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BIG > SEC Filings for BIG > Form 10-Q on 12-Jun-2013All Recent SEC Filings

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Form 10-Q for BIG LOTS INC


12-Jun-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the "safe harbor" provisions of the Act.

Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words "anticipate," "estimate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "will," "should," "may," "target," "forecast," "guidance," "outlook," and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, the current economic and credit conditions, the cost of goods, our inability to successfully execute strategic initiatives, competitive pressures, economic pressures on our customers and us, the availability of brand name closeout merchandise, trade restrictions, freight costs, operating in Canada, the risks discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, and other factors discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report should be read in conjunction with such filings, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.


Table of Contents

OVERVIEW

The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes. Each term defined in the notes has the same meaning in this item and the balance of this report.

We are North America's largest broadline closeout retailer, and manage our business as two segments: U.S. and Canada. The following are the results from the first quarter of 2013 that we believe are key indicators of both our consolidated and segment operating performance when compared to the first quarter of 2012:

Consolidated Highlights
Net sales increased $16.9 million, or 1.3%.

Diluted earnings per share from continuing operations decreased from $0.63 per share to $0.56 per share.

Inventory increased by 4.4% or $37.1 million to $884.8 million from the first quarter of 2012.

U.S. Segment Highlights
Net sales increased $12.5 million, or 1.0%.

Comparable store sales for stores open at least fifteen months decreased 2.9%.

Gross margin dollars increased $2.1 million, while gross margin rate decreased 20 basis points from 39.7% to 39.5% of sales. Gross margin dollars in the first quarter of 2012 include the impact of a non-cash, non-recurring charge of $5.6 million, or 40 basis points, related to a change in accounting principle associated with the implementation of our new inventory management systems.

Selling and administrative expenses increased $13.7 million. Selling and administrative expenses in the first quarter of 2013 include a pretax charge of $5.1 million, or 40 basis points, associated with a store-related legal matter. As a percentage of net sales, selling and administrative expenses increased 80 basis points to 32.6% of net sales.

Operating profit rate decreased 110 basis points to 4.8%.

Canadian Segment Highlights
Net sales increased $4.4 million, or 13.7%.

Operating loss narrowed $1.8 million to $4.4 million in the first quarter of 2013.

See the discussion and analysis below for additional details regarding our segments' operating results.

STORES

The following table presents stores opened and closed during the first quarter
of 2013 and the first quarter of 2012:
                                                     U.S.   Canada   Total
2012
  Stores open at the beginning of the fiscal year   1,451       82  1,533
  Stores opened during the period                      10        -     10
  Stores closed during the period                      (7 )      -     (7 )
     Stores open at the end of the period           1,454       82  1,536
2013
  Stores open at the beginning of the fiscal year   1,495       79  1,574
  Stores opened during the period                      14        1     15
  Stores closed during the period                      (4 )      -     (4 )
     Stores open at the end of the period           1,505       80  1,585

We continue to expect to open 50 new stores and close 45 existing locations in the U.S. during 2013. Additionally, we expect to open two new stores and to rebrand two or three existing Liquidation World or LW stores under the Big Lots brand in Canada during 2013.


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RESULTS OF OPERATIONS

The following table compares components of our consolidated statements of
operations as a percentage of net sales at the end of each period:

                                                   First Quarter
                                                 2013         2012
Net sales                                        100.0  %     100.0  %
Cost of sales (exclusive of depreciation
expense shown separately below)                   60.6         60.4
Gross margin                                      39.4         39.6
Selling and administrative expenses               33.0         32.3
Depreciation expense                               2.1          2.0
Operating profit                                   4.3          5.3
Interest expense                                  (0.1 )       (0.0 )
Other income (expense)                            (0.0 )        0.0
Income from continuing operations before
income taxes                                       4.3          5.3
Income tax expense                                 1.8          2.1
Income from continuing operations                  2.5          3.2
Discontinued operations                            0.0         (0.0 )
Net income                                         2.5  %       3.1  %

