | 33 | New Hampshire | 6 | Virginia | 39 | |||||
| Indiana | 44 | New Jersey | 28 | Washington | 27 | |||||
| Iowa | 3 | New Mexico | 11 | West Virginia | 15 | |||||
| Kansas | 7 | New York | 64 | Wisconsin | 9 | |||||
| Kentucky | 40 | North Carolina | 71 | Wyoming | 2 | |||||
| Louisiana | 21 | North Dakota | 1 | |||||||
| Total stores | 1,404 | |||||||||
| Number of states | 47 | |||||||||
Our global sourcing team and overseas vendor relationships continue to source quality closeout merchandise at competitive prices in these categories.
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 value 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 1.8%, 1.6%, and 1.7% in 2022, 2021, and 2020, respectively.
We have conducted extensive consumer research to enhance our understanding of why customers shop us and the reasons why others do not shop us. We have used this research to refine our brand positioning and implement changes to our messaging across all marketing touchpoints. Our research shows that our customers believe we excel in four key areas or brand pillars: unmistakable 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.
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 28, 2023, our customer loyalty program, which we call the “BIG Rewards Program,” included approximately 21 million active members who had made a purchase in our stores in the last 12 months, compared to approximately 22 million active members at January 29, 2022. In addition to the customer communications mentioned above, our BIG Rewards Program rewards our customers for making frequent and high-ticket purchases and offers 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 have incentivized our store associates to encourage customer enrollment into the program.
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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. We invest in point of sale campaigns in each of our geographic regions, the beneficiaries of which are selected based on their impacts on local customers and associates. We serve the community on a national level through our Big Lots Foundation, which focuses on healthcare, housing, hunger, and education. In addition, we are pleased 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 the Big Lots Behavioral Health Pavilion, a state-of-the-art medical facility dedicated to child and adolescent mental and behavioral health, which opened 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 and, 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 for customer, fulfillment capabilities, and technological innovation from a wider range of retailers in a highly competitive marketplace.
Real Estate
The following table compares the number of our stores in operation at the beginning and end of each of the last five fiscal years:
| 2022 | 2021 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||
| Stores open at the beginning of the year | 1,431 | 1,408 | 1,404 | 1,401 | 1,416 | ||||||||||||||||||||||||
| Stores opened during the year | 56 | 50 | 24 | 54 | 32 | ||||||||||||||||||||||||
| Stores closed during the year | (62) | (27) | (20) | (51) | (47) | ||||||||||||||||||||||||
| Stores open at the end of the year | 1,425 | 1,431 | 1,408 | 1,404 | 1,401 | ||||||||||||||||||||||||
For additional information regarding our real estate strategy, see the discussion under the caption “Operating Strategy - Real Estate” in the accompanying “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) in this Form 10-K.
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The following table details our U.S. stores by state at January 28, 2023:
| Alabama | 30 | Maine | 6 | Ohio | 104 | ||||||||||||||||||
| Arizona | 35 | Maryland | 28 | Oklahoma | 20 | ||||||||||||||||||
| Arkansas | 12 | Massachusetts | 23 | Oregon | 14 | ||||||||||||||||||
| California | 115 | Michigan | 47 | Pennsylvania | 72 | ||||||||||||||||||
| Colorado | 14 | Minnesota | 2 | Rhode Island | 1 | ||||||||||||||||||
| Connecticut | 15 | Mississippi | 14 | South Dakota | 1 | ||||||||||||||||||
| Delaware | 5 | Missouri | 25 | South Carolina | 38 | ||||||||||||||||||
| Florida | 109 | Montana | 3 | Tennessee | 47 | ||||||||||||||||||
| Georgia | 52 | Nebraska | 2 | Texas | 120 | ||||||||||||||||||
| Idaho | 6 | Nevada | 13 | Utah | 7 | ||||||||||||||||||
| Illinois | 34 | New Hampshire | 6 | Vermont | 4 | ||||||||||||||||||
| Indiana | 45 | New Jersey | 28 | Virginia | 44 | ||||||||||||||||||
| Iowa | 3 | New Mexico | 12 | Washington | 27 | ||||||||||||||||||
| Kansas | 7 | New York | 68 | West Virginia | 16 | ||||||||||||||||||
| Kentucky | 41 | North Carolina | 76 | Wisconsin | 11 | ||||||||||||||||||
| Louisiana | 20 | North Dakota | 1 | Wyoming | 2 | ||||||||||||||||||
| Total stores | 1,425 | ||||||||||||||||||||||
| Number of states | 48 | ||||||||||||||||||||||
Of our 1,425 stores, 31% operate in four states: California, Texas, Florida, and Ohio, and net sales from stores in these states represented 33% of our 2022 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.
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 supplements ourserves as a fulfillment center for our direct-ship 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 located in Georgia and Pennsylvania, to divert processing and logistics for bulk goods out of our regional distribution centers into our forward distribution centers and, increase the efficiency and capacity of our regional distribution centers, which were designed to efficiently process cartons as opposed to bulk goods. In 2022, we opened two additional small-format forward distribution centers in Washington and Indiana, to accommodate projected purchasing volumes. Each of our four forward distribution centers are operated by a third-party logistics services provider. In March 2023, the Company communicated to our third-party logistics service provider our plans to close all of our forward distribution centers by August 2023 due to the decreases in sales and purchasing volumes. We will
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continue to evaluate our supply chain needs based on projected purchasing volumes and adjust the capacity of our distribution and fulfillment network accordingly.
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.
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.
The seasonality of our net sales in 2022 generally aligned with our historical seasonality. The seasonality of our operating results, however, differs significantly due to our recording an operating loss in each quarter of 2022 compared to recording an operating loss in only one quarter (the third quarter of 2021) in the prior two years. This change in the seasonality of our operating results is primarily attributable to inflationary and macroeconomic pressures experienced throughout 2022, which resulted in decreased net sales, decreased gross margin as a percentage of net sales, and increased selling and administrative expenses.
The following table sets forth the seasonality of net sales and operating profit (loss) for 2019, 2018,2022, 2021, and 20172020 by fiscal quarter:
| First | Second | Third | Fourth | |||||||||||
| Fiscal Year 2022 | ||||||||||||||
| Net sales as a percentage of full year | 25.1 | % | 24.6 | % | 22.0 | % | 28.3 | % | ||||||
Operating loss as a percentage of full year (a) | (5.2) | (41.7) | (50.0) | (3.1) | ||||||||||
| 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 (b) | 8.7 | 71.0 | 5.0 | 15.3 | ||||||||||
| 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, third, and fourth quarters of 2022 included asset impairment charges of $24.1 million, $21.7 million, and $22.6 million, respectively. The fourth quarter of 20192022 also included a gain on sale of real estate and related expenses of $16.8 million related to the sale of 20 owned store locations and one unoccupied land parcel.
(b) 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.
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Human Capital
At January 28, 2023, we had approximately 32,200 active associates comprised of 10,200 full-time and 22,000 part‑time associates. Approximately 68% of the associates we employed during 2022 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 35,800 in 2022. 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, talent development and health and safety.
Associate Engagement
We have sent 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 obtain the thoughts of $178.5those associates regarding manager effectiveness, performance enablement, and our diversity and inclusion efforts. In 2022, 89% of the associates surveyed responded to the survey with a 77% 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. As a structural expense savings measure, we intend to perform future associate engagement surveys on a less frequent basis.
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. As part of our commitment to DEI, we maintain a 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, was established in 2020 to lead the development and advancement of our DEI strategy. Additionally, our Diversity, Equity, and Inclusion Executive Advisory Committee, which is comprised of senior leaders, provides guidance to the DEI Council, approves our DEI strategy and promotes its achievement throughout our organization. In 2022, we integrated our conscious inclusion program into the onboarding process for all of our associates, which we developed to build awareness of our DEI strategy, educate our associates on how we can improve DEI, and ultimately engrain DEI in the culture of the Company.
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 $25 million in corporate discounts in 2022.
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 significantly increased third quarter operating profitis 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 percentagetool for identifying and developing high-potential individuals within our organization as well as ensuring business continuity. We also offer a robust catalog of full yeartraining 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, leadership, 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 comparisoneach of our stores, distribution centers, and corporate offices to 2018ensure the safety of associates, customers, and 2017.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.
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Environmental, Social and Governance Practices
Our Environmental, Social and Governance Committee supports the Company’s ongoing commitment to environmental, health and safety, corporate social responsibility, corporate governance, sustainability and other public policy matters relevant to the Company (“ESG Matters”). The Environmental, Social and Governance Committee takes a leadership role in (a) developing the Company’s general strategy with respect to ESG Matters, (b) overseeing the development of policies and practices relating to ESG Matters based on such strategy and the integration of such policies and practices into the Company’s business operations and strategy, (c) overseeing communications with employees, investors and stakeholders regarding ESG Matters and (d) monitoring and assessing developments relating to, and improving the Company’s understanding of, ESG Matters. The Environmental, Social and Governance Committee is comprised of our Chief Legal and Governance Officer, our Chief Financial and Administrative Officer and the leaders of our Compliance/Social, Diversity, Equity & Inclusion, Investor Relations, Public Relations and Sustainability functions. The duties and responsibilities of the Environmental, Social and Governance Committee are further described in its charter, which is available in the Investor Relations section of our website (www.biglots.com) under the “Corporate Governance” caption.
In April 2023, we expect to publish our second corporate social responsibility report, titled “BIG Cares,” which will address our environmental, social and governance policies, initiatives and achievements. A copy of our first corporate social responsibility report is, and a copy of our second corporate social responsibility report will be, available on our website (www.biglots.com). The contents of our website, including the Big Cares reports, are not incorporated into, or otherwise made a part of, this Form 10-K.
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. 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,” “continue,” “could,” “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.
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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
We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential liability, and potentially disrupt our business.
We accept payments using a variety of methods, including credit cards, debit cards, credit accounts, our private label credit cards, gift cards, direct debit from a customer’s bank account, consumer invoicing, and physical bank checks, and we may offer different payment options over time. These payment options subject us to many compliance requirements, including, but not limited to, compliance with payment card association operating rules, including data security rules, certification requirements, rules governing electronic funds transfers, and Payment Card Industry Data Security Standards. They also subject us to potential fraud by criminal elements seeking to discover and take advantage of security vulnerabilities that may exist in some of these payment systems. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, electronic checks, gift cards and promotional financing, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these rules or requirements, adequately encrypt payment transaction data, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.
If we are unable to successfully refine and execute our operating strategies, our operating performance could be significantly impacted.
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.
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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 2019,2022, we purchased approximately 24%28% of our products, at cost, directly from overseas vendors, including 17%19% 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.
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.
United Furniture Industries, Inc. (“UFI”) unexpectedly and without notice to us ceased operations and terminated its employees on November 21, 2022. Furniture products supplied by UFI to the Company represented approximately 6% of our merchandise purchases in 2022. We are closely monitoring this developing situation, evaluating its potential impact on our business and reviewing our rights and legal and strategic options. We believe that we have identified merchandise sourcing alternatives to fill both near and long term gaps in our product offerings that may result from UFI’s cessation of operations, including, among other things, obtaining merchandise from other furniture vendors, pursuing closeout opportunities and acquiring additional non furniture merchandise. We expect the assortment gaps related to the UFI closure to be fully mitigated by the end of the second quarter of 2023. Over time, if we are unable to secure alternative sources of merchandise on acceptable terms to replace merchandise previously sourced from UFI, our results of operations could be materially adversely impacted.
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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 28% 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. For example, in the second and third quarters of 2022, we aggressively discounted Seasonal and other products to reduce inventory levels which negatively impacted our gross margins. 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 maintain or upgrade our information technology or computer systems or if such 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 and extreme weather conditions 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.
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 the store 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 we are unable to negotiate favorable lease renewals and/or new store leases under unfavorable lease terms or at all, our financial position, results of operations, and liquidity may be negatively affected.
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.
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Market and Competitive Risks
Further deterioration in general economic conditions, disposable income levels, and other conditions, such as unseasonable weather, pandemic diseases, inflation, or global events, 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 and materially 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 and interest rates, recession, 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 2022 and continuing into 2023, the U.S. has experienced its highest level of inflation in decades. This inflation and the general economic conditions, which we anticipate will persist through 2023, have negatively impacted, and we expect will continue 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 or extreme 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 31% of our current stores operate and 33% of our 2022 net sales occurred in these states.
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 rapidly evolving. We must keep pace with changing customer expectations and new developments. 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.
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, directly impact the carrying cost of inventory, could adversely affectthe cost of outbound transportation from our operating performance.
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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 actions 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 regulatory environment 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, and also control 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 the availability of a sufficient number of qualified persons in the work force, 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.
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Regulatory and gross margin.
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.
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 aremay be 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.regulations among others. Due to the inherent uncertainties of litigation, we may not be able to accurately determine the impact on us of any future adverse outcome of such proceedings. The ultimate resolution of these matters could have a material adverse impact on our financial condition, results of operations, and liquidity. In addition, regardless of the outcome, these proceedings could result in substantial cost to us and may require us to devote substantial attention and resources to defend ourselves. For a description of certain current legal proceedings, see note 9Note 8 to the accompanying consolidated financial statements.
