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

Show all filings for BIG LOTS INC

Form 10-Q for BIG LOTS INC


10-Sep-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.


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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 second quarter of 2013 that we believe are key indicators of both our consolidated and segment operating performance when compared to the second quarter of 2012:

Consolidated Highlights
Net sales increased $7.5 million or 0.6%.

Diluted earnings per share from continuing operations decreased from $0.36 per share to $0.31 per share.

Inventory increased by 3.7% or $32.6 million to $913.7 million from the second quarter of 2012.

U.S. Segment Highlights
Net sales increased $4.7 million or 0.4%.

Comparable store sales for stores open at least fifteen months decreased 2.2%.

Gross margin dollars decreased $0.1 million, while gross margin rate decreased 10 basis points from 39.3% to 39.2% of sales.

Selling and administrative expenses increased $3.9 million, or 1.0%. As a percentage of net sales, selling and administrative expenses increased 20 basis points to 33.8%.

Operating profit rate decreased 50 basis points to 3.1%.

Canadian Segment Highlights
Net sales increased $2.9 million, or 8.3%.

Operating loss increased $0.4 million to $3.7 million.

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 year-to-date
2013 and the year-to-date 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                      28      -       28
  Stores closed during the period                     (16 )   (1 )    (17 )
     Stores open at the end of the period           1,463     81    1,544
2013
  Stores open at the beginning of the fiscal year   1,495     79    1,574
  Stores opened during the period                      27      1       28
  Stores closed during the period                      (8 )   (1 )     (9 )
     Stores open at the end of the period           1,514     79    1,593

We continue to expect to have a net increase of five U.S store locations during 2013, but now expect to open 54 new stores and close 49 existing locations in the U.S. during 2013. Additionally, we expect to open two new stores and to rebrand four 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:

                                                Second Quarter              Year-to-Date
                                               2013        2012           2013        2012
Net sales                                      100.0  %    100.0  %       100.0  %    100.0  %
Cost of sales (exclusive of depreciation
expense shown separately below)                 60.9        60.8           60.7        60.6
Gross margin                                    39.1        39.2           39.3        39.4
Selling and administrative expenses             34.1        33.8           33.5        33.1
Depreciation expense                             2.3         2.2            2.2         2.1
Operating profit                                 2.7         3.2            3.5         4.3
Interest expense                                (0.1 )      (0.1 )         (0.1 )      (0.0 )
Other income (expense)                          (0.0 )      (0.0 )         (0.0 )      (0.0 )
Income from continuing operations before
income taxes                                     2.6         3.2            3.5         4.3
Income tax expense                               1.1         1.3            1.5         1.8
Income from continuing operations                1.5         1.8            2.0         2.5
Discontinued operations                          0.0        (0.0 )          0.0        (0.0 )
Net income                                       1.5  %      1.8  %         2.0  %      2.5  %


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SECOND QUARTER OF 2013 COMPARED TO SECOND 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 second quarter of 2013 compared
to the second quarter of 2012 were as follows:
                                   Second Quarter
($ in thousands)            2013                   2012                 Change
Consumables         $   224,222   18.8 %   $   218,304   18.4 %   $  5,918    2.7  %
Seasonal                200,648   16.9         194,472   16.4        6,176    3.2
Furniture               197,920   16.7         181,619   15.4       16,301    9.0
Home                    172,889   14.6         178,260   15.1       (5,371 ) (3.0 )
Food                    167,933   14.1         169,892   14.4       (1,959 ) (1.2 )
Hardlines & Toys        122,064   10.3         127,650   10.8       (5,586 ) (4.4 )
Electronics & Other     102,001    8.6         112,826    9.5      (10,825 ) (9.6 )
 Net sales          $ 1,187,677  100.0 %   $ 1,183,023  100.0 %   $  4,654    0.4  %

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 second quarter of 2012 have been reclassified to reflect this realignment.

