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BIG > SEC Filings for BIG > Form 10-K on 1-Apr-2014All Recent SEC Filings

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Form 10-K for BIG LOTS INC


1-Apr-2014

Annual Report


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 years 2013 and 2011 were each comprised of 52 weeks. Fiscal year 2012 was comprised of 53 weeks. Fiscal year 2014 will be comprised of 52 weeks.

Operating Results Summary

The following are the results from 2013 that we believe are key indicators of both our consolidated and segment operating performance when compared to 2012.

Consolidated Highlights
• Net sales decreased $65.3 million, or 1.2%.

• Diluted earnings per common share from continuing operations decreased from $2.93 in 2012 to $2.15 in 2013.

•         Our 2013 results included the impact of the Canadian Wind Down, which
          involved an aggregate of $23.7 million in impairments, severance
          charges, and contract termination costs and increased markdowns to
          begin liquidating our inventory, offset by a $23.9 million U.S.
          deferred tax benefit.


•         Our 2012 results included the impact of a non-cash, non-recurring
          charge of $0.06 per diluted share related to a change in accounting
          principle associated with the implementation of our new retail
          inventory systems in the U.S.

• Inventory decreased by 0.3%, or $3.1 million, to $915.0 million in 2013.

U.S. Segment Highlights
• Net sales decreased $87.6 million or 1.7%.

• Comparable store sales for stores open at least fifteen months decreased 2.7%.

• Gross margin dollars decreased $47.3 million and gross margin rate decreased 20 basis points from 39.4% to 39.2% of sales.

• Selling and administrative expenses increased $24.4 million. As a percentage of net sales, selling and administrative expenses increased 100 basis points to 32.5% of sales.

• Operating profit rate decreased 150 basis points to 4.5%.

Canadian Segment Highlights
• In the fourth quarter of 2013, we announced the Canadian Wind Down was to substantially occur during the first quarter of 2014.

• Costs associated with the Canadian Wind Down are estimated to range from $60 million to $64 million, of which $24 million were incurred in 2013.


Table of Contents

The following table compares components of our consolidated statements of operations as a percentage of net sales:

                                                   2013          2012          2011
Net sales                                           100.0  %      100.0  %      100.0  %
Cost of sales (exclusive of depreciation
expense shown separately below)                      61.0          60.6          60.0
Gross margin                                         39.0          39.4          40.0
Selling and administrative expenses                  33.2          31.8          31.6
Depreciation expense                                  2.2           2.0           1.7
Operating profit                                      3.6           5.6           6.7
Interest expense                                     (0.1 )        (0.1 )        (0.1 )
Other income (expense)                               (0.0 )         0.0          (0.0 )
Income from continuing operations before
income taxes                                          3.5           5.5           6.6
Income tax expense                                    1.2           2.2           2.6
Income from continuing operations                     2.4           3.3           4.0
Loss from discontinued operations, net of tax         0.0           0.0           0.0
Net income                                            2.4  %        3.3  %        4.0  %

See the discussion below under the captions "2013 Compared To 2012" and "2012 Compared To 2011" for additional details regarding the specific components of our operating results.

In December 2013, we announced the Canadian Wind Down would begin in the fourth quarter of 2013 and continue through the first quarter of 2014. During 2013, we recorded $19.7 million in charges associated with the impairment of the property and equipment, goodwill, and certain intangible assets relating to our Canadian segment, $2.7 million in severance charges associated with the closing of our Canadian distribution centers and certain functions within our Canadian administrative offices, and $1.3 million in contract termination costs associated with the operating leases of our distribution centers. Please see note 13 to the accompanying consolidated financial statements for a more detailed discussion regarding the Canadian Wind Down activities. Additionally, in 2013, we recorded a $23.9 million U.S. deferred tax benefit associated with the excess tax basis related to our investment in our Canadian segment.

In 2013, our selling and administrative expenses include a $4.4 million charge associated with the settlement of a legal matter, which was partially offset by a $3.6 million gain on the sale of a company-owned property in California.

