Big Lots, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2005
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 1-8897
BIG LOTS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Ohio
|
|
06-1119097 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
|
|
300 Phillipi Road, P.O. Box 28512, Columbus, Ohio
|
|
|
|
43228-5311 |
(Address of principal executive office)
|
|
|
|
(Zip Code) |
(614) 278-6800
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number
of the registrants common shares, $0.01 par value, outstanding
as of December 2, 2005, was 113,942,005.
BIG LOTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2005
TABLE OF CONTENTS
1
Part I. Financial Information
Item 1. Financial Statements
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
|
|
|
|
|
October 30, 2004 |
|
|
|
|
|
|
October 30, 2004 |
|
|
|
|
|
|
|
(as restated |
|
|
|
|
|
|
(as restated |
|
|
|
October 29, 2005 |
|
|
see Note 2) |
|
|
October 29, 2005 |
|
|
see Note 2) |
|
|
|
|
|
|
Net sales |
|
$ |
1,041,046 |
|
|
$ |
980,027 |
|
|
$ |
3,191,189 |
|
|
$ |
2,994,175 |
|
Cost of sales |
|
|
634,330 |
|
|
|
583,816 |
|
|
|
1,914,058 |
|
|
|
1,771,426 |
|
|
|
|
|
|
Gross profit |
|
|
406,716 |
|
|
|
396,211 |
|
|
|
1,277,131 |
|
|
|
1,222,749 |
|
Selling and administrative expenses |
|
|
410,583 |
|
|
|
396,135 |
|
|
|
1,231,342 |
|
|
|
1,167,089 |
|
Depreciation expense |
|
|
30,806 |
|
|
|
27,101 |
|
|
|
86,270 |
|
|
|
77,347 |
|
|
|
|
|
|
Operating loss |
|
|
(34,673 |
) |
|
|
(27,025 |
) |
|
|
(40,481 |
) |
|
|
(21,687 |
) |
Interest expense |
|
|
2,359 |
|
|
|
13,960 |
|
|
|
4,848 |
|
|
|
23,201 |
|
Interest income |
|
|
|
|
|
|
(2 |
) |
|
|
(31 |
) |
|
|
(495 |
) |
|
|
|
|
|
Loss before income taxes |
|
|
(37,032 |
) |
|
|
(40,983 |
) |
|
|
(45,298 |
) |
|
|
(44,393 |
) |
Income tax benefit |
|
|
(18,244 |
) |
|
|
(15,568 |
) |
|
|
(20,558 |
) |
|
|
(17,598 |
) |
|
|
|
|
|
Loss from continuing operations |
|
|
(18,788 |
) |
|
|
(25,415 |
) |
|
|
(24,740 |
) |
|
|
(26,795 |
) |
Discontinued operations |
|
|
|
|
|
|
(6,648 |
) |
|
|
|
|
|
|
(6,648 |
) |
|
|
|
|
|
Net loss |
|
$ |
(18,788 |
) |
|
$ |
(32,063 |
) |
|
$ |
(24,740 |
) |
|
$ |
(33,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.17 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.23 |
) |
Discontinued operations |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.17 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.23 |
) |
Discontinued operations |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
113,320 |
|
|
|
112,403 |
|
|
|
113,178 |
|
|
|
114,788 |
|
Dilutive effect of share-based awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
113,320 |
|
|
|
112,403 |
|
|
|
113,178 |
|
|
|
114,788 |
|
|
|
|
|
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
2
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
October 29, 2005 |
|
|
January 29, 2005 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,092 |
|
|
$ |
2,521 |
|
Inventories |
|
|
1,089,873 |
|
|
|
895,016 |
|
Deferred income taxes |
|
|
76,773 |
|
|
|
73,845 |
|
Other current assets |
|
|
97,542 |
|
|
|
63,400 |
|
|
Total current assets |
|
|
1,279,280 |
|
|
|
1,034,782 |
|
|
Property and equipment net |
|
|
614,030 |
|
|
|
648,741 |
|
Deferred income taxes |
|
|
28,458 |
|
|
|
12,820 |
|
Other assets |
|
|
29,807 |
|
|
|
37,241 |
|
|
Total assets |
|
$ |
1,951,575 |
|
|
$ |
1,733,584 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
271,577 |
|
|
$ |
149,777 |
|
Accrued liabilities |
|
|
270,218 |
|
|
|
262,736 |
|
|
Total current liabilities |
|
|
541,795 |
|
|
|
412,513 |
|
|
Long-term obligations |
|
|
253,200 |
|
|
|
159,200 |
|
Other liabilities |
|
|
97,079 |
|
|
|
86,381 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
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 and 117,495 shares, respectively;
outstanding 113,570 shares and 112,780 shares, respectively |
|
|
1,175 |
|
|
|
1,175 |
|
Treasury
shares 3,925 shares and 4,715 shares, respectively, at cost |
|
|
(52,989 |
) |
|
|
(64,029 |
) |
Unearned compensation |
|
|
(2,316 |
) |
|
|
(1,814 |
) |
Additional paid-in capital |
|
|
471,003 |
|
|
|
472,790 |
|
Retained earnings |
|
|
642,628 |
|
|
|
667,368 |
|
|
Total shareholders equity |
|
|
1,059,501 |
|
|
|
1,075,490 |
|
|
Total liabilities and shareholders equity |
|
$ |
1,951,575 |
|
|
$ |
1,733,584 |
|
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
3
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders Equity (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
Common |
|
|
Treasury |
|
|
Unearned |
|
|
Paid-In |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Compensation |
|
|
Capital |
|
|
Earnings |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2004 |
|
|
116,594 |
|
|
$ |
1,169 |
|
|
|
333 |
|
|
$ |
(2,735 |
) |
|
$ |
|
|
|
$ |
466,740 |
|
|
$ |
643,605 |
|
|
$ |
1,108,779 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,443 |
) |
|
|
(33,443 |
) |
Exercise of stock options
and related tax effects |
|
|
252 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,518 |
|
|
|
|
|
|
|
2,521 |
|
Employee benefits paid
with common shares |
|
|
316 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,764 |
|
|
|
|
|
|
|
4,767 |
|
Treasury shares used for
deferred compensation
plan |
