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 May 1, 2021April 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-08897
BIG LOTS, INC.
(Exact name of registrant as specified in its charter)
Ohio 06-1119097
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
4900 E. Dublin-Granville Road, Columbus, Ohio 43081
(Address 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 | ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ Noþ
The number of the registrant’s common shares, $0.01 par value, outstanding as of June 4, 2021,3, 2022, was 34,639,480.28,917,471.
BIG LOTS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MAY 1, 2021APRIL 30, 2022
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 1A. 3. | | |
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Item 2. 4. | | |
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Item 3. 5. | | |
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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 | | Thirteen Weeks Ended |
| | May 1, 2021 | May 2, 2020 | | April 30, 2022 | May 1, 2021 |
Net sales | Net sales | $ | 1,625,552 | | $ | 1,439,149 | | Net sales | $ | 1,374,714 | | $ | 1,625,552 | |
Cost of sales (exclusive of depreciation expense shown separately below) | Cost of sales (exclusive of depreciation expense shown separately below) | 971,605 | | 868,393 | | Cost of sales (exclusive of depreciation expense shown separately below) | 870,120 | | 971,605 | |
Gross margin | Gross margin | 653,947 | | 570,756 | | Gross margin | 504,594 | | 653,947 | |
Selling and administrative expenses | Selling and administrative expenses | 497,418 | | 458,631 | | Selling and administrative expenses | 480,779 | | 497,418 | |
Depreciation expense | Depreciation expense | 33,977 | | 37,690 | | Depreciation expense | 37,356 | | 33,977 | |
Operating profit | 122,552 | | 74,435 | | |
Operating (loss) profit | | Operating (loss) profit | (13,541) | | 122,552 | |
Interest expense | Interest expense | (2,568) | | (3,322) | | Interest expense | (2,750) | | (2,568) | |
Other income (expense) | Other income (expense) | 960 | | (3,317) | | Other income (expense) | 1,040 | | 960 | |
Income before income taxes | 120,944 | | 67,796 | | |
Income tax expense | 26,381 | | 18,473 | | |
Net income and comprehensive income | $ | 94,563 | | $ | 49,323 | | |
(Loss) income before income taxes | | (Loss) income before income taxes | (15,251) | | 120,944 | |
Income tax (benefit) expense | | Income tax (benefit) expense | (4,169) | | 26,381 | |
Net (loss) income and comprehensive (loss) income | | Net (loss) income and comprehensive (loss) income | $ | (11,082) | | $ | 94,563 | |
| Earnings per common share | | |
Earnings (loss) per common share | | Earnings (loss) per common share | |
Basic | Basic | $ | 2.68 | | $ | 1.26 | | Basic | $ | (0.39) | | $ | 2.68 | |
Diluted | Diluted | $ | 2.62 | | $ | 1.26 | | Diluted | $ | (0.39) | | $ | 2.62 | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | | Weighted-average common shares outstanding | |
Basic | Basic | 35,349 | | 39,129 | | Basic | 28,621 | | 35,349 | |
Dilutive effect of share-based awards | Dilutive effect of share-based awards | 693 | | 111 | | Dilutive effect of share-based awards | — | | 693 | |
Diluted | Diluted | 36,042 | | 39,240 | | Diluted | 28,621 | | 36,042 | |
| Cash dividends declared per common share | Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | | Cash dividends declared per common share | $ | 0.30 | | $ | 0.30 | |
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) |
| | | May 1, 2021 | | January 30, 2021 | | April 30, 2022 | | January 29, 2022 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 613,329 | | | $ | 559,556 | | Cash and cash equivalents | $ | 61,707 | | | $ | 53,722 | |
Inventories | Inventories | 901,482 | | | 940,294 | | Inventories | 1,338,737 | | | 1,237,797 | |
Other current assets | Other current assets | 114,001 | | | 85,939 | | Other current assets | 125,362 | | | 119,449 | |
Total current assets | Total current assets | 1,628,812 | | | 1,585,789 | | Total current assets | 1,525,806 | | | 1,410,968 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 1,631,817 | | | 1,649,009 | | Operating lease right-of-use assets | 1,729,053 | | | 1,731,995 | |
Property and equipment - net | Property and equipment - net | 723,158 | | | 717,216 | | Property and equipment - net | 749,416 | | | 735,826 | |
Deferred income taxes | Deferred income taxes | 17,741 | | | 16,329 | | Deferred income taxes | 10,199 | | | 10,973 | |
Other assets | Other assets | 36,008 | | | 68,914 | | Other assets | 37,283 | | | 37,491 | |
Total assets | Total assets | $ | 4,037,536 | | | $ | 4,037,257 | | Total assets | $ | 4,051,757 | | | $ | 3,927,253 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
Accounts payable | Accounts payable | $ | 380,942 | | | $ | 398,433 | | Accounts payable | $ | 488,524 | | | $ | 587,496 | |
Current operating lease liabilities | Current operating lease liabilities | 219,367 | | | 226,075 | | Current operating lease liabilities | 233,683 | | | 242,275 | |
Property, payroll, and other taxes | Property, payroll, and other taxes | 112,532 | | | 109,694 | | Property, payroll, and other taxes | 95,920 | | | 90,728 | |
Accrued operating expenses | Accrued operating expenses | 158,136 | | | 138,331 | | Accrued operating expenses | 121,977 | | | 120,684 | |
Insurance reserves | Insurance reserves | 34,803 | | | 34,660 | | Insurance reserves | 36,227 | | | 36,748 | |
Accrued salaries and wages | Accrued salaries and wages | 73,799 | | | 49,830 | | Accrued salaries and wages | 24,745 | | | 45,762 | |
Income taxes payable | Income taxes payable | 70,340 | | | 43,601 | | Income taxes payable | 1,325 | | | 894 | |
Total current liabilities | Total current liabilities | 1,049,919 | | | 1,000,624 | | Total current liabilities | 1,002,401 | | | 1,124,587 | |
Long-term debt | Long-term debt | 32,063 | | | 35,764 | | Long-term debt | 270,800 | | | 3,500 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | 1,466,090 | | | 1,465,433 | | Noncurrent operating lease liabilities | 1,577,932 | | | 1,569,713 | |
Deferred income taxes | Deferred income taxes | 3,805 | | | 7,762 | | Deferred income taxes | 22,854 | | | 21,413 | |
Insurance reserves | Insurance reserves | 59,379 | | | 57,452 | | Insurance reserves | 59,847 | | | 62,591 | |
Unrecognized tax benefits | Unrecognized tax benefits | 10,601 | | | 11,304 | | Unrecognized tax benefits | 10,623 | | | 10,557 | |
Other liabilities | Other liabilities | 147,177 | | | 181,187 | | Other liabilities | 126,972 | | | 127,529 | |
Shareholders’ equity: | Shareholders’ equity: | | | | Shareholders’ equity: | | | |
Preferred shares - authorized 2,000 shares; $0.01 par value; NaN issued | 0 | | | 0 | | |
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 34,920 shares and 35,535, respectively | 1,175 | | | 1,175 | | |
Treasury shares - 82,575 shares and 81,960 shares, respectively, at cost | (2,782,987) | | | (2,709,259) | | |
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 28,893 shares and 28,476, respectively | | Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 28,893 shares and 28,476, respectively | 1,175 | | | 1,175 | |
Treasury shares - 88,602 shares and 89,019 shares, respectively, at cost | | Treasury shares - 88,602 shares and 89,019 shares, respectively, at cost | (3,107,806) | | | (3,121,602) | |
Additional paid-in capital | Additional paid-in capital | 615,955 | | | 634,813 | | Additional paid-in capital | 619,754 | | | 640,522 | |
Retained earnings | Retained earnings | 3,434,359 | | | 3,351,002 | | Retained earnings | 3,467,205 | | | 3,487,268 | |
Total shareholders’ equity | Total shareholders’ equity | 1,268,502 | | | 1,277,731 | | Total shareholders’ equity | 980,328 | | | 1,007,363 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 4,037,536 | | | $ | 4,037,257 | | Total liabilities and shareholders’ equity | $ | 4,051,757 | | | $ | 3,927,253 | |
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 May 2, 2020 | |
Balance - February 1, 2020 | 39,037 | | $ | 1,175 | | 78,458 | | $ | (2,546,232) | | $ | 620,728 | | $ | 2,769,793 | | $ | 845,464 | | |
Comprehensive income | — | | 0 | | — | | 0 | | 0 | | 49,323 | | 49,323 | | |