In 2012, the cost of sales increase included a charge of $5.6 million (0.1% of net sales) due to a change in accounting principle resulting from our successful implementation of new retail inventory management systems. This non-cash charge reduced both income from continuing operations and net income by $3.4 million, or 10 basis points. Please see note 1 to the accompanying consolidated financial statements for a more detailed discussion regarding this change in accounting principle.

Seasonality

As discussed in "Item 1. Business - Seasonality" of this Form 10-K, our financial results fluctuate from quarter to quarter depending on various factors such as the timing of new or closed stores, the timing and extent of advertisements and promotions, and the timing of holidays. We expect the Christmas holiday selling season to continue to produce a significant portion of our sales and operating profits. If our sales performance is significantly better or worse during the Christmas holiday selling season, we would expect a more pronounced impact on our annual financial results than if our sales performance is significantly better or worse in a different season.


Table of Contents

The following table sets forth the seasonality of net sales and operating profit for 2013, 2012, and 2011 by fiscal quarter:

                                                First    Second    Third    Fourth
Fiscal Year 2013
Net sales as a percentage of full year          24.6 %    23.0 %  21.5  %    30.9 %
Operating profit as a percentage of full year   30.0      17.2    (4.0 )     56.8
Fiscal Year 2012
Net sales as a percentage of full year          24.0 %    22.6 %  20.9  %    32.5 %
Operating profit as a percentage of full year   23.1      13.3    (2.4 )     66.0
Fiscal Year 2011
Net sales as a percentage of full year          23.6 %    22.4 %  21.8  %    32.2 %
Operating profit as a percentage of full year   24.9      17.1     2.3       55.7

Operating Strategy

In May of 2013, Mr. Campisi joined us as our Chief Executive Officer and President. Under Mr. Campisi's leadership, we reevaluated the key components of our operating strategy, the organization's leadership and structure, and the businesses that we operated. After performing his review, Mr. Campisi and the senior management team introduced our new operating strategy, the Edit to Amplify strategy ("Edit to Amplify"), which applies to all aspects of our business, but has a particular focus on merchandising, marketing, and our customers' shopping experience, all of which we believe are the key drivers of our net sales. Edit to Amplify is a strategy that focuses our entire attention on our core customer. We believe our Edit to Amplify strategy will help us to exceed the expectations of our core customer, to whom we refer as Jennifer, by adopting a customer-first mentality and delivering a product assortment that meets her everyday needs while delivering excitement and surprises aimed to drive discretionary purchases. The following sections provide additional discussion and analysis of our Edit to Amplify strategy. During this transition period, as we embrace this new focus for our business, we anticipate in 2014:

• Earnings per diluted share from continuing operations to be $2.25 to $2.45 for our U.S. segment.

•         Our earnings per diluted share from continuing operations assumes the
          Canadian Wind Down and the related reclassification of the results of
          our Canadian segment to discontinued operations. We anticipate a loss
          from discontinued operations in the range of $37 million to $41
          million, or $0.64 to $0.71 per diluted share.


•      Net sales for our U.S. segment will be in the range of flat to a slight
       decrease driven by comparable stores sales in the range of flat to an
       increase of 2%, partially offset by a lower expected store count.

• Opening 30 new stores and closing 50 stores in our U.S. segment.

• Cash flow (operating activities less investing activities) of approximately $140 million for future reinvestment, return to shareholders, and / or to lower our obligations under the 2011 Credit Agreement.

• Forecasting U.S. segment cash flow of $165 million.

•         Our forecasted cash flow also includes payments of $25 million
          associated with the Canadian Wind Down.


•         In March, our Board of Directors authorized the repurchase of up to
          $125 million of our common shares, which is expected to be funded by
          our $140 million of cash flow.

The "2013 Compared To 2012" section below provides additional discussion and analysis of our financial performance and the assumptions and expectations upon which we are basing our guidance for our future results.