|
|
67 |
|
|
|
|
|
|
|
(67 |
) |
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301 |
|
Purchase of common shares |
|
|
(5,427 |
) |
|
|
|
|
|
|
5,427 |
|
|
|
(75,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,000 |
) |
Treasury share issuances
for stock options |
|
|
378 |
|
|
|
|
|
|
|
(378 |
) |
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 30,
2004 (as restated see
Note 2) |
|
|
112,180 |
|
|
|
1,175 |
|
|
|
5,315 |
|
|
|
(72,168 |
) |
|
|
|
|
|
|
474,022 |
|
|
|
610,162 |
|
|
|
1,013,191 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,206 |
|
|
|
57,206 |
|
Exercise of stock options
and related tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(721 |
) |
|
|
|
|
|
|
(721 |
) |
Treasury shares used for
deferred compensation
plan |
|
|
7 |
|
|
|
|
|
|
|
(7 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
Treasury share issuances
for stock options |
|
|
421 |
|
|
|
|
|
|
|
(421 |
) |
|
|
5,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,847 |
|
Treasury share issuances
for restricted shares |
|
|
172 |
|
|
|
|
|
|
|
(172 |
) |
|
|
2,377 |
|
|
|
(1,866 |
) |
|
|
(511 |
) |
|
|
|
|
|
|
|
|
Earned compensation on
restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 29, 2005 |
|
|
112,780 |
|
|
|
1,175 |
|
|
|
4,715 |
|
|
|
(64,029 |
) |
|
|
(1,814 |
) |
|
|
472,790 |
|
|
|
667,368 |
|
|
|
1,075,490 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,740 |
) |
|
|
(24,740 |
) |
Employee benefits paid
with treasury shares |
|
|
447 |
|
|
|
|
|
|
|
(447 |
) |
|
|
6,213 |
|
|
|
|
|
|
|
(1,041 |
) |
|
|
|
|
|
|
5,172 |
|
Treasury shares used for
deferred compensation
plan |
|
|
3 |
|
|
|
|
|
|
|
(3 |
) |
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127 |
|
Treasury share issuances
for stock options
and related tax effects |
|
|
250 |
|
|
|
|
|
|
|
(250 |
) |
|
|
3,456 |
|
|
|
|
|
|
|
(519 |
) |
|
|
|
|
|
|
2,937 |
|
Treasury share issuances
for restricted shares |
|
|
100 |
|
|
|
|
|
|
|
(100 |
) |
|
|
1,382 |
|
|
|
(1,125 |
) |
|
|
(257 |
) |
|
|
|
|
|
|
|
|
Treasury shares forfeited
from restricted shares |
|
|
(10 |
) |
|
|
|
|
|
|
10 |
|
|
|
(138 |
) |
|
|
108 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
Earned compensation on
restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 29, 2005 |
|
|
113,570 |
|
|
$ |
1,175 |
|
|
|
3,925 |
|
|
$ |
(52,989 |
) |
|
$ |
(2,316 |
) |
|
$ |
471,003 |
|
|
$ |
642,628 |
|
|
$ |
1,059,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
4
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
|
|
|
|
|
October 30, |
|
|
|
|
|
|
|
2004 (as |
|
|
|
|
|
|
|
restated see |
|
|
|
October 29, 2005 |
|
|
Note 2) |
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(24,740 |
) |
|
$ |
(33,443 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
6,648 |
|
Depreciation and amortization expense |
|
|
80,362 |
|
|
|
76,490 |
|
Deferred income taxes |
|
|
(18,566 |
) |
|
|
(9,165 |
) |
Partial charge-off of KB Note |
|
|
6,389 |
|
|
|
|
|
(Gain) loss on sale of assets |
|
|
(554 |
) |
|
|
1,602 |
|
Employee benefits paid with company shares |
|
|
5,172 |
|
|
|
4,767 |
|
Non-cash share-based compensation expense |
|
|
515 |
|
|
|
|
|
Other |
|
|
251 |
|
|
|
301 |
|
Change in assets and liabilities |
|
|
(75,494 |
) |
|
|
(200,571 |
) |
|
Net cash used in operating activities |
|
|
(26,665 |
) |
|
|
(153,371 |
) |
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(58,429 |
) |
|
|
(108,085 |
) |
Purchase of short-term investments |
|
|
|
|
|
|
(115,125 |
) |
Redemption of short-term investments |
|
|
|
|
|
|
122,625 |
|
Cash proceeds from sale of assets |
|
|
1,274 |
|
|
|
132 |
|
Other |
|
|
(49 |
) |
|
|
(187 |
) |
|
Net cash used in investing activities |
|
|
(57,204 |
) |
|
|
(100,640 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term obligations |
|
|
1,967,700 |
|
|
|
893,900 |
|
Payments for long-term obligations |
|
|
(1,873,700 |
) |
|
|
(726,800 |
) |
Payments for treasury shares acquired |
|
|
|
|
|
|
(75,000 |
) |
Proceeds from the exercise of stock options |
|
|
2,814 |
|
|
|
7,787 |
|
Deferred bank fees |
|
|
(374 |
) |
|
|
(1,249 |
) |
|
Net cash provided by financing activities |
|
|
96,440 |
|
|
|
98,638 |
|
|
Increase (decrease) in cash and cash equivalents |
|
|
12,571 |
|
|
|
(155,373 |
) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
2,521 |
|
|
|
174,003 |
|
|
End of period |
|
$ |
15,092 |
|
|
$ |
18,630 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
3,997 |
|
|
$ |
24,786 |
|
Cash paid for income taxes (excluding refunds) |
|
$ |
22,251 |
|
|
$ |
23,224 |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
5
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
All references herein to the Company are to Big Lots, Inc. and its subsidiaries. The Company is
the nations largest broadline closeout retailer. At October 29, 2005, the Company operated a total
of 1,550 stores in 47 states with 1,511 stores under the name Big Lots® and 39 stores
under the name Big Lots Furniture®. The Companys Web site is located at
www.biglots.com. Wholesale operations are conducted through Big Lots Wholesale, Consolidated
International, Wisconsin Toy, and with online sales at www.biglotswholesale.com. The contents of
the Companys Web sites are not part of this report.