Dividends declared ($0.30 per share) | — | | 0 | | — | | 0 | | 0 | | (11,905) | | (11,905) | | |
Purchases of common shares | (119) | | 0 | | 119 | | (1,940) | | 0 | | 0 | | (1,940) | | |
Restricted shares vested | 240 | | 0 | | (240) | | 7,782 | | (7,782) | | 0 | | 0 | | |
Performance shares vested | 65 | | 0 | | (65) | | 2,107 | | (2,107) | | 0 | | 0 | | |
Other | 0 | | 0 | | 0 | | 7 | | (1) | | 0 | | 6 | | |
Share-based employee compensation expense | — | | 0 | | — | | 0 | | 2,985 | | 0 | | 2,985 | | |
Balance - May 2, 2020 | 39,223 | | $ | 1,175 | | 78,272 | | $ | (2,538,276) | | $ | 613,823 | | $ | 2,807,211 | | $ | 883,933 | | |
Thirteen Weeks Ended May 1, 2021 | Thirteen Weeks Ended May 1, 2021 | Thirteen Weeks Ended May 1, 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 | | 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 | | 94,563 | | 94,563 | | Comprehensive income | — | | — | | — | | — | | — | | 94,563 | | 94,563 | |
Dividends declared ($0.30 per share) | Dividends declared ($0.30 per share) | — | | 0 | | — | | 0 | | 0 | | (11,206) | | (11,206) | | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (11,206) | | (11,206) | |
Purchases of common shares | Purchases of common shares | (1,538) | | 0 | | 1,538 | | (104,491) | | 0 | | 0 | | (104,491) | | Purchases of common shares | (1,538) | | — | | 1,538 | | (104,491) | | — | | — | | (104,491) | |
Restricted shares vested | Restricted shares vested | 390 | | 0 | | (390) | | 12,995 | | (12,995) | | 0 | | 0 | | Restricted shares vested | 390 | | — | | (390) | | 12,995 | | (12,995) | | — | | — | |
Performance shares vested | Performance shares vested | 533 | | 0 | | (533) | | 17,770 | | (17,770) | | 0 | | 0 | | Performance shares vested | 533 | | — | | (533) | | 17,770 | | (17,770) | | — | | — | |
Other | Other | 0 | | 0 | | 0 | | (2) | | 0 | | 0 | | (2) | | Other | — | | — | | — | | (2) | | — | | — | | (2) | |
Share-based employee compensation expense | Share-based employee compensation expense | — | | 0 | | — | | 0 | | 11,907 | | 0 | | 11,907 | | Share-based employee compensation expense | — | | — | | — | | — | | 11,907 | | — | | 11,907 | |
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 | | Balance - May 1, 2021 | 34,920 | | $ | 1,175 | | 82,575 | | $ | (2,782,987) | | $ | 615,955 | | $ | 3,434,359 | | $ | 1,268,502 | |
Thirteen Weeks Ended April 30, 2022 | | Thirteen Weeks Ended April 30, 2022 |
Balance - January 29, 2022 | | Balance - January 29, 2022 | 28,476 | | 1,175 | | 89,019 | | (3,121,602) | | 640,522 | | 3,487,268 | | 1,007,363 | |
Comprehensive income | | Comprehensive income | — | | — | | — | | — | | — | | (11,082) | | (11,082) | |
Dividends declared ($0.30 per share) | | Dividends declared ($0.30 per share) | — | | — | | — | | — | | — | | (8,981) | | (8,981) | |
Purchases of common shares | | Purchases of common shares | (280) | | — | | 281 | | (10,639) | | — | | — | | (10,639) | |
Restricted shares vested | | Restricted shares vested | 356 | | — | | (356) | | 12,483 | | (12,483) | | — | | — | |
Performance shares vested | | Performance shares vested | 341 | | — | | (342) | | 11,952 | | (11,952) | | — | | — | |
Share-based employee compensation expense | | Share-based employee compensation expense | — | | — | | — | | — | | 3,667 | | — | | 3,667 | |
Balance - April 30, 2022 | | Balance - April 30, 2022 | 28,893 | | 1,175 | | 88,602 | | (3,107,806) | | 619,754 | | 3,467,205 | | 980,328 | |
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) |
| | | Thirteen Weeks Ended | | Thirteen Weeks Ended |
| | May 1, 2021 | May 2, 2020 | | April 30, 2022 | May 1, 2021 |
Operating activities: | Operating activities: | | Operating activities: | |
Net income | $ | 94,563 | | $ | 49,323 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net (loss) income | | Net (loss) income | $ | (11,082) | | $ | 94,563 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | |
Depreciation and amortization expense | Depreciation and amortization expense | 34,116 | | 37,819 | | Depreciation and amortization expense | 37,631 | | 34,116 | |
Non-cash lease expense | Non-cash lease expense | 64,457 | | 57,766 | | Non-cash lease expense | 68,473 | | 64,457 | |
Deferred income taxes | Deferred income taxes | (5,369) | | (8,838) | | Deferred income taxes | 2,215 | | (5,369) | |
Non-cash impairment charge | Non-cash impairment charge | 194 | | 362 | | Non-cash impairment charge | 222 | | 194 | |
Loss on disposition of equipment | 780 | | 129 | | |
(Gain) loss on disposition of property and equipment | | (Gain) loss on disposition of property and equipment | (1,568) | | 780 | |
Non-cash share-based compensation expense | Non-cash share-based compensation expense | 11,907 | | 2,985 | | Non-cash share-based compensation expense | 3,667 | | 11,907 | |
Unrealized (gain) loss on fuel derivatives | (1,005) | | 3,144 | | |
Unrealized gain on fuel derivatives | | Unrealized gain on fuel derivatives | (699) | | (1,005) | |
Change in assets and liabilities: | Change in assets and liabilities: | | Change in assets and liabilities: | |
Inventories | Inventories | 38,813 | | 114,707 | | Inventories | (100,940) | | 38,813 | |
Accounts payable | Accounts payable | (17,492) | | (102,779) | | Accounts payable | (98,972) | | (17,492) | |
Operating lease liabilities | Operating lease liabilities | (53,511) | | (54,919) | | Operating lease liabilities | (66,127) | | (53,511) | |
Current income taxes | Current income taxes | 29,435 | | 27,077 | | Current income taxes | (8,856) | | 29,435 | |
Other current assets | Other current assets | 1,294 | | (486) | | Other current assets | 3,908 | | 1,294 | |
Other current liabilities | Other current liabilities | 2,703 | | 16,315 | | Other current liabilities | (20,432) | | 2,703 | |
Other assets | Other assets | 389 | | 4,395 | | Other assets | 107 | | 389 | |
Other liabilities | Other liabilities | 3,019 | | (879) | | Other liabilities | (3,780) | | 3,019 | |
Net cash provided by operating activities | 204,293 | | 146,121 | | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (196,233) | | 204,293 | |
Investing activities: | Investing activities: | | Investing activities: | |
Capital expenditures | Capital expenditures | (32,160) | | (28,928) | | Capital expenditures | (43,741) | | (32,160) | |
Cash proceeds from sale of property and equipment | Cash proceeds from sale of property and equipment | 7 | | 26 | | Cash proceeds from sale of property and equipment | 2,505 | | 7 | |
Other | Other | (17) | | (11) | | Other | (5) | | (17) | |
Net cash used in investing activities | Net cash used in investing activities | (32,170) | | (28,913) | | Net cash used in investing activities | (41,241) | | (32,170) | |
Financing activities: | Financing activities: | | Financing activities: | |
Net (repayments of) proceeds from long-term debt | (3,580) | | 157,337 | | |
Net proceeds from (repayments of) long-term debt | | Net proceeds from (repayments of) long-term debt | 267,300 | | (3,580) | |
Payment of finance lease obligations | Payment of finance lease obligations | (1,293) | | (982) | | Payment of finance lease obligations | (497) | | (1,293) | |
Dividends paid | Dividends paid | (12,460) | | (12,478) | | Dividends paid | (10,705) | | (12,460) | |
Payment for treasury shares acquired | Payment for treasury shares acquired | (101,016) | | (1,940) | | Payment for treasury shares acquired | (10,639) | | (101,016) | |
Other | Other | (1) | | 6 | | Other | — | | (1) | |
Net cash (used in) provided by financing activities | (118,350) | | 141,943 | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 245,459 | | (118,350) | |
Increase in cash and cash equivalents | Increase in cash and cash equivalents | 53,773 | | 259,151 | | Increase in cash and cash equivalents | 7,985 | | 53,773 | |
Cash and cash equivalents: | Cash and cash equivalents: | | Cash and cash equivalents: | |
Beginning of period | Beginning of period | 559,556 | | 52,721 | | Beginning of period | 53,722 | | 559,556 | |
End of period | End of period | $ | 613,329 | | $ | 311,872 | | End of period | $ | 61,707 | | $ | 613,329 | |
The accompanying notes are an integral part of these consolidated financial statements.