Table of Contents

U.S. Segment

Merchandising

The goal of exceeding our core customer's expectations will be driven by the delivery of a product assortment that is meaningful to our core customer, combined with the quality and ease of the shopping experience. Our Edit to Amplify strategy focuses on the two separate "Edit" and "Amplify" components to achieve our goal of exceeding our core customer's expectations. The "Edit" component focuses on continuously evaluating our product mix and downsizing, or potentially eliminating, those departments within our merchandise categories and product offerings which we believe are not top of mind with our core customer and we do not maintain a competitive advantage. The "Amplify" component of our Edit to Amplify strategy seeks to expand the assortment of those departments within our merchandise categories and product offerings that we believe are important to our core customer's shopping experience and with respect to which we believe we have a competitive advantage in pricing and sourcing. In the fourth quarter of 2013, we made significant changes to our merchandising team to execute our new strategy and we restructured our merchandise categories to:
Food, Consumables, Soft Home, Hard Home, Furniture & Home Décor, Seasonal, and Electronics & Accessories. We believe the restructured merchandise categories better align our business with how our core customer shops our stores. Our restructured categories place differing emphasis on essential items (needs) and discretionary items (wants).

• Our Food and Consumables categories will focus primarily on catering to our core customers' daily essentials, or "need, use, buy most" items. We believe our competitive advantage in the Food and Consumables categories revolves around our sourcing capabilities for closeout merchandise. Manufacturers and vendors have closeout merchandise for a number of different reasons, including other retailers canceling orders, other retailers going out of business, marketing or packaging changes, or a new product launch that has failed. We believe our vendor relationships along with the size and financial strength of our company afford us these opportunities. In addition to closeouts, we intend to expand our everyday offerings, including the roll-out of coolers and freezers in 2014.

• Our Soft Home and Hard Home will address our core customers' cooking and living essentials, such as tabletop, bedding, and bath, as well as their home-related discretionary items, such as small appliances, home fashion, and accents. We believe that our competitive advantage in the Soft Home and Hard Home categories is principally based around value, which is a combination of the pricing and quality of our goods. In these categories, our merchandise mix is comprised of replenishable products as the closeout penetration is lower than Food and Consumables. As we edit to amplify, we will be consistently introducing more fashion based products that our core customer uses to decorate her home, while editing areas that our core customer has communicated are not important to her, such as home maintenance, tools, and paint.

• Our Furniture & Home Décor category's primary focus will be our core customers' home furnishing needs, such as upholstery, mattresses, ready-to-assemble, and case goods, as well as discretionary items, such as décor, frames, and framed art. In Furniture & Home Décor, we believe our competitive advantage is our sourcing relationships and everyday value offerings. The majority of our offerings in these categories are replenishable products 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 for us to work directly with them to create product offerings specifically for our store, which allows for us to provide a high-quality product at a competitive price.

• Our Seasonal and Electronics & Accessories categories will focus around our core customers' discretionary purchases, such as patio furniture and Christmas trim. For the Seasonal and Electronics & Accessories categories, there is not always an abundant supply of closeout inventory. As such, we generally work with vendors to develop product for us based on our merchants' market evaluations. Much of this merchandise is sourced on an import basis, which allows us to maintain our competitive pricing. During 2014, we will reduce our offerings in the Electronic & Accessories category, as we have concluded that we do not have a competitive advantage in pricing on products such as televisions, cameras, GPS devices, or gaming.


Table of Contents

In order to support our realigned merchandise categories, we updated our merchandising management organizational hierarchy by adding general merchandise managers, who report directly to our chief merchandising officer, back to our management team. Their responsibility is to ensure that our merchandise offerings are cohesive across merchandise categories throughout the year and to introduce and implement broader programs associated with merchandise execution. The expected outcome of our new strategies, re-alignment, and enhancement to our merchandising management team is to increase our total company comparable store sales ("comps"). We will focus our performance review of merchandise management on comps by merchandise category, as we believe it is the key metric that will drive long-term company net sales performance. By focusing on growing merchandise categories, which includes managing contraction in certain departments, we believe our merchandise management team can address our customer's changing shopping behaviors and implement more tailored programs within each merchandise category, which will lead to growing our comps by merchandise category in 2014.