Net sales increased $4.7 million, or 0.4%, to $1,187.7 million in the second quarter of 2013, compared to $1,183.0 million in the second quarter of 2012. The increase in net sales was principally due to the net addition of 51 stores since the end of the second quarter of 2012, which increased net sales by $29.6 million, partially offset by a 2.2% decrease in comparable store sales for stores open at least fifteen months, which decreased net sales by $24.9 million. During the second quarter of 2013, the Seasonal category experienced increases in both sales dollars and comparable store sales. This increase was a positive change in trend from the first quarter of 2013, as sales of our weather-sensitive merchandise in the lawn & garden and summer departments increased as cool spring weather conditions improved in many parts of the country. The Furniture category also experienced increases in both sales dollars and comparable store sales during the second quarter of 2013. The increase in the Furniture category was driven primarily by strong upholstery and mattress sales which benefited from focused promotional activities during the second quarter of 2013. The Consumables category also experienced growth, primarily driven by growth in our pet department, which has been allocated additional square footage in our stores from our home organization department. The Food category experienced declines in several departments as we continue to work toward improving the merchandise flow and consistency of product offerings in the Food category. The Home category also experienced declines in most departments as we began transitioning our product offerings to improve the quality of merchandise available for sale. The decrease in Hardlines & Toys sales was primarily driven by declines in our auto and small appliance departments. The decrease in Electronics & Other sales was primarily driven by a decrease in electronics sales, particularly in tablets, digital cameras, gaming and DVDs.


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Gross Margin
Gross margin dollars decreased $0.1 million to $465.3 million for the second quarter of 2013, compared to $465.4 million for the second quarter of 2012. The decrease in gross margin dollars was primarily due to lower gross margin rate, which decreased gross margin dollars by approximately $1.9 million, partially offset by an increase in sales, which increased gross margin dollars by approximately $1.8 million. Gross margin as a percentage of net sales decreased 10 basis points to 39.2% in the second quarter of 2013, compared to 39.3% in the second quarter of 2012. The gross margin rate decrease principally resulted due to increased markdowns implemented to address the negative impact of the cool spring in 2013 on sales of our weather-sensitive goods, primarily in our Seasonal and Hardlines & Toys categories.

Selling and Administrative Expenses
Selling and administrative expenses were $401.2 million for the second quarter of 2013, compared to $397.3 million for the second quarter of 2012. The increase of $3.9 million, or 1.0%, was primarily due to increases in store occupancy expenses of $5.5 million, store payroll of $2.6 million, general office payroll expenses of $2.2 million, and other variable store expenses of $2.0 million, partially offset by decreases in share-based compensation expense of $3.4 million, health benefits expense of $2.0 million, and advertising expense of $1.9 million. The increase in store occupancy, payroll, and other variable expenses were the result of a net increase of 51 stores compared to the second quarter of 2012. The increase in general office payroll expenses was primarily driven by annual merit increases combined with executive severance costs. The decrease in share-based compensation expense of $3.4 million was primarily driven by the forfeiture of awards related to separation activities during the second quarter of 2013 and a reduction in the equity compensation awarded to Mr. Campisi in 2013, as compared to our prior CEO in 2012. The decrease in health benefits expense was primarily driven by a decrease in the number and severity of large claims in the second quarter of 2013 compared to the second quarter of 2012. Advertising expense decreased as a result of cost savings on print advertising due to improved targeting of circulars.

As a percentage of net sales, selling and administrative expenses increased 20 basis points to 33.8% for the second quarter of 2013 compared to 33.6% for the second quarter of 2012.

Depreciation Expense
Depreciation expense increased $2.1 million to $27.6 million in the second quarter of 2013, compared to $25.5 million for the second quarter of 2012. The increase was directly related to our new store growth, investments in systems, and capital spending to support and maintain our stores and distribution centers. Depreciation expense as a percentage of sales increased by 10 basis points compared to the second quarter of 2012.

Canadian Segment

Our Canadian segment's net sales increased $2.9 million to $37.9 million for the second quarter of 2013, as compared to $35.0 million in the second quarter of 2012. The increase in net sales was principally due to an 8.3% increase in comparable store sales for stores open at least fifteen months. Our operating loss increased $0.4 million to $3.7 million for the second quarter of 2013 compared to $3.3 million in the second quarter of 2012.

Other Performance Factors

Interest Expense
Interest expense was $0.7 million in the second quarter of 2013, compared to $0.9 million in the second quarter of 2012. The decrease was driven by a decrease in borrowings in the second quarter of 2013 and a reduction in our interest rate as a result of the amendment to the 2011 Credit Agreement. We had total average borrowings (including capital leases) of $130.2 million in the second quarter of 2013 compared to total average borrowings of $148.6 million in the second quarter of 2012. The decrease in total average borrowings was primarily the result of share repurchases in the second quarter of 2012, whereas there was no such repurchase program in place for the second quarter of 2013.