We may be adversely affected by legal, regulatory or market responses to global climate change.
Growing concern over climate change has led policy makers in the U.S. to consider the enactment of legislative and regulatory proposals that would impose mandatory requirements on greenhouse gas emissions. Such laws, if enacted, are likely to impact our business in a number of ways. For example, we use natural gas, diesel fuel, gasoline and electricity in conducting our operations. Increased government regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs, which could materially affect our profitability. Compliance with any new or more stringent laws or requirements, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to appropriately respond to such changes could adversely impact our business, financial condition, results of operations or cash flows.
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 whichthat 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 businessfinancial condition and result of operations 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.
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If we are unable to comply with the terms of the 20182022 Credit Agreement, our capital resources, financial condition, results of operations, and liquidity may be materially adversely effected.affected.
We may need to borrow funds under our $700$900 million five-year unsecuredasset-based revolving credit facility (“2018(the “2022 Credit Agreement”), from time to time depending on operating or other cash flow requirements. The 20182022 Credit Agreement contains financialcustomary affirmative and negative covenants (including, where applicable, restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, redeem or repurchase stock, prepay certain indebtedness, make certain loans and investments, dispose of assets, enter into restrictive agreements, engage in transactions with affiliates, modify organizational documents, incur liens and consummate mergers and other covenants, including, but not limitedfundamental changes) and events of default. In addition, the 2022 Credit Agreement requires us to limitations on indebtedness, liens, and investments, as well as the maintenance of a leverage ratio andmaintain a fixed charge coverage ratio. A severe short-term economic downturn, potentially broughtratio of not less than 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million. These covenants could impose significant operating and financial limitations and restrictions on by the COVID-19 coronavirus, may challengeus, including restrictions on our ability to maintain complianceenter into particular transactions that we believe are advisable or necessary for our business. Our ability to comply with these covenants. Additionally, wecovenants and other provisions in the 2022 Credit Agreement may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. We are also subject to cross-defaultcross default provisions under the synthetic lease agreement (the “Synthetic Lease”) that we entered in connection witharrangement for our new distribution center in California.Apple Valley, CA. A violation of any of these covenants maycould result in a default under the 2022 Credit Agreement which would permit the lenders to restrict our ability to borrow additional funds, providefurther access the 2022 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 20182022 Credit Agreement and may require us to immediately repay any outstanding loans.Agreement. Our failure to comply with these covenants may have a material adverse effect on our capital resources, financial condition, results of operations, and liquidity.
In addition, our ability to borrow under the 2022 Credit Agreement is limited by the amount of our borrowing base which consists of eligible credit card receivables and eligible inventory (including in-transit inventory), subject to customary exceptions and reserves.
Any negative impact on the elements of our borrowing base could reduce our borrowing capacity under the 2022 Credit Agreement which could have a material adverse effect on our capital resources, financial condition, results of operations, and liquidity.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future and is subject to general economic, financial, competitive, legislative, regulatory, tax and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to fund our other liquidity needs, our business, financial condition and results of operations could be materially adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal and interest payments in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. The terms of the 2022 Credit Agreement or future debt agreements may also restrict us from effecting any of these alternatives. Further, changes in the credit and capital markets, including market disruptions and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to these sources of future liquidity. Our inability to refinance any of our indebtedness on commercially reasonable terms or at all or to effect any other action relating to our indebtedness on satisfactory terms or at all could have a material adverse effect on our business, financial condition and results of operations.
A significantcontinued decline in our operating (loss) 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. For example, in 2022, we incurred $68.4 million of impairments relating to underperforming stores. 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.
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Other Risks
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;
•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;
•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 32,40033,300 square feet, of which an average of 22,60023,100 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 20192022 was approximately $1.8$1.3 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 our landlord completed construction. All of our stores are leased, except for the 5225 stores we own in the following states:
| State | Stores Owned | ||||
| 1 | |||||
Additionally, we own onefive closed sitesites which we are not currently operating and isare available for sale. Since thisthese owned site issites are no longer operating as an active store, it has beenstores, they are excluded from our store counts since February 2, 2019.at January 28, 2023. In the fourth quarter of 2022, we completed the sale of 20 owned store locations (see Note 9 to the accompanying consolidated financial statements for additional information on the sale of real estate).
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-nineNineteen of our 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 seventeen store leases have generic early termination clauses that allow us to exit the location upon providing sufficient notice to the landlord.
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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 5225 owned locations.
| Fiscal Year: | Expiring Leases | Leases Without Options | |||||||||
| 2023 | 210 | 48 | |||||||||
| 2024 | 190 | 30 | |||||||||
| 2025 | 211 | 31 | |||||||||
| 2026 | 229 | 42 | |||||||||
| 2027 | 168 | 37 | |||||||||
| Thereafter | 389 | 18 | |||||||||
| 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 28, 2023, 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.U.S.. 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 2.32.0 million merchandise cartons per week in 2019.2022. 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. 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 28, 2023, were as follows:
| Location | Year Opened | Total Square Footage | Number of Stores Served | ||||||||
| (Square footage in thousands) | |||||||||||
| Columbus, OH | 1989 | 3,559 | 340 | ||||||||
| Montgomery, AL | 1996 | 1,411 | 325 | ||||||||
| Tremont, PA | 2000 | 1,295 | 313 | ||||||||
| Durant, OK | 2004 | 1,297 | 229 | ||||||||
| Apple Valley, CA | 2019 | 1,416 | 218 | ||||||||
| Total | 8,978 | 1,425 | |||||||||
At January 28, 2023, we also leased four small-format forward distribution centers, which are operated by a third-party logistics service provider. These forward distribution centers divert processing and logistics for bulk goods from our regional distribution centers into the forward distribution centers, and increase the efficiency of our regional distribution centers, which are designed to efficiently process cartons as opposed to bulk goods. The locations and respective square footage of the forward distribution centers at January 28, 2023, were as follows:
| Location | Year Opened | Total Square Footage | ||||||
| (Square footage in thousands) | ||||||||
| McDonough, GA | 2021 | 485 | ||||||
| Bethel, PA | 2021 | 587 | ||||||
| Lacey, WA | 2022 | 204 | ||||||
| Merrillville, IN | 2022 | 262 | ||||||
| Total | 1,538 | |||||||
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| 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 | |
Corporate Office
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
None.
Supplemental Item. Information about our Executive Officers of the Registrant
Our executive officers at March 31, 202028, 2023 were as follows:
| Name | Age | Offices Held | Officer Since | ||||||||
| Bruce K. Thorn | 55 | President and Chief Executive Officer | 2018 | ||||||||
| Gene Eddie Burt | 57 | Executive Vice President, Chief Supply Chain Officer | 2020 | ||||||||
| Margarita Giannantonio | 61 | Executive Vice President, Chief Merchandising Officer | 2022 | ||||||||
| Andrej Mueller | 47 | Executive Vice President, eCommerce, Strategy, and Merchandise Solutions | 2019 | ||||||||
| Nicholas E. Padovano | 59 | Executive Vice President, Chief Stores Officer | 2014 | ||||||||
| Jonathan E. Ramsden | 58 | Executive Vice President, Chief Financial Officer and Chief Administrative Officer | 2019 | ||||||||
| Ronald A. Robins, Jr. | 59 | Executive Vice President, Chief Legal and Governance Officer, General Counsel and Corporate Secretary | 2015 | ||||||||
| Michael A. Schlonsky | 56 | Executive Vice President, Chief Human Resources Officer | 2000 | ||||||||
| 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.
Margarita Giannantiono is responsible for merchandising, merchandise presentation, and global sourcing. Prior to that,e-commerce. Ms. Bachmann was promoted toGiannantonio joined us in November 2022 as Executive Vice President, Chief Operating Officer in August 2012 and Executive Vice President, Supply Chain Management and Chief Information Officer in March 2010.Merchandising Officer. Prior to joining us, Ms. Bachmann joined us asGiannantonio spent 10 years at TJX Canada, where she was most recently Senior Vice President and General Merchandise Planning, AllocationManager of TJX Canada. Ms. Giannantonio also previously served in roles with Hudson's Bay Company, a multi-brand retailer, Incredible Clothing Company, The House2/Stylekraft Sportswear, and PresentationHugo Boss Canada. She has been recognized by the Canadian Woman's Business Association as the “Woman of the Year” and has more than 30 years of experience in March 2002.merchandising, sales, marketing, and product development in the apparel, home and housewares merchandise categories.
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Andrej Mueller is responsible for business strategy.e-commerce, strategy, and merchandise solutions. Mr. Mueller joined us in October 2019 as Executive Vice President, Business Strategy.Strategy and now serves as the Executive Vice President, e-commerce, Strategy, and Merchandise Solutions. 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.
Jonathan E. Ramsden is responsible for financial reporting and controls, financial planning and analysis, treasury, risk management, tax, internal audit, investor relations, real estate, asset protection, and asset protection.merchandise planning and allocation. 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.
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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 2019:2022:
| (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 30, 2022 - November 26, 2022 | 3 | $ | 19.23 | — | $ | 159,425 | |||||||||||
| November 27, 2022 - December 24, 2022 | 3 | 19.17 | — | 159,425 | |||||||||||||
| December 25, 2022 - January 28, 2023 | — | 18.18 | — | 159,425 | |||||||||||||
| Total | 6 | $ | 19.19 | — | $ | 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) In November 2022, December 2022, and January 2023, in connection with the vesting of certain outstanding restricted stock units, we acquired 3,279, 2,370, and 64 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings.
(2) On December 1, 2021, our Board of Directors authorized the repurchase of up to $250.0 million of our common shares (the “2021 Repurchase Authorization”). During the fourth quarter of 2022, we had no repurchases under the 2021 Repurchase Authorization. At January 28, 2023, the 2021 Repurchase Authorization has $159.4 million of remaining authorization. The 2021 Repurchase Authorization has no scheduled termination date.
At the close of trading on the NYSE on March 27, 2020,24, 2023, there were approximately 721885 registered holders of record of our common shares.
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The following graph and table compares, for the five fiscal years ended February 1, 2020,January 28, 2023, 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, January 29, 2022 and January 28, 2023. The graph and table assume that $100 was invested on January 31, 2015,February 3, 2018, 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 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||
| Big Lots, Inc. | $ | 100.00 | $ | 55.95 | $ | 50.43 | $ | 116.80 | $ | 79.77 | $ | 35.52 | ||||||||
| S&P 500 Index | 100.00 | 99.94 | 121.49 | 142.45 | 172.36 | 160.94 | ||||||||||||||
| S&P 500 Retailing Index | $ | 100.00 | $ | 108.22 | $ | 130.53 | $ | 184.54 | $ | 195.42 | $ | 161.84 | ||||||||
| 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]
21
| 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 | ||||||||||
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 year 2019years 2022, 2021, and 20182020 were comprised of 52 weeks. Fiscal year 2017 was2023 will be comprised of 53 weeks. Fiscal year 2020 will be comprised of 52 weeks.
Operating Results Summary
The following are the results from 20192022 that we believe are key indicators of our financial condition and results of operations when compared to 2018.2021.
•Net sales increased $85.1decreased $682.3 million, or 1.6%11.1%.
•Comparable store sales for stores open at least fifteen months, includingplus our e-commerce increased $17.3operations, decreased $766.6 million, or 0.3%12.9%.
•Gross margin dollars decreased $7.2$483.5 million whileand gross margin rate declined 80decreased 400 basis points to 39.7%35.0% of net sales.
•Selling and administrative expenses increased $45.0$5.4 million to $2,020.1 million. As a percentage of net sales, selling and administrative expenses increased 30410 basis points to 34.3%36.9% of net sales.
•Also included within our selling and administrative expenses was a gain on sale of real estate and related expenses of $18.6 million. Included within our depreciation expense was a $1.7 million charge for accelerated depreciation on fixtures and equipment associated with the closure of the sold stores. The net gain on sale of real estate and related expenses in 2022 decreased our operating loss by $16.8 million and decreased our diluted loss per share by approximately $0.44 per share.
•Operating (loss) profit rate increased 210 basis pointsdecreased $501.3 million to 6.3%.an operating loss of $261.5 million in 2022, compared to an operating profit of $239.8 million in 2021.
•Diluted earnings (loss) per share decreased 237.0% to diluted loss per share of ($7.30), compared to diluted earnings per share increased 60.8% to $6.16 per share, compared to $3.83 per shareof $5.33 in 2018.2021.
•Our (loss) return on invested capital decreased to (17.3)% from 14.9%.
•Long-term debt increased $297.9 million, from $3.5 million at the end of 2021 to 21.2% from 16.3%.$301.4 million at the end of 2022.
•Inventory of $921.3decreased $89.8 million, represented a $48.3 million decrease, or 5.0%7.3%, from 2018.to $1,147.9 million.