FIRST QUARTER OF 2013 COMPARED TO FIRST QUARTER OF 2012

U.S. Segment

Net Sales
Net sales by merchandise category, as a percentage of total net sales, and net
sales change in dollars and percentage from the first quarter of 2013 compared
to the first quarter of 2012 were as follows:
                                   First Quarter
(in thousands)              2013                   2012                 Change
Furniture           $   303,754   23.8 %   $   286,904   22.7 %   $ 16,850    5.9  %
Consumables             207,421   16.3         200,023   15.8        7,398    3.7
Home                    185,777   14.6         191,177   15.2       (5,400 ) (2.8 )
Seasonal                178,816   14.0         173,405   13.8        5,411    3.1
Food                    176,324   13.8         177,910   14.1       (1,586 ) (0.9 )
Electronics & Other     116,045    9.1         115,031    9.1        1,014    0.9
Hardlines & Toys        106,607    8.4         117,785    9.3      (11,178 ) (9.5 )
 Net sales          $ 1,274,744  100.0 %   $ 1,262,235  100.0 %   $ 12,509    1.0  %

In the fourth quarter of 2012, we realigned select merchandise categories to be consistent with the realignment of our merchandising team and changes to our management reporting. Prior to the fourth quarter of 2012, we reported sales of our toys, books and sporting goods departments in the Play n' Wear category. We moved the toys, books and sporting goods departments out of the Play n' Wear category and repositioned them in the Hardlines & Other category. We also moved the results of certain large closeout deals that are typically acquired through our alternate product sourcing operations out of the Hardlines & Other category and repositioned them in the Play n' Wear category. We subsequently renamed our Hardlines & Other category to Hardlines & Toys and renamed our Play n' Wear category to Electronics & Other. Our Consumables category was also separated into a Food category and a Consumables category. The Consumables category now contains our health and beauty care, housekeeping supplies, household chemicals, paper products, pet, and home organization departments, while the Food category contains our various food and beverage departments. Sales results for the first quarter of 2012 have been reclassified to reflect this realignment.


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Net sales increased $12.5 million, or 1.0%, to $1,274.7 million in the first quarter of 2013, compared to $1,262.2 million in the first quarter of 2012. The increase in net sales was principally due to the net addition of 51 stores since the end of the first quarter of 2012, which increased net sales by $47.3 million, partially offset by a 2.9% decrease in comparable store sales for stores open at least fifteen months, which decreased net sales by $34.8 million. The Furniture category had the largest sales gains during the first quarter of 2013, with upholstery and case goods being the primary drivers as our customers responded positively to an updated merchandise assortment combined with certain promotional events. The Consumables category experienced increases in nearly all departments due to an increased volume of brand name close-outs in the first quarter of 2013 as compared to first quarter of 2012. The primary driver of the sales increase in the Seasonal category was the change in timing of our quarter end. The first quarter of 2013 ended one calendar week later in the Spring than the first quarter of 2012, as 2012 was a 53-week fiscal year. The benefit of the change in timing of our quarter end was offset by lower than anticipated comparable store sales driven by unseasonably cool conditions in many areas of the country during March and April. The Electronics & Other category increased in the first quarter of 2013 compared to the first quarter of 2012, although net sales for this category were below our expectations. Electronics, in particular, is sensitive to both price and updates in technology and our content needs to be constantly adjusting to stay current in the marketplace. The increase was partially offset by declines in our apparel offerings due to space reductions taken in the late Spring of 2012. The decrease in our Food category was primarily a result of low customer response to our assortment, which did not contain the balance of product offering that we anticipated, particularly in our specialty foods department. Our Home category experienced declines in many departments as we work to enhance the quality in our assortment towards more current customer trends within this major category. The decline in the Hardlines & Toys category was driven by certain weather sensitive departments that we believe were negatively impacted by the unseasonably cool weather in many regions of the U.S. during the first quarter of 2013.

We expect comparable store sales to decrease in the range of negative 2% to 4% during the second quarter of 2013, which is largely a reflection of continued challenges in weather during May and its negative implications on the pricing and necessary promotional cadence of certain of our merchandise offerings, namely components of our Seasonal and Hardlines & Toys categories.

Gross Margin
Gross margin dollars increased $2.2 million, or 0.4%, to $503.1 million for the first quarter of 2013, compared to $500.9 million for the first quarter of 2012. The increase in gross margin dollars was principally due to higher net sales of $12.5 million, which increased gross margin dollars by approximately $4.9 million, partially offset by a lower gross margin rate, which decreased gross margin dollars by approximately $2.8 million. Gross margin as a percentage of net sales decreased 20 basis points to 39.5% in the first quarter of 2013, compared to 39.7% in the first quarter of 2012 which included the impact of the change in accounting principle related to our merchandise inventories that lowered our rate by 40 basis points during that period. The gross margin rate decrease was principally due to the impact of a higher markdown rate and a change in merchandise mix with increases in categories with a lower gross margin rate. The increase in the markdown rate was primarily driven by the usage of higher markdown dollars to sell through certain under-performing categories.