Fiscal Year
The Company follows the concept of a 52-53 week fiscal year, which ends on the Saturday nearest to
January 31. Fiscal year 2005 is comprised of 52 weeks and ends on January 28, 2006. Fiscal year
2004 was comprised of 52 weeks and ended on January 29, 2005.
Segment Reporting
The Company manages its business based on one segment, broadline closeout retailing. At October 29,
2005 and October 30, 2004, all of the Companys operations were located within the United States of
America. The following net sales data is presented in accordance with the Financial Accounting
Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
|
$ |
334,782 |
|
|
$ |
312,927 |
|
|
$ |
963,699 |
|
|
$ |
946,984 |
|
Home |
|
|
349,723 |
|
|
|
306,478 |
|
|
|
1,001,303 |
|
|
|
884,218 |
|
Seasonal and toys |
|
|
127,686 |
|
|
|
138,333 |
|
|
|
512,559 |
|
|
|
502,055 |
|
Other |
|
|
228,855 |
|
|
|
222,289 |
|
|
|
713,628 |
|
|
|
660,918 |
|
|
Net sales |
|
$ |
1,041,046 |
|
|
$ |
980,027 |
|
|
$ |
3,191,189 |
|
|
$ |
2,994,175 |
|
|
The Home category includes furniture, domestics, and home décor departments. The Other
category primarily includes electronics, small appliances, home maintenance, and tools. The Company
internally evaluates and externally communicates overall sales and merchandise performance based on
these key merchandising categories and believes that these categories facilitate analysis of the
Companys results.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) for interim financial
information. The Condensed Consolidated Balance Sheet at October 29, 2005, the Condensed
Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 29, 2005
and October 30, 2004, as restated (see Note 2), and the Condensed Consolidated Statements of
Shareholders Equity and of Cash Flows for the thirty-nine weeks ended October 29, 2005 and October
30, 2004, as restated (see Note 2), have been prepared by the Company without audit. In the opinion
of management, all normal recurring adjustments necessary to present fairly the financial
condition, results of operations, and cash flows for all periods presented have been made. The
Condensed Consolidated Financial Statements include all the accounts of the Company. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been omitted or condensed. The Company believes the disclosures herein are adequate to make
the information presented not misleading. It is recommended that these Condensed Consolidated
Financial Statements be read in conjunction with the audited Consolidated Financial Statements and
6
related Notes included in the Companys Annual Report on Form 10-K for the fiscal year ended
January 29, 2005, filed April 18, 2005 with the SEC. Interim results are not necessarily indicative
of results for a full year.
The Companys discontinued operations relate to the disposition of the KB Toys business (see Note
3).
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of
significant contingent assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting periods. Actual results could materially
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments which are unrestricted as to
withdrawal or use and which have an original maturity of three months or less. Cash equivalents are
stated at cost, which approximates market value.
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. Under the average cost retail inventory method, inventory is
segregated into departments of merchandise having similar characteristics at its current retail
selling value. Inventory retail selling values are converted to a cost basis by applying specific
average cost factors for each merchandise department. Cost factors represent the average
cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal
year purchase activity. The average cost retail inventory method requires management to make
judgments and contains estimates, such as the amount and timing of markdowns to clear unproductive
or slow-moving inventory, which may impact the ending inventory valuation and gross profit. These
assumptions are based on historical experience and current information.
Permanent markdowns are recorded as a gross profit reduction in the period of managements decision
to initiate price reductions with the intent not to return the price to regular retail. Promotional
markdowns are recorded as a gross profit reduction in the period the merchandise is sold. Factors
considered in the determination of markdowns include current and anticipated demand, customer
preferences, age of the merchandise, and seasonal trends.
Shrinkage is recorded as a reduction to inventories and gross profit and is estimated 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 the Companys actual experience and the Companys
most recent physical inventory results. While it is not possible to quantify the impact from each
cause of shrinkage, the Company has loss prevention programs and policies that it believes minimize
shrinkage.
Due to the nature of the Companys purchasing practices for closeout and deeply discounted
merchandise, vendors and merchandise suppliers generally do not offer the Company incentives such
as slotting fees, cooperative advertising allowances, buy down agreements, or other forms of
rebates that could materially reduce its cost of sales.
