UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2019October 31, 2020
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 INC
(Exact name of registrant as specified in its charter)
Ohio 06-1119097
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
4900 E. Dublin-Granville Road, Columbus, Ohio 43081
(Address (Address of Principal Executive Offices) (Zip Code)
(614) 278-6800
(614) 278-6800(Registrant’
(Registrant'ss 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 | BIG | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yesþ Noo
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 þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of the registrant’s common shares, $0.01 par value, outstanding as of December 6, 2019,4, 2020, was 39,042,767.
BIG LOTS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED NOVEMBER 2, 2019OCTOBER 31, 2020
TABLE OF CONTENTS
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| Item 1. | | |
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| b) | | |
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| c) | | |
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| d) | | |
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| e) | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
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Part I. Financial Information
Item 1. Financial Statements
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| |
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except per share amounts) |
| | | | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| | November 2, 2019 | November 3, 2018 | | November 2, 2019 | November 3, 2018 | | October 31, 2020 | November 2, 2019 | | October 31, 2020 | November 2, 2019 |
| Net sales | $ | 1,167,988 |
| $ | 1,149,402 |
| | $ | 3,716,198 |
| $ | 3,639,554 |
| Net sales | $ | 1,377,925 | | $ | 1,167,988 | | | $ | 4,461,271 | | $ | 3,716,198 | |
| Cost of sales (exclusive of depreciation expense shown separately below) | 704,602 |
| 690,228 |
| | 2,235,535 |
| 2,177,003 |
| Cost of sales (exclusive of depreciation expense shown separately below) | 820,032 | | 704,602 | | | 2,649,058 | | 2,235,535 | |
| Gross margin | 463,386 |
| 459,174 |
| | 1,480,663 |
| 1,462,551 |
| Gross margin | 557,893 | | 463,386 | | | 1,812,213 | | 1,480,663 | |
| Selling and administrative expenses | 436,714 |
| 436,826 |
| | 1,352,345 |
| 1,301,523 |
| Selling and administrative expenses | 482,307 | | 436,714 | | | 1,444,938 | | 1,352,345 | |
| Depreciation expense | 34,752 |
| 31,911 |
| | 97,572 |
| 90,936 |
| Depreciation expense | 33,086 | | 34,752 | | | 104,750 | | 97,572 | |
| Gain on sale of distribution center | (178,534 | ) | — |
| | (178,534 | ) | — |
| |
| Operating profit (loss) | 170,454 |
| (9,563 | ) | | 209,280 |
| 70,092 |
| |
| Gain on sale of distribution centers | | Gain on sale of distribution centers | 0 | | (178,534) | | | (463,053) | | (178,534) | |
| Operating profit | | Operating profit | 42,500 | | 170,454 | | | 725,578 | | 209,280 | |
| Interest expense | (5,359 | ) | (3,138 | ) | | (13,657 | ) | (7,121 | ) | Interest expense | (2,586) | | (5,359) | | | (8,456) | | (13,657) | |
| Other income (expense) | (322 | ) | 59 |
| | (201 | ) | 716 |
| Other income (expense) | (484) | | (322) | | | (2,444) | | (201) | |
| Income (loss) before income taxes | 164,773 |
| (12,642 | ) | | 195,422 |
| 63,687 |
| |
| Income tax expense (benefit) | 37,791 |
| (6,086 | ) | | 46,722 |
| 14,840 |
| |
| Net income (loss) and comprehensive income (loss) | $ | 126,982 |
| $ | (6,556 | ) | | $ | 148,700 |
| $ | 48,847 |
| |
| Income before income taxes | | Income before income taxes | 39,430 | | 164,773 | | | 714,678 | | 195,422 | |
| Income tax expense | | Income tax expense | 9,520 | | 37,791 | | | 183,473 | | 46,722 | |
| Net income and comprehensive income | | Net income and comprehensive income | $ | 29,910 | | $ | 126,982 | | | $ | 531,205 | | $ | 148,700 | |
| | | | | | | |
| Earnings (loss) per common share | |
| |
| | | |
| Earnings per common share | | Earnings per common share | | | |
| Basic | $ | 3.25 |
| $ | (0.16 | ) | | $ | 3.78 |
| $ | 1.19 |
| Basic | $ | 0.79 | | $ | 3.25 | | | $ | 13.69 | | $ | 3.78 | |
| Diluted | $ | 3.25 |
| $ | (0.16 | ) | | $ | 3.77 |
| $ | 1.19 |
| Diluted | $ | 0.76 | | $ | 3.25 | | | $ | 13.46 | | $ | 3.77 | |
| | | | | | | | |
| Weighted-average common shares outstanding | |
| |
| | | Weighted-average common shares outstanding | | | |
| Basic | 39,017 |
| 40,021 |
| | 39,313 |
| 41,065 |
| Basic | 38,054 | | 39,017 | | | 38,807 | | 39,313 | |
| Dilutive effect of share-based awards | 77 |
| — |
| | 85 |
| 138 |
| Dilutive effect of share-based awards | 1,137 | | 77 | | | 659 | | 85 | |
| Diluted | 39,094 |
| 40,021 |
| | 39,398 |
| 41,203 |
| Diluted | 39,191 | | 39,094 | | | 39,466 | | 39,398 | |
| | | | | | | |
| Cash dividends declared per common share | $ | 0.30 |
| $ | 0.30 |
| | $ | 0.90 |
| $ | 0.90 |
| Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | | | $ | 0.90 | | $ | 0.90 | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(In thousands, except par value)
|
| | | | November 2, 2019 | | February 2, 2019 | | October 31, 2020 | | February 1, 2020 |
| ASSETS | | | | ASSETS | | | |
| Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | $ | 61,794 |
| | $ | 46,034 |
| Cash and cash equivalents | $ | 547,831 | | | $ | 52,721 | |
| Inventories | 1,117,263 |
| | 969,561 |
| Inventories | 1,089,068 | | | 921,266 | |
| Other current assets | 82,495 |
| | 112,408 |
| Other current assets | 84,814 | | | 89,962 | |
| Total current assets | 1,261,552 |
| | 1,128,003 |
| Total current assets | 1,721,713 | | | 1,063,949 | |
| Operating lease right-of-use assets | 1,233,558 |
| | — |
| Operating lease right-of-use assets | 1,679,054 | | | 1,202,252 | |
| Property and equipment - net | 860,659 |
| | 822,338 |
| Property and equipment - net | 721,668 | | | 849,147 | |
| Deferred income taxes | — |
| | 8,633 |
| Deferred income taxes | 15,428 | | | 4,762 | |
| Other assets | 65,977 |
| | 64,373 |
| Other assets | 66,533 | | | 69,171 | |
| Total assets | $ | 3,421,746 |
| | $ | 2,023,347 |
| Total assets | $ | 4,204,396 | | | $ | 3,189,281 | |
| | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | |
| | |
| Current liabilities: | | | |
| Accounts payable | $ | 475,995 |
| | $ | 396,903 |
| Accounts payable | $ | 569,434 | | | $ | 378,241 | |
| Current operating lease liabilities | 205,390 |
| | — |
| Current operating lease liabilities | 215,027 | | | 212,144 | |
| Property, payroll, and other taxes | 87,357 |
| | 75,317 |
| Property, payroll, and other taxes | 99,399 | | | 82,109 | |
| Accrued operating expenses | 131,987 |
| | 99,422 |
| Accrued operating expenses | 142,162 | | | 118,973 | |
| Insurance reserves | 36,534 |
| | 38,883 |
| Insurance reserves | 34,094 | | | 36,131 | |
| Accrued salaries and wages | 38,004 |
| | 26,798 |
| Accrued salaries and wages | 40,049 | | | 39,292 | |
| Income taxes payable | 1,977 |
| | 1,237 |
| Income taxes payable | 52,813 | | | 3,930 | |
| Total current liabilities | 977,244 |
| | 638,560 |
| Total current liabilities | 1,152,978 | | | 870,820 | |
| Long-term debt | 501,115 |
| | 374,100 |
| Long-term debt | 39,434 | | | 279,464 | |
| Noncurrent operating lease liabilities | 1,067,529 |
| | — |
| Noncurrent operating lease liabilities | 1,491,571 | | | 1,035,377 | |
| Deferred income taxes | 8,316 |
| | — |
| Deferred income taxes | 9,303 | | | 48,610 | |
| Deferred rent | — |
| | 60,700 |
| |
| Insurance reserves | 51,665 |
| | 54,507 |
| Insurance reserves | 55,089 | | | 57,567 | |
| Unrecognized tax benefits | 12,913 |
| | 14,189 |
| Unrecognized tax benefits | 10,073 | | | 10,722 | |
| Synthetic lease obligation | — |
| | 144,477 |
| |
| Other liabilities | 40,640 |
| | 43,773 |
| Other liabilities | 189,646 | | | 41,257 | |
| Shareholders’ equity: | |
| | |
| Shareholders’ equity: | | | |
| Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | — |
| | — |
| |
| Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 39,036 shares and 40,042 shares, respectively | 1,175 |
| | 1,175 |
| |
| Treasury shares - 78,459 shares and 77,453 shares, respectively, at cost | (2,546,251 | ) | | (2,506,086 | ) | |
| Preferred shares - authorized 2,000 shares; $0.01 par value; 0ne issued | | Preferred shares - authorized 2,000 shares; $0.01 par value; 0ne issued | 0 | | | 0 | |
| Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 37,088 shares and 39,037 shares, respectively | | Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 37,088 shares and 39,037 shares, respectively | 1,175 | | | 1,175 | |
| Treasury shares - 80,407 shares and 78,458 shares, respectively, at cost | | Treasury shares - 80,407 shares and 78,458 shares, respectively, at cost | (2,636,939) | | | (2,546,232) | |
| Additional paid-in capital | 619,441 |
| | 622,685 |
| Additional paid-in capital | 627,301 | | | 620,728 | |
| Retained earnings | 2,687,959 |
| | 2,575,267 |
| Retained earnings | 3,264,765 | | | 2,769,793 | |
| Total shareholders' equity | 762,324 |
| | 693,041 |
| |
| Total liabilities and shareholders' equity | $ | 3,421,746 |
| | $ | 2,023,347 |
| |
| Total shareholders’ equity | | Total shareholders’ equity | 1,256,302 | | | 845,464 | |
| Total liabilities and shareholders’ equity | | Total liabilities and shareholders’ equity | $ | 4,204,396 | | | $ | 3,189,281 | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity (Unaudited)
(In thousands) |
| | | | | | | | | | | | | | | | | Common | Treasury | Additional
Paid-In
Capital | Retained Earnings | |
| | Common | Treasury | Additional Paid-In Capital | Retained Earnings | | |
| | Shares | Amount | Shares | Amount | Total | |
| Thirteen Weeks Ended November 3, 2018 | |
| Balance - August 4, 2018 | 39,987 |
| $ | 1,175 |
| 77,508 |
| $ | (2,507,784 | ) | $ | 613,891 |
| $ | 2,498,443 |
| $ | 605,725 |
| |
| Comprehensive income | — |
| — |
| — |
| — |
| — |
| (6,556 | ) | (6,556 | ) | |
| Dividends declared ($0.30 per share) | — |
| — |
| — |
| — |
| — |
| (12,321 | ) | (12,321 | ) | |
| Purchases of common shares | (12 | ) | — |
| 12 |
| (486 | ) | — |
| — |
| (486 | ) | |
| Exercise of stock options | 42 |
| — |
| (42 | ) | 1,375 |
| 464 |
| — |
| 1,839 |
| |
| Restricted shares vested | 25 |
| — |
| (25 | ) | 809 |
| (809 | ) | — |
| — |
| |
| Performance shares vested | — |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| Other | — |
| — |
| — |
| (2 | ) | — |
| — |
| (2 | ) | |
| Share-based employee compensation expense | — |
| — |
| — |
| — |
| 4,533 |
| — |
| 4,533 |
| |
| Balance - November 3, 2018 | 40,042 |
| $ | 1,175 |
| 77,453 |
| $ | (2,506,088 | ) | $ | 618,079 |
| $ | 2,479,566 |
| $ | 592,732 |
| |
| | | | | | |
| Thirty-Nine Weeks Ended November 3, 2018 | |
| Balance - February 3, 2018 | 41,925 |
| $ | 1,175 |
| 75,570 |
| $ | (2,422,396 | ) | $ | 622,550 |
| $ | 2,468,258 |
| $ | 669,587 |
| |
| Comprehensive income | — |
| — |
| — |
| — |
| — |
| 48,847 |
| 48,847 |
| |
| Dividends declared ($0.90 per share) | — |
| — |
| — |
| — |
| — |
| (37,539 | ) | (37,539 | ) | |
| Purchases of common shares | (2,635 | ) | — |
| 2,635 |
| (107,827 | ) | (3,920 | ) | — |
| (111,747 | ) | |
| Exercise of stock options | 43 |
| — |
| (43 | ) | 1,395 |
| 464 |
| — |
| 1,859 |
| |
| Restricted shares vested | 413 |
| — |
| (413 | ) | 13,263 |
| (13,263 | ) | — |
| — |
| |
| Performance shares vested | 296 |
| — |
| (296 | ) | 9,475 |
| (9,475 | ) | — |
| — |
| |
| Other | — |
| — |
| — |
| 2 |
| 1 |
| — |
| 3 |
| |
| Share-based employee compensation expense | — |
| — |
| — |
| — |
| 21,722 |
| — |
| 21,722 |
| |
| Balance - November 3, 2018 | 40,042 |
| $ | 1,175 |
| 77,453 |
| $ | (2,506,088 | ) | $ | 618,079 |
| $ | 2,479,566 |
| $ | 592,732 |
| |
| | | | | | | Shares | Amount | Shares | Amount | Additional
Paid-In
Capital | Retained Earnings | Total |
| Thirteen Weeks Ended November 2, 2019 | Thirteen Weeks Ended November 2, 2019 | Thirteen Weeks Ended November 2, 2019 |
| Balance - August 3, 2019 | 39,001 |
| $ | 1,175 |
| 78,494 |
| $ | (2,547,556 | ) | $ | 617,993 |
| $ | 2,572,931 |
| $ | 644,543 |
| Balance - August 3, 2019 | 39,001 | | $ | 1,175 | | 78,494 | | $ | (2,547,556) | | $ | 617,993 | | $ | 2,572,931 | | $ | 644,543 | |
| Comprehensive income | — |
| — |
| — |
| — |
| — |
| 126,982 |
| 126,982 |
| Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 126,982 | | 126,982 | |
| Dividends declared ($0.30 per share) | — |
| — |
| — |
| — |
| — |
| (11,954 | ) | (11,954 | ) | Dividends declared ($0.30 per share) | — | | 0 | | — | | 0 | | 0 | | (11,954) | | (11,954) | |
| Purchases of common shares | (18 | ) | — |
| 18 |
| (423 | ) | — |
| — |
| (423 | ) | Purchases of common shares | (18) | | 0 | | 18 | | (423) | | 0 | | 0 | | (423) | |
| Exercise of stock options | — |
| — |
| — |
| — |
| — |
| — |
| — |
| Exercise of stock options | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Restricted shares vested | 47 |
| — |
| (47 | ) | 1,526 |
| (1,526 | ) | — |
| — |
| Restricted shares vested | 47 | | 0 | | (47) | | 1,526 | | (1,526) | | 0 | | 0 | |
| Performance shares vested | 6 |
| — |
| (6 | ) | 204 |
| (204 | ) | — |
| — |
| Performance shares vested | 6 | | 0 | | (6) | | 204 | | (204) | | 0 | | 0 | |
| Other | — |
| — |
| — |
| (2 | ) | — |
| — |
| (2 | ) | Other | 0 | | 0 | | 0 | | (2) | | 0 | | 0 | | (2) | |
| Share-based employee compensation expense | — |
| — |
| — |
| — |
| 3,178 |
| — |
| 3,178 |
| Share-based employee compensation expense | — | | 0 | | — | | 0 | | 3,178 | | 0 | | 3,178 | |
| Balance - November 2, 2019 | 39,036 |
| $ | 1,175 |
| 78,459 |
| $ | (2,546,251 | ) | $ | 619,441 |
| $ | 2,687,959 |
| $ | 762,324 |
| Balance - November 2, 2019 | 39,036 | | $ | 1,175 | | 78,459 | | $ | (2,546,251) | | $ | 619,441 | | $ | 2,687,959 | | $ | 762,324 | |
| | | | | | | |
| Thirty-Nine Weeks Ended November 2, 2019 | Thirty-Nine Weeks Ended November 2, 2019 | Thirty-Nine Weeks Ended November 2, 2019 |
| Balance - February 2, 2019 | 40,042 |
| $ | 1,175 |
| 77,453 |
| $ | (2,506,086 | ) | $ | 622,685 |
| $ | 2,575,267 |
| $ | 693,041 |
| Balance - February 2, 2019 | 40,042 | | $ | 1,175 | | 77,453 | | $ | (2,506,086) | | $ | 622,685 | | $ | 2,575,267 | | $ | 693,041 | |
| Comprehensive income | — |
| — |
| — |
| — |
| — |
| 148,700 |
| 148,700 |
| Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 148,700 | | 148,700 | |
| Dividends declared ($0.90 per share) | — |
| — |
| — |
| — |
| — |
| (36,356 | ) | (36,356 | ) | Dividends declared ($0.90 per share) | — | | 0 | | — | | 0 | | 0 | | (36,356) | | (36,356) | |
| Adjustment for ASU 2016-02 | — |
| — |
| — |
| — |
| — |
| 348 |
| 348 |
| Adjustment for ASU 2016-02 | — | | — | | — | | — | | — | | 348 | | 348 | |
| Purchases of common shares | (1,474 | ) | — |
| 1,474 |
| (55,342 | ) | — |
| — |
| (55,342 | ) | Purchases of common shares | (1,474) | | 0 | | 1,474 | | (55,342) | | 0 | | 0 | | (55,342) | |
| Exercise of stock options | 6 |
| — |
| (6 | ) | 202 |
| (2 | ) | — |
| 200 |
| Exercise of stock options | 6 | | 0 | | (6) | | 202 | | (2) | | 0 | | 200 | |
| Restricted shares vested | 201 |
| — |
| (201 | ) | 6,521 |
| (6,521 | ) | — |
| — |
| Restricted shares vested | 201 | | 0 | | (201) | | 6,521 | | (6,521) | | 0 | | 0 | |
| Performance shares vested | 261 |
| — |
| (261 | ) | 8,459 |
| (8,459 | ) | — |
| — |
| Performance shares vested | 261 | | 0 | | (261) | | 8,459 | | (8,459) | | 0 | | 0 | |
| Other | — |
| — |
| — |
| (5 | ) | — |
| — |
| (5 | ) | Other | 0 | | 0 | | 0 | | (5) | | 0 | | 0 | | (5) | |
| Share-based employee compensation expense | — |
| — |
| — |
| — |
| 11,738 |
| — |
| 11,738 |
| Share-based employee compensation expense | — | | 0 | | — | | 0 | | 11,738 | | 0 | | 11,738 | |
| Balance - November 2, 2019 | 39,036 |
| $ | 1,175 |
| 78,459 |
| $ | (2,546,251 | ) | $ | 619,441 |
| $ | 2,687,959 |
| $ | 762,324 |
| Balance - November 2, 2019 | 39,036 | | $ | 1,175 | | 78,459 | | $ | (2,546,251) | | $ | 619,441 | | $ | 2,687,959 | | $ | 762,324 | |
| | Thirteen Weeks Ended October 31, 2020 | | Thirteen Weeks Ended October 31, 2020 |
| Balance - August 1, 2020 | | Balance - August 1, 2020 | 39,251 | | $ | 1,175 | | 78,244 | | $ | (2,537,359) | | $ | 617,496 | | $ | 3,246,848 | | $ | 1,328,160 | |
| Comprehensive income | | Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 29,910 | | 29,910 | |
