UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OctoberJuly 31, 20202021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-08897
BIG LOTS, INCINC.
(Exact name of registrant as specified in its charter)
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 of Principal Executive Offices) (Zip Code)
(614) 278-6800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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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 4, 2020,September 3, 2021, was 37,110,016.32,556,311.
BIG LOTS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBERJULY 31, 20202021
TABLE OF CONTENTS
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Item 1. | | |
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a) | | |
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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 | | Twenty-Six Weeks Ended |
| | October 31, 2020 | November 2, 2019 | | October 31, 2020 | November 2, 2019 | | July 31, 2021 | August 1, 2020 | | July 31, 2021 | August 1, 2020 |
Net sales | Net sales | $ | 1,377,925 | | $ | 1,167,988 | | | $ | 4,461,271 | | $ | 3,716,198 | | Net sales | $ | 1,457,374 | | $ | 1,644,197 | | | $ | 3,082,926 | | $ | 3,083,346 | |
Cost of sales (exclusive of depreciation expense shown separately below) | Cost of sales (exclusive of depreciation expense shown separately below) | 820,032 | | 704,602 | | | 2,649,058 | | 2,235,535 | | Cost of sales (exclusive of depreciation expense shown separately below) | 879,577 | | 960,633 | | | 1,851,182 | | 1,829,026 | |
Gross margin | Gross margin | 557,893 | | 463,386 | | | 1,812,213 | | 1,480,663 | | Gross margin | 577,797 | | 683,564 | | | 1,231,744 | | 1,254,320 | |
Selling and administrative expenses | Selling and administrative expenses | 482,307 | | 436,714 | | | 1,444,938 | | 1,352,345 | | Selling and administrative expenses | 488,658 | | 504,000 | | | 986,076 | | 962,631 | |
Depreciation expense | Depreciation expense | 33,086 | | 34,752 | | | 104,750 | | 97,572 | | Depreciation expense | 35,289 | | 33,974 | | | 69,266 | | 71,664 | |
Gain on sale of distribution centers | Gain on sale of distribution centers | 0 | | (178,534) | | | (463,053) | | (178,534) | | Gain on sale of distribution centers | — | | (463,053) | | | — | | (463,053) | |
Operating profit | Operating profit | 42,500 | | 170,454 | | | 725,578 | | 209,280 | | Operating profit | 53,850 | | 608,643 | | | 176,402 | | 683,078 | |
Interest expense | Interest expense | (2,586) | | (5,359) | | | (8,456) | | (13,657) | | Interest expense | (2,296) | | (2,548) | | | (4,864) | | (5,870) | |
Other income (expense) | Other income (expense) | (484) | | (322) | | | (2,444) | | (201) | | Other income (expense) | (133) | | 1,357 | | | 827 | | (1,960) | |
Income before income taxes | Income before income taxes | 39,430 | | 164,773 | | | 714,678 | | 195,422 | | Income before income taxes | 51,421 | | 607,452 | | | 172,365 | | 675,248 | |
Income tax expense | Income tax expense | 9,520 | | 37,791 | | | 183,473 | | 46,722 | | Income tax expense | 13,714 | | 155,480 | | | 40,095 | | 173,953 | |
Net income and comprehensive income | Net income and comprehensive income | $ | 29,910 | | $ | 126,982 | | | $ | 531,205 | | $ | 148,700 | | Net income and comprehensive income | $ | 37,707 | | $ | 451,972 | | | $ | 132,270 | | $ | 501,295 | |
| Earnings per common share | Earnings per common share | | | | Earnings per common share | | | |
Basic | Basic | $ | 0.79 | | $ | 3.25 | | | $ | 13.69 | | $ | 3.78 | | Basic | $ | 1.11 | | $ | 11.52 | | | $ | 3.81 | | $ | 12.79 | |
Diluted | Diluted | $ | 0.76 | | $ | 3.25 | | | $ | 13.46 | | $ | 3.77 | | Diluted | $ | 1.09 | | $ | 11.29 | | | $ | 3.75 | | $ | 12.66 | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | | | | Weighted-average common shares outstanding | | | |
Basic | Basic | 38,054 | | 39,017 | | | 38,807 | | 39,313 | | Basic | 34,004 | | 39,239 | | | 34,676 | | 39,184 | |
Dilutive effect of share-based awards | Dilutive effect of share-based awards | 1,137 | | 77 | | | 659 | | 85 | | Dilutive effect of share-based awards | 712 | | 801 | | | 643 | | 419 | |
Diluted | Diluted | 39,191 | | 39,094 | | | 39,466 | | 39,398 | | Diluted | 34,716 | | 40,040 | | | 35,319 | | 39,603 | |
| Cash dividends declared per common share | Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | | | $ | 0.90 | | $ | 0.90 | | Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | | | $ | 0.60 | | $ | 0.60 | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands, except par value) |
| | | October 31, 2020 | | February 1, 2020 | | July 31, 2021 | | January 30, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 547,831 | | | $ | 52,721 | | Cash and cash equivalents | $ | 293,322 | | | $ | 559,556 | |
Inventories | Inventories | 1,089,068 | | | 921,266 | | Inventories | 943,776 | | | 940,294 | |
Other current assets | Other current assets | 84,814 | | | 89,962 | | Other current assets | 142,066 | | | 85,939 | |
Total current assets | Total current assets | 1,721,713 | | | 1,063,949 | | Total current assets | 1,379,164 | | | 1,585,789 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 1,679,054 | | | 1,202,252 | | Operating lease right-of-use assets | 1,652,631 | | | 1,649,009 | |
Property and equipment - net | Property and equipment - net | 721,668 | | | 849,147 | | Property and equipment - net | 737,259 | | | 717,216 | |
Deferred income taxes | Deferred income taxes | 15,428 | | | 4,762 | | Deferred income taxes | 18,316 | | | 16,329 | |
Other assets | Other assets | 66,533 | | | 69,171 | | Other assets | 35,355 | | | 68,914 | |
Total assets | Total assets | $ | 4,204,396 | | | $ | 3,189,281 | | Total assets | $ | 3,822,725 | | | $ | 4,037,257 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
Accounts payable | Accounts payable | $ | 569,434 | | | $ | 378,241 | | Accounts payable | $ | 390,597 | | | $ | 398,433 | |
Current operating lease liabilities | Current operating lease liabilities | 215,027 | | | 212,144 | | Current operating lease liabilities | 218,930 | | | 226,075 | |
Property, payroll, and other taxes | Property, payroll, and other taxes | 99,399 | | | 82,109 | | Property, payroll, and other taxes | 102,477 | | | 109,694 | |
Accrued operating expenses | Accrued operating expenses | 142,162 | | | 118,973 | | Accrued operating expenses | 137,874 | | | 138,331 | |
Insurance reserves | Insurance reserves | 34,094 | | | 36,131 | | Insurance reserves | 36,033 | | | 34,660 | |
Accrued salaries and wages | Accrued salaries and wages | 40,049 | | | 39,292 | | Accrued salaries and wages | 72,306 | | | 49,830 | |
Income taxes payable | Income taxes payable | 52,813 | | | 3,930 | | Income taxes payable | 1,396 | | | 43,601 | |
Total current liabilities | Total current liabilities | 1,152,978 | | | 870,820 | | Total current liabilities | 959,613 | | | 1,000,624 | |
Long-term debt | Long-term debt | 39,434 | | | 279,464 | | Long-term debt | — | | | 35,764 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | 1,491,571 | | | 1,035,377 | | Noncurrent operating lease liabilities | 1,492,148 | | | 1,465,433 | |
Deferred income taxes | Deferred income taxes | 9,303 | | | 48,610 | | Deferred income taxes | 1,287 | | | 7,762 | |
Insurance reserves | Insurance reserves | 55,089 | | | 57,567 | | Insurance reserves | 58,955 | | | 57,452 | |
Unrecognized tax benefits | Unrecognized tax benefits | 10,073 | | | 10,722 | | Unrecognized tax benefits | 10,392 | | | 11,304 | |
Other liabilities | Other liabilities | 189,646 | | | 41,257 | | Other liabilities | 146,961 | | | 181,187 | |
Shareholders’ equity: | Shareholders’ equity: | | | | Shareholders’ equity: | | | |
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 | 1,175 | | | 1,175 | | |
Treasury shares - 80,407 shares and 78,458 shares, respectively, at cost | (2,636,939) | | | (2,546,232) | | |
Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | | Preferred shares - authorized 2,000 shares; $0.01 par value; none issued | — | | | — | |
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 32,550 shares and 35,535 shares, respectively | | Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 32,550 shares and 35,535 shares, respectively | 1,175 | | | 1,175 | |
Treasury shares - 84,945 shares and 81,960 shares, respectively, at cost | | Treasury shares - 84,945 shares and 81,960 shares, respectively, at cost | (2,934,912) | | | (2,709,259) | |
Additional paid-in capital | Additional paid-in capital | 627,301 | | | 620,728 | | Additional paid-in capital | 625,651 | | | 634,813 | |
Retained earnings | Retained earnings | 3,264,765 | | | 2,769,793 | | Retained earnings | 3,461,455 | | | 3,351,002 | |
Total shareholders’ equity | Total shareholders’ equity | 1,256,302 | | | 845,464 | | Total shareholders’ equity | 1,153,369 | | | 1,277,731 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 4,204,396 | | | $ | 3,189,281 | | Total liabilities and shareholders’ equity | $ | 3,822,725 | | | $ | 4,037,257 | |
The accompanying notes are an integral part of these consolidated financial statements.