Intangible Assets
Trademarks, service marks, and other intangible assets with finite lives are stated at cost and are
amortized on a straight-line basis over a period of fifteen years. Where there is an indication of
impairment, the Company evaluates the fair value and future benefits of the related intangible
asset and the anticipated undiscounted future net cash flows from the related intangible asset are
calculated and compared to the carrying value. The Companys assumptions related to estimates of
future cash flows are based on historical results of cash flows adjusted for management projections
for future periods. The net book value of the Companys intangible assets was $0.8 million at both
October 29, 2005 and January 29, 2005. The related accumulated amortization was $0.1 million at
both October 29, 2005 and January 29, 2005.
Property and Equipment Net
Property and equipment are stated at cost. Depreciation and amortization expense are recorded using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful life or the lease
term.
7
The estimated useful lives by major asset category are as follows:
|
|
|
Land improvements
|
|
15 years |
Buildings and leasehold improvements
|
|
5 40 years |
Fixtures and equipment
|
|
5 15 years |
Transportation equipment
|
|
3 20 years |
There was no capitalized interest for the thirteen and thirty-nine weeks ended October 29,
2005. Capitalized interest was $0.3 million and $0.6 million for the thirteen and thirty-nine weeks ended
October 30, 2004, respectively.
Impairment
The Company has long-lived assets that consist primarily of property and equipment. The Company
estimates useful lives on buildings and equipment using assumptions based on historical data and
industry trends. Impairment is recorded if the carrying value of the long-lived asset exceeds its
anticipated undiscounted future net cash flows. The Companys assumptions related to estimates of
future cash flows are based on historical results of cash flows adjusted for management projections
for future periods. The Company estimates the fair value of its long-lived assets using readily
available market information for similar assets.
Computer Software Costs
The Company capitalizes certain computer software costs, included in fixtures and equipment, after
the application development stage has been established. Capitalized computer software costs are
depreciated using the straight-line method over five years. The net book value of computer software
costs was $13.7 million and $14.2 million at October 29, 2005 and January 29, 2005, respectively.
Share-Based Compensation
The Company measures compensation cost for stock options issued to employees and directors using
the intrinsic value-based method of accounting in accordance with Accounting Principles Board
(APB) Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees. The Company has
adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
and, as permitted by these standards, continues to apply the recognition and measurement principles
of APB No. 25 to its stock options and other share-based employee compensation awards.
The following table presents the effect on net loss and earnings per share if the fair value-based
method had been applied to all outstanding and unvested awards in each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
|
|
|
|
(In thousands, except per share
amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(18,788 |
) |
|
$ |
(32,063 |
) |
|
$ |
(24,740 |
) |
|
$ |
(33,443 |
) |
Total share-based employee
compensation
expense determined
under fair value method
for all awards, net of
related tax effect |
|
|
(923 |
) |
|
|
159 |
|
|
|
(2,802 |
) |
|
|
(2,500 |
) |
|
|
|
|
|
Pro forma net loss |
|
$ |
(19,711 |
) |
|
$ |
(31,904 |
) |
|
$ |
(27,542 |
) |
|
$ |
(35,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.17 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.29 |
) |
Pro forma |
|
$ |
(0.17 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.17 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.29 |
) |
Pro forma |
|
$ |
(0.17 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
8
The Company used a binomial model to determine the fair value of all stock options granted on
or after February 1, 2004. The fair value of stock options granted prior to February 1, 2004 was
determined using the Black-Scholes model. The Company believes that the binomial model considers
characteristics of fair value option pricing that are not available under the Black-Scholes model
and, therefore, the binomial model provides a more accurate estimate of fair value. Similar to the
Black-Scholes model, the binomial model takes into account variables such as volatility, dividend
yield rate, and risk-free interest rate. In addition, the binomial model considers the contractual
term of the option, the probability that the option will be exercised prior to the end of its
contractual life, and the probability of termination or retirement of the option holder in
computing the value of the option. The assumptions used in the option pricing model for each of the
respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
|
|
|
|
Weighted-average fair value of
options granted |
|
$ |
4.77 |
|
|
$ |
4.42 |
|
|
$ |
4.73 |
|
|
$ |
5.49 |
|
Risk-free interest rate |
|
|
4.3 |
% |
|
|
3.5 |
% |
|
|
3.9 |
% |
|
|
3.1 |
% |
Expected life (years) |
|
|
5.0 |
|
|
|
5.4 |
|
|
|
5.4 |
|
|
|
5.2 |
|
Expected volatility |
|
|
43.4 |
% |
|
|
38.1 |
% |
|
|
42.4 |
% |
|
|
39.1 |
% |
Expected annual forfeiture rate |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
Income Taxes
The Company has generated deferred tax assets and liabilities due to temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company assesses the adequacy and need for a valuation allowance
for deferred tax assets. The Company also considers SFAS No. 109
tax planning strategies in
determining the amount of valuation allowance required. The Company has established a valuation
allowance to reduce its deferred tax assets to the balance that is more likely than not to be
realized.
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), changes in
the expected outcome or settlement of an income tax contingency, changes in the deferred tax
valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in
tax laws or rates.
The Companys income tax accounts reflect estimates of the outcome or settlement of various
asserted and unasserted income tax contingencies including tax audits and administrative appeals.
At any point in time, several tax years may be in various stages of audit or appeal or could be
subject to audit by various taxing jurisdictions. This requires a periodic identification and
evaluation of significant doubtful or controversial issues. The results of the audits, appeals, and
expiration of the statute of limitations are reflected in the income tax accounts accordingly.