| Dividends declared ($0.30 per share) | | Dividends declared ($0.30 per share) | — | | 0 | | — | | 0 | | 0 | | (11,993) | | (11,993) | |
| Purchases of common shares | | Purchases of common shares | (2,197) | | 0 | | 2,197 | | (100,690) | | 0 | | 0 | | (100,690) | |
| Exercise of stock options | | Exercise of stock options | 0 | | 0 | | 0 | | 10 | | 0 | | 0 | | 10 | |
| Restricted shares vested | | Restricted shares vested | 34 | | 0 | | (34) | | 1,102 | | (1,102) | | 0 | | 0 | |
| Performance shares vested | | Performance shares vested | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Other | | Other | 0 | | 0 | | 0 | | (2) | | 1 | | 0 | | (1) | |
| Share-based employee compensation expense | | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 10,906 | | 0 | | 10,906 | |
| Balance - October 31, 2020 | | Balance - October 31, 2020 | 37,088 | | $ | 1,175 | | 80,407 | | $ | (2,636,939) | | $ | 627,301 | | $ | 3,264,765 | | $ | 1,256,302 | |
| | Thirty-Nine Weeks Ended October 31, 2020 | | Thirty-Nine Weeks Ended October 31, 2020 |
| 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 | — | | 0 | | — | | 0 | | 0 | | 531,205 | | 531,205 | |
| Dividends declared ($0.90 per share) | | Dividends declared ($0.90 per share) | — | | 0 | | — | | 0 | | 0 | | (36,233) | | (36,233) | |
| Purchases of common shares | | Purchases of common shares | (2,316) | | 0 | | 2,316 | | (102,641) | | 0 | | 0 | | (102,641) | |
| Exercise of stock options | | Exercise of stock options | 3 | | 0 | | (3) | | 101 | | 7 | | 0 | | 108 | |
| Restricted shares vested | | Restricted shares vested | 298 | | 0 | | (298) | | 9,679 | | (9,679) | | 0 | | 0 | |
| Performance shares vested | | Performance shares vested | 65 | | 0 | | (65) | | 2,107 | | (2,107) | | 0 | | 0 | |
| Other | | Other | 1 | | 0 | | (1) | | 47 | | 8 | | 0 | | 55 | |
| Share-based employee compensation expense | | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 18,344 | | 0 | | 18,344 | |
| Balance - October 31, 2020 | | Balance - October 31, 2020 | 37,088 | | $ | 1,175 | | 80,407 | | $ | (2,636,939) | | $ | 627,301 | | $ | 3,264,765 | | $ | 1,256,302 | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands) |
| | | | | | | | |
| | Thirty-Nine Weeks Ended |
| | October 31, 2020 | November 2, 2019 |
| Operating activities: | | |
| Net income | $ | 531,205 | | $ | 148,700 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization expense | 105,136 | | 98,153 | |
| Non-cash lease amortization expense | 175,174 | | 171,564 | |
| Deferred income taxes | (49,973) | | 16,842 | |
| Non-cash impairment charge | 920 | | 3,292 | |
| Gain on disposition of property and equipment | (463,191) | | (178,431) | |
| Non-cash share-based compensation expense | 18,344 | | 11,738 | |
| Unrealized loss on fuel derivatives | 1,635 | | 126 | |
| Change in assets and liabilities: | | |
| Inventories | (167,801) | | (147,702) | |
| Accounts payable | 191,193 | | 79,092 | |
| Operating lease liabilities | (193,818) | | (163,970) | |
| Current income taxes | 62,204 | | 2,000 | |
| Other current assets | (7,738) | | (4,880) | |
| Other current liabilities | 36,823 | | 48,538 | |
| Other assets | 2,420 | | (2,066) | |
| Other liabilities | 24,877 | | (2,448) | |
| Net cash provided by operating activities | 267,410 | | 80,548 | |
| Investing activities: | | |
| Capital expenditures | (103,000) | | (231,889) | |
| Cash proceeds from sale of property and equipment | 588,231 | | 190,679 | |
| Other | (22) | | (21) | |
| Net cash provided by (used in) investing activities | 485,209 | | (41,231) | |
| Financing activities: | | |
| Net (repayments of) proceeds from long-term debt | (239,677) | | 140,926 | |
| Net financing proceeds from sale and leaseback | 123,435 | | 0 | |
| Payment of finance lease obligations | (2,962) | | (72,479) | |
| Dividends paid | (35,825) | | (36,707) | |
| Proceeds from the exercise of stock options | 108 | | 200 | |
| Payment for treasury shares acquired | (102,641) | | (55,342) | |
| Payments for debt issuance costs | 0 | | (150) | |
| Other | 53 | | (5) | |
| Net cash used in financing activities | (257,509) | | (23,557) | |
| Increase in cash and cash equivalents | 495,110 | | 15,760 | |
| Cash and cash equivalents: | | |
| Beginning of period | 52,721 | | 46,034 | |
| End of period | $ | 547,831 | | $ | 61,794 | |
|
| | | | | | |
| | Thirty-Nine Weeks Ended |
| | November 2, 2019 | November 3, 2018 |
| Operating activities: | | |
| Net income | $ | 148,700 |
| $ | 48,847 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
|
| Depreciation and amortization expense | 98,153 |
| 82,666 |
|
| Non-cash lease amortization expense | 171,564 |
| — |
|
| Deferred income taxes | 16,842 |
| (8,937 | ) |
| Non-cash impairment charge | 3,292 |
| — |
|
| (Gain) Loss on disposition of property and equipment | (178,431 | ) | 350 |
|
| Non-cash share-based compensation expense | 11,738 |
| 21,722 |
|
| Unrealized loss (gain) on fuel derivatives | 126 |
| (460 | ) |
| Change in assets and liabilities: | |
| |
|
| Inventories | (147,702 | ) | (201,095 | ) |
| Accounts payable | 79,092 |
| 128,409 |
|
| Operating lease liabilities | (163,970 | ) | — |
|
| Current income taxes | 2,000 |
| (35,540 | ) |
| Other current assets | (4,880 | ) | (15,626 | ) |
| Other current liabilities | 48,538 |
| 7,943 |
|
| Other assets | (2,066 | ) | 1,253 |
|
| Other liabilities | (2,448 | ) | 10,888 |
|
| Net cash provided by operating activities | 80,548 |
| 40,420 |
|
| Investing activities: | |
| |
|
| Capital expenditures | (231,889 | ) | (165,396 | ) |
| Cash proceeds from sale of property and equipment | 190,679 |
| 367 |
|
| Assets acquired under synthetic lease | — |
| (116,039 | ) |
| Other | (21 | ) | 35 |
|
| Net cash used in investing activities | (41,231 | ) | (281,033 | ) |
| Financing activities: | |
| |
|
| Net proceeds from long-term debt | 140,926 |
| 288,200 |
|
| Payment of finance lease obligations | (72,479 | ) | (2,899 | ) |
| Dividends paid | (36,707 | ) | (38,592 | ) |
| Proceeds from the exercise of stock options | 200 |
| 1,859 |
|
| Payment for treasury shares acquired | (55,342 | ) | (111,747 | ) |
| Proceeds from synthetic lease | — |
| 116,039 |
|
| Payments for debt issuance costs | (150 | ) | (1,488 | ) |
| Other | (5 | ) | 3 |
|
| Net cash (used in) provided by financing activities | (23,557 | ) | 251,375 |
|
| Increase in cash and cash equivalents | 15,760 |
| 10,762 |
|
| Cash and cash equivalents: | |
| |
|
| Beginning of period | 46,034 |
| 51,176 |
|
| End of period | $ | 61,794 |
| $ | 61,938 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| |
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) |
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All references in this report to “we,” “us,” or “our” are to Big Lots, Inc. and its subsidiaries. We are a neighborhood discount retailer operating in the United States (“U.S.”). At November 2, 2019,October 31, 2020, we operated 1,4181,411 stores in 47 states.states and an e-commerce platform. We make available, free of charge, through the “Investor Relations” section of our website (www.biglots.com) under the “SEC Filings” caption, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). The contents of our website are not incorporated into or otherwise part of this report.
The accompanying consolidated financial statements and these notes have been prepared in accordance with the rules and regulations of the SEC for interim financial information. The consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly our financial condition, results of operations, and cash flows for all periods presented. The consolidated financial statements, however, do not include all information necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Interim results may not necessarily be indicative of results that may be expected for, or actually result during, any other interim period or for the year as a whole.whole, including as a result of the COVID-19 coronavirus pandemic, which has disrupted and may continue to disrupt our business. We have historically experienced and expect to continue to experience, seasonal fluctuations, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter. However, due to demand volatility we have experienced during the COVID-19 coronavirus pandemic, the seasonality of our 2020 results may differ from our historical experience. The accompanying consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 2, 1, 2020 (“2019 (“2018 Form 10-K”).
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 2020 (“2020”) is comprised of the 52 weeks that began on February 2, 2020 and will end on January 30, 2021. Fiscal year 2019 (“2019”) iswas comprised of the 52 weeks that began on February 3, 2019 and will endended 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. The fiscal quarters ended October 31, 2020 (“third quarter of 2020”) and November 2, 2019 (“third quarter of 2019”) and November 3, 2018 (“third quarter of 2018”) were both comprised of 13 weeks. The year-to-date periods ended October 31, 2020 (“year-to-date 2020") and November 2, 2019 (“year-to-date 2019") and November 3, 2018 (“year-to-date 2018”2019”) were both comprised of 39 weeks.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of amounts on deposit with financial institutions, outstanding checks, credit and debit card receivables, and highly liquid investments, including money market funds, treasury bills and commercial paper, which are unrestricted to withdrawal or use and which have an original maturity of three months or less. We review cash and cash equivalent balances on a bank by bank basis in order to identify book overdrafts. Book overdrafts occur when the aggregate amount of outstanding checks and electronic fund transfers exceed the cash deposited at a given bank. We reclassify book overdrafts, if any, to accounts payable on our consolidated balance sheets.
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. Our selling and administrative expense rates may not be comparable to those of other retailers that include warehousing, distribution, and outbound transportation costs in cost of sales. Warehousing, distribution, and outbound transportation costs included in selling and administrative expenses were $48.8$66.3 million and $45.5$48.8 million for the third quarter of 20192020 and the third quarter of 2018,2019, respectively, and $137.1$178.3 million and $131.1$137.1 million for the year-to-date 20192020 and the year-to-date 2018,2019, respectively.
Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, digital, social media, internet and e-mail marketing and advertising, and in-store point-of-purchase signage and presentations. Advertising expenses are included in selling and administrative expenses. Advertising expenses were $18.2$24.4 million and $16.4$18.2 million for the third quarter of 20192020 and the third quarter of 2018,2019, respectively, and $57.9$69.2 million and $54.7$57.9 million for the year-to-date 20192020 and the year-to-date 2018,2019, respectively.
Derivative Instruments
We use derivative instruments to mitigate the risk of market fluctuations in the price of diesel fuel that we expect to consume to support our outbound transportation of inventory to our stores. We do not enter into derivative instruments for speculative purposes. Our derivative instruments may consist of collar or swap contracts. Our current derivative instruments do not meet the requirements for cash flow hedge accounting. Instead, our derivative instruments are marked-to-market to determine their fair value and any gains or losses are recognized currently in other income (expense) on our consolidated statements of operations and comprehensive income. For further information on our derivative instruments, see note 11.
Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for the year-to-date 20192020 and the year-to-date 2018:2019:
| | | | | | | | | | | |
| Thirty-Nine Weeks Ended |
| (In thousands) | October 31, 2020 | | November 2, 2019 |
| Supplemental disclosure of cash flow information: | | | |
| Cash paid for interest | $ | 5,864 | | | $ | 13,828 | |
| Cash paid for income taxes, excluding impact of refunds | 171,155 | | | 28,379 | |
| Gross proceeds from long-term debt | 514,500 | | | 1,425,400 | |
| Gross payments of long-term debt | 754,177 | | | 1,284,474 | |
| Gross financing proceeds from sale and leaseback | 133,999 | | | 0 | |
| Gross repayments of financing from sale and leaseback | 10,564 | | | 0 | |
| Cash paid for operating lease liabilities | 264,676 | | | 217,935 | |
| Non-cash activity: | | | |
| Assets acquired under finance leases | 0 | | | 70,831 | |
| Accrued property and equipment | 19,608 | | | 23,906 | |
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 661,182 | | | $ | 1,489,449 | |
|
| | | | | | | |
| | Thirty-Nine Weeks Ended |
| (In thousands) | November 2, 2019 | | November 3, 2018 |
| Supplemental disclosure of cash flow information: | |
| | |
|
| Cash paid for interest, including financing or capital leases | $ | 13,828 |
| | $ | 6,494 |
|
| Cash paid for income taxes, excluding impact of refunds | 28,379 |
| | 59,600 |
|
| Gross proceeds from long-term debt | 1,425,400 |
| | 1,376,400 |
|
| Gross payments of long-term debt | 1,284,474 |
| | 1,088,200 |
|
| Cash paid for operating lease liabilities | 217,935 |
| | — |
|
| Non-cash activity: | |
| | |
|
| Assets acquired under financing or capital leases | 70,831 |
| | 785 |
|
| Accrued property and equipment | 23,906 |
| | 37,440 |
|
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,489,449 |
| | $ | — |
|
Property and Equipment - Net
Depreciation and amortization expense of property and equipment are recorded on a straight-line basis using estimated service lives. We began a significant capital investment program in our store of the future concept in 2018, which resulted in us reviewing our 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, we changed the estimated service lives on leasehold improvements for new stores from 5 years to 10 years and for renovated stores from 5 years to 7 years, both of which more appropriately reflect the remaining lease term on these stores. 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.
Reclassification of Merchandise Categories
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,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).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 update requires a lessee to recognize, onnew guidance aligns cloud computing arrangement implementation cost accounting with the balance sheet, a liability to make lease payments and a right-of-use asset representing a right to usecapitalization requirements for internal-use software development, while leaving the underlying assetaccounting for the lease term. Additionally, this guidance expanded related disclosure requirements.service elements unchanged. On February 3, 2019,2, 2020, 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 unaudited consolidated financial statements. We elected to apply the following practical expedients and policy elections at adoption:
|
| | |
Practical expedient package | | We have not reassessed whether any expired or existing contracts are, or contain, leases. |
We have not reassessed the lease classification for any expired or existing leases. |
We have not reassessed initial direct costs for any expired or existing leases. |
Hindsight practical expedient | | We have not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. |
Separation of lease and non-lease components | | We have elected to establish an accounting policy to account for lease and non-lease components as a single component for our real estate class of assets. |
Short-term policy | | We have elected to establish a short-term lease exception policy, permitting us to not apply the recognition requirements of the new standard to short-term leases (i.e., leases with terms of 12 months or less). |
Adoption of this standard, in the first quarter of 2019, resulted in the recognition of right-of-use assets and lease liabilities for operating leases of $1,110 million and $1,138 million, respectively, with difference in amounts being primarily comprised of
pre-existing deferred rent and prepaid rent.2018-15 on a prospective basis. The impact of the adoption was immaterial to the consolidated statementsfinancial statements.