•We declared and paid four quarterly cash dividends in the amount of $0.30 per common share, for a total dividends paid amount of approximately $48.4$37.0 million.
22
The following table compares components of our consolidated statements of operations as a percentage of net sales:
| 2022 | 2021 | 2020 | |||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||||
| Cost of sales (exclusive of depreciation expense shown separately below) | 65.0 | 61.0 | 59.7 | ||||||||
| Gross margin | 35.0 | 39.0 | 40.3 | ||||||||
| Selling and administrative expenses | 36.9 | 32.8 | 31.7 | ||||||||
| Depreciation expense | 2.8 | 2.3 | 2.2 | ||||||||
| Gain on sale of distribution centers | 0.0 | 0.0 | (7.5) | ||||||||
| Operating (loss) profit | (4.8) | 3.9 | 13.8 | ||||||||
| Interest expense | (0.4) | (0.2) | (0.2) | ||||||||
| Other income (expense) | 0.0 | 0.0 | (0.0) | ||||||||
| (Loss) income before income taxes | (5.1) | 3.8 | 13.6 | ||||||||
| Income tax (benefit) expense | (1.3) | 0.9 | 3.5 | ||||||||
| Net (loss) income | (3.9) | % | 2.9 | % | 10.1 | % | |||||
| 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“2022 Compared To 2018”2021” for additional detailsinformation 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 29, 2022 for a comparison of our operating results for 20182021 to our operating results for 2017.2020, which was filed with the SEC on March 29, 2022.
In 2019, our cost2022, we recognized non-cash store asset impairments of sales includes a $6.0$68.4 million charge for impairment of inventoryrelated to underperforming stores in our greeting cards department,chain, which included impairments of both operating lease right-of-use assets and property and equipment. The store asset impairment charges increased our operating loss by $68.4 million and decreased our diluted (loss) earnings per share by approximately $1.79 per share. In 2022, we chosealso recognized a gain on sale of real estate and related expenses of $16.8 million related to exitthe sale of twenty owned store locations and one unoccupied land parcel. The gain on sale of real estate and related expenses decreased our diluted (loss) earnings per share by approximately $0.44 per share. See Note 2, Note 4 and Note 9 to the accompanying consolidated financial statements for additional information on the store asset impairment charges and gain on sale of real estate and related expenses.
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 9 to the first quarteraccompanying consolidated financial statements for additional information on the store asset impairment charges.
In 2020, we recognized a gain on sale of 2019.distribution centers of $463.1 million related to the sale and leaseback of four distribution centers. Additionally, our selling and administrative expenses include $38.3$4.0 million of costs associated with our transformational restructuring initiative, which we refer to as “Operation North Star”, announced in the first quarter of 2019consulting and $7.3 million in estimated costs associated with employee wage and hour claims brought against us in the state of California.
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.
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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:
◦Opening approximately 18 new stores in 2023, with concentration in low density markets;
◦Developing a more compelling reason to shop across all stores by differentiating our home offerings (“Home”), which spansassortment in high density markets versus low density markets; and
◦Evaluating the profitability of stores within our Furniture, Seasonal,fleet to ensure healthy long-term growth.
•Increasing our sales productivity by:
◦Owning “Bargains and Soft Home merchandise categories, as a destination for Jennifer;Treasures” to enhance the excitement of our product assortment;
◦Communicating unmistakable comparable value to grow trust in our pricing and make shopping easier.
•Winning with e-commerce by:
◦Simplifying our online shopping experience to provide an easier and more pleasant experience;
◦Improving online customer satisfaction by utilizing customer feedback to make improvements; and
◦Growing site traffic through various traffic driver initiatives;targeted marketing and brand growth.
Fund the journey
The “fund the journey” objective of Operation North Star is focused on a series ofimplementing the following cost reduction initiatives to reduce costs sogenerate savings that we can invest those savings in the growth areas of our business. Those initiatives include:business:
•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;
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.
Operation North Star Progress
In 2022, we successfully completed the following under our Operation North Star strategy:
•Implemented a new “Lots under $5” presentation initiative in the majority of our stores, providing incremental assortment at an attractive price point;
•Enhanced our shrink mitigation programs by adding cart locking systems and expanding security tagging;
•Achieved structural savings through various cost saving initiatives and implementation of organizational efficiencies;
•Launched a multi-year project to overhaul our order management system to enable future growth opportunities;
•Executed Project Refresh remodels in approximately 150 additional stores;
•Opened 56 new stores, many of which were in rural markets; and
•Enhanced our e-commerce supply chain with last mile carrier capabilities and an improved ship from store network.
Next Steps
In 2023, we plan to implement the following initiatives to achieve our Operation North Star goals:
•Own “Bargains and Treasures” by increasing bargain penetration to enhance the excitement of our product through closeouts, great deals, and fun, unique products;
•Communicate unmistakable value to our customer with clear comparable price ticketing;
•Leverage our brand identity as a value-add, trade-down destination;
•Grow store relevance by developing a more compelling reason to shop across all stores;
•Deliver a simple and more pleasant shopping experience leveraging our store fleet; and
•Drive productivity through margin growth, expense reduction, and effective investments.
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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 categories through high quality closeouts on name brand items, affordable opening price points and low prices on our own brand assortment; (2) the treasure hunt, by seeking to surprise and delight our customers with a fresh, unique, quirky, trendy and seasonal product assortment; and (3) essentials, by seeking to offer a reliable assortment of simple to shop staple products that bring consistency to our product mix. We evaluate our product offerings to ensure we are providing quality and unmistakable 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 assortment that surprises and delights her. Under 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 wecategories.
We believe we can play to win.
We believe our merchandising strategies for our Furniture, Seasonal, and Soft Home categories position us to surpriseprovide “Bargains” and delight Jennifer with“Treasures” in 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, delivery options, and everyday value offerings. A significant majorityportion of our offeringsoffering in this category consistconsists 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 toand 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 Jenniferenables our 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. SupplementingTo supplement our merchandising and presentation strategies, we also 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 unmistakable 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
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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 categories offer convenience categories:and 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 unmistakable value consistency,through high quality closeouts and convenience of productaffordable opening 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. To supplementthe opportunity to consistently source and deliver high quality closeouts. In addition to 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 believeIn 2022, we continued to focus on providing surprise and delight by expanding our holiday Food and Consumables assortment provides more value than our Food offerings, and as a result, 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 reallocate space from the Food category to the Consumables category in our stores in the Store of the Future format during 2020. See discussion under the caption “Shopping Experience” below for description of our Store of the Future platform.assortments.
•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.
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 and furniture 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 offeringscustomers. We believe continuously evaluating our assortment within each merchandise category which we believe will lead to continuedlong-term comp growth.
Marketing
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:
We have also implemented a streamlined checkout experience in nearly all of the “hunt” from the experience. Following a successful test, we plan to expand this concept to our stores incalled the Store of the Future format during 2020.
In 2022, we introduced a supplement to The new checkout experienceLot and Queue Line called “Lots Under $5,” which sits in the front of our stores and is comprised of items priced less than $5 each that we believe appeal to our bargain hunt and treasure hunt shoppers.
In 2021, we launched a project called Project Refresh, which was well-receivedintended to make cosmetic improvements to older stores in our testingfleet and align branding across our stores. The investment for a Project Refresh remodel was less than $150,000 per store and includes updated exterior signage, vestibules, flooring, bathrooms, interior wall graphics, and paint. We completed
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approximately 50 Project Refresh remodels in 2021 in a successful test and we plancompleted an additional 150 stores under Project Refresh in 2022. We paused further Project Refresh remodels during 2022 to expand this conceptconserve cash and focus our investment on the highest return initiatives. When macroeconomic conditions improve, we expect to our stores in the Store of the Future format during 2020.reevaluate resuming Project Refresh remodels.
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, providing an easier and more pleasant 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 expect to continuein 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 further enhanced 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 by partnering with Shipt and Door Dash to provide a broader assortment of goods and a more complete shopping experience. We also expect to continue improvingadd new fulfillment options for 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.customers.
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
| (In thousands, except store counts and average store size) | 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||
| Stores open at end of the fiscal year | 1,425 | 1,431 | 1,408 | 1,404 | 1,401 | ||||||||||||
| Total gross square footage | 47,470 | 47,120 | 46,008 | 45,453 | 44,500 | ||||||||||||
| Total selling square footage | 32,897 | 32,736 | 32,016 | 31,705 | 31,217 | ||||||||||||
| Average store size - selling square feet | 23,086 | 22,876 | 22,739 | 22,582 | 22,282 | ||||||||||||
In 2022, we intenddecreased our net store count by six stores, which included the sale of 20 owned store locations. Although our store count decreased year-over-year, the average size of stores that we have opened or relocated over the past several years exceeds our averages in prior years. As a result, our overall average selling square footage has increased. In 2023, we expect to remodelopen approximately 20 stores18 new stores. Looking beyond 2023, we anticipate a return to growth in 2020 as we retrofit our existing Store ofnet new store count and focusing store growth within rural and small-town markets. Our real estate team has identified more than 500 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. When we believe macroeconomic conditions and our return on investment.financial position are conducive to store growth, we plan to actively pursue those locations with the goal of significantly increasing our 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.
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Although we strategically close stores when our analyses indicate we are unable to continue operating profitable locations, we actively work toward reducing our store closures. To reduce store closures, we have 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 223210 store leases that will expire in 2020. During 2020, we anticipate opening up to 40 new stores and closing up to 352023, 162 of which have renewal options. The balance of our existing locations. The majority of these2023 closings will involve the relocation of stores to improved locations within the same local market, with the balance resultingresult 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.
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2022 COMPARED TO 20182021
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 20192022 compared to 20182021 were as follows:
| (In thousands) | 2019 | 2018 | Change | Comps | (In thousands) | 2022 | 2021 | Change | Comps | |||||||||||||||||||||||||||||||||||||||||||
| Furniture | $ | 1,427,129 | 26.8 | % | $ | 1,286,995 | 24.6 | % | $ | 140,134 | 10.9 | % | 8.2 | % | Furniture | $ | 1,279,346 | 23.4 | % | $ | 1,684,393 | 27.4 | % | $ | (405,047) | (24.0) | % | (26.0) | % | |||||||||||||||||||||||
| Seasonal | Seasonal | 961,446 | 17.6 | 954,165 | 15.5 | 7,281 | 0.8 | (0.9) | ||||||||||||||||||||||||||||||||||||||||||||
| Food | Food | 736,120 | 13.5 | 746,415 | 12.1 | (10,295) | (1.4) | (2.5) | ||||||||||||||||||||||||||||||||||||||||||||
| Soft Home | 853,434 | 16.0 | 828,451 | 15.8 | 24,983 | 3.0 | 1.7 | Soft Home | 677,633 | 12.4 | 822,559 | 13.4 | (144,926) | (17.6) | (19.3) | |||||||||||||||||||||||||||||||||||||
| Consumables | 803,593 | 15.1 | 799,038 | 15.3 | 4,555 | 0.6 | 0.3 | Consumables | 629,161 | 11.5 | 665,732 | 10.8 | (36,571) | (5.5) | (6.8) | |||||||||||||||||||||||||||||||||||||
| 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 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Hard Home | 363,006 | 6.8 | 407,596 | 7.8 | (44,590 | ) | (10.9 | ) | (11.4 | ) | Hard Home | 594,343 | 10.9 | 675,041 | 11.0 | (80,698) | (12.0) | (13.4) | ||||||||||||||||||||||||||||||||||
| Electronics, Toys, & Accessories | 344,947 | 6.5 | 367,418 | 7.0 | (22,471 | ) | (6.1 | ) | (7.7 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Apparel, Electronics, & Other | Apparel, Electronics, & Other | 590,280 | 10.7 | 602,298 | 9.8 | (12,018) | (2.0) | (5.2) | ||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 5,323,180 | 100.0 | % | $ | 5,238,105 | 100.0 | % | $ | 85,075 | 1.6 | % | 0.3 | % | Net sales | $ | 5,468,329 | 100.0 | % | $ | 6,150,603 | 100.0 | % | $ | (682,274) | (11.1) | % | (12.9) | % | |||||||||||||||||||||||
We periodically assess and make minor adjustments to our product hierarchy, which can impact the roll-up toof our merchandise categories. OurSee the reclassifications discussion in Note 1 to the accompanying consolidated financial reporting process utilizes the most current product hierarchystatements for additional information.
Net sales decreased $682.3 million, or 11.1%, to $5,468.3 million in reporting2022, compared to $6,150.6 million in 2021. The decrease in net sales was primarily driven by an overall comp decrease of 12.9%, which decreased net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales$766.6 million, partially offset by merchandise category compared to previously reported amounts.
Our decreased comps and net sales in 2022 were significantly impacted by $67.8 million.the absence of government sponsored relief packages that were present in 2021, which included government stimulus payments and enhanced unemployment benefits. Additionally, there waswe experienced decreased demand in 2022 as a 0.3%result of general economic pressures on our customers caused by inflation, which we believe significantly impacted the discretionary spending of our customers.