Pension Liabilities
Pension and other retirement benefits, including all relevant assumptions required by GAAP, are
evaluated each year. Outside actuaries are used to provide assistance in calculating the future
obligations for pension and other retirement benefits. Since there are many assumptions used to
estimate the Companys obligations for retirement benefits, differences between actual future
events and prior estimates and assumptions could result in adjustments to pension expenses and
obligations. Certain actuarial assumptions, such as the discount rate and expected long-term rate
of return, have a significant effect on the amounts reported for net periodic pension cost and the
related benefit obligations. The Company reviews external data and historical trends to help
determine the discount rate and expected long-term rate of return. The Companys objective in
selecting a discount rate is to identify the best estimate of the rate at which the benefit
obligations would be settled on the measurement date. In making this estimate, the Company reviews
rates of return on high-quality, fixed-income investments currently available and expected to be
available during the period to maturity of the benefits. This process includes a review of the
bonds available on the measurement date with a quality rating of at least Aa. To develop the
expected long-term rate of return on assets, the Company considers the historical returns and the
future expectations for returns for each asset class, as well as the current or anticipated future
allocation of the pension portfolio.
The following table represents components of net periodic pension cost:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost benefits earned in
the period |
|
$ |
828 |
|
|
$ |
873 |
|
|
$ |
2,483 |
|
|
$ |
2,620 |
|
Interest cost on projected benefit
obligation |
|
|
787 |
|
|
|
818 |
|
|
|
2,362 |
|
|
|
2,455 |
|
Expected investment return on plan
assets |
|
|
(1,067 |
) |
|
|
(855 |
) |
|
|
(3,201 |
) |
|
|
(2,564 |
) |
Amortization of actuarial loss |
|
|
331 |
|
|
|
378 |
|
|
|
994 |
|
|
|
1,131 |
|
Amortization of prior service cost |
|
|
33 |
|
|
|
34 |
|
|
|
101 |
|
|
|
101 |
|
Amortization of transition obligation |
|
|
3 |
|
|
|
3 |
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
915 |
|
|
$ |
1,251 |
|
|
$ |
2,749 |
|
|
$ |
3,753 |
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic pension cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
October 29, 2005 |
|
|
October 30, 2004 |
|
|
|
|
|
|
Discount rate |
|
|
5.7 |
% |
|
|
6.1 |
% |
|
|
5.7 |
% |
|
|
6.1 |
% |
Rate of increase in compensation
levels |
|
|
4.0 |
% |
|
|
4.6 |
% |
|
|
4.0 |
% |
|
|
4.6 |
% |
Expected long-term rate of return |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
8.5 |
% |
Measurement date for plan assets
and benefit obligations |
|
|
12/31/04 |
|
|
|
12/31/03 |
|
|
|
12/31/04 |
|
|
|
12/31/03 |
|
|
|
|
|
|
The Companys funding policy is to make annual contributions based on advice from its
actuaries and evaluation of its cash position, but not less than the minimum required by applicable
regulations. The Company expects no required contributions in fiscal year 2005. Discretionary
contributions could be made upon further analysis of the Big Lots Defined Benefit Pension Plan
during fiscal year 2005. No contributions were made during the thirteen and thirty-nine weeks ended
October 29, 2005 and October 30, 2004.
Insurance Reserves
The Company is self-insured for certain losses relating to property, general liability, workers
compensation, and employee medical and dental benefit claims, and the Company has purchased
stop-loss coverage to limit significant exposure in these areas. Accrued insurance liabilities are
based on claims filed and estimates of claims incurred but not reported. Such amounts are
determined by applying actuarially-based calculations taking into account known trends and
projections of future results. Actual claims experience can impact these calculations and, to the
extent that subsequent claim costs vary from estimates, future earnings could be impacted and the
impact could be material.
Fair Value of Financial Instruments
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses
approximates fair value because of the relative short maturity of these items. The fair value of
the long-term obligations was estimated based on the current rates offered to the Company for
obligations of the same remaining maturities. The carrying value of the Companys long-term
obligations at October 29, 2005 and January 29, 2005 approximates fair value since the interest
rates are variable and approximate current market rates.
Commitments and Contingencies
In the ordinary course of its business, the Company is or may be subject to various legal actions
and claims. In connection with such actions and claims, the Company must make estimates of
potential legal obligations and liabilities, which require the use of managements judgment on the
outcome of various issues. Management may also use outside legal counsel to assist in the
estimating process; however, the ultimate outcome of various legal issues could be materially
different from managements estimates and adjustments to income could be required. The assumptions
used by management are based on the requirements of SFAS No. 5, Accounting for Contingencies. The
Company will, if material, record a liability when it has determined that the occurrence of a loss
contingency is probable and the loss can be reasonably estimated, and it will disclose the related
facts in
10
the notes to its financial statements. If the Company determines that the occurrence of a loss
contingency is reasonably possible or that it is probable but the loss cannot be reasonably
estimated, the Company will, if material, disclose the nature of the loss contingency and the
estimated range of possible loss or include a statement that no estimate of loss can be made. The
Company makes these determinations in consultation with its attorneys.
Revenue
Recognition
The Company recognizes retail sales in its stores at the time the customer takes possession of
merchandise. All sales are net of discounts and returns and exclude sales tax. The reserve for
retail merchandise returns is based on the Companys prior experience.
Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase
order. Wholesale sales are predominantly recognized under freight on board (FOB) origin where
title and risk of loss pass to the buyer when the merchandise leaves the Companys distribution
facility. However, when the shipping terms are FOB destination, recognition of sales revenue is
delayed until completion of delivery to the designated location.
The Company recognizes gift card sales revenue at the time of redemption. The liability for the
gift cards is established for the cash value at the time of purchase. The liability for outstanding
gift cards is recorded in accrued liabilities.