NOTE 2 – DEBT
Bank Credit Facility
On August 31, 2018, we entered into a $700 million five-yearfive-year unsecured credit facility (“2018 Credit Agreement”) that replaced our prior credit facility entered into in July 2011 and most recently amended in May 2015 (“2011 Credit Agreement”). The 2018 Credit Agreement expires on August 31, 2023. In connection with our entry into the 2018 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $1.5 million, which are being amortized over the term of the 2018 Credit Agreement.
Borrowings under the 2018 Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness. The 2018 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The interest rates, pricing and fees under the 2018 Credit Agreement fluctuate based on our debt rating. The 2018 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolving loans made under the 2018 Credit Agreement. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio. The covenants of the 2018 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with the synthetic lease for our new distribution center in California.Apple Valley, CA. A violation of any of the covenants could result in a default under the 2018 Credit Agreement that would permit the lenders to restrict our ability to further access the 2018 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2018 Credit Agreement. At November 2, 2019,October 31, 2020, we had $447.3 million of0 borrowings outstanding under the 2018 Credit Agreement, while $6.9$6.3 million was committed to outstanding letters of credit, leaving $245.8$693.7 million available under the 2018 Credit Agreement.
Secured Equipment Term Note
On August 7, 2019, we entered into a $70 million term note agreement (“2019 Term Note”), which is secured by the equipment at our new CaliforniaApple Valley, CA distribution center. The 2019 Term Note will expire on May 7, 2024. We are required to make monthly payments over the term of the 2019 Term Note and are permitted to prepay, subject to penalties, at any time. The interest rate on the 2019 Term Note is 3.3%. In connection with our entry into the 2019 Term Note, we paid debt issuance costs of $0.2 million.
Debt was recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
Instrument (In thousands) | | October 31, 2020 | | February 1, 2020 |
| 2019 Term Note | | $ | 53,815 | | | $ | 64,291 | |
| 2018 Credit Agreement | | 0 | | | 229,200 | |
| Total debt | | $ | 53,815 | | | $ | 293,491 | |
| Less current portion of long-term debt (included in Accrued operating expenses) | | $ | (14,381) | | | $ | (14,027) | |
| Long-term debt | | $ | 39,434 | | | $ | 279,464 | |
|
| | | | | | | | |
Instrument (In thousands) | | November 2, 2019 | | February 2, 2019 |
| 2019 Term Note | | $ | 67,726 |
| | $ | — |
|
| 2018 Credit Agreement | | 447,300 |
| | 374,100 |
|
| Total debt | | $ | 515,026 |
| | $ | 374,100 |
|
| Less current portion of long-term debt (included in Accrued operating expenses) | | $ | (13,911 | ) | | $ | — |
|
| Long-term debt | | $ | 501,115 |
| | $ | 374,100 |
|
NOTE 3 – FAIR VALUE MEASUREMENTS
In 2020, we invested a portion of the proceeds from the sale of four distribution centers (see note 9 for additional information on the sale and leaseback transactions) in money market fund investments and commercial paper investments. These highly liquid investments were recorded in cash and cash equivalents in our consolidated balance sheets at their fair value. The fair values of the money market fund investments were Level 1 valuations under the fair value hierarchy because each fund’s quoted market value per share was available in an active market. The fair values of the commercial paper investments were Level 2 valuations under the fair value hierarchy because the instruments’ market values were determined based on quoted market prices in active markets.
In connection with our nonqualified deferred compensation plan, we had mutual fund investments, of $32.5 million and $31.6 million at November 2, 2019 and February 2, 2019, respectively, which were recorded in other assets. These investments were classified as trading securities and were recorded at their fair value. The fair values of mutual fund investments were Level 1 valuations under the fair value hierarchy because each fund’s quoted market value per share was available in an active market.
As of October 31, 2020, the fair value of our investments were recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
| (In thousands) | Balance Sheet Location | October 31,
2020 | Level 1 | Level 2 |
| Assets: | | | | |
| Money market funds | Cash and cash equivalents | $ | 175,070 | | $ | 175,070 | | $ | 0 | |
| Commercial paper | Cash and cash equivalents | 29,996 | | 0 | | 29,996 | |
| Mutual funds - deferred compensation plan | Other Assets | $ | 30,777 | | $ | 30,777 | | $ | 0 | |
As of February 1, 2020, the fair value of our investments were recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
| (In thousands) | Balance Sheet Location | February 1,
2020 | Level 1 | Level 2 |
| Assets: | | | | |
| Money market funds | Cash and cash equivalents | $ | 0 | | $ | 0 | | $ | 0 | |
| Commercial paper | Cash and cash equivalents | 0 | | 0 | | 0 | |
| Mutual funds - deferred compensation plan | Other Assets | $ | 33,715 | | $ | 33,715 | | $ | 0 | |
The fair values of our long-term obligations under the 2018 Credit Agreement are estimated based on 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, theThe carrying value of these instruments approximates their fair value.was $0 as of October 31, 2020.
The fair value of our long-term obligations under the 2019 Term Note are based on quoted market prices and are classified as Level 2 within the fair value hierarchy. The carrying value of the instrument approximates its fair value.
The carrying value of accounts receivable and accounts payable approximates fair value because of the relatively short maturity of these items.
NOTE 4 – LEASES
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 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, 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 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 arrangement discussed below), restrictions, or covenants.
In November 2017, we entered into a synthetic lease arrangement for a new distribution center in California. The term of this lease commenced in the second quarter of 2019 and will expire five years after commencement. Under the prior accounting standard, this lease was accounted for as a capital lease due to certain construction period considerations; therefore, it was reflected in both our balance sheet and our future minimum lease obligations disclosure. As the lease commenced in the second quarter of 2019, we assessed the lease classification of the agreement and determined it was an operating lease under ASC 842; therefore, the lease is included in our operating lease right-of-use assets and operating lease liabilities in the below table as of November 2, 2019. The annual lease payments are approximately $7 million for the duration of the term. Additionally, this arrangement includes a residual value guarantee.
Leases were recorded in our consolidated balance sheets as follows:
|
| | | | |
| Leases | Balance Sheet Location | November 2, 2019 |
| Assets | | (In thousands) |
| Operating | Operating lease right-of-use assets | $ | 1,233,558 |
|
| Finance | Property and equipment - net | 8,755 |
|
| Total right-of-use assets | | $ | 1,242,313 |
|
| Liabilities | | |
| Current | | |
| Operating | Current operating lease liabilities | $ | 205,390 |
|
| Finance | Accrued operating expenses | 3,771 |
|
| Noncurrent | | |
| Operating | Noncurrent operating lease liabilities | 1,067,529 |
|
| Finance | Other liabilities | 5,635 |
|
| Total lease liabilities | $ | 1,282,325 |
|
The components of lease costs were as follows:
|
| | | | | | | | |
| | Statements of Operations and Comprehensive Income Location | Third Quarter | | Year-to-date |
| Lease cost | 2019 | | 2019 |
| | | (In thousands) |
| Operating lease cost | Selling and administrative expenses | $ | 71,721 |
| | $ | 214,771 |
|
| Finance lease cost | | | | |
| Amortization of leased assets | Depreciation | 1,427 |
| | 3,403 |
|
| Interest on lease liabilities | Interest expense | 598 |
| | 850 |
|
| Short-term lease cost | Selling and administrative expenses | 1,304 |
| | 4,386 |
|
| Variable lease cost | Selling and administrative expenses | 17 |
| | 237 |
|
| Total lease cost | $ | 75,067 |
| | $ | 223,647 |
|
Maturity |
| | | | | | | |
| Fiscal Year | Operating Leases | | Finance Leases |
| 2019 (represents the fourth quarter of 2019) | $ | 59,797 |
| | $ | 1,494 |
|
| 2020 | 291,127 |
| | 4,441 |
|
| 2021 | 257,137 |
| | 3,330 |
|
| 2022 | 220,601 |
| | 607 |
|
| 2023 | 186,539 |
| | 117 |
|
| Thereafter | 469,884 |
| | 71 |
|
| Total lease payments | $ | 1,485,085 |
| | $ | 10,060 |
|
| Less amount to discount to present value | $ | (212,166 | ) | | $ | (654 | ) |
| Present value of lease liabilities | $ | 1,272,919 |
| | $ | 9,406 |
|
Lease term and discount rate, for our operating leases, at November 2, 2019 were as follows:
|
| | |
| November 2, 2019 |
Weighted average remaining lease term (years) | 6.4 |
|
Weighted average discount rate | 4.2 | % |
Our weighted average discount rate represents our estimated incremental borrowing rate, assuming a secured borrowing, based on the remaining lease term at the time of adoption of the standard, lease commencement, or the period in which the lease term expectation was modified. Our finance leases, and the associated remaining lease term and discount rate, are insignificant.
Disclosures Related to Periods Prior to Adoption of ASC 842, Leases
Under ASC 840, Leases, future minimum rental commitments for leases, excluding closed store leases, real estate taxes, CAM, and property insurance, and scheduled payments for all capital leases at February 2, 2019, were as follows:
|
| | | | | | | |
| Fiscal Year | Operating Leases | | Capital Leases |
| 2019 (full 12 months) | $ | 279,844 |
| | $ | 9,050 |
|
| 2020 | 244,978 |
| | 10,815 |
|
| 2021 | 204,362 |
| | 9,725 |
|
| 2022 | 159,479 |
| | 6,992 |
|
| 2023 | 120,023 |
| | 6,512 |
|
| Thereafter | 310,474 |
| | 127,864 |
|
| Total lease payments | $ | 1,319,160 |
| | $ | 170,958 |
|
| Less amount to discount to present value | | | $ | (14,758 | ) |
| Present value of lease liabilities | | | $ | 156,200 |
|
NOTE 54 – SHAREHOLDERS’ EQUITY
Earnings per Share
There were no adjustments required to be made to the weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share. At October 31, 2020 and November 2, 2019, we excluded from securities outstanding for the computation of earnings per share, antidilutive stock options, restricted stock units, and performance share units, for which the minimum applicable performance conditions had not been attained as of October 31, 2020 and November 2, 2019. At November 3, 2018, there were no securities outstanding which were excluded from the computation of earnings per share other than antidilutive stock options, restricted stock units, and performance share units.2019, respectively. For the third quarter of 2019 and 2018, there were 0.1 million and 0.1 million2020, it was determined that an immaterial amount of stock options respectively, outstanding that were antidilutive as determined under the treasury stock method, and excluded from the computation of diluted earnings. Thereearnings per share, and for the third quarter of 2019, there were 0.1 million stock options outstanding that were antidilutive. Antidilutive stock options for the year-to-date 2019 that were antidilutive,2020 and for the year-to-date 2018, antidilutive options outstanding2019 were determined to be immaterial.immaterial and 0.1 million, respectively. Antidilutive stock options generally consist of outstanding stock options where the exercise price per share is greater than the weighted-average market price per share for our common shares for each period. Antidilutive stock options, restricted stock units and performance share units are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. The restricted stock units and performance share units that were antidilutive, as determined under the treasury stock method, were immaterial and 0.5 million for the third quarter of 20192020 and determined to be immaterial for the third quarter of 2018. The restricted stock units2019, respectively, and performance share units that were antidilutive, as determined under the treasury stock method, wereimmaterial and 0.4 million for the year-to-date 2019, while2020 and the year-to-date 2018 units were immaterial.2019, respectively.
Share Repurchase Programs
On March 6, 2019,August 27, 2020, our Board of Directors (“Board”) authorized a share repurchase program providing for the repurchase of $50up to $500 million of our common shares (“20192020 Repurchase Program”Authorization”). Pursuant to the 2020 Repurchase Authorization, we may repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Common shares acquired through the 2020 Repurchase Authorization will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 20192020 Repurchase Program was exhausted during the second quarter of 2019.Authorization has no scheduled termination date.
During the year-to-date 2019,third quarter of 2020, we acquired approximately 1.32.2 million of our outstanding common shares for $50.0$100.0 million under the 20192020 Repurchase Program.Authorization.
Dividends
The Company declared and paid cash dividends per common share during the quarterly periods presented as follows:
| | | | | | | | | | | | | | | | | |
| Dividends
Per Share | | Amount Declared | | Amount Paid |
| 2020: | | | (In thousands) | | (In thousands) |
| First quarter | $ | 0.30 | | | $ | 11,905 | | | $ | 12,478 | |
| Second quarter | 0.30 | | | 12,335 | | | 11,807 | |
| Third quarter | 0.30 | | | 11,993 | | | 11,540 | |
| Total | $ | 0.90 | | | $ | 36,233 | | | $ | 35,825 | |
| | | | | |
|
| | | | | | | | | | | |
| | Dividends
Per Share | | Amount Declared | | Amount Paid |
| 2019: | | | (In thousands) | | (In thousands) |
| First quarter | $ | 0.30 |
| | $ | 12,206 |
| | $ | 13,197 |
|
| Second quarter | $ | 0.30 |
| | $ | 12,196 |
| | $ | 11,718 |
|
| Third quarter | $ | 0.30 |
| | $ | 11,954 |
| | $ | 11,792 |
|
| Total | $ | 0.90 |
| | $ | 36,356 |
| | $ | 36,707 |
|
| | | | | | |
The amount of dividends declared may vary from the amount of dividends paid in a period due to the vesting of restricted stock units and performance share units.units, which accrue dividend equivalent rights that are paid when the award vests. The payment of future dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with applicable laws and agreements and any other factors deemed relevant by our Board.Board of Directors.
NOTE 65 – SHARE-BASED PLANS
We have issued nonqualified stock options, restricted stock awards, restricted stock units, and performance share units under our shareholder-approved equity compensation plans. At October 31, 2020, the number of nonqualified stock options outstanding was immaterial. Our restricted stock units and performance share units, as described below, are expensed and reported as non-vested shares. We recognized share-based compensation expense of $3.2$10.9 million and $4.5$3.2 million in the third quarter of 20192020 and the third quarter of 2018,2019, respectively, and $11.7$18.3 million and $21.7$11.7 million for the year-to-date 20192020 and the year-to-date 2018,2019, respectively.
Non-vested Restricted Stock Units
The following table summarizes the non-vested restricted stock units activity for the year-to-date 2019:2020:
| | | | | | | | |
| Number of Shares | Weighted Average Grant-Date Fair Value Per Share |
| Outstanding non-vested restricted stock units at February 1, 2020 | 648,510 | | $ | 38.52 | |
| Granted | 921,309 | | 15.82 | |
| Vested | (239,856) | | 43.07 | |
| Forfeited | (1,511) | | 38.06 | |
| Outstanding non-vested restricted stock units at May 2, 2020 | 1,328,452 | | $ | 21.95 | |
| Granted | 74,244 | | 33.20 | |
| Vested | (24,498) | | 27.99 | |
| Forfeited | (41,074) | | 25.26 | |
| Outstanding non-vested restricted stock units at August 1, 2020 | 1,337,124 | | $ | 22.35 | |
| Granted | 33,868 | | 49.83 | |
| Vested | (33,628) | | 37.45 | |
| Forfeited | (108,120) | | 21.93 | |
| Outstanding non-vested restricted stock units at October 31, 2020 | 1,229,244 | | $ | 22.68 | |
|
| | | | | |
| Number of Shares | Weighted Average Grant-Date Fair Value Per Share |
| Outstanding non-vested restricted stock units at February 2, 2019 | 483,182 |
| $ | 46.50 |
|
| Granted | 333,222 |
| 36.45 |
|
| Vested | (141,820 | ) | 47.72 |
|
| Forfeited | (20,418 | ) | 42.73 |
|
| Outstanding non-vested restricted stock units at May 4, 2019 | 654,166 |
| $ | 41.25 |
|
| Granted | 46,487 |
| 27.86 |
|
| Vested | (12,509 | ) | 40.74 |
|
| Forfeited | (9,110 | ) | 40.43 |
|
| Outstanding non-vested restricted stock units at August 3, 2019 | 679,034 |
| $ | 40.35 |
|
| Granted | 35,011 |
| 22.14 |
|
| Vested | (47,001 | ) | 43.38 |
|
| Forfeited | (32,597 | ) | 40.94 |
|
| Outstanding non-vested restricted stock units at November 2, 2019 | 634,447 |
| $ | 39.09 |
|
The non-vested restricted stock units granted in the year-to-date 20192020 generally vest and are expensed on a ratable basis over three years from the grant date of the award, if certaina threshold financial performance objectives areobjective is achieved and the grantee remains employed by us through the vesting dates.
Non-vested Restricted Stock Units Granted to Non-Employee Directors
In the second quarter of 2019, 11,6322020, 44,229 common shares underlying the restricted stock units granted in 20182019 to the non-employee members of our Board vested on the trading day immediately preceding our 20192020 Annual Meeting of Shareholders (“20192020 Annual Meeting”). These units were part of the annual compensation toof the non-employee membersdirectors of the Board. Additionally, in the second quarter of 2019,2020, the chairman of our Board received an annual restricted stock unit grant having a grant date fair value of approximately $210,000. The remaining non-employees elected to our Board at our 20192020 Annual Meeting each received an annual restricted stock unit grant having a grant date fair value of approximately $145,000. The 20192020 restricted stock units will vest on the earlier of (1) the trading day immediately preceding our 20202021 Annual Meeting of Shareholders, or (2) the non-employee director’s death or disability. However, the non-employee directors will forfeit their restricted stock units will not vest if their service on the non-employee director ceases to serve on our Board terminates before either vesting event occurs.