In 2022, we experienced decreased comps and net sales in all of our merchandise categories except our Seasonal category, which experienced decreased comps, but a modest increase in our comps, which increased net sales by $17.3 million.
sales. Our home products categories - Furniture, Soft Home and Consumables merchandiseHard Home - were most impacted, as purchases from these categories generated increased net salesare generally more discretionary in nature. We believe an inflationary environment and positive comps in 2019 comparedabsence of government sponsored relief packages significantly reduced our customer's discretionary spending, which then led to 2018:
To improve our home product net sales, we will continue to introduce more closeout offerings in these categories and lower our opening price points as we execute our “Bargains, Treasures, and Essentials” merchandising strategy, which we expect to change our merchandise mix to one-third Bargains (largely synonymous with closeouts), one-third Treasures (fun and unique items), and one-third Essentials (staple product offerings that bring consistency to our mix of products). In order to expand our lower entry-level price points, we expect more price point mix adjustments within these categories throughout 2023 and beyond. We will also continue to offer high value products with higher price points that we believe will attract customers from higher income households such as our Broyhill® branded home products.
Our Food category performed marginally better than our home products categories in 2022 as this category is less sensitive to changes in discretionary spending.
Our Consumables and Apparel, Electronics, & Other categories experienced decreases in net sales and comps which were driven by the decreased discretionary spending discussed above.
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The modest increase in net sales within our Seasonal category in 2022 was driven by our second and third quarter sales in the lawn & garden and Halloween departments, which benefited from promotional selling activity and increased inventory levels entering their respective selling seasons. The lawn & garden department sales particularly benefited from increased inventory levels in early 2022 and category-specific promotional activity as we aggressively discounted our lawn & garden assortments to be competitive in the current market and reduce our inventory levels. Net sales and comps in our Furniture, Soft Home, and Consumables merchandise categories were partially offset byChristmas department decreased due to a winter storm that adversely impacted the decreased net sales and negative comps in our Food, Hard Home, and Electronics, Toys, & Accessories merchandise categories:week of Christmas.
Gross Margin
Gross margin dollars decreased $7.2$483.5 million, or 0.3%20.2%, to $2,114.7$1,913.5 million in 2019,2022, compared to $2,121.9$2,397.0 million in 2018.2021. The decrease in gross margin dollars was primarily due to a lowerdecrease in net sales, which decreased gross margin dollars by $265.9 million, and a decrease in gross margin rate, which decreased gross margin dollars by approximately $41.7 million, partially offset by an increase in net sales, which increased gross margin dollars by approximately $34.5$217.6 million. Gross margin as a percentage of net sales or gross margin rate, decreased 80approximately 400 basis points to 39.7%35.0% in 20192022 compared to 40.5%39.0% in 2018.2021. 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,markdowns and a higher shrink rate compared to 2018. The decrease in gross margin rate wasinbound freight costs, partially offset by a higher initial mark-upmarkup compared to 2018.
Selling and Administrative Expenses
Selling and administrative expenses were $2,020.1 million in 2022, compared to $2,014.7 million in 2021. The increase of $5.4 million, or 0.3%, was primarily attributable to increases in store asset impairment charges of $63.4 million, and distribution and transportation costs of $21.4 million, partially offset by decreases in accrued bonus expense of $27.4 million, share-based compensation expense of $24.8 million, self-insurance expense of $16.1 million, and a gain on sale of real estate and related expenses of $18.6 million (see Note 9 to the accompanying consolidated financial statements for more information regarding the gain on sale of real estate and related expenses). The non-cash store asset impairment charges (see Note 2 to the accompanying consolidated financial statements) were recorded as a result of a review of underperforming store locations. The increase in distribution and transportation costs was driven by increased fuel costs and outbound transportation rates, as well as the costs associated with our four forward distribution centers, two of which were opened in third quarter of 2021 and two of which were opened in 2022, partially offset by lower outbound and inbound carton volumes. The decrease in accrued bonus expense was driven by strongerdue to lower operating performance in 20192022 relative to our quarterly and annual operating plans as compared to our performance in 2018 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, as well as higher transportation rates. The increase in advertising cost was primarily a result of higher spend on video media advertising and social media marketing. The decrease in store-related payroll was primarily due to the strategic reorganization of our store workforce at the end of the second quarter of 2019, which optimized our store management structure to better serve our customers and resulted in a lower average wage rate and a reduction in total payroll hours.2021. Our share-based compensation expense decreased as a resultprimarily due to the absence of lower attainment of the long-term target on our 20172019 performance share units (“PSUs”) expensed(for which the grant date was established in 2019,the first quarter of 2021), which carried a higher grant date fair value and represented substantially more awards than the 2022 relative to the attainment of the 2016total shareholder return PSUs expensed in 2018.(“TSR PSUs”). Our share-based compensation expense also decreased due to the lower average grant date fair value on awards expensedforfeitures resulting from executive departures in 2019 compared to those recorded in 2018. The lower expense in store repairs and maintenance was driven by improved expense management.2022. The decrease in our self-insurance costs resulted from favorable actuarial trends realized in 2019, partially offsetexpense was primarily driven by a net decrease in self-insurance claims the discount rate for our self-insurance reserves.balance of which led to lower incurred expense in 2022 compared to 2021.
As a percentage of net sales, selling and administrative expenses increased by 30410 basis points to 34.3%36.9% in 20192022 compared to 34.0%32.8% 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.2021.
Depreciation Expense
Depreciation expense increased $10.0$12.3 million to $135.0$154.9 million in 20192022 compared to $125.0$142.6 million in 2018.2021. 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 California distribution center. In 2019, we extended our estimated service livesstores, supply chain improvements in the last 12 months, and $1.7 million of accelerated depreciation due to the anticipated disposal of fixtures and equipment related to the closure and sale of owned store properties (see Note 9 to the accompanying consolidated financial statements for more information regarding the gain on assets in stores that we have converted to our Storesale of the Future concept to more accurately reflect our expected usage periodreal estate and their average remaining lease term, which impacted depreciation expense. related expenses).
Depreciation expense as a percentage of net sales increased by 1050 basis points compared to 2018.2021.
Operating (Loss) Profit
Operating profitloss was $334.8$261.5 million in 20192022 compared to $218.5operating profit of $239.8 million in 2018.2021. The increasedecrease in operating profit was primarily driven by the items discussed in the “Net Sales,” “Gross Margin,” “Selling and Administrative Expenses,” and “Depreciation Expense,” and “Gain on Sale of Distribution Center”Expense” sections above. In summary, the decrease in operating (loss) profit was driven by the gain on the sale of our distribution center and an increasedecrease in net sales partially offset by a decrease inand gross margin rate, and the increases in selling and administrative expenses and depreciation expense.
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Interest Expense
Interest expense increased $6.5$11.0 million, to $16.8$20.3 million in 20192022 compared to $10.3$9.3 million in 2018.2021. The increase in interest expense was primarily driven by an increase inhigher 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$421.3 million in 20192022 compared to total average borrowings of $320.1$148.5 million in 2018.2021. The increase in total average borrowings (including finance leases) was driven by an increase of $106.4 million in our average revolving debt balanceincreased borrowings under our 2018 Credit Agreement in 2019 ascredit agreements throughout 2022 compared to 2018, which was driven by elevated capital expenditures to supportthe average balance on our Store 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, which was fully repaid in the thirdsecond quarter of 2019 (“2019 Term Note”), which increased our total2021, and average borrowings by $33.6 million. The average interest rate on our revolving debt, which is variable based on LIBOR andunder our credit rating, was impacted by a slight increaseagreements in our total interest rate due to a decrease in our credit rating in the fourth quarter of 2018.2021.
Other Income (Expense)
Other income (expense) was $(0.5)$1.4 million in 2019,2022, compared to $(0.6)$1.3 million in 2018.2021. The change from 2018was primarily driven by the absence of loss on debt extinguishment of $0.5 million, recognized in 2021, related to 2019 was related tothe prepayment of the term note secured by equipment at our California distribution center, partly offset by gains on our diesel fuel hedging contracts, driven by a changederivatives in pricing trends for diesel fuel forward contracts.2022.
Income Taxes
Our effective income tax rate in 20192022 and 20182021 was 23.6%24.9% and 24.4%23.3%, respectively. The effective income tax rate comparisons were significantly impacted by higher income before income taxes for 2019 compared to 2018. The decreaseincrease in the effective income tax rate was principally drivenprimarily attributable to a net deficiency associated with vesting of share-based payment awards in 2022 compared to a net benefit in 2021, increased audit settlements and the effect of employment related tax credits, partially offset by lower non-deductible executive compensation. Additionally, the gain on the sale of our Rancho Cucamonga, California distribution center being taxed at a lower effective rate as that gain does not attract certain state income taxes that do not tax on a consolidated or combined basis, and lower derecognition of current year uncertain positions. The decreaseincrease in the effective income tax rate was offsetimpacted by the effect of hiring-based tax creditsloss before income taxes in 2022 compared to the income before income taxes in 2021.
Known Trends
In 2022, the U.S. economy experienced its highest inflationary period in decades, which has adversely impacted costs in our business, particularly freight and transportation-related expenses, and the absencebuying power of a favorable adjustment recognized in 2018our customers. We expect the inflationary environment will continue to the provisional amounts that we recorded for the Tax Cutsnegatively impact costs within our business and Jobs Act of 2017.
Capital Resources and Liquidity
On August 31, 2018,September 21, 2022, we entered into a five-year asset-based revolving credit facility (“2022 Credit Agreement”) in an aggregate committed amount of up to $900 million (the “Commitments”) that expires on September 21, 2027. In connection with our entry into the 20182022 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $3.4 million, which provides for a $700are being amortized over the term of the 2022 Credit Agreement.
The 2022 Credit Agreement replaced the $600 million five-year unsecured credit facility.facility we entered into on September 22, 2021 (“2021 Credit Agreement”). The 20182021 Credit Agreement expireswas scheduled to expire on August 31, 2023.September 22, 2026, but was terminated concurrent with our entry into the 2022 Credit Agreement. We did not incur any material early termination penalties in connection with the termination of the 2021 Credit Agreement.
Revolving loans under the 2022 Credit Agreement are available in an aggregate amount equal to the lesser of (1) the aggregate Commitments and (2) a borrowing base consisting of eligible credit card receivables and eligible inventory (including in-transit inventory), subject to customary exceptions and reserves. Under the 2022 Credit Agreement, we may obtain additional Commitments on no more than five occasions in an aggregate amount of up to $300 million, subject to agreement by the lenders to increase their respective Commitments and certain other conditions. The 2022 Credit Agreement includes a swing loan sublimit of 10% of the then applicable aggregate Commitments and a $90 million letter of credit sublimit. Loans made under the 2022 Credit Agreement may be prepaid without penalty. Borrowings under the 20182022 Credit Agreement are available for general corporate purposes, working capital and working capital. The 2018to repay certain of our indebtedness. Our obligations under the 2022 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter ofare secured by our working capital assets (including inventory, credit sublimit, a $75 million sublimit for loanscard receivables and other accounts receivable, deposit accounts, and cash), subject to foreign borrowers,customary exceptions. The pricing and a $200 million optional currency sublimit. The interest rates, pricing andcertain fees under the 20182022 Credit Agreement fluctuate based on our debt rating.availability under the 2022 Credit Agreement. The 20182022 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.one, three or six month adjusted Term SOFR. We may prepay revolving loans made underwill also pay an unused commitment fee of 0.20% per annum on the 2018 Credit Agreement.unused Commitments. The 20182022 Credit Agreement contains financialan 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 2022 Credit Agreement.
The 2022 Credit Agreement contains customary affirmative and negative covenants (including, where applicable, restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, redeem or repurchase stock, prepay certain indebtedness, make certain loans and investments, dispose of assets, enter into restrictive agreements, engage in transactions with affiliates, modify organizational documents, incur liens and consummate mergers and other covenants, including, but not limitedfundamental changes) and events of default. In addition, the 2022 Credit Agreement requires us to limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio andmaintain a fixed charge coverage ratio.ratio of not less than
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1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million. Additionally, we are subject to cross-default provisions associated with the 2023 Synthetic Lease.Lease (as defined below). A violation of any of thethese covenants could result in a default under the 20182022 Credit Agreement that wouldwhich could permit the lenders to restrict our ability to further access the 20182022 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 20182022 Credit Agreement. At February 1, 2020,January 28, 2023, we were in compliance with the covenants of the 20182022 Credit Agreement.
Also on March 15, 2023, we entered into a Lease Agreement and supplement to the Lease Agreement (collectively, the “Lease” and together with the Participation Agreement and related agreements, the “2023 Synthetic Lease”) pursuant to which the Lessor will lease the Leased Property to the Company for an initial term of 60 months. The Lease may be extended for up to an additional five years, in one-year or longer annual periods, with each renewal subject to approval by the Participants. The 2023 Synthetic Lease requires the Company to pay basic rent on the scheduled payment dates in arrears in an amount equal to (a) a per annum rate equal to Term SOFR for the applicable payment period plus a 10 basis point spread adjustment plus an applicable margin equal to 250 basis points multiplied by (b) the portion of the lease balance not constituting the investment by Lessor in the Leased Property. In addition to basic rent, the Company must pay all costs and expenses associated with the use or occupancy of the 2018Leased Property, including without limitation, maintenance, insurance and certain indemnity payments. The Company will also be responsible for break-funding costs, annual lease administration fees and increased costs. The 2023 Synthetic Lease is expected to be an operating lease.