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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 | | Shares | Amount | Shares | Amount | Total |
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 | | |
Thirteen Weeks Ended August 1, 2020 | | Thirteen Weeks Ended August 1, 2020 |
Balance - May 2, 2020 | | Balance - May 2, 2020 | 39,223 | | $ | 1,175 | | 78,272 | | $ | (2,538,276) | | $ | 613,823 | | $ | 2,807,211 | | $ | 883,933 | |
Comprehensive income | Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 126,982 | | 126,982 | | Comprehensive income | — | | — | | — | | — | | — | | 451,972 | | 451,972 | |
Dividends declared ($0.30 per share) | Dividends declared ($0.30 per share) | — | | 0 | | — | | 0 | | 0 | | (11,954) | | (11,954) | | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (12,335) | | (12,335) | |
Purchases of common shares | Purchases of common shares | (18) | | 0 | | 18 | | (423) | | 0 | | 0 | | (423) | | Purchases of common shares | — | | — | | — | | (11) | | — | | — | | (11) | |
Exercise of stock options | Exercise of stock options | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Exercise of stock options | 3 | | — | | (3) | | 91 | | 7 | | — | | 98 | |
Restricted shares vested | Restricted shares vested | 47 | | 0 | | (47) | | 1,526 | | (1,526) | | 0 | | 0 | | Restricted shares vested | 24 | | — | | (24) | | 795 | | (795) | | — | | — | |
Performance shares vested | Performance shares vested | 6 | | 0 | | (6) | | 204 | | (204) | | 0 | | 0 | | Performance shares vested | — | | — | | — | | — | | — | | — | | — | |
Other | Other | 0 | | 0 | | 0 | | (2) | | 0 | | 0 | | (2) | | Other | 1 | | — | | (1) | | 42 | | 8 | | — | | 50 | |
Share-based employee compensation expense | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 3,178 | | 0 | | 3,178 | | Share-based employee compensation expense | — | | — | | — | | — | | 4,453 | | — | | 4,453 | |
Balance - November 2, 2019 | 39,036 | | $ | 1,175 | | 78,459 | | $ | (2,546,251) | | $ | 619,441 | | $ | 2,687,959 | | $ | 762,324 | | |
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 | |
| 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 | | |
Twenty-Six Weeks Ended August 1, 2020 | | Twenty-Six Weeks Ended August 1, 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 | | 148,700 | | 148,700 | | Comprehensive income | — | | — | | — | | — | | — | | 501,295 | | 501,295 | |
Dividends declared ($0.90 per share) | — | | 0 | | — | | 0 | | 0 | | (36,356) | | (36,356) | | |
Adjustment for ASU 2016-02 | — | | — | | — | | — | | — | | 348 | | 348 | | |
Dividends declared ($0.60 per share) | | Dividends declared ($0.60 per share) | — | | — | | — | | — | | — | | (24,240) | | (24,240) | |
Purchases of common shares | Purchases of common shares | (1,474) | | 0 | | 1,474 | | (55,342) | | 0 | | 0 | | (55,342) | | Purchases of common shares | (119) | | — | | 119 | | (1,951) | | — | | — | | (1,951) | |
Exercise of stock options | Exercise of stock options | 6 | | 0 | | (6) | | 202 | | (2) | | 0 | | 200 | | Exercise of stock options | 3 | | — | | (3) | | 91 | | 7 | | — | | 98 | |
Restricted shares vested | Restricted shares vested | 201 | | 0 | | (201) | | 6,521 | | (6,521) | | 0 | | 0 | | Restricted shares vested | 264 | | — | | (264) | | 8,577 | | (8,577) | | — | | — | |
Performance shares vested | Performance shares vested | 261 | | 0 | | (261) | | 8,459 | | (8,459) | | 0 | | 0 | | Performance shares vested | 65 | | — | | (65) | | 2,107 | | (2,107) | | — | | — | |
Other | Other | 0 | | 0 | | 0 | | (5) | | 0 | | 0 | | (5) | | Other | 1 | | — | | (1) | | 49 | | 7 | | — | | 56 | |
Share-based employee compensation expense | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 11,738 | | 0 | | 11,738 | | Share-based employee compensation expense | — | | — | | — | | — | | 7,438 | | — | | 7,438 | |
Balance - November 2, 2019 | 39,036 | | $ | 1,175 | | 78,459 | | $ | (2,546,251) | | $ | 619,441 | | $ | 2,687,959 | | $ | 762,324 | | |
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 | |
| Thirteen Weeks Ended October 31, 2020 | |
Balance - August 1, 2020 | 39,251 | | $ | 1,175 | | 78,244 | | $ | (2,537,359) | | $ | 617,496 | | $ | 3,246,848 | | $ | 1,328,160 | | |
Thirteen Weeks Ended July 31, 2021 | | Thirteen Weeks Ended July 31, 2021 |
Balance - May 1, 2021 | | Balance - May 1, 2021 | 34,920 | | $ | 1,175 | | 82,575 | | $ | (2,782,987) | | $ | 615,955 | | $ | 3,434,359 | | $ | 1,268,502 | |
Comprehensive income | Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 29,910 | | 29,910 | | Comprehensive income | — | | — | | — | | — | | — | | 37,707 | | 37,707 | |
Dividends declared ($0.30 per share) | Dividends declared ($0.30 per share) | — | | 0 | | — | | 0 | | 0 | | (11,993) | | (11,993) | | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (10,611) | | (10,611) | |
Purchases of common shares | Purchases of common shares | (2,197) | | 0 | | 2,197 | | (100,690) | | 0 | | 0 | | (100,690) | | Purchases of common shares | (2,411) | | — | | 2,411 | | (153,327) | | — | | — | | (153,327) | |
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 | | Restricted shares vested | 38 | | — | | (38) | | 1,265 | | (1,265) | | — | | — | |
Performance shares vested | Performance shares vested | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Performance shares vested | 3 | | — | | (3) | | 109 | | (109) | | — | | — | |
Other | Other | 0 | | 0 | | 0 | | (2) | | 1 | | 0 | | (1) | | Other | — | | — | | — | | 28 | | 33 | | — | | 61 | |
Share-based employee compensation expense | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 10,906 | | 0 | | 10,906 | | Share-based employee compensation expense | — | | — | | — | | — | | 11,037 | | — | | 11,037 | |
Balance - October 31, 2020 | 37,088 | | $ | 1,175 | | 80,407 | | $ | (2,636,939) | | $ | 627,301 | | $ | 3,264,765 | | $ | 1,256,302 | | |
Balance - July 31, 2021 | | Balance - July 31, 2021 | 32,550 | | $ | 1,175 | | 84,945 | | $ | (2,934,912) | | $ | 625,651 | | $ | 3,461,455 | | $ | 1,153,369 | |
| Thirty-Nine Weeks Ended October 31, 2020 | |
Balance - February 1, 2020 | 39,037 | | $ | 1,175 | | 78,458 | | $ | (2,546,232) | | $ | 620,728 | | $ | 2,769,793 | | $ | 845,464 | | |
Twenty-Six Weeks Ended July 31, 2021 | | Twenty-Six Weeks Ended July 31, 2021 |
Balance - January 30, 2021 | | Balance - January 30, 2021 | 35,535 | | $ | 1,175 | | 81,960 | | $ | (2,709,259) | | $ | 634,813 | | $ | 3,351,002 | | $ | 1,277,731 | |
Comprehensive income | Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 531,205 | | 531,205 | | Comprehensive income | — | | — | | — | | — | | — | | 132,270 | | 132,270 | |
Dividends declared ($0.90 per share) | — | | 0 | | — | | 0 | | 0 | | (36,233) | | (36,233) | | |
Dividends declared ($0.60 per share) | | Dividends declared ($0.60 per share) | — | | — | | — | | — | | — | | (21,817) | | (21,817) | |
Purchases of common shares | Purchases of common shares | (2,316) | | 0 | | 2,316 | | (102,641) | | 0 | | 0 | | (102,641) | | Purchases of common shares | (3,949) | | — | | 3,949 | | (257,818) | | — | | — | | (257,818) | |
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 | | Restricted shares vested | 428 | | — | | (428) | | 14,260 | | (14,260) | | — | | — | |
Performance shares vested | Performance shares vested | 65 | | 0 | | (65) | | 2,107 | | (2,107) | | 0 | | 0 | | Performance shares vested | 536 | | — | | (536) | | 17,879 | | (17,879) | | — | | — | |
Other | Other | 1 | | 0 | | (1) | | 47 | | 8 | | 0 | | 55 | | Other | — | | — | | — | | 26 | | 33 | | — | | 59 | |
Share-based employee compensation expense | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 18,344 | | 0 | | 18,344 | | Share-based employee compensation expense | — | | — | | — | | — | | 22,944 | | — | | 22,944 | |
Balance - October 31, 2020 | 37,088 | | $ | 1,175 | | 80,407 | | $ | (2,636,939) | | $ | 627,301 | | $ | 3,264,765 | | $ | 1,256,302 | | |
Balance - July 31, 2021 | | Balance - July 31, 2021 | 32,550 | | $ | 1,175 | | 84,945 | | $ | (2,934,912) | | $ | 625,651 | | $ | 3,461,455 | | $ | 1,153,369 | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) |
| | | Thirty-Nine Weeks Ended | | Twenty-Six Weeks Ended | |
| | October 31, 2020 | November 2, 2019 | | July 31, 2021 | August 1, 2020 | |
Operating activities: | Operating activities: | | Operating activities: | | |
Net income | Net income | $ | 531,205 | | $ | 148,700 | | Net income | $ | 132,270 | | $ | 501,295 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization expense | Depreciation and amortization expense | 105,136 | | 98,153 | | Depreciation and amortization expense | 69,669 | | 71,924 | | |
Non-cash lease amortization expense | Non-cash lease amortization expense | 175,174 | | 171,564 | | Non-cash lease amortization expense | 129,958 | | 118,170 | | |
Deferred income taxes | Deferred income taxes | (49,973) | | 16,842 | | Deferred income taxes | (8,463) | | (55,806) | | |
Non-cash impairment charge | Non-cash impairment charge | 920 | | 3,292 | | Non-cash impairment charge | 954 | | 658 | | |
Gain on disposition of property and equipment | (463,191) | | (178,431) | | |
Loss (gain) on disposition of property and equipment | | Loss (gain) on disposition of property and equipment | 800 | | (462,744) | | |
Non-cash share-based compensation expense | Non-cash share-based compensation expense | 18,344 | | 11,738 | | Non-cash share-based compensation expense | 22,944 | | 7,438 | | |
Unrealized loss on fuel derivatives | 1,635 | | 126 | | |
Unrealized (gain) loss on fuel derivatives | | Unrealized (gain) loss on fuel derivatives | (1,365) | | 1,438 | | |
Loss on extinguishment of debt | | Loss on extinguishment of debt | 535 | — | | |
Change in assets and liabilities: | Change in assets and liabilities: | | Change in assets and liabilities: | | |
Inventories | Inventories | (167,801) | | (147,702) | | Inventories | (3,482) | | 207,762 | | |
Accounts payable | Accounts payable | 191,193 | | 79,092 | | Accounts payable | (7,836) | | 1,168 | | |
Operating lease liabilities | Operating lease liabilities | (193,818) | | (163,970) | | Operating lease liabilities | (114,965) | | (148,722) | | |
Current income taxes | Current income taxes | 62,204 | | 2,000 | | Current income taxes | (59,900) | | 191,488 | | |
Other current assets | Other current assets | (7,738) | | (4,880) | | Other current assets | (6,561) | | (9,768) | | |
Other current liabilities | Other current liabilities | 36,823 | | 48,538 | | Other current liabilities | (15,608) | | 28,938 | | |
Other assets | Other assets | 2,420 | | (2,066) | | Other assets | 809 | | 2,512 | | |
Other liabilities | Other liabilities | 24,877 | | (2,448) | | Other liabilities | 2,399 | | 12,633 | | |
Net cash provided by operating activities | Net cash provided by operating activities | 267,410 | | 80,548 | | Net cash provided by operating activities | 142,158 | | 468,384 | | |
Investing activities: | Investing activities: | | Investing activities: | | |
Capital expenditures | Capital expenditures | (103,000) | | (231,889) | | Capital expenditures | (77,075) | | (69,402) | | |
Cash proceeds from sale of property and equipment | Cash proceeds from sale of property and equipment | 588,231 | | 190,679 | | Cash proceeds from sale of property and equipment | 13 | | 587,010 | | |
Other | Other | (22) | | (21) | | Other | (24) | | (22) | | |
Net cash provided by (used in) investing activities | 485,209 | | (41,231) | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (77,086) | | 517,586 | | |
Financing activities: | Financing activities: | | Financing activities: | | |
Net (repayments of) proceeds from long-term debt | (239,677) | | 140,926 | | |
Net repayments of long-term debt | | Net repayments of long-term debt | (50,264) | | (236,155) | | |
Net financing proceeds from sale and leaseback | Net financing proceeds from sale and leaseback | 123,435 | | 0 | | Net financing proceeds from sale and leaseback | — | | 124,074 | | |
Payment of finance lease obligations | Payment of finance lease obligations | (2,962) | | (72,479) | | Payment of finance lease obligations | (2,247) | | (1,968) | | |
Dividends paid | Dividends paid | (35,825) | | (36,707) | | Dividends paid | (22,664) | | (24,285) | | |
Proceeds from the exercise of stock options | Proceeds from the exercise of stock options | 108 | | 200 | | Proceeds from the exercise of stock options | — | | 98 | | |
Payment for treasury shares acquired | Payment for treasury shares acquired | (102,641) | | (55,342) | | Payment for treasury shares acquired | (255,752) | | (1,951) | | |
Payments for debt issuance costs | 0 | | (150) | | |
Payments to extinguish debt | | Payments to extinguish debt | (438) | | — | | |
Other | Other | 53 | | (5) | | Other | 59 | | 56 | | |
Net cash used in financing activities | Net cash used in financing activities | (257,509) | | (23,557) | | Net cash used in financing activities | (331,306) | | (140,131) | | |
Increase in cash and cash equivalents | 495,110 | | 15,760 | | |
(Decrease) increase in cash and cash equivalents | | (Decrease) increase in cash and cash equivalents | (266,234) | | 845,839 | | |
Cash and cash equivalents: | Cash and cash equivalents: | | Cash and cash equivalents: | | |
Beginning of period | Beginning of period | 52,721 | | 46,034 | | Beginning of period | 559,556 | | 52,721 | | |
End of period | End of period | $ | 547,831 | | $ | 61,794 | | End of period | $ | 293,322 | | $ | 898,560 | | |
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 OctoberJuly 31, 2020,2021, we operated 1,4111,418 stores in 47 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 websitewebsites 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, including as a result of the COVID-19 coronavirus pandemic, which has disrupted and may continue to disrupt our business. We have historically experienced seasonal fluctuations, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter. However, due to demand volatility, supply chain disruption, and other effects we have experienced duringas a result of the COVID-19 coronavirus pandemic, the seasonality of our 20202021 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 1, January 30, 2021 (“2020 (“2019 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 2021 (“2021”) is comprised of the 52 weeks that began on January 31, 2021 and will end on January 29, 2022. Fiscal year 2020 (“2020”) iswas comprised of the 52 weeks that began on February 2, 2020 and will endended on January 30, 2021. Fiscal year 2019 (“2019”) was comprised of the 52 weeks that began on February 3, 2019 and ended on February 1, 2020. The fiscal quarters ended OctoberJuly 31, 20202021 (“thirdsecond quarter of 2020”2021”) and November 2, 2019August 1, 2020 (“thirdsecond quarter of 2019”2020”) were both comprised of 13 weeks. The year-to-date periods ended OctoberJuly 31, 2021 (“year-to-date 2021”) and August 1, 2020 (“year-to-date 2020") and November 2, 2019 (“year-to-date 2019”2020”) were both comprised of 3926 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 (which includes rent), 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 $66.3$71.9 million and $48.8$59.7 million for the thirdsecond quarter of 2021 and the second quarter of 2020, and the third quarter of 2019, respectively, and $178.3$138.1 million and $137.1$112.0 million for the year-to-date 20202021 and the year-to-date 2019,2020, 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,payment card-linked marketing, and in-store point-of-purchase signage and presentations. Advertising expenses are included in selling and administrative expenses. Advertising expenses were $24.4$21.9 million and $18.2$21.9 million for the thirdsecond quarter of 2021 and the second quarter of 2020, and the third quarter of 2019, respectively, and $69.2$43.8 million and $57.9$44.8 million for the year-to-date 20202021 and the year-to-date 2019,2020, 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.
Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for the year-to-date 20202021 and the year-to-date 2019:2020:
| | | Thirty-Nine Weeks Ended | | Twenty-Six Weeks Ended |
(In thousands) | (In thousands) | October 31, 2020 | | November 2, 2019 | (In thousands) | July 31, 2021 | | August 1, 2020 |
Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | | | |
Cash paid for interest | Cash paid for interest | $ | 5,864 | | | $ | 13,828 | | Cash paid for interest | $ | 2,310 | | | $ | 5,338 | |
Cash paid for income taxes, excluding impact of refunds | Cash paid for income taxes, excluding impact of refunds | 171,155 | | | 28,379 | | Cash paid for income taxes, excluding impact of refunds | 108,112 | | | 38,356 | |
Gross proceeds from long-term debt | Gross proceeds from long-term debt | 514,500 | | | 1,425,400 | | Gross proceeds from long-term debt | — | | | 514,500 | |
Gross payments of long-term debt | Gross payments of long-term debt | 754,177 | | | 1,284,474 | | Gross payments of long-term debt | 50,264 | | | 750,655 | |
Gross financing proceeds from sale and leaseback | Gross financing proceeds from sale and leaseback | 133,999 | | | 0 | | Gross financing proceeds from sale and leaseback | — | | | 133,999 | |
Gross repayments of financing from sale and leaseback | Gross repayments of financing from sale and leaseback | 10,564 | | | 0 | | Gross repayments of financing from sale and leaseback | — | | | 9,925 | |
Cash paid for operating lease liabilities | Cash paid for operating lease liabilities | 264,676 | | | 217,935 | | Cash paid for operating lease liabilities | 163,744 | | | 189,263 | |
Non-cash activity: | Non-cash activity: | | | | Non-cash activity: | | | |
Assets acquired under finance leases | 0 | | | 70,831 | | |
Share repurchases payable | | Share repurchases payable | 2,066 | | | — | |
Accrued property and equipment | Accrued property and equipment | 19,608 | | | 23,906 | | Accrued property and equipment | 30,551 | | | 22,057 | |
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 661,182 | | | $ | 1,489,449 | | Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 134,738 | | | $ | 572,949 | |
ReclassificationReclassifications
In the year-to-date 2021, we realigned select merchandise categories to be consistent with the realignment of Merchandise Categories
We periodically assess,our merchandising team and make minor adjustmentschanges to our product hierarchy, which can impactmanagement reporting. To better suit the roll-up ofnew alignment, we renamed our Electronics, Toys, & Accessories category as Apparel, Electronics, & Other. We moved our pet department from our Consumables category to our Food category; our home organization department from our Soft Home category to our Hard Home category; our toys department from our Apparel, Electronics, & Other category to our Hard Home category; our candy & snacks from our Food category to our Apparel, Electronics, & Other category; and added new departments for the merchandise categories. Our financial reporting process utilizesassortments for The Lot, our cross-category presentation solution, and 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 comparedQueue Line, our streamlined checkout experience, to previously reported amounts.the Apparel, Electronics, & Other category.
Recently Adopted Accounting Standards
In August 2018,Our seven merchandise categories, which match our internal management and reporting of merchandise net sales are now as follows: Food; Consumables; Soft Home; Hard Home; Furniture; Seasonal; and Apparel, Electronics, & Other. The Food category includes our beverage & grocery; specialty foods; and pet departments. The Consumables category includes our health, beauty and cosmetics; plastics; paper; and chemical departments. The Soft Home category includes our home décor; frames; fashion bedding; utility bedding; bath; window; decorative textile; and area rugs departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; home maintenance; home organization; and toys departments. The Furniture category includes our upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden; summer; Christmas; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15 Intangibles - Goodwillassortment for The Lot, our cross-category presentation solution, and Other - Internal-Use Software. This update evaluates the accountingassortment for costs paid by a customer to implement a cloud computing arrangement. The new guidance aligns cloud computing arrangement implementation cost accounting with the capitalization requirements for internal-use software development, while leaving the accounting for service elements unchanged. On February 2, 2020, we adopted ASU 2018-15 on a prospective basis. The impact of the adoption was immaterial to the consolidated financial statements.Queue Line, our streamlined checkout experience.
In order to provide comparative information, we have reclassified our results into the new alignment for both periods presented.
Recent Accounting Pronouncements
There are currently no new accounting pronouncements with a future effective date that are of significance, or potential significance, to us.
NOTE 2 – DEBT
Bank Credit Facility
On August 31, 2018, we entered into a $700 million five-year unsecured credit facility (“2018 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 distribution center in 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 OctoberJuly 31, 2020,2021, we had 0no borrowings outstanding under the 2018 Credit Agreement, while $6.3$9.1 million was committed to outstanding letters of credit, leaving $693.7$690.9 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 iswas secured by the equipment at our Apple Valley, CA distribution center. The 2019 Term Note will expire on May 7, 2024. We are required to make monthly payments over the term of the 2019 Term Notecenter and are permitted to prepay, subject to penalties, at any time. Thecarried an interest rate on the 2019 Term Note isof 3.3%. In connection with our entry into the 2019 Term Note, we paid debt issuance costs of $0.2 million. In light of our strong liquidity and current market conditions, on June 7, 2021, we prepaid the remaining $44.3 million principal balance under the 2019 Term Note. In connection with the prepayment, we incurred a $0.4 million prepayment fee and recognized a $0.5 million loss on debt extinguishment, which was recorded in Other income (expense) in the consolidated statements of operations and comprehensive income, in the second quarter of 2021.
Debt was recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
Instrument (In thousands) | | 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) | | July 31, 2021 | | January 30, 2021 |
2019 Term Note | | $ | — | | | $ | 50,264 | |
Credit Agreement | | — | | | — | |
Total debt | | $ | — | | | $ | 50,264 | |
Less current portion of long-term debt (included in Accrued operating expenses) | | $ | — | | | $ | (14,500) | |
Long-term debt | | $ | — | | | $ | 35,764 | |
NOTE 3 – FAIR VALUE MEASUREMENTS
In 2020,At July 31, 2021 and January 30, 2021, 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)held investments in money market fund investments and commercial paper investments. These highly liquid investmentsfunds, which 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.
InAt July 31, 2021 and January 30, 2021, in connection with our nonqualified deferred compensation plan, we had mutual fund investments, which 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 OctoberJuly 31, 2020,2021, the fair value of our investments were recorded in our consolidated balance sheets as follows:
| (In thousands) | (In thousands) | Balance Sheet Location | October 31, 2020 | Level 1 | Level 2 | (In thousands) | Balance Sheet Location | July 31, 2021 | Level 1 |
Assets: | Assets: | | Assets: | |
Money market funds | Money market funds | Cash and cash equivalents | $ | 175,070 | | $ | 175,070 | | $ | 0 | | Money market funds | Cash and cash equivalents | $ | 35,038 | | $ | 35,038 | |
Commercial paper | Cash and cash equivalents | 29,996 | | 0 | | 29,996 | | |
Mutual funds - deferred compensation plan | Mutual funds - deferred compensation plan | Other Assets | $ | 30,777 | | $ | 30,777 | | $ | 0 | | Mutual funds - deferred compensation plan | Other current assets | $ | 27,354 | | $ | 27,354 | |
As of February 1, 2020,January 30, 2021, 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. The carrying value of these instruments 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. | | | | | | | | | | | |
(In thousands) | Balance Sheet Location | January 30, 2021 | Level 1 |
Assets: | | | |
Money market funds | Cash and cash equivalents | $ | 175,113 | | $ | 175,113 | |
Mutual funds - deferred compensation plan | Other Assets | $ | 32,484 | | $ | 32,484 | |
The carrying value of accounts receivable and accounts payable approximates fair value because of the relatively short maturity of these items.
NOTE 4 – 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,Antidilutive 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, respectively. For the third quarter of 2020, it was determined that an immaterial amount of stock options outstanding were antidilutive and excluded from the computation of diluted earnings 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 2020 and the year-to-date 2019 were 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(“PSUs”), and performance restricted share units (“PRSUs”), are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. The restricted stock units, PSUs, and performance share unitsPRSUs that were antidilutive, as determined under the treasury stock method, were immaterial0.2 million and 0.5 millionimmaterial for the thirdsecond quarter of 2021 and the second quarter of 2020, and the third quarter of 2019, respectively, and immaterial0.1 million and 0.40.3 million for the year-to-date 20202021 and the year-to-date 2019,2020, respectively.
Share Repurchase Programs
On August 27, 2020, our Board of Directors authorized the repurchase of up to $500 million of our common shares (“2020 Repurchase 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 2020 Repurchase Authorization has no scheduled termination date.
During the third quarter of 2020, we acquired approximately 2.2 million of our outstanding commonThe Company repurchased shares for $100.0 million under the 2020 Repurchase Authorization during the year-to-date 2021 as follows:
| | | | | | | | | | | |
| Number of Shares Repurchased | | Amount of Repurchased Shares |
2021: | (In thousands) | | (In thousands) |
First quarter | 1,149 | | | $ | 77,533 | |
Second quarter | 2,405 | | | 152,883 | |
Total | 3,554 | | | $ | 230,416 | |
As of July 31, 2021, we had $96.8 million available for future repurchases under the 2020 Repurchase Authorization.
In addition to shares repurchased under the 2020 Repurchase Authorization, purchases of common shares reported in the consolidated statements of shareholders’ equity include shares repurchased to satisfy income tax withholdings associated with the vesting of share-based awards.
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 | | Dividends Per Share | | Amount Declared | | Amount Paid |
2020: | | | (In thousands) | | (In thousands) | |
2021: | | 2021: | | | (In thousands) | | (In thousands) |
First quarter | First quarter | $ | 0.30 | | | $ | 11,905 | | | $ | 12,478 | | First quarter | $ | 0.30 | | | $ | 11,206 | | | $ | 12,460 | |
Second quarter | Second quarter | 0.30 | | | 12,335 | | | 11,807 | | Second quarter | 0.30 | | | 10,611 | | | 10,204 | |
Third quarter | 0.30 | | | 11,993 | | | 11,540 | | |
Total | Total | $ | 0.90 | | | $ | 36,233 | | | $ | 35,825 | | Total | $ | 0.60 | | | $ | 21,817 | | | $ | 22,664 | |
|
The amount of dividends declared may vary from the amount of dividends paid in a period due to the vesting of restricted stock units, PSUs, and performance share units, which accrue dividend equivalent rights that are paid when the award vests.PRSUs. 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 of Directors.