In the second quarter of 2013, we expect our gross margin rate will be lower than the second quarter of 2012, as we expect a higher markdown rate in 2013 will be needed to sell through seasonally related product whose May sales did not meet expectations as we prepare for the back-to-school and fall seasons.

Selling and Administrative Expenses
Selling and administrative expenses were $415.2 million for the first quarter of 2013, compared to $401.5 million for the first quarter of 2012. The increase of $13.7 million, or 3.4%, was primarily due to a loss contingency on a legal matter for $5.1 million, an increase in store occupancy expenses of $5.5 million, an increase in store repair and maintenance expenses of $2.4 million, and higher accrued bonus expense of $2.0 million, partially offset by a decrease in share-based compensation expense of $3.5 million. The increase in store occupancy expense was due to the net increase of 51 stores compared to the end of the first quarter of 2012, and higher store repair and maintenance expenses reflected a shift in timing of annual store repair and maintenance projects that have historically taken place in later periods of the fiscal year. The increase in bonus expense was directly related to better relative financial performance in the first quarter of 2013 to our annual operating plan as compared to the performance during the first quarter of 2012.


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Share-based compensation expense decreased due to a lower number of share-based awards granted in the first quarter of 2013. The share-based awards for our new Chief Executive Officer were not granted until the beginning of the second quarter of 2013. Also contributing to the decrease were the nonvested restricted stock awards granted to our former Chief Executive Officer, Steven S. Fishman in 2012. In 2012, the corporate financial goal associated with Mr. Fishman's 2012 award was not achieved, therefore the award did not vest and was forfeited during the first quarter of 2013.

As a percentage of net sales, selling and administrative expenses increased 80 basis points to 32.6% for the first quarter of 2013 compared to 31.8% for the first quarter of 2012.

In the second quarter of 2013, we expect our selling and administrative expenses as a percentage of net sales will increase compared to the second quarter of 2012. We expect an increase in spend associated with additional store occupancy costs related with our continued store growth.

Depreciation Expense
Depreciation expense increased $2.5 million to $26.9 million in the first quarter of 2013, compared to $24.4 million for the first quarter of 2012. The increase is directly related to our new store growth, continued investment in systems, and capital spending to support and maintain our stores and distribution centers. Depreciation expense as a percentage of sales increased by 20 basis points compared to the first quarter of 2012.

During the balance of 2013, we expect that depreciation expense will increase as compared to 2012 based on our forecasted capital expenditures associated with new store openings, store projects, and maintenance of existing stores and distribution centers. Capital expenditures continue to be forecasted in the range of $115 million to $120 million for 2013.

Canadian Segment

Our Canadian segment's net sales increased $4.4 million, or 13.5%, to $36.6 million in the first quarter of 2013, compared to $32.2 million in the first quarter of 2012. The increase in net sales was principally due to a 13.2% increase in comparable store sales for stores open at least fifteen months, which increased net sales by $4.1 million. Net sales were positively impacted by improved inventory levels and quality and breadth of assortments. As a result of the increase in net sales, our total gross margin dollars increased, which decreased our operating loss by $1.8 million to $4.4 million in the first quarter of 2013, compared to an operating loss of $6.2 million in the first quarter of 2012.

In the second quarter of 2013, we estimate a net loss of $3 million to $6 million compared to a net loss of $3.3 million in the second quarter of 2012. This result is based on sales in the range of $37 million to $41 million, an increase of 6% to 17%. Comparable store sales are estimated to increase in the range of 4% to 14%.

Other Performance Factors

Interest Expense
Interest expense was $0.7 million in the first quarter of 2013, compared to $0.3 million in the first quarter of 2012. We had total average borrowings (including capital leases) of $120.2 million in the first quarter of 2013 compared to total average borrowings of $17.2 million in the first quarter of 2012. The increase in total average borrowings from the first quarter of 2012 to the first quarter of 2013 was the result of us beginning 2013 with $171.2 million of outstanding borrowings, compared to $65.9 million in borrowings outstanding at the beginning of the first quarter of 2012.

Income Taxes
The effective income tax rate for the first quarter of 2013 and the first quarter of 2012 for income from continuing operations was 42.1% and 40.5%, respectively. The lower effective income tax rate for the first quarter of 2012 was principally driven by the recognition of income tax benefits associated with state settlement activity that did not occur in the first quarter of 2013, partially offset by favorability in hiring tax credits (resulting from passage of the American Taxpayer Relief Act of 2012) and a lower valuation allowance relative to the deferred tax benefits of our Canadian segment (as a result of a lower Canadian segment loss).