Performance Share Units
In 2020, we awarded performance share units with a restriction feature to certain members of senior management, which vest based on the year-to-date 2019,achievement of share price performance goals and a minimum service requirement of one year (“RPSUs”). The RPSUs have a contractual term of three years. We use a Monte Carlo simulation to estimate the fair value of the RPSUs on the grant date and recognize expense over the derived service period. If the share price performance goals applicable to the RPSUs are not achieved prior to expiration, the unvested portion of the awards will be forfeited. Shares issued in connection with vested RPSUs are generally restricted from sale, transfer, or other disposition prior to the third anniversary of the grant date except under certain circumstances, including death, disability, or change in control.
Prior to 2020, we issuedawarded performance share units (“PSUs”) to certain members of management, which will vest if certain financial performance objectives are achieved over a three-yearthree-year performance period and the grantee remains employed by us during the performance period. TheTypically, the financial performance objectives for each fiscal year within the three-year performance period will be approved by the Compensation Committee of our Board of Directors during the first quarter of the respective fiscal year. In 2020, due to the lack of business visibility resulting from the COVID-19 pandemic, the Compensation Committee chose to defer the establishment of the 2020 performance objectives until the third quarter of 2020.
As a result of the process used to establish the financial performance objectives, we will only meet the requirements for establishing a grant date for the PSUs when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.
In the third quarter of 2020, the Compensation Committee established the financial performance objectives for the third fiscal year of PSUs issued in 2018; therefore, the 2018 PSUs were deemed granted in August 2020.
We have begun or expect to begin recognizing expense related to PSUs and RPSUs as follows:
| | | | | | | | | | | | | | |
| Issue Year | Outstanding PSUs and RPSUs at October 31, 2020 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
| 2018 | 136,199 | | August 2020 | | Fiscal 2020 |
| 2019 | 266,118 | | | March 2021 | Fiscal 2021 |
| 2020 | 339,568 | | April 2020 | | Fiscal 2020 - 2021 |
| Total | 741,885 | | | | |
|
| | | | | |
| Issue Year | Outstanding PSUs at November 2, 2019 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
| 2017 | 184,779 |
| March 2019 | | Fiscal 2019 |
| 2018 | 195,182 |
| | March 2020 | Fiscal 2020 |
| 2019 | 322,379 |
| | March 2021 | Fiscal 2021 |
| Total | 702,340 |
| | | |
The number of shares to be distributed upon vesting of the PSUs depends on the average performance attained during the three-year performance period compared to the performance targets established by the Compensation Committee, and may result in the distribution of an amount of shares that is greater or less than the number of PSUs granted, as defined in the related award agreement. At November 2, 2019, we estimate the attainment of an average performance that is lower than the targets established for the PSUs issued in 2017, but above the minimum attainment for vesting. We recognized $0.2$7.8 million and $2.1$0.2 million in the third quarter of 20192020 and 2018,2019, respectively, and $2.5$9.4 million and $13.3$2.5 million in the year-to-date 20192020 and 2018,2019 respectively, of share-based compensation expense related to PSUs.
The following table summarizes the activity related to PSUs and RPSUs for the year-to-date 2019:2020:
| | | | | | | | |
| Number of Units | Weighted Average Grant-Date Fair Value Per Share |
| Outstanding PSUs and RPSUs at February 1, 2020 | 181,922 | | $ | 31.89 | |
| Granted | 408,340 | | 11.70 | |
| Vested | (181,062) | | 31.89 | |
| Forfeited | (860) | | 31.89 | |
| Outstanding PSUs and RPSUs at May 2, 2020 | 408,340 | | $ | 11.70 | |
| Granted | 4,682 | | 29.44 | |
| Vested | 0 | | 0 | |
| Forfeited | (12,450) | | 11.70 | |
| Outstanding PSUs and RPSUs at August 1, 2020 | 400,572 | | $ | 11.90 | |
| Granted | 167,263 | | 55.71 | |
| Vested | 0 | | 0 | |
| Forfeited | (92,068) | | 26.81 | |
| Outstanding PSUs and RPSUs at October 31, 2020 | 475,767 | | $ | 24.42 | |
|
| | | | | |
| | Number of Units | Weighted Average Grant-Date Fair Value Per Share |
| Outstanding PSUs at February 2, 2019 | 282,083 |
| $ | 55.67 |
|
| Granted | 217,518 |
| 31.89 |
|
| Vested | (275,308 | ) | 55.67 |
|
| Forfeited | (8,144 | ) | 31.89 |
|
| Outstanding PSUs at May 4, 2019 | 216,149 |
| $ | 32.51 |
|
| Granted | — |
| — |
|
| Vested | — |
| — |
|
| Forfeited | (3,954 | ) | 31.89 |
|
| Outstanding PSUs at August 3, 2019 | 212,195 |
| $ | 32.52 |
|
| Granted | — |
| — |
|
| Vested | (6,775 | ) | 55.67 |
|
| Forfeited | (20,641 | ) | 31.89 |
|
| Outstanding PSUs at November 2, 2019 | 184,779 |
| $ | 31.89 |
|
Stock Options
The following table summarizes stock option activity for the year-to-date 2019:
|
| | | | | | | | | |
| Number of Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (000's) |
| Outstanding stock options at February 2, 2019 | 237,501 |
| $ | 38.30 |
| | |
| Exercised | (6,250 | ) | 32.04 |
| | |
| Forfeited | (77,500 | ) | 43.85 |
| | |
| Outstanding stock options at May 4, 2019 | 153,751 |
| $ | 35.76 |
| 0.9 | $ | 288 |
|
| Exercised | — |
| — |
| | |
| Forfeited | — |
| — |
| | |
| Outstanding stock options at August 3, 2019 | 153,751 |
| $ | 35.76 |
| 0.6 | $ | — |
|
| Exercised | — |
| — |
| | |
| Forfeited | (5,000 | ) | 30.82 |
| | |
| Outstanding stock options at November 2, 2019 | 148,751 |
| $ | 35.93 |
| 0.4 | $ | — |
|
| Vested or expected to vest at November 2, 2019 | 148,751 |
| $ | 35.93 |
| 0.4 | $ | — |
|
| Exercisable at November 2, 2019 | 148,751 |
| $ | 35.93 |
| 0.4 | $ | — |
|
The stock options granted in prior years vest in equal amounts on the first four anniversaries
The following activity occurred under our share-based plans during the respective periods shown:
| | | | | | | | | | | | | | | | | |
| Third Quarter | | Year-to-Date |
| (In thousands) | 2020 | 2019 | | 2020 | 2019 |
| Total intrinsic value of stock options exercised | $ | 4 | | $ | 0 | | | $ | 16 | | $ | 42 | |
| Total fair value of restricted stock vested | 1,694 | | 1,051 | | | 6,584 | | 6,434 | |
| Total fair value of performance shares vested | $ | 0 | | $ | 143 | | | $ | 924 | | $ | 9,849 | |
|
| | | | | | | | | | | | | |
| | Third Quarter | | Year-to-Date |
| (In thousands) | 2019 | 2018 | | 2019 | 2018 |
| Total intrinsic value of stock options exercised | $ | — |
| $ | 220 |
| | $ | 42 |
| $ | 228 |
|
| Total fair value of restricted stock vested | 1,051 |
| 1,042 |
| | 6,434 |
| 19,230 |
|
| Total fair value of performance shares vested | $ | 143 |
| $ | — |
| | $ | 9,849 |
| $ | 12,792 |
|
The total unearned compensation cost related to all share-based awards outstanding, excluding PSUs issued in 2018 and 2019, at November 2, 2019October 31, 2020 was approximately $16.3$25.0 million. This compensation cost is expected to be recognized through October 2022September 2023 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 1.91.7 years from November 2, 2019.October 31, 2020.
NOTE 76 – INCOME TAXES
We have estimated the reasonably possible expected net change in unrecognized tax benefits through November 1, 2020,October 30, 2021, based on (1) expected cash and noncash settlements or payments of uncertain tax positions, and (2) lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0$3.0 million. Actual results may differ materially from this estimate.
NOTE 87 – CONTINGENCIES
California Wage and Hour Matters
We currently are defending three purportedseveral wage and hour class actions and several individual representative actionsmatters in California. The cases were brought by various current and/or former California associates alleging various violations of California wage and hour laws. Upon furtherDuring the first quarter of 2019, upon consideration of these matters, including outcomes of cases against other retailers, during the first quarter of 2019, we determined a loss from these matters was probable and we increased our accrual for litigation by recording a $7.3 million charge as our best estimate for these matters in aggregate. Since
During the end of the firstthird quarter of 2019,2020, we reached tentativesettlement agreements in our two largest wage and hour class action matters in California and the settlements in each ofwere preliminarily approved by the class actions, subject to final documentation and court approval.court. The settlements were consistent with the previously accrued loss contingencies for these matters. We intend to defend ourselves vigorously against the allegations levied in the remaining lawsuits. We believe the existing accrual for litigation remains appropriate.
Other Matters
We are involved in other legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material effect on our financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material effect on our financial condition, results of operations, and liquidity.
NOTE 9 – RESTRUCTURING COSTS
In March 2019, we announced a transformational restructuring initiative to both drive growth in our net sales and reduce costs within our business. We expect to generate costs savings from this initiative through improved markdown and merchandise management, reduced management layers, optimization of store labor, improved efficiencies in our supply chain, and reduced central and other costs. As we implement this initiative, we have incurred upfront costs, including employee severance costs and consultancy fees, and made payments to execute the initiative.
During the first quarter of 2019, we incurred $15.3 million in costs associated with our transformational restructuring initiative, which were recorded in selling and administrative expenses. During the second quarter of 2019, we incurred an additional $19.5 million in costs from this initiative. In the third quarter of 2019, we incurred $3.6 million in costs associated with this initiative. We expect any additional costs recorded during the fourth quarter of 2019 with respect to this initiative to be immaterial.
The changes in our liabilities associated with severance and postemployment benefits, which are recorded in accrued operating expenses, during the year-to-date 2019 were as follows (in thousands):
|
| | | | |
| Balance at February 2, 2019 | | $ | — |
|
| Charges | | 7,253 |
|
| Payments | | (803 | ) |
| Other | | — |
|
| Balance at May 4, 2019 | | $ | 6,450 |
|
| Charges | | 7,344 |
|
| Payments | | (1,882 | ) |
| Other | | (1,182 | ) |
| Balance at August 3, 2019 | | $ | 10,730 |
|
| Charges | | — |
|
| Payments | | (5,276 | ) |
| Other | | (347 | ) |
| Balance at November 2, 2019 | | $ | 5,107 |
|
NOTE 108 – BUSINESS SEGMENT DATA
We use the following seven merchandise categories, which match our internal management and reporting of merchandise net sales: Food, Consumables,Food; Consumables; Soft Home,Home; Hard Home, Furniture, Seasonal,Home; Furniture; Seasonal; and Electronics, Toys, & Accessories. The Food category includes our beverage & grocery,grocery; candy & snacks,snacks; and specialty foods departments. The Consumables category includes our health, beauty and cosmetics, plastics, paper, chemical,cosmetics; plastics; paper; chemical; and pet departments. The Soft Home category includes the home décor, frames,cor; frames; fashion bedding,bedding; utility bedding, bath, window,bedding; bath; window; decorative textile,textile; home organizationorganization; and area rugs departments. The Hard Home category includes our small appliances,appliances; table top,top; food preparation, stationery,preparation; stationery; greeting cards,cards; and home maintenance departments. The Furniture category includes our upholstery, mattress, ready-to-assemble,upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden, summer, Christmas,garden; summer; Christmas; and other holiday departments. The Electronics, Toys, & Accessories category includes our electronics, jewelry, hosiery,electronics; jewelry; hosiery; apparel; and toys departments.
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.
The following table presents net sales data by merchandise category:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Year-to-Date |
| (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Furniture | | $ | 429,305 | | | $ | 344,103 | | | $ | 1,284,743 | | | $ | 1,031,357 | |
| Soft Home | | 253,700 | | | 206,493 | | | 770,078 | | | 606,397 | |
| Consumables | | 216,515 | | | 198,467 | | | 679,007 | | | 581,925 | |
| Food | | 181,710 | | | 180,687 | | | 570,540 | | | 530,970 | |
| Seasonal | | 100,829 | | | 94,225 | | | 596,850 | | | 523,822 | |
| Electronics, Toys, & Accessories | | 100,294 | | | 64,180 | | | 272,704 | | | 198,143 | |
| Hard Home | | 95,572 | | | 79,833 | | | 287,349 | | | 243,584 | |
| Net sales | | $ | 1,377,925 | | | $ | 1,167,988 | | | $ | 4,461,271 | | | $ | 3,716,198 | |
|
| | | | | | | | | | | | | | | | |
| | | Third Quarter | | Year-to-Date |
| (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Furniture | | $ | 344,103 |
| | $ | 313,450 |
| | $ | 1,031,357 |
| | $ | 941,022 |
|
| Soft Home | | 206,493 |
| | 203,328 |
| | 606,397 |
| | 585,850 |
|
| Consumables | | 198,467 |
| | 194,480 |
| | 581,925 |
| | 573,215 |
|
| Food | | 180,687 |
| | 185,641 |
| | 530,970 |
| | 549,576 |
|
| Seasonal | | 94,225 |
| | 90,824 |
| | 523,822 |
| | 508,397 |
|
| Hard Home | | 79,833 |
| | 92,275 |
| | 243,584 |
| | 271,916 |
|
| Electronics, Toys, & Accessories | | 64,180 |
| | 69,404 |
| | 198,143 |
| | 209,578 |
|
| Net sales | | $ | 1,167,988 |
| | $ | 1,149,402 |
| | $ | 3,716,198 |
| | $ | 3,639,554 |
|
NOTE 11 – DERIVATIVE INSTRUMENTS
We enter into derivative instruments, particularly collar contracts designed to mitigate our risk associated with market fluctuations in diesel fuel prices. These contracts are used strictly to limit our risk exposure and not as speculative transactions. Our derivative instruments associated with diesel fuel do not meet the requirements for cash flow hedge accounting. Therefore, our derivative instruments associated with diesel fuel will be marked-to-market to determine their fair value and the associated gains and losses will be recognized currently in other income (expense) on our consolidated statements of operations and comprehensive income.
Our outstanding derivative instrument contracts were comprised of the following:
|
| | | | | |
| (In thousands) | November 2, 2019 | | February 2, 2019 |
| Diesel fuel collars (in gallons) | 4,500 |
| | 7,200 |
|
The fair value of our outstanding derivative instrument contracts was as follows:
|
| | | | | | | | |
| (In thousands) | | Assets (Liabilities) |
| Derivative Instrument | Balance Sheet Location | November 2, 2019 | | February 2, 2019 |
| Diesel fuel collars | Other current assets | $ | 157 |
| | $ | 523 |
|
| | Other assets | 297 |
| | 203 |
|
| | Accrued operating expenses | (672 | ) | | (586 | ) |
| | Other liabilities | (594 | ) | | (825 | ) |
| Total derivative instruments | $ | (812 | ) | | $ | (685 | ) |
The effect of derivative instruments on the consolidated statements of operations and comprehensive income was as follows:
|
| | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) |
| (In thousands) | | Third Quarter | | Year-to-Date |
| Derivative Instrument | Statements of Operations and Comprehensive Income Location | 2019 | | 2018 | | 2019 | | 2018 |
| Diesel fuel collars | | | | | | | | |
| Realized | Other income (expense) | $ | (47 | ) | | $ | 154 |
| | $ | (71 | ) | | $ | 279 |
|
| Unrealized | Other income (expense) | (278 | ) | | (102 | ) | | (126 | ) | | 460 |
|
| Total derivative instruments | $ | (325 | ) | | $ | 52 |
| | $ | (197 | ) | | $ | 739 |
|
The fair values of our derivative instruments are determined using observable inputs from commonly quoted markets. These fair value measurements are classified as Level 2 within the fair value hierarchy.
NOTE 129 – GAIN ON SALE OF DISTRIBUTION CENTERCENTERS
On October 30,June 12, 2020, we completed sale and leaseback transactions for our distribution centers located in Columbus, OH; Durant, OK; Montgomery, AL; and Tremont, PA. The aggregate sale price for the transactions was $725.0 million. Due to sale-leaseback accounting requirements, the proceeds received in the transactions were allocated between proceeds on the sale of the distribution centers and financing proceeds. Accordingly, aggregate net proceeds, before income taxes, on the sales of the distribution centers were $586.9 million and the aggregate gain on the sales was $463.1 million. Additionally, we incurred $4.0 million of additional selling and administrative expenses in connection with the transaction, which primarily consisted of consulting services. The remainder of consideration received was financing liability proceeds of $134.0 million. The current portion of the financing liability was recorded in accrued operating expenses in our consolidated balance sheets. The noncurrent portion of the financing liability was recorded in other liabilities in our consolidated balance sheets. Interest expense will be recognized on the financing liability using the effective interest method and the financing liability will be accreted over the duration of the lease agreements. Future payments to the buyer-lessor will be allocated between the financing liability and the lease liabilities.