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BIG LOTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (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 neighborhoodhome discount retailer operating in the United States (“U.S.”). At May 1, 2021,April 30, 2022, we operated 1,4131,434 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 websites are not 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.whole. 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 we have experienced during the COVID-19 coronavirus pandemic, the seasonality of our 2021 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 January 30, 29, 2022 (“2021 (“2020 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 2022 (“2022”) is comprised of the 52 weeks that began on January 30, 2022 and will end on January 28, 2023. Fiscal year 2021 (“2021”) iswas comprised of the 52 weeks that began on January 31, 2021 and will endended on January 29, 2022. Fiscal year 2020 (“2020”) was comprised of the 52 weeks that began on February 2, 2020 and ended on January 30, 2021. The fiscal quarters ended April 30, 2022 (“first quarter of 2022”) and May 1, 2021 (“first quarter of 2021”) and May 2, 2020 (“first quarter of 2020”) were both comprised of 13 weeks.
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 to stores in cost of sales. Warehousing, distribution,Distribution and outbound transportation costs included in selling and administrative expenses were $66.2$82.0 million and $52.3$66.2 million for the first quarter of 20212022 and the first quarter of 2020,2021, 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 $21.8$21.4 million and $23.0$21.8 million for the first quarter of 20212022 and the first quarter of 2020,2021, respectively.
Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for the first quarter of 20212022 and the first quarter of 2020:2021:
| | | Thirteen Weeks Ended | | Thirteen Weeks Ended |
(In thousands) | (In thousands) | May 1, 2021 | | May 2, 2020 | (In thousands) | April 30, 2022 | | May 1, 2021 |
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 | $ | 468 | | | $ | 3,211 | | Cash paid for interest | $ | 3,326 | | | $ | 468 | |
Cash paid for income taxes, excluding impact of refunds | Cash paid for income taxes, excluding impact of refunds | 2,303 | | | 122 | | Cash paid for income taxes, excluding impact of refunds | 2,933 | | | 2,303 | |
Gross proceeds from long-term debt | Gross proceeds from long-term debt | 0 | | | 514,500 | | Gross proceeds from long-term debt | 648,200 | | | — | |
Gross payments of long-term debt | Gross payments of long-term debt | 3,580 | | | 357,163 | | Gross payments of long-term debt | 380,900 | | | 3,580 | |
Cash paid for operating lease liabilities | Cash paid for operating lease liabilities | 76,727 | | | 75,317 | | Cash paid for operating lease liabilities | 90,725 | | | 76,727 | |
Non-cash activity: | Non-cash activity: | | | | Non-cash activity: | | | |
Share repurchases payable | Share repurchases payable | 3,476 | | | 0 | | Share repurchases payable | — | | | 3,476 | |
Assets acquired under finance leases | | Assets acquired under finance leases | 1,377 | | | — | |
Accrued property and equipment | Accrued property and equipment | 26,306 | | | 27,213 | | Accrued property and equipment | 26,073 | | | 26,306 | |
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 | 47,661 | | | 62,641 | | Operating lease right-of-use assets obtained in exchange for operating lease liabilities | 65,753 | | | 47,661 | |
Reclassifications
InWe periodically assess, and make minor adjustments to, our product hierarchy, which can impact the first quarter of 2021, we realigned select merchandise categories to be consistent with the initial realignmentroll-up of our merchandising team and changes to our management reporting. We eliminated our Electronics, Toys, & Accessories category by absorbing its former merchandise departments into three of our existing merchandise categories. We moved our apparel, jewelry, and hosiery departments into our Soft HomeOur financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category our toys department into our Seasonalfor all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category and our electronics department into our Hard Home merchandise category.
Our six merchandise categories, which match our internal management and reporting of merchandise net sales are now as follows: Food; Consumables; Soft Home; Hard Home; Furniture; and Seasonal. The Food category includes our beverage & grocery; candy & snacks; and specialty foods departments. The Consumables category includes our health, beauty and cosmetics; plastics; paper; chemical; and pet departments. The Soft Home category includes our home décor; frames; fashion bedding; utility bedding; bath; window; decorative textile; home organization; area rugs; apparel; hosiery; and jewelry departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; home maintenance; and electronics departments. The Furniture category includes our upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden; summer; Christmas; toys; and other holiday departments.
In ordercompared to provide comparative information, we have reclassified our results into the new alignment for both periods presented.previously reported amounts.
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,September 22, 2021, we entered into a $700$600 million five-year unsecured credit facility (“Credit Agreement”). The Credit Agreement that expires on August 31, 2023.September 22, 2026. In connection with our entry into the Credit Agreement, we paid bank fees and other expenses in the aggregate amount of $1.5$1.2 million, which are being amortized over the term of the Credit Agreement.
Borrowings under the Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness. The Credit Agreement includes a $30$50 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The Credit Agreement also contains an environmental, social and governance (“ESG”) provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the Credit Agreement. Under the Credit Agreement, we have the option to establish incremental term loans and/or increases in the revolving credit limits in an aggregate amount of up to $300 million, subject to the lenders agreeing to increase their commitments. Additionally, the Credit Agreement includes two options to extend the maturity date of the Credit Agreement by one year each, subject to each lender agreeing to extend the maturity date of its respective loans. The interest rates, pricing and fees under the Credit Agreement fluctuate based on our debt rating.rating or leverage ratio, whichever results in more favorable pricing to us. The 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 revolvingThe Credit Agreement updated the LIBOR fallback language to implement fallback provisions, pursuant to which the interest rate on the loans will transition to an alternative rate upon the occurrence of certain LIBOR cessation events. Loans made under the Credit Agreement.Agreement may be prepaid without penalty. The 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 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.CA, which was amended concurrent with our entry into the Credit Agreement to conform with the covenants of the Credit Agreement. A violation of any of the covenants could result in a default under the Credit Agreement that would permit the lenders to restrict our ability to further access the Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Agreement. At May 1, 2021,April 30, 2022, we had 0$270.8 million in outstanding borrowings outstanding under the Credit Agreement while $5.8and $5.0 million was committed to outstanding letters of credit, leaving $694.2$324.2 million available under the Credit Agreement.
Secured Equipment Term Note
On August 7, 2019, we entered into a $70.0 million term note agreement (“2019 Term Note”), which is secured by the equipment at our Apple Valley, CA distribution center. 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 in the second quarter of 2021. The interest rate on the 2019 Term Note was 3.3%.
Debt was recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
Instrument (In thousands) | | May 1, 2021 | | January 30, 2021 |
2019 Term Note | | $ | 46,684 | | | $ | 50,264 | |
Credit Agreement | | 0 | | | 0 | |
Total debt | | $ | 46,684 | | | $ | 50,264 | |
Less current portion of long-term debt (included in Accrued operating expenses) | | $ | (14,621) | | | $ | (14,500) | |
Long-term debt | | $ | 32,063 | | | $ | 35,764 | |
NOTE 3 – FAIR VALUE MEASUREMENTS
At May 1, 2021 and January 30, 2021, we held investments in money market funds, which were recorded 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.
At May 1, 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 May 1, 2021, the fair value of our investments were recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | |
(In thousands) | Balance Sheet Location | May 1, 2021 | Level 1 |
Assets: | | | |
Money market funds | Cash and cash equivalents | $ | 175,135 | | $ | 175,135 | |
Mutual funds - deferred compensation plan | Other current assets | $ | 29,988 | | $ | 29,988 | |
As of January 30, 2021, the fair value of our investments were recorded in our consolidated balance sheets as follows:
| | | | | | | | | | | |
(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 fair value of our long-term obligations under the 2019 Term Note aredebt is estimated based on the quoted market prices for 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. TheGiven the variable rate features and relatively short maturity of the instruments underlying our long-term debt, the carrying value of the instrumentthese instruments approximates itstheir fair value.
The carrying value of accounts receivable and accounts payable approximates fair value because of the relatively short maturity of these items.
