Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes. Please refer to “Item 1A. Risk Factors” of this Form 10-K for a discussion of forward-looking statements and certain risk factors that may have a material adverse effect on our business, financial condition, results of operations, and/or liquidity.
Our fiscal year ends on the Saturday nearest to January 31, which results in some fiscal years with 52 weeks and some with 53 weeks. Fiscal year
2018
and
2016
were comprised of 52 weeks. Fiscal year
2017
was comprised of 53 weeks. Fiscal year 2019 will be comprised of 52 weeks.
Operating Results Summary
The following are the results from
2018
that we believe are key indicators of our operating performance when compared to
2017
.
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Net sales decreased $26.3 million, or 0.5%.
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•
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Comparable store sales for stores open at least fifteen months, including e-commerce, increased $62.3 million, or 1.2%.
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Gross margin dollars decreased $20.5 million with a 20 basis point decrease in gross margin rate to 40.5% of sales.
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Selling and administrative expenses increased $54.4 million. As a percentage of net sales, selling and administrative expenses increased 130 basis points to 34.0% of net sales.
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Operating profit rate decreased 150 basis points to 4.2%.
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Diluted earnings per share decreased 12.6% to $3.83 per share, compared to $4.38 per share in 2017.
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Our return on invested capital decreased to 16.3% from 22.9%.
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Inventory of $969.6 million represented a $96.8 million increase, or 11.1%, from
2017
.
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We acquired approximately 2.4 million of our outstanding common shares for $100.0 million, under our 2018 Repurchase Program (as defined below in “Capital Resources and Liquidity”), at a weighted average price of $42.11 per share.
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We declared and paid four quarterly cash dividends in the amount of $0.30 per common share, for a total paid amount of approximately $50.6 million.
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The following table compares components of our consolidated statements of operations as a percentage of net sales:
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2018
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2017
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2016
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Net sales
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100.0
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%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales (exclusive of depreciation expense shown separately below)
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59.5
|
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59.3
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59.6
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Gross margin
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40.5
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40.7
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40.4
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Selling and administrative expenses
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34.0
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32.7
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33.3
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Depreciation expense
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2.4
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2.2
|
|
2.3
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Operating profit
|
4.2
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5.7
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|
4.8
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Interest expense
|
(0.2
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)
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(0.1
|
)
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(0.1
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)
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Other income (expense)
|
(0.0
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)
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0.0
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0.0
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Income before income taxes
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4.0
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5.6
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4.7
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Income tax expense
|
1.0
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2.0
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1.8
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Net income
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3.0
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%
|
3.6
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%
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2.9
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%
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See the discussion below under the captions “2018 Compared To 2017” and “2017 Compared To 2016” for additional details regarding the specific components of our operating results.
In 2018, our selling and administrative expenses include $7.0 million of costs associated with the retirement of our former chief executive officer and $3.5 million of costs associated with the settlement of our shareholder litigation matter, which is described in further detail in note 10 to the accompanying consolidated financial statements.
In 2017, our selling and administrative expenses include recoveries of $3.0 million from our insurance carriers related to a legal matter. Additionally, our income tax expense reflects a $4.5 million charge for the impact of the Tax Cuts and Jobs Act of 2017 related to our net deferred tax position and a $3.5 million benefit for the reduction in our federal tax rate.
In 2016, our selling and administrative expenses include $27.8 million of costs associated with the termination of our pension plans, which was completed near the end of fiscal 2016, partially offset by a $3.8 million gain on the sale of a company-owned property in California.
Operating Strategy
The core principle of our operating strategy has been to consistently re-evaluate the regularly shifting needs and wants of our core customer, Jennifer, to ensure that our customer value proposition stays current and relevant to her. This core principle applies to all aspects of our business, but particularly focuses on merchandising, marketing, and our customers’ shopping experience, which we believe represent the key drivers of our net sales. As a result of the continual re-evaluation process of our strategy, we have shifted our focus to what we call “ownable” or “winnable” merchandise categories, as we believe this is where Jennifer has given us the most latitude in providing her with merchandise that meets her needs and presents a surprise and delight factor in our stores. Our goal is to offer Jennifer affordable solutions in every season and category. Through our “ownable” and “winnable” merchandise categories, we are committed to offering product assortments that score highly in quality, brand, fashion, and value (“QBFV”) at a price tag Jennifer will love. She expects us to employ a friendly, customer-first mentality, which includes delivering a product assortment that meets her everyday needs and delivers exciting surprises that we intend to drive discretionary purchases.
In 2019, we expect to continue to review our operating strategy, and anticipate:
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Earnings per diluted share to be $3.55 to $3.75, which excludes the impact of potential strategic review and transformation costs.
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Comparable store sales increase in the low single digits.
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Opening approximately 50 new stores and closing up to 45 stores.
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Cash flow (operating activities less capital expenditures) of approximately $95 to $105 million.
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Cash returned to shareholders of approximately $100 million, through our quarterly dividend program and the 2019 Repurchase Program.
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Additional discussion and analysis of our financial performance and the assumptions and expectations upon which we are basing our guidance for our future results is set forth below under the caption “2018 Compared To 2017.”
Merchandising
We intend to achieve our goal of exceeding Jennifer’s expectations by offering quality product assortments and friendly solutions that align with our understanding of both her needs and her wants. We are committed to providing Jennifer value priced products with high levels of QBFV. Our operating strategy evaluates our product mix by focusing on downsizing, or potentially eliminating, those departments within our merchandise categories and product offerings that we believe Jennifer does not prioritize, does not believe we have the "right to play" in or where we believe we do not maintain a competitive advantage. Additionally, our operating strategy focuses on enhancing the assortment of those product offerings and departments within our merchandise categories that Jennifer has communicated to us are important to her shopping experience, and that we believe provide us with a competitive advantage. We have narrowed our focus to internally define our merchandise categories as “ownable” or “winnable,” and we plan to deepen our commitment to expanding our offerings in these areas. An “ownable” merchandise category is one where we believe Jennifer views us as a destination to shop for a tasteful assortment of products and affordable solutions. We believe that our value proposition and in-store execution differentiates us from the competition in our “ownable” categories. A “winnable” merchandise category is one where we believe the reliable value of our focused, trend-right assortment and/or closeout merchandise differentiates us from the competition when Jennifer shops for these key product offerings. We believe that our Furniture, Seasonal, Soft Home, Food, and Consumables merchandise categories are “ownable” or “winnable” and align our business with how our core customer shops our stores, while our Hard
Home and Electronics, Toys, & Accessories merchandise categories provide convenient adjacencies to our “ownable” or “winnable” categories.
We define our Furniture and Seasonal categories as “ownable”:
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Our Furniture category primarily focuses on our core customer’s home furnishing needs, such as upholstery, mattresses, case goods, and ready-to-assemble. In Furniture, we believe our competitive advantage is attributable to our sourcing relationships, our in-store availability, and everyday value offerings. A significant majority of our offerings in this category consists of replenishable products sourced either from recognized brand-name manufacturers or sold under our own brands. Our long-standing relationships with certain brand-name manufacturers, most notably in our mattresses and upholstery departments, allow us to work directly with them to create product offerings specifically for us, which enables us to provide a high-quality product at a competitive price. Additionally, we believe our “buy today, take home today” practice of carrying in-stock inventory of our core furniture offerings, which allows Jennifer to take home her purchase at the end of her shopping experience, positively differentiates us from our competition. We encourage Jennifer to shop and buy us online anytime and anywhere, and we invite her into our stores to touch and feel the quality and comfort of our products. We believe that offering a focused assortment, which is displayed in furniture vignettes, provides Jennifer a solution for decorating her home when combined with our home décor offerings. Supplementing our merchandising and presentation strategies, we provide multiple third-party financing options for our customers who may be more challenged for approval in traditional credit channels. Our financing partners are solely responsible for the credit approval decisions and carry the financial risk.
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Our Seasonal category is “ownable” in our patio furniture, gazebos, and Christmas trim departments. We believe we have a competitive advantage in this category by creating trend-right products with strong value proposition in our own brands. We believe our in-store shopping experience differentiates us from the competition. We have a large selection of samples assembled and displayed throughout the seasonal section of our store and have packaged the box stock so that it is very easy for Jennifer to purchase and take home. Much of this merchandise is sourced on an import basis, which allows us to maintain our competitive pricing. Additionally, our Seasonal category offers a mix of departments and products that complement her outdoor experience and holiday decorating desires. We continue to work with our vendors to expand our assortment to respond to Jennifer’s evolving wants and needs.
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We define our Soft Home, Food, and Consumables categories as “winnable”:
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Our Soft Home category is considered a “winnable” category, but has shown the potential to be an “ownable” category based on sales performance in areas such as bedding, bath, home fashion, and accents. Over the past few years, we have enhanced our assortment in Soft Home by allocating more selling space to the category to support a wider range of replenishable, fashion-based products. Our competitive advantage in Soft Home is centered around (1) a trend-right, focused assortment with improved quality and perceived value; and (2) our ability to furnish Jennifer’s home with the décor that compliments an in-store furniture purchase. We have worked to develop a “solutions” approach to complete a room through our cross-merchandising efforts, particularly color palette coordination, when combining our Soft Home offerings with our Furniture and Seasonal categories. This helps Jennifer envision how the product can work in her home and enhances our brand image.
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Our Food and Consumables categories focus primarily on catering to Jennifer’s daily essentials by providing reliable value and consistency of product offerings. We believe we possess a competitive advantage in the Food and Consumables categories based on our sourcing capabilities for closeout merchandise. Manufacturers and vendors have closeout merchandise for a variety of different reasons, including other retailers canceling orders or going out of business, production overruns, or marketing or packaging changes. We believe our vendor relationships, along with our size and financial strength, afford us these opportunities. To supplement our closeout business, we have focused on improving and expanding our “never out” product assortment to provide more consistency in those areas where Jennifer desires consistently available product offerings, such as over-the-counter medications. We believe that we have added top brands to our “never out” programs in Consumables and that our assortment and value proposition will continue to differentiate us in this highly competitive industry. In recent customer surveys, our customers have indicated they have a greater association of value in our Consumables assortment than our Food offerings, and as such, we are evaluating our mix and allocation between these merchandise categories.
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We consider our Hard Home and Electronics, Toys, & Accessories as convenience categories:
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We believe that our Hard Home and Electronics, Toys, & Accessories categories serve as convenient adjacencies to our “ownable” and “winnable” categories. Over the past few years, we have intentionally narrowed our assortments in these categories and re-allocated linear footage to the “ownable” and “winnable” categories. Our product assortments in these categories focus on value, and savings in comparison to competitors, in areas such as food prep, table top, home maintenance, small appliances, and electronics.
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Our merchandising management team is aligned with our merchandise categories, and their primary goal is to increase our total company comparable store sales (“comp” or “comps”). Our review of the performance of the members of our merchandise management team focuses on comps by merchandise category, as we believe it is the key metric that will drive our long-term net sales. By focusing on growing our “ownable” and “winnable” merchandise categories, and managing contraction in our convenience categories, we believe our merchandise management team can effectively address the changing shopping behaviors of our customers and implement more focused offerings within each merchandise category, which we believe will lead to continued comp growth.
Marketing
The top priority of our marketing activities is to increase our net sales and comps. Over the past few years, we have reviewed our brand identity to gain further insights into Jennifer’s perception of us and how best to improve the overall effectiveness of our marketing efforts. Our research has affirmed that Jennifer is deal-driven and comes to us for our value-priced merchandise assortment. She appreciates our ability to assist her in fashioning and furnishing her home so that she can enjoy the space with family and friends. We believe our strong price value perception and the surprise and delight factor in our stores enhances our ability to effectively connect with Jennifer in a way that lets her understand when shopping at Big Lots, she can afford to live Big, while saving Lots.
In an effort to align our messaging with the positive aspects of Jennifer’s perception of our brand, we have focused our marketing efforts on driving our value proposition in every season and category. We continue to increase our use of social and digital media outlets including conducting entire campaigns through these outlets (specifically on Facebook
®
, Instagram
®
, Pinterest
®
, Twitter
®
, and YouTube
®
) to drive an increased understanding of our value proposition with our core customer and to attempt to communicate that message to new potential customers. These outlets enable us to deliver our message directly to Jennifer and provide her with the opportunity to share direct feedback with us, which can enhance our understanding of what is most important to her and how we can improve the shopping experience in our stores.
Given our customer’s proficiency with mobile devices and digital media, we focus on communicating with her through those channels. We launched a new loyalty program, the BIG Rewards Program in November of 2017, to more effectively incentivize our loyal customers and encourage new membership by highlighting the significant features and benefits. Our new loyalty program rewards Jennifer with a coupon after every third purchase, a birthday surprise offer, and special rewards after large-ticket furniture purchases. We believe our BIG Rewards Program will help increase engagement with Jennifer and clearly communicate our offerings. At February 2, 2019, our BIG Rewards Program had over 17 million active members (defined as having made a purchase in the last 12 months) and we have a focused concerted efforts to grow the membership base in our Big Rewards Program in 2019.
In addition to electronic, social and digital media, our marketing communication efforts involve a mix of television advertising, printed ad circulars, and in-store signage. The primary goals of our television advertising are to promote our brand and, from time to time, promote products or special discounts in our stores. We have also shifted towards using more digital streaming media in concentrated markets of our stores, which allows us to connect deeper and more frequently with Jennifer. Our printed advertising circulars and our in-store signage initiatives focus on promoting our value proposition on our unique merchandise offerings.
Shopping Experience
In 2017, we introduced a new in-store shopping experience with our “Store of the Future” concept, which more deeply incorporates our brand identity and seeks to enhance the way Jennifer shops our stores, including:
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Showcasing our “ownable” and “winnable” merchandise categories by moving our Furniture department to the front center of the prototype store with Seasonal and Soft Home on either side to improve the coordination of our home decorating solutions. We moved Food and Consumables to the back of the prototype store, while keeping them visible
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with clear sight lines from the entrance of the store. We have also added color coordinated way-finding signage to help Jennifer navigate our stores.
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Creating a warm and personalized tone throughout the store through improved lighting, new flooring, softening the colors on our walls, and greeting Jennifer with a “Hello” wall as she enters the store. We increased the length of our check-out counter and removed signage and clutter to make checking out more friendly and efficient. Additionally, we have added furniture vignettes and incorporated lifestyle photography to provide visual solutions for Jennifer.
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Highlighting our focus on the community and local events. The wall behind the check-out counter thanks Jennifer for shopping us. We personalized the signage throughout the store and back room to reflect our friendly and community-oriented values.
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See “Real Estate” below for the projected roll-out schedule for the Store of the Future concept.
In addition to implementing our Store of the Future concept, we are also reviewing cross-category presentation opportunities through the lens of “life’s occasions,” where we display our product offerings in a solution format, with items from various departments placed in vignettes to promote occasions, such as fall tailgating. The intent of these cross-category presentations is to demonstrate the breadth and value of products that we offer to Jennifer in one convenient experience. Our expectation is to re-introduce Jennifer to the “treasure” that we offer, while removing the challenges of the “hunt” from the experience.
In addition to our efforts to improve the in-store shopping experience, we continue to focus on improving our e-commerce platform. Our integrated e-commerce platform has offered a narrowed assortment of our in-store offerings. In 2017, we began offering expanded fabric and color options on select products on our e-commerce platform in our Furniture and Seasonal categories, including items only available online. In 2019, we intend to integrate our in-store experience and our e-commerce platform by launching our “buy on-line, pick-up in store” solution. Jennifer will be able to identify and purchase products on-line for easy pick-up in one of our stores. Additionally, we expect to expand our on-line assortment to offer a broader assortment of goods for a more complete shopping experience.
Lastly, we continue to offer a private label credit card and our Easy Leasing lease-to-own solutions for customer financing and a coverage/warranty program, focused on our Furniture and Seasonal merchandise categories, to round out Jennifer’s experience. Our private label credit card provides access to revolving credit, through a third party, for use on both larger ticket items and daily purchases. Our Easy Leasing lease-to-own program provides a single use opportunity for access to third-party financing. Our coverage/warranty program provides a method for obtaining multi-year warranty coverage for furniture and our living purchases.
Real Estate
Historically, we have determined that our average store size of approximately 22,000 selling square feet is appropriate for us to provide our core customer with a positive shopping experience and properly present a representative assortment of merchandise categories that our core customer finds meaningful. After studying our store design and layout in relation to the changing retail landscape and needs of our core customers and testing certain design and layout revisions, we rolled-out our Store of the Future layout to two geographic test markets in 2017. In 2018, we began the chain-wide conversion to our Store of the Future layout and converted 164 stores through either remodels or new openings. Currently, we intend to convert the majority of the remainder of our store fleet over approximately the next three years. As we increase our capital investment in our stores, we have collaborated with our landlords to negotiate longer lease terms and renewal options.
As discussed in “Item 2. Properties,” of this Form 10-K, we have
224
store leases that will expire in 2019. During 2019, we anticipate opening approximately 50 new stores and closing up to 45 of our existing locations. The majority of these closings will involve the relocation of stores to improved locations within the same local market, with the balance resulting from a lack of renewal options or our belief that a location’s sales and operating profit volume are not strong enough to warrant additional investment in the location. As part of our evaluation of potential store closings, we consider our ability to transfer sales from a closing store to other nearby locations and generate a better overall financial result for the geographic market. For our remaining store locations with fiscal 2019 lease expirations, we expect to exercise our renewal option or negotiate lease renewal terms sufficient to allow us to continue operations and achieve an acceptable return on our investment.