NOTE 5 – SHARE-BASED PLANS
We have issued nonqualified stock options, restricted stock units, PSUs, PRSUs, and performance share unitsnonqualified stock options under our shareholder-approved equity compensation plans. At OctoberJuly 31, 2020, the number of2021, we had no outstanding PRSUs and no outstanding 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.options. We recognized share-based compensation expense of $10.9$11.0 million and $3.2$4.5 million in the thirdsecond quarter of 2021 and the second quarter of 2020, and the third quarter of 2019, respectively, and $18.3$22.9 million and $11.7$7.4 million for the year-to-date 20202021 and the year-to-date 2019,2020, respectively.
Non-vested Restricted Stock Units
The following table summarizes the non-vested restricted stock units activity for the year-to-date 2020:2021:
| | | Number of Shares | Weighted Average Grant-Date Fair Value Per Share | | 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 | | |
Outstanding non-vested restricted stock units at January 30, 2021 | | Outstanding non-vested restricted stock units at January 30, 2021 | 1,214,212 | | $ | 22.71 | |
Granted | Granted | 921,309 | | 15.82 | | Granted | 206,685 | | 70.77 | |
Vested | Vested | (239,856) | | 43.07 | | Vested | (390,116) | | 22.74 | |
Forfeited | Forfeited | (1,511) | | 38.06 | | Forfeited | (31,181) | | 25.26 | |
Outstanding non-vested restricted stock units at May 2, 2020 | 1,328,452 | | $ | 21.95 | | |
Outstanding non-vested restricted stock units at May 1, 2021 | | Outstanding non-vested restricted stock units at May 1, 2021 | 999,600 | | $ | 32.56 | |
Granted | Granted | 74,244 | | 33.20 | | Granted | 34,847 | | 64.55 | |
Vested | Vested | (24,498) | | 27.99 | | Vested | (37,454) | | 32.85 | |
Forfeited | Forfeited | (41,074) | | 25.26 | | Forfeited | (12,851) | | 25.39 | |
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 | | |
Outstanding non-vested restricted stock units at July 31, 2021 | | Outstanding non-vested restricted stock units at July 31, 2021 | 984,142 | | $ | 33.77 | |
The non-vested restricted stock units granted in the year-to-date 20202021 generally vest and are expensed on a ratable basis over three years from the grant date of the award, if a threshold financial performance objective 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 2020, 44,2292021, 22,850 common shares underlying the restricted stock units granted in 20192020 to the non-employee members of our Board vested on the trading day immediately preceding our 20202021 Annual Meeting of Shareholders (“20202021 Annual Meeting”). These units were part of the annual compensation of the non-employee directors of the Board. Additionally, in the second quarter of 2020,2021, the chairman of our Board received an annual restricted stock unit grant having a grant date fair value of approximately $210,000.$245,000. The remaining non-employees elected to our Board at our 20202021 Annual Meeting each received an annual restricted stock unit grant having a grant date fair value of approximately $145,000. The 20202021 restricted stock units will vest on the earlier of (1) the trading day immediately preceding our 20212022 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 if their service on the Board terminates before either vesting event occurs.
Performance Share Units
In the year-to-date 2020, we awarded performance share units with a restriction featurePRSUs to certain members of senior management, which vestwere subject to vesting based on the achievement of share price performance goals and a minimum service requirement of one year (“RPSUs”).year. The RPSUs havePRSUs had 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 RPSUsPRSUs 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. All of the PRSUs awarded in 2020 vested in the year-to-date 2021.
Prior to 2020, and in the year-to-date 2021, we awarded performance share units (“PSUs”)issued PSUs to certain members of management, which will vest if certain financial performance objectives are achieved over a three-year performance period and the grantee remains employed by us during the performance period. Typically, theThe 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 | Issue Year | Outstanding PSUs and RPSUs at October 31, 2020 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period | Issue Year | Outstanding PSUs at July 31, 2021 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
2018 | 136,199 | | August 2020 | | Fiscal 2020 | |
2019 | 2019 | 266,118 | | | March 2021 | Fiscal 2021 | 2019 | 254,860 | | March 2021 | | Fiscal 2021 |
2020 | 339,568 | | April 2020 | | Fiscal 2020 - 2021 | |
2021 | | 2021 | 174,576 | | | March 2023 | Fiscal 2023 |
Total | Total | 741,885 | | | Total | 429,436 | | |
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. During the first quarter of 2021, the PSUs issued in 2018 vested with an average performance attainment higher than the targets established.
We recognized $7.8$7.2 million and $0.2$1.2 million in the thirdsecond quarter of 20202021 and 2019,2020, respectively, and $9.4$15.8 million and $2.5$1.6 million in the year-to-date 20202021 and 20192020 respectively, of share-based compensation expense related to PSUs.PSUs and PRSUs.
The following table summarizes the activity related to PSUs and RPSUsPRSUs for the year-to-date 2020:2021:
| | | Number of Units | Weighted Average Grant-Date Fair Value Per Share | | Number of Units | Weighted Average Grant-Date Fair Value Per Share |
Outstanding PSUs and RPSUs at February 1, 2020 | 181,922 | | $ | 31.89 | | |
Outstanding PSUs and PRSUs at January 30, 2021 | | Outstanding PSUs and PRSUs at January 30, 2021 | 474,031 | | $ | 24.31 | |
Granted | Granted | 408,340 | | 11.70 | | Granted | 263,787 | | 70.24 | |
Vested | Vested | (181,062) | | 31.89 | | Vested | (470,808) | | 24.27 | |
Forfeited | Forfeited | (860) | | 31.89 | | Forfeited | (8,300) | | 70.24 | |
Outstanding PSUs and RPSUs at May 2, 2020 | 408,340 | | $ | 11.70 | | |
Outstanding PSUs and PRSUs at May 1, 2021 | | Outstanding PSUs and PRSUs at May 1, 2021 | 258,710 | | $ | 69.74 | |
Granted | Granted | 4,682 | | 29.44 | | Granted | — | | — | |
Vested | Vested | 0 | | 0 | | Vested | (3,223) | | 29.93 | |
Forfeited | Forfeited | (12,450) | | 11.70 | | Forfeited | (627) | | 70.24 | |
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 | | |
Outstanding PSUs and PRSUs at July 31, 2021 | | Outstanding PSUs and PRSUs at July 31, 2021 | 254,860 | | $ | 70.24 | |
The following activity occurred under our share-based plans during the respective periods shown:
| | | Third Quarter | | Year-to-Date | | Second Quarter | | Year-to-Date |
(In thousands) | (In thousands) | 2020 | 2019 | | 2020 | 2019 | (In thousands) | 2021 | 2020 | | 2021 | 2020 |
Total intrinsic value of stock options exercised | Total intrinsic value of stock options exercised | $ | 4 | | $ | 0 | | | $ | 16 | | $ | 42 | | Total intrinsic value of stock options exercised | $ | — | | $ | 12 | | | $ | — | | $ | 12 | |
Total fair value of restricted stock vested | Total fair value of restricted stock vested | 1,694 | | 1,051 | | | 6,584 | | 6,434 | | Total fair value of restricted stock vested | 2,417 | | 849 | | | 29,318 | | 4,890 | |
Total fair value of performance shares vested | Total fair value of performance shares vested | $ | 0 | | $ | 143 | | | $ | 924 | | $ | 9,849 | | Total fair value of performance shares vested | $ | 219 | | $ | — | | | $ | 37,387 | | $ | 924 | |
The total unearned compensation cost related to all share-based awards outstanding, excluding PSUs issued in 2018 and 2019,2021, at OctoberJuly 31, 20202021 was approximately $25.0$37.0 million. This compensation cost is expected to be recognized through September 2023July 2024 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 1.71.6 years from OctoberJuly 31, 2020.2021.
NOTE 6 – INCOME TAXES
We have estimated the reasonably possible expected net change in unrecognized tax benefits through OctoberJuly 30, 2021,2022, 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 $3.0$4.0 million. Actual results may differ materially from this estimate.
NOTE 7 – CONTINGENCIES
California Wage and Hour Matters
We currently are defending several wage and hour matters in California. The cases were brought by various current and/or former California associates alleging various violations of California wage and hour laws. During the first quarter of 2019, upon consideration of these matters, including outcomes of cases against other retailers, 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.
During the third quarter of 2020, we reached settlement agreements in our two largest wage and hour class action matters in California and the settlements were preliminarily approved by the 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.
Other MattersLegal Proceedings
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 8 – BUSINESS SEGMENT DATA
We use the following seven merchandise categories, which matchare consistent with our internal management and reporting of merchandise net sales: Food; Consumables; Soft Home; Hard Home; Furniture; Seasonal; and Apparel, Electronics, Toys, & Accessories.Other. The Food category includes our beverage & grocery; candy & snacks;specialty foods; and specialty foodspet departments. The Consumables category includes our health, beauty and cosmetics; plastics; paper; chemical; and petchemical departments. The Soft Home category includes theour home décor; frames; fashion bedding; utility bedding; bath; window; decorative textile; home organization; and area rugs departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; greeting cards;home maintenance; home organization; and home maintenancetoys departments. The Furniture category includes our upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden; summer; Christmas; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the assortment for The Lot, our cross-category presentation solution, and the assortment for the Queue Line, our streamlined checkout experience.
In the year-to-date 2021, we realigned our merchandise categories and renamed our Electronics, Toys, & Accessories merchandise category includes our electronics; jewelry; hosiery; apparel; and toys departments.as Apparel, Electronics, & Other. See the reclassifications section of note 1 to the consolidated financial statements for further discussion.
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 | | Second Quarter | | Year-to-Date |
(In thousands) | (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (In thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Furniture | Furniture | | $ | 429,305 | | | $ | 344,103 | | | $ | 1,284,743 | | | $ | 1,031,357 | | Furniture | | $ | 409,078 | | | $ | 439,737 | | | $ | 890,509 | | | $ | 855,438 | |
Seasonal | | Seasonal | | 259,682 | | | 299,700 | | | 563,600 | | | 496,021 | |
Soft Home | Soft Home | | 253,700 | | | 206,493 | | | 770,078 | | | 606,397 | | Soft Home | | 183,249 | | | 242,664 | | | 407,103 | | | 439,416 | |
Food | | Food | | 178,167 | | | 205,797 | | | 358,464 | | | 420,911 | |
Consumables | Consumables | | 216,515 | | | 198,467 | | | 679,007 | | | 581,925 | | Consumables | | 159,301 | | | 177,236 | | | 321,689 | | | 372,931 | |
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 | Hard Home | | 95,572 | | | 79,833 | | | 287,349 | | | 243,584 | | Hard Home | | 145,241 | | | 174,291 | | | 297,002 | | | 304,834 | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | | 122,656 | | | 104,772 | | | 244,559 | | | 193,795 | |
Net sales | Net sales | | $ | 1,377,925 | | | $ | 1,167,988 | | | $ | 4,461,271 | | | $ | 3,716,198 | | Net sales | | $ | 1,457,374 | | | $ | 1,644,197 | | | $ | 3,082,926 | | | $ | 3,083,346 | |
NOTE 9 – GAIN ON SALE OF DISTRIBUTION CENTERS
On 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 in Rancho Cucamonga, CA for a gain on the sale of $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 thirdsecond quarter of 20202021 that we believe are key indicators of our operating performance when compared to our operating performance from the thirdsecond quarter of 2019:2020:
•Net sales increased $209.9decreased $186.8 million, or 18.0%11.4%.
•Comparable sales for stores open at least fifteen months, plus our e-commerce operations, increased $196.2decreased $211.3 million, or 17.8%13.2%.
•Gross margin dollars increased $94.5decreased $105.8 million, while gross margin rate increased 80decreased 200 basis points to 40.5%39.6% of net sales.