Income Taxes
The effective income tax expense rate for the second quarter of 2013 and the second quarter of 2012 for income from continuing operations was 43.3% and 42.5%, respectively. The higher rate was primarily due to a full valuation allowance relative to the deferred tax benefit of a higher loss generated by our Canadian segment along with its accompanying effect on a significantly lower base of income from continuing operations.


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YEAR-TO-DATE 2013 COMPARED TO YEAR-TO-DATE 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 year-to-date 2013 compared to
the year-to-date 2012 were as follows:
                                    Year-to-Date
($ in thousands)            2013                   2012                 Change
Furniture           $   501,674   20.3 %   $   468,523   19.3 %   $ 33,151    7.1  %
Consumables             431,643   17.5         418,326   17.1       13,317    3.2
Seasonal                379,464   15.4         367,877   15.0       11,587    3.1
Home                    358,666   14.6         369,437   15.1      (10,771 ) (2.9 )
Food                    344,257   14.0         347,803   14.2       (3,546 ) (1.0 )
Hardlines & Toys        228,671    9.3         245,435   10.0      (16,764 ) (6.8 )
Electronics & Other     218,046    8.9         227,857    9.3       (9,811 ) (4.3 )
 Net sales          $ 2,462,421  100.0 %   $ 2,445,258  100.0 %   $ 17,163    0.7  %

As discussed above in the section "Second Quarter of 2013 Compared to Second Quarter of 2012", 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. Sales results for the year-to-date 2012 have been reclassified to reflect this realignment.

Net sales increased $17.1 million, or 0.7%, to $2,462.4 million in the year-to-date 2013, compared to $2,445.3 million in the year-to-date 2012. The increase in net sales was principally due to a net increase of 51 new stores since the end of the second quarter of 2012, which increased net sales by $76.8 million, partially offset by a 2.6% decrease in comparable store sales for stores open at least fifteen months, which decreased net sales by $59.7 million. The Furniture category was our strongest performer and had the largest sales gains in the year-to-date 2013, with upholstered items being the primary driver. The sales increase in the Consumables category was led by the pet department with household chemicals, housekeeping supplies, and paper products also contributing to the increase, partially offset by declines in health and beauty care and home organization products. The Consumables category benefited from an increased volume of brand name close-outs early in the year. The increase for the Seasonal category was consistent with the growth in our new stores. Sales in our Food category declined in several departments as we work to improve product flow and assortment in this category. Electronics & Other decreased due to slow electronics sales, particularly in tablet, digital camera, gaming and DVD sales. Our Home category continues to experience declines in most departments as we began transitioning our product offerings to improve the quality of merchandise available for sale. The decline in the Hardlines & Toys category was primarily driven by slow automotive and home maintenance sales throughout the year, coupled with a planned reduction in our toys and books offerings.

Based on our year-to-date 2013 results and trends during the first few weeks of August, we expect comparable store sales to be in the range of flat to a decrease of 2% for the third quarter of 2013. For the fourth quarter of 2013 which includes the holiday selling season, we anticipate comparable store sales to be in the range of flat to an increase of 2%. Additionally, net sales for the fourth quarter of 2013 will be negatively impacted by the lack of a 53rd week when compared to the fourth quarter of 2012, as fiscal 2013 is a 52-week fiscal year and fiscal 2012 was a 53-week fiscal year.

Gross Margin
Gross margin dollars increased $2.0 million, or 0.2%, to $968.4 million for the year-to-date 2013, compared to $966.4 million for the year-to-date 2012. The increase in gross margin dollars was principally due to the sales increase of $17.1 million, which increased gross margin dollars by approximately $6.8 million, partially offset by a decrease in gross margin rate, which decreased gross margin dollars by approximately $4.8 million. Gross margin as a percentage of net sales decreased 20 basis points to 39.3% in the year-to-date 2013, compared to 39.5% in the year-to-date 2012. The gross margin rate decrease was principally due to an increase in the volume of markdowns to encourage sales following the cool spring, which negatively impacted our Seasonal and weather-sensitive goods.