NOTE 43 – SHAREHOLDERS’ EQUITY
Earnings per Share
There were 0no adjustments required to be made to the weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share. At May 2, 2020, we excluded performance restricted share units (“PRSUs”) from the securities outstanding for the computation of earnings per share because the minimum applicable performance conditions had not been attained.all periods presented. At May 1, 2021, all outstanding awards were included in our computation of earnings per share because the minimum applicable performance conditions had been attained. At April 30, 2022, performance share units that vest based on relative total shareholder return (“TSR PSUs” - see Note 4 for a more detailed description of these awards), were excluded from our computation of earnings per share because the minimum applicable performance conditions had not been attained. Antidilutive restricted stock units (“RSUs”), performance share units (“PSUs”), performance restricted share units (“PRSUs”), and PRSUs,TSR PSUs are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. The restricted stock units,RSUs, PSUs, PRSUs, and PRSUsTSR PSUs that were antidilutive, as determined under the treasury stock method, were 0.10.4 million and 0.30.1 million for the first quarter of 20212022 and the first quarter of 2020,2021, respectively.
Due to the net loss in first quarter of 2022, any potentially dilutive shares were excluded from the denominator in computing diluted earnings (loss) per common share for the first quarter of 2022.
Share Repurchase Programs
On August 27, 2020,December 1, 2021, our Board of Directors authorized the repurchase of up to $500$250 million of our common shares (“20202021 Repurchase Authorization”). Pursuant to the 20202021 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 20202021 Repurchase Authorization has no scheduled termination date.
During In the first quarter of 2021, we acquired approximately 1.1 million of our outstanding common2022, no shares for $77.5 millionwere repurchased under the 20202021 Repurchase Authorization. As of May 1, 2021,April 30, 2022, we had $249.6$159.4 million available for future repurchases under the 20202021 Repurchase Authorization.
In addition to shares repurchased under the 2020 Repurchase Authorization, purchases
Purchases of common shares reported in the consolidated statements of shareholders’ equity include shares acquired to satisfy income tax withholdings associated with the vesting of share-based awards.
Dividends
We declared and paid cash dividends per common share during the first quarter of 20212022 as follows:
| | | Dividends Per Share | | Amount Declared | | Amount Paid | | Dividends Per Share | | Amount Declared | | Amount Paid |
2021: | | | (In thousands) | | (In thousands) | |
2022: | | 2022: | | | (In thousands) | | (In thousands) |
First quarter | First quarter | $ | 0.30 | | | $ | 11,206 | | | $ | 12,460 | | First quarter | $ | 0.30 | | | $ | 8,981 | | | $ | 10,705 | |
Total | Total | $ | 0.30 | | | $ | 11,206 | | | $ | 12,460 | | Total | $ | 0.30 | | | $ | 8,981 | | | $ | 10,705 | |
|
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,RSUs and PRSUs.PSUs. 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 54 – SHARE-BASED PLANS
We have issued restricted stock units,RSUs, PSUs, PRSUs, and PRSUsTSR PSUs under our shareholder-approved equity compensation plans. We recognized share-based compensation expense of $11.9$3.7 million and $3.0$11.9 million in the first quarter of 20212022 and the first quarter of 2020,2021, respectively. As of April 30, 2022, there were no PRSUs outstanding.
Non-vested Restricted Stock Units
The following table summarizes the non-vested restricted stock unitsRSU activity for the first quarter of 2021:2022:
| | | 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 January 30, 2021 | 1,214,212 | | $ | 22.71 | | |
Outstanding non-vested RSUs at January 29, 2022 | | Outstanding non-vested RSUs at January 29, 2022 | 909,287 | | $ | 33.87 | |
Granted | Granted | 206,685 | | 70.77 | | Granted | 418,247 | | 38.13 | |
Vested | Vested | (390,116) | | 22.74 | | Vested | (355,911) | | 29.29 | |
Forfeited | Forfeited | (31,181) | | 25.26 | | Forfeited | (23,271) | | 29.59 | |
Outstanding non-vested restricted stock units at May 1, 2021 | 999,600 | | $ | 32.56 | | |
Outstanding non-vested RSUs at April 30, 2022 | | Outstanding non-vested RSUs at April 30, 2022 | 948,352 | | $ | 37.52 | |
The non-vested restricted stock unitsRSUs granted in the first quarter of 20212022 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.
Performance Share Units
In the first quarter of 2020, we awarded PRSUs to certain members of senior management, which vest based on the achievement of share price performance goals and a minimum service requirement of one year. The PRSUs have a contractual term of three years. Shares issued in connection with vested PRSUs 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. The majority of PRSUs awarded in 2020 vested in the first quarter of 2021. At May 1, 2021, the share price performance goals applicable to the remaining 3,223 outstanding PRSUs had been attained and we expect the PRSUs outstanding at May 1, 2021 to vest in the second quarter of 2021.
Prior to 2020, in 2021, and in the first quarter of 2021,2022, we 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. The financial performance objectives for each fiscal year within the three-year performance period will be approved by the Compensation Committee of our Board of Directors during the first quarter of the respective fiscal year.
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 PSUs when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.
We have begun or expect to begin recognizing expense related to PSUs and PRSUs as follows:
| | | | | | | | | | | | | | |
Issue Year | Outstanding PSUs and PRSUs at May 1, 2021 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
2019 | 255,487 | | March 2021 | | Fiscal 2021 |
2020 | 3,223 | | April 2020 | | Fiscal 2020-2021 |
2021 | 166,055 | | | March 2023 | Fiscal 2023 |
Total | 424,765 | | | | |
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 award agreement.
In the first quarter of 2022, we also awarded TSR PSUs to certain members of management, which vest based on the achievement of total shareholder return (“TSR”) targets relative to a peer group over a three-year performance period and require the grantee to remain employed by us through the end of the performance period. If we meet the applicable performance thresholds over the three-year performance period and the grantee remains employed by us through the end of the performance period, the TSR PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period. We use a Monte Carlo simulation to estimate the fair value of the TSR PSUs on the grant date and recognize expense over the service period. The TSR PSUs have a contractual period of three years.
We have begun or expect to begin recognizing expense related to PSUs and TSR PSUs as follows:
| | | | | | | | | | | | | | | | | |
Issue Year | Measurement Basis | Outstanding PSUs and TSR PSUs at April 30, 2022 | Actual Grant Date | Expected Valuation (Grant) Date | Actual or Expected Expense Period |
2019 | ROIC/EPS | 6,109 | | March 2021 | | Fiscal 2021 |
2021 | ROIC/EPS | 170,426 | | | March 2023 | Fiscal 2023 |
2022 | Relative TSR | 68,231 | | March 2022 | | Fiscal 2022 - 2024 |
2022 | ROIC/EPS | 272,951 | | | March 2024 | Fiscal 2024 |
Total | | 517,717 | | | | |
During the first quarter of 2021,2022, the PSUs issued in 20182019 vested with an average performance attainment higher than the targets established. During the first quarters of 20212022 and 2020,2021, we recognized $8.6$0.1 million and $0.4$8.6 million in share-based compensation expense related to PSUs and PRSUs,TSR PSUs, respectively.
The following table summarizes the activity related to PSUs and PRSUsTSR PSUs for the first quarter of 2021:2022:
| | | 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 PRSUs at January 30, 2021 | 474,031 | | $ | 24.31 | | |
Outstanding PSUs and TSR PSUs at January 29, 2022 | | Outstanding PSUs and TSR PSUs at January 29, 2022 | 240,110 | | $ | 70.24 | |
Granted | Granted | 263,787 | | 70.24 | | Granted | 68,231 | | 58.09 | |
Vested | Vested | (470,808) | | 24.27 | | Vested | (234,001) | | 70.24 | |
Forfeited | Forfeited | (8,300) | | 70.24 | | Forfeited | — | | — | |
Outstanding PSUs and PRSUs at May 1, 2021 | 258,710 | | $ | 69.74 | | |
Outstanding PSUs and TSR PSUs at April 30, 2022 | | Outstanding PSUs and TSR PSUs at April 30, 2022 | 74,340 | | $ | 59.09 | |
The following activity occurred under our share-based plans during the respective periods shown:
| | | First Quarter | | First Quarter |
(In thousands) | (In thousands) | 2021 | | 2020 | (In thousands) | 2022 | | 2021 |
Total fair value of restricted stock vested | Total fair value of restricted stock vested | $ | 26,901 | | | $ | 4,040 | | Total fair value of restricted stock vested | $ | 12,631 | | | $ | 26,901 | |
Total fair value of performance shares vested | Total fair value of performance shares vested | $ | 37,168 | | | $ | 924 | | Total fair value of performance shares vested | $ | 13,753 | | | $ | 37,168 | |
The total unearned compensation costexpense related to all share-based awards outstanding, excluding PSUs issued in 2021 and 2022, at May 1, 2021April 30, 2022 was approximately $46.2$32.9 million. This compensation cost is expected to be recognized through April 2024March 2025 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 1.72.4 years from May 1, 2021.April 30, 2022.