•Selling and administrative expenses increased $45.6decreased $15.3 million. As a percentage of net sales, selling and administrative expenses decreased 240increased 280 basis points to 35.0%33.5% of net sales.
•DilutedOperating profit decreased to $53.9 million from $608.6 million and diluted earnings per share decreased to $0.76$1.09 per share from $3.25$11.29 per share.
•In the thirdsecond quarter of 2019,2020, we recorded a pre-tax gain on sale of distribution centercenters of $178.5$463.1 million and consulting and other expenses of $4.0 million related to the sale and leaseback of our four owned distribution center locatedcenters. The combined gain on sale of distribution centers and associated consulting and other expenses increased our operating profit in Rancho Cucamonga, CA, whichthe second quarter of 2020 by $459.1 million and increased our diluted earnings per share for the third quarter of 2019 by approximately $3.49$8.54 per share.
•Inventory decreased by 2.5%, or $28.2 million, to $1,089.1 million from the third quarter of 2019.
•Cash and cash equivalents increaseddecreased by $486.0$605.2 million to $547.8$293.3 million from the thirdsecond quarter of 2019.2020.
•Inventory increased by 32.3%, or $230.3 million, to $943.8 million from the second quarter of 2020.
•Long-term debt decreased $43.1 million following the prepayment of the 2019 Term Note in the second quarter of 2021. We ended the second quarter of 2021 with no long-term debt.
•We declared and paid a quarterly cash dividend in the amount of $0.30 per common share in the thirdsecond quarter of 20202021 consistent with the quarterly cash dividend of $0.30 per common share paid in the thirdsecond quarter of 2019.2020.
•We acquired 2.22.4 million of our outstanding common shares for $100.0$152.9 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 20202021 and the year-to-date 2019:2020:
| | | | 2020 | 2019 | | | 2021 | 2020 |
Stores open at the beginning of the fiscal year | Stores open at the beginning of the fiscal year | 1,404 | | 1,401 | | Stores open at the beginning of the fiscal year | 1,408 | | 1,404 | |
Stores opened during the period | Stores opened during the period | 24 | | 50 | | Stores opened during the period | 25 | | 11 | |
Stores closed during the period | Stores closed during the period | (17) | | (33) | | Stores closed during the period | (15) | | (11) | |
| | Stores open at the end of the period | 1,411 | | 1,418 | | | Stores open at the end of the period | 1,418 | | 1,404 | |
We do not expect to open any stores, while closing approximately three stores in the fourth quarter of 2020. Therefore, we expect our store count at the end of 20202021 to beincrease by approximately 1,408 stores.20 stores compared to our store count at the end of 2020.
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 | | Second Quarter | Year-to-Date |
| | 2020 | 2019 | 2020 | 2019 | | 2021 | 2020 | 2021 | 2020 |
Net sales | Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales (exclusive of depreciation expense shown separately below) | Cost of sales (exclusive of depreciation expense shown separately below) | 59.5 | | 60.3 | | 59.4 | | 60.2 | | Cost of sales (exclusive of depreciation expense shown separately below) | 60.4 | | 58.4 | | 60.0 | | 59.3 | |
Gross margin | Gross margin | 40.5 | | 39.7 | | 40.6 | | 39.8 | | Gross margin | 39.6 | | 41.6 | | 40.0 | | 40.7 | |
Selling and administrative expenses | Selling and administrative expenses | 35.0 | | 37.4 | | 32.4 | | 36.4 | | Selling and administrative expenses | 33.5 | | 30.7 | | 32.0 | | 31.2 | |
Depreciation expense | Depreciation expense | 2.4 | | 3.0 | | 2.3 | | 2.6 | | Depreciation expense | 2.4 | | 2.1 | | 2.2 | | 2.3 | |
Gain on sale of distribution center | 0.0 | | (15.3) | | (10.4) | | (4.8) | | |
Gain on sale of distribution centers | | Gain on sale of distribution centers | 0.0 | | (28.2) | | 0.0 | | (15.0) | |
Operating profit | Operating profit | 3.1 | | 14.6 | | 16.3 | | 5.6 | | Operating profit | 3.7 | | 37.0 | | 5.7 | | 22.2 | |
Interest expense | Interest expense | (0.2) | | (0.5) | | (0.2) | | (0.4) | | Interest expense | (0.2) | | (0.2) | | (0.2) | | (0.2) | |
Other income (expense) | Other income (expense) | (0.0) | | (0.0) | | (0.1) | | (0.0) | | Other income (expense) | (0.0) | | 0.1 | | 0.0 | | (0.1) | |
Income before income taxes | Income before income taxes | 2.9 | | 14.1 | | 16.0 | | 5.3 | | Income before income taxes | 3.5 | | 36.9 | | 5.6 | | 21.9 | |
Income tax expense | Income tax expense | 0.7 | | 3.2 | | 4.1 | | 1.3 | | Income tax expense | 0.9 | | 9.5 | | 1.3 | | 5.6 | |
Net income | Net income | 2.2 | % | 10.9 | % | 11.9 | % | 4.0 | % | Net income | 2.6 | % | 27.5 | % | 4.3 | % | 16.3 | % |
THIRDSECOND QUARTER OF 20202021 COMPARED TO THIRDSECOND QUARTER OF 20192020
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 sales (“comp” or “comps”) in the thirdsecond quarter of 2021 compared to the second quarter of 2020 compared to the third quarter of 2019 were as follows:
| Third Quarter | |
Second Quarter | | Second Quarter |
($ in thousands) | ($ in thousands) | 2020 | | 2019 | | Change | | Comps | ($ in thousands) | 2021 | | 2020 | | Change | | Comps |
Furniture | Furniture | $ | 429,305 | | 31.2 | % | | $ | 344,103 | | 29.4 | % | | $ | 85,202 | | 24.8 | % | | 23.7 | % | Furniture | $ | 409,078 | | 28.1 | % | | $ | 439,737 | | 26.7 | % | | $ | (30,659) | | (7.0) | % | | (9.5) | % |
Seasonal | | Seasonal | 259,682 | | 17.8 | | | 299,700 | | 18.2 | | | (40,018) | | (13.4) | | | (14.6) | |
Soft Home | Soft Home | 253,700 | | 18.4 | | | 206,493 | | 17.7 | | | 47,207 | | 22.9 | | | 23.0 | | Soft Home | 183,249 | | 12.6 | | | 242,664 | | 14.8 | | | (59,415) | | (24.5) | | | (26.1) | |
Food | | Food | 178,167 | | 12.2 | | | 205,797 | | 12.5 | | | (27,630) | | (13.4) | | | (14.9) | |
Consumables | Consumables | 216,515 | | 15.7 | | | 198,467 | | 17.0 | | | 18,048 | | 9.1 | | | 9.8 | | Consumables | 159,301 | | 10.9 | | | 177,236 | | 10.8 | | | (17,935) | | (10.1) | | | (11.4) | |
Food | 181,710 | | 13.2 | | | 180,687 | | 15.5 | | | 1,023 | | 0.6 | | | 0.9 | | |
Seasonal | 100,829 | | 7.3 | | | 94,225 | | 8.1 | | | 6,604 | | 7.0 | | | 7.5 | | |
Electronics, Toys, & Accessories | 100,294 | | 7.3 | | | 64,180 | | 5.5 | | | 36,114 | | 56.3 | | | 56.1 | | |
Hard Home | Hard Home | 95,572 | | 6.9 | | | 79,833 | | 6.8 | | | 15,739 | | 19.7 | | | 19.9 | | Hard Home | 145,241 | | 10.0 | | | 174,291 | | 10.6 | | | (29,050) | | (16.7) | | | (18.0) | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | 122,656 | | 8.4 | | | 104,772 | | 6.4 | | | 17,884 | | 17.1 | | | 15.2 | |
Net sales | Net sales | $ | 1,377,925 | | 100.0 | % | | $ | 1,167,988 | | 100.0 | % | | $ | 209,937 | | 18.0 | % | | 17.8 | % | Net sales | $ | 1,457,374 | | 100.0 | % | | $ | 1,644,197 | | 100.0 | % | | $ | (186,823) | | (11.4) | % | | (13.2) | % |
We periodically assess, and make minor adjustments to, our product hierarchy, which can impactIn the roll-up ofyear-to-date 2021, we realigned our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales bycategories and renamed our Electronics, Toys, & Accessories merchandise category as Apparel, Electronics, & Other. See the reclassifications discussion in note 1 to the consolidated financial statements for alladditional information. In order to provide comparative information, we have reclassified our results into the revised merchandise category alignment for both periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
Net sales increased $209.9decreased $186.8 million, or 18.0%11.4%, to $1,377.9$1,457.4 million in the thirdsecond quarter of 2020,2021, compared to $1,168.0$1,644.2 million in the thirdsecond quarter of 2019.2020. The increasedecrease in net sales was primarily driven by a 17.8% increase13.2% decrease in our comps, which decreased net sales by $211.3 million. This decrease was partially offset by our non-comparable sales, which increased net sales by $196.2 million. Additionally, our non-comparable sales increased net sales by $13.7$24.5 million, driven by increased sales in our new and relocated stores compared to closed stores.stores, and a higher store count compared to the second quarter of 2020. Our comps are calculated based on the results of all stores that were open at least fifteen months plus our e-commerce net sales.
Our comps and net sales declined during the second quarter of 2021 in comparison to the second quarter of 2020 primarily due to the relatively larger impact of government stimulus on consumer behavior during the height of quarantining in the second quarter of 2020.
We experienced a favorable impact toComps and net sales during the third quarter of 2020 driven by demand forin our home products categories, which includesinclude our Furniture, Seasonal, Soft Home, and Hard Home merchandise categories, duedecreased in the second quarter of 2021 compared to customers spending more time at their homes asthe second quarter of 2020. We believe this decrease was primarily attributable to a resultrelatively larger impact of government-sponsored relief funding on consumer behavior in the ongoing COVID-19 coronavirus pandemic. We also experienced a favorable impact to net salesfirst half of 2020 and the easing of nesting trends driven by the additionCOVID-19 pandemic in the second quarter of 2021 compared to the second quarter of 2020. Additionally, we believe our comps and net sales in our home products categories were negatively impacted by supply chain constraints which reduced inventory availability in the second quarter of 2021, and by the impact of labor challenges in our distribution centers, particularly those servicing our stores located on the east coast, which resulted in fewer shipments from our distribution centers to our stores. With the planned opening of our forward distribution centers, small-format distribution centers designed to process bulky and full-pallet shipments, in the third quarter of 2021 and our continuing sourcing efforts, we believe we will begin to mitigate the challenges we are encountering in our supply chain. Despite these challenges, our home products categories performed in line with our expectations in the second quarter of 2021 and we believe that our customers continued to respond positively to our trend-right home offerings and the Broyhill® brand.
Comps and net sales in our Food and Consumables merchandise categories also decreased during the second quarter of 2021 compared to the second quarter of 2020. The decrease was partly driven by lower demand for essential products, which we define as food, consumables, health products, and pet supplies, compared to the second quarter of 2020. We experienced greater demand for these products in the early stages of the COVID-19 pandemic when customers were stocking up on these products. Similar to our home products categories above, comps and net sales in our Food and Consumables categories were also negatively impacted by supply chain constraints and labor challenges in our distribution centers.
Partially offsetting our decreased comps and net sales in the second quarter of 2021 was an increase in comps and net sales in our Apparel, Electronics, & Other category driven by the product assortments found in The Lot and the Queue Line to approximately 50% our stores.Line. 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. Theoccasions. 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 categoryfootprint that provides additional floor space 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 2020 compared to the third quarter of 2019:
•other categories. 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 mattressthese strategic initiatives and we believe the product assortment offered by The Lot and our new Broyhill® furniture assortment.