2018
COMPARED TO
2017
Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comps in
2018
compared to
2017
were as follows:
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(In thousands)
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2018
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2017
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Change
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Comps
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Furniture
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$
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1,289,133
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24.6
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%
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$
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1,236,737
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23.5
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%
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$
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52,396
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4.2
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%
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5.4
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%
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Soft Home
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826,313
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15.8
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789,596
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15.0
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36,717
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4.7
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6.6
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Consumables
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799,038
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15.3
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822,533
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15.6
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(23,495
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)
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(2.9
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)
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(0.4
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)
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Food
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782,988
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14.9
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818,387
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15.5
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(35,399
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)
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(4.3
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)
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(2.0
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)
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Seasonal
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765,619
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14.6
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765,674
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14.5
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(55
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)
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—
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1.1
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Hard Home
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407,596
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7.8
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428,788
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8.2
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(21,192
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)
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(4.9
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)
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(3.0
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)
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Electronics, Toys, & Accessories
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367,418
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7.0
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402,647
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7.7
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(35,229
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)
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(8.7
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)
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(7.4
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)
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Net sales
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$
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5,238,105
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|
100.0
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%
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$
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5,264,362
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100.0
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%
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$
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(26,257
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)
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(0.5
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)%
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1.2
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%
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We periodically assess and make minor adjustments to our product hierarchy, which can impact the roll-up to our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
Net sales decreased
$26.3 million
, or
0.5%
, to
$5,238.1 million
in
2018
, compared to
$5,264.4 million
in
2017
. The decrease in net sales was principally due to fiscal 2017 consisting of 53 weeks and fiscal 2018 consisting of 52 weeks, which decreased net sales by $69.1 million. The fiscal week difference was partially offset by a 1.2% increase in comps, which increased net sales by $62.3 million. The decrease in net sales was also affected by the net decrease of 15 stores since the end of 2017, which decreased net sales by approximately $19.5 million.
Our “ownable” Furniture and Seasonal merchandise categories and our “winnable” Soft Home merchandise category generated positive comps:
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Soft Home
experienced increases in net sales and comps which were primarily driven by continued improvement in the product assortment, quality, and perceived value by our customers, particularly in our flooring, home decor, and bath departments, as well as increased selling space.
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•
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The
Furniture
category experienced increased net sales and comps during 2018, primarily driven by improved trends from newness in styles and color options throughout the sequential quarters in all departments, which was aided by the continued positive impact of our Easy Leasing lease-to-own program and our third-party, private label credit card offering.
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•
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The positive comps in our
Seasonal
category were primarily the result of positive results in fall fashion assortments as well as late season promotional strength in our lawn & garden department.
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The positive comps in our Soft Home, Furniture, and Seasonal merchandise categories were partially offset by negative comps in our Consumables, Food, Hard Home and Electronics, Toys, & Accessories merchandise categories:
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•
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Consumables
experienced a slight decline in comps as close-out availability constrained net sales, partially offset by our efforts to expand our “never-out” brand-name offerings, particularly in our housekeeping department.
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•
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The
Food
category continued to experience decreased net sales and comps as price competition from the largest grocery store chains continues to weigh negatively on this category. This price competition has muted our ability to communicate and demonstrate our value proposition in this category as well as we have been able to do in the past.
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•
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The negative comps and decreased net sales in
Hard Home
and
Electronics, Toys, & Accessories
resulted from an intentionally narrowed merchandise assortment to support growth of “ownable” categories.
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For 2019, we expect net sales to increase in the low single digits compared to 2018, which is based on an anticipated increase in comps in the low single digits. We expect comps above the company average in our Furniture, Soft Home and Seasonal categories, driven by continued focus on these “ownable” and “winnable” categories. We anticipate Consumables should see net sales trend improvement during the year due to higher focus and presentation in our stores. We are planning comps below the company average in our Hard Home and Electronics, Toys, & Accessories categories, due to the convenience nature and narrowed product assortments, and our Food category as we further refine our product offering and space allocation.
Gross Margin
Gross margin dollars decreased $20.5 million, or 1.0%, to $2,121.9 million in
2018
, compared to $2,142.4 million in
2017
. The decrease in gross margin dollars was primarily due to the decrease in net sales, which decreased gross margin dollars by approximately $10.7 million, along with a lower gross margin rate, which decreased gross margin dollars by approximately $9.8 million. Gross margin as a percentage of net sales, or gross margin rate, decreased 20 basis points to 40.5% in
2018
compared to 40.7% in
2017
. The gross margin rate decrease was the result of a higher overall markdown rate, partially offset by a higher initial mark-up, driven by favorable product costs and a lower shrink rate. Our higher markdown rate was driven by slower early season selling of our summer, lawn & garden, and Christmas trim departments that required increased end of season promotions.
For 2019, we expect our gross margin rate to be up slightly compared to 2018, which is driven by continued sales growth in our higher margin “ownable” and “winnable” categories, an improved initial mark-up, and a lower shrink rate.
Selling and Administrative Expenses
Selling and administrative expenses were $1,778.4 million in
2018
, compared to $1,724.0 million in
2017
. The increase of $54.4 million, or 3.2%, was primarily due to $7.0 million in costs associated with the retirement of our former chief executive officer, $3.5 million in charges associated with the settlement of our shareholder and derivative litigation matters that were initially filed in 2012, and increases in distribution and outbound transportation costs of $19.0 million, store-related occupancy costs of $11.7 million, store-related payroll of $9.8 million, $4.6 million in non-payroll costs associated with our Store of the Future project, and corporate headquarters occupancy expense of $4.6 million, partially offset by decreases in accrued bonus of $10.9 million. Our former chief executive officer separated from service and retired during the first quarter of 2018, entitling him to certain separation benefits. The rise in distribution and outbound transportation costs was a result of higher carrier rates, an increase in fuel prices, and investment in our distribution center associate wage rates in 2018 compared to 2017. The increase in store occupancy costs was due to normal renewals of our leased properties, growth in the average store size for our new stores, and pre-opening rents associated with leases we purchased from a bankrupt retailer. Store-related payroll increased mainly due to our investment in the average wage rate, along with additional payroll costs associated with our Store of the Future remodel activity in certain markets, partially offset by a net decrease of 15 stores since the end of 2017. The non-payroll Store of the Future project costs include incurred costs related to supplies, in-store displays, and travel to support the completion of each location, which are not included in the capitalized construction costs. Our corporate headquarters occupancy expense increase was driven principally by the commencement of the lease for our new headquarters, compared to 2017 when we operated in an owned facility. Accrued bonus expense decreased due to lower performance in 2018 relative to our annual operating plan as compared to 2017 performance related to our annual operating plan.
As a percentage of net sales, selling and administrative expenses increased by 130 basis points to 34.0% in
2018
compared to 32.7% in
2017
. Our future selling and administrative expense as a percentage of net sales depends on many factors, including our level of net sales, our ability to implement additional efficiencies, principally in our store and distribution center operations, and fluctuating commodity prices, such as diesel fuel, which directly affects our outbound transportation cost.
For 2019, selling and administrative expenses as a percentage of net sales are expected to increase from 2018. Specifically, we anticipate selling and administrative expenses as a percentage of net sales will increase due to further investment in our store associate-related costs, including wages, an increase in costs to support our increased investments in our Store of the Future initiative, transition costs associated with moving our California distribution center, an increase in incentive compensation costs due to the absence of corporate bonuses in 2018, and, lastly, increased occupancy costs, including the impacts of the new lease accounting standard. We expect to implement certain cost reduction initiatives in 2019, and beyond, to partially offset the previously noted expense drivers.
Depreciation Expense
Depreciation expense increased $7.9 million to
$125.0 million
in
2018
compared to
$117.1 million
in
2017
. The increase was primarily driven by our investment in our Store of the Future remodels. Depreciation expense as a percentage of net sales increased by 20 basis points compared to
2017
.
For 2019, we expect capital expenditures to be approximately $260 million to $270 million, which is an increase compared to 2018 when capital expenditures were approximately $232 million. The expected increase in capital expenditures is driven by our continued investments in strategic initiatives to support future growth including a larger investment in the Store of the Future project as more stores will be remodeled in 2019 than in 2018, and our final significant investment in equipment for our new distribution center in California. Our 2019 expectations also include maintenance capital for our stores, distribution centers, and corporate offices, and investments in the construction costs associated with opening 50 new stores. Based on our level of investment in 2018 and our anticipated level of capital expenditures in 2019, we expect 2019 depreciation expense to be approximately $155 million, compared to $125 million in 2018.
Operating Profit
Operating profit was $218.5 million in 2018 compared to $301.4 million in 2017. The decrease in operating profit was primarily driven by the items discussed in the “Net Sales,” “Gross Margin,” “Selling and Administrative Expenses,” and “Depreciation Expense” sections above. In summary, operating profit was driven by decreases in sales and gross margin rate, coupled with increases in selling and administrative expenses and depreciation expense. Additionally, operating profit was negatively impacted by the absence of the 53rd week in 2018.
Interest Expense
Interest expense increased $3.6 million, to $10.3 million in
2018
compared to $6.7 million in
2017
. The increase was primarily driven by an increase in our average interest rate on our revolving debt and total average borrowings. The average interest rate on our revolving debt was impacted by increases in the LIBOR rate, as our 2011 Credit Agreement and 2018 Credit Agreement are both variable based on LIBOR. We had total average borrowings (including capital leases) of $320.1 million in
2018
compared to total average borrowings of $241.5 million in
2017
. The increase in our average borrowings (including capital leases) was driven by an increase of $83.4 million to our average revolving debt balance in 2018 as compared to 2017. The increase in our average revolving debt balance was driven by lower than expected cash flows from operating activities, principally resulting from lower than anticipated net sales in 2018 and an increase in purchases of inventory in late 2018 in order to mitigate potential tariff cost impacts, and increased investments in capital expenditures.
Other Income (Expense)
Other income (expense) was
$(0.6) million
in
2018
, compared to
$0.7 million
in
2017
. The change from 2017 to 2018 was related to our diesel fuel hedging contracts, driven by a change in pricing trends for diesel fuel formed contracts.
Income Taxes
Our effective income tax rate in
2018
and
2017
was 24.4% and 35.7%, respectively. The net decrease in our effective rate was principally driven by the following:
|
|
•
|
The lower rate on 2018 taxable income due to the enactment of federal legislation on December 22, 2017 commonly referred to as the Tax Cut and Jobs Act (“TCJA”) that resulted in a lower 2018 U.S. federal rate compared to the blended 2017 U.S. federal rate;
|
|
|
•
|
The absence of the impact of the net deferred tax expense related to the TCJA corporate income tax rate reduction on our net deferred tax assets during 2017; and
|
|
|
•
|
An increase in favorable state income tax settlements.
|
Lastly, the effective income tax rate decrease was partially offset by a shift from generating net excess tax benefits associated with the settlement of share-based payment awards in 2017 to experiencing net tax deficiencies associated with share-based payment awards in 2018 and an increase in nondeductible expenses primarily associated with enacted law changes in the TCJA.
2017 COMPARED TO 2016
Net Sales
Net sales by merchandise category, in dollars and as a percentage of total net sales, net sales change in dollars and percentage, and comps from 2017 compared to 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2016
|
|
Change
|
|
Comps
|
Furniture
|
$
|
1,236,737
|
|
23.5
|
%
|
|
$
|
1,195,365
|
|
23.0
|
%
|
|
$
|
41,372
|
|
3.5
|
%
|
|
1.8
|
%
|
Consumables
|
822,533
|
|
15.6
|
|
|
817,747
|
|
15.7
|
|
|
4,786
|
|
0.6
|
|
|
(0.2
|
)
|
Food
|
818,387
|
|
15.5
|
|
|
824,414
|
|
15.9
|
|
|
(6,027
|
)
|
(0.7
|
)
|
|
(1.8
|
)
|
Soft Home
|
789,596
|
|
15.0
|
|
|
750,814
|
|
14.5
|
|
|
38,782
|
|
5.2
|
|
|
4.2
|
|
Seasonal
|
765,674
|
|
14.5
|
|
|
738,756
|
|
14.2
|
|
|
26,918
|
|
3.6
|
|
|
3.6
|
|
Hard Home
|
428,788
|
|
8.2
|
|
|
437,575
|
|
8.4
|
|
|
(8,787
|
)
|
(2.0
|
)
|
|
(2.5
|
)
|
Electronics, Toys, & Accessories
|
402,647
|
|
7.7
|
|
|
429,324
|
|
8.3
|
|
|
(26,677
|
)
|
(6.2
|
)
|
|
(7.8
|
)
|
Net sales
|
$
|
5,264,362
|
|
100.0
|
%
|
|
$
|
5,193,995
|
|
100.0
|
%
|
|
$
|
70,367
|
|
1.4
|
%
|
|
0.4
|
%
|
Net sales increased
$70.4 million
, or
1.4%
, to
$5,264.4 million
in 2017, compared to
$5,194.0 million
in 2016. The increase in net sales was principally due to an extra week of sales, as 2017 had 53 weeks, which increased net sales by $69.1 million, coupled with a
0.4%
increase in comps, which increased net sales by $18.9 million. The increases in net sales were partially offset by the net decrease of 16 stores since the end of 2016, which decreased net sales by $17.4 million.
Our Soft Home, Seasonal, and Furniture merchandise categories generated positive comps:
|
|
•
|
Soft Home
experienced increases in net sales and comps which were primarily driven by continued improvement in the product assortment, quality, and perceived value by our customers, particularly in our bath and kitchen textiles.
|
|
|
•
|
The positive comps and increased net sales in our
Seasonal
category were primarily the result of strength in our summer and lawn & garden departments, which was the result of improved product assortment, particularly in outdoor décor and patio furniture, and strategically higher inventory levels in 2017 compared to 2016.
|
|
|
•
|
The
Furniture
category experienced increased net sales and comps during 2017, primarily driven by strength in our upholstery and mattress departments and the positive impact of our Easy Leasing lease-to-own program and our third-party, private label credit card offering.
|
The positive comps in our Seasonal, Soft Home, and Furniture merchandise categories were partially offset by negative comps in our Consumables, Food, Hard Home and Electronics, Toys, & Accessories merchandise categories:
|
|
•
|
Consumables
experienced a slight decrease in comps in numerous departments due to the timing of closeout inventory purchases, which was partially offset by positive comps in our health, beauty, and cosmetics department due to the introduction of an everyday, branded product program and space expansions in our bath / body wash and over-the-counter / nutritional health departments.
|
|
|
•
|
The
Food
category experienced decreased net sales and comps due to product mix imbalances, particularly in our snacks and dry goods, and a highly competitive marketplace. We invested in growing our Food inventory position from the beginning of the year to address these imbalances and in improving our assortment of “never out” products.
|
|
|
•
|
The negative comps and decreased net sales in
Hard Home
and
Electronics, Toys, & Accessories
resulted from an intentionally narrowed merchandise assortment.
|
Gross Margin
Gross margin dollars increased $43.0 million, or 2.0%, to $2,142.4 million in 2017, compared to $2,099.4 million in 2016. The increase in gross margin dollars was principally due to an increase in net sales, which increased gross margin dollars by approximately $28.5 million along with a higher gross margin rate, which increased gross margin dollars by approximately $14.5 million. Gross margin as a percentage of net sales increased 30 basis points to 40.7% in 2017 compared to 40.4% in 2016. The gross margin rate increase was the result of a higher initial mark-up, driven by favorable cumulative inbound freight costs and lower product costs, and a lower shrink rate, partially offset by a higher overall markdown rate.
Selling and Administrative Expenses
Selling and administrative expenses were $1,724.0 million in 2017, compared to $1,731.0 million in 2016. The decrease of $7.0 million, or 0.4%, was primarily due to the absence of pension termination related expenses of $27.8 million, decreases in accrued bonus expense of $9.5 million, legal settlement costs of $7.7 million, share-based compensation expense of $5.2 million, self-insurance costs of $4.1 million, and utility expenses of $3.1 million, partially offset by increases in store operations payroll of $12.2 million, distribution and outbound transportation costs of $9.6 million, occupancy charges of $8.6 million, and corporate office payroll expenses of $6.3 million, the absence of a gain on the real estate sale of $3.8 million, and an increase in professional fees of $2.9 million. In 2016, the pension expense included all costs associated with the termination of our pension plan including settlement charges and professional fees. The decrease in accrued bonus expense was driven by our performance relative to our operating plan in 2017 as compared to our out-performance relative to our operating plan in 2016. During 2016, we incurred $4.8 million in charges related to State of California wage and hour claims brought against both our stores and our distribution center and an action related to our handling of hazardous materials and hazardous waste in California. Additionally, in the third quarter of 2017, we collected $3.0 million in recoveries from our insurance carriers related to the previously disclosed tabletop torches matter. The decrease in share-based compensation expense was primarily a result of fewer performance share units expensing in 2017 compared to 2016. The decrease in self-insurance costs was driven by a decreased occurrence of high cost claims within our health benefit program. The decrease in utility expenses was primarily driven by cost saving initiatives, such as our LED lighting replacement project. The increase in store operations payroll was driven by the addition of the 53rd week in fiscal 2017. The increase in distribution and outbound transportation costs was driven by higher fuel prices in 2017 compared to 2016, coupled with additional expenses as we continue to sell and ship larger sized items in our Furniture and Seasonal categories. The increase in occupancy charges was primarily driven by annual rent increases for the renewal of expiring leases, coupled with increases in real estate taxes. The increase in corporate office payroll expenses was primarily driven by annual merit increases and the addition of the 53rd week in fiscal 2017. In the fourth quarter of 2016, we recorded a gain on real estate resulting from the sale of an owned store location, while no similar transaction occurred in 2017. The increase in professional fees was driven by consulting fees for various corporate projects.