NOTE 65 – INCOME TAXES
In 2021, the provision for income taxes was based on a current estimate of the annual effective tax rate, adjusted to reflect the effect of discrete items.
For 2022, the Company's estimated annual effective tax rate has fluctuated with changes in estimated full-year pre-tax earnings due to uncertainty in our forecasted earnings resulting from an unpredictable retail landscape due to macroeconomic pressures, including cost inflation, and a decline in consumer discretionary spending. Differences between pre-tax and taxable income, such as non-deductible executive compensation, cause the effective income rate to vary significantly. Accordingly, the Company does not believe that it can estimate the annual effective tax rate for 2022 with sufficient precision and, as permitted by GAAP, has determined the income tax benefit for the first quarter of 2022 based upon the year-to-date pre-tax loss and the effect of differences between book and taxable loss.
We have estimated the reasonably possible expected net change in unrecognized tax benefits through April 30, 2022,29, 2023, based on (1) expected cash and noncash settlements or payments of uncertain tax positions, and (2) lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0 million. Actual results may differ materially from this estimate.
NOTE 76 – CONTINGENCIES
Legal Proceedings
We are involved in 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 87 – BUSINESS SEGMENT DATA
We use the following sixseven merchandise categories, which are consistent with our internal management and reporting of merchandise net sales: Food; Consumables; Soft Home; Hard Home; Furniture; Seasonal; and Seasonal.Apparel, Electronics, & 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 our home décor; frames; fashion bedding; utility bedding; bath; window; decorative textile; home organization;and area rugs; jewelry; apparel; and hosieryrugs departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; home maintenance; home organization; and electronicstoys departments. The Furniture category includes our upholstery; mattress; ready-to-assemble; and case goods departments. The Seasonal category includes our lawn & garden; summer; Christmas; toys; and other holiday departments. The Apparel, Electronics, & Other department includes our apparel; electronics; jewelry; hosiery; and candy & snacks departments, as well as the assortments for The Lot, our cross-category presentation solution, and the Queue Line, our streamlined checkout experience.
InWe periodically assess, and make minor adjustments to, our product hierarchy, which can impact the first quarterroll-up of 2021, we realigned our merchandise categories and eliminated our Electronics, Toys, & Accessoriescategories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category which comprised $75.1 millionfor all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported in the first quarter of 2020. See the reclassifications section of note 1 to the consolidated financial statements for further discussion.amounts.
The following table presents net sales data by merchandise category:
| | | | | | | | | | | | | | |
| | First Quarter |
(In thousands) | | 2021 | | 2020 |
Furniture | | $ | 481,431 | | | $ | 415,700 | |
Seasonal | | 328,794 | | | 215,302 | |
Soft Home | | 303,981 | | | 248,743 | |
Consumables | | 204,015 | | | 237,241 | |
Food | | 175,131 | | | 203,819 | |
Hard Home | | 132,200 | | | 118,344 | |
Net sales | | $ | 1,625,552 | | | $ | 1,439,149 | |
| | | | | | | | | | | | | | |
| | First Quarter |
(In thousands) | | 2022 | | 2021 |
Furniture | | $ | 390,386 | | | $ | 481,431 | |
Seasonal | | 234,171 | | | 303,918 | |
Food | | 176,620 | | | 180,297 | |
Soft Home | | 166,295 | | | 223,854 | |
Consumables | | 155,310 | | | 162,388 | |
Hard Home | | 129,284 | | | 152,198 | |
Apparel, Electronics, & Other | | 122,648 | | | 121,466 | |
Net sales | | $ | 1,374,714 | | | $ | 1,625,552 | |
| | | | |
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, inflation, 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 to the accompanying consolidated financial statements has the same meaning in this item and the balance of this report.
The following are the results from the first quarter of 20212022 that we believe are key indicators of our operating performance when compared to our operating performance from the first quarter of 2020:2021:
•Net sales increased $186.4decreased $250.8 million, or 13.0%15.4%.
•Comparable sales for stores open at least fifteen months, plus our e-commerce operations, increased $159.3decreased $268.3 million, or 11.3%17.0%.
•Gross margin dollars increased $83.2decreased $149.3 million, while gross margin rate increased 50decreased 350 basis points to 40.2%36.7% of sales.
•Selling and administrative expenses increased $38.8decreased $16.6 million. As a percentage of net sales, selling and administrative expenses decreased 130increased 440 basis points to 30.6%35.0% of net sales.
•Operating (loss) profit rate increased 230decreased 850 basis points to 7.5%(1.0)%.
•Diluted earnings (loss) per share increaseddecreased to $2.62$(0.39) per share from $1.26$2.62 per share.
•Cash and cash equivalents increased by $301.5decreased $551.6 million, tofrom $613.3 million fromat the end of the first quarter of 2020.2021 to $61.7 million at the end of the first quarter of 2022.
•Inventory increased by 11.8%48.5% or $94.9$437.2 million, tofrom $901.5 million fromat the end of the first quarter 2021 to $1,338.7 million at the end of 2020.the first quarter 2022.
•We declared and paid a quarterly cash dividend in the amount of $0.30 per common share in the first quarter of 2021,2022, which was consistent with the quarterly cash dividend of $0.30 per common share paid in the first quarter of 2020.
•We acquired 1.1 million of our outstanding common shares for $77.5 million under the 2020 Repurchase Authorization (as defined below).2021.
See the discussion and analysis below for additional details regarding our operating results.
STORES
The following table presents stores opened and closed during the first quarter of 20212022 and the first quarter of 2020:2021:
| | | | 2021 | 2020 | | | 2022 | 2021 |
Stores open at the beginning of the fiscal year | Stores open at the beginning of the fiscal year | 1,408 | | 1,404 | | Stores open at the beginning of the fiscal year | 1,431 | | 1,408 | |
Stores opened during the period | Stores opened during the period | 13 | | 6 | | Stores opened during the period | 7 | | 13 | |
Stores closed during the period | Stores closed during the period | (8) | | (6) | | Stores closed during the period | (4) | | (8) | |
| | Stores open at the end of the period | 1,413 | | 1,404 | | | Stores open at the end of the period | 1,434 | | 1,413 | |
We expect our store count at the end of 20212022 to increase by approximately 2030 stores compared to our store count at the end of 2020.2021.