•The Soft Home category experienced increased net sales and comps during the third quarter of 2020, 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 and comps during the third quarter of 2020, driven by our Christmas and harvest departments, partially offset by decreased net sales and comps in our lawn & garden department. The increase in the Christmas and harvest departments resulted from strong alignment of our holiday assortments toQueue Line is aligned with customer demand increased demand dueand leading 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 Apparel, Electronics, Toys, & Accessories category was driven by our toys, apparel, and accessories departments. The increase was driven byOther category. At the introductionend of these products intothe second quarter of 2021, The Lot and the Queue Line in manyhad each been rolled out to approximately 1,225 stores, compared to approximately 570 stores at the end of our stores, as well as a traffic-driving, brand-name toy promotion run in the thirdsecond 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.
Gross Margin
Gross margin dollars increased $94.5decreased $105.8 million, or 20.4%15.5%, to $557.9$577.8 million for the thirdsecond quarter of 2020,2021, compared to $463.4$683.6 million for the thirdsecond quarter of 2019.2020. The increasedecrease in gross margin dollars was primarily due to an increasea decrease in net sales, which increaseddecreased gross margin dollars by $83.3$77.7 million, and a decrease in gross margin rate, which decreased gross margin dollars by $28.1 million. Gross margin as a percentage of net sales increased 80decreased 200 basis points to 40.5%39.6% in the thirdsecond quarter of 20202021 as compared to 39.7%41.6% in the thirdsecond quarter of 2019.2020. The gross margin rate increasedecrease was primarily a result of higher inbound freight costs driven by increased ocean carriage rates as demand outpaced container and carrier supply. The ocean carriage demand and supply imbalance was exacerbated by temporary COVID-19-related port shutdowns during the second quarter of 2021. Additionally, inbound freight costs increased due to higher domestic transportation rates, related to increased demand following the easing of COVID-19-related restrictions, and increased fuel costs compared to the second quarter of 2020. This increase was partially offset by a lower markdown rate and higher comps in our higher margin merchandise categories, partially offset by higher shrink and lower initial markupcompared to the second quarter of products, which was driven by higher freight costs and receipts skewed toward domestic purchases, which carry a slightly lower average initial markup.2020.
Selling and Administrative Expenses
Selling and administrative expenses were $482.3$488.7 million for the thirdsecond quarter of 2020,2021, compared to $436.7$504.0 million for the thirdsecond quarter of 2019.2020. The increasedecrease of $45.6$15.3 million in selling and administrative expenses was compriseddriven by a decrease in store-related payroll expense of increases$17.7 million, accrued bonus expense of $9.2 million, and the absence of sale and leaseback transaction-related expenses of $4.0 million, partially offset by an increase in distribution and transportation costs of $17.5 million, store-related payroll of $11.5 million, accrued bonus expense of $10.5$12.2 million, share-based compensation expense of $7.7$6.6 million, health benefit expense of $2.9 million, and advertising expense$2.6 million of $6.2 million, partially offset by astore occupancy expense. The decrease in health benefit costsstore-related payroll expense was primarily due to the absence of $7.8 million anda temporary $2 per hour wage increase that was in place during a portion of the second quarter of 2020 for most of our non-exempt workforce. The decrease in accrued bonus expense was driven by the absence of $3.6 million relateda one-time discretionary bonus granted in the second quarter of 2020 to recognize our non-exempt associates in our stores and distribution centers, as well as decreased performance in the second quarter of 2021 relative to our transformational restructuring initiative announcedbonus targets as compared to our performance in 2019,the second quarter of 2020 relative to our bonus targets. The sale and leaseback transaction-related expenses, which consistedincluded consulting costs, were incurred in completing the sale and leaseback of consulting expenses and employee separation costs.our distribution centers in the second quarter of 2020. The increase in distribution and transportation costs was driven by rent on our leased distribution centers, for which we recognized rent expense for the full second quarter of 2021 compared to approximately half of the second quarter of 2020. Additionally, our distribution centers, all of which are now leased,and transportation costs increased due to higher inboundvolume, increased labor costs, and outbound shipment volume to supporttransportation costs, partially offset by the increased sales, and higher transportation rates. Theabsence of the aforementioned temporary $2 per hour wage increase in store-related payroll wasthe second quarter of 2020. Our share-based compensation expense increased primarily due to additional payroll hoursthe timing of the establishment of the grant date of our 2019 PSUs, for which
the grant date was established in the first quarter of 2021, compared to support our increased sales. The increase in accrued bonus expense2018 PSUs, for which the grant date was driven by increased performanceestablished 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 plans.2020. The increase in share-based compensation expense was driven by a higher grant date fair value, higher estimated performance, and timing of the grant date of the 2018 PSUs for which we will recognize expense during 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 costsexpense was due to a lower amounthigher volume of benefits claims duringin the thirdsecond quarter of 2021 compared to the second quarter of 2020, as many medical providers halted elective care in the second quarter of 2020. The increase in store occupancy expense was due to an increase in net store count since the second quarter of 2020, relocated stores which have higher rents than the stores closed, and normal rent increases resulting from lease renewals.
As a percentage of net sales, selling and administrative expenses decreased 240increased 280 basis points to 35.0%33.5% for the thirdsecond quarter of 20202021 compared to 37.4%30.7% for the thirdsecond quarter of 2019.2020.
Depreciation Expense
Depreciation expense decreased $1.7increased $1.3 million to $33.1$35.3 million in the third quarter of 2020, compared to $34.8 million for the third quarter of 2019. The decrease in depreciation expense was due to the absence of depreciation for our distribution centers sold in the second quarter of 2021, compared to $34.0 million for the second quarter of 2020. The increase in depreciation expense was driven by investments in our strategic initiatives, such as The Lot and Queue Line, new stores, and supply chain improvements in the last twelve months.
Depreciation expense as a percentage of sales decreased 60increased 30 basis points compared to the thirdsecond quarter of 2019.2020.
Gain on Sale of Distribution Centers
Gain on sale of distribution centers decreased $463.1 million to $0 in the second quarter of 2021, compared to $463.1 million in the second quarter of 2020. The gain on sale of distribution centers in the second quarter of 2020 was attributable to the sale and leaseback of our distribution centers in Durant, OK; Tremont, PA; Montgomery, AL; and Columbus, OH.
Interest Expense
Interest expense was $2.6$2.3 million in the thirdsecond quarter of 2020,2021, compared to $5.4$2.5 million in the thirdsecond quarter of 2019.2020. The decrease in interest expense was primarily driven by a decrease in total average borrowings.borrowings, partially offset by an increase in our average interest rate. We had total average borrowings (including finance leases and the sale and leaseback financing liability) of $185.9$148.3 million in the thirdsecond quarter of 20202021 compared to total average borrowings of $536.0$249.4 million in the thirdsecond quarter of 2019.2020. The decrease in total average borrowings was driven by our repayment of all outstanding borrowings under the 2018 Credit Agreement duringlate in the second quarter of 2020 and payments made towardthe repayment of all borrowings under the 2019 Term Note sincein the thirdsecond quarter of 2019,2021, partially offset by the establishment of a financing liability in connection with the sale and leaseback transactions for our distribution centers late in the second quarter of 2020. The increase in our average interest rate was driven by a higher average interest rate on the sale and leaseback financing liability compared to our other outstanding borrowings.
Other Income (Expense)
Other income (expense) was $(0.5)$(0.1) million in the thirdsecond quarter of 2020,2021, compared to $(0.3)$1.4 million in the thirdsecond quarter of 2019.2020. The change was driven by increased lossesdecreased gains on our diesel fuel derivatives in thirdsecond quarter of 20202021 compared to lossesthe gains on diesel fuel derivatives during the thirdsecond quarter of 2019.2020, as well as the $0.5 million loss on debt extinguishment recognized in connection with the prepayment of the 2019 Term Note in the second quarter of 2021.
Income Taxes
The effective income tax rate for the thirdsecond quarter of 20202021 was 24.1%26.7% compared to 22.9%25.6% in the thirdsecond quarter of 2019.2020. The increase in the effective income tax rate in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 20192020 was primarily attributable to an increase in nondeductible executive compensation, partially offset by an increase in employment-related tax credits compared to the impact of the gain on sale of distribution center in California in 2019. The tax rate on the gain was less than our normalized tax rate and, thereby reduced our effective tax rate in the thirdsecond quarter of 2019. The impact of the discrete items on the effective income tax rate in the third quarter of 2020 was not meaningfully different from the impact in the third quarter of 2019.
2020.
YEAR-TO-DATE 20202021 COMPARED TO YEAR-TO-DATE 20192020
Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales) in the year-to-date 20202021 and the year-to-date 2019,2020, and the change in net sales (in dollars and percentage) and the change in comps (in percentage) from the year-to-date 20202021 compared to the year-to-date 20192020 were as follows:
| Year-to-Date | Year-to-Date | Year-to-Date |
($ in thousands) | ($ in thousands) | 2020 | | 2019 | | Change | | Comps | ($ in thousands) | 2021 | | 2020 | | Change | | Comps |
Furniture | Furniture | $ | 1,284,743 | | 28.8 | % | | $ | 1,031,357 | | 27.7 | % | | $ | 253,386 | | 24.6 | % | | 23.1 | % | Furniture | $ | 890,509 | | 28.9 | % | | $ | 855,438 | | 27.7 | % | | $ | 35,071 | | 4.1 | % | | 1.8 | % |
Seasonal | | Seasonal | 563,600 | | 18.4 | | | 496,021 | | 16.1 | | | 67,579 | | 13.6 | | | 12.2 | |
Soft Home | Soft Home | 770,078 | | 17.3 | | | 606,397 | | 16.3 | | | 163,681 | | 27.0 | | | 27.0 | | Soft Home | 407,103 | | 13.2 | | | 439,416 | | 14.3 | | | (32,313) | | (7.4) | | | (9.0) | |
Food | | Food | 358,464 | | 11.6 | | | 420,911 | | 13.6 | | | (62,447) | | (14.8) | | | (16.0) | |
Consumables | Consumables | 679,007 | | 15.2 | | | 581,925 | | 15.7 | | | 97,082 | | 16.7 | | | 17.3 | | Consumables | 321,689 | | 10.4 | | | 372,931 | | 12.1 | | | (51,242) | | (13.7) | | | (14.8) | |
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 | Hard Home | 287,349 | | 6.4 | | | 243,584 | | 6.6 | | | 43,765 | | 18.0 | | | 18.5 | | Hard Home | 297,002 | | 9.6 | | | 304,834 | | 9.9 | | | (7,832) | | (2.6) | | | (4.0) | |
Electronics, Toys, & Accessories | 272,704 | | 6.1 | | | 198,143 | | 5.3 | | | 74,561 | | 37.6 | | | 38.6 | | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | 244,559 | | 7.9 | | | 193,795 | | 6.3 | | | 50,764 | | 26.2 | | | 24.4 | |
Net sales | Net sales | $ | 4,461,271 | | 100.0 | % | | $ | 3,716,198 | | 100.0 | % | | $ | 745,073 | | 20.0 | % | | 19.7 | % | Net sales | $ | 3,082,926 | | 100.0 | % | | $ | 3,083,346 | | 100.0 | % | | $ | (420) | | — | % | | (1.7) | % |
Net sales increased $745.1decreased $0.4 million, or 20.0%0%, to $4,461.3$3,082.9 million in the year-to-date 2020,2021, compared to $3,716.2$3,083.3 million in the year-to-date 2019.2020. The increasedecrease in net sales was driven by a comp increases in eachdecrease of 1.7%, which decreased net sales by $52.0 million, partially offset by our merchandise categories, with an overall comp increase of 19.7%,non-comparable sales which increased net sales by $694.2 million. Additionally, our non-comparable sales$51.6 million as a result of increased net sales by $50.9 million, driven by increased sales in our new and relocated stores compared to closed stores.stores, and an increase in net store count compared to the second quarter of 2020.