As a percentage of net sales, selling and administrative expenses decreased by 60 basis points to 32.7% in 2017 compared to 33.3% in 2016.
Depreciation Expense
Depreciation expense decreased $3.4 million to $117.1 million in 2017 compared to $120.5 million in 2016. The decrease was driven by a reduction in new store spending in 2016 and 2017 as compared to 2011 and 2012, as the initial store construction costs on those stores are completing the depreciation cycle. Depreciation expense as a percentage of net sales decreased by 10 basis points compared to 2016.
Operating Profit
Operating profit was $301.4 million in 2017 as compared to $248.0 million in 2016. The increase in operating profit was primarily driven by the items discussed in the “Net Sales,” “Gross Margin,” “Selling and Administrative Expenses,” and “Depreciation Expense” sections above. In summary, operating profit was driven by increases in sales and gross margin, coupled with decreases in selling and administrative expenses and depreciation expense. Additionally, our operating profit increased by approximately $7 million as a result of the addition of the 53rd week in fiscal 2017.
Interest Expense
Interest expense increased $1.6 million to $6.7 million in 2017 compared to $5.1 million in 2016. The increase was primarily driven by an increase in our average interest rate on our revolving debt, as our revolving debt was impacted by increases in the LIBOR rate. Additionally, we maintained a slightly higher average borrowings under the 2011 Credit Agreement. We had total average borrowings (including capital leases) of $241.5 million in 2017 compared to total average borrowings of $240.7 million in 2016. The slight increase in our average borrowings (including capital leases) was driven by increases in our capital lease liabilities.
Other Income (Expense)
Other income (expense) was $0.7 million in 2017, compared to $1.4 million in 2016. The change from 2016 to 2017 was related to our diesel fuel hedging contracts, driven by a change in pricing trends for diesel fuel.
Income Taxes
The effective income tax rate in 2017 and 2016 was 35.7% and 37.4%, respectively. The decrease in our effective rate was principally driven by the following:
|
|
•
|
The net excess tax benefits associated with settlement of share-based payment awards due to the adoption of ASU 2016-09;
|
|
|
•
|
The lower rate on 2017 current taxable income due to enactment of federal legislation on December 22, 2017 commonly referred to as the Tax Cut and Jobs Act (“TCJA”) that resulted in a lower blended 2017 rate (prorated based on a January 1, 2018 effective date for the rate reduction); and
|
|
|
•
|
A decrease in the nondeductible expenses.
|
The rate decreases were offset by the estimated effects of the TCJA corporate income tax rate reduction on our net deferred tax assets resulting in the provisional recognition of income tax expense.
Capital Resources and Liquidity
On August 31, 2018, we entered into the 2018 Credit Agreement which provides for a
$700 million
five
-year unsecured credit facility and replaces our prior credit facility entered into in July 2011 and most recently amended in May 2015 (“2011 Credit Agreement”). The 2018 Credit Agreement expires on August 31, 2023. Borrowings under the 2018 Credit Agreement are available for general corporate purposes and working capital. The 2018 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The interest rates, pricing and fees under the 2018 Credit Agreement fluctuate based on our debt rating. The 2018 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolving loans made under the 2018 Credit Agreement. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio. Additionally, we are subject to cross-default provisions associated with the Synthetic Lease. A violation of any of the covenants could result in a default under the 2018 Credit Agreement that would permit the lenders to restrict our ability to further access the 2018 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2018 Credit Agreement. At
February 2, 2019
, we were in compliance with the covenants of the 2018 Credit Agreement.
We use the 2018 Credit Agreement, as necessary, to provide funds for ongoing and seasonal working capital, capital expenditures, dividends, share repurchase programs, and other expenditures. In addition, we use the 2018 Credit Agreement to provide letters of credit for various operating and regulatory requirements, and if needed, letters of credit required to cover our self-funded insurance programs. Given the seasonality of our business, the amount of borrowings under the 2018 Credit Agreement may fluctuate materially depending on various factors, including our operating financial performance, the time of year, and our need to increase merchandise inventory levels prior to the peak selling season. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have typically funded those requirements with borrowings under our credit facility. In
2018
, our total indebtedness (outstanding borrowings and letters of credit) under the 2018 Credit Agreement peaked at approximately $536 million in November. At
February 2, 2019
, we had
$374.1 million
in outstanding borrowings under the 2018 Credit Agreement and
$320.9 million
in borrowings available under the 2018 Credit Agreement, after taking into account the reduction in availability resulting from outstanding letters of credit totaling
$5.0 million
. The increase in our outstanding borrowings was driven by lower than expected cash flows from operating activities, principally resulting from lower than anticipated net sales in 2018 and an increase in purchases of inventory in late 2018 in order to mitigate potential tariff cost impacts. Working capital was
$489.4 million
at
February 2, 2019
.
The primary source of our liquidity is cash flows from operations and, as necessary, borrowings under the 2018 Credit Agreement. Our net income and, consequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our net sales are typically highest during the nine-week Christmas selling season in our fourth fiscal quarter.
Whenever our liquidity position requires us to borrow funds under the 2018 Credit Agreement, we typically repay and/or borrow on a daily basis. The daily activity is a net result of our liquidity position, which is generally driven by the following components of our operations: (1) cash inflows such as cash or credit card receipts collected from stores for merchandise sales and other miscellaneous deposits; and (2) cash outflows such as check clearings, wire transfers and other electronic transactions for the acquisition of merchandise, payment of capital expenditures, and payment of payroll and other operating expenses, income and other taxes, employee benefits, and other miscellaneous disbursements.
On March 7, 2018, our Board of Directors authorized a share repurchase program providing for the repurchase of $100 million of our common shares (“2018 Repurchase Program”). During 2018, we exhausted this program by purchasing approximately 2.4 million of our outstanding common shares at an average price of $42.11.
On March 6, 2019, our Board of Directors authorized a share repurchase program providing for the repurchase of $50 million of our common shares (the “2019 Repurchase Program”). Pursuant to the 2019 Repurchase Program, we are authorized to repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Common shares acquired through the 2019 Repurchase Program will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 2019 Repurchase Program has no scheduled termination date and will be funded with cash and cash equivalents, cash generated from operations and by drawing on the 2018 Credit Agreement.
In 2018, we declared and paid four quarterly cash dividends of $0.30 per common share for a total paid amount of approximately $50.6 million.
In March 2019, our Board declared a quarterly cash dividend of $0.30 per common share payable on April 5, 2019 to shareholders of record as of the close of business on March 22, 2019.
The following table compares the primary components of our cash flows from
2018
to
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
Change
|
Net cash provided by operating activities
|
$
|
234,060
|
|
|
$
|
250,368
|
|
|
$
|
(16,308
|
)
|
Net cash used in investing activities
|
(376,473
|
)
|
|
(156,508
|
)
|
|
(219,965
|
)
|
Net cash provided by (used in) financing activities
|
$
|
137,271
|
|
|
$
|
(93,848
|
)
|
|
$
|
231,119
|
|
Cash provided by operating activities decreased by $16.3 million to
$234.1 million
in
2018
compared to
$250.4 million
in
2017
. The decrease was primarily driven by our decision to accelerate our inventory purchases to mitigate tariff cost exposure which resulted in an increase in cash outflow associated with inventories of $82.7 million, as well as a decrease in net income of $32.9 million and a decrease in deferred income taxes of $27.2 million. The decrease in conversion of our deferred tax asset to offset cash tax payments was a byproduct of our effort in 2017 to utilize as much of our deferred tax assets as possible prior to the federal income tax rate change associated with the TCJA, and the absence of the write-off of deferred tax assets associated with the change in federal tax rate. Partially offsetting this decrease was a change in our accounts payable, which increased our cash provided by operating activities by $95.0 million.
Cash used in investing activities increased by $220.0 million to
$376.5 million
in
2018
compared to
$156.5 million
in
2017
. The increase was driven by a $113.3 million increase in assets acquired under synthetic lease to $128.9 million in 2018 compared to $15.6 million in 2017, as well as an increase of $89.7 million in capital expenditures to $232.4 million in 2018 from $142.7 million in 2017. The increase in assets acquired under synthetic lease was driven by a full year of construction on our new distribution center in Apple Valley, California in 2018 compared to two months of construction in 2017. The increase in capital expenditures was driven by our increased investment in our Store of the Future remodels and new store openings, and fixtures and equipment for our new California distribution center and new corporate office. Additionally, we acquired intangible assets associated with the Broyhill trademark during 2018 for $15.8 million.
Cash provided by financing activities increased by $231.1 million to
$137.3 million
in
2018
compared to
$93.8 million
in cash used in financing activities in
2017
. The increase was primarily driven by a $113.3 million increase in the proceeds from synthetic lease to $128.9 million in 2018 from $15.6 million in 2017, an increase in net borrowings under our bank credit facility of $80.9 million to $174.3 million in 2018 compared to $93.4 million in 2017, and a $54.0 million decrease in payments for treasury shares acquired to $111.8 million in 2018 from $165.8 million in 2017. In addition, we received $9.9 million less in proceeds from the exercise of stock options in 2018 compared to 2017.
Based on historical and expected financial results, we believe that we have or, if necessary, have the ability to obtain, adequate resources to fund ongoing and seasonal working capital requirements, proposed capital expenditures, new projects, and currently maturing obligations. On a consolidated basis, we expect cash provided by operating activities less capital expenditures to be approximately $95 to $105 million in 2019; and we intend to distribute approximately $100 million to shareholders through the 2019 Repurchase Program and quarterly dividend payments.
Contractual Obligations
The following table summarizes payments due under our contractual obligations at
February 2, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
(1)
|
|
|
Less than
|
|
|
More than
|
(In thousands)
|
Total
|
1 year
|
1 to 3 years
|
3 to 5 years
|
5 years
|
Obligations under bank credit facility
(2)
|
$
|
374,884
|
|
$
|
784
|
|
$
|
—
|
|
$
|
374,100
|
|
$
|
—
|
|
Operating lease obligations
(3) (4)
|
1,679,983
|
|
369,008
|
|
588,935
|
|
347,325
|
|
374,715
|
|
Capital lease obligations
(4)
|
170,958
|
|
9,050
|
|
20,540
|
|
13,504
|
|
127,864
|
|
Purchase obligations
(4) (5)
|
741,502
|
|
622,037
|
|
95,563
|
|
23,381
|
|
521
|
|
Other long-term liabilities
(6)
|
62,299
|
|
9,329
|
|
10,325
|
|
9,544
|
|
33,101
|
|
Total contractual obligations
|
$
|
3,029,626
|
|
$
|
1,010,208
|
|
$
|
715,363
|
|
$
|
767,854
|
|
$
|
536,201
|
|
|
|
(1)
|
The disclosure of contractual obligations in this table is based on assumptions and estimates that we believe to be reasonable as of the date of this report. Those assumptions and estimates may prove to be inaccurate; consequently, the amounts provided in the table may differ materially from those amounts that we ultimately incur. Variables that may cause the stated amounts to vary from the amounts actually incurred include, but are not limited to: the termination of a contractual obligation prior to its stated or anticipated expiration; fees or damages incurred as a result of the premature termination or breach of a contractual obligation; the acquisition of more or less services or goods under a contractual obligation than are anticipated by us as of the date of this report; fluctuations in third party fees, governmental charges, or market rates that we are obligated to pay under contracts we have with certain vendors; and the exercise of renewal options under, or the automatic renewal of, contracts that provide for the same.
|
|
|
(2)
|
Obligations under the bank credit facility consist of the borrowings outstanding under the 2018 Credit Agreement, and the associated accrued interest of $0.8 million. In addition, we had outstanding letters of credit totaling
$55.9 million
at
February 2, 2019
. Approximately
$53.8 million
of the outstanding letters of credit represent stand-by letters of credit and we do not expect to meet the conditions requiring significant cash payments on these letters of credit; accordingly, they have been excluded from this table. For a further discussion, see note 3 to the accompanying consolidated financial statements. The remaining
$2.1 million
of outstanding letters of credit represent commercial letters of credit whereby the related obligation is included in the purchase obligation.
|
|
|
(3)
|
Operating lease obligations include, among other items, leases for retail stores, offices, and certain computer and other business equipment. The future minimum commitments for retail store and office operating leases are
$1,319.2 million
. For a further discussion of leases, see note 5 to the accompanying consolidated financial statements. Many of the store lease obligations require us to pay for our applicable portion of CAM, real estate taxes, and property insurance. In connection with our store lease obligations, we estimated that future obligations for CAM, real estate taxes, and property insurance were $360.8 million at
February 2, 2019
. We have made certain assumptions and estimates in order to account for our contractual obligations relative to CAM, real estate taxes, and property insurance. Those assumptions and estimates include, but are not limited to: use of historical data to estimate our future obligations; calculation of our obligations based on comparable store averages where no historical data is available for a particular leasehold; and assumptions related to average expected increases over historical data.
|
|
|
(4)
|
For purposes of the lease and purchase obligation disclosures, we have assumed that we will make all payments scheduled or reasonably estimated to be made under those obligations that have a determinable expiration date, and we disregarded the possibility that such obligations may be prematurely terminated or extended, whether automatically by the terms of the obligation or by agreement between us and the counterparty, due to the speculative nature of premature termination or extension. Where an operating lease or purchase obligation is subject to a month-to-month term or another automatically renewing term, we included in the table our minimum commitment under such obligation, such as one month in the case of a month-to-month obligation and the then-current term in the case of another automatically renewing term, due to the uncertainty of future decisions to exercise options to extend or terminate any existing leases.
|
|
|
(5)
|
Purchase obligations include outstanding purchase orders for merchandise issued in the ordinary course of our business that are valued at
$401.4 million
, the entirety of which represents obligations due within one year of
February 2, 2019
. In addition, we have purchase commitments for future inventory purchases totaling
$1.3 million
at
February 2, 2019
. While we are not required to meet any periodic minimum purchase requirements under this commitment, we have included, for purposes of this tabular disclosure, the value of the purchases that we anticipate making during each of the reported periods as purchases that will count toward our fulfillment of the aggregate obligation. The remaining
$338.9 million
of purchase obligations is primarily related to distribution and transportation, information technology, print advertising, energy procurement, and other store security, supply, and maintenance commitments.
|
|
|
(6)
|
Other long-term liabilities include $31.8 million for obligations related to our nonqualified deferred compensation plan, $25.1 million for a charitable commitment, and $3.4 million for unrecognized tax benefits. We have estimated the payments due by period for the nonqualified deferred compensation plan based on an average of historical distributions. We have committed to make a $40.0 million charitable donation over a 10-year period, and we have a remaining obligation of $25.1 million over the next eight years. We have included unrecognized tax benefits of $2.6 million for payments expected in 2019 and $0.8 million of timing-related income tax uncertainties anticipated to reverse in 2019. Unrecognized tax benefits in the amount of $13.4 million have been excluded from the table because we are unable to make a reasonably reliable estimate of the timing of future payments.
|
Off-Balance Sheet Arrangements
Not applicable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. The use of estimates, judgments, and assumptions creates a level of uncertainty with respect to reported or disclosed amounts in our consolidated financial statements or accompanying notes. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, including those that management considers critical to the accurate presentation and disclosure of our consolidated financial statements and accompanying notes. Management bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that management believes are reasonable under the circumstances. Because of the inherent uncertainty in using estimates, judgments, and assumptions, actual results may differ from these estimates.
Our significant accounting policies, including the recently adopted accounting standards and recent accounting standards - future adoptions, if any, are described in note 1 to the accompanying consolidated financial statements. We believe the following estimates, assumptions, and judgments are the most critical to understanding and evaluating our reported financial results. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price at or near the end of the reporting period. The average cost retail inventory method requires management to make judgments and contains estimates, such as the amount and timing of markdowns to clear slow-moving inventory and the estimated allowance for shrinkage, which may impact the ending inventory valuation and current or future gross margin. These estimates are based on historical experience and current information.
When management determines the salability of merchandise inventories is diminished, markdowns for clearance activity and the related cost impact are recorded at the time the price change decision is made. Factors considered in the determination of markdowns include current and anticipated demand, customer preferences, the age of merchandise, and seasonal trends. Timing of holidays within fiscal periods, weather, and customer preferences could cause material changes in the amount and timing of markdowns from year to year.