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:
| | | First Quarter | | First Quarter |
| | 2021 | 2020 | | 2022 | 2021 |
Net sales | Net sales | 100.0 | % | 100.0 | % | Net sales | 100.0 | % | 100.0 | % |
Cost of sales (exclusive of depreciation expense shown separately below) | Cost of sales (exclusive of depreciation expense shown separately below) | 59.8 | | 60.3 | | Cost of sales (exclusive of depreciation expense shown separately below) | 63.3 | | 59.8 | |
Gross margin | Gross margin | 40.2 | | 39.7 | | Gross margin | 36.7 | | 40.2 | |
Selling and administrative expenses | Selling and administrative expenses | 30.6 | | 31.9 | | Selling and administrative expenses | 35.0 | | 30.6 | |
Depreciation expense | Depreciation expense | 2.1 | | 2.6 | | Depreciation expense | 2.7 | | 2.1 | |
Operating profit | 7.5 | | 5.2 | | |
Operating (loss) profit | | Operating (loss) profit | (1.0) | | 7.5 | |
Interest expense | Interest expense | (0.2) | | (0.2) | | Interest expense | (0.2) | | (0.2) | |
Other income (expense) | Other income (expense) | 0.1 | | (0.2) | | Other income (expense) | 0.1 | | 0.1 | |
Income before income taxes | 7.4 | | 4.7 | | |
Income tax expense | 1.6 | | 1.3 | | |
Net income | 5.8 | % | 3.4 | % | |
(Loss) income before income taxes | | (Loss) income before income taxes | (1.1) | | 7.4 | |
Income tax (benefit) expense | | Income tax (benefit) expense | (0.3) | | 1.6 | |
Net (loss) income and comprehensive (loss) income | | Net (loss) income and comprehensive (loss) income | (0.8) | % | 5.8 | % |
FIRST QUARTER OF 20212022 COMPARED TO FIRST QUARTER OF 20202021
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 first quarter of 20212022 compared to the first quarter of 20202021 were as follows:
| First Quarter | First Quarter | | First Quarter | |
($ in thousands) | ($ in thousands) | 2021 | | 2020 | | Change | | Comps | ($ in thousands) | 2022 | | 2021 | | Change | | Comps |
Furniture | Furniture | $ | 481,431 | | 29.6 | % | | $ | 415,700 | | 28.9 | % | | $ | 65,731 | | 15.8 | % | | 13.7 | % | Furniture | $ | 390,386 | | 28.4 | % | | $ | 481,431 | | 29.6 | % | | $ | (91,045) | | (18.9) | % | | (20.8) | % |
Seasonal | Seasonal | 328,794 | | 20.2 | | | 215,302 | | 15.0 | | | 113,492 | | 52.7 | | | 51.0 | | Seasonal | 234,171 | | 17.0 | | | 303,918 | | 18.7 | | | (69,747) | | (22.9) | | | (24.0) | |
Food | | Food | 176,620 | | 12.9 | | | 180,297 | | 11.1 | | | (3,677) | | (2.0) | | | (3.2) | |
Soft Home | Soft Home | 303,981 | | 18.7 | | | 248,743 | | 17.2 | | | 55,238 | | 22.2 | | | 20.6 | | Soft Home | 166,295 | | 12.1 | | | 223,854 | | 13.8 | | | (57,559) | | (25.7) | | | (27.1) | |
Consumables | Consumables | 204,015 | | 12.6 | | | 237,241 | | 16.5 | | | (33,226) | | (14.0) | | | (14.7) | | Consumables | 155,310 | | 11.3 | | | 162,388 | | 10.0 | | | (7,078) | | (4.4) | | | (5.5) | |
Food | 175,131 | | 10.8 | | | 203,819 | | 14.2 | | | (28,688) | | (14.1) | | | (15.1) | | |
Hard Home | Hard Home | 132,200 | | 8.1 | | | 118,344 | | 8.2 | | | 13,856 | | 11.7 | | | 9.3 | | Hard Home | 129,284 | | 9.4 | | | 152,198 | | 9.4 | | | (22,914) | | (15.1) | | | (16.7) | |
Apparel, Electronics, & Other | | Apparel, Electronics, & Other | 122,648 | | 8.9 | | | 121,466 | | 7.4 | | | 1,182 | | 1.0 | | | (1.1) | |
Net sales | Net sales | $ | 1,625,552 | | 100.0 | % | | $ | 1,439,149 | | 100.0 | % | | $ | 186,403 | | 13.0 | % | | 11.3 | % | Net sales | $ | 1,374,714 | | 100.0 | % | | $ | 1,625,552 | | 100.0 | % | | $ | (250,838) | | (15.4) | % | | (17.0) | % |
InWe periodically assess, and make minor adjustments to, our product hierarchy, which can impact the first quarterroll-up of 2021, we realigned our merchandise categories and eliminated our Electronics, Toys, & Accessories merchandise category. Seecategories. Our financial reporting process utilizes the reclassifications discussionmost current product hierarchy in note 1 to the consolidated financial statements for additional information. In order to provide comparative information, we have reclassified our results into the newreporting net sales by merchandise category alignment for bothall periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
Net sales increased $186.4decreased $250.8 million, or 13.0%15.4%, to $1,374.7 million in the first quarter of 2022, compared to $1,625.6 million in the first quarter of 2021, compared to $1,439.1 million in the first quarter of 2020.2021. The increasedecrease in net sales was primarily driven by an 11.3% increasea 17.0% decrease in our comps, which decreased net sales by $268.3 million, partially offset by our non-comparable sales, which increased net sales by $159.3 million. Additionally, our non-comparable sales increased net sales by $27.1$17.5 million, driven by the net increase of 21 stores since the first quarter of 2021 and increased sales of our new and relocated stores compared to closed stores. Our comps are calculated based on the results of all stores that were open at least fifteen months plus the results of our e-commerce net sales.
Our net sales duringand comps decreased in the first quarter of 2021 benefited from2022 due to the absence of government sponsored relief packages related to COVID-19, which included stimulus payments and enhanced unemployment benefits, the majority of whichthat were released in January 2021 and March 2021. Additionally, we continued to experience increased demand for our home productspresent in the first quarter of 2021, which includes our Furniture, Seasonal, Soft Home,included government stimulus payments and Hard Home merchandise categories. We believe thisenhanced unemployment benefits, and resulted in increased demand wasnet sales and comps in the resultfirst quarter of the continuation of nesting trends2021. Additionally, we experienced decreased demand in 2020 due to customers investing more time andthe
discretionary funds in their homefirst quarter of 2022 as a byproductresult of general economic pressures on our customers caused by inflation and other macroeconomic impacts, including rising fuel and food prices, which we believe impacted the COVID-19 pandemic. discretionary spending of our customers.
In the first quarter of 2021, nesting trends shifted toward patio furniture2022, we experienced decreased comps and other outdoornet sales in all of our merchandise categories except our Apparel, Electronics, & Other category where net sales increased slightly. Our home products categories - Furniture, Seasonal, Soft Home, and Hard Home - were most impacted, as purchases from these categories are generally more discretionary. As discussed above, the absence of stimulus and enhanced unemployment benefits and a challenging macroeconomic environment reduced our customer's discretionary spending. Furthermore, our Seasonal category was negatively impacted in the first quarter of 2022 by cooler weather stretching into March and April in much of the country, which droveled to a slow start to the increasedlawn & garden and summer selling season, both weather-sensitive departments. Accordingly, we experienced lower net sales and comps in our Seasonal merchandise category compared to the first quarter of 2020. While our business in the first quarter of 2021 benefited from COVID-19-related factors, such as government stimulus, we believe2022 in the strengthnorthern parts of our trend-right home offerings provided a strong foundation for net sales growththe U.S. compared to the first quarter of 2020. Additionally, we believe thatsouthern U.S., particularly the southeastern U.S.
While our strategic initiatives - including The Lot, Queue Line, Broyhill®,Food and Pantry Optimization - continued to contribute to our increasedConsumables categories experienced decreased comps and net sales in the first quarter of 2021. The Lot is a cross-category presentation solution with a curated assortment to promote life’s occasions. Queue Line offers2022, these categories performed relatively better than our customers a streamlined checkout experience with a new and expanded convenience assortment and a smaller footprint. The Broyhill® brand, which we launched in 2019, continues to grow as we have expanded our assortment. Pantry Optimization reallocated square footage from our Food category to Consumables category. Our customers have responded positively to each of these strategic initiatives and we believe that our product assortment is aligned with customer demand. At the end of the first quarter of 2021, The Lot and Queue Line have been rolled out to approximately 1,050 and 1,200 stores, respectively.
Partially offsetting our success in home offerings was a decline in net sales in our Food and Consumables merchandiseproducts categories during the first quarter of 2021 due to a decrease in demand for essential products, which we define as food, consumables, health products, and pet supplies, compared to the first quarter of 2020. Demand for essential products surged in the first quarter of 20202022 as customers stocked up on these products at the onsetthey are less sensitive to changes in discretionary spending.
Our Apparel, Electronics, & Other category experienced a slight decrease in comps as a result of the COVID-19 pandemic. Our customers did not stock up on these products to the same extentdecreased discretionary spending in the first quarter of 2021. Despite the decline in net sales in the first quarter of 2021 in our Food and Consumables categories compared to the first quarter of 2020, the performance of our Food and Consumables categories was consistent with our expectations, and we believe that our Pantry Optimization initiative has been successful to date.2022 discussed above.
Gross Margin
Gross margin dollars increased $83.2decreased $149.3 million, or 14.6%22.8%, to $504.6 million for the first quarter of 2022, compared to $653.9 million for the first quarter of 2021, compared to $570.8 million for the first quarter of 2020.2021. The increasedecrease in gross margin dollars was primarily due to an increasea decrease in net sales which increasedand gross margin dollars by $73.9 million.rate. Gross margin as a percentage of net sales increased 50decreased 350 basis points to 36.7% in the first quarter of 2022 compared to 40.2% in the first quarter of 2021 compared2021. The gross margin rate decrease was primarily due to 39.7%higher markdowns, higher inbound freight costs, and a higher shrink rate. The higher markdowns were a result of our being more promotional in the first quarter of 2020. The gross margin rate increase was primarily due2022 compared to lower markdowns and favorable product mix resulting from increased sales in higher average gross margin items, particularly in our Seasonal category, in the first quarter of 2021 compared to lower average gross margin items in the first quarter of 2020, partially offset by higher inbound2021. Inbound freight costs. Freight costs increased primarily due to higher ocean carriage rates, detention and demurrage charges resulting from delayed receipt of inventory related to supply chain constraints, high transportation rates,delays, and increasinghigher fuel costs. The higher shrink rate was driven by a higher rate of theft and other loss in our stores during 2021, which has led to unfavorable physical inventory counts in the 2022 physical inventory cycle and a higher shrink accrual rate in the fourth quarter of 2021 and first quarter of 2022.