The Company offers price hold contracts on selected furniture merchandise. Revenue for price hold
contracts is recognized when the customer makes the final payment and takes possession of the
merchandise. Cash paid by the customers is recorded in accrued liabilities. In the event that a
sale is not consummated, liquidated damages are recorded as the lesser of: a) $25; b) 10% of the
merchandise purchase price (exclusive of sales tax); or c) the amounts deposited by the customer.
Cost of
Sales
Cost of sales includes the cost of merchandise (including related inbound freight to the Companys
distribution centers, duties, and commissions), markdowns, and inventory shrinkage, net of cash
discounts and rebates. The Company classifies outbound distribution and transportation costs as
selling and administrative expenses. Due to this classification, the Companys gross profit rates
may not be comparable to those of other retailers that include outbound distribution and
transportation costs in cost of sales.
Selling
and Administrative Expenses
The Company includes store expenses (such as payroll and occupancy costs), outbound distribution
and transportation costs to the Companys stores, advertising, purchasing, insurance, and overhead
costs in selling and administrative expenses. Selling and administrative expense rates may not be
comparable to those of other retailers that include outbound distribution and transportation costs
in cost of sales. Outbound distribution and transportation costs were $57.6 million and $56.1
million for the thirteen weeks ended October 29, 2005 and October 30, 2004, respectively, and
$174.5 million and $169.9 million for the thirty-nine weeks ended October 29, 2005 and October 30,
2004, respectively.
Rent
Expense
Rent expense is recognized over the term of the lease. The Company recognizes minimum rent starting
when possession of the property is taken from the landlord, which normally includes a construction
period prior to store opening. When a lease contains a predetermined fixed escalation of the
minimum rent, the Company recognizes the related rent expense on a straight-line basis and records
the difference between the recognized rental expense and the amounts payable under the lease as
deferred incentive rent. The Company also receives tenant allowances, which are recorded in
deferred incentive rent and are amortized as a reduction to rent expense over the term of the
lease. Deferred incentive rent is reflected in other liabilities.
Certain leases provide for contingent rents that are not measurable at inception. These contingent
rents are primarily based on a percentage of sales that are in excess of a predetermined level.
These amounts are excluded from minimum rent and are 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 are expensed as incurred and consist primarily of print and television
advertisements. Advertising expenditures were $24.0 million and $25.3 million for the thirteen
weeks ended October 29, 2005 and October 30, 2004,
11
respectively, and $71.0 million and $70.7
million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively.
Earnings
per Share
Basic earnings per share is calculated using the weighted-average number of shares outstanding
during the period. Diluted earnings per share includes the additional dilutive effect of stock
options and unvested restricted stock, calculated using the treasury stock method.
There are 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 which were excluded from the computation of earnings per share for any period presented
herein. Diluted shares outstanding are equal to basic shares outstanding for the thirteen and
thirty-nine weeks ended October 29, 2005 and October 30, 2004, as the Company incurred a loss, and
to include the effect of stock options and unvested restricted stock would be anti-dilutive. As a
result, an aggregate of 106,173 and 233,569 common shares subject to unexercised stock options were
not included in the computation of diluted earnings per share for the thirteen weeks ended October
29, 2005 and October 30, 2004, respectively. Common shares subject to unexercised stock options
not included in the computation of diluted earnings per share for the thirty-nine weeks ended
October 29, 2005 and October 30, 2004, were 157,267 and 667,585, respectively. In addition, 47,494
and 34,087 unvested restricted shares were not included in diluted earnings per share for the
thirteen and thirty-nine weeks ended October 29, 2005, respectively.
For the thirteen weeks ended October 29, 2005 and October 30, 2004, stock options outstanding with
an exercise price greater than the weighted-average market price, excluded from the computation of
diluted earnings per share due to their anti-dilutive effect, were 7.4 million and 5.8 million,
respectively. For the thirty-nine weeks ended October 29, 2005 and October 30, 2004, stock options
outstanding with an exercise price greater than the weighted-average market price, excluded from
the computation of diluted earnings per share due to their anti-dilutive effect, were 6.2 million
and 4.7 million, respectively.
Store
Pre-opening Costs
Pre-opening costs related to new store openings and the construction periods are expensed as
incurred.
Discontinued
Operations
The reserve for discontinued operations, which is included in accrued liabilities in the Condensed
Consolidated Balance Sheets, includes managements estimate of the Companys potential liability
under its lease and mortgage obligations which have been rejected by
KB (as defined in Note 3) as part of its bankruptcy
proceeding. For a discussion of the discontinued operations, see Note 3.
12
Recent
Accounting Pronouncements
In December, 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires an entity
to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award using an option-pricing model. The cost of the
awards, including the related tax effects, will be recognized in the Consolidated Statement of
Operations. This statement eliminates the alternative to use the intrinsic value method for
valuing share-based compensation, which typically resulted in recognition of no compensation cost.