The inventory allowance for shrinkage is recorded as a reduction to inventories, charged to cost of sales, and calculated as a percentage of sales for the period from the last physical inventory date to the end of the reporting period. Such estimates are based on both our current year and historical inventory results. Independent physical inventory counts are taken at each store once a year. During calendar 2019, the majority of these counts will occur between January and June. As physical inventories are completed, actual results are recorded and new go-forward shrink accrual rates are established based on historical results at the individual store level. Thus, the shrink accrual rates will be adjusted throughout the January to June inventory cycle based on actual results. At
February 2, 2019
, a 10% difference in our shrink reserve would have affected gross margin, operating profit and income before income taxes by approximately $3.0 million. While it is not possible to quantify the impact from each cause of shrinkage, we have asset protection programs and policies aimed at minimizing shrinkage.
Long-Lived Assets
Our long-lived assets primarily consist of property and equipment. We perform impairment reviews of our long-lived assets at the store level on an annual basis, or when other impairment indicators are present. Generally, all other property and equipment is reviewed for impairment at the enterprise level. When we perform our annual impairment reviews, we first determine which stores had impairment indicators present. We use actual historical cash flows to determine which stores had negative cash flows within the past two years. For each store with negative cash flows or other impairment indicators, we obtain undiscounted future cash flow estimates based on operating performance estimates specific to each store’s operations that are based on assumptions currently being used to develop our company level operating plans. If the net book value of a store’s long-lived assets is not recoverable through the expected undiscounted future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over their fair value. The fair value of store assets is estimated based on expected cash flows, including salvage value, which is based on information available in the marketplace for similar assets.
In 2018 or 2017, we did not identify any stores with impairment risk indicators as a result of our annual store impairment tests. As such, we did not recognize any store impairment charges in 2018 or
2017
. In 2016, we identified one store with impairment indicators and recognized an impairment charge of $0.1 million.
If our future operating results decline significantly, we may be exposed to impairment losses that could be material (for additional discussion of this risk, see “Item 1A. Risk Factors - A significant decline in our operating profit and taxable income may impair our ability to realize the value of our long-lived assets and deferred tax assets.”).
In addition to our annual store impairment reviews, we evaluate our other long-lived assets at each reporting period to determine whether impairment indicators are present.
Share-Based Compensation
We currently grant non-vested restricted stock units and performance share units (“PSUs”) to our employees under shareholder approved incentive plans. Additionally, we have granted stock options and non-vested restricted stock awards in prior years. Share-based compensation expense was
$26.3 million
,
$27.8 million
, and
$33.0 million
in
2018
,
2017
, and
2016
, respectively. Future share-based compensation expense for non-vested restricted stock units depends on the future number of awards granted, fair value of our common shares on the grant date, and the estimated vesting period. Future share-based compensation expense for PSUs is dependent upon the future number of awards issued, the estimated vesting period, the grant date of the award which may vary from the issuance date, financial results relative to the targets established for each fiscal year within the three-year performance period, and potentially other estimates, judgments and assumptions used in arriving at the fair value of PSUs. Future share-based compensation expense related to non-vested restricted stock units and PSUs may vary materially from the currently amortizing awards.
Compensation expense for non-vested restricted stock units is recorded over the contractual vesting period based on our expectation of achieving the performance criteria. We monitor the achievement of the performance criteria at each reporting period.
We issued PSUs to certain employees in
2016
,
2017
, and
2018
. The PSUs issued in
2016
,
2017
, and
2018
were structured to reflect specific shareholder feedback and are based on a three-year financial performance period and are payable to associates at the end of the third year assuming certain financial performance metrics are achieved. Those financial metrics include earnings per share (“EPS”) and return on invested capital (“ROIC”). Financial performance targets (for both EPS and ROIC) are established by the Compensation Committee of our Board of Directors at the beginning of each fiscal year based on our approved operating plan. From an accounting perspective, a grant date will be deemed to be established when all financial targets are determined, which occurred in March
2018
for the PSUs issued in
2016
, and is estimated to occur in March 2019 and March 2020 for the PSUs issued in
2017
and
2018
, respectively. Compensation expense for the PSUs will be recorded (1) based on fair value of the award on the grant date and the estimated achievement of financial performance objectives, and (2) on a straight-line basis from the grant date, which may vary from the issuance date, through the end of the performance period. Accordingly, based on this accounting treatment, there was no expense recognized in fiscal
2016
or fiscal
2017
related to the PSUs issued in
2016
. On March 6,
2018
, the Compensation Committee established the
2018
performance targets, which established the grant date, and, therefore, the fair value of the PSUs issued in
2016
. We monitored the estimated achievement of the financial performance objectives at each reporting period end and adjusted the estimated expense on a cumulative basis. In
2018
, we recognized
$14.9 million
in share-based compensation expense related to the PSUs issued in 2016. In
2017
, we recognized
$15.4 million
in share-based compensation expense related to the PSUs issued in 2015. In
2016
, we recognized
$17.5 million
in share-based compensation expense related to the PSUs issued in 2014.
At
February 2, 2019
, PSUs issued and outstanding were as follows:
|
|
|
|
|
Issue Year
|
Outstanding PSUs at
February 2, 2019
|
Actual Grant Date
|
Expected Valuation (Grant) Date
|
2016
|
282,083
|
March 2018
|
|
2017
|
222,323
|
|
March 2019
|
2018
|
239,925
|
|
March 2020
|
Total
|
744,331
|
|
|
Income Taxes
The determination of our income tax expense, refunds receivable, income taxes payable, deferred tax assets and liabilities and financial statement recognition, de-recognition and/or measurement of uncertain tax benefits (for positions taken or to be taken on income tax returns) requires significant judgment, the use of estimates, and the interpretation and application of complex accounting and multi-jurisdictional income tax laws.
The effective income tax rate in any period may be materially impacted by the overall level of income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws (which may be retroactive to the beginning of the fiscal year), subsequent recognition, de-recognition and/or measurement of an uncertain tax benefit, changes in deferred tax asset valuation allowances and adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates, such as the TCJA. Although we believe that our estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated financial statements.
We evaluate our ability to recover our deferred tax assets within the jurisdiction from which they arise. We consider all available positive and negative evidence including recent financial results, projected future pretax income and tax planning strategies (when necessary). This evaluation requires us to make assumptions that require significant judgment about the forecasts of future pretax accounting income. The assumptions that we use in this evaluation are consistent with the assumptions and estimates used to develop our consolidated operating financial plans. If we determine that a portion of our deferred tax assets, which principally represent expected future deductions or benefits, are not likely to be realized, we recognize a valuation allowance for our estimate of these benefits which we believe are not likely recoverable. Additionally, changes in tax laws, apportionment of income for state and local tax purposes, and rates could also affect recorded deferred tax assets.
We evaluate the uncertainty of income tax positions taken or to be taken on income tax returns. When a tax position meets the more-likely-than-not threshold, we recognize economic benefits associated with the position on our consolidated financial statements. The more-likely-than-not recognition threshold is a positive assertion that an enterprise believes it is entitled to economic benefits associated with a tax position. When a tax position does not meet the more-likely-than-not threshold, or in the case of those positions that do meet the threshold but are measured at less than the full benefit taken on the return, we recognize tax liabilities (or de-recognize tax assets, as the case may be). A number of years may elapse before a particular matter, for which we have de-recognized a tax benefit, is audited and fully resolved or clarified. We adjust unrecognized tax
benefits and the income tax provision in the period in which an uncertain tax position is effectively or ultimately settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or as a result of the evaluation of new information that becomes available.
Insurance and Insurance-Related Reserves
We are self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical, dental, and prescription drug benefit claims, a portion of which is funded by employees. We purchase stop-loss coverage from third party insurance carriers to limit individual or aggregate loss exposures in these areas. Accrued insurance liabilities and related expenses are based on actual claims reported and estimates of claims incurred but not reported. The estimated loss accruals for claims incurred but not paid are determined by applying actuarially-based calculations taking into account historical claims payment results and known trends such as claims frequency and claims severity. Management makes estimates, judgments, and assumptions with respect to the use of these actuarially-based calculations, including but not limited to, estimated health care cost trends, estimated lag time to report and pay claims, average cost per claim, network utilization rates, network discount rates, and other factors. A 10% change in our self-insured liabilities at
February 2, 2019
would have affected selling and administrative expenses, operating profit, and income before income taxes by approximately $7 million.
General liability and workers’ compensation liabilities are recorded at our estimate of their net present value, using a 3.5% discount rate, while other liabilities for insurance reserves are not discounted. A 1.0% change in the discount rate on these liabilities would have affected selling and administrative expenses, operating profit, and income before income taxes by approximately $2.1 million.
Lease Accounting
In order to recognize rent expense on our leases, we evaluate many factors to identify the lease term such as the contractual term of the lease, our assumed possession date of the property, renewal option periods, and the estimated value of leasehold improvement investments that we are required to make. Based on this evaluation, our lease term is typically the minimum contractually obligated period over which we have control of the property. This term is used because although many of our leases have renewal options, we typically do not incur an economic or contractual penalty in the event of non-renewal. Therefore, we typically use the initial minimum lease term for purposes of calculating straight-line rent, amortizing deferred rent, and recognizing depreciation expense on our leasehold improvements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Big Lots, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Big Lots, Inc. and subsidiaries (the “Company”) as of February 2, 2019, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2019, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements as of and for the year ended February 2, 2019, of the Company and our report dated April 2, 2019 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
April 2, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Big Lots, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Big Lots, Inc. and subsidiaries (the “Company”) as of February 2, 2019 and February 3, 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended February 2, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 2, 2019 and February 3, 2018, and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of February 2, 2019, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 2, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
April 2, 2019
We have served as the Company’s auditor since 1989.
|
|
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
Net sales
|
$
|
5,238,105
|
|
$
|
5,264,362
|
|
$
|
5,193,995
|
|
Cost of sales (exclusive of depreciation expense shown separately below)
|
3,116,210
|
|
3,121,920
|
|
3,094,576
|
|
Gross margin
|
2,121,895
|
|
2,142,442
|
|
2,099,419
|
|
Selling and administrative expenses
|
1,778,416
|
|
1,723,996
|
|
1,730,956
|
|
Depreciation expense
|
124,970
|
|
117,093
|
|
120,460
|
|
Operating profit
|
218,509
|
|
301,353
|
|
248,003
|
|
Interest expense
|
(10,338
|
)
|
(6,711
|
)
|
(5,091
|
)
|
Other income (expense)
|
(558
|
)
|
712
|
|
1,387
|
|
Income before income taxes
|
207,613
|
|
295,354
|
|
244,299
|
|
Income tax expense
|
50,719
|
|
105,522
|
|
91,471
|
|
Net income
|
$
|
156,894
|
|
$
|
189,832
|
|
$
|
152,828
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
Basic
|
$
|
3.84
|
|
$
|
4.43
|
|
$
|
3.37
|
|
Diluted
|
$
|
3.83
|
|
$
|
4.38
|
|
$
|
3.32
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
Net income
|
$
|
156,894
|
|
$
|
189,832
|
|
$
|
152,828
|
|
Other comprehensive income:
|
|
|
|
Amortization of pension, net of tax benefit of $0, $0, and $(886), respectively
|
—
|
|
—
|
|
1,355
|
|
Valuation adjustment of pension, net of tax benefit of $0, $0, and $(9,556), respectively
|
—
|
|
—
|
|
14,622
|
|
Total other comprehensive income
|
—
|
|
—
|
|
15,977
|
|
Comprehensive income
|
$
|
156,894
|
|
$
|
189,832
|
|
$
|
168,805
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
46,034
|
|
|
$
|
51,176
|
|
Inventories
|
969,561
|
|
|
872,790
|
|
Other current assets
|
112,408
|
|
|
98,007
|
|
Total current assets
|
1,128,003
|
|
|
1,021,973
|
|
Property and equipment - net
|
822,338
|
|
|
565,977
|
|
Deferred income taxes
|
8,633
|
|
|
13,986
|
|
Other assets
|
64,373
|
|
|
49,790
|
|
Total assets
|
$
|
2,023,347
|
|
|
$
|
1,651,726
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
396,903
|
|
|
$
|
351,226
|
|
Property, payroll, and other taxes
|
75,317
|
|
|
80,863
|
|
Accrued operating expenses
|
99,422
|
|
|
72,013
|
|
Insurance reserves
|
38,883
|
|
|
38,517
|
|
Accrued salaries and wages
|
26,798
|
|
|
39,321
|
|
Income taxes payable
|
1,237
|
|
|
7,668
|
|
Total current liabilities
|
638,560
|
|
|
589,608
|
|
Long-term obligations
|
374,100
|
|
|
199,800
|
|
Deferred rent
|
60,700
|
|
|
58,246
|
|
Insurance reserves
|
54,507
|
|
|
55,015
|
|
Unrecognized tax benefits
|
14,189
|
|
|
14,929
|
|
Synthetic lease obligation
|
144,477
|
|
|
15,606
|
|
Other liabilities
|
43,773
|
|
|
48,935
|
|
Shareholders’ equity:
|
|
|
|
|
|
Preferred shares - authorized 2,000 shares; $0.01 par value; none issued
|
—
|
|
|
—
|
|
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 40,042 shares and 41,925 shares, respectively
|
1,175
|
|
|
1,175
|
|
Treasury shares - 77,453 shares and 75,570 shares, respectively, at cost
|
(2,506,086
|
)
|
|
(2,422,396
|
)
|
Additional paid-in capital
|
622,685
|
|
|
622,550
|
|
Retained earnings
|
2,575,267
|
|
|
2,468,258
|
|
Accumulated other comprehensive loss
|
—
|
|
|
—
|
|
Total shareholders’ equity
|
693,041
|
|
|
669,587
|
|
Total liabilities and shareholders’ equity
|
$
|
2,023,347
|
|
|
$
|
1,651,726
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
Treasury
|
Additional
Paid-In
Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Loss
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Total
|
Balance - January 30, 2016
|
49,101
|
|
$
|
1,175
|
|
68,394
|
|
$
|
(2,063,091
|
)
|
$
|
588,124
|
|
$
|
2,210,239
|
|
$
|
(15,977
|
)
|
$
|
720,470
|
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
152,828
|
|
15,977
|
|
168,805
|
|
Dividends declared ($0.84 per share)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(39,749
|
)
|
—
|
|
(39,749
|
)
|
Purchases of common shares
|
(5,685
|
)
|
—
|
|
5,685
|
|
(254,304
|
)
|
—
|
|
—
|
|
—
|
|
(254,304
|
)
|
Exercise of stock options
|
573
|
|
—
|
|
(573
|
)
|
17,834
|
|
3,822
|
|
—
|
|
—
|
|
21,656
|
|
Restricted shares vested
|
252
|
|
—
|
|
(252
|
)
|
7,649
|
|
(7,649
|
)
|
—
|
|
—
|
|
—
|
|
Performance shares vested
|
13
|
|
—
|
|
(13
|
)
|
394
|
|
(394
|
)
|
—
|
|
—
|
|
—
|
|
Tax benefit from share-based awards
|
—
|
|
—
|
|
—
|
|
—
|
|
510
|
|
—
|
|
—
|
|
510
|
|
Share activity related to deferred compensation plan
|
—
|
|
—
|
|
—
|
|
3
|
|
6
|
|
—
|
|
—
|
|
9
|
|
Other
|
5
|
|
—
|
|
(5
|
)
|
136
|
|
68
|
|
—
|
|
—
|
|
204
|
|
Share-based employee compensation expense
|
—
|
|
—
|
|
—
|
|
—
|
|
33,029
|
|
—
|
|
—
|
|
33,029
|
|
Balance - January 28, 2017
|
44,259
|
|
1,175
|
|
73,236
|
|
(2,291,379
|
)
|
617,516
|
|
2,323,318
|
|
—
|
|
650,630
|
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
189,832
|
|
—
|
|
189,832
|
|
Dividends declared ($1.00 per share)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(44,746
|
)
|
—
|
|
(44,746
|
)
|
Adjustment for ASU 2016-09
|
—
|
|
—
|
|
—
|
|
—
|
|
241
|
|
(146
|
)
|
—
|
|
95
|
|
Purchases of common shares
|
(3,437
|
)
|
—
|
|
3,437
|
|
(165,757
|
)
|
—
|
|
—
|
|
—
|
|
(165,757
|
)
|
Exercise of stock options
|
304
|
|
—
|
|
(304
|
)
|
9,659
|
|
2,053
|
|
—
|
|
—
|
|
11,712
|
|
Restricted shares vested
|
368
|
|
—
|
|
(368
|
)
|
11,562
|
|
(11,562
|
)
|
—
|
|
—
|
|
—
|
|
Performance shares vested
|
431
|
|
—
|
|
(431
|
)
|
13,523
|
|
(13,523
|
)
|
—
|
|
—
|
|
—
|
|
Share activity related to deferred compensation plan
|
—
|
|
—
|
|
—
|
|
(4
|
)
|
—
|
|
—
|
|
—
|
|
(4
|
)
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Share-based employee compensation expense
|
—
|
|
—
|
|
—
|
|
—
|
|
27,825
|
|
—
|
|
—
|
|
27,825
|
|
Balance - February 3, 2018
|
41,925
|
|
1,175
|
|
75,570
|
|
(2,422,396
|
)
|
622,550
|
|
2,468,258
|
|
—
|
|
669,587
|
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
156,894
|
|
—
|
|
156,894
|
|
Dividends declared ($1.20 per share)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(49,885
|
)
|
—
|
|
(49,885
|
)
|
Purchases of common shares
|
(2,635
|
)
|
—
|
|
2,635
|
|
(107,830
|
)
|
(3,920
|
)
|
—
|
|
—
|
|
(111,750
|
)
|
Exercise of stock options
|
43
|
|
—
|
|
(43
|
)
|
1,395
|
|
464
|
|
—
|
|
—
|
|
1,859
|
|
Restricted shares vested
|
413
|
|
—
|
|
(413
|
)
|
13,271
|
|
(13,271
|
)
|
—
|
|
—
|
|
—
|
|
Performance shares vested
|
296
|
|
—
|
|
(296
|
)
|
9,475
|
|
(9,475
|
)
|
—
|
|
—
|
|
—
|
|
Share activity related to deferred compensation plan
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
2
|
|
—
|
|
—
|
|
1
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Share-based employee compensation expense
|
—
|
|
—
|
|
—
|
|
—
|
|
26,335
|
|
—
|
|
—
|
|
26,335
|
|
Balance - February 2, 2019
|
40,042
|
|
$
|
1,175
|
|
77,453
|
|
$
|
(2,506,086
|
)
|
$
|
622,685
|
|
$
|
2,575,267
|
|
$
|
—
|
|
$
|
693,041
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
156,894
|
|
|
$