The leases for the Columbus, OH and Montgomery, AL distribution centers each have an initial term of 15 years and multiple five-year extension options. The leases for the 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 extension options were reasonably certain to be exercised. Therefore, none of the extension options were included in the computation of the operating lease liabilities and operating lease right-of-use assets. At commencement of the leases, 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. In connection with our entrance into the sale and leaseback transactions, we agreed to repay all borrowings outstanding under the 2018 Credit Agreement and restrict our borrowings under the 2018 Credit Agreement for 90 days following closing of the transactions.
Aggregate initial annual cash payments to the buyer-lessor, including payments of the financing liability and lease payments, are approximately $50 million and the payments escalate two percent annually. Aggregate annual straight-line rent expense for the four leases is approximately $46 million. Aggregate initial annual interest expense on the financing liability, which will decrease over the term, is approximately $8 million.
In the third quarter of 2019, we completed the sale of our distribution center located in Rancho Cucamonga, California. As part of our agreement with the purchaser, we will lease the property back from the purchaserCA for six months while we wind down our operations at the distribution center. The lease permits us to exit the lease early or extend the lease for up to six additional months. Net proceeds from the sale of the distribution center were $190.3 million and oura gain on the sale wasof $178.5 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.
Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “approximate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.
Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, developments related to the COVID-19 coronavirus pandemic, the current economic and credit conditions, the cost of goods, our inability to successfully execute strategic initiatives, competitive pressures, economic pressures on our customers and us, the availability of brand name closeout merchandise, trade restrictions, freight costs, the risks discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, and other factors discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report should be read in conjunction with such filings, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.
OVERVIEW
The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes. Each term defined in the notes has the same meaning in this item and the balance of this report.
The following are the results from the third quarter of 20192020 that we believe are key indicators of our operating performance when compared to our operating performance from the third quarter of 2018:2019:
•Net sales increased $18.6$209.9 million, or 1.6%18.0%.
•Comparable store sales for stores open at least fifteen months, plus our e-commerce operations, decreased $1.4increased $196.2 million, or 0.1%17.8%.
•Gross margin dollars increased $4.2$94.5 million, while gross margin rate declined 20increased 80 basis points to 39.7%40.5% of net sales.
•Selling and administrative expenses decreased $0.1increased $45.6 million. As a percentage of net sales, selling and administrative expenses decreased 60240 basis points to 37.4%35.0% of net sales.
We•Diluted earnings per share decreased to $0.76 per share from $3.25 per share.
•In the third quarter of 2019, we recorded a gain on sale of distribution center of $178.5 million related to the sale of our distribution center located in Rancho Cucamonga, California,CA, which increased our operating profit by $178.5 million and increased our diluted earnings per share for the third quarter of 2019 by approximately $3.49 per share.
Operating profit rate increased to 14.6%.
Diluted earnings per share increased to $3.25 per share from a loss per share of $0.16 per share.
•Inventory increaseddecreased by 4.0%2.5%, or $43.4$28.2 million, to $1,117.3$1,089.1 million from the third quarter of 2018.2019.
•Cash and cash equivalents increased by $486.0 million to $547.8 million from the third quarter of 2019.
•We declared and paid a quarterly cash dividend in the amount of $0.30 per common share in the third quarter of 20192020 consistent with the quarterly cash dividend of $0.30 per common share paid in the third quarter of 2018.2019.
•We acquired 2.2 million of our outstanding common shares for $100.0 million under our 2020 Repurchase Authorization.
See the discussion and analysis below for additional details regarding our operating results.
STORES
The following table presents stores opened and closed during the year-to-date 20192020 and the year-to-date 2018:2019:
| | | | | | | | | | | |
| | 2020 | 2019 |
| Stores open at the beginning of the fiscal year | 1,404 | | 1,401 | |
| Stores opened during the period | 24 | | 50 | |
| Stores closed during the period | (17) | | (33) | |
| Stores open at the end of the period | 1,411 | | 1,418 | |
|
| | | | | |
| | | 2019 | 2018 |
| Stores open at the beginning of the fiscal year | 1,401 |
| 1,416 |
|
| Stores opened during the period | 50 |
| 20 |
|
| Stores closed during the period | (33 | ) | (21 | ) |
| Stores open at the end of the period | 1,418 |
| 1,415 |
|
We do not expect to open 54any stores, and closewhile closing approximately 50three stores during 2019.in the fourth quarter of 2020. Therefore, we expect our store count at the end of 2020 to be approximately 1,408 stores.
RESULTS OF OPERATIONS
The following table compares components of our consolidated statements of operations and comprehensive income as a percentage of net sales at the end of each period:
| | | | | | | | | | | | | | |
| Third Quarter | Year-to-Date |
| 2020 | 2019 | 2020 | 2019 |
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of sales (exclusive of depreciation expense shown separately below) | 59.5 | | 60.3 | | 59.4 | | 60.2 | |
| Gross margin | 40.5 | | 39.7 | | 40.6 | | 39.8 | |
| Selling and administrative expenses | 35.0 | | 37.4 | | 32.4 | | 36.4 | |
| Depreciation expense | 2.4 | | 3.0 | | 2.3 | | 2.6 | |
| Gain on sale of distribution center | 0.0 | | (15.3) | | (10.4) | | (4.8) | |
| Operating profit | 3.1 | | 14.6 | | 16.3 | | 5.6 | |
| Interest expense | (0.2) | | (0.5) | | (0.2) | | (0.4) | |
| Other income (expense) | (0.0) | | (0.0) | | (0.1) | | (0.0) | |
| Income before income taxes | 2.9 | | 14.1 | | 16.0 | | 5.3 | |
| Income tax expense | 0.7 | | 3.2 | | 4.1 | | 1.3 | |
| Net income | 2.2 | % | 10.9 | % | 11.9 | % | 4.0 | % |
|
| | | | | | | | |
| | Third Quarter | Year-to-Date |
| | 2019 | 2018 | 2019 | 2018 |
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of sales (exclusive of depreciation expense shown separately below) | 60.3 |
| 60.1 |
| 60.2 |
| 59.8 |
|
| Gross margin | 39.7 |
| 39.9 |
| 39.8 |
| 40.2 |
|
| Selling and administrative expenses | 37.4 |
| 38.0 |
| 36.4 |
| 35.8 |
|
| Depreciation expense | 3.0 |
| 2.8 |
| 2.6 |
| 2.5 |
|
| Gain on sale of distribution center | (15.3 | ) | 0.0 |
| (4.8 | ) | 0.0 |
|
| Operating profit (loss) | 14.6 |
| (0.8 | ) | 5.6 |
| 1.9 |
|
| Interest expense | (0.5 | ) | (0.3 | ) | (0.4 | ) | (0.2 | ) |
| Other income (expense) | (0.0 | ) | 0.0 |
| (0.0 | ) | 0.0 |
|
| Income (loss) before income taxes | 14.1 |
| (1.1 | ) | 5.3 |
| 1.7 |
|
| Income tax expense (benefit) | 3.2 |
| (0.5 | ) | 1.3 |
| 0.4 |
|
| Net income (loss) | 10.9 | % | (0.6 | )% | 4.0 | % | 1.3 | % |
THIRD QUARTER OF 20192020 COMPARED TO THIRD QUARTER OF 20182019
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 comparable store sales (“comp” or “comps”) in the third quarter of 20192020 compared to the third quarter of 20182019 were as follows:
| | | Third Quarter | Third Quarter | Third Quarter |
| ($ in thousands) | 2019 | | 2018 | | Change | | Comps | ($ in thousands) | 2020 | | 2019 | | Change | | Comps |
| Furniture | $ | 344,103 |
| 29.4 | % | | $ | 313,450 |
| 27.3 | % | | $ | 30,653 |
| 9.8 | % | | 6.4 | % | Furniture | $ | 429,305 | | 31.2 | % | | $ | 344,103 | | 29.4 | % | | $ | 85,202 | | 24.8 | % | | 23.7 | % |
| Soft Home | 206,493 |
| 17.7 |
| | 203,328 |
| 17.7 |
| | 3,165 |
| 1.6 |
| | (0.2 | ) | Soft Home | 253,700 | | 18.4 | | | 206,493 | | 17.7 | | | 47,207 | | 22.9 | | | 23.0 | |
| Consumables | 198,467 |
| 17.0 |
| | 194,480 |
| 16.9 |
| | 3,987 |
| 2.1 |
| | 1.4 |
| Consumables | 216,515 | | 15.7 | | | 198,467 | | 17.0 | | | 18,048 | | 9.1 | | | 9.8 | |
| Food | 180,687 |
| 15.5 |
| | 185,641 |
| 16.2 |
| | (4,954 | ) | (2.7 | ) | | (3.7 | ) | Food | 181,710 | | 13.2 | | | 180,687 | | 15.5 | | | 1,023 | | 0.6 | | | 0.9 | |
| Seasonal | 94,225 |
| 8.1 |
| | 90,824 |
| 7.9 |
| | 3,401 |
| 3.7 |
| | 2.2 |
| Seasonal | 100,829 | | 7.3 | | | 94,225 | | 8.1 | | | 6,604 | | 7.0 | | | 7.5 | |
| Electronics, Toys, & Accessories | | Electronics, Toys, & Accessories | 100,294 | | 7.3 | | | 64,180 | | 5.5 | | | 36,114 | | 56.3 | | | 56.1 | |
| Hard Home | 79,833 |
| 6.8 |
| | 92,275 |
| 8.0 |
| | (12,442 | ) | (13.5 | ) | | (14.2 | ) | Hard Home | 95,572 | | 6.9 | | | 79,833 | | 6.8 | | | 15,739 | | 19.7 | | | 19.9 | |
| Electronics, Toys, & Accessories | 64,180 |
| 5.5 |
| | 69,404 |
| 6.0 |
| | (5,224 | ) | (7.5 | ) | | (9.5 | ) | |
| Net sales | $ | 1,167,988 |
| 100.0 | % | | $ | 1,149,402 |
| 100.0 | % | | $ | 18,586 |
| 1.6 | % | | (0.1 | )% | Net sales | $ | 1,377,925 | | 100.0 | % | | $ | 1,167,988 | | 100.0 | % | | $ | 209,937 | | 18.0 | % | | 17.8 | % |
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.
Net sales increased $18.6$209.9 million, or 1.6%18.0%, to $1,377.9 million in the third quarter of 2020, compared to $1,168.0 million in the third quarter of 2019, compared to $1,149.4 million in the third quarter of 2018.2019. The increase in net sales was primarily attributable todriven by a net17.8% increase of three stores at the end of the third quarter of 2019 compared to the end of the third quarter of 2018 and thein our comps, which increased net sales ofby $196.2 million. Additionally, our non-comparable sales increased net sales by $13.7 million, driven by increased sales in our new and relocated stores compared to the sales of the stores we closed which increased net sales by $20.0 million, partially offset by a decrease in comps of 0.1%, which decreased net sales by $1.4 million.stores. Our comps are calculated based on the results of all stores that were open at least fifteen months plus our e-commerce net sales.
We experienced a favorable impact to net sales during the third quarter of 2020 driven by demand for our home products, which includes our Furniture, Seasonal, Soft Home, and Hard Home merchandise categories, due to customers spending more time at their homes as a result of the ongoing COVID-19 coronavirus pandemic. We also experienced a favorable impact to net sales driven by the addition of The Lot and the Queue Line to approximately 50% our stores. The Lot is a cross-category presentation solution with a curated assortment to promote life’s occasions, which drove increased sales in our Electronics, Toys, and Accessories merchandise category through apparel and toys. The Queue Line offers our customers a streamlined checkout experience with a new and expanded convenience assortment and a smaller footprint. Additionally, we experienced the early benefits of our Pantry Optimization project completed late in the third quarter of 2020, which reallocated linear square footage from our Food merchandise category to our Consumables category. Overall, we believe our net sales in the third quarter of 2020 were favorably impacted by a strong alignment of our product assortment with current customer demand, successful retention of new customers we attracted as a result of our position as an essential retailer during COVID-19 related shutdowns in the earlier part of 2020, and a favorable customer response to our strategic initiatives such as The Lot, Queue Line, and Pantry Optimization.
Consistent with the first and second quarters of 2020, in the third quarter of 2020, we made the decision to cancel our Friends and Family promotion to address social distancing concerns related to the COVID-19 coronavirus pandemic. In response, we ran a “Your Deal, Your Day” promotion to offset the sales decrease caused by cancellation of the Friends and Family promotion.
Throughout the COVID-19 coronavirus pandemic, our stores have remained open and operating, with the exception of a small number of temporary closures for cleaning. We believe the impact of temporary closings and shortened operating hours and selling restrictions due to the COVID-19 coronavirus pandemic was immaterial to our results for the third quarter of 2020 and we expect the impact of shortened operating hours and selling restrictions due to the COVID-19 coronavirus pandemic to be immaterial to our results for the remainder of 2020.
All of our merchandise categories generated increased net sales and positive comps in the third quarter of 20192020 compared to the third quarter of 2018:
| |
• | Our Furniture category experienced increased net sales and positive comps during the third quarter of 2019, primarily driven by mattresses and upholstery. Mattress sales benefited from a new and expanded brand-name mattress assortment introduced during the third quarter of 2019, while upholstery experienced strong comps resulting from our continued focus on quality, brand, fashion, and value.
|
| |
• | Our Seasonal category experienced increased net sales and positive comps, driven by our summer, lawn & garden, and Halloween departments, resulting from enhanced quality, assortment range, and increased promotional activities in the third quarter of 2019.
|
| |
• | The increased net sales and positive comps in our Consumables category were primarily driven by our housekeeping and health, beauty, and cosmetics departments. The housekeeping and health, beauty, and cosmetics departments improved in comparison to the third quarter of 2018 due to new everyday assortments and branded products.
|
•OurFurniture category experienced increased net sales and positive comps during the third quarter of 2020, driven by increased demand as customers have chosen to invest in home furnishings due to spending more time at their homes as a result of the ongoing COVID-19 coronavirus pandemic. Additionally, our customers have continued to respond positively to our brand-name mattress assortment and our new Broyhill® furniture assortment.
•The Soft Home merchandise category experienced an increase inincreased net sales and a slight decrease in comps induring the third quarter of 2019. The2020, driven by an increase in demand as our customers chose to invest more in their home environment due to spending more time at their homes as a result of the ongoing COVID-19 coronavirus pandemic. Additionally, our Soft Home category benefited from a favorable response to our new Broyhill® offerings.
•The Seasonal category experienced increased net sales wasand comps during the third quarter of 2020, driven by our home decor, home organization,Christmas and beddingharvest departments, which benefited from the higher net store count, increased selling space, and continued improvement in quality, assortment, and value.
The increased net sales in our Furniture, Consumables, Seasonal, and Soft Home merchandise categories and the positive comp in our Furniture, Consumables, and Seasonal merchandise categories were partially offset by decreased net sales and negative comps in our Food, Hard Home,lawn & garden department. The increase in the Christmas and harvest departments resulted from strong alignment of our holiday assortments to customer demand, increased demand due to our customers’ desire to invest in their home environments as a result of the ongoing COVID-19 coronavirus pandemic, and favorable response to holiday promotions during the third quarter of 2020. For our Christmas department in particular, we experienced the annual ramp up in Christmas-related net sales activity earlier during the third quarter of 2020 compared to the third quarter of 2019 and years prior. The decrease in net sales and comps in our lawn & garden department was principally due to lower remaining lawn & garden inventory entering the third quarter of 2020 compared to the third quarter of 2019.
•The increased net sales and positive comps in our Electronics, Toys, & Accessories merchandise categories: category was driven by our toys, apparel, and accessories departments. The increase was driven by the introduction of these products into The Lot and the Queue Line in many of our stores, as well as a traffic-driving, brand-name toy promotion run in the third quarter of 2020. The increased sales and comps in apparel were driven by graphic tees, which were introduced to our stores late in the fourth quarter of 2019, and several brand-name apparel closeouts in the third quarter of 2020.
| |
• | •The Hard Home category experienced increased net sales and comps during the third quarter of 2020, driven by increased net sales in our table top, small appliances, and food prep categories. As a result of various state-wide closures of dine-in restaurants, our customer has chosen to invest in our offerings from these departments to focus on her in-home dining experience. Additionally, our Hard Home net sales and comps increased due to several brand-name closeouts during the third quarter of 2020.
•Our Consumables and Food categories experienced increased net sales and comps compared to the third quarter of 2019 driven by increased sales in our Consumables category driven by health, beauty, and cosmetics, housekeeping supplies, and household chemicals. We also saw increased sales in our Food category driven by candy & snack and beverage & groceries departments. Additionally, our Consumables category benefited from the completion of our Pantry Optimization project in the third quarter of 2020, which reallocated linear square footage from our Food category to our Consumables category and improved our brand name, “never out” product assortment.