Overall, we experienced a favorable impact toOur net sales duringin the year-to-date 2021 were in line with our net sales in the year-to-date 2020, duedespite a greater impact of government sponsored relief funds distributed in the year-to-date 2020 compared to our position asthe year-to-date 2021. In the year-to-date 2021, we experienced an “essential retailer” during the COVID-19 coronavirus pandemic and the increasedincrease in demand for our home products whileFurniture and Seasonal categories which we believe was bolstered by government stimulus and unemployment funds, particularly in the first quarter of 2021, together with the continuation of nesting trends we experienced in 2020 due to customers are spendinginvesting more time atand discretionary funds in their home. In the first quarter of 2020,2021, these nesting trends shifted toward patio furniture and other outdoor products which drove increased net sales and comps in the lawn & garden and summer departments of our Seasonal merchandise category. Nesting trends abated in the second quarter of 2021 as COVID-19 vaccines became widely available and many consumers began spending more time outside their homes. Despite the easing of the nesting trends and stimulus spending that were driven by the COVID-19 pandemic, we believe that our customers continued to respond positively to our product assortments and our Broyhill® brand in particular. While our Furniture and Seasonal comps and net sales were negatively impacted by supply chain constraints and labor challenges in our distribution centers in the second quarter of 2021, we were pleased with the performance of these categories in the year-to-date 2021 and we believe we can overcome the challenges we are encountering in our supply chain.
Our Soft Home and Hard Home categories each experienced a decrease in net sales and comps in the year-to-date 2021 compared to the year-to-date 2020, primarily due to lower on-hand product availability in the second quarter of 2021, which was primarily driven by global supply chain challenges. Despite the decrease in net sales and comps in the year-to-date 2021, both categories performed in line with our expectations.
Our Apparel, Electronics, & Other category also experienced increased net sales and positive comps in the year-to-date 2021 driven by our customers responding positively to our strategic initiatives - including The Lot and Queue Line, which led to our increased net sales and positive comps in the year-to-date 2021. We believe our product assortment is strongly aligned with customer demand and that the Apparel, Electronics, & Other category is a significant increasegrowth opportunity for us.
Our Food and Consumables categories each experienced a decrease in net sales and comps in the year-to-date 2021 compared to the year-to-date 2020, primarily due to a decrease in demand for “essentialessential products,” which we define as food, consumables, health products, and pet supplies, with the primary 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, wesupplies. We experienced a shift ingreater demand from essentialfor these products to products in our Furniture, Seasonal, Soft Home and Hard Home categories driven by the release of government stimulus and enhanced unemployment funds. Despite the conclusion of government stimulus and enhanced unemployment programs at the beginning of the third quarter of 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 and positive comps compared to the year-to-date 2019. Additionally, the early impact of our Pantry Optimization project, which was completed late in the third quarter of 2020, contributed to the increased net sales and positive comps compared to the year-to-date 2019.
All of our merchandise categories generated increased net sales and positive comps in the year-to-date 2020 compared to the year-to-date 2019:
•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 category benefited from a favorable response to our new Broyhill® assortment.
•Our Food and Consumables categories experienced increased sales and positive comps driven by high demand for “essential products” during the early stages of the COVID-19 coronavirus pandemic. Whilepandemic, which has since declined as customers are no longer stocking up on these products. Our Food and Consumables net sales and comps deceleratedcategories were also negatively impacted by supply chain constraints in the second quarter of 2021 and third quarters of 2020, the categories continued to outperform theby labor challenges in our distribution centers.
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 Seasonal 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 outdoor furniture, lawn maintenance assortments, and holiday decorations as a result of spending more time at home. Additionally, our customers continue to respond well to our new Broyhill® assortment of patio furniture.
•The increased net sales and positive comps in Hard Home was driven by an increase in our small appliances, table top, and food preparation departments. Despite space reductions and the exit 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 positive 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 the year-to-date 2020.
Gross Margin
Gross margin dollars increased $331.5decreased $22.6 million, or 22.4%1.8%, to $1,812.2$1,231.7 million for the year-to-date 2020,2021, compared to $1,480.7$1,254.3 million for the year-to-date 2019.2020. The increasedecrease in gross margin dollars was principally due to an increasea decrease in net sales, which increased gross margin dollarsrate, which decreased gross margin by $296.9$22.4 million. Gross margin as a percentage of net sales increased 80decreased 70 basis points to 40.6%40.0% in the year-to-date 2020,2021, compared to 39.8%40.7% in the year-to-date 2019. This2020. The gross margin rate increasedecrease was primarily due to ahigher inbound freight costs, partially offset by lower markdown rate,markdowns. Freight costs increased primarily due to higher comps in our higher margin merchandise categories,ocean carriage rates, domestic transportation rates and the absence of a $6.0 million impairment of inventory in our greeting cards department, which we chose to exitfuel costs, and in the first quarter of 2019. The increase was partially offset by higher shrink costs2021, detention and a lower initial mark-up compareddemurrage charges resulting from delayed receipt of inventory related to the year-to-date 2019, 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 year-to-date 2019 due to increased freight costs in the third quarter of 2020.supply chain constraints.
Selling and Administrative Expenses
Selling and administrative expenses were $1,444.9$986.1 million for the year-to-date 2020,2021, compared to $1,352.3$962.6 million for the year-to-date 2019.2020. The increase of $92.6$23.5 million in selling and administrative expenses was attributable to increases in distribution and transportation costs of $41.2$26.1 million, store-related payroll$15.5 million of $41.0 million, accrued bonusshare-based compensation expense, of $22.9 million, advertising expense of $11.3 million, transaction fees of $7.6 million, $6.9and $4.7 million of store occupancy costs, $6.6 millionpartially offset by a decrease of share-based compensation expense, $4.6$15.8 million in store supplies, $4.6 millionstore-related payroll, the absence of employee retirement and separation costs, $4.0 million of sale and leaseback relatedtransaction-related expenses, andthe absence of proxy contest-related costs of $3.7 million, and $3.1 million in store supplies expense. The increase in distribution and transportation costs was driven by rent on our leased distribution centers, four of proxy contest-relatedwhich were sold and leased back in the second quarter of 2020, and higher volume, transportation costs, and labor costs, partially offset by the absence of $38.3 million in costs incurred for our transformational restructuring initiative, the absence of a $7.3 million loss contingency recorded in the year-to-date 2019, and a decrease in health benefit costs of $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 outbound rates and volume to support the increased year-to-date net sales, and a temporary $2 per hour wage increase that was implemented for most of our non-exempt workforce during the COVID-19 coronavirus pandemic. The temporary $2 per hour wage increase beganbeginning in March 2020 and continued through early July 2020.June 2020 at the height of the COVID-19 pandemic. The increase in store-related payroll was driven by additional payroll hours allocated to stores to support the increased net sales during the year-to-date 2020 and the aforementioned temporary $2 per hour wage increase. The increase in accrued bonusshare-based compensation expense was driven by increased performance in the year-to-date 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 year-to-date 2019 relative to our quarterly and annual operating plans, and a one-time discretionary bonus in the second quarter of 2020 to recognize our non-exempt associates in our stores and distribution centers. Advertising expense increased due to increased investments in social media engagement, our rewards and loyalty program, and video media to promote The Lot and our Store of the Future concept. The increase in transaction fees, which includes credit card fees, debit card fees, and other transaction-driven costs, was primarily due to timing of establishing the increased net salesgrant date of our 2019 PSUs, for which the grant date was established in the year-to-date 2020first quarter of 2021, compared to our 2018 PSUs, for which the year-to-date 2019. The increasegrant date was established in store-related occupancy costs was due to new stores opened since the end of the third quarter of 2019,2020. Our store occupancy costs increased primarily due to an increased store count in the year-to-date 2021, new stores opened in the year-to-date 2021, which have higher rents than the stores closed, and normal rent increases resulting from lease renewals. The increasedecrease 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 stores in the year-to-date 2020 to ensure a safe environment for our customers and associates during the COVID-19 coronavirus pandemic. The increase in employee retirement and separation costsstore-related payroll was primarily drivendue the absence of the above-mentioned $2 per hour wage increase, partially offset by the retirement and separation of senior executives in the year-to-date 2020.additional payroll hours to support our sales. The sale and leaseback relatedtransaction-related expenses, were due towhich included consulting costs, were incurred in connection with the completion ofcompleting the sale and leaseback transaction forof 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 consisteddecrease in store supplies was driven by a decrease in distribution of consulting expensessafety and employee separation costs recognizedcleaning supplies, such as personal protective equipment, hand sanitizer, and disinfectants, as the availability and adoption of COVID-19 vaccines continued 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 benefits claim volume in the year-to-date 2020 as many medical care providers suspended non-emergency care and procedures during the year-to-date 2020 due to the COVID-19 coronavirus pandemic.2021.
As a percentage of net sales, selling and administrative expenses decreased 400increased 80 basis points to 32.4%32.0% for the year-to-date 20202021 compared to 36.4%31.2% for the year-to-date 2019.2020.
Depreciation Expense
Depreciation expense increased $7.2decreased $2.4 million to $104.8$69.3 million in the year-to-date 2020,2021, compared to $97.6$71.7 million for the year-to-date 2019.2020. The increasedecrease was driven primarily by investments in our Apple Valley, CA distribution center, new store build-outs, and Store of the Future remodels, and the acquisition of our corporate headquarters facility in the third quarter of 2019, partially offset by a decrease from the sale and leaseback of our four distribution centers in the second quarter of 2020.2020, partially offset by the investments in our strategic initiatives, new stores, and supply chain improvements.
Depreciation expense as a percentage of sales decreased by 3010 basis points compared to the year-to-date 2019.2020.
Gain on Sale of Distribution Centers
The gainGain on sale of distribution centers decreased $463.1 million to $0 in the year-to-date 2020 was $463.1 million,2021, compared to $178.5$463.1 million in the year-to-date 2019.2020. 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 the third quarter of 2019.
Interest Expense
Interest expense was $8.5$4.9 million in the year-to-date 2020,2021, compared to $13.7$5.9 million in the year-to-date 2019.2020. The decrease in interest expense was driven by lower total average borrowings (including finance leases and the sale and leaseback financing liability) and a lower average interest rate on our revolving debt.. We had total average borrowings of $282.3$164.5 million in the year-to-date 20202021 compared to $490.3$351.1 million in the year-to-date 2019.2020. The decrease in total average borrowings was driven by our repayment of all outstanding debt under the 2018 Credit Agreement following the sale and leaseback transaction completed in the second quarter of 2020, partially offset by timingand our prepayment of our entry into the 2019 Term Note as the 2019 Term Note was only in place for the second halfquarter of 2019, and2021, partially offset by the establishment of athe financing liability in connection with the sale and leaseback transactions for our distribution centerstransactions. The decrease in the second quarter of 2020. Thetotal average borrowings was partially offset by a higher average interest rate on our revolving debt, which is variable based on LIBORthe sale and our credit rating, decreased due to a significant decline in the LIBOR 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 2020.leaseback financing liability.
Other Income (Expense)
Other income (expense) was $(2.4)$0.8 million in the year-to-date 2020,2021, compared to $(0.2)$(2.0) million in the year-to-date 2019.2020. The change was primarily driven by unrealized lossesgains on our diesel fuel derivatives duein the year-to-date 2021 compared to a sharp decline in current and forwardunrealized
losses on diesel fuel pricesderivatives in the first quarter of 2020 asyear-to-date 2020. The gains on diesel fuel derivatives in the year-to-date 2021 were partially offset by a result$0.5 million loss on debt extinguishment recognized in the year-to-date 2021 related to the prepayment of the COVID-19 coronavirus pandemic.2019 Term Note.
Income Taxes
The effective income tax rate for the year-to-date 20202021 and the year-to-date 20192020 were 25.7%23.3% and 23.9%25.8%, respectively. The increasedecrease in the effective income tax rate was primarily attributable to impactthe net tax benefit associated with settlement of the sales of our distribution centers. Inshare-based payment awards during the year-to-date 2019, the tax rate on the gain of our California distribution center was less than our normalized tax rate, thereby reducing our effective tax rate2021 and an increase in employment-related credits in the year-to-date 2019. While in the year-to-date 2020, the tax rate on the gains of our non-California distribution centers were similar to our normalized tax rate, thereby 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 curtailed in the year-to-date 2020 by the significant growth in income before income taxes in the year-to-date 2020 as2021 compared to the year-to-date 2019.2020, partially offset by an increase in nondeductible executive compensation compared to the year-to-date 2020.