|
189,832
|
|
|
$
|
152,828
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
114,025
|
|
|
106,004
|
|
|
108,315
|
|
Deferred income taxes
|
5,353
|
|
|
32,578
|
|
|
(9,171
|
)
|
Non-cash share-based compensation expense
|
26,335
|
|
|
27,825
|
|
|
33,029
|
|
Excess tax benefit from share-based awards
|
—
|
|
|
—
|
|
|
(1,111
|
)
|
Non-cash impairment charge
|
141
|
|
|
—
|
|
|
100
|
|
Loss (gain) on disposition of property and equipment
|
732
|
|
|
483
|
|
|
(2,899
|
)
|
Unrealized loss (gain) on fuel derivatives
|
1,075
|
|
|
(1,398
|
)
|
|
(3,657
|
)
|
Pension expense, net of contributions
|
—
|
|
|
—
|
|
|
6,644
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
Inventories
|
(96,772
|
)
|
|
(14,100
|
)
|
|
(8,707
|
)
|
Accounts payable
|
45,677
|
|
|
(49,269
|
)
|
|
18,217
|
|
Current income taxes
|
(14,108
|
)
|
|
(26,368
|
)
|
|
12,391
|
|
Other current assets
|
(7,055
|
)
|
|
(12,144
|
)
|
|
34
|
|
Other current liabilities
|
(11,637
|
)
|
|
(15,342
|
)
|
|
(4,789
|
)
|
Other assets
|
1,985
|
|
|
(9,335
|
)
|
|
(3,976
|
)
|
Other liabilities
|
11,415
|
|
|
21,602
|
|
|
14,677
|
|
Net cash provided by operating activities
|
234,060
|
|
|
250,368
|
|
|
311,925
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(232,402
|
)
|
|
(142,745
|
)
|
|
(89,782
|
)
|
Cash proceeds from sale of property and equipment
|
519
|
|
|
1,854
|
|
|
5,061
|
|
Assets acquired under synthetic lease
|
(128,872
|
)
|
|
(15,606
|
)
|
|
—
|
|
Payments for purchase of intangible assets
|
(15,750
|
)
|
|
—
|
|
|
—
|
|
Other
|
32
|
|
|
(11
|
)
|
|
20
|
|
Net cash used in investing activities
|
(376,473
|
)
|
|
(156,508
|
)
|
|
(84,701
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from borrowings under bank credit facility
|
174,300
|
|
|
93,400
|
|
|
44,100
|
|
Payment of capital lease obligations
|
(3,908
|
)
|
|
(4,134
|
)
|
|
(4,514
|
)
|
Dividends paid
|
(50,608
|
)
|
|
(44,671
|
)
|
|
(38,466
|
)
|
Proceeds from the exercise of stock options
|
1,859
|
|
|
11,712
|
|
|
21,656
|
|
Excess tax benefit from share-based awards
|
—
|
|
|
—
|
|
|
1,111
|
|
Payment for treasury shares acquired
|
(111,750
|
)
|
|
(165,757
|
)
|
|
(254,304
|
)
|
Proceeds from synthetic lease
|
128,872
|
|
|
15,606
|
|
|
—
|
|
Deferred bank credit facility fees paid
|
(1,495
|
)
|
|
—
|
|
|
—
|
|
Other
|
1
|
|
|
(4
|
)
|
|
213
|
|
Net cash provided by (used in) financing activities
|
137,271
|
|
|
(93,848
|
)
|
|
(230,204
|
)
|
(Decrease) increase in cash and cash equivalents
|
(5,142
|
)
|
|
12
|
|
|
(2,980
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of year
|
51,176
|
|
|
51,164
|
|
|
54,144
|
|
End of year
|
$
|
46,034
|
|
|
$
|
51,176
|
|
|
$
|
51,164
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
We are a discount retailer in the United States (“U.S.”). At
February 2, 2019
, we operated
1,401
stores in
47
states and an e-commerce platform. We are dedicated to friendly service, trustworthy value, and affordable solutions in every season and category – furniture, food, décor, and more. We exist to provide a better shopping experience for our customers by providing great savings on value-priced merchandise, which includes tasteful and “trend-right” import merchandise, consistent and replenishable “never out” offerings, and brand-name closeouts.
Basis of Presentation
The consolidated financial statements include Big Lots, Inc. and all of its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and include all of our accounts. We consolidate all majority-owned and controlled subsidiaries. All intercompany accounts and transactions have been eliminated.
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. The use of estimates, judgments, and assumptions creates a level of uncertainty with respect to reported or disclosed amounts in our consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, including those that management considers critical to the accurate presentation and disclosure of our consolidated financial statements and accompanying notes. Management bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that it believes are reasonable under the circumstances. Because of the inherent uncertainty in using estimates, judgments, and assumptions, actual results may differ from these estimates.
Fiscal Periods
Our fiscal year ends on the Saturday nearest to January 31, which results in fiscal years consisting of
52 or 53 weeks
. Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years. Fiscal year
2018
(“
2018
”) was comprised of the 52 weeks that began on February 4, 2018 and ended on
February 2, 2019
. Fiscal year
2017
(“
2017
”) was comprised of the 53 weeks that began on January 29, 2017 and ended on
February 3, 2018
. Fiscal year
2016
(“
2016
”) was comprised of the 52 weeks that began on January 31, 2016 and ended on
January 28, 2017
.
Segment Reporting
We manage our business based on
one
segment, discount retailing. Our entire operation is located in the U.S.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of amounts on deposit with financial institutions, outstanding checks, credit and debit card receivables, and highly liquid investments, including money market funds, which are unrestricted to withdrawal or use and which have an original maturity of three months or less. We review cash and cash equivalent balances on a bank by bank basis in order to identify book overdrafts. Book overdrafts occur when the amount of outstanding checks exceed the cash deposited at a given bank. We reclassify book overdrafts, if any, to accounts payable on our consolidated balance sheets. Amounts due from banks for credit and debit card transactions are typically settled in less than five days, and at
February 2, 2019
and
February 3, 2018
, totaled
$23.6 million
and
$27.0 million
, respectively.
Investments
Investment securities are classified as available-for-sale, held-to-maturity, or trading at the date of purchase. Investments are recorded at fair value as either current assets or non-current assets based on the stated maturity or our plans to either hold or sell the investment. Unrealized holding gains and losses on trading securities are recognized in earnings. Unrealized holding gains and losses on available-for-sale securities are recognized in other comprehensive income, until realized. We did not own any held-to-maturity or available-for-sale securities as of
February 2, 2019
and
February 3, 2018
.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Cost includes any applicable inbound shipping and handling costs associated with the receipt of merchandise into our distribution centers (see the discussion below under the caption “Selling and Administrative Expenses” for additional information regarding outbound shipping and handling costs to our stores). Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. Under the average cost retail inventory method, inventory is segregated into classes of merchandise having similar characteristics at its current retail selling value. Current retail selling values are converted to a cost basis by applying an average cost factor to each specific merchandise class’s retail selling value. Cost factors represent the average cost-to-retail ratio computed using beginning inventory and all fiscal year-to-date purchase activity specific to each merchandise class.
Under the average cost retail inventory method, permanent sales price markdowns result in cost reductions in inventory. Our permanent sales price markdowns are typically related to end of season clearance events and are recorded as a charge to cost of sales in the period of management’s decision to initiate sales price reductions with the intent not to return the price to regular retail. Promotional markdowns are recorded as a charge to net sales in the period the merchandise is sold. Promotional markdowns are typically related to specific marketing efforts with respect to products maintained continuously in our stores or products that are only available in limited quantities but represent substantial value to our customers. Promotional markdowns are principally used to drive higher sales volume during a defined promotional period.
We record a reduction to inventories and charge to cost of sales for a shrinkage inventory allowance. The shrinkage allowance is calculated as a percentage of sales for the period from the last physical inventory date to the end of the reporting period. Such estimates are based on a combination of our historical experience and current year physical inventory results.
We record a reduction to inventories and charge to cost of sales for any excess or obsolete inventory. The excess or obsolete inventory is estimated based on a review of our aged inventory and takes into account any items that have already received a cost reduction as a result of the permanent markdown process discussed above. We estimate the reduction for excess or obsolete inventory based on historical sales trends, age and quantity of product on hand, and anticipated future sales.
Payments Received from Vendors
Payments received from vendors relate primarily to rebates and reimbursement for markdowns and are recognized in our consolidated statements of operations as a reduction to cost of inventory purchases in the period that the rebate or reimbursement is earned or realized and, consequently, result in a reduction in cost of sales when the related inventory is sold.
Store Supplies
When opening a new store, a portion of the initial shipment of supplies (which primarily includes display materials, signage, security-related items, and miscellaneous store supplies) is capitalized at the store opening date. These capitalized supplies represent more durable types of items for which we expect to receive future economic benefit. Subsequent replenishments of capitalized store supplies are expensed. The consumable/non-durable type items for which the future economic benefit is less measurable are expensed upon shipment to the store. Capitalized store supplies are adjusted periodically for changes in estimated quantities or costs and are included in other current assets in our consolidated balance sheets.
Property and Equipment - Net
Depreciation and amortization expense of property and equipment are recorded on a straight‑line basis using estimated service lives. The estimated service lives of our depreciable property and equipment by major asset category were as follows:
|
|
|
Land improvements
|
15 years
|
Buildings
|
40 years
|
Leasehold improvements
|
5 years
|
Store fixtures and equipment
|
3 - 7 years
|
Distribution and transportation fixtures and equipment
|
5 - 15 years
|
Office and computer equipment
|
3 - 5 years
|
Computer software costs
|
5 - 8 years
|
Company vehicles
|
3 years
|
Leasehold improvements are amortized on a straight-line basis using the shorter of their estimated service lives or the lease term. Because many initial lease terms range from five to ten years and the majority of our lease options have a term of five years, we estimate the useful life of leasehold improvements at five years. This amortization period is reasonably consistent with the amortization period for any lease incentives that we would typically receive when initially entering into a new lease that are recognized as deferred rent and amortized over the initial lease term.
Assets acquired under noncancellable leases, which meet the criteria of a capital lease, are capitalized in property and equipment - net and amortized over the estimated service life of the asset or the applicable lease term, whichever is shorter.
Depreciation estimates are revised prospectively to reflect the remaining depreciation or amortization of the asset over the shortened estimated service life when a decision is made to dispose of property and equipment prior to the end of its previously estimated service life. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in selling and administrative expenses. Major repairs that extend service lives are capitalized. Maintenance and repairs are charged to expense as incurred. Capitalized interest was not significant in any period presented.
Long-Lived Assets
Our long-lived assets primarily consist of property and equipment - net. In order to determine if impairment indicators are present for store property and equipment, we review historical operating results at the store level on an annual basis, or when other impairment indicators are present. Generally, all other property and equipment is reviewed for impairment at the enterprise level. If the net book value of a store’s long-lived assets is not recoverable by the expected undiscounted future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over their fair value. Our assumptions related to estimates of undiscounted future cash flows are based on historical results of cash flows adjusted for management projections for future periods. We estimate the fair value of our long-lived assets using expected cash flows, including salvage value, which is based on readily available market information for similar assets.
Intangible Assets
During the fourth quarter of 2018, we acquired the Broyhill trademark and trade name for
$15.8 million
. This trademark and trade name have indefinite lives, which will be tested for impairment annually or whenever circumstances indicate that a decline in value may have occurred. We will estimate the fair value of these intangible assets based on an income approach. We would recognize an impairment charge if the estimated fair value of the intangible asset becomes less than the carrying value.
Closed Store Accounting
We recognize an obligation for the fair value of lease termination costs when we cease using the leased property in our operations. In measuring fair value of these lease termination obligations, we consider the remaining minimum lease payments, estimated sublease rentals that could be reasonably obtained, and other potentially mitigating factors. We discount the estimated obligation using the applicable credit adjusted interest rate, which results in accretion expense in periods subsequent to the period of initial measurement. We monitor the estimated obligation for lease termination liabilities in subsequent periods and revise our estimated liabilities, if necessary. Severance and benefits associated with terminating employees from employment are recognized ratably from the communication date through the estimated future service period, unless the estimated future service period is less than 60 days, in which case we recognize the impact at the communication date. Generally all other store closing costs are recognized when incurred.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement basis and tax basis of assets and liabilities using enacted law and tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We assess the adequacy and need for a valuation allowance for deferred tax assets. In making such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. We have established a valuation allowance to reduce our deferred tax assets to the balance that is more likely than not to be realized.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the accompanying consolidated balance sheets.
The effective income tax rate in any period may be materially impacted by the overall level of income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws (which may be retroactive to the beginning of the fiscal year), subsequent recognition, de-recognition and/or measurement of an uncertain tax benefit, changes in a deferred tax valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates.
Insurance and Insurance-Related Reserves
We are self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical, dental, and prescription drug benefit claims, a portion of which is paid by employees. We purchase stop-loss coverage to limit significant exposure in these areas. Accrued insurance-related liabilities and related expenses are based on actual claims filed and estimates of claims incurred but not reported and are reliably determinable. The accruals are determined by applying actuarially-based calculations. General liability and workers’ compensation liabilities are recorded at our estimate of their net present value, using a 3.5% discount rate, while other liabilities for insurance-related reserves are not discounted.
Fair Value of Financial Instruments
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Level 1, defined as observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2, defined as observable inputs other than Level 1 inputs. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value because of the relatively short maturity of these items.
Commitments and Contingencies
We are subject to various claims and contingencies including legal actions and other claims arising out of the normal course of business. In connection with such claims and contingencies, we estimate the likelihood and amount of any potential obligation, where it is possible to do so, using management's judgment. Management uses various internal and external specialists to assist in the estimating process. We accrue a liability if the likelihood of a loss is probable and the amount is estimable. If the likelihood of a loss is only reasonably possible (as opposed to probable), or if it is probable but an estimate is not determinable, disclosure of a material claim or contingency is made in the notes to our consolidated financial statements and no accrual is made.
Revenue Recognition
We recognize sales revenue at the time the customer takes possession of the merchandise (i.e., the point at which we transfer the goods). Sales are recorded net of discounts (i.e., the amount of consideration we expect to receive for the goods) and estimated returns and exclude any sales tax. The reserve for merchandise returns is estimated based on our prior return experience.
We sell gift cards in our stores and issue merchandise credits, typically as a result of customer returns, on stored value cards. We do not charge administrative fees on unused gift card or merchandise credit balances and our gift cards and merchandise credits do not expire. We recognize sales revenue related to gift cards and merchandise credits (1) when the gift card or merchandise credit is redeemed in a sales transaction by the customer or (2) as breakage occurs. We recognize gift card and merchandise credit breakage when we estimate that the likelihood of the card or credit being redeemed by the customer is remote and we determine that we do not have a legal obligation to remit the value of unredeemed cards or credits to the relevant regulatory authority. We estimate breakage based upon historical redemption patterns. The liability for the unredeemed cash value of gift cards and merchandise credits is recorded in accrued operating expenses.
We offer price hold contracts on merchandise. Revenue for price hold contracts is recognized when the customer makes the final payment and takes possession of the merchandise. Amounts paid by customers under price hold contracts are recorded in accrued operating expenses until a sale is consummated.
Cost of Sales
Cost of sales includes the cost of merchandise, net of cash discounts and rebates, markdowns, and inventory shrinkage. Cost of merchandise includes related inbound freight to our distribution centers, duties, and commissions. We classify warehousing, distribution and outbound transportation costs as selling and administrative expenses. Due to this classification, our gross margin rates may not be comparable to those of other retailers that include warehousing, distribution and outbound transportation costs in cost of sales.
Selling and Administrative Expenses
Selling and administrative expenses include store expenses (such as payroll and occupancy costs) and costs related to warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance, non-income taxes, accepting credit/debit cards, and overhead. Selling and administrative expense rates may not be comparable to those of other retailers that include warehousing, distribution, and outbound transportation costs in cost of sales. Distribution and outbound transportation costs included in selling and administrative expenses were
$180.5 million
,
$161.5 million
, and
$151.9 million
for
2018
,
2017
, and
2016
, respectively.