Food category experienced decreased net sales and negative comps primarily driven by competitive pressures on our staple food offerings.
|
| |
• | Our Hard Home and Electronics, Toys, & Accessoriescategories experienced decreased net sales and negative comps primarily due to intentionally narrowed assortments, as we gradually reduce our space allocation from these categories through our store of the future conversions. Additionally, Hard Home was impacted by the liquidation of our greeting card offering during the second quarter of 2019.
|
Gross Margin
Gross margin dollars increased $4.2$94.5 million, or 0.9%20.4%, to $557.9 million for the third quarter of 2020, compared to $463.4 million for the third quarter of 2019, compared to $459.2 million for the third quarter of 2018.2019. The increase in gross margin dollars was primarily due to an increase in net sales, which increased gross margin dollars by $7.4$83.3 million. Gross margin as a percentage of net sales decreased 20increased 80 basis points to 40.5% in the third quarter of 2020 as compared to 39.7% in the third quarter of 2019 as compared to 39.9% in the third quarter of 2018. This2019. The gross margin rate decreaseincrease was primarily a result of a higherlower markdown rate from promotional activities, which wasand higher comps in our higher margin merchandise categories, partially offset by higher shrink and lower initial markup of products, which was driven by higher freight costs and receipts skewed toward domestic purchases, which carry a higherslightly lower average initial mark-up compared to the third quarter of 2018.markup.
Selling and Administrative Expenses
Selling and administrative expenses were $482.3 million for the third quarter of 2020, compared to $436.7 million for the third quarter of 2019, compared to $436.8 million for the third quarter2019. The increase of 2018. The decrease of $0.1$45.6 million in selling and administrative expenses was comprised of decreasesincreases in distribution and transportation costs of $17.5 million, store-related payroll of $6.8$11.5 million, accrued bonus expense of $2.6$10.5 million, corporate payrollshare-based compensation expense of $1.7$7.7 million, and store repairs and maintenanceadvertising expense of $1.7$6.2 million, partially offset by increasesa decrease in store-related occupancyhealth benefit costs of $5.0$7.8 million $3.3 million in distribution and transportation costs,by the absence of $3.6 million in costs associated withrelated to our transformational restructuring initiative announced in 2019, which consisted of consulting expenses and employee separation costs. The increase in distribution and transportation costs was driven by rent expense for our distribution centers, all of which are now leased, higher inbound and outbound shipment volume to support the first quarter of 2019,increased sales, and advertising expense of $1.8 million.higher transportation rates. The decreaseincrease in store-related payroll in the third quarter of 2019 was primarily due to the strategic reorganization ofadditional payroll hours to support 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 slight reduction in hours.increased sales. The decreaseincrease in accrued bonus expense was driven by lowerincreased performance in the third quarter of 2020 and higher anticipated performance for the fourth quarter of 2020 relative to our quarterly and annual operating plans as compared to our performance in the third quarter of 2019 relative to our quarterly and annual operating plan as compared to our performanceplans. The increase in the third quarter of 2018 relative to our 2018 annual operating plan. The decrease in corporate payroll was a result of our transformational restructuring during the first quarter of 2019. The decrease in store repairs and maintenanceshare-based compensation expense was driven by improveda higher grant date fair value, higher estimated performance, and timing of the grant date of the 2018 PSUs for which we will recognize expense management. Store-related occupancyduring 2020, compared to 2017 PSUs for which expense was recognized in 2019. The increase in advertising expense was driven by increased investments in digital and social media engagement leading into the holiday season and increased investments in our loyalty and rewards programs through purchase intelligence insights. The decrease in health benefit costs increased in the third quarter of 2019 primarilywas due to the impacta lower amount of the adoption of a new lease accounting standard, normal rent increases for lease renewals, and the impact of right-of-use asset impairment charges on a few early store closings. Distribution and transportation expense increased due to occupancy and pre-opening costs associated with our new California distribution center. The costs associated with our transformational restructuring initiative consisted of consulting and employee separation costs incurredbenefits claims during the third quarter of 2019. The increase in advertising costs was primarily a result of higher television broadcast spend.2020.
As a percentage of net sales, selling and administrative expenses decreased 60240 basis points to 35.0% for the third quarter of 2020 compared to 37.4% for the third quarter of 2019 compared to 38.0% for the third quarter of 2018.2019.
Depreciation Expense
Depreciation expense increased $2.9decreased $1.7 million to $34.8$33.1 million in the third quarter of 2019,2020, compared to $31.9$34.8 million for the third quarter of 2018. 2019. The decrease in depreciation expense was due to the absence of depreciation for our distribution centers sold in the second quarter of 2020.
Depreciation expense as a percentage of sales increased 20decreased 60 basis points compared to the third quarter of 2018. The increase was driven by our continued investment in our store2019.
Gain on Sale of Distribution Center
The gain on sale of distribution center in the third quarter of 2019 was $178.5 million, which was attributable to the sale of our distribution center in Rancho Cucamonga, California in preparation for the opening of our new Apple Valley, California distribution center. Proceeds from the sale were utilized to pay down outstanding debt under the 2018 Credit Agreement and to pay the remainder of the finance lease obligation, which was triggered by the exercise of our purchase option in the second quarter of 2019, to acquire our corporate headquarters facility using a tax-deferred transaction in the third quarter of 2019.
Interest Expense
Interest expense was $2.6 million in the third quarter of 2020, compared to $5.4 million in the third quarter of 2019, compared to $3.12019. The decrease in interest expense was primarily driven by a decrease in total average borrowings. We had total average borrowings (including finance leases and the sale and leaseback financing liability) of $185.9 million in the third quarter of 2018. The increase in interest expense was driven by both higher2020 compared to total average borrowings and an increase in interest rates during the past 12 months. We had total average borrowings (including financing and capital leases) of $536.0 million in the third quarter of 2019 compared to total average borrowings of $393.2 million in the third quarter of 2018.2019. The increasedecrease in total average borrowings (including finance leases) was driven by an increaseour repayment of $78.5 million in our average revolving debt balanceall outstanding borrowings under the 2018 Credit Agreement which was driven by beginning 2019 with a debt balance that was $174.3 million higher compared toduring the beginningsecond quarter of 2018. Additionally, our total average borrowings increased due to our entrance into2020 and payments made toward the 2019 Term Note which increasedsince the third quarter of 2019, partially offset by the establishment of a financing liability in connection with the sale and leaseback transactions for our total average borrowings by $68.9 million. The increased debt balance was principally driven by elevated capital expenditures during the past twelve months. The average interest rate on our revolving debt continued to be impacted by increases in our total interest rate, which is variable based on LIBOR and our credit rating that decreaseddistribution centers in the fourthsecond quarter of 2018.2020.
Other Income (Expense)
Other income (expense) was $(0.5) million in the third quarter of 2020, compared to $(0.3) million in the third quarter of 2019, compared to $0.1 million in the third quarter of 2018.2019. The change was driven by increased losses on our diesel fuel derivatives duein third quarter of 2020 compared to a slight increase inlosses on diesel fuel pricing trends.derivatives during the third quarter of 2019.
Income Taxes
The effective income tax rate for the third quarter of 20192020 was an expense rate of 22.9%24.1% compared to a benefit rate of 48.1%22.9% in the third quarter of 2018.2019. The decreaseincrease in the effective income tax benefit rate was principally attributable to (1) the tax effect of comparing the income before income taxes in the third quarter of 20192020 compared to a loss before income taxes in the third quarter of 2018; (2) a lower effective income tax rate on2019 was primarily attributable to the impact of the gain on sale of distribution center; (3) a decreasecenter in favorable federalCalifornia in 2019. The tax rate on the gain was less than our normalized tax rate and, state settlements and statute of limitation lapses on uncertainthereby reduced our effective tax positions; (4) higher nondeductible executive compensation; and (5) the absencerate in the third quarter of 20192019. The impact of a favorable adjustment recognizedthe discrete items on the effective income tax rate in the third quarter of 2018 to2020 was not meaningfully different from the provisional amounts that we recorded forimpact in the Tax Cuts and Jobs Actthird quarter of 2017.2019.
YEAR-TO-DATE 20192020 COMPARED TO YEAR-TO-DATE 20182019
Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales) in the year-to-date 20192020 and the year-to-date 2018,2019, and the change in net sales (in dollars and percentage) and the change in comps (in percentage) from the year-to-date 20192020 compared to the year-to-date 20182019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year-to-Date |
| ($ in thousands) | 2020 | | 2019 | | Change | | Comps |
| Furniture | $ | 1,284,743 | | 28.8 | % | | $ | 1,031,357 | | 27.7 | % | | $ | 253,386 | | 24.6 | % | | 23.1 | % |
| Soft Home | 770,078 | | 17.3 | | | 606,397 | | 16.3 | | | 163,681 | | 27.0 | | | 27.0 | |
| Consumables | 679,007 | | 15.2 | | | 581,925 | | 15.7 | | | 97,082 | | 16.7 | | | 17.3 | |
| Seasonal | 596,850 | | 13.4 | | | 523,822 | | 14.1 | | | 73,028 | | 13.9 | | | 14.0 | |
| Food | 570,540 | | 12.8 | | | 530,970 | | 14.3 | | | 39,570 | | 7.5 | | | 7.7 | |
| Hard Home | 287,349 | | 6.4 | | | 243,584 | | 6.6 | | | 43,765 | | 18.0 | | | 18.5 | |
| Electronics, Toys, & Accessories | 272,704 | | 6.1 | | | 198,143 | | 5.3 | | | 74,561 | | 37.6 | | | 38.6 | |
| Net sales | $ | 4,461,271 | | 100.0 | % | | $ | 3,716,198 | | 100.0 | % | | $ | 745,073 | | 20.0 | % | | 19.7 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| Year-to-Date |
| ($ in thousands) | 2019 | | 2018 | | Change | | Comps |
| Furniture | $ | 1,031,357 |
| 27.7 | % | | $ | 941,022 |
| 25.8 | % | | $ | 90,335 |
| 9.6 | % | | 7.0 | % |
| Seasonal | 523,822 |
| 14.1 |
| | 508,397 |
| 14.0 |
| | 15,425 |
| 3.0 |
| | 2.1 |
|
| Soft Home | 606,397 |
| 16.3 |
| | 585,850 |
| 16.1 |
| | 20,547 |
| 3.5 |
| | 2.2 |
|
| Consumables | 581,925 |
| 15.7 |
| | 573,215 |
| 15.7 |
| | 8,710 |
| 1.5 |
| | 1.3 |
|
| Food | 530,970 |
| 14.3 |
| | 549,576 |
| 15.1 |
| | (18,606 | ) | (3.4 | ) | | (3.7 | ) |
| Hard Home | 243,584 |
| 6.6 |
| | 271,916 |
| 7.5 |
| | (28,332 | ) | (10.4 | ) | | (10.9 | ) |
| Electronics, Toys, & Accessories | 198,143 |
| 5.3 |
| | 209,578 |
| 5.8 |
| | (11,435 | ) | (5.5 | ) | | (7.3 | ) |
| Net sales | $ | 3,716,198 |
| 100.0 | % | | $ | 3,639,554 |
| 100.0 | % | | $ | 76,644 |
| 2.1 | % | | 0.9 | % |
Net sales increased $76.6$745.1 million, or 2.1%20.0%, to $4,461.3 million in the year-to-date 2020, compared to $3,716.2 million in the year-to-date 2019, compared to $3,639.6 million in the year-to-date 2018.2019. The increase in net sales was principally due to thedriven by comp increases in each of our merchandise categories, with an overall comp increase of 19.7%, which increased net sales ofby $694.2 million. Additionally, our non-comparable sales increased net sales by $50.9 million, driven by increased sales in our new and relocated stores compared to closed stores, alongstores.
Overall, we experienced a favorable impact to net sales during the year-to-date 2020 due to our position as an “essential retailer” during the COVID-19 coronavirus pandemic and the increased demand for our home products while customers are spending more time at home. In the first quarter of 2020, we experienced a significant increase in demand for “essential products,” which we define as food, consumables, health products, and pet supplies, with the net increaseprimary impact in our Food and Consumables merchandise categories, as concern over the COVID-19 coronavirus pandemic grew and customers began stocking up on essential products. Beginning in mid-April, we experienced a shift in demand from essential products to products in our Furniture, Seasonal, Soft Home and Hard Home categories driven by the release of three stores sincegovernment stimulus and enhanced unemployment funds. Despite the endconclusion of government stimulus and enhanced unemployment programs at the beginning of the third quarter of 2018,2020, the increased demand continued through the third quarter of 2020. Our customers have chosen to invest more in their homes as a result of spending more time at home and our product assortment has a strong alignment with current customer demand. Furthermore, we have successfully retained many of the new customers we attracted as a result of our position as an essential retailer during COVID-19 and we have seen a positive response to our strategic initiatives.
In the year-to-date 2020, we introduced The Lot and the Queue Line in approximately 50% of our stores, which contributed to the increased net sales by $45.5 million. In addition,and positive comps compared to the year-to-date 2019. Additionally, the early impact of our comps increased 0.9%,Pantry Optimization project, which was completed late in the third quarter of 2020, contributed to the increased net sales by $31.1 million.and positive comps compared to the year-to-date 2019.
Our Furniture, Soft Home, Seasonal, and ConsumablesAll of our merchandise categories generated increased net sales and positive comps in the year-to-date 20192020 compared to the year-to-date 2018:
| |
• | Our Furniture category experienced increased net sales and positive comps during the year-to-date 2019, primarily attributable to the upholstery, mattresses, and case goods departments. Our core customer, Jennifer, continued to respond to our newness of trend-right products. In addition, our lease-to-own finance offering sustained a favorable impact on sales performance. Furthermore, in the third quarter of 2019, we introduced a new and expanded assortment of brand-name mattresses, which improved net sales and comps for our mattresses department.
|
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• | The positive comps and increased net sales in our Soft Home category were primarily driven by continued improvement in quality, assortment, value, and increased allocation of selling space, which resulted in increases in the home décor, bath, flooring, and home organization departments.
|
| |
• | We experienced increased net sales and positive comps in our Seasonal category, specifically in the summer and lawn & garden departments, despite weather and tariff challenges extending into the third quarter of 2019. These increases were attributable to improved quality and expansion of assortment along with more aggressive promotional activity.
|
| |
• | Consumables experienced increased net sales and positive comps, particularly in the housekeeping, health, beauty, and cosmetics, paper, and pet departments. These increases, particularly in our housekeeping and health, beauty, and cosmetics departments, continue to be a result of our new branded everyday assortment.
|
•Our Furniture category experienced increased net sales and positive comps during the year-to-date 2020, driven by our customers choosing to invest in home furnishings as a result of spending more time at home during the COVID-19 coronavirus pandemic, as well as a surge in demand following the release of government stimulus and enhanced unemployment funds during the year-to-date 2020. Additionally, our customers have responded positively to our brand-name mattress assortment and Broyhill® furniture offerings in the year-to-date 2020.
•The positive comps and increased net sales in our Soft Home category were primarily driven by an increase in demand due to our customers’ decision to invest more in their homes as a result of spending more time at home. Additionally, our Soft Home and Seasonal sales alsocategory benefited from ana favorable response to our new Broyhill® assortment.
•Our Food and Consumables categories experienced increased allocationsales and positive comps driven by high demand for “essential products” during the early stages of selling square footagethe COVID-19 coronavirus pandemic. While Food and Consumables net sales and comps decelerated in the second and third quarters of 2020, the categories continued to outperform the
second and third quarters of 2019. Additionally, our Consumables category benefited from the completion of our Pantry Optimization project in the third quarter of 2020.
•We experienced increased net sales and positive comps in our stores remodeled intoSeasonal category, driven by the lawn & garden, summer, Christmas, and harvest departments. We experienced an increase in sales of high-ticket items such as patio furniture following the release of government stimulus and enhanced unemployment funds in mid-April 2020. Our customers have chosen to invest in our storeoutdoor furniture, lawn maintenance assortments, and holiday decorations as a result of the future format, with a decrease in selling square footage allocatedspending more time at home. Additionally, our customers continue to respond well to our Hard Home and Electronics, Toys, & Accessories categories.new Broyhill® assortment of patio furniture.
•The increased net sales and positive comps in Hard Home was driven by an increase in our Furniture, Soft Home, Seasonal,small appliances, table top, and Consumables merchandise categories were partially offset byfood preparation departments. Despite space reductions and the decreasedexit from our greeting card offering, we experienced high demand for products that improve our customers’ at-home dining experience.
•Our Electronics, Toys, & Accessories category experienced increased net sales and negativepositive comps driven by our toys, apparel, and accessories departments. The increased sales and comps were driven by the introduction of these products into the Queue Line and The Lot in our Food, Hard Home, and Electronics, Toys, & Accessories merchandise categories:
| |
• | Our the year-to-date 2020.Food category experienced decreased net sales and negative comps due to competitive pressures on our staple food offerings. We executed a merchandise category reset late in the first quarter of 2019, which drove slight improvement in the second quarter of 2019, but has not yet met our expectations.
|
| |
• | The decreased net sales and negative comps in Hard Home were due to gradual space reduction as we convert stores to our store of the future concept and the liquidation of our greeting card offering during the second quarter of 2019, partially offset by positive comps in our tabletop department.
|
| |
• | Our Electronics, Toys, & Accessories category experienced decreased net sales and negative comps as a result of an intentionally narrowed assortment, specifically in our electronics department, as part of the reduction in the allocation of square footage to this category due to our store of the future conversions.
|
For the fourth quarter of 2019, we expect comparable sales to increase slightly and net sales to increase by a greater amount due to the net effect of new store openings and closings.