Selling and Administrative Expenses
Selling and administrative expenses were $480.8 million for the first quarter of 2022, compared to $497.4 million for the first quarter of 2021, compared to $458.6 million for the first quarter2021. The decrease of 2020. The increase of $38.8$16.6 million in selling and administrative expenses was driven by an increasedecreases in accrued bonus expense of $19.1 million, share-based compensation expense of $8.2 million, and self-insurance expense of $3.6 million, partially offset by increases in distribution and transportation expense of $13.9 million, accrued bonus expense of $8.9 million, share-based compensation expense of $8.9 million, $2.1 million of store occupancy costs, and store-related payroll expense of $1.9 million, partially offset by the absence of proxy contest related costs of $3.7$15.8 million. The increase in distribution and transportation expenses was driven by rent on our leased distribution centers, four of which were sold and leased back in the second quarter of 2020, and higher outbound transportation volume and higher distribution costs to support our increased net sales. The increasedecrease in accrued bonus expense was due to increasedlower performance in the first quarter of 20212022 relative to our quarterly and annual operating plans as compared to the first quarter of 2020 and accrual of a discretionary bonus for most of our non-exempt associates in the first quarter of 2021. Our share-based compensation expense increased primarilydecreased due to the timing of establishing the grant date of our 2019 PSUs for which the grant date was established in the first quarter of 2021, compared to our 2018 PSUs, for which the grant date was established in the third quarter of 2020. Our store occupancy costs increased as a result of new stores openedgranted in the first quarter of 2021, which havecarried a higher rentsgrant date fair value and for which substantially more awards were granted than the stores closed, normal rent increases resulting from lease renewals, and a higher store count at the end of the first quarter of 2021 compared to the first quarter of 2020. The increase in store-related payroll was primarily due to additional payroll hours to support our increased net sales2022 TSR PSUs granted in the first quarter of 2021.2022. The proxy contest related costs were comprised of legal, public relations,decrease in self-insurance expense was primarily driven by favorable workers' compensation, general liability, and advisory fees, and settlement costshealthcare claims experience, which led to lower incurred to resolve a proxy contestexpense in the first quarter of 2020.2022. The increase in distribution and transportation expenses was driven by increased fuel costs and outbound transportation rates.
As a percentage of net sales, selling and administrative expenses decreased 130increased 440 basis points to 35.0% for the first quarter of 2022 compared to 30.6% for the first quarter of 2021 compared to 31.9% for the first quarter of 2020.
2021.
Depreciation Expense
Depreciation expense decreased $3.7increased $3.4 million to $34.0$37.4 million in the first quarter of 2021,2022, compared to $37.7$34.0 million for the first quarter of 2020.2021. Depreciation expense as a percentage of sales decreased 50increased 60 basis points compared to the first quarter of 2020.2021. The decreaseincrease was primarily driven by the sale of four distribution centersinvestments in second quarter of 2020our strategic initiatives, new stores, and the disposition of other store assets since the first quarter of 2020.supply chain improvements.
Interest Expense
Interest expense was $2.8 million in the first quarter of 2022, compared to $2.6 million in the first quarter of 2021, compared to $3.3 million in the first quarter of 2020.2021. The decreaseincrease in interest expense was driven by a decreasean increase in total average borrowings. We had total average borrowings (including finance leases and the financing liability related to the sale and leaseback transactions for four of our distribution centerscenters) of $301.1 million in the secondfirst quarter of 2020)2022 compared to total average borrowings of $180.7 million in the first quarter of 2021 compared to total average borrowings of $452.8 million in the first quarter of 2020.2021. The decreaseincrease in total average borrowings was driven by our repayment of all outstanding borrowings under the Credit Agreement as a conditionthroughout the first quarter of 2022, while we had no borrowings under our revolving credit facility in the first quarter of 2021, partially offset by the repayment of the closingbalance of the sale and leaseback transactionsa term note agreement in the second quarter of 2020, partially offset by the establishment of the financing liability in connection with the sale and leaseback transactions. The decrease in total average borrowings was partially offset by a higher average interest rate on the sale and leaseback financing liability.2021.
Other Income (Expense)
Other income (expense) was $1.0 million of income in the first quarter of 2021, compared to $(3.3) million of expense2022 and in the first quarter of 2020.2021. The changeincome in both years was primarily driven by unrealized gains on our diesel fuel derivatives due to an increase in current and forward diesel fuel prices in the first quarter of 2021 as compared to a sharp decline in prices in the first quarter of 2020.derivatives.
Income Taxes
The effective income tax rate for the first quarter of 20212022 and the first quarter of 20202021 was 21.8%27.3% and 27.2%21.8%, respectively. The decreaseincrease in the effective income tax rate was primarily attributable to theaudit settlements and a net tax benefitdeficiency associated with settlementvesting of share-based payment awards duringin 2022 compared to a net benefit in the first quarter of 2021, partially offset by an increase in employment-related tax credits in 2022. Additionally, the increase in the effective income tax rate was impacted by the loss before income taxes in the first quarter of 2022 compared to the income before income taxes in the first quarter of 2021.
2021Known Trends and 2022 Guidance
In March 2020,late 2021 and early 2022, the World Health Organization declared COVID-19 a pandemic. The effects of the virus, the related government response, and the impact on consumer spending behaviors have significantlyU.S. economy has experienced its highest inflationary period in decades, which has adversely impacted costs in our business and reducedadversely impacted the buying power of our visibilitycustomers. We expect the inflationary environment to future financial results.continue and negatively impact discretionary spending by our customers. At this time, the Company does not believe it has sufficient visibility to provide full year guidance for 2021.2022.
Given a wider-than-usual range of potential outcomes, we are not currently providing earnings per share guidance for the second quarter of 2022. However, we do anticipate a loss in the second quarter of 2022. As of May 28, 2021, and excluding consideration of potential share repurchase activity,27, 2022, we expect the following in the second quarter of 2021:2022:
•ComparableA comparable sales decrease in the low doublemid-to-high single digits ascompared to the second quarter of 2020 benefited significantly from a government sponsored relief package;2021;
•Gross margin rate below last year in considerationthe low 30s as result of macro-economic headwinds in freight cost;increased promotional activity and inbound transportation costs; and
•Selling and administrative expenses slightly below last year; and
•Diluted earnings per share inup compared to the rangesecond quarter of $1.00 to $1.15.
2021.
Capital Resources and Liquidity
On August 31, 2018,September 22, 2021, we entered into the Credit Agreement which provides for a $700$600 million five-year unsecured credit facility. The Credit Agreementfacility that expires on August 31, 2023.September 22, 2026. Borrowings under the Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness. The Credit Agreement includes a $30$50 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The Credit Agreement also contains an environmental, social and governance (“ESG”) provision, which may provide favorable pricing and fee adjustments if we meet ESG performance criteria to be established by a future amendment to the Credit Agreement. Under the Credit Agreement, we have the option to establish incremental term loans and/or increases in the revolving credit limits in an aggregate amount of up to $300 million, subject to the lenders agreeing to increase their commitments. Additionally, the Credit Agreement includes two options to extend the maturity date of the Credit Agreement by one year each, subject to each lender agreeing to extend the maturity date of its respective loans. The interest rates, pricing and fees under the Credit Agreement fluctuate based on our debt rating.rating or leverage ratio, whichever results in more favorable pricing to us. The 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 revolvingThe Credit Agreement updated the LIBOR fallback language to implement fallback provisions, pursuant to which the interest rate on the loans will transition to an alternative rate upon the occurrence of certain LIBOR cessation events. Loans made under the Credit Agreement may be prepaid without penalty. The 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 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.CA, which was amended concurrent with our entry into the Credit Agreement to conform with the covenants of the Credit Agreement. A violation of any of the covenants could result in a default under the Credit Agreement that would permit the lenders to restrict our ability to further access the Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Agreement. At May 1, 2021,April 30, 2022, we were in compliance with the covenants of the Credit Agreement.
At May 1, 2021,April 30, 2022, we had no$270.8 million of borrowings under the Credit Agreement, and the borrowings available under the Credit Agreement were $694.2$324.2 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $5.8$5.0 million.