Rent Expense
Rent expense is recognized over the term of the lease and is included in selling and administrative expenses. We recognize minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction or set-up period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. We also receive tenant allowances, which are recorded in deferred incentive rent and are amortized as a reduction to rent expense over the term of the lease.
Our leases generally obligate us for our applicable portion of real estate taxes, CAM, and property insurance that has been incurred by the landlord with respect to the leased property. We maintain accruals for our estimated applicable portion of real estate taxes, CAM, and property insurance incurred but not settled at each reporting date. We estimate these accruals based on historical payments made and take into account any known trends. Inherent in these estimates is the risk that actual costs incurred by landlords and the resulting payments by us may be higher or lower than the amounts we have recorded on our books.
Certain of our leases provide for contingent rents that are not measurable at the lease inception date. Contingent rent includes rent based on a percentage of sales that are in excess of a predetermined level. Contingent rent is excluded from minimum rent but is included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, internet and social media marketing and advertising, e-mail, and in-store point-of-purchase presentations. Advertising expenses are included in selling and administrative expenses. Advertising expenses were
$93.6 million
,
$92.0 million
, and
$92.3 million
for
2018
,
2017
, and
2016
, respectively.
Store Pre-opening Costs
Pre-opening costs incurred during the construction periods for new store openings are expensed as incurred and included in our selling and administrative expenses.
Share-Based Compensation
Share-based compensation expense is recognized in selling and administrative expense in our consolidated statements of operations for all awards that we expect to vest.
Non-vested Restricted Stock Awards
Compensation expense for our performance-based non-vested restricted stock awards is recorded based on fair value of the award on the grant date and the estimated achievement date of the performance criteria. An estimated target achievement date is determined at the time of the award grant based on historical and forecasted performance of similar measures.
Non-vested Restricted Stock Units
We expense our non-vested restricted stock units with graded vesting as a single award with an average estimated life over the entire term of the award. The expense for the non-vested restricted stock units is recorded on a straight-line basis over the vesting period.
Performance Share Units
Compensation expense for performance share units (“PSUs”) is recorded based on fair value of the award on the grant date and the estimated achievement of financial performance objectives. From an accounting perspective, the grant date is established once all financial performance targets have been set. We monitor the estimated achievement of the financial performance objectives at each reporting period and will potentially adjust the estimated expense on a cumulative basis. The expense for the PSUs is recorded on a straight-line basis from the grant date through the end of the performance period.
Earnings per Share
Basic earnings per share is based on the weighted-average number of shares outstanding during each period. Diluted earnings per share is based on the weighted-average number of shares outstanding during each period and the additional dilutive effect of stock options, restricted stock awards, restricted stock units, and PSUs, calculated using the treasury stock method.
Derivative Instruments
We use derivative instruments to mitigate the risk of market fluctuations in diesel fuel prices. We do not enter into derivative instruments for speculative purposes. Our derivative instruments may consist of collar or swap contracts. Our current derivative instruments do not meet the requirements for cash flow hedge accounting. Instead, our derivative instruments are marked-to-market to determine their fair value and any gains or losses are recognized currently in other income (expense) on our consolidated statements of operations.
Other Comprehensive Income
Our other comprehensive income included the impact of the amortization of our pension actuarial loss, net of tax, and the revaluation of our pension actuarial loss, net of tax.
Supplemental Cash Flow Disclosures
The following table provides supplemental cash flow information for
2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
2017
|
|
2016
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest, including capital leases
|
$
|
10,292
|
|
|
$
|
5,991
|
|
|
$
|
4,486
|
|
Cash paid for income taxes, excluding impact of refunds
|
$
|
59,691
|
|
|
$
|
99,693
|
|
|
$
|
103,323
|
|
Gross proceeds from borrowings under the bank credit facility
|
$
|
1,861,900
|
|
|
$
|
1,656,100
|
|
|
$
|
1,673,700
|
|
Gross repayments of borrowings under the bank credit facility
|
$
|
1,687,600
|
|
|
$
|
1,562,700
|
|
|
$
|
1,629,600
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
Assets acquired under capital leases
|
$
|
902
|
|
|
$
|
238
|
|
|
$
|
286
|
|
Accrued property and equipment
|
$
|
32,264
|
|
|
$
|
11,236
|
|
|
$
|
9,295
|
|
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842)
. The update requires a lessee to recognize, on the balance sheet, a liability to make lease payments and a right-of-use asset representing a right to use the underlying asset for the lease term. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The ASU allows for the modified retrospective method of adoption. The FASB issued ASU No. 2018-11,
Leases (Topic 842), Targeted Improvements,
which allows entities to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in the consolidated financial statements. ASU 2018-11 will allow entities to continue to apply the legacy guidance in Topic 840,
Leases
, including its disclosure requirements, in the comparative periods presented in the year the new leases standard is adopted. Entities that elect this option to adopt the new leases standard would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. We did not early adopt this standard, but rather we will adopt this standard on February 3, 2019, which is in the first quarter of 2019. We have elected to use the modified retrospective method as of the effective date of the standard as allowed by ASU 2018-11. We will elect the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We will not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, we will elect a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. Adoption of the standard is expected to result in the recognition of right-of-use assets and lease liabilities for operating leases of approximately
$1.1 billion
. We are finalizing the impact of the standard to our accounting policies, processes, disclosures, and internal control over financial reporting and have implemented a new lease administration and accounting system. We are evaluating the disclosure requirements and are incorporating the collection of relevant data into our processes in preparation for disclosure in 2019. The Company does not expect the adoption of this guidance to have a material impact on its statements of operations, shareholders’ equity, or cash flows.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
This update provided a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Additionally, this guidance expanded related disclosure requirements. During the first quarter of 2018, we adopted the new standard on the retrospective method. The adoption had no impact on the timing of the recognition of our revenue or costs. The adoption resulted in an immaterial adjustment to the amount of gross revenue and costs that we had previously reported, as certain of our vendor relationships had different principal versus agent treatment under the new standard. Additionally, we considered the disclosure requirements of the standard and determined that no additional disclosures were necessary.
Subsequent Events
We have evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, we are not aware of any events or transactions (other than those disclosed in notes 10 and 16) that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in our consolidated financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT - NET
Property and equipment - net consist of:
|
|
|
|
|
|
|
|
(In thousands)
|
February 2, 2019
|
February 3, 2018
|
Land and land improvements
|
$
|
61,200
|
|
$
|
60,416
|
|
Buildings and leasehold improvements
|
1,078,142
|
|
881,077
|
|
Fixtures and equipment
|
784,170
|
|
772,711
|
|
Computer software costs
|
179,071
|
|
172,539
|
|
Construction-in-progress
|
78,580
|
|
35,084
|
|
Property and equipment - cost
|
2,181,163
|
|
1,921,827
|
|
Less accumulated depreciation and amortization
|
1,358,825
|
|
1,355,850
|
|
Property and equipment - net
|
$
|
822,338
|
|
$
|
565,977
|
|
Property and equipment - cost includes
$29.5 million
and
$28.6 million
at
February 2, 2019
and
February 3, 2018
, respectively, to recognize assets from capital leases. Accumulated depreciation and amortization includes
$17.9 million
and
$13.2 million
at
February 2, 2019
and
February 3, 2018
, respectively, related to capital leases. Additionally, we had
$144.5 million
and
$15.6 million
in assets from a synthetic lease for our distribution center in Apple Valley, California at
February 2, 2019
and February 3, 2018, respectively.
During
2018
,
2017
, and
2016
, respectively, we invested
$232.4 million
,
$142.7 million
, and
$89.8 million
of cash in capital expenditures and we recorded
$125.0 million
,
$117.1 million
, and
$120.5 million
of depreciation expense.
We incurred
$0.1 million
,
$0.0 million
, and
$0.1 million
in asset impairment charges in
2018
,
2017
, and
2016
, respectively. During 2018, we wrote down the value of an asset held for sale. In 2018 and 2017, we did
no
t impair the value of long-lived assets at any stores as a result of our annual store impairment review. In 2016, we wrote down the value of long-lived assets at
one
store identified as part of our annual store impairment review.
Asset impairment charges are included in selling and administrative expenses in our accompanying consolidated statements of operations. We perform annual impairment reviews of our long-lived assets at the store level. When we perform the annual impairment reviews, we first determine which stores had impairment indicators present. We generally use actual historical cash flows to determine if stores had negative cash flows within the past two years. For each store with negative cash flows, we estimate future cash flows based on operating performance estimates specific to each store’s operations that are based on assumptions currently being used to develop our company level operating plans. If the net book value of a store’s long-lived assets is not recoverable by the expected future cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over their fair value.
NOTE 3 – BANK CREDIT FACILITY
On August 31, 2018, we entered into a
$700 million
five
-year unsecured credit facility (“2018 Credit Agreement”) that replaces our prior credit facility entered into in July 2011 and most recently amended in May 2015 (“2011 Credit Agreement”) and, among other things, amends certain of the representations and covenants applicable to the facility. The 2018 Credit Agreement expires on August 31, 2023. In connection with our entry into the 2018 Credit Agreement, we paid bank fees and other expenses in the aggregate amount of
$1.5 million
, which are being amortized over the term of the agreement.
Borrowings under the 2018 Credit Agreement are available for general corporate purposes, working capital, and to repay certain of our indebtedness. The 2018 Credit Agreement includes a
$30 million
swing loan sublimit, a
$75 million
letter of credit sublimit, a
$75 million
sublimit for loans to foreign borrowers, and a
$200 million
optional currency sublimit. The interest rates, pricing and fees under the 2018 Credit Agreement fluctuate based on our debt rating. The 2018 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolving loans made under the 2018 Credit Agreement. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios - a leverage ratio and a fixed charge coverage ratio. A violation of any of the covenants could result in a default under the 2018 Credit Agreement that would permit the lenders to restrict our ability to further access the 2018 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2018 Credit Agreement. At
February 2, 2019
, we had
$374.1 million
of borrowings outstanding under the 2018 Credit Agreement and
$5.0 million
was committed to outstanding letters of credit, leaving
$320.9 million
available under the 2018 Credit Agreement.
NOTE 4 – FAIR VALUE MEASUREMENTS
In connection with our nonqualified deferred compensation plan, we had mutual fund investments of
$31.6 million
and
$33.0 million
at
February 2, 2019
and
February 3, 2018
, respectively, which were recorded in other assets. These investments were classified as trading securities and were recorded at their fair value. The fair values of mutual fund investments were Level 1 valuations under the fair value hierarchy because each fund’s quoted market value per share was available in an active market.
The fair values of our long-term obligations under our bank credit facility are estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for similar instruments. These fair value measurements are classified as Level 2 within the fair value hierarchy. Given the variable rate features and relatively short maturity of the instruments underlying our long-term obligations, the carrying value of these instruments approximates the fair value.
NOTE 5 – LEASES
Leased property consisted primarily of
1,348
of our retail stores, our new corporate office, our new California distribution center, and certain transportation, information technology and other office equipment. After entering into a lease in 2016 for our new corporate office, we moved into the new office during the second quarter of 2018. In late 2017, we entered into a synthetic lease arrangement for a new distribution center in California. We are the construction agent for the new distribution center in California and construction began in December 2017. We expect the lease term to commence and to begin operations in 2019 for the new distribution center in California. Many of the store leases obligate us to pay for our applicable portion of real estate taxes, CAM, and property insurance. Certain store leases provide for contingent rents, have rent escalations, and have tenant allowances or other lease incentives. Many of our leases contain provisions for options to renew or extend the original term for additional periods.
Total rent expense, including real estate taxes, CAM, and property insurance for operating leases consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
2017
|
2016
|
Minimum rents
|
$
|
346,067
|
|
$
|
330,229
|
|
$
|
321,248
|
|
Contingent rents
|
168
|
|
469
|
|
607
|
|
Total rent expense
|
$
|
346,235
|
|
$
|
330,698
|
|
$
|
321,855
|
|
Future minimum rental commitments for leases, excluding closed store leases, real estate taxes, CAM, and property insurance, at
February 2, 2019
, were as follows:
|
|
|
|
|
Fiscal Year
|
(In thousands)
|
|
2019
|
$
|
279,844
|
|
2020
|
244,978
|
|
2021
|
204,362
|
|
2022
|
159,479
|
|
2023
|
120,023
|
|
Thereafter
|
310,474
|
|
Total leases
|
$
|
1,319,160
|
|
We have obligations for capital leases primarily for store asset protection equipment and office equipment, included in accrued operating expenses and other liabilities on our consolidated balance sheet. Additionally, we have recorded the obligation for our synthetic lease arrangement in California in the synthetic lease obligation caption on our consolidated balance sheet. Scheduled payments for all capital leases at
February 2, 2019
, were as follows:
|
|
|
|
|
Fiscal Year
|
(In thousands)
|
|
2019
|
$
|
9,050
|
|
2020
|
10,815
|
|
2021
|
9,725
|
|
2022
|
6,992
|
|
2023
|
6,512
|
|
Thereafter
|
127,864
|
|
Total lease payments
|
$
|
170,958
|
|
Less amount to discount to present value
|
(14,758
|
)
|
Capital lease obligation per balance sheet
|
$
|
156,200
|
|
NOTE 6 – SHAREHOLDERS’ EQUITY
Earnings per Share
There were no adjustments required to be made to weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share and there were no securities outstanding in any year presented, which were excluded from the computation of earnings per share other than antidilutive stock options, restricted stock awards, restricted stock units, and PSUs. Stock options outstanding that were excluded from the diluted share calculation because their impact was antidilutive at the end of
2018
,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
(In millions)
|
2018
|
2017
|
2016
|
Antidilutive stock options excluded from dilutive share calculation
|
0.1
|
|
—
|
|
—
|
|
Antidilutive options are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury stock method. Antidilutive stock options are generally outstanding options where the exercise price per share is greater than the weighted-average market price per share for our common shares for each period. The restricted stock awards, restricted stock units, and PSUs that were antidilutive, as determined under the treasury stock method, were immaterial for all years presented.
A reconciliation of the number of weighted-average common shares outstanding used in the basic and diluted earnings per share computations is as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
2017
|
2016
|
Weighted-average common shares outstanding:
|
|
|
|
Basic
|
40,809
|
|
42,818
|
|
45,316
|
|
Dilutive effect of share-based awards
|
153
|
|
482
|
|
658
|
|
Diluted
|
40,962
|
|
43,300
|
|
45,974
|
|
Share Repurchase Programs
On March 7, 2018, our Board of Directors authorized a share repurchase program providing for the repurchase of up to
$100 million
of our common shares (“2018 Repurchase Program”). The 2018 Repurchase Program was exhausted during the second quarter of 2018. On June 5, 2018, we utilized the entire authorization under our 2018 Repurchase Program to execute a
$100 million
accelerated share repurchase transaction (“ASR Transaction”), which reduced our common shares outstanding by
2.4 million
during the second quarter of 2018.
Common shares acquired through repurchase programs are held in treasury at cost and are available to meet obligations under equity compensation plans and for general corporate purposes.
Dividends
The Company declared and paid cash dividends per common share during the periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Per Share
|
|
Amount Declared
|
|
Amount Paid
|
2017:
|
|
|
(In thousands)
|
|
(In thousands)
|
First quarter
|
$
|
0.25
|
|
|
$
|
11,547
|
|
|
$
|
12,683
|
|
Second quarter
|
0.25
|
|
|
11,289
|
|
|
10,872
|
|
Third quarter
|
0.25
|
|
|
11,007
|
|
|
10,638
|
|
Fourth quarter
|
0.25
|
|
|
10,903
|
|
|
10,478
|
|
Total
|
$
|
1.00
|
|
|
$
|
44,746
|
|
|
$
|
44,671
|
|
2018:
|
|
|
(In thousands)
|
|
(In thousands)
|
First quarter
|
$
|
0.30
|
|
|
$
|
12,744
|
|
|
$
|
14,386
|
|
Second quarter
|
0.30
|
|
|
12,474
|
|
|
12,141
|
|
Third quarter
|
0.30
|
|
|
12,321
|
|
|
12,065
|
|
Fourth quarter
|
0.30
|
|
|
12,346
|
|
|
12,016
|
|
Total
|
$
|
1.20
|
|
|
$
|
49,885
|
|
|
$
|
50,608
|
|
The amount of dividends declared may vary from the amount of dividends paid in a period based on certain instruments with restrictions on payment, including restricted stock awards, restricted stock units, and 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 7 – SHARE-BASED PLANS
Our shareholders approved the Big Lots 2017 Long-Term Incentive Plan (“2017 LTIP”) in May 2017. The 2017 LTIP authorizes the issuance of incentive and nonqualified stock options, restricted stock, restricted stock units, deferred stock awards, PSUs, stock appreciation rights, cash-based awards, and other share-based awards. We have issued restricted stock units and PSUs under the 2017 LTIP. The number of common shares available for issuance under the 2017 LTIP consists of an initial allocation of
5,500,000
common shares plus any common shares subject to the
1,743,116
outstanding awards as of January 28, 2017 under the Big Lots 2012 Long-Term Incentive Plan (“2012 LTIP”) that, on or after January 28, 2017, cease for any reason to be subject to such awards (other than by reason of exercise or settlement). The Compensation Committee of our Board of Directors (“Committee”), which is charged with administering the 2017 LTIP, has the authority to determine the terms of each award.