Gross Margin
Gross margin dollars increased $18.1$331.5 million, or 1.2%22.4%, to $1,812.2 million for the year-to-date 2020, compared to $1,480.7 million for the year-to-date 2019, compared to $1,462.6 million for the year-to-date 2018.2019. The increase in gross margin dollars was principally due to an increase in net sales, which increased gross margin dollars by $30.8$296.9 million. Gross margin as a percentage of net sales decreased 40increased 80 basis points to 40.6% in the year-to-date 2020, compared to 39.8% in the year-to-date 2019, compared to 40.2% in the year-to-date 2018.2019. This gross margin rate decreaseincrease was primarily due to a lower markdown rate, higher comps in our higher margin merchandise categories, and the resultabsence of a $6.0 million impairment of inventory in our greeting cards department, which we chose to exit in the first quarter of 2019, and a higher markdown rate from increased promotional activities in the second and third quarters of 2019. The decrease in gross margin rateincrease was partially offset by higher shrink costs and a higherlower initial mark-up compared to the year-to-date 2018.
For2019, as our receipts have skewed toward domestic purchases, which carry a lower average initial markup. Additionally, our initial mark-up was lower compared to the fourthyear-to-date 2019 due to increased freight costs in the third quarter of 2019, we expect our gross margin rate to decrease, driven in part by absorbing a portion of the impact from tariffs, as well as from anticipated higher levels of promotional selling.2020.
Selling and Administrative Expenses
Selling and administrative expenses were $1,444.9 million for the year-to-date 2020, compared to $1,352.3 million for the year-to-date 2019, compared to $1,301.5 million for the year-to-date 2018.2019. The increase of $50.8$92.6 million in selling and administrative expenses was attributable to increases in distribution and transportation costs of $41.2 million, store-related payroll of $41.0 million, accrued bonus expense of $22.9 million, advertising expense of $11.3 million, transaction fees of $7.6 million, $6.9 million of store occupancy costs, $6.6 million of share-based compensation expense, $4.6 million in store supplies, $4.6 million of employee retirement and separation costs, $4.0 million of sale and leaseback related expenses, and $3.7 million of proxy contest-related costs, partially offset by the absence of $38.3 million in costs associated withincurred for our transformational restructuring initiative, announcedthe absence of a $7.3 million loss contingency recorded in Marchthe year-to-date 2019, store-related occupancyand a decrease in health benefit costs of $19.1 million, $9.6 million in accrued bonus expense, $7.3 million in estimated costs associated with employee wage and hour claims brought against us in the state of California, $6.0 million$12.9 million. The increase in distribution and transportation expenses was due to the transition from our Rancho Cucamonga, CA distribution center to our new Apple Valley, CA distribution center, rent expense on our leased distribution centers, higher inbound and anoutbound rates and volume to support the increased year-to-date net sales, and a temporary $2 per hour wage increase for most of our non-exempt workforce during the COVID-19 coronavirus pandemic. The temporary $2 per hour wage increase began in March 2020 and continued through early July 2020. The increase in advertising expense of $3.4 million, partially offsetstore-related payroll was driven by additional payroll hours allocated to stores to support the impactincreased net sales during the year-to-date 2018 of both the retirement of our former chief executive officer of $7.0 million2020 and the $3.5 million in charges incurred related to the settlement of shareholder and derivative litigation matters filed in 2012 and decreases in self-insurance costs of $6.9 million, share-based compensation expense of $5.8 million, store repairs and maintenance of $5.7 million, and store-related payroll of $5.6 million. The costs associated with our transformational restructuring initiative consisted of consulting expenses and employee separation costs, relating to our corporate headquarters and our store organization incurred during the year-to-date 2019. Store-related occupancy costs increased in the year-to-date 2019 primarily due to the impact of the adoption of a new lease accounting standard, the impact of rent associated with leases acquired in 2018 through bankruptcy proceedings in locations that generated rent expense beginning in the first quarter of 2019, but did not open until the second and third quarters of 2019, normal rent increases for lease renewals, and the impact of right-of-use asset impairments on a few early store closings.aforementioned temporary $2 per hour wage increase. The increase in accrued bonus expense was driven by strongerincreased performance in the year-to-date 20192020 and higher anticipated performance for the fourth quarter of 2020 relative to our quarterly and annual operating plans as compared to our performance in the year-to-date 20182019 relative to our quarterly and annual operating plans. Distributionplans, and transportationa one-time discretionary bonus in the second quarter of 2020 to recognize our non-exempt associates in our stores and distribution centers. Advertising expense was higher than last yearincreased due to occupancyincreased investments in social media engagement, our rewards and pre-opening costs associated withloyalty program, and video media to promote The Lot and our new California distribution center, as well as higher transportation rates.Store of the Future concept. The increase in advertising cost was primarily a result of higher spend on television advertisingtransaction fees, which includes credit card fees, debit card fees, and digital marketing. The decrease in our self-insuranceother transaction-driven costs, resulted from a decrease in self-insurance claims in year-to-date 2019 compared to year-to-date 2018. Our share-based compensation expense decreased as a result of lower estimated attainment of the long-term target on our 2017 PSUs expensed in the year-to-date 2019, relative to the estimated attainment of the 2016 PSUs expensed in the year-to-date 2018. Our share-based compensation expense also decreased due to the lower average grant date fair value on awards expensed in the year-to-date 2019 compared to those recorded in the year-to-date 2018. The lower expense in store repairs and maintenance was driven by improved expense management. The decrease in store-related payroll was primarily due to the strategic reorganization of our store workforce atincreased net sales in the year-to-date 2020 compared to the year-to-date 2019. The increase in store-related occupancy costs was due to new stores opened since the end of the secondthird quarter of 2019, which optimizedhave higher rents than the stores closed, and normal rent increases resulting from lease renewals. The increase in share-based compensation expense was driven by a higher grant date fair value and higher estimated performance for the 2018 PSUs for which we will recognize expense during 2020, compared to the 2017 PSUs for which expense was recognized in 2019. The increase in store supplies expense was driven by safety and cleaning supplies, such as personal protective equipment, hand sanitizer, and disinfectants, distributed to our store management structurestores in the year-to-date 2020 to better serveensure a safe environment for our customers and resultedassociates during the COVID-19 coronavirus pandemic. The increase in employee retirement and separation costs was primarily driven by the retirement and separation of senior executives in the year-to-date 2020. The sale and leaseback related expenses were due to consulting costs incurred in connection with the completion of the sale and leaseback transaction for our four distribution centers in the second quarter of 2020. The proxy contest-related costs were comprised of legal, public relations, and advisory fees, and settlement costs incurred to resolve a proxy contest in the first
quarter of 2020. The costs incurred for our transformational restructuring initiative consisted of consulting expenses and employee separation costs recognized in the year-to-date 2019. The loss contingency recorded in the year-to-date 2019 was associated with wage and hour claims in the state of California. The decrease in health benefits costs was primarily due to lower average wage ratebenefits claim volume in the year-to-date 2020 as many medical care providers suspended non-emergency care and a slight reduction in hours.procedures during the year-to-date 2020 due to the COVID-19 coronavirus pandemic.
As a percentage of net sales, selling and administrative expenses increased 60decreased 400 basis points to 32.4% for the year-to-date 2020 compared to 36.4% for the year-to-date 2019 compared to 35.8% for the year-to-date 2018.2019.
During the fourth quarter of 2019, we anticipate that our selling and administrative expenses will be higher than in the fourth quarter of 2018, due to the impact of bonus accruals, transition costs for our new California distribution center, and other items, partially offset by cost savings from our transformational restructuring activities.
Depreciation Expense
Depreciation expense increased $6.7$7.2 million to $97.6$104.8 million in the year-to-date 2019,2020, compared to $90.9$97.6 million for the year-to-date 2018.2019. The increase continued to bewas driven primarily by investments in our Apple Valley, CA distribution center, new store build-outs, and Store of the future projectFuture remodels, and the acquisition of our investmentcorporate headquarters facility in furniture, fixtures, and equipment for our new headquarters. The increase wasthe third quarter of 2019, partially offset by a change in our accounting estimate ondecrease from the service livessale and leaseback of our leasehold improvements, fixtures, and equipment. In 2019, we extended our estimated service lives on stores that we have converted to our storefour distribution centers in the second quarter of the future concept to more accurately reflect our expected usage period and their average remaining lease term. 2020.
Depreciation expense as a percentage of sales increaseddecreased by 1030 basis points compared to the year-to-date 2018.2019.
We expect that our depreciation expense for the fourth quarter of 2019 will be higher in comparison to the fourth quarter of 2018, principally due to our continued investment in our store of the future concept and the opening of our Apple Valley, California distribution center, partially offset by the impact of the change in the estimated service lives of our leasehold improvements, fixtures, and equipment on our store of the future concept stores.
Gain on Sale of Distribution CenterCenters
The gain on sale of distribution centercenters in the year-to-date 20192020 was $463.1 million, compared to $178.5 million whichin the year-to-date 2019. The gain on sale of distribution centers in the year-to-date 2020 was attributable to the sale and leaseback of our distribution centers in Durant, OK; Tremont, PA; Montgomery, AL; and Columbus, OH during the second quarter of 2020. The gain on sale of distribution centers in the year-to-date 2019 was attributable to the sale of our Rancho Cucamonga, CA distribution center in Rancho Cucamonga, California during the third quarter of 2019 in preparation for the opening of our Apple Valley, California distribution center.2019.
Interest Expense
Interest expense was $8.5 million in the year-to-date 2020, compared to $13.7 million in the year-to-date 2019, compared to $7.1 million in the year-to-date 2018.2019. The increasedecrease in interest expense was primarily driven by increases in both ourlower total average borrowings (including finance leases and the sale and leaseback financing liability) and a lower average interest rate and our average borrowings on our revolving debt in the year-to-date 2019 compared to the year-to-date 2018.debt. We had total average borrowings (including finance leases) of $282.3 million in the year-to-date 2020 compared to $490.3 million in the year-to-date 2019 compared to total average borrowings of $300.0 million in the year-to-date 2018.2019. The increasedecrease in total average borrowings (including finance leases) was driven by an increaseour repayment of $163.7 million to our average revolvingall outstanding debt balance under ourthe 2018 Credit Agreement following the sale and leaseback transaction completed in 2019 as compared to 2018, which was driventhe second quarter of 2020, partially offset by elevated capital expenditures to supporttiming of our store of the future concept and the equipment purchases for our new California distribution center during the past twelve months. Additionally, our total average borrowings increased due to our entranceentry into the 2019 Term Note, which increasedas the 2019 Term Note was only in place for the second half of 2019, and establishment of a financing liability in connection with the sale and leaseback transactions for our total average borrowings by $23.0 million.distribution centers in the second quarter of 2020. The average interest rate on our revolving debt, continued to be impacted by increases in our total interest rate, which is variable based on LIBOR and our credit rating, that decreased due to a significant decline in the fourthLIBOR rate in the year-to-date 2020 as a result of the COVID-19 coronavirus pandemic, partially offset by the impact of a decrease in our credit rating during the first quarter of 2018.2020.
We expect that our interest expense for the fourth quarter of 2019 will be slightly higher in comparison to the fourth quarter of 2018.
Other Income (Expense)
Other income (expense) was $(2.4) million in the year-to-date 2020, compared to $(0.2) million in the year-to-date 2019, compared2019. The change was primarily driven by unrealized losses on our diesel fuel derivatives due to $0.7 milliona sharp decline in current and forward diesel fuel prices in the year-to-date 2018. The net increase in expense was driven byfirst quarter of 2020 as a change in diesel fuel pricing trends inresult of the year-to-date 2019 compared to the year-to-date 2018.COVID-19 coronavirus pandemic.
Income Taxes
The effective income tax rate for the year-to-date 20192020 and the year-to-date 2018 was2019 were 25.7% and 23.9% and 23.3%, respectively. The increase in the effective income tax rate was primarily attributable to (1) a decrease in favorable federal and state settlements and statuteimpact of limitation lapses; (2) the absence insales of our distribution centers. In the third quarter ofyear-to-date 2019, of a favorable adjustment recognized in the third quarter of 2018 to the provisional amounts that we recorded for the Tax Cuts and Jobs Act of 2017; and (3) higher nondeductible executive compensation, partially offset by a lower effective income tax rate on the gain of our California distribution center was less than our normalized tax rate, thereby reducing our effective tax rate in the year-to-date 2019. While in the year-to-date 2020, the tax rate on the salegains of our Rancho Cucamonga, Californianon-California distribution center. The effective incomecenters were similar to our normalized tax rate, comparisons werethereby having a more muted impact on our effective tax rate in the year-to-date 2020. Additionally, the impact of our discrete items was similar in value in the year-to-date 2020 and the year-to-date 2019, but their impact on the tax rate was significantly impactedcurtailed in the year-to-date 2020 by higherthe significant growth in income before income taxes forin the year-to-date 20192020 as compared to the year-to-date 2018.2019.
2020 Guidance
In March 2020, the World Health Organization declared the COVID-19 coronavirus a pandemic. The rapid spread of the disease throughout the U.S. has significantly impacted the U.S. economy, which has reduced our visibility to future financial results in comparison to prior years. Therefore, in March 2020, the Company withdrew its full year guidance for 2020. At this time, the Company still does not believe it has sufficient visibility to reinstate full year guidance. We expect to provide a business update in early January 2020 when we have greater visibility to expected results for the fourth quarter of 2020.
Capital Resources and Liquidity
On August 31, 2018, we entered into the 2018 Credit Agreement, which provides for a $700 million five-year unsecured credit facility and replaced the 2011 Credit Agreement.facility. The 2018 Credit Agreement expires on August 31, 2023. Borrowings under the 2018 Credit Agreement are available for general corporate purposes, working capital, and the repayment ofto repay certain indebtedness. The 2018 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The interest rates, pricing and fees under the 2018 Credit Agreement fluctuate based on our debt rating. The 2018 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolving loans made under the 2018 Credit Agreement without penalty. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio. The covenants of the 2018 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with the synthetic lease for our new distribution center in California.Apple Valley, CA. A violation of any of the covenants could result in a default under the 2018 Credit Agreement that would permit the lenders to restrict our ability to further access the 2018 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2018 Credit Agreement. At November 2, 2019,October 31, 2020, we were in compliance with the covenants of the 2018 Credit Agreement.
The primary source of our liquidity is cash flows from operations and, as necessary, borrowings under the 2018 Credit Agreement. Our net income and, consequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our net sales are typically highest during the nine-week Christmas selling season in our fourth fiscal quarter. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have typically funded those requirements with borrowings under our credit facility. At November 2, 2019, we had $447.3 million of borrowings under the 2018 Credit Agreement, and the borrowings available under the 2018 Credit Agreement were $245.8 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $6.9 million. We believe that cash on hand, cash equivalents, cash available from future operations, and our 2018 Credit Agreement will provide us with sufficient liquidity to fund our operations for at least the next twelve months. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments.
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 note is fixed at 3.3%. We utilized the proceeds
The primary source of our liquidity is cash flows from the 2019 Term Note to pay down outstandingoperations and borrowings under the 2018 Credit Agreement, as necessary. Our net income and, consequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our net sales are typically highest during the nine-week Christmas selling season in our fourth fiscal quarter. However, due to demand volatility we have experienced during the COVID-19 coronavirus pandemic, the seasonality of our 2020 results may differ from our historical experience. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have typically funded those requirements with borrowings under our credit facility. However, as a result of the sale and leaseback transactions completed in the second quarter of 2020 and our strong cash flow from operations during the year-to-date 2020, we funded our working capital requirements in the third quarter of 2020 without borrowing under the 2018 Credit Agreement. At October 31, 2020, we had no borrowings under the 2018 Credit Agreement, and the borrowings available under the 2018 Credit Agreement were $693.7 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $6.3 million. We believe that cash on hand, cash equivalents, cash available from future operations, and our 2018 Credit Agreement will provide us with sufficient liquidity to fund our operations for at least the next twelve months. However, we do not anticipate borrowing under the 2018 Credit Agreement for the remainder of 2020. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments.
As a measure to secure additional liquidity during a period of economic uncertainty caused by the COVID-19 coronavirus pandemic, on June 12, 2020, we completed the sale and leaseback transactions relating to our distribution centers located in Columbus, OH; Durant, OK; Montgomery, AL; and Tremont, PA for an aggregate selling price of $725 million. Due to sale-leaseback accounting requirements, the proceeds received in the transactions were allocated between proceeds on the sale of the distribution centers and financing proceeds. Accordingly, aggregate net proceeds on the sales of the distribution centers was $586.9 million and the aggregate gain on the sales was $463.1 million. The remainder of consideration received was financing liability proceeds of $134.0 million.
In March 2019,the second quarter of 2020, we invested a portion of the proceeds from the sale and leaseback of our four distribution centers in money market fund investments and commercial paper investments. These highly liquid investments were recorded in cash and cash equivalents in our consolidated balance sheets. Our aggregate money market fund and commercial paper investments were $205.1 million and $0 at October 31, 2020 and February 1, 2020, respectively.
As a result of the sale and leaseback transactions and our strong cash flow from operations during the year-to-date 2020, our cash and cash equivalents increased $486.0 million to $547.8 million compared to the third quarter of 2019.