The statement was to become effective for interim or annual periods beginning after June 15, 2005,
with early adoption encouraged. On April 15, 2005, the SEC issued Release No. 33-8568, which
amended the date for compliance with SFAS No. 123(R), to the first interim or annual period of the
first fiscal year beginning after June 15, 2005, with early adoption permitted. On November 21,
2005, the Company announced that the Nominating and Compensation Committee (Committee) of the
Companys Board of Directors, after discussion with the Board of
Directors, approved accelerating the vesting of stock options
representing approximately 3.8 million of the Companys
shares awarded on or
before February 21, 2005. The decision to accelerate vesting of stock options was made primarily
to reduce non-cash compensation expense that would have been recorded in future periods following
the adoption of SFAS No. 123(R) in the first quarter of fiscal year 2006. This action is expected
to enable the Company to eliminate approximately $11.7 million (before tax) of expense over the
five year period during which the stock options would have vested, subject to determination of the
exact number of stock options being accelerated and the impact of additional adjustments related to
cancellation of certain stock options. The Company also believes this action will have a positive
effect on associate morale and retention. Additionally, the Committee imposed a holding period
that requires all directors, executive vice presidents, and senior
vice presidents (including the Companys named executive
officers other than Messrs. Fishman and Potter, whose stock options
were not accelerated) to refrain from selling net shares acquired upon any exercise of
these accelerated options, until the date on which the exercise would have been permitted under the
options original vesting terms or, if earlier, the executive officers death, disability or
termination of employment.
NOTE 2 RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
In light of views expressed by the Office of the Chief Accountant of the SEC on February 7, 2005,
the Company reviewed its accounting practices for operating leases during the fourth quarter of
fiscal year 2004 and restated its financial statements for fiscal years 2000, 2001, 2002, 2003 and
the first three quarters of fiscal year 2004 in the Companys Annual Report on Form 10-K for the
fiscal year ended January 29, 2005.
Under the requirements of the FASB Technical Bulletin 85-3, Accounting for Operating Leases with
Scheduled Rent Increases, rent expense should be amortized on a straight-line basis over the term
of the lease. Historically, the Company had determined that the term of the lease began on the
earlier of the commencement date of the lease or the store opening date, rather than at the time
the Company took physical possession of the property to start construction of leasehold
improvements. This had the effect of excluding the construction period of the stores from the
straight-line rent calculation. The Company corrected its accounting policy to begin the lease term
at the possession date. The Company restated its previously reported financial statements to
correct its accounting to include construction periods in store operating leases.
In addition, under FASB Technical Bulletin 88-1, Issues Relating to Accounting for Leases, lease
incentives such as tenant allowances received from the landlord to cover construction costs
incurred by the Company should be reflected as a deferred liability, amortized over the term of the
lease and reflected as a reduction to rent expense. Historically, the Company had classified tenant
allowances as a reduction to property and equipment instead of as a deferred lease credit on the
Consolidated Balance Sheets. As a result, the Company also amortized the deferred lease credit over
the asset life instead of over the lease term, reflected the amortization as a reduction to
depreciation expense instead of as a reduction to rent expense, and reflected tenant allowances as
a reduction of capital expenditures within investing activities instead of a change in operating
activities in the Consolidated Statements of Cash Flows. The Company reassessed this accounting
policy and corrected its accounting policy to treat lease incentives received as a deferred
liability amortized over the lease term. The Company also restated the previously reported
financial statements to properly account for tenant allowances.
Subsequent to the issuance of the Companys fiscal 2003 financial statements, the Companys
management determined that investments in certain mutual funds and company stock associated with a
non-qualified deferred compensation plan were incorrectly presented as cash instead of non-current
assets and treasury stock on the Consolidated Balance Sheet. Furthermore, the corresponding
deferred compensation liability was incorrectly presented as a current liability instead of a
non-current liability and the acquisition of treasury stock was incorrectly presented as a
component of operating activity instead of as a component of financing activity in the Consolidated
Statements of Cash Flows.
13
The Company evaluated the materiality of these corrections on its financial statements and
concluded that the incremental impact of these corrections was not material to any quarterly or
annual period; however, the cumulative effect of these corrections was material to the fourth
quarter of fiscal year 2004. As a result, the Company recorded the cumulative effect as of fiscal
year 2000, and restated the Consolidated Balance Sheet at January 31, 2004, and the Consolidated
Statements of Operations, Shareholders Equity and Cash Flows for the years ended January 31, 2004
and February 1, 2003 in the Companys Annual Report on Form 10-K for the period ended January 29,
2005. Additionally, the Company restated the quarterly financial information for fiscal year 2003,
and the first three quarters of fiscal year 2004 in the Companys Annual Report on Form 10-K for
the period ended January 29, 2005.
The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the restatement, and the financial statements and related financial information
contained in such reports should no longer be relied upon. Throughout this Quarterly Report on
Form 10-Q, all referenced amounts for prior periods and prior period comparisons reflect the
balances and amounts on a restated basis.
The cumulative effect of these accounting corrections reduced shareholders equity by $7.3 million
at the beginning of fiscal year 2004. The restatement principally resulted in an increase to the
net loss of $0.6 million and $1.4 million for the thirteen and thirty-nine weeks ended October 30,
2004, respectively. Additionally, the restatement resulted in a decrease in cash flows used in
operating activities of $10.6 million and an increase in cash flows used in investing activities of
$3.2 million for the thirty-nine weeks ended October 30, 2004.
Investments in auction rate preferred securities and municipal auction rate securities
(collectively, auction rate securities) were reclassified from cash and cash equivalents to
short-term investments. The Company has made corresponding adjustments to its Condensed
Consolidated Statement of Cash Flows for the thirty-nine week period ended October 30, 2004 to
reflect the purchases and redemptions of auction rate securities as investing activities rather
than as a component of cash and cash equivalents. This reclassification was made because the
auction rate securities had stated maturities beyond three months. The auction rate securities
reclassification resulted in an increase in purchases and redemptions of short-term investments of
$115.1 million and $122.6 million, respectively, resulting in a net decrease in cash used in
investing activities of $7.5 million in the Condensed Consolidated Statement of Cash Flows for the
thirty-nine week period ended October 30, 2004. The reclassifications had no impact on the
Companys results of operations or financial condition.