Marketing

In the fourth quarter of 2013, we began shifting our marketing efforts to focus on connecting with our core customer in new forms of media that she now uses in her daily life. Historically, our marketing communication efforts have involved a mix of printed ad circulars, television advertising, email advertising, and in-store signage. In the later parts of 2013 with the shift in the management team, we began a more concentrated effort on embracing social media as a method of communicating with our core customer through outlets such as Twitter, Facebook, and YouTube. With the continued proliferation of online and mobile technologies, we need to better compete for our core customer's attention and drive both brand and product awareness on platforms in which our core customer communicates. For example, in early 2014, we introduced a new campaign - "The Thrift is Back" - via social media which promotes our newly formed arrangement with Hostess, where we will effectively be functioning as Hostess's thrift outlet locations. We believe Jennifer responds to our brand-name offerings, therefore we want to ensure our message and promotions are delivered to her in a timely and meaningful way. In 2014, we intend to grow our presence and use of social media to connect with customers as we introduce new programs and campaigns.

Our core customer remains active in electronic communication, and as such, we continue to market to our Buzz Club Rewards members through email campaigns and promotions. In 2013, we restructured our rewards program from a cumulative transaction approach for issuing promotional discounts to a program based on targeted promotions expected to attract members to our stores for new merchandise or promotional events. The goals of the promotions can vary from attempting to tailor the shopping experience based on past purchasing behaviors, to introducing products that a member has previously not purchased from us with the hope of changing their shopping habits. As we continue to learn additional information about our members, we will refine our methodologies for incenting our rewards members.

In 2014, we will continue to communicate our product offerings in order to grow comps through the following traditional approaches to advertise, in addition to social media and our rewards program:

• Printed advertising circulars and promotional pricing to create excitement surrounding the deals that we offer;

• Television commercials broadcast nationwide to promote our brand and, from time to time, promote items or special discounts in our stores; and

• In-store signage initiatives that focus on promoting value.

Shopping Experience

During 2013, we tested a variety of initiatives aimed at improving our core customer's shopping experience with an overall goal of driving increased comps. Specifically, we identified two programs that we will be rolling-out on a broader scale during 2014 to further demonstrate our customer-first mentality.

First, we tested a cooler and freezer program in approximately 100 stores in 2013. The goal of the program was to increase the convenience of the shopping experience for our core customer in our Food category. We determined that our core customer could not complete a portion of the weekly grocery shopping in our stores, as we did not offer refrigerated and frozen food products needed to complete her basket. Our test results were positive; therefore, we will be implementing our cooler and freezer program to approximately 600 additional stores in 2014. Additionally, by introducing coolers and freezers, the Food assortment that we will offer in many of these locations will qualify for certain governmental assistance programs, such as the supplemental nutrition assistance program ("SNAP"), which will provide our customer with another source of funds to spend at our stores. We believe these programs will help drive comps in both our Food and Consumables categories.


Table of Contents

In 2013, we analyzed our customer financing program available in our Furniture & Home Décor category, and concluded that our current offering was not competitive as too few of our customers were qualifying for access. Effectively, we were not providing an adequate financing solution to assist our core customer in completing the larger purchases that the customer may have desired. In response to this conclusion, in the second half of 2013, we tested a new lease-to-purchase solution provided by a third party. To date, our new provider's program has qualified a larger percentage of our core customers for access to financing. In 2014, we will implement an expanded roll-out of the new lease-to-purchase program to approximately 1,300 stores, or more than 85% of our total fleet. We believe the new lease-to-purchase program will increase comps in the Furniture & Home Décor category as our core customer will have a convenient source of financing to either complete or expand her home furnishing purchases.

Real Estate

We have determined our average store size of approximately 22,000 selling square feet is an appropriate size for us to provide our core customers with a positive shopping experience and properly present our restructured merchandise categories. This store size enables us to present a representative assortment of products in the merchandise categories that our core customer finds meaningful; therefore when we relocate or open new stores in the future, we intend to open stores of a similar size. In 2012 and 2013, we performed store remodel programs in approximately 3% of our stores in five geographic markets: Miami, Florida; Tampa, Florida; Modesto, California; San Francisco, California; and in the border region of Tennessee and Virginia. Although we believe the remodeled stores created an improved shopping experience, incremental sales results were inconsistent and did not generate enough evidence to support a broader roll-out this program.