Our former equity compensation plan, the 2012 LTIP, approved by our shareholders in May 2012, expired on May 24, 2017. The 2012 LTIP authorized the issuance of incentive and nonqualified stock options, restricted stock, restricted stock units, deferred stock awards, PSUs, stock appreciation rights, cash-based awards, and other share-based awards. We issued nonqualified stock options, restricted stock, restricted stock units, and PSUs under the 2012 LTIP. The Committee, which was charged with administering the 2012 LTIP, had the authority to determine the terms of each award. Nonqualified stock options granted to employees under the 2012 LTIP, the exercise price of which was not less than the fair market value of the underlying common shares on the grant date, generally expire on the earlier of: (1) the
seven
year term set by the Committee; or (2)
one
year following termination of employment, death, or disability. The nonqualified stock options generally vest ratably over a
four
-year period; however, upon a change in control, all awards outstanding automatically vest.
Our other former equity compensation plan, the 2005 LTIP, approved by our shareholders in May 2005, expired on May 16, 2012. The 2005 LTIP authorized the issuance of nonqualified stock options, restricted stock, and other award types. We issued only nonqualified stock options and restricted stock under the 2005 LTIP. The Committee, which was charged with administering the 2005 LTIP, had the authority to determine the terms of each award. Nonqualified stock options granted to employees under the 2005 LTIP, the exercise price of which was not less than the fair market value of the underlying common shares on the grant date, generally expire on the earlier of: (1) the
seven
year term set by the Committee; or (2)
one
year following termination of employment, death, or disability. The nonqualified stock options generally vest ratably over a
four
-year period; however, upon a change in control, all awards outstanding automatically vest.
Share-based compensation expense was
$26.3 million
,
$27.8 million
and
$33.0 million
in
2018
,
2017
, and
2016
, respectively.
Non-vested Restricted Stock
The following table summarizes the non-vested restricted stock awards and restricted stock units activity for fiscal years
2016
,
2017
, and
2018
:
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average Grant-Date Fair Value Per Share
|
Outstanding non-vested restricted stock at January 30, 2016
|
785,149
|
|
$
|
40.96
|
|
Granted
|
261,792
|
|
45.62
|
|
Vested
|
(252,156
|
)
|
42.03
|
|
Forfeited
|
(23,264
|
)
|
43.63
|
|
Outstanding non-vested restricted stock at January 28, 2017
|
771,521
|
|
$
|
42.12
|
|
Granted
|
205,819
|
|
51.16
|
|
Vested
|
(368,408
|
)
|
42.84
|
|
Forfeited
|
(19,089
|
)
|
44.02
|
|
Outstanding non-vested restricted stock at February 3, 2018
|
589,843
|
|
$
|
44.77
|
|
Granted
|
354,457
|
|
45.38
|
|
Vested
|
(413,261
|
)
|
42.60
|
|
Forfeited
|
(47,857
|
)
|
44.49
|
|
Outstanding non-vested restricted stock at February 2, 2019
|
483,182
|
|
$
|
46.50
|
|
The non-vested restricted stock units granted in 2016, 2017 and 2018 generally vest, and are expensed, on a ratable basis over
three years
from the grant date of the award, if certain threshold financial performance objectives are achieved and the grantee remains employed by us through the vesting dates.
The non-vested restricted stock awards granted to employees in 2013 have met the applicable threshold financial performance objective and vested in 2018.
Performance Share Units
In 2013, in connection with our former CEO's appointment, he was awarded
37,800
PSUs, which vested based on the achievement of share price performance goals and had a weighted average grant-date fair value per share of
$34.68
. In 2014, Mr. Campisi’s first two tranches for a total of
25,200
PSUs vested. In 2016, Mr. Campisi's third and final tranche of
12,600
PSUs vested.
In 2016, 2017, and 2018, we issued PSUs to certain members of management, which vest if certain financial performance objectives are achieved over a
three
-year performance period and the grantee remains employed by us through that performance period. At
February 2, 2019
,
744,331
non-vested PSUs were outstanding in the aggregate. The financial performance objectives for each fiscal year within the three-year performance period are 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 of establishing a grant date for the PSUs when we communicate the financial performance objectives for the third fiscal year of the award to the award recipients, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period. If we meet the applicable threshold financial performance objectives over the three-year performance period and the grantee remains employed by us through the end of the performance period, the PSUs will vest on the first trading day after we file our Annual Report on Form 10-K for the last fiscal year in the performance period.
We have begun or expect to begin recognizing expense related to PSUs as follows:
|
|
|
|
|
|
|
Issue Year
|
Outstanding PSUs at
February 2, 2019
|
Actual Grant Date
|
Expected Valuation (Grant) Date
|
Actual or Expected Expense Period
|
2016
|
282,083
|
|
March 2018
|
|
Fiscal 2018
|
2017
|
222,323
|
|
|
March 2019
|
Fiscal 2019
|
2018
|
239,925
|
|
|
March 2020
|
Fiscal 2020
|
Total
|
744,331
|
|
|
|
|
The number of shares to be distributed upon vesting of the PSUs depends on our average performance attained during the three-year performance period as compared to the targets defined by the 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. The PSUs issued in 2015 performed above the average targets and more shares were distributed than initially granted. The PSUs issued in 2016 performed below the average targets and fewer shares will be distributed than outstanding at
February 2, 2019
. At
February 2, 2019
, we estimate the attainment of an average performance that is less than the average targets established for the PSUs issued in 2017. In 2018, 2017, and 2016, we recognized
$14.9 million
,
$15.4 million
and
$17.5 million
, respectively, in share-based compensation expense related to PSUs.
The following table summarizes the activity related to PSUs for fiscal years
2016
,
2017
, and
2018
:
|
|
|
|
|
|
|
|
PSUs, excluding 2013 CEO PSUs
|
|
Number of Shares
|
Weighted Average Grant-Date Fair Value Per Share
|
Outstanding PSUs at January 30, 2016
|
—
|
|
$
|
—
|
|
Granted
|
379,794
|
|
41.04
|
|
Vested
|
—
|
|
—
|
|
Forfeited
|
(19,437
|
)
|
41.04
|
|
Outstanding PSUs at January 28, 2017
|
360,357
|
|
$
|
41.04
|
|
Granted
|
259,042
|
|
51.49
|
|
Vested
|
(360,357
|
)
|
41.04
|
|
Forfeited
|
(9,718
|
)
|
51.49
|
|
Outstanding PSUs at February 3, 2018
|
249,324
|
|
$
|
51.49
|
|
Granted
|
337,421
|
|
55.67
|
|
Vested
|
(249,324
|
)
|
51.49
|
|
Forfeited
|
(55,338
|
)
|
46.31
|
|
Outstanding PSUs at February 2, 2019
|
282,083
|
|
$
|
55.67
|
|
Board of Directors' Awards
In 2016, we granted to each non-employee member of our Board of Directors a restricted stock award. In 2018 and 2017, we granted (1) the chairman of our Board of Directors an annual restricted stock unit award having a grant date fair value of approximately
$200,000
, and (2) the remaining non-employees directors an annual restricted stock unit award having a grant date fair value of approximately
$135,000
. These awards vest on the earlier of (1) the trading day immediately preceding the next annual meeting of our shareholders or (2) the death or disability of the grantee. However, the restricted stock units will not vest if the non-employee director ceases to serve on our Board of Directors before either vesting event occurs. Additionally, we allow our non-employee directors to defer all or a portion of their restricted stock unit award and by such election, the non-employee director can defer receipt of the restricted stock units until the earlier of the first to occur of; (1) the specified date by the non-employee director in the deferral agreement, (2) the non-employee director’s death or disability, or (3) the date the non-employee director ceases to serve as a member of the Board of Directors.
Stock Options
The following table summarizes information about our stock options outstanding and exercisable at
February 2, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Prices
|
|
Options Outstanding
|
|
Options Exercisable
|
Greater Than
|
|
Less Than or Equal to
|
|
Options Outstanding
|
|
Weighted-Average Remaining Life (Years)
|
Weighted-Average Exercise Price
|
|
Options Exercisable
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30.01
|
|
|
$
|
40.00
|
|
|
160,001
|
|
|
1.1
|
$
|
35.62
|
|
|
160,001
|
|
$
|
35.62
|
|
$
|
40.01
|
|
|
$
|
50.00
|
|
|
77,500
|
|
|
0.1
|
43.85
|
|
|
77,500
|
|
43.85
|
|
|
|
|
|
237,501
|
|
|
0.8
|
$
|
38.30
|
|
|
237,501
|
|
$
|
38.30
|
|
A summary of the annual stock option activity for fiscal years
2016
,
2017
, and
2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
Weighted Average Exercise Price Per Share
|
Weighted Average Remaining Contractual Term (years)
|
Aggregate Intrinsic Value (000's)
|
Outstanding stock options at January 30, 2016
|
1,174,902
|
|
$
|
38.26
|
|
|
|
Exercised
|
(572,727
|
)
|
37.81
|
|
|
|
Forfeited
|
(12,500
|
)
|
35.83
|
|
|
|
Outstanding stock options at January 28, 2017
|
589,675
|
|
$
|
38.75
|
|
|
|
Exercised
|
(304,049
|
)
|
38.51
|
|
|
|
Forfeited
|
(5,000
|
)
|
36.93
|
|
|
|
Outstanding stock options at February 3, 2018
|
280,626
|
|
$
|
39.04
|
|
|
|
Exercised
|
(43,125
|
)
|
43.11
|
|
|
|
Forfeited
|
—
|
|
—
|
|
|
|
Outstanding stock options at February 2, 2019
|
237,501
|
|
$
|
38.30
|
|
0.8
|
$
|
5
|
|
Vested or expected to vest at February 2, 2019
|
237,501
|
|
$
|
38.30
|
|
0.8
|
$
|
5
|
|
Exercisable at February 2, 2019
|
237,501
|
|
$
|
38.30
|
|
0.8
|
$
|
5
|
|
The stock options granted in prior years vested in equal amounts on the first
four
anniversaries of the grant date and have a contractual term of
seven
years.
During
2018
,
2017
, and
2016
, the following activity occurred under our share-based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
2017
|
2016
|
Total intrinsic value of stock options exercised
|
$
|
228
|
|
$
|
4,423
|
|
$
|
7,392
|
|
Total fair value of restricted stock vested
|
$
|
19,240
|
|
$
|
19,015
|
|
$
|
11,510
|
|
Total fair value of performance shares vested
|
$
|
12,792
|
|
$
|
21,026
|
|
$
|
621
|
|
The total unearned compensation cost related to all share-based awards outstanding, excluding PSUs issued in 2017 and 2018, at
February 2, 2019
was approximately
$13.2 million
. This compensation cost is expected to be recognized through October 2021 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately
1.8 years
from
February 2, 2019
.
NOTE 8 – EMPLOYEE BENEFIT PLANS
Pension Benefits
In prior years, we maintained the Pension Plan and Supplemental Pension Plan covering certain employees whose hire date was on or before April 1, 1994. Benefits under each plan were based on credited years of service and the employee’s compensation during the last five years of employment.
On October 31, 2015, our Board of Directors approved amendments to freeze benefits and terminate the Pension Plan. The Pension Plan discontinued accruing benefits on December 31, 2015, and the termination was effective January 31, 2016. On December 2, 2015, our Board of Directors approved amendments to freeze benefits and terminate the Supplemental Pension Plan. The Supplemental Pension Plan discontinued accruing benefits on December 31, 2015, and the termination was effective December 31, 2015. During 2016, we completed the termination proceedings for the Pension Plan, including seeking and receiving a favorable IRS determination letter, conducting a lump sum offering to our active and terminated vested participants, and conducting an insurance placement for the annuity purchasers. Additionally, we funded the Pension Plan and reduced our liability thereunder to zero. In January 2017, we completed the termination proceedings for the Supplemental Pension Plan and paid all accrued balances to participants through lump sum settlements.
The components of net periodic pension expense were comprised of the following:
|
|
|
|
|
(In thousands)
|
2016
|
Interest cost on projected benefit obligation
|
$
|
879
|
|
Expected investment return on plan assets
|
(1,536
|
)
|
Amortization of actuarial loss
|
2,241
|
|
Settlement loss
|
24,483
|
|
Net periodic pension cost
|
$
|
26,067
|
|
The weighted-average assumptions used to determine net periodic pension expense were:
|
|
|
|
|
2016
|
Discount rate
|
1.2
|
%
|
Expected long-term rate of return
|
2.8
|
%
|
Savings Plans
We have a savings plan with a 401(k) deferral feature and a nonqualified deferred compensation plan with a similar deferral feature for eligible employees. We contribute a matching percentage of employee contributions. Our matching contributions are subject to Internal Revenue Service (“IRS”) regulations. For
2018
,
2017
, and
2016
, we expensed
$8.5 million
,
$7.7 million
, and
$6.6 million
, respectively, related to our matching contributions. In connection with our nonqualified deferred compensation plan, we had liabilities of
$31.8 million
and
$33.4 million
at
February 2, 2019
and
February 3, 2018
, respectively, which are recorded in other liabilities.
NOTE 9 – INCOME TAXES
On December 22, 2017, the President of the United States signed into law legislation commonly referred to as the Tax Cut and Jobs Act (“TCJA”). The legislation significantly changed U.S. tax law, including permanently lowering the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, expanding the disallowance of deductions for executive compensation and accelerating tax depreciation for certain assets placed in service after September 27, 2017.
The provision for income taxes was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
2017
|
2016
|
Current:
|
|
|
|
U.S. Federal
|
$
|
35,025
|
|
$
|
63,743
|
|
$
|
87,521
|
|
U.S. State and local
|
10,341
|
|
9,201
|
|
13,122
|
|
Total current tax expense
|
45,366
|
|
72,944
|
|
100,643
|
|
Deferred:
|
|
|
|
U.S. Federal
|
5,300
|
|
28,336
|
|
(7,965
|
)
|
U.S. State and local
|
53
|
|
4,242
|
|
(1,207
|
)
|
Total deferred tax expense
|
5,353
|
|
32,578
|
|
(9,172
|
)
|
Income tax provision
|
$
|
50,719
|
|
$
|
105,522
|
|
$
|
91,471
|
|
In 2017, we estimated the effects of the corporate income tax rate reduction on our net deferred tax assets resulting in the provisional recognition of an additional
$4.5 million
of income tax expense in our consolidated statement of operations.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As noted above, we recorded the provisional tax impacts of the TCJA on existing current and deferred tax amounts in 2017. The ultimate impact differed from those provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we made, and additional regulatory guidance that was issued. During the third quarter of 2018, we made approximately
$0.6 million
in adjustments to our previously recorded provisional amounts related to the TCJA. During the fourth quarter of 2018, we finalized our estimate related to the TCJA and the adjustment was immaterial.
Net deferred tax assets fluctuated by items that are not reflected in deferred tax expense in the above table in 2017 and 2016. In 2017, net deferred tax assets increased by
$0.1 million
as a result of ASU 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. Net deferred tax assets decreased by
$10.4 million
in
2016
, principally from pension-related charges recorded in accumulated other comprehensive loss.
Reconciliation between the statutory federal income tax rate and the effective income tax rate was as follows:
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
Statutory federal income tax rate
|
21.0
|
%
|
33.7
|
%
|
35.0
|
%
|
Effect of:
|
|
|
|
State and local income taxes, net of federal tax benefit
|
4.0
|
|
3.0
|
|
3.2
|
|
Executive compensation limitations - permanent difference
|
0.7
|
|
—
|
|
—
|
|
Provisional effect of the TCJA
|
(0.3
|
)
|
1.5
|
|
—
|
|
Work opportunity tax and other employment tax credits
|
(1.4
|
)
|
(1.0
|
)
|
(1.1
|
)
|
Excess tax detriment (benefit) from share-based compensation
|
0.4
|
|
(1.3
|
)
|
—
|
|
Other, net
|
—
|
|
(0.2
|
)
|
0.3
|
|
Effective income tax rate
|
24.4
|
%
|
35.7
|
%
|
37.4
|
%
|
Since the TCJA rate reduction was effective on January 1, 2018, our 2017 federal statutory tax rate was a blended rate of 33.7%.
In 2017, we adopted
ASU 2016-09
.
Prior to the adoption of ASU 2016-09, differences between the tax deduction ultimately realized from an equity award and the deferred tax asset recognized as compensation cost were generally credited (“excess tax benefits”) or charged (“deficiencies”) to equity. Under ASU 2016-09, all tax effects of share-based compensation, including excess tax benefits and tax deficiencies, are recognized in income tax expense. In 2018, we recognized net tax deficiencies which increased income tax expense by
$1.0 million
. In 2017, we recognized net excess tax benefits which reduced income tax expense by
$4.3 million
.