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Capital Resources and Liquidity
On July 22, 2011, we entered into the 2011 Credit Agreement. The 2011 Credit Agreement was scheduled to expire on July 22, 2016. On May 30, 2013, we entered into an amendment of the 2011 Credit Agreement that extended its expiration date to May 30, 2018. Borrowings under the 2011 Credit Agreement are available for working capital and general corporate purposes. The 2011 Credit Agreement includes a $10 million Canadian swing loan sublimit, a $30 million U.S. swing loan sublimit, $150 million letter of credit sublimit, and a $200 million Canadian revolving credit loan subfacility. The interest rates, pricing and fees under the 2011 Credit Agreement fluctuate based on our debt rating. The 2011 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, LIBOR, or CDOR. We may prepay revolving loans made under the 2011 Credit Agreement. The 2011 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 2011 Credit Agreement that would permit the lenders to restrict our ability to further access the 2011 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2011 Credit Agreement. At May 4, 2013, we were in compliance with the covenants of the 2011 Credit Agreement.

The primary source of our liquidity is cash flows from operations and, as necessary, borrowings under the 2011 Credit Agreement. Our net income and, consequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our net sales are typically highest during the nine-week Christmas selling season in our fourth fiscal quarter. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have typically funded those requirements with borrowings under our credit facility. At May 4, 2013, we had $137.2 million borrowings under the 2011 Credit Agreement and the borrowings available under the 2011 Credit Agreement were $554.1 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $8.7 million. We anticipate that through September 15, 2013, total indebtedness under the 2011 Credit Agreement will peak at less than $200 million, which includes outstanding letters of credit and the estimated impact of the cash needs of our Canadian segment.

Cash provided by operating activities decreased by $65.4 million to $60.2 million in the first quarter of 2013 compared to $125.6 million in the first quarter of 2012. The decrease was primarily driven by a decrease in change in accounts payable of $114.0 million to $30.9 million of cash used in the first quarter of 2013 compared to $83.1 million of cash provided in the first quarter of 2012, partially offset by an increase in the change in inventory of $54.4 million. The change in accounts payable was primarily driven by an increase in accounts payable at the end of the first quarter of 2012 associated with the increase in inventory in the corresponding period as well as the transition to a new inventory management system, which created a temporary delay in accounts payable processing during the transition. Additionally, during the first quarter of 2012, our Canadian segment was building its post-acquisition inventory levels up to meet store inventory requirements, which generated an increase in accounts payable. Also contributing was a decrease in net income of $8.4 million to $32.3 million in the first quarter of 2013 compared to $40.7 million in the first quarter of 2012.

Cash used in investing activities decreased by $2.2 million to $15.8 million in the first quarter of 2013 compared to $18.0 million in the first quarter of 2012. The decrease was primarily due to an increase in cash proceeds from sale of property and equipment of $1.2 million associated with the sale of a company-owned aircraft in the first quarter of 2013. Also contributing was a decrease of $1.0 million in capital expenditures to $17.3 million in the first quarter of 2013 compared to $18.3 million in the first quarter of 2012.

Cash used in financing activities decreased by $60.4 million to $33.2 million in the first quarter of 2013 compared to $93.6 million in the first quarter of 2012. The primary driver of the decrease was the lack of a share repurchase program in the first quarter of 2013, which accounts for a $67.6 million decrease in cash used in financing activities. Additionally, there was a decrease in net repayment of borrowings under our bank credit facility of $31.9 million to $34.0 million in the first quarter of 2013 compared to $65.9 million in the first quarter of 2012. These decreases in cash used in financing activities were partially offset by fewer proceeds received from the exercise of stock options, which decreased $31.4 million to $0.9 million in the first quarter of 2013 compared to $32.3 million in the first quarter of 2012.

On a consolidated basis, we expect cash provided by operating activities less capital expenditures to be approximately $175 million for 2013.


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, and bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. See note 1 to our consolidated financial statements included in our 2012 Form 10-K for additional information about our accounting policies.

The estimates, judgments, and assumptions that have a higher degree of inherent uncertainty and require the most significant judgments are outlined in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2012 Form 10-K. Had we used estimates, judgments, and assumptions different from any of those discussed in our 2012 Form 10-K, our financial condition, results of operations, and liquidity for the current period could have been materially different from those presented.

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