Our focus will be on improving our comps and enhancing our core customer's shopping experience. Currently, we anticipate a slight decrease in our total store count in 2014. As discussed in "Item 2. Properties," of this Form 10-K, we have 285 U.S. store leases which will expire in 2014. During 2014, we anticipate closing approximately 50 of those locations. The majority of these closings will be the result of either relocation to a better location, 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 and the overall company. The balance of the closings will be the result of our choice to relocate the store to an improved location nearby. For our remaining store locations with fiscal 2014 lease expirations, we expect to exercise our renewal option or negotiate more favorable lease renewal terms sufficient enough to allow us to continue operations and achieve an acceptable return on our investment.

Canadian Segment

During 2013, we announced that the Canadian Wind Down would begin in the fourth quarter of 2013 and continue through the first quarter of 2014. During the fourth quarter of 2013, we discontinued receiving merchandise and closed our distribution centers. During the first quarter of 2014 and prior to filing this Form10-K, we closed all of our remaining stores. Additionally, we transferred the majority of our administrative functions from our office in Brantford, Ontario to our office in Columbus, Ohio.

We also intend to close our office in Brantford, Ontario in its entirety during the first quarter of 2014.

Discontinued Operations

During 2013, we completed the wind down of the wholesale business within our U.S. segment. As the operations were ceased in 2013, we reported the results of our wholesale business as discontinued operations and reclassified our prior period results, both consolidated and those of our U.S. segment, to reflect this change from continuing operations to discontinued operations.

We continue to incur an insignificant amount of costs on the 130 stores we closed in 2005 that are classified as discontinued operations. We also report certain activity related to our prior ownership of the KB Toys business in discontinued operations. See note 14 to the accompanying consolidated financial statements for a more detailed discussion of all of our discontinued operations.


Table of Contents

2013 COMPARED TO 2012

U.S. Segment

Net Sales
Net sales by merchandise category (in dollars and as a percentage of total net
sales), net sales change (in dollars and percentage), and comparable store sales
("comp" or "comps") in 2013 compared to 2012 were as follows:

(In thousands)                    2013                    2012                   Change           Comps
Furniture & Home Décor    $ 1,072,410    20.9 %   $ 1,060,993    20.4 %   $  11,417     1.1  %    (0.5 )%
Seasonal                      958,681    18.7         971,003    18.6       (12,322 )  (1.3 )     (2.9 )
Consumables                   918,124    17.9         905,444    17.4        12,680     1.4        1.0
Food                          747,840    14.6         742,267    14.2         5,573     0.8        0.0
Hard Home                     514,232    10.0         543,954    10.4       (29,722 )  (5.5 )     (6.1 )
Electronics & Accessories     486,331     9.5         556,658    10.7       (70,327 ) (12.6 )    (13.1 )
Soft Home                     427,137     8.4         431,999     8.3        (4,862 )  (1.1 )     (2.1 )
 Net sales                $ 5,124,755   100.0 %   $ 5,212,318   100.0 %   $ (87,563 )  (1.7 )%    (2.7 )%

In the fourth quarter of 2013, we realigned select merchandise categories to be consistent with the realignment of our merchandising team and changes to our management reporting. Our U.S. segment now uses the following merchandise categories, which match our internal management and reporting of merchandise net sales: Food, Consumables, Soft Home, Hard Home, Furniture & Home Décor, Seasonal, and Electronics & Accessories. The Food category includes our beverage & grocery, candy & snacks, and specialty foods departments. The Consumables category includes our health and beauty, plastics, paper, chemical, and pet departments. The Soft Home category includes the fashion bedding, utility bedding, bath, window, decorative textile, and flooring departments. The Hard Home category includes our small appliances, table top, food preparation, stationary, greeting card, tools, paint, and home maintenance departments. The Furniture & Home Décor category includes our upholstery, mattress, ready-to-assemble, case goods, home décor, and frames departments. The Seasonal . . .

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