Concurrently with Lessor’s purchase of the Lease Property from Prior Lessor, the participation agreement and lease agreement associated with our former synthetic lease arrangement, in each case entered into on November 30, 2017 and most recently amended on September 21, 2022 (the “Prior Synthetic Lease”), was terminated effective on March 15, 2023. In connection with the termination of the Prior Synthetic Lease, the Company paid approximately $53.4 million of the outstanding lease balance to Prior Lessor as an in-substance residual value guarantee using borrowings under the 2022 Credit Agreement. As a result of the termination of the Prior Synthetic Lease, the borrowing base under the 2022 Credit Agreement is no longer subject to a reserve for the outstanding balance under the Prior Synthetic Lease.
The Company, together with all of its direct and indirect subsidiaries that serve as guarantors under the 2022 Credit Agreement guarantee the payment and performance obligations under the 2023 Synthetic Lease. The obligations under the 2023 Synthetic Lease are also secured by a pledge of the Company’s interest in the Leased Property. In addition, the Company, no less frequently than annually, will be subject to a test (the “LTV Test”) that requires the ratio of (a) the adjusted lease balance minus any Lessee Letter of Credit (as defined below) to (b) the Leased Property’s fair market value to be greater than 60 percent. If the Company does not comply with the LTV Test, the Company must deliver or adjust a letter of credit in favor of the Collateral Agent (“Lessee Letter of Credit”) in an amount necessary to provide funds for ongoingcomply with the LTV Test. The 2023 Synthetic Lease also contains customary representations and seasonal working capital, capital expenditures, dividends, share repurchase programs,warranties, covenants and other expenditures. In addition, we useevents of default.
The Participation Agreement also requires us to maintain a fixed charge coverage ratio of not less than 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 20182022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million, which is consistent with the terms of the 2022 Credit Agreement.
If an event of default occurs under the Lease, Lessor generally has the right to providerecover the adjusted lease balance and certain other costs and amounts payable under the 2023 Synthetic Lease and, following such payment, the Company would be entitled to receive ownership in the Leased Property from Lessor.
As of January 28, 2023, we had a Borrowing Base (as defined under the 2022 Credit Agreement) of $710.3 million under the 2022 Credit Agreement. At January 28, 2023, we had $301.4 million in borrowings outstanding under the 2022 Credit Agreement and $32.0 million committed to outstanding letters of credit, leaving $376.9 million available under the 2022 Credit Agreement, subject to certain borrowing base limitations as discussed above.
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In the fourth quarter of 2022, the Company sold 20 owned store locations and an unoccupied parcel of land in an effort to monetize underperforming assets for various operating and regulatory requirements, and if needed, lettersnet proceeds on the sale of credit required$47.8 million (see Note 9 to cover our self-funded insurance programs. Given the seasonalityaccompanying consolidated financial statements for additional information).
The primary source of our business, the amount ofliquidity is cash flows from operations and borrowings under our credit facility, as necessary. Our net income (loss) and, consequently, our cash provided by (used in) operations are impacted by net sales volume, seasonal sales patterns, and operating profit (loss) margins. Our cash provided by operations typically peaks in the 2018 Credit Agreement may fluctuate materially depending on various factors, including our operating financial performance,fourth quarter of each fiscal year due to net sales generated during the time of year, and our need to increase merchandise inventory levels prior to the peakholiday selling season. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter.quarter as we build our inventory levels prior to the holiday selling season. We have typicallyhistorically funded those requirements with cash provided by operations and borrowings under our credit facility. In 2019, our total indebtedness (outstanding borrowings and letters of credit)We expect to periodically borrow under the 20182022 Credit Agreement peaked at approximately $555during 2023 to fund our cash requirements. The Company is also exploring other asset monetization opportunities with its remaining owned real estate properties to generate additional liquidity.
Our cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other
contractual commitments.
At January 28, 2023 our material cash requirements, which are comprised of written purchase orders, cancellable and noncancellable contractual commitments, and other obligations, were $1,224.9 million for the upcoming fiscal year and $3,853.7 million in October. At February 1, 2020, we had $229.2total. Excluding operating lease and finance lease obligations disclosed in the Note 4 to the accompanying consolidated financial statements, our material cash requirements at January 28, 2023 were $888.9 million for the upcoming fiscal year and $1,666.8 million in outstanding borrowings under the 2018 Credit Agreementtotal. The material cash requirements disclosed above include merchandise purchase orders of $552.0 million. The cancellable and $467.9 million in borrowings available under the 2018 Credit Agreement, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $2.9 million. Working capital was $193.1 million at February 1, 2020.noncancellable contractual commitments include purchase commitments related to distribution and transportation, information technology, advertising, energy procurement, and store security, supply, and maintenance commitments. At January 28, 2023, our noncancellable commitments were immaterial.
On 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.
Common shares acquired through share repurchase authorizations are available to meet obligations under our outstanding common shares.equity compensation plans and for general corporate purposes.
In 2019,2022, we declared and paid four quarterly cash dividends of $0.30 per common share for a total paid amount of approximately $48.4$37.0 million. While the per-share cash dividends declared and paid in 2022 were consistent with the per-share cash dividends declared and paid in 2021, dividends declared decreased $5.1 millionand dividends paid decreased $4.7 million to $36.4 million and $37.0 million, respectively, in 2022. The decrease in both was driven by a lower number of common shares outstanding as a result of our share repurchases in prior years.
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The following table compares the primary components of our cash flows from 20192022 to 2018:2021:
| (In thousands) | 2022 | 2021 | Change | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (144,286) | $ | 193,762 | $ | (338,048) | |||||||||||
| Net cash used in investing activities | (108,940) | (159,686) | 50,746 | ||||||||||||||
| Net cash provided by (used in) financing activities | $ | 244,234 | $ | (539,910) | $ | 784,144 | |||||||||||
| (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 (used in) provided by operating activities increaseddecreased by $104.9$338.0 million to $339.0cash used in operating activities of $144.3 million in 20192022 compared to $234.1cash provided by operating activities of $193.8 million in 2018.2021. The increasedecrease was primarily due to a $145.1 millionthe decrease in net (loss) income after adjusting for non-cash activities such as non-cash impairment charge, non-cash share-based compensation expense, and non-cash lease expense, and gain on disposition of equipment and property. Partially offsetting this decrease was an increase in the change in current income taxes, which was driven by the loss before income taxes in 2022 compared to income before income taxes in 2021, and net cash inflows from inventories a $85.6 million increase in net income, a $48.6 million increase in other current liabilities, and a $47.0 million increase in our net deferred tax liabilities, partially offset by the add-back of $178.7 million for gain on disposition of property and equipment and a $64.4 million increase in cash outflows for accounts payable. The increase in cash inflows from inventoriespayable, which was primarily driven by our decision to accelerate the receipt ofdecreased inventory late in 2018 to mitigate tariff concerns, which increased our inventory position at the end of 2018. As of the end of 2019, we have normalized our inventory position as we decreased our receipt of inventory throughout 2019, which generated an increase in cash inflows from inventory sales. The net income increase was principally due to the sale of our distribution center in Rancho Cucamonga, California as well as a $85.1 million increase in net sales in 2019 compared to 2018. The increase in net income was partially offset by a reduction for the add-back of the gain on disposition of property and equipment, which was primarily related to the sale of our Rancho Cucamonga, California distribution center. The increase in other current liabilities was driven by an increase in accrued bonus expense. The increase in our net deferred tax 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.levels.
Cash used in investing activities decreased by $302.0$50.7 million to $74.5$108.9 million in 20192022 compared to $376.5$159.7 million in 2018.2021. The decrease was primarily attributed to andriven by the increase in cash proceeds from sale of property and equipment, of $190.2 million resulting fromdue to the sale of our Rancho Cucamonga, California distribution center, decreasestwenty owned store locations and one unoccupied land parcel in assets acquired under Synthetic Leasethe fourth quarter of $128.9 million2022 (see Note 9 to the accompanying consolidated financial statements for our new California distribution center, and payments for purchase of intangible assets of $15.8 million, partially offset by a $32.8 million 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.additional information).
Cash used inprovided by (used in) financing activities increased by $395.1$784.1 million to $257.8 million in 2019 compared to $137.3 million in cash provided by financing activities of $244.2 million in 2018. The increase in2022 compared to cash used in financing activities of $539.9 million in 2021. The increase was attributable todriven by a $254.9 million changedecrease in cash usagepayment for treasury shares acquired and an increase in net proceeds from long-term debt in 2019 compareddue 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 sharesborrowings under our share repurchase programs.credit agreements to fund working capital requirements. The decrease in net long-term debt was primarily due to the proceeds from the sale of the Rancho Cucamonga, California distribution center, a portion of which was utilized to pay down outstanding debt under the 2018 Credit Agreement. The decrease in proceeds from our Synthetic Leasepayment for treasury shares acquired was driven by the impact of the adoptionrepurchase of a new lease accounting standard. The increasetotal of $417.7 million of our common shares under share repurchase authorizations during 2021 compared to no shares repurchased in payments of finance lease obligations was due to our payment of the remainder of the finance lease obligation for our corporate headquarters facility in the third quarter of 2019.2022 under share repurchase authorizations.
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.
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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 | |||||
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 physicalPhysical inventory counts are typically taken at each store once aper year. During calendar 2020,2022, we primarily relied on third-party services to perform physical inventory counts, but began testing counts performed by our own associates under supervision by field leadership. During calendar 2023, we expect the majority of thesephysical inventory counts will be performed by our own associates with a limited number of counts performed by third-party services in small markets with a limited number of associates available for counting. During calendar 2022, the majority of physical counts occurred between January and July. During calendar 2023, we expect the majority of physical counts to occur between January and June. 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 28, 2023 and January 29, 2022 was $40.9 million and $53.7 million, respectively. The decrease of $12.8 million was driven by lower aggregate sales since the last physical inventory for each store and a lower estimated shrinkage rate for 2022 compared to 2021. At February 1, 2020,January 28, 2023, a 10% difference in our shrink accrual would have affected gross margin, operating (loss) profit and (loss) income before income taxes by approximately $3.4$4.1 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.
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Store Level Long-Lived Assets
Our store level long-lived assets primarily consist of property and equipment - net and operating lease right-of-use assets. 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 its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. The Company uses judgment in its determination of the existence of impairment indicators at the store level, which is primarily based on operating performance.
We assess the impairment of long-lived assets, primarily property and equipment and operating lease assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our assessment of changes in circumstances requires significant judgment. Factors we consider important which could trigger an impairment review include the following:
•Significant changes in the manner of our use of assets or the strategy for the overall business;
•Significant negative industry or economic trends; and
•An unusual current-period operating loss or cash flow loss in comparison to historical operating or cash flow losses.
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 28, 2023 and January 29, 2022 were $94.5 million and $99.3 million, respectively. The decrease of $4.8 million was driven by both workers' compensation and general liability reserves due to decreases in incurred development within the year, which also resulted in a decrease to our case reserve for self-insured matters that 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 28, 2023 would have affected selling and administrative expenses, operating (loss) profit, and income (loss) before income taxes by approximately $8$7.9 million.
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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 2018 Credit Agreement that we make from time to time.time and on borrowings under the 2022 Credit Agreement. We had $301.4 million in borrowings of $229.2 million under the 20182022 Credit Agreement at February 1, 2020.January 28, 2023. An increase of 1% in our variable interest rate on our investments and estimated future borrowings could affectwould have an impact of approximately $3.0 million on our financial condition, resultsresult 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 increaseoperations.
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Contents
| 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 | ) | |||||
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 28, 2023, based on criteria established inInternal 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 28, 2023, based on criteria established inInternal 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 28, 2023, of the Company and our report dated March 31, 2020,28, 2023, 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. 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, 202028, 2023
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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 28, 2023 and February 2, 2019,January 29, 2022, 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 28, 2023, 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 28, 2023 and February 2, 2019,January 29, 2022, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020,January 28, 2023, 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 28, 2023, 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, 2020,28, 2023, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
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$1,148.0 million at February 1, 2020.January 28, 2023.
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.
39
Given the significant estimates and assumptions management utilizes to quantify inventory reserves which includesinclude 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 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 counts observed.
◦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 98 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$94.5 million at February 1, 2020,January 28, 2023, 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.
•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;
40
◦Evaluated the key assumptions underlying the Company’s actuarial estimates used to determine the insurance reserves.