20202021 Guidance
In March 2020,As we enter the World Health Organization declaredsecond half of 2021, we are facing significant supply chain challenges as a result of COVID-19-related shutdowns in Asian factories and ports, which we expect to adversely impact our net sales and gross margin in the COVID-19 coronavirusthird and fourth quarters of 2021. Additionally, we are facing a pandemic. The rapid spreadhighly competitive domestic labor market, which we expect to result in increased payroll expenses for our stores and distribution centers in the third and fourth quarters of 2021. We have incorporated our current best estimate of the disease throughoutimpacts of the U.S. has significantly impactedsupply chain and labor headwinds into the U.S. economy, which has reduced our visibilityguidance below.
As of August 27, 2021, and excluding consideration of potential share repurchase activity, we expect the following in the third quarter of 2021:
•Comparable sales decline in the mid-single digits;
•Gross margin rate down approximately 175 basis points compared to future financial resultslast year, driven by freight headwinds;
•Selling and administrative expenses up slightly compared to last year; and
•Diluted loss per share in comparisonthe range of $0.10 to prior years. Therefore,$0.20.
As of August 27, 2021, and excluding consideration of potential share repurchase activity, we expect the following in March 2020, the Company withdrew its full year guidance for 2020. At this time,2021:
•Comparable sales decline in the Company still does not believe it has sufficient visibilitylow single digits;
•Gross margin rate down approximately 100 basis points compared to reinstate full year guidance. We expectlast year;
•Selling and administrative expenses up compared to provide a business updatelast year; and
•Diluted earnings per share in early January 2020 when we have greater visibilitythe range of $5.90 to expected results for the fourth quarter of 2020.$6.05.
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. The 2018 Credit Agreement expires on August 31, 2023. 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 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 distribution center in 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 OctoberJuly 31, 2020,2021, we were in compliance with the covenants of the 2018 Credit Agreement. At July 31, 2021, we had no borrowings outstanding under the Credit Agreement, and the borrowings available under the Credit Agreement were $690.9 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $9.1 million.
On August 7, 2019, we entered into the 2019 Term Note, a $70 million term note agreement, which iswas secured by the equipment at our California distribution center. The 2019 Term Note will expire on May 7, 2024. We are required to make monthly payments overcenter and carried a fixed interest rate of 3.3%. In light of our strong liquidity and current market conditions, we prepaid the term ofremaining $44.3 million principal balance under the 2019 Term Note in the second quarter of 2021. In connection with the prepayment, we incurred a $0.4 million prepayment fee and are permitted to prepayrecognized a $0.5 million loss on debt extinguishment in the note, subject to penalties, at any time. The interest rate on the note is fixed at 3.3%.second quarter of 2021.
We have experienced during the COVID-19 coronavirus pandemic, the seasonality of our 2020 results may differ from our historical experience. Generally,historically funded 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 salebased on our current cash and leaseback transactions completed in the second quarter of 2020cash equivalents position and our strongprojected cash flowflows from operations, during the year-to-date 2020, we fundedintend to fund our working capital requirements, inalong with capital expenditures, share repurchases, and other contractual commitments, for the thirdupcoming 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 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 the repurchase of up to $500 million of our common shares. During the third quarter of 2020, we purchased approximately 2.2 million of our common shares for $100.0 million under the (“2020 Repurchase Authorization, at an average price of $45.81.Authorization”). 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 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 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. During the year-to-date 2021, we purchased 3.6 million of our common shares for $230.4 million under the 2020 Repurchase Authorization, at an average price of $64.83. At July 31, 2021, we had $96.8 million available for future repurchases under the 2020 Repurchase Authorization.
In May 2021, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on June 25, 2021 to shareholders of record as of the close of business on June 11, 2021. The cash dividend of $0.30 per common share is consistent with our quarterly dividends declared in 2020. In the year-to-date of 2021, we paid approximately $22.7 million in dividends compared to $24.3 million in the year-to-date of 2020.
In August 2020,2021, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on September 25, 202024, 2021 to shareholders of record as of the close of business on September 11, 2020. The cash dividend of $0.30 per common share is consistent with our quarterly dividends declared in 2019. In the year-to-date of 2020, we paid approximately $35.8 million in dividends compared to $36.7 million in the year-to-date 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, 2020.10, 2021.
The following table compares the primary components of our cash flows from the year-to-date 20202021 compared to the year-to-date 2019:2020:
| (In thousands) | (In thousands) | 2020 | | 2019 | | Change | (In thousands) | 2021 | | 2020 | | Change |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 267,410 | | | $ | 80,548 | | | $ | 186,862 | | Net cash provided by operating activities | $ | 142,158 | | | $ | 468,384 | | | $ | (326,226) | |
Net cash provided by (used in) investing activities | 485,209 | | | (41,231) | | | 526,440 | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (77,086) | | | 517,586 | | | (594,672) | |
Net cash used in financing activities | Net cash used in financing activities | $ | (257,509) | | | $ | (23,557) | | | $ | (233,952) | | Net cash used in financing activities | $ | (331,306) | | | $ | (140,131) | | | $ | (191,175) | |
Cash provided by operating activities increased $186.9decreased $326.2 million to $267.4$142.2 million in the year-to-date 20202021 compared to $80.5$468.4 million in the year-to-date 2019.2020. The primary drivers of the increase weredecrease was principally driven by an increase of $382.5 million in net income, a $112.1 million increase in cash inflowsoutflows from accounts payable,inventories, due to normalization of inventory levels at the end of the second quarter of 2021 compared to the historically low inventory levels at the end of the second quarter of 2020, and a $60.2 millionan increase in the change incash outflows from current income taxes, driven by the payment of taxes on the sale of our distribution centers since the second quarter of 2020. These decreases were partially offset by an increase in net income after adjusting for non-cash activities such as non-cash share-based compensation expense, non-cash lease expense, and the add-back for (loss) gain on disposition of equipment and property of $284.8 million, and an increase in the add-back for deferred taxes of $66.8 million. The increase in net income was primarily due to the gain on sale of distribution centers in the second quarter of 2020 and a $745.1 million increase in net sales in the year-to-date 2020. 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 2019. The increase in the add-back for deferred taxes was primarily due to the deferred gain on the sale of our Rancho Cucamonga, CA distribution center in the year-to-date 2019.property.
Cash (used in) provided by (used in) investing activities increaseddecreased by $526.4$594.7 million to cash used in investing activities of $77.1 million in the year-to-date 2021 compared to cash provided by investing activities of $485.2$517.6 million in the year-to-date 2020 compared to cash used in investing activities of $41.2 million in the year-to-date 2019.2020. The increasedecrease was primarilyprincipally due to an increase of $397.5 millionthe decrease 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 the sale and leaseback transactions for our four distribution centerstransaction completed in the year-to-date 2020, compared to the salesecond quarter of one distribution center in the year-to-date 2019. The decrease in capital expenditures was driven by our decision to reduce our investments in our Store of the Future concept and new stores in 2020 to preserve liquidity and promote safety during the COVID-19 coronavirus pandemic, and a decrease in investments in our Apple Valley, CA distribution center which opened in late 2019.2020.
Cash used in financing activities increased by $234.0$191.2 million to $257.5$331.3 million in the year-to-date 20202021 compared to $23.6$140.1 million in the year-to-date 2019.2020. The primary driver of theincrease was primarily driven by an increase in cash usedpayments for treasury shares acquired due to shares repurchased under the 2020 Repurchase Authorization compared to the year-to-date 2020 when we did not have an active share repurchase program, and the absence of financing proceeds from sale and leaseback transactions completed in financing activitiesthe second quarter of 2020. The increase was an increasepartially offset by a decrease in net repayments of long-term debt of $380.6 million and an increase in payment for treasury shares acquired 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 repayments of long-term debt was a result ofdue to the repayment of all outstanding borrowings under the 2018 Credit Agreement following the completion of the sale and leaseback transaction for our four distribution centers in the second quarter of 2020. The increase in payment for treasury shares acquired was driven by the repurchase of $100.0 million of our common shares under the 2020 Repurchase Authorization during the year-to-date 2020 compared to $50.0 millionrepayment of our common sharesall outstanding borrowings under the 2019 Repurchase Program duringTerm Note, which carried a lower balance at 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 quartertime of 2020. The decrease in payments of finance lease obligations was duerepayment compared to the absenceCredit Agreement at the time of repayment, in the year-to-date 2020 of our payment of the remainder of the finance lease obligation for our corporate headquarters facility in the year-to-date 2019.2021.
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 20192020 Form 10-K for additional information about our accounting policies.
The estimates, judgments, and assumptions that have a higher degree of inherent uncertainty and require the most significant judgments are outlined in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20192020 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 20192020 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 under the 2018 Credit Agreement at OctoberJuly 31, 2020.2021. An increase of 1% in our variable interest rate on our expected future borrowings would not currently materially affect our financial condition, results of operations, or liquidity.
We are subject to market risk from exposure to changes in our derivative instruments associated with diesel fuel. At OctoberJuly 31, 2020,2021, we had outstanding derivative instruments, in the form of collars, covering 4.62.4 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 | Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value | Calendar Year of Maturity | | Diesel Fuel Derivatives | | Fair Value |
| Puts | | Calls | | Asset (Liability) | | Puts | | Calls | | Asset (Liability) |
| | | (Gallons, in thousands) | | (In thousands) | | | (Gallons, in thousands) | | (In thousands) |
2020 | | 960 | | | 960 | | | $ | (582) | | |
2021 | 2021 | | 2,400 | | | 2,400 | | | (1,410) | | 2021 | | 1,200 | | | 1,200 | | | 224 | |
2022 | 2022 | | 1,200 | | | 1,200 | | | (675) | | 2022 | | 1,200 | | | 1,200 | | | 404 | |
Total | Total | | 4,560 | | | 4,560 | | | $ | (2,667) | | Total | | 2,400 | | | 2,400 | | | $ | 628 | |
Additionally, at OctoberJuly 31, 2020,2021, a 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $1.2$0.8 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 Over 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 information regarding certain legal proceedings to which we have been named a discussion of certain litigated matters,party or are subject, see note 7 to the accompanying consolidated financial statements.
Item 1A. Risk Factors
During the thirdsecond quarter of 2020,2021, there were no material changes to the risk factors previously disclosed in our 20192020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (In thousands, except price per share data) | (In thousands, except price per share data) | | (In thousands, except price per share data) | |
Period | 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 | Period | (a) Total Number of Shares Purchased (1)(2) | (b) Average Price Paid per Share (1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
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 | | |
May 2, 2021 - May 29, 2021 | | May 2, 2021 - May 29, 2021 | 46 | | $ | 69.07 | | 42 | | 246,750 | |
May 30, 2021 - June 26, 2021 | | May 30, 2021 - June 26, 2021 | 1,521 | | 65.81 | | 1,519 | | 146,750 | |
June 27, 2021 - July 31, 2021 | | June 27, 2021 - July 31, 2021 | 844 | | 59.26 | | 844 | | 96,751 | |
Total | Total | 2,196 | | $ | 45.84 | | 2,183 | | $ | 400,000 | | Total | 2,411 | | $ | 63.58 | | 2,405 | | 96,751 | |
(1) In May, June, and July 2021, in connection with the vesting of certain outstanding restricted stock units and PRSUs, we acquired 4,545, 1,497, and 623 of our common shares, respectively, which were withheld to satisfy minimum statutory income tax withholdings.
(2) 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 thirdsecond quarter of 2020,2021, we purchased approximately 2.22.4 million of our common shares for approximately $100.0$152.9 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.
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 |
| | | |
| | | Lease Agreement, as amended, betweenForm of Big Lots Stores, Inc. and BIGCOOH002, LLC relating2020 Long-Term Incentive Plan Performance Share Units Award Agreement (incorporated herein by reference to the registrant’s distribution center located in Columbus, OH.Exhibit 10.2 to our Form 8-K dated March 9, 2021). |
| | | Form of Big Lots 2020 Long-Term Incentive Plan Restricted Stock Units Award Agreement (incorporated herein by reference to Exhibit 10.2 to our Form 8-K dated March 9, 2021). |
| | | 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 9, 2020September 8, 2021
| | | | | |
| 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) |