Income tax payments and refunds were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
2017
|
2016
|
Income taxes paid
|
$
|
59,691
|
|
$
|
99,693
|
|
$
|
103,323
|
|
Income taxes refunded
|
(474
|
)
|
(888
|
)
|
(16,187
|
)
|
Net income taxes paid
|
$
|
59,217
|
|
$
|
98,805
|
|
$
|
87,136
|
|
Deferred taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax, including income tax uncertainties. Significant components of our deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
February 2, 2019
|
February 3, 2018
|
Deferred tax assets:
|
|
|
Workers’ compensation and other insurance reserves
|
$
|
20,841
|
|
$
|
21,106
|
|
Uniform inventory capitalization
|
18,454
|
|
13,591
|
|
Compensation related
|
17,218
|
|
14,308
|
|
Accrued rent
|
16,208
|
|
15,292
|
|
Depreciation and fixed asset basis differences
|
10,497
|
|
8,435
|
|
State tax credits, net of federal tax benefit
|
3,856
|
|
4,246
|
|
Accrued state taxes
|
3,416
|
|
3,749
|
|
Accrued operating liabilities
|
1,316
|
|
537
|
|
Other
|
11,767
|
|
11,623
|
|
Valuation allowances, net of federal tax benefit
|
(2,940
|
)
|
(2,311
|
)
|
Total deferred tax assets
|
100,633
|
|
90,576
|
|
Deferred tax liabilities:
|
|
|
Accelerated depreciation and fixed asset basis differences
|
66,016
|
|
51,310
|
|
Lease construction reimbursements
|
13,917
|
|
11,542
|
|
Prepaid expenses
|
4,285
|
|
5,559
|
|
Workers’ compensation and other insurance reserves
|
2,477
|
|
2,424
|
|
Other
|
5,305
|
|
5,755
|
|
Total deferred tax liabilities
|
92,000
|
|
76,590
|
|
Net deferred tax assets
|
$
|
8,633
|
|
$
|
13,986
|
|
We have the following income tax loss and credit carryforwards at
February 2, 2019
(amounts are shown net of tax excluding the federal income tax effect of the state and local items):
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. State and local:
|
|
|
|
|
State net operating loss carryforwards
|
$
|
15
|
|
Expires fiscal years 2020
|
California enterprise zone credits
|
4,566
|
|
Predominately expires fiscal year 2023
|
Other state credits
|
315
|
|
Expires fiscal years through 2025
|
Total income tax loss and credit carryforwards
|
$
|
4,896
|
|
|
|
|
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for
2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
2017
|
2016
|
Unrecognized tax benefits - beginning of year
|
$
|
11,673
|
|
$
|
13,121
|
|
$
|
13,772
|
|
Gross increases - tax positions in current year
|
1,649
|
|
361
|
|
822
|
|
Gross increases - tax positions in prior period
|
1,025
|
|
1,329
|
|
171
|
|
Gross decreases - tax positions in prior period
|
(1,827
|
)
|
(1,385
|
)
|
(80
|
)
|
Settlements
|
403
|
|
(319
|
)
|
(236
|
)
|
Lapse of statute of limitations
|
(937
|
)
|
(1,434
|
)
|
(1,328
|
)
|
Unrecognized tax benefits - end of year
|
$
|
11,986
|
|
$
|
11,673
|
|
$
|
13,121
|
|
At the end of
2018
and
2017
, the total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is
$9.4 million
and
$9.2 million
, respectively, after considering the federal tax benefit of state and local income taxes of
$1.8 million
and
$2.1 million
, respectively. Unrecognized tax benefits of
$0.8 million
and
$0.6 million
in 2018 and 2017, respectively, relate to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The uncertain timing items could result in the acceleration of the payment of cash to the taxing authority to an earlier period.
We recognized an expense (benefit) associated with interest and penalties on unrecognized tax benefits of approximately
$(0.7) million
,
$0.1 million
, and
$0.2 million
during
2018
,
2017
, and
2016
, respectively, as a component of income tax expense. The amount of accrued interest and penalties recognized in the accompanying consolidated balance sheets at
February 2, 2019
and
February 3, 2018
was
$5.4 million
and
$6.1 million
, respectively.
We are subject to U.S. federal income tax, and income tax of multiple state and local jurisdictions. The statute of limitations for assessments on our federal income tax returns for periods prior to 2015 has lapsed. In addition, the state income tax returns filed by us are subject to examination generally for periods beginning with 2006, although state income tax carryforward attributes generated prior to 2006 and non-filing positions may still be adjusted upon examination. We have various state returns in the process of examination or administrative appeal. After acquiring Canadian operations on July 18, 2011 and prior to dissolution on June 10, 2014, we also were subject to Canadian and provincial taxes. Generally, the time limit for reassessing returns for Canadian and provincial income taxes for periods prior to the fiscal year ended February 2, 2013 have lapsed.
We have estimated the reasonably possible expected net change in unrecognized tax benefits through February 1, 2020, based on expected cash and noncash settlements or payments of uncertain tax positions and lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately
$4.0 million
. Actual results may differ materially from this estimate.
NOTE 10 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Shareholder and Derivative Matters
On May 21, May 22 and July 2, 2012,
three
shareholder derivative lawsuits were filed in the U.S. District Court for the Southern District of Ohio against us and certain of our current and former outside directors and executive officers. The lawsuits were consolidated, and, on August 13, 2012, plaintiffs filed a consolidated complaint captioned
In re Big Lots, Inc. Shareholder Litigation
, No. 2:12-cv-00445 (S.D. Ohio) (the “Consolidated Derivative Action”). The consolidated complaint asserted various claims under Ohio law, including for breach of fiduciary duty. On October 18, 2013, a different shareholder filed an additional derivative lawsuit captioned
Brosz v. Fishman et al.
, No. 1:13-cv-00753 (S.D. Ohio) (the “Brosz Action”), in the U.S. District Court for the Southern District of Ohio against us and each of the current and former outside directors and executive officers originally named in the 2012 shareholder derivative lawsuit. On December 29, 2016, the Court ordered that the Brosz Action be consolidated with the Consolidated Derivative Action. On December 14, 2017, the parties entered into a Stipulation and Agreement of Settlement and plaintiffs filed an Unopposed Motion for Preliminary Approval of Derivative Settlement with the Court. On August 28, 2018, the Court issued an Order granting final approval of the Settlement.
On July 9, 2012, a putative securities class action lawsuit captioned
Willis, et al. v. Big Lots, Inc., et al.
, 2:12-cv-00604 (S.D. Ohio) was filed in the U.S. District Court for the Southern District of Ohio on behalf of persons who acquired our common shares between February 2, 2012 and April 23, 2012. Effective May 16, 2018, the parties executed a Stipulation of Settlement. On November 9, 2018, the Court issued an Order granting final approval of the Settlement. On November 9, 2018, the Court issued an Order granting final approval of the settlement.
In connection with the settlement of the Willis class action and the Consolidated Derivative Action, during the first quarter of 2018, we recorded a net charge of
$3.5 million
related to the expected cost of the settlements for the funds in excess of our insurance coverage. During the second quarter of 2018, the settlement associated with the Willis class action was paid into escrow and has since been released.
California Hazardous Materials Matter
On October 1, 2013, we received a subpoena from the District Attorney for the County of Alameda, State of California, seeking information concerning our handling of hazardous materials and hazardous waste in the State of California. We provided information and cooperated with the authorities from multiple counties and cities in California in connection with this matter. In the first quarter of 2016, we entered into settlement negotiations related to this matter. We settled this matter in the first quarter of 2017. During the first quarter of 2016, we recorded accruals totaling
$4.7 million
associated with pending legal and regulatory matters, including this matter related to hazardous materials and hazardous waste.
Tabletop Torches Matter
In 2013, we sold certain tabletop torch and citronella products manufactured by third parties. In August 2013, we recalled the tabletop torches and discontinued their sale in our stores. In 2014, we were named as a defendant in a number of lawsuits relating to these products alleging personal injuries suffered as a result of negligent shelving and pairing of the products, product design, manufacturing and marketing defects and/or breach of warranties. In the second quarter of 2015, we settled
one
of the lawsuits and settled another lawsuit in the third quarter of 2015. We settled an additional lawsuit in the first quarter of 2017. In the second quarter of 2017, we reached a settlement with the plaintiff in the final lawsuit. Additionally, we have brought a separate lawsuit in the United States District Court of Massachusetts against the company that tested the tabletop torch and an additional lawsuit in the United States District Court for the Southern District of Ohio against the third-party manufacturers and the company that tested the tabletop torch. In the second quarter of 2017, we reached a settlement in principle with our primary and excess insurance carriers. In the third quarter of 2017, we finalized the settlement with our insurance carriers and collected the associated settlement funds, which resulted in a
$3.0 million
gain. In addition, our excess insurance carrier has negotiated a settlement with each of the third-party manufacturers and the company that tested the tabletop torch. All pending actions have now been dismissed. During the second quarter of 2015, we recorded a
$4.5 million
charge related to these matters.
California Wage and Hour Matters
We currently are defending five purported wage and hour class actions in California, including several that have been brought since January 2018. The cases were brought by various current and/or former California associates alleging various violations of California wage and hour laws. We intend to defend ourselves vigorously against the allegations levied in these lawsuits. While a loss from these lawsuits is reasonably possible, at this time, we cannot reasonably estimate the amount of any loss that may result or whether the lawsuits will have a material adverse effect on our financial condition, results of operation or cash flows.
Other Matters
We are involved in other legal actions and claims arising in the ordinary course of business. We currently believe that each such action and claim will be resolved without a material effect on our financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material effect on our financial condition, results of operations, and liquidity.
We are self-insured for certain losses relating to property, general liability, workers' compensation, and employee medical, dental, and prescription drug benefit claims, a portion of which is paid by employees, and we have purchased stop-loss coverage in order to limit significant exposure in these areas. Accrued insurance liabilities are actuarially determined based on claims filed and estimates of claims incurred but not reported. We use letters of credit, which amounted to
$55.9 million
at
February 2, 2019
, as collateral to back certain of our self-insured losses with our claims administrators.
We have purchase obligations for outstanding purchase orders for merchandise issued in the ordinary course of our business that are valued at
$401.4 million
, the entirety of which represents obligations due within one year of
February 2, 2019
. In addition, we have purchase commitments for future inventory purchases totaling
$1.3 million
at
February 2, 2019
. We paid
$10.5 million
,
$11.0 million
, and
$18.2 million
related to these commitments during
2018
,
2017
, and
2016
, respectively. We are not required to meet any periodic minimum purchase requirements under this commitment. The term of the commitment extends until the purchase requirement is satisfied, which we anticipated will occur in the first quarter of 2019. We have additional purchase obligations in the amount of
$338.9 million
primarily related to distribution and transportation, information technology, print advertising, energy procurement, and other store security, supply, and maintenance commitments.
NOTE 11 – DERIVATIVE INSTRUMENTS
In the first quarter of 2015, our Board of Directors authorized our management to enter into derivative instruments designed to mitigate certain risks; and we entered into collar contracts to mitigate our risk associated with market fluctuations in diesel fuel prices. These contracts are used strictly to limit our risk exposure and not as speculative transactions. Our derivative instruments associated with diesel fuel do not meet the requirements for cash flow hedge accounting. Therefore, our derivative instruments associated with diesel fuel will be marked-to-market to determine their fair value, and the associated gains and losses will be recognized currently in other income (expense) on our consolidated statements of operations.
Our outstanding derivative instrument contracts were comprised of the following:
|
|
|
|
(In thousands)
|
February 2, 2019
|
February 3, 2018
|
Diesel fuel collars (in gallons)
|
7,200
|
3,600
|
The fair value of our outstanding derivative instrument contracts was as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Assets (Liabilities)
|
Derivative Instrument
|
Balance Sheet Location
|
February 2, 2019
|
February 3, 2018
|
Diesel fuel collars
|
Other current assets
|
$
|
523
|
|
$
|
312
|
|
|
Other assets
|
203
|
|
262
|
|
|
Accrued operating expenses
|
(586
|
)
|
(77
|
)
|
|
Other liabilities
|
(825
|
)
|
(107
|
)
|
Total derivative instruments
|
|
$
|
(685
|
)
|
$
|
390
|
|
The effect of derivative instruments on the consolidated statements of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amount of Gain (Loss)
|
Derivative Instrument
|
Statements of Operations Location
|
2018
|
2017
|
2016
|
Diesel fuel collars
|
|
|
|
|
Realized
|
Other income (expense)
|
$
|
455
|
|
$
|
(756
|
)
|
$
|
(2,299
|
)
|
Unrealized
|
Other income (expense)
|
(1,075
|
)
|
1,398
|
|
3,657
|
|
Total derivative instruments
|
|
$
|
(620
|
)
|
$
|
642
|
|
$
|
1,358
|
|
The fair values of our derivative instruments are determined using observable inputs from commonly quoted markets. These fair value measurements are classified as Level 2 within the fair value hierarchy.
NOTE 12 – COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the components of accumulated other comprehensive loss, net of tax, during
2016
:
|
|
|
|
|
(In thousands)
|
2016
|
Beginning of Period
|
$
|
(15,977
|
)
|
Other comprehensive income before reclassifications
|
(185
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
16,162
|
|
Net period change
|
15,977
|
|
End of Period
|
—
|
|
The amounts reclassified from accumulated other comprehensive loss associated with our pension plans have been reclassified to selling and administrative expenses in our statements of operations. Please see note 8 to the consolidated financial statements for further information on our pension plans.
NOTE 13 - SALE OF REAL ESTATE
In January 2017, we sold real property in California, on a component of which we operated a store, for
$4.6 million
. Based on the terms of the transaction, we recognized a pre-tax gain of
$3.8 million
during the fourth quarter of 2016.
NOTE 14 – BUSINESS SEGMENT DATA
We use the following seven merchandise categories, which match our internal management and reporting of merchandise net sales: Furniture, Seasonal, Soft Home, Food, Consumables, Hard Home, and Electronics, Toys, & Accessories. The Furniture category includes our upholstery, mattress, case goods, and ready-to-assemble departments. The Seasonal category includes our Christmas trim, lawn & garden, summer, and other holiday departments. The Soft Home category includes our fashion bedding, utility bedding, bath, window, decorative textile, home organization, area rugs, home décor, and frames departments. 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 Hard Home category includes our small appliances, table top, food preparation, stationery, greeting cards, and home maintenance departments. The Electronics, Toys, & Accessories category includes our electronics, toys, jewelry, and hosiery departments.
We periodically assess, and potentially enact minor adjustments to, our product hierarchy, which can impact the roll-up of our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.
The following table presents net sales data by merchandise category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Furniture
|
|
$
|
1,289,133
|
|
|
$
|
1,236,737
|
|
|
$
|
1,195,365
|
|
Soft Home
|
|
826,313
|
|
|
789,596
|
|
|
750,814
|
|
Consumables
|
|
799,038
|
|
|
822,533
|
|
|
817,747
|
|
Food
|
|
782,988
|
|
|
818,387
|
|
|
824,414
|
|
Seasonal
|
|
765,619
|
|
|
765,674
|
|
|
738,756
|
|
Hard Home
|
|
407,596
|
|
|
428,788
|
|
|
437,575
|
|
Electronics, Toys, & Accessories
|
|
367,418
|
|
|
402,647
|
|
|
429,324
|
|
Net sales
|
|
$
|
5,238,105
|
|
|
$
|
5,264,362
|
|
|
$
|
5,193,995
|
|
NOTE 15 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized fiscal quarterly financial data for
2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
First
|
Second
|
Third
|
Fourth
|
Year
|
(In thousands, except per share amounts) (a)
|
|
|
|
|
Net sales
|
$
|
1,267,983
|
|
$
|
1,222,169
|
|
$
|
1,149,402
|
|
$
|
1,598,551
|
|
$
|
5,238,105
|
|
Gross margin
|
511,958
|
|
491,419
|
|
459,174
|
|
659,344
|
|
2,121,895
|
|
Net income
|
31,239
|
|
24,164
|
|
(6,556
|
)
|
108,047
|
|
156,894
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
$
|
0.74
|
|
$
|
0.59
|
|
$
|
(0.16
|
)
|
$
|
2.70
|
|
$
|
3.84
|
|
Diluted
|
0.74
|
|
0.59
|
|
(0.16
|
)
|
2.68
|
|
3.83
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
First
|
Second
|
Third
|
Fourth
|
Year
|
(In thousands, except per share amounts) (a)
|
|
|
|
|
Net sales
|
$
|
1,294,970
|
|
$
|
1,219,597
|
|
$
|
1,109,184
|
|
$
|
1,640,611
|
|
$
|
5,264,362
|
|
Gross margin
|
524,275
|
|
492,500
|
|
443,626
|
|
682,041
|
|
2,142,442
|
|
Net income
|
51,512
|
|
29,120
|
|
4,372
|
|
104,828
|
|
189,832
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
$
|
1.16
|
|
$
|
0.68
|
|
$
|
0.10
|
|
$
|
2.50
|
|
$
|
4.43
|
|
Diluted
|
1.15
|
|
0.67
|
|
0.10
|
|
2.46
|
|
4.38
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings per share calculations for each fiscal quarter are based on the applicable weighted-average shares outstanding for each period, and the sum of the earnings per share for the four fiscal quarters may not necessarily be equal to the full year earnings per share amount.
|
NOTE 16 – SUBSEQUENT EVENT
On March 6, 2019, our Board of Directors authorized the repurchase of up to
$50.0 million
of our common shares (“2019 Repurchase Program”). Pursuant to the 2019 Repurchase Program, 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 2019 Repurchase Program will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 2019 Repurchase Program has no scheduled termination date and will be funded with cash and cash equivalents, cash generated from operations or, if needed, by drawing on the 2018 Credit Agreement.