Identification of Indicators of Impairment for Store Level Long-Lived Assets - Refer to Notes 1, 2 and 4 to the financial statements
Critical Audit Matter Description
Management assesses impairment of long-lived assets within each store level asset group, primarily property and equipment – net and operating lease right-of-use assets, whenever events or changes in circumstances indicate that the carrying amount of each asset group may not be recoverable. The Company has long-lived assets which include consolidated property and equipment – net of $691.1 million and consolidated operating lease right-of-use assets of $1,619.8 million as of January 28, 2023, of which a significant portion of such balances relate to store level long-lived assets. Some stores may generate negative cash flow or experience other events that indicate the carrying value of their long-lived assets may not be recoverable, indicating a risk that their long-lived assets might be impaired. This requires management to consider historic profitability among other store specific factors when evaluating its stores for impairment to determine whether an impairment triggering event has occurred. For the year ended January 28, 2023, the Company recognized aggregate asset impairment charges of $68.4 million related to store level long-lived assets.
Given the significant judgments management utilizes in identifying whether events or changes in circumstances indicate that store level long-lived asset carrying amounts may not be recoverable, a high degree of auditor judgment and an increased extent of effort is required. The identification of changes in the manner of management’s use of assets, the identification of negative industry or economic trends, or the identification of unusual current-period operating losses or cash flow losses involve substantial management judgment, as those assessments could have a significant impact on management’s identification of an impairment triggering event.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s identification of triggering events for impairment of store level long-lived assets included the following, among others:
•We tested the effectiveness of internal controls related to the identification of triggering events.
•We evaluated the methods and assumptions used by management to identify triggering events by:
◦Inspecting the Company’s triggering event analysis to determine if contrary evidence existed as to the completeness of the population of potentially impaired stores.
◦Evaluating the methodology of identifying store level factors to be considered in the triggering event analysis by:
▪Analyzing the duration of cash flows used to assess store profitability;
▪Evaluating the allocation of long-lived assets to individual asset groups, as well as the identification of store level cash flows attributable to each asset group;
▪Comparing individual store level current and historical operating results to the general ledger, to assess the reliability of information used;
▪Reading board of director meeting minutes, while considering available industry information and macroeconomic trends.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
March 31, 202028, 2023
We have served as the Company’s auditor since 1989.
41
| BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (In thousands, except per share amounts) | ||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||
| Net sales | $ | 5,323,180 | $ | 5,238,105 | $ | 5,264,362 | Net sales | $ | 5,468,329 | $ | 6,150,603 | $ | 6,199,186 | |||||||
| 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) | 3,554,826 | 3,753,596 | 3,701,800 | |||||||||||||
| Gross margin | 2,114,682 | 2,121,895 | 2,142,442 | Gross margin | 1,913,503 | 2,397,007 | 2,497,386 | |||||||||||||
| Selling and administrative expenses | 1,823,409 | 1,778,416 | 1,723,996 | Selling and administrative expenses | 2,020,144 | 2,014,682 | 1,965,555 | |||||||||||||
| Depreciation expense | 134,981 | 124,970 | 117,093 | Depreciation expense | 154,859 | 142,572 | 138,336 | |||||||||||||
| Gain on sale of distribution center | (178,534 | ) | — | — | ||||||||||||||||
| Operating profit | 334,826 | 218,509 | 301,353 | |||||||||||||||||
| Gain on sale of distribution centers | Gain on sale of distribution centers | — | — | (463,053) | ||||||||||||||||
| Operating (loss) profit | Operating (loss) profit | (261,500) | 239,753 | 856,548 | ||||||||||||||||
| Interest expense | (16,827 | ) | (10,338 | ) | (6,711 | ) | Interest expense | (20,280) | (9,281) | (11,031) | ||||||||||
| Other income (expense) | (451 | ) | (558 | ) | 712 | Other income (expense) | 1,363 | 1,339 | (911) | |||||||||||
| Income before income taxes | 317,548 | 207,613 | 295,354 | |||||||||||||||||
| Income tax expense | 75,084 | 50,719 | 105,522 | |||||||||||||||||
| Net income and comprehensive income | $ | 242,464 | $ | 156,894 | $ | 189,832 | ||||||||||||||
| (Loss) income before income taxes | (Loss) income before income taxes | (280,417) | 231,811 | 844,606 | ||||||||||||||||
| Income tax (benefit) expense | Income tax (benefit) expense | (69,709) | 54,033 | 215,415 | ||||||||||||||||
| Net (loss) income and comprehensive (loss) income | Net (loss) income and comprehensive (loss) income | $ | (210,708) | $ | 177,778 | $ | 629,191 | |||||||||||||
| Earnings per common share: | ||||||||||||||||||||
| Earnings (loss) per common share: | Earnings (loss) per common share: | |||||||||||||||||||
| Basic | $ | 6.18 | $ | 3.84 | $ | 4.43 | Basic | $ | (7.30) | $ | 5.43 | $ | 16.46 | |||||||
| Diluted | $ | 6.16 | $ | 3.83 | $ | 4.38 | Diluted | $ | (7.30) | $ | 5.33 | $ | 16.11 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except par value) | ||
| February 1, 2020 | February 2, 2019 | January 28, 2023 | January 29, 2022 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 52,721 | $ | 46,034 | Cash and cash equivalents | $ | 44,730 | $ | 53,722 | |||||||||
| Inventories | 921,266 | 969,561 | Inventories | 1,147,949 | 1,237,797 | |||||||||||||
| Other current assets | 89,962 | 112,408 | Other current assets | 92,635 | 119,449 | |||||||||||||
| Total current assets | 1,063,949 | 1,128,003 | Total current assets | 1,285,314 | 1,410,968 | |||||||||||||
| Operating lease right-of-use assets | 1,202,252 | — | Operating lease right-of-use assets | 1,619,756 | 1,731,995 | |||||||||||||
| Property and equipment - net | 849,147 | 822,338 | Property and equipment - net | 691,111 | 735,826 | |||||||||||||
| Deferred income taxes | 4,762 | 8,633 | Deferred income taxes | 56,301 | 10,973 | |||||||||||||
| Other assets | 69,171 | 64,373 | Other assets | 38,449 | 37,491 | |||||||||||||
| Total assets | $ | 3,189,281 | $ | 2,023,347 | Total assets | $ | 3,690,931 | $ | 3,927,253 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 378,241 | $ | 396,903 | Accounts payable | $ | 421,680 | $ | 587,496 | |||||||||
| Current operating lease liabilities | 212,144 | — | Current operating lease liabilities | 252,320 | 242,275 | |||||||||||||
| Property, payroll, and other taxes | 82,109 | 75,317 | Property, payroll, and other taxes | 71,274 | 90,728 | |||||||||||||
| Accrued operating expenses | 118,973 | 99,422 | Accrued operating expenses | 111,752 | 120,684 | |||||||||||||
| Insurance reserves | 36,131 | 38,883 | Insurance reserves | 35,871 | 36,748 | |||||||||||||
| Accrued salaries and wages | 39,292 | 26,798 | Accrued salaries and wages | 26,112 | 45,762 | |||||||||||||
| Income taxes payable | 3,930 | 1,237 | Income taxes payable | 845 | 894 | |||||||||||||
| Total current liabilities | 870,820 | 638,560 | Total current liabilities | 919,854 | 1,124,587 | |||||||||||||
| Long-term debt | 279,464 | 374,100 | Long-term debt | 301,400 | 3,500 | |||||||||||||
| Noncurrent operating lease liabilities | 1,035,377 | — | Noncurrent operating lease liabilities | 1,514,009 | 1,569,713 | |||||||||||||
| Deferred income taxes | 48,610 | — | Deferred income taxes | — | 21,413 | |||||||||||||
| Deferred rent | — | 60,700 | ||||||||||||||||
| Insurance reserves | 57,567 | 54,507 | Insurance reserves | 58,613 | 62,591 | |||||||||||||
| Unrecognized tax benefits | 10,722 | 14,189 | Unrecognized tax benefits | 8,091 | 10,557 | |||||||||||||
| Synthetic lease obligation | — | 144,477 | ||||||||||||||||
| Other liabilities | 41,257 | 43,773 | Other liabilities | 125,057 | 127,529 | |||||||||||||
| 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 28,959 shares and 28,476 shares, respectively | Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 28,959 shares and 28,476 shares, respectively | 1,175 | 1,175 | |||||||||||||||
| Treasury shares - 88,536 shares and 89,019 shares, respectively, at cost | Treasury shares - 88,536 shares and 89,019 shares, respectively, at cost | (3,105,175) | (3,121,602) | |||||||||||||||
| Additional paid-in capital | 620,728 | 622,685 | Additional paid-in capital | 627,714 | 640,522 | |||||||||||||
| Retained earnings | 2,769,793 | 2,575,267 | Retained earnings | 3,240,193 | 3,487,268 | |||||||||||||
| Total shareholders’ equity | 845,464 | 693,041 | Total shareholders’ equity | 763,907 | 1,007,363 | |||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,189,281 | $ | 2,023,347 | Total liabilities and shareholders’ equity | $ | 3,690,931 | $ | 3,927,253 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
43
| 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 | ||||||||||||||||||||||||||||||||||
| Balance - February 1, 2020 | 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) | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||||
| Balance - January 28, 2017 | 44,259 | $ | 1,175 | 73,236 | $ | (2,291,379 | ) | $ | 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 | ) | Purchases of common shares | (3,890) | — | 3,890 | (175,642) | — | — | (175,642) | ||||||||||||||||||||||||
| Exercise of stock options | 304 | — | (304 | ) | 9,659 | 2,053 | — | 11,712 | Exercise of stock options | 13 | — | (13) | 429 | 64 | — | 493 | ||||||||||||||||||||||||||
| Restricted shares vested | 368 | — | (368 | ) | 11,562 | (11,562 | ) | — | — | Restricted shares vested | 309 | — | (309) | 10,034 | (10,034) | — | — | |||||||||||||||||||||||||
| Performance shares vested | 431 | — | (431 | ) | 13,523 | (13,523 | ) | — | — | Performance shares vested | 65 | — | (65) | 2,107 | (2,107) | — | — | |||||||||||||||||||||||||
| Other | — | — | — | (4 | ) | — | — | (4 | ) | Other | 1 | — | (1) | 45 | 7 | — | 52 | |||||||||||||||||||||||||
| Share-based employee compensation expense | — | — | — | — | 27,825 | — | 27,825 | Share-based employee compensation expense | — | — | — | — | 26,155 | — | 26,155 | |||||||||||||||||||||||||||
| Balance - February 3, 2018 | 41,925 | 1,175 | 75,570 | (2,422,396 | ) | 622,550 | 2,468,258 | 669,587 | ||||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | 156,894 | 156,894 | Comprehensive income | — | — | — | — | — | 177,778 | 177,778 | |||||||||||||||||||||||||||
| Dividends declared ($1.20 per share) | — | — | — | — | — | (49,885 | ) | (49,885 | ) | Dividends declared ($1.20 per share) | — | — | — | — | — | (41,512) | (41,512) | |||||||||||||||||||||||||
| Purchases of common shares | (2,635 | ) | — | 2,635 | (107,830 | ) | (3,920 | ) | — | (111,750 | ) | Purchases of common shares | (8,076) | — | 8,076 | (446,374) | — | — | (446,374) | |||||||||||||||||||||||
| Exercise of stock options | 43 | — | (43 | ) | 1,395 | 464 | — | 1,859 | ||||||||||||||||||||||||||||||||||
| Restricted shares vested | 413 | — | (413 | ) | 13,271 | (13,271 | ) | — | — | Restricted shares vested | 482 | — | (482) | 16,140 | (16,140) | — | — | |||||||||||||||||||||||||
| Performance shares vested | 296 | — | (296 | ) | 9,475 | (9,475 | ) | — | — | Performance shares vested | 535 | — | (535) | 17,879 | (17,879) | — | — | |||||||||||||||||||||||||
| Other | — | — | — | (1 | ) | 2 | — | 1 | Other | — | — | — | 12 | 127 | — | 139 | ||||||||||||||||||||||||||
| Share-based employee compensation expense | — | — | — | — | 26,335 | — | 26,335 | Share-based employee compensation expense | — | — | — | — | 39,601 | — | 39,601 | |||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||
| Comprehensive loss | Comprehensive loss | — | — | — | — | — | (210,708) | (210,708) | ||||||||||||||||||||||||||||||||||
| Dividends declared ($1.20 per share) | — | — | — | — | — | (48,286 | ) | (48,286 | ) | Dividends declared ($1.20 per share) | — | — | — | — | — | (36,367) | (36,367) | |||||||||||||||||||||||||
| Adjustment for ASU 2016-02 | — | — | — | — | — | 348 | 348 | |||||||||||||||||||||||||||||||||||
| Purchases of common shares | (1,474 | ) | — | 1,474 | (55,347 | ) | — | — | (55,347 | ) | Purchases of common shares | (304) | — | 304 | (11,180) | — | — | (11,180) | ||||||||||||||||||||||||
| Exercise of stock options | 6 | — | (6 | ) | 202 | (2 | ) | — | 200 | |||||||||||||||||||||||||||||||||
| Restricted shares vested | 202 | — | (202 | ) | 6,545 | (6,545 | ) | — | — | Restricted shares vested | 440 | — | (440) | 15,440 | (15,440) | — | — | |||||||||||||||||||||||||
| Performance shares vested | 261 | — | (261 | ) | 8,459 | (8,459 | ) | — | — | Performance shares vested | 347 | — | (347) | 12,167 | (12,167) | — | — | |||||||||||||||||||||||||
| Other | — | — | — | (5 | ) | (2 | ) | — | (7 | ) | ||||||||||||||||||||||||||||||||
| Share-based employee compensation expense | — | — | — | — | 13,051 | — | 13,051 | Share-based employee compensation expense | — | — | — | — | 14,799 | — | 14,799 | |||||||||||||||||||||||||||
| Balance - February 1, 2020 | 39,037 | $ | 1,175 | 78,458 | $ | (2,546,232 | ) | $ | 620,728 | $ | 2,769,793 | $ | 845,464 | |||||||||||||||||||||||||||||
| Balance - January 28, 2023 | Balance - January 28, 2023 | 28,959 | $ | 1,175 | 88,536 | $ | (3,105,175) | $ | 627,714 | $ | 3,240,193 | $ | 763,907 | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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| BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) | ||
| 2022 | 2021 | 2020 | |||||||||||||||
| Operating activities: | |||||||||||||||||