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In both the third and fourth quarters of 2013, we expect our gross margin rate will be higher than the third and fourth quarters of 2012, as we expect a lower overall markdown rate in 2013 as compared to 2012 as well as improvements in our merchandise mix.

Selling and Administrative Expenses
Selling and administrative expenses were $816.4 million for the year-to-date 2013, compared to $798.8 million for the year-to-date 2012. The increase of $17.6 million, or 2.2%, was primarily due to increases in store occupancy expenses of $10.9 million, a one-time litigation settlement of $4.4 million, store payroll expense of $3.5 million, general office payroll expenses of $2.6 million, store maintenance and repairs of $2.4 million, and bonus expenses of $2.2 million, which were partially offset by decreases in share-based compensation expense of $6.9 million, and advertising expense of $2.8 million. The one-time litigation settlement is the result of a loss contingency for a legal matter that was accrued in the first quarter of 2013 for $5.1 million, for which the settlement was finalized in the second quarter of 2013 for $4.4 million. The increase in store occupancy and payroll was primarily due to the net increase of 51 stores compared to the year-to-date 2012. The increase in general office payroll expenses was primarily driven by annual merit increases combined with separation activities that occurred during the second quarter of 2013. The increase in store maintenance and repair expense was primarily driven by annual store updates, such as lighting and floor maintenance, to update their appearance. The increase in bonus expense was directly related to better relative financial performance in the year-to-date 2013 to our annual operating plan as compared to the financial performance during the year-to-date 2012. The decrease in share-based compensation expense was primarily driven by a lower number of share-based awards granted in the year-to-date 2013 compared to the year-to-date 2012, notably as a result of a reduction in the size of the equity compensation package awarded to Mr. Campisi in 2013 as compared to our former CEO in 2012, and the forfeiture of certain awards resulting from the departure of certain members of senior management during the second quarter of 2013. The decrease in advertising expense was primarily driven by cost savings on print advertising due to improved targeting of circulars.

As a percentage of net sales, selling and administrative expenses increased 50 basis points to 33.2% for the year-to-date 2013 compared to 32.7% for the year-to-date 2012.

For the third quarter of 2013, we expect our selling and administrative expenses as a percentage of net sales will slightly increase compared to the third quarter of 2012. The anticipated deleverage for the third quarter of 2013 is the result of estimated comparable store sales of flat to a decrease of 2%, as forecasted selling and administrative expense dollars on a per store basis are expected to be slightly up to the third quarter of 2012.

For the fourth quarter of 2013, we anticipate our selling and administrative expenses as a percentage of net sales will increase compared to the fourth quarter of 2012. The primary driver of this increase is anticipated accrued bonus expense in 2013 as compared to 2012 when there was no corporate payout.

Depreciation Expense
Depreciation expense increased $4.6 million to $54.5 million in the year-to-date 2013, compared to $49.9 million for the year-to-date 2012. The increase is directly related to our new store growth, investments 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 year-to-date 2012.

During the balance of 2013, we expect that depreciation expense will increase as compared to 2012 as a result of our continued investment in capital expenditures associated with new store openings and maintenance of existing stores and distribution centers. Total 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 $7.2 million to $74.5 million in the year-to-date 2013, as compared to $67.3 million in the year-to-date 2012. The increase in net sales was principally due to a 10.6% increase in comparable store sales for stores open at least fifteen months. The increase in comparable store sales was primarily driven by an improvement in inventory levels and assortment in the first quarter of 2013 compared to an inventory deficiency in the first quarter of 2012 as we were working towards establishing sufficient merchandise flow at that time. Our operating loss narrowed $1.4 million to $8.0 million in the year-to-date 2013 as compared to $9.4 million in the year-to-date 2012. Our operating loss narrowed primarily due to an increase in sales and the associated gross margin dollars.

For the full fiscal year of 2013, we estimate sales in the range of $165 to $173 million, an increase of 7% to 12%. Comparable store sales are estimated to increase in the range of 7% to 12% as well. Based on sales in the above estimated range, we estimate a net loss of $9 to $14 million for the full fiscal year of 2013.


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Other Performance Factors

Interest Expense
Interest expense was $1.5 million in the year-to-date 2013, compared to $1.2 . . .

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