On August 7, 2019, we entered into the 2019 Term Note, a $70 million term note agreement, which was secured by the equipment at our California distribution center. The interest rate on the note was fixed at 3.3%. In lightprimarily source of our strong liquidity is cash flows from operations and current market conditions, on June 7, 2021, we prepaid the remaining $44.3 million principal balanceborrowings under the 2019 Term Note. In connection with the prepayment, we incurred a $0.4 million prepayment feeour credit facility as necessary. Our net income and, recognized a $0.5 million loss on debt extinguishmentconsequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our cash provided by operations typically peaks in the secondfourth quarter of 2021.
each fiscal year due to net sales generated during the holiday selling season. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter as we build our inventory levels prior to the holiday selling season. We have historically funded our working capitalthose requirements with cash provided by operations and borrowings under our credit facility. However, based on our current cash and cash equivalents position and projected cash flows from operations, we intendWe expect to borrow under the Credit Agreement during 2022 to fund our working capital requirements, along with capital expenditures, share repurchases, and other contractual commitments, for the upcoming quarter without borrowingcash requirements. However, we currently expect to reduce our borrowings under the Credit Agreement.Agreement at the end of the second quarter of 2022 compared to the first quarter of 2022. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments.
In August 2020,On December 1, 2021, our Board of Directors authorized the repurchase of up to $500$250 million of our common shares (“2020under the 2021 Repurchase Authorization”).Authorization. Pursuant to the 20202021 Repurchase Authorization, we are authorized tomay 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 20202021 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. Duringdate. In the first quarter of 2021,2022, we purchased 1.1 million of our commondid not repurchase shares for $77.5 million under the 20202021 Repurchase Authorization, at an average priceAuthorization. As of $67.45. At May 1, 2021,April 30, 2022, we had $249.6$159.4 million available for future repurchases under the 20202021 Repurchase Authorization.
In February 2021,March 2022, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on April 2, 20211, 2022 to shareholders of record as of the close of business on March 19, 2021.18, 2022. The cash dividend of $0.30 per common share is consistent with our quarterly dividends declared in 2020.2021. In the first quarter of 2021,2022, we paid approximately $12.5$10.7 million in dividends, consistent withcompared to the dividends paid of $12.5 million in the first quarter of 2020.2021.
In May 2021,2022, our Board of Directors declared a quarterly cash dividend of $0.30 per common share payable on June 25, 202124, 2022 to shareholders of record as of the close of business on June 11, 2021.10, 2022.
The following table compares the primary components of our cash flows from the first quarter 20212022 compared to the first quarter 2020:2021:
| (In thousands) | (In thousands) | 2021 | | 2020 | | Change | (In thousands) | 2022 | | 2021 | | Change |
Net cash provided by operating activities | $ | 204,293 | | | $ | 146,121 | | | $ | 58,172 | | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | $ | (196,233) | | | $ | 204,293 | | | $ | (400,526) | |
Net cash used in investing activities | Net cash used in investing activities | (32,170) | | | (28,913) | | | (3,257) | | Net cash used in investing activities | (41,241) | | | (32,170) | | | (9,071) | |
Net cash (used in) provided by financing activities | $ | (118,350) | | | $ | 141,943 | | | $ | (260,293) | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | $ | 245,459 | | | $ | (118,350) | | | $ | 363,809 | |
Cash (used in) provided by operating activities increaseddecreased by $58.2$400.5 million to cash used in operating activities of $196.2 million in the first quarter of 2022 compared to cash provided by operating activities of $204.3 million in the first quarter of 2021 compared to $146.1 million2021. The decrease was driven by the combined increase in cash outflows from inventories and accounts payable, which were driven by increased inventory levels at the end of the first quarter of 2020. The increase was principally driven by our higher2022, a lower net (loss) income after adjusting for non-cash activities such as non-cash share-based compensation expense and non-cash lease expense.expense, and an increase in cash outflows from current income taxes, which was driven by our lower (loss) income before income taxes in the year-to-date 2022.
Cash used in investing activities increased by $3.3$9.1 million to $41.2 million in the first quarter of 2022 compared to $32.2 million in the first quarter of 2021 compared2021. The increase was principally driven by an increase in capital expenditures, which was primarily due to $28.9increased investments in new stores.
Cash provided by (used in) financing activities increased by $363.8 million to cash provided by financing activities of $245.5 million in the first quarter of 2020. The increase was principally due to an increase in capital expenditures.
Cash (used in) provided by financing activities increased by $260.3 million2022 compared to cash used in financing activities of $118.4 million in the first quarter of 2021 compared to cash provided by financing activities of $141.9 million in the first quarter of 2020.2021. The increase was primarily driven by net proceeds from long-term debt due to borrowings under the Credit Agreement to fund working capital requirements, and a decrease in the first quarter of 2020, which was due to our borrowing approximately $200 million under the Credit Agreement in the first quarter of 2020 as a liquidity safeguard at the outset of the COVID-19 pandemic and an increasepayment for treasury shares acquired. The decrease in payment for treasury shares acquired was due to shares repurchased under a share repurchase authorization in first quarter of 2021, whereas there were no shares repurchased in the first quarter of 2021 primarily due to shares repurchased2022 under the 20202021 Repurchase Authorization. In
Based on historical and expected financial results, we believe that we have or, if necessary, have the first quarter of 2020, we had no active share repurchase program in place.ability to obtain, adequate resources to fund our cash requirements, including ongoing and seasonal working capital requirements, proposed capital expenditures, new projects, and currently maturing obligations.
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 20202021 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 20202021 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 20202021 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 Credit Agreement. We had no$270.8 million in borrowings under the Credit Agreement at May 1, 2021.April 30, 2022. An increase of 1% in our variable interest rate on our expected future borrowings would not currently materiallycould affect our financial condition, results of operations, or liquidity.liquidity through higher interest expense by approximately $2.7 million.
We are subject to market risk from exposure to changes in our derivative instruments associated with diesel fuel. At May 1, 2021,April 30, 2022, we had outstanding derivative instruments, in the form of collars, covering 3.00.9 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) |
2021 | | 1,800 | | | 1,800 | | | $ | 84 | | |
2022 | 2022 | | 1,200 | | | 1,200 | | | 183 | | 2022 | | 900 | | | 900 | | | $ | 1,555 | |
Total | Total | | 3,000 | | | 3,000 | | | $ | 267 | | Total | | 900 | | | 900 | | | $ | 1,555 | |
Additionally, at May 1, 2021,April 30, 2022, a 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $1.0$0.4 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
For information regarding certain legal proceedings to which we have been named a party or are subject, see note 76 to the accompanying consolidated financial statements.
Item 1A. Risk Factors
During the first quarter of 2021,2022, there were no material changes to the risk factors previously disclosed in our 20202021 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 (1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | Period | (a) Total Number of Shares Purchased (1)(2) | (b) Average Price Paid per Share (1)(2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
January 31, 2021 - February 27, 2021 | 41 | | $ | 55.25 | | 39 | | $ | 325,000 | | |
February 28, 2021 - March 27, 2021 | 543 | | 67.85 | | 500 | | 290,948 | | |
March 28, 2021 - May 1, 2021 | 954 | | 68.56 | | 610 | | 249,634 | | |
January 30, 2022 - February 26, 2022 | | January 30, 2022 - February 26, 2022 | 1 | | $ | 42.09 | | — | | $ | 159,425 | |
February 27, 2022 - March 26, 2022 | | February 27, 2022 - March 26, 2022 | 49 | | 36.58 | | — | | 159,425 | |
March 27, 2022 - April 30, 2022 | | March 27, 2022 - April 30, 2022 | 230 | | 38.17 | | — | | 159,425 | |
Total | Total | 1,538 | | $ | 67.96 | | 1,149 | | $ | 249,634 | | Total | 280 | | $ | 37.91 | | — | | $ | 159,425 | |
(1) In February, March, and April 2021,2022, in connection with the vesting of certain outstanding restricted stock units,RSUs and PSUs, and PRSUs, we acquired 946, 42,9301,340, 48,998 and 344,189230,300 of our common shares, respectively, which were withheld to satisfy income tax withholdings.
(2) The 20202021 Repurchase Authorization is comprised of an August 27, 2020a December 1, 2021 authorization by our Board of Directors for the repurchase of up to $500.0$250.0 million of our common shares. During the first quarter of 2022, we had no repurchases under the 2021 we purchased approximately 1.1Repurchase Authorization. At April 30, 2022, the 2021 Repurchase Authorization has $159.4 million of our common shares for approximately $77.5 million under the 2020 Repurchase Authorization.remaining authorization. The 20202021 Repurchase Authorization has no scheduled termination date.
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.
| | | | | | | | | | | |
| Exhibit No. | | Document |
| | | Form of Big Lots 2020 Long-Term Incentive Plan Performance Share Units Award Agreement (incorporated herein by reference to Exhibit 10.110.14 to our Form 8-K10-K dated March 9, 2021)29, 2022). |
| | | 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).Inc. Executive Severance Agreement. |
| | | Big Lots, Inc. Senior Executive Severance Agreement. |
| | | 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: June 9, 20218, 2022
| | | | | |
| 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) |