| Net (loss) income | $ | (210,708) | $ | 177,778 | $ | 629,191 | |||||||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||
| Depreciation and amortization expense | 156,427 | 143,713 | 138,848 | ||||||||||||||
| Non-cash lease expense | 271,945 | 265,401 | 246,442 | ||||||||||||||
| Deferred income taxes | (66,742) | 19,007 | (52,415) | ||||||||||||||
| Non-cash share-based compensation expense | 14,799 | 39,601 | 26,155 | ||||||||||||||
| Non-cash impairment charge | 70,221 | 6,096 | 1,792 | ||||||||||||||
| (Gain) loss on disposition of property and equipment | (19,392) | 342 | (462,916) | ||||||||||||||
| Unrealized loss (gain) on fuel derivatives | 856 | (1,593) | (294) | ||||||||||||||
| Loss on extinguishment of debt | — | 535 | — | ||||||||||||||
| Change in assets and liabilities: | |||||||||||||||||
| Inventories | 89,848 | (297,503) | (19,028) | ||||||||||||||
| Accounts payable | (165,816) | 189,063 | 20,193 | ||||||||||||||
| Operating lease liabilities | (257,686) | (233,057) | (250,131) | ||||||||||||||
| Current income taxes | 19,680 | (76,429) | 56,564 | ||||||||||||||
| Other current assets | 3,146 | 32,154 | (10,238) | ||||||||||||||
| Other current liabilities | (45,181) | (56,220) | 55,775 | ||||||||||||||
| Other assets | 1,865 | (785) | (90) | ||||||||||||||
| Other liabilities | (7,548) | (14,341) | 19,501 | ||||||||||||||
| Net cash (used in) provided by operating activities | (144,286) | 193,762 | 399,349 | ||||||||||||||
| Investing activities: | |||||||||||||||||
| Capital expenditures | (159,413) | (160,804) | (135,220) | ||||||||||||||
| Cash proceeds from sale of property and equipment | 50,496 | 1,155 | 588,258 | ||||||||||||||
| Other | (23) | (37) | (51) | ||||||||||||||
| Net cash (used in) provided by investing activities | (108,940) | (159,686) | 452,987 | ||||||||||||||
| Financing activities: | |||||||||||||||||
| Net proceeds from (repayments of) long-term debt | 297,900 | (46,764) | (243,227) | ||||||||||||||
| Net (repayments of) proceeds from sale and leaseback financing | (355) | — | 123,435 | ||||||||||||||
| Payment of finance lease obligations | (1,736) | (3,654) | (3,648) | ||||||||||||||
| Dividends paid | (36,997) | (41,653) | (46,964) | ||||||||||||||
| Proceeds from the exercise of stock options | — | — | 493 | ||||||||||||||
| Payment for treasury shares acquired | (11,180) | (446,374) | (175,642) | ||||||||||||||
| Payments for debt issuance costs | (3,398) | (1,167) | — | ||||||||||||||
| Payments to extinguish debt | — | (438) | — | ||||||||||||||
| Other | — | 140 | 52 | ||||||||||||||
| Net cash provided by (used in) financing activities | 244,234 | (539,910) | (345,501) | ||||||||||||||
| (Decrease) increase in cash and cash equivalents | (8,992) | (505,834) | 506,835 | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Beginning of year | 53,722 | 559,556 | 52,721 | ||||||||||||||
| End of year | $ | 44,730 | $ | 53,722 | $ | 559,556 | |||||||||||
| 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.
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| 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 28, 2023, we operated 1,4041,425 stores in 4748 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 unmatchedunmistakable 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 20192022 (“2019”2022”) was comprised of the 52 weeks that began on January 30, 2022 and ended on January 28, 2023. 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 3, 20192, 2020 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, 2018.30, 2021.
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, and credit and debit card receivables, and highly liquid investments, including money market funds, which are unrestricted to withdrawal or use and which have an original maturity of three months or less.receivables. 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, including private label credit card transactions, are typically settled in less than three days, and at February 1, 2020January 28, 2023 and February 2, 2019,January 29, 2022, totaled $28.8$24.7 million and $23.6$32.5 million, respectively.
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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.
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 | |||||
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.
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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. We generally use actual historical cash flows to determine if stores had negative cash flows. For each store with negative cash flows, we estimate future cash flows based on operating performance estimates specific to each store’s operations based on assumptions currently being used to develop our company level on an annual basis, or when other impairment indicators are present. Generally, all other property and equipment and operating lease right-of-use assets are reviewed for impairment at the enterprise level.plans. 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 estimatevalue (categorized as Level 3 under the fair value of our long-lived assets using expectedhierarchy). Fair value at the store level is typically based on projected discounted cash flows including salvage value, which is based on readily available market information for similarover the remaining lease term. Asset impairment charges are proportionately recorded between property and equipment - net and operating lease right-of-use assets. Asset impairment charges are included in selling and administrative expenses in our accompanying consolidated statements of operations and comprehensive income.
Intangible Assets
Savings Plans
We have a savings plan with a 401(k) deferral feature and a nonqualified deferred compensation plan with a similar deferral feature for eligible employees. Wewe provide a matching contribution based on a percentage of employee contributions. Our matching contributions, which are subject to Internal Revenue Service (“IRS”) regulations.regulations, based on a percentage of employee contributions. For 2019, 2018,2022, 2021, and 2017,2020, we expensed $8.3$9.2 million, $8.5$9.2 million, and $7.7$9.2 million, respectively, related to our matching contributions. In connection with our nonqualified deferred compensation plan, we had liabilities of $33.9 million and $31.8 million at February 1, 2020 and February 2, 2019, respectively, which are 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
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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.
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 $191.8$331.8 million, $180.5$310.4 million, and $161.5$251.0 million for 2019, 2018,2022, 2021, and 2017,2020, respectively.
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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 $95.2$98.3 million, $93.6$97.7 million, and $92.0$102.8 million for 2019, 2018,2022, 2021, and 2017,2020, respectively.
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.
In 2022, we awarded performance share units with a performance condition to certain members of senior management, which vest based on the achievement of total shareholder return (“TSR”) targets relative to a peer group over a three-year performance period and require the grantee to remain employed by us through the end of the performance period (“TSR PSUs”). The TSR 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 use a Monte Carlo simulation to estimate the fair value of the TSR PSUs on the grant date and recognize expense over the service period. The TSR PSUs have a contractual period of three years.
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, PSUs, PRSUs, and TSR PSUs, calculated using the treasury stock method.
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Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for 2019, 2018,2022, 2021, and 2017:2020:
| (In thousands) | 2022 | 2021 | 2020 | ||||||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | 22,225 | $ | 8,066 | $ | 6,366 | |||||||||||
| Cash paid for income taxes, excluding impact of refunds | 4,318 | 111,206 | 217,308 | ||||||||||||||
| Gross proceeds from long-term debt | 2,208,400 | 55,600 | 514,500 | ||||||||||||||
| Gross payments of long-term debt | 1,910,500 | 102,364 | 757,727 | ||||||||||||||
| Gross financing proceeds from sale and leaseback | — | — | 133,999 | ||||||||||||||
| Gross repayments of financing from sale and leaseback | 355 | — | 10,564 | ||||||||||||||
| Cash paid for operating lease liabilities | 373,172 | 341,341 | 340,747 | ||||||||||||||
| Non-cash activity: | |||||||||||||||||
| Assets acquired under finance leases | 3,740 | 1,080 | — | ||||||||||||||
| Accrued property and equipment | 16,674 | 19,303 | 17,791 | ||||||||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 216,499 | $ | 354,066 | $ | 694,811 | |||||||||||
| (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 | $ | — | $ | — | |||||
Our seven merchandise categories are 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.
We periodically assess, and make minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
Recently Adopted Accounting Standards
In February 2016, the FASB issuedthird quarter of 2021, the Company adopted Accounting Standards Update (“ASU”) 2016-02, 2020-04Leases (Topic 842) 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 update requiresCompany adopted ASU 2020-04 in connection with its entry into a lesseenew credit facility (see Note 3 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 electedstatements) that includes language to applyaddress LIBOR fallback and in connection with an amendment to the following practical expedients and policy elections at adoption:
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 shareholders' equity. For further discussionthe adoption was immaterial to the consolidated financial statements.
Recent Accounting Pronouncements
In September 2022, FASB issued ASU 2022-04 related to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that buyers disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a rollforward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after
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December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective for fiscal years beginning after December 15, 2023. We will adopt ASU 2022-04 for our fiscal year beginning January 29, 2023, and we do not expect it to have a material effect on our leases, see note 5.
There are currently no additional new accounting pronouncements with a future effective date that are of significance, or potential significance, to us.
NOTE 2 – PROPERTY AND EQUIPMENT - NET
Property and equipment - net consist of:
| (In thousands) | January 28, 2023 | January 29, 2022 | ||||||
| Land and land improvements | $ | 27,257 | $ | 48,849 | ||||
| Buildings and leasehold improvements | 775,837 | 828,179 | ||||||
| Fixtures and equipment | 940,613 | 940,921 | ||||||
| Computer software costs | 191,910 | 187,190 | ||||||
| Construction-in-progress | 24,676 | 25,394 | ||||||
| Property and equipment - cost | 1,960,293 | 2,030,533 | ||||||
| Less accumulated depreciation and amortization | 1,269,182 | 1,294,707 | ||||||
| Property and equipment - net | $ | 691,111 | $ | 735,826 | ||||
| (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$24.6 million and $29.5$25.3 million at February 1, 2020January 28, 2023 and February 2, 2019,January 29, 2022, respectively, to recognize assets from finance or capital leases. Accumulated depreciation and amortization includes $20.1$20.8 million and $17.9$23.6 million at February 1, 2020January 28, 2023 and February 2, 2019,January 29, 2022, 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, 2020 and February 2, 2019, respectively.
During 2019, 2018,2022, 2021, and 2017,2020, respectively, we invested $265.2$159.4 million, $232.4$160.8 million, and $142.7$135.2 million of cash in capital expenditures and we recorded $135.0$154.9 million, $125.0$142.6 million, and $117.1$138.3 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 9 to the accompanying consolidated financial statements for additional information on the sale and leaseback transactions).
In 2022, land and building-related assets for 25 owned store locations and one unoccupied land parcel with an aggregate carrying value of $30.6 million were classified as held for sale on the consolidated balance sheets. In the fourth quarter of 2022, we sold $29.4 million of these assets that we classified as held for sale in connection with the sale of 20 owned properties and one land parcel (see Note 9 to the accompanying consolidated financial statements for additional information on the sale of real estate).
We incurred $0.4$17.9 million, $0.1$0.9 million, and 0$0.9 million in asset impairment charges, excluding impairment of right-of-use assets (see note 5)Note 4 to the accompanying consolidated financial statements), in 2019, 2018,2022, 2021, and 2017,2020, respectively. In 2019, weWe impaired the value of property and equipment assets at 2155, eight, and four stores as a result of our annual store impairment review. During 2018, we wrote down the valuereview in 2022, 2021, and 2020, respectively.
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NOTE 3 – DEBT
Bank Credit Facility
On August 31, 2018,September 21, 2022, we entered into a $700 million five-year unsecuredfive-year asset-based revolving credit facility (“20182022 Credit Agreement”) that replaced our prior credit facility entered into in July 2011 and most recently amended in May 2015 (“2011 Credit Agreement”an aggregate committed amount of up to $900 million (the “Commitments”) and, among other things, amended certain of the representations and covenants applicable to the facility. The 2018 Credit Agreementthat expires on August 31, 2023.September 21, 2027. In connection with our entry into the 20182022 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $1.5$3.4 million, which are being amortized over the term of the agreement.2022 Credit Agreement.