In August 2020, our Board of Directors authorized us tothe repurchase of up to $50.0$500 million of our outstanding common shares (“2019 Repurchase Program”).shares. During the year-to-date 2019,third quarter of 2020, we purchased approximately 1.32.2 million of our common shares for $50.0$100.0 million under the 20192020 Repurchase ProgramAuthorization, at an average price of $45.81. Pursuant to the 2020 Repurchase Authorization, we are authorized to repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and exhausted the 2019 Repurchase Program. We utilized proceeds from the 2018 Credit Agreement to assist in funding these purchases.other factors. Common shares acquired through the 20192020 Repurchase ProgramAuthorization will be available to meet obligations under our
equity compensation plans and for general corporate purposes. The 2020 Repurchase Authorization has no scheduled termination date and we intend to fund repurchases under the authorization with cash and cash equivalents on hand and cash generated from operations going forward.
In December 2019,August 2020, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on December 30, 2019September 25, 2020 to shareholders of record as of the close of business on December 16, 2019.September 11, 2020. The cash dividend of $0.30 per common share is consistent with our quarterly dividends declared in 2018.2019. In the year-to-date 2019,of 2020, we paid approximately $36.7$35.8 million in dividends compared to $38.6$36.7 million in the year-to-date 2018.of 2019.
In December 2020, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on December 30, 2020 to shareholders of record as of the close of business on December 16, 2020.
The following table compares the primary components of our cash flows from the year-to-date 20192020 compared to the year-to-date 2018:2019:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2020 | | 2019 | | Change |
| Net cash provided by operating activities | $ | 267,410 | | | $ | 80,548 | | | $ | 186,862 | |
| Net cash provided by (used in) investing activities | 485,209 | | | (41,231) | | | 526,440 | |
| Net cash used in financing activities | $ | (257,509) | | | $ | (23,557) | | | $ | (233,952) | |
|
| | | | | | | | | | | |
| (In thousands) | 2019 | | 2018 | | Change |
| Net cash provided by operating activities | $ | 80,548 |
| | $ | 40,420 |
| | $ | 40,128 |
|
| Net cash used in investing activities | (41,231 | ) | | (281,033 | ) | | 239,802 |
|
| Net cash (used in) provided by financing activities | $ | (23,557 | ) | | $ | 251,375 |
| | $ | (274,932 | ) |
Cash provided by operating activities increased $40.1$186.9 million to $267.4 million in the year-to-date 2020 compared to $80.5 million in the year-to-date 2019 compared to $40.42019. The primary drivers of the increase were an increase of $382.5 million in the year-to-date 2018. The increase was primarily due to a $99.9 million increase in net income, $53.4a $112.1 million increase in cash inflows from inventories,accounts payable, and a $40.6$60.2 million increase in otherthe change in current liabilities, a $37.5 million decrease in cash paid for taxes, and $25.8 million inflow from deferredincome taxes, partially offset by a $178.8 millionan increase in the add-back for gain on disposition of property and equipment and a $49.3property of $284.8 million, decreaseand an increase in cash outflowsthe add-back for accounts payable.deferred taxes of $66.8 million. The increase in net income increase was primarily due to the gain on sale of our distribution centercenters in Rancho Cucamonga, California as well asthe second quarter of 2020 and a $76.6$745.1 million increase in net sales in the year-to-date 20192020. Similarly, the increase in the change in current income taxes was due to higher income before income taxes, which primarily resulted from the gain on sale of distribution centers and increased net sales, partially offset by payment in the third quarter of 2020 of a portion of our income tax liability resulting from the gain on sale of distribution centers. The increase in the change in accounts payable was primarily driven by later inventory receipts leading into the holiday season, which increased our accounts payable balance in the third quarter of 2020 compared to the third quarter of 2019. The increase in the add-back for gain on disposition of equipment and property was principally due to an increase in the gain on sale of distribution centers of $284.6 million compared to the year-to-date 2018.2019. The increase in net incomethe add-back for deferred taxes was partially offset by the gain on disposition of property and equipment, which primarily relateddue to the sale of our Rancho Cucamonga, California distribution center. The increase in cash inflows from inventories was primarily driven by our decision to accelerate the receipt of inventory late in 2018 to mitigate tariff concerns, which increased our inventory position at the end of 2018. As of the end of the third quarter of 2019, we have normalized our inventory position as we decreased our receipt of inventory in the second quarter of 2019, which has generated an increase in cash inflows from inventory sales. The increase in other current liabilities was driven by an increase in accrued bonus expense. The decrease in cash paid for taxes was the result of a decrease in the year-to-date second quarter taxable income which is used for estimated tax installments for the year-to-date 2019 compared to the year-to-date 2018. The increase in deferred taxes is primarily the result of the gain on the sale of our Rancho Cucamonga, CaliforniaCA distribution center as we utilized a portionin the year-to-date 2019.
Cash provided by (used in) investing activities increased by $526.4 million to cash provided by investing activities of $485.2 million in the proceeds on the saleyear-to-date 2020 compared to pay the remainder of the finance lease obligation for our corporate headquarters facility, which we acquired in a tax-deferred exchange through a qualified intermediary. The cash outflows for accounts payable were directly related to our inventory levels, discussed previously, and the timing of receipts.
Cash used in investing activities decreased by $239.8 million toof $41.2 million in the year-to-date 2019 compared to $281.0 million in the year-to-date 2018.2019. The decreaseincrease was primarily due to an increase of $397.5 million in cash proceeds from sale of property and equipment, coupled with a $128.9 million reduction in capital expenditures. The increase in cash proceeds from sale of property and equipment was due to the completion of $190.3 million resulting fromthe sale and leaseback transactions for our four distribution centers in the year-to-date 2020, compared to the sale of our Rancho Cucamonga, Californiaone distribution center along with a decrease in assets acquired under synthetic lease of $116.0 million for our new California distribution center, partially offset by a $66.5 million increase in capital expenditures.the year-to-date 2019. The decrease in assets acquired under the synthetic lease was driven by the impact of the adoption of a new lease accounting standard. The increase in capital expenditures was driven by continuedour decision to reduce our investments in new store growth, our storeStore of the future remodel initiative,Future concept and equipment fornew stores in 2020 to preserve liquidity and promote safety during the COVID-19 coronavirus pandemic, and a decrease in investments in our new CaliforniaApple Valley, CA distribution center.center which opened in late 2019.
Cash used in financing activities increased by $274.9$234.0 million to $257.5 million in the year-to-date 2020 compared to $23.6 million in the year-to-date 2019 compared to $251.4 million provided by financing activities in the year-to-date 2018.2019. The increase in cash used in financing activities was due to a $147.3 million decrease in net proceeds from long-term debt in the year-to-date 2019 compared to the year-to-date 2018, a decreaseprimary driver of $116.0 million in proceeds from the synthetic lease for our California distribution center in the year-to-date 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 reductionan increase in net repayments of $50.0long-term debt of $380.6 million and an increase in cash used to repurchase commonpayment for treasury shares under our share repurchase programs. Theacquired of $47.3 million, partially offset by an increase in net financing proceeds from sale and leaseback of $123.4 million and a decrease in payment of finance lease obligations of $69.5 million. The increase in net proceeds fromrepayments of long-term debt was partially attributable to the salea result of the Rancho Cucamonga, California distribution center, a portionrepayment of which was utilized to pay downall outstanding debtborrowings under the 2018 Credit Agreement.Agreement following the completion of the sale and leaseback transaction for our four distribution centers in the second quarter of 2020. The decreaseincrease in proceeds from synthetic leasepayment for treasury shares acquired was driven by the impactrepurchase of $100.0 million of our common shares under the adoption2020 Repurchase Authorization during the year-to-date 2020, compared to $50.0 million of a new lease accounting standard.our common shares under the 2019 Repurchase Program during the year-to-date 2019. The increase in net financing proceeds from sale and leaseback was driven by the sale and leaseback transactions completed for our four distribution centers in second quarter of 2020. The decrease in payments of finance lease obligations was due to the absence in the year-to-date 2020 of our payment of the remainder of the finance lease obligation for our corporate headquarters facility in the third quarteryear-to-date 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, and bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. See note 1 to our consolidated financial statements included in our 20182019 Form 10-K for additional information about our accounting policies. During the first quarter of 2019, we adopted ASU 2016-02, Leases (Topic 842), and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. We revised our accounting policy on leases in conjunction with the adoption of ASU 2016-02.
The estimates, judgments, and assumptions that have a higher degree of inherent uncertainty and require the most significant judgments are outlined in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20182019 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 20182019 Form 10-K, our financial condition, results of operations, and liquidity for the current period could have been materially different from those presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk from exposure to changes in interest rates on investments that we make from time to time and on borrowings under the 2018 Credit Agreement. We had no borrowings of $447.3 million under the 2018 Credit Agreement at November 2, 2019.October 31, 2020. An increase of 1% in our variable interest rate on our expected future borrowings couldwould not currently affect our financial condition, results of operations, or liquidity through higher interest expense by approximately $4.5 million. Additionally, we are subject to cross-default provisions associated with the Synthetic Lease for our new distribution center in California. An increase of 1% in this leasing instrument could affect our financial condition, results of operations, or liquidity through higher rent expense by approximately $1.5 million.liquidity.
We are subject to market risk from exposure to changes in our derivative instruments associated with diesel fuel. At November 2, 2019,October 31, 2020, we had outstanding derivative instruments, in the form of collars, covering 4.54.6 million gallons of diesel fuel. The below table provides further detail related to our current derivative instruments, associated with diesel fuel.
| | | | | | | | | | | | | | | | | | | | |
| Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value |
| Puts | | Calls | | Asset (Liability) |
| | (Gallons, in thousands) | | (In thousands) |
| 2020 | | 960 | | | 960 | | | $ | (582) | |
| 2021 | | 2,400 | | | 2,400 | | | (1,410) | |
| 2022 | | 1,200 | | | 1,200 | | | (675) | |
| Total | | 4,560 | | | 4,560 | | | $ | (2,667) | |
|
| | | | | | | | | | |
| Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value |
| | Puts | | Calls | | Asset (Liability) |
| | | (Gallons, in thousands) | | (In thousands) |
| 2019 | | 900 |
| | 900 |
| | $ | (32 | ) |
| 2020 | | 2,400 |
| | 2,400 |
| | (594 | ) |
| 2021 | | 1,200 |
| | 1,200 |
| | (186 | ) |
| Total | | 4,500 |
| | 4,500 |
| | $ | (812 | ) |
Additionally, at November 2, 2019,October 31, 2020, a 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $1.3$1.2 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control overOver Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
No response is required under Item 103 of Regulation S-K. For a discussion of certain litigated matters, see note 87 to the accompanying consolidated financial statements.
Item 1A. Risk Factors
Except as set forth below,During the third quarter of 2020, there have beenwere no material changes to the risk factors previously disclosed in our 20182019 Form 10-K.
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 recently imposed by the U.S. with respect to certain consumer goods imported from China.
Global sourcing of many of the products we sell is an important factor in driving higher operating profit. During 2018, we purchased approximately 25% of our products directly from overseas vendors, including 21% from vendors located in China. Additionally, a significant amount of our domestically-purchased merchandise is manufactured abroad. Our ability to identify qualified vendors and to access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside of the U.S. Global sourcing and foreign trade involve numerous risks and uncertainties beyond our control, including increased shipping costs, increased import duties, more restrictive quotas, loss of most favored nation trading status, currency and exchange rate fluctuations, work stoppages, transportation delays, economic uncertainties such as inflation, foreign government regulations, political unrest, natural disasters, war, terrorism, trade restrictions and tariffs (including retaliation by the U.S. against foreign practices or by foreign countries against U.S. practices), the financial stability of vendors, or merchandise quality issues. U.S. policy on trade restrictions is ever-changing and may result in new laws, regulations, or treaties that increase the costs of importing goods and/or limit the scope of available foreign vendors. These and other issues affecting our international vendors could materially adversely affect our business and financial performance.
On March 22, 2018, President Trump, pursuant to Section 301 of the Trade Act of 1974, directed the U.S. Trade Representative (“USTR”) to impose tariffs on $50 billion worth of imports from China. Incremental tariffs of 25% on products valued at $34 billion (“List 1”) went into effect on July 6, 2018, and were also imposed on products valued at $16 billion (“List 2”) effective August 23, 2018. On September 24, 2018, a 10% incremental tariff went into effect with respect to another $200 billion worth of imports from China (“List 3”). On May 10, 2019, the USTR announced that the List 3 tariffs would increase to 25% for all List 3 goods. On August 20, 2019, the USTR published the List 4 tariffs, specifying that 10% duties would be imposed in two stages, with List 4A effective on September 1, 2019 (representing goods worth approximately $110 billion), and List 4B effective on December 15, 2019 (representing goods worth approximately $155 billion). On August 30, 2019, the USTR published an amended official notice regarding the List 4 tariff rate, to be imposed at a rate of 15% instead of 10%. The List 4A tariffs of 15% became effective on September 1, 2019. On September 3, 2019, the USTR published notice of its intention to increase the incremental tariffs for Lists 1 through 3 from 25% to 30% on October 1, 2019, but on October 11, 2019, it was announced that this increase would be delayed until further notice. As of November 26, 2019, there is no indication that implementation of the List 4B tariffs will be delayed beyond the implementation date of December 15, 2019.
During the past eleven months, USTR has granted “exclusions” from the 301 tariffs for products on Lists 1 through 3. These exclusions have been both product-specific as well as more general and have been released in sixteen separate lists issued between December 21, 2018 and November 26, 2019. The exclusion request process for List 1 through 3 is closed. Some products imported by Big Lots were impacted by exclusions pertaining to Lists 2 and 3. The USTR has indicated that all exclusion requests for Lists 1 and 2 have been reviewed. The List 3 exclusion requests are still in process of review by USTR. While the exclusions grant the importers of record the opportunity to seek the return of the 301 tariffs paid with respect to the excluded product retroactively to their effective date, the granted exclusions do currently expire approximately within eleven to thirteen months of their retroactive effective dates. There has been no definitive indication that the 301 tariff exclusions will be extended, although USTR has decided to open up public comment on whether to extend the List 1 exclusions granted in December 2018, that will be expiring on December 28, 2019. USTR has yet to formalize any process to extend the current exclusions, the first of which is set to expire on December 28, 2019. USTR has stated that it continues to review exclusion requests for List 3 and will issue decisions on pending exclusion requests on a periodic basis.
The majority of our products and components of our products that are imported from China are currently subject to Lists 1 through 4. 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 USTR 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| | | | | | | | | | | | | | |
| (In thousands, except price per share data) | | | | |
| Period | (a) Total Number of Shares Purchased (1)(2) | (b) Average Price Paid per Share | (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 |
| August 2, 2020 - August 29,2020 | — | | $ | 50.05 | | — | | $ | 500,000 | |
| August 30, 2020 - September 26, 2020 | 2,185 | | 45.82 | | 2,183 | | 400,000 | |
| September 27, 2020 - October 31,2020 | 11 | | 51.44 | | — | | 400,000 | |
| Total | 2,196 | | $ | 45.84 | | 2,183 | | $ | 400,000 | |
(1) The 2020 Repurchase Authorization is comprised of an August 27, 2020 authorization by our Board of Directors for the repurchase of up to $500.0 million of our common shares. During the third quarter of 2020, we purchased approximately 2.2 million of our common shares for approximately $100.0 million under the 2020 Repurchase Authorization. The 2020 Repurchase Authorization has no scheduled termination date.
(2) In August, September, and October 2020, in connection with the vesting of certain outstanding restricted stock units, we acquired 464, 2,496, and 10,664 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings.
|
| | | | | | | | | | |
| (In thousands, except price per share data) | | | | |
| Period | (a) Total Number of Shares Purchased (1) | (b) Average Price Paid per Share | (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 |
| August 4, 2019 - August 31, 2019 | — |
| $ | — |
| — |
| $ | — |
|
| September 1, 2019 - September 28, 2019 | 11 |
| 22.72 |
| — |
| — |
|
| September 29, 2019 - November 2, 2019 | 7 |
| 21.99 |
| — |
| — |
|
| Total | 18 |
| $ | 22.45 |
| — |
| $ | — |
|
| |
(1) | In September and October 2019, in connection with the vesting of certain outstanding restricted stock units and performance share units, we acquired 11,723 and 7,086 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits marked with an asterisk (*) are filed herewith.
Certain portions of the exhibits marked with a pound sign (#) have been excluded from the exhibit pursuant to Item 601(b)(10)(iv) of Regulation S-K. | | | | | | | | | | | |
| Exhibit No. | | Document |
| | | |
| Exhibit No. | | DocumentLease Agreement, as amended, between Big Lots Stores, Inc. and BIGCOOH002, LLC relating to the registrant’s distribution center located in Columbus, OH. |
| | | |
| | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | XBRL Taxonomy Definition Linkbase Document |
| | | XBRL Taxonomy Presentation Linkbase Document |
| | | XBRL Taxonomy Labels Linkbase Document |
| | | XBRL Taxonomy Calculation Linkbase Document |
| 101.Sch | | XBRL Taxonomy Schema Linkbase Document |
| 101.Ins | | XBRL Taxonomy Instance Document - the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: December 11, 2019
|
| | | | |
| BIG LOTS, INC. |
| |
| By: /s/ Jonathan E. Ramsden |
| |
| Jonathan E. Ramsden |
| Executive Vice President, Chief Financial and Administrative Officer |
| (Principal Financial Officer, Principal Accounting Officer and Duly Authorized Officer) |