The 2022 Credit Agreement replaced the $600 million five-year unsecured credit facility we entered into on September 22, 2021 (“2021 Credit Agreement”). The 2021 Credit Agreement was scheduled to expire on September 22, 2026, but was terminated concurrent with our entry into the 2022 Credit Agreement. We did not incur any material early termination penalties in connection with the termination of the 2021 Credit Agreement.
Revolving loans under the 2022 Credit Agreement are available in an aggregate amount equal to the lesser of (1) the aggregate Commitments and (2) a borrowing base consisting of eligible credit card receivables and eligible inventory (including in-transit inventory), subject to customary exceptions and reserves. Under the 2022 Credit Agreement, we may obtain additional Commitments on no more than five occasions in an aggregate amount of up to $300 million, subject to agreement by the lenders to increase their respective Commitments and certain other conditions. The 2022 Credit Agreement includes a swing loan sublimit of 10% of the then applicable aggregate Commitments and a $90 million letter of credit sublimit. Loans made under the 2022 Credit Agreement may be prepaid without penalty. Borrowings under the 20182022 Credit Agreement are available for general corporate purposes, working capital and repayment ofto repay certain of our indebtedness. The 2018Our obligations under the 2022 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter ofare secured by our working capital assets (including inventory, credit sublimit, a $75 million sublimit for loanscard receivables and other accounts receivable, deposit accounts, and cash), subject to foreign borrowers,customary exceptions. The pricing and a $200 million optional currency sublimit. The interest rates, pricing andcertain fees under the 20182022 Credit Agreement fluctuate based on our debt rating.availability under the 2022 Credit Agreement. The 20182022 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.one, three or six month adjusted Term SOFR. We may prepay revolving loans made underwill also pay an unused commitment fee of 0.20% per annum on the 2018 Credit Agreement.unused Commitments. The 20182022 Credit Agreement contains financialan 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 2022 Credit Agreement.
The 2022 Credit Agreement contains customary affirmative and negative covenants (including, where applicable, restrictions on our ability to, among other things, incur additional indebtedness, pay dividends, redeem or repurchase stock, prepay certain indebtedness, make certain loans and investments, dispose of assets, enter into restrictive agreements, engage in transactions with affiliates, modify organizational documents, incur liens and consummate mergers and other covenants, including, but not limitedfundamental changes) and events of default. In addition, the 2022 Credit Agreement requires us to limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios - a leverage ratio andmaintain a fixed charge coverage ratio.ratio of not less than 1.0 if (1) certain events of default occur and continue or (2) borrowing availability under the 2022 Credit Agreement is less than the greater of (a) 10% of the Maximum Credit Amount (as defined in the 2022 Credit Agreement) or (b) $67.5 million. A violation of any of thethese covenants could result in a default under the 20182022 Credit Agreement that wouldwhich could permit the lenders to restrict our ability to further access the 20182022 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 20182022 Credit Agreement.
As of January 28, 2023, we had a Borrowing Base (as defined under the 2022 Credit Agreement) of $710.3 million under the 2022 Credit Agreement. At February 1, 2020,January 28, 2023 we had $229.2$301.4 million ofin borrowings outstanding under the 20182022 Credit Agreement and $2.9$32.0 million was committed to outstanding letters of credit, leaving $467.9$376.9 million available under the 20182022 Credit Agreement.
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Synthetic Lease
Simultaneous with our entry into the 2019 Term 2022 Credit Agreement, we entered into an amendment (the “Synthetic Lease Amendment”) to the synthetic lease for our distribution center in Apple Valley, CA (the “Synthetic Lease”). The Synthetic Lease Amendment amended the Synthetic Lease to, among other things, (1) amend the lessor yield payable thereunder from a LIBOR-based rate to a SOFR-based rate, and to fix the SOFR margin paid on the lessor yield at 2.60%, (2) remove the financial covenants thereunder, (3) change the maturity date of the Synthetic Lease from May 30, 2024 to June 1, 2023, (4) permit the liens and indebtedness under the 2022 Credit Agreement, and (5) restrict our ability to amend the 2022 Credit Agreement, without the consent of all of the Synthetic Lease participants, to (a) increase the Commitments under the 2022 Credit Agreement to an amount in excess of $900 million, (b) remove or reduce the reserve for the then outstanding balance under the Synthetic Lease from the borrowing base under the 2022 Credit Agreement and (c) revise the maturity date under the 2022 Credit Agreement to an earlier date. On March 15, 2023, we entered into the 2023 Synthetic Lease (as defined below) for our distribution center in Apply Valley, CA which replaced the Synthetic Lease. For additional information on the 2023 Synthetic Lease, see Note we paid debt issuance costs of $0.2 million.11 to the accompanying consolidated financial statement.
Debt was recorded in our consolidated balance sheets as follows:
Instrument (In thousands) | January 28, 2023 | January 29, 2022 | ||||||||||||
| 2021 Credit Agreement | $ | — | $ | 3,500 | ||||||||||
| 2022 Credit Agreement | 301,400 | — | ||||||||||||
| Long-term debt | $ | 301,400 | $ | 3,500 | ||||||||||
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 fair values of our long-term obligations under the 20182022 Credit Agreement are estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for similar instruments. These fair value measurements are classified as Level 2 within the fair value hierarchy. Given the variable rate features and relatively short maturity of the instruments underlying the 2018 Credit Agreement, the carrying value of these instruments approximates the fair value.
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NOTE 54 – LEASES
Our leased property consists of our retail stores, distribution centers, in California, store security, and other office equipment.
In November 2017, we entered into a synthetic lease arrangement (the “Synthetic Lease”) for a new distribution center in California. The term of the Synthetic Lease commenced in the second quarter of 20192020, we completed sale and will expire 5leaseback transactions for our distribution centers located in Columbus, OH; Durant, OK; Montgomery, AL; and Tremont, PA. The leases for the Columbus, OH and Montgomery, AL distribution centers each have an initial term of 15 years after commencement. Underand multiple five-year extension options. The leases for the prior accounting standard,Durant, OK and Tremont, PA distribution centers each have an initial term of 20 years and multiple five-year extension options. At lease commencement, we determined that none of the Synthetic Lease was accounted for as a capital lease dueextension options were reasonably certain to certain construction period considerations, and therefore, was initially reflected in both our balance sheet and our future minimum lease obligations disclosure. Asbe exercised. Therefore, none of the Synthetic Lease commencedextension options were included in the second quartercomputation of 2019, we assessed its lease classification and determined it was anthe operating lease under ASC 842. Therefore,liabilities and operating lease right-of-use assets. At commencement of the Synthetic Lease is included in ourleases, we recorded aggregate operating lease liabilities of $466.1 million and aggregate operating lease right-of-use assets of $466.1 million. The weighted average discount rate for the leases was 6.2%. All of the leases are absolute net. Additionally, all of the leases include a right of first refusal beginning after the fifth year of the initial term which allows us to purchase the leased property if the buyer-lessor receives a bona fide purchase offer from a third-party. For additional information on the sale and leaseback transactions, see Note 9 to the accompanying consolidated financial statements.
In the fourth quarter of 2022, we entered into the Synthetic Lease Amendment to the Synthetic Lease for our distribution center in Apple Valley, CA. For additional information on the amendment, see Note 3 to the accompanying consolidated financial statements. On March 15, 2023, we entered into the 2023 Synthetic Lease for our distribution center in Apple Valley, CA, which replaced the Synthetic Lease. For additional information on the 2023 Synthetic Lease, see Note 11 to the accompanying consolidated financial statements.
In the fourth quarter of 2022, we completed the sale of 20 owned properties and one land parcel. As part of the consideration in the sale, the leases for our San Pablo, California and Citrus Heights, California stores were cancelled at no additional cost. As a result of these lease cancellations, we derecognized operating lease right-of-use assets of $4.0 million in aggregate and derecognized operating lease liabilities of $5.9 million resulting in a net gain on extinguishment of lease liabilities of $1.9 million (see Note 9 to the below table as of February 1, 2020. The annual lease payments are approximately $7 millionaccompanying consolidated financial statements for additional information on the duration of the term. Additionally, the Synthetic Lease includes a residual value guarantee, which is not probable to be paid.transaction).
Leases were recorded in our consolidated balance sheets as follows:
Leases (In thousands) | Balance Sheet Location | January 28, 2023 | January 29, 2022 | ||||||||
| Assets | |||||||||||
| Operating | Operating lease right-of-use assets | $ | 1,619,756 | $ | 1,731,995 | ||||||
| Finance | Property and equipment - net | 3,813 | 1,686 | ||||||||
| Total right-of-use assets | $ | 1,623,569 | $ | 1,733,681 | |||||||
| Liabilities | |||||||||||
| Current | |||||||||||
| Operating | Current operating lease liabilities | $ | 252,320 | $ | 242,275 | ||||||
| Finance | Accrued operating expenses | 1,789 | 869 | ||||||||
| Noncurrent | |||||||||||
| Operating | Noncurrent operating lease liabilities | 1,514,009 | 1,569,713 | ||||||||
| Finance | Other liabilities | 1,967 | 955 | ||||||||
| Total lease liabilities | $ | 1,770,085 | $ | 1,813,812 | |||||||
Leases (In thousands) | Balance Sheet Location | February 1, 2020 | ||
| Assets | (In thousands) | |||
| Operating | Operating lease right-of-use assets | $ | 1,202,252 | |
| Finance | Property and equipment - net | 7,436 | ||
| Total right-of-use assets | $ | 1,209,688 | ||
| Liabilities | ||||
| Current | ||||
| Operating | Current operating lease liabilities | $ | 212,144 | |
| Finance | Accrued operating expenses | 3,650 | ||
| Noncurrent | ||||
| Operating | Noncurrent operating lease liabilities | 1,035,377 | ||
| Finance | Other liabilities | 4,482 | ||
| Total lease liabilities | $ | 1,255,653 | ||
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The components of lease costs were as follows:
Lease cost (In thousands) | Statements of Operations and Comprehensive Income Location | 2022 | 2021 | 2020 | ||||||||||
| Operating lease cost | Selling and administrative expenses | $ | 363,315 | $ | 355,021 | 326,780 | ||||||||
| Finance lease cost | ||||||||||||||
| Amortization of leased assets | Depreciation | 1,546 | 3,024 | 3,800 | ||||||||||
| Interest on lease liabilities | Interest expense | 163 | 104 | 274 | ||||||||||
| Short-term lease cost | Selling and administrative expenses | 5,251 | 5,152 | 4,728 | ||||||||||
| Variable lease cost | Selling and administrative expenses | 96,265 | 84,940 | 88,074 | ||||||||||
| Total lease cost | $ | 466,540 | $ | 448,241 | $ | 423,656 | ||||||||
Lease cost (In thousands) | Statements of Operations and Comprehensive Income Location | 2019 | ||
| Operating lease cost | Selling and administrative expenses | $ | 295,810 | |
| Finance lease cost | ||||
| Amortization of leased assets | Depreciation | 4,373 | ||
| Interest on lease liabilities | Interest expense | 948 | ||
| Short-term lease cost | Selling and administrative expenses | 5,671 | ||
| Variable lease cost | Selling and administrative expenses | 81,666 | ||
| Total lease cost | $ | 388,468 | ||
In 2019,2022, 2021, and 2020, our operating lease cost above included $3.6$1.8 million, $1.1 million and $0.9 million, respectively, of right-of-use asset impairment charges related to store closures prior to lease termination date. In 2022, 2021, and 2020, our operating lease cost above excludes $50.5 million, $4.1 million, and $0.0 million respectively, of right-of-use asset impairment charges related to our store impairment review for underperforming stores.
Maturity of our lease liabilities at February 1, 2020,January 28, 2023, was as follows:
Fiscal Year (In thousands) | Operating Leases | Finance Leases | Fiscal Year (In thousands) | Operating Leases | Finance Leases | |||||||||||||
| 2020 | $ | 259,731 | $ | 4,664 | ||||||||||||||
| 2021 | 261,390 | 3,406 | ||||||||||||||||
| 2022 | 224,919 | 585 | ||||||||||||||||
| 2023 | 191,012 | 182 | 2023 | $ | 334,092 | $ | 1,992 | |||||||||||
| 2024 | 148,038 | 52 | 2024 | 330,858 | 1,712 | |||||||||||||
| 2025 | 2025 | 295,401 | 321 | |||||||||||||||
| 2026 | 2026 | 251,214 | — | |||||||||||||||
| 2027 | 2027 | 198,934 | — | |||||||||||||||
| Thereafter | 343,237 | 20 | Thereafter | 772,362 | — | |||||||||||||
| Total lease payments | $ | 1,428,327 | $ | 8,909 | Total lease payments | $ | 2,182,861 | $ | 4,025 | |||||||||
| Less amount to discount to present value | $ | (180,806 | ) | $ | (777 | ) | Less amount to discount to present value | $ | (416,532) | $ | (269) | |||||||
| Present value of lease liabilities | $ | 1,247,521 | $ | 8,132 | Present value of lease liabilities | $ | 1,766,329 | $ | 3,756 | |||||||||