14
The following tables summarize the effect of the restatement adjustments and reclassifications in
the Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended October 30, 2004 |
|
|
Thirty-Nine Weeks Ended October 30, 2004 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
|
Reported |
|
|
Adjustments |
|
|
As Restated |
|
(In thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
$ |
396,815 |
|
|
$ |
(680 |
) |
|
$ |
396,135 |
|
|
$ |
1,169,501 |
|
|
$ |
(2,412 |
) |
|
$ |
1,167,089 |
|
Depreciation expense |
|
|
25,434 |
|
|
|
1,667 |
|
|
|
27,101 |
|
|
|
72,609 |
|
|
|
4,738 |
|
|
|
77,347 |
|
Operating (loss) profit |
|
|
(26,038 |
) |
|
|
(987 |
) |
|
|
(27,025 |
) |
|
|
(19,361 |
) |
|
|
(2,326 |
) |
|
|
(21,687 |
) |
Loss from continuing operations
before income taxes |
|
|
(39,996 |
) |
|
|
(987 |
) |
|
|
(40,983 |
) |
|
|
(42,067 |
) |
|
|
(2,326 |
) |
|
|
(44,393 |
) |
Income tax benefit |
|
|
(15,184 |
) |
|
|
(384 |
) |
|
|
(15,568 |
) |
|
|
(16,674 |
) |
|
|
(924 |
) |
|
|
(17,598 |
) |
Net Loss |
|
$ |
(31,460 |
) |
|
$ |
(603 |
) |
|
$ |
(32,063 |
) |
|
$ |
(32,041 |
) |
|
$ |
(1,402 |
) |
|
$ |
(33,443 |
) |
Loss per common share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
(0.22 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.23 |
) |
Discontinued Operations |
|
|
(0.06 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
(0.06 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.28 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.29 |
) |
Loss per common share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
(0.22 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.23 |
) |
Discontinued Operations |
|
|
(0.06 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
(0.06 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.28 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended October 30, 2004 |
|
|
As Previously |
|
|
|
|
|
|
|
|
|
As Reclassified |
|
|
Reported |
|
Reclassifications |
|
Adjustments |
|
and Restated |
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(163,987 |
) |
|
$ |
|
|
|
$ |
10,616 |
|
|
$ |
(153,371 |
) |
Net cash used in investing activities |
|
|
(97,415 |
) |
|
|
7,500 |
|
|
|
(10,725 |
) |
|
|
(100,640 |
) |
Net cash provided by financing activities |
|
|
98,638 |
|
|
|
|
|
|
|
|
|
|
|
98,638 |
|
|
Decrease in cash and cash equivalents |
|
|
(162,764 |
) |
|
|
7,500 |
|
|
|
(109 |
) |
|
|
(155,373 |
) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
191,228 |
|
|
|
(7,500 |
) |
|
|
(9,725 |
) |
|
|
174,003 |
|
|
End of period |
|
$ |
28,464 |
|
|
$ |
|
|
|
$ |
(9,834 |
) |
|
$ |
18,630 |
|
|
NOTE 3 KB TOYS MATTERS
In December 2000, the Company sold the KB Toys business to KB Acquisition Corporation. On January
14, 2004, KB Acquisition Corporation and certain affiliated entities (collectively, KB) filed for
bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code. KB acquired the
KB Toys business from the Company pursuant to a Stock Purchase Agreement dated as of December 7,
2000 (the KB Stock Purchase Agreement).
The Company continues to analyze the effect of KBs bankruptcy on the various continuing rights and
obligations of the parties to the KB Stock Purchase Agreement, including: a) a note issued from
Havens Corners Corporation (HCC), a subsidiary of KB
15
Acquisition Corporation and a party to the bankruptcy proceedings, to the Company, and an
accompanying warrant to acquire common stock of KB Holdings, Inc. (KB Holdings); b) the status of
KBs indemnification obligations to the Company with respect to guarantees of KB store leases by
the Company and guarantees (relating to lease and mortgage obligations) for which the Company has
indemnification obligations arising out of its 1996 acquisition of the KB Toys business from
Melville Corporation (now known as CVS New York, Inc., and together with its subsidiaries CVS);
and c) the status of the Companys and KBs other indemnification obligations to each other with
respect to general liability claims, representations and warranties, litigation, taxes, and other
payment obligations pursuant to the KB Stock Purchase Agreement.
When and to the extent the Company believes that a loss is probable, can be reasonably estimated
and is material, the Company records a liability. The Company recorded a $3.7 million charge (net
of tax) in the fourth quarter of fiscal year 2003 associated with the estimated impact of the KB
bankruptcy, which was comprised of a $10.6 million benefit (net of tax) related to the partial
charge-off of the HCC Note and KB Warrant (as each is defined below) and a $14.3 million charge
(net of tax) related to KB guarantee obligations. The Company recorded an additional $6.6 million
charge (net of tax) in the third quarter of fiscal year 2004 related to the estimated impact of
additional guarantee obligations resulting from the KB bankruptcy and, as discussed below, the
Company recorded an additional $3.8 million charge (net of tax) related to an additional partial
charge-off of the HCC Note in the second quarter of fiscal 2005.
In connection with the sale of the KB Toys business, the Company received $258.0 million in cash
and a 10-year note from HCC in the aggregate principal amount of $45.0 million. This note bears
interest, on an in-kind basis, at the rate of 8.0% per annum (principal and interest together known
as the HCC Note). The Company also received a warrant to acquire up to 2.5% of the common stock
of KB Holdings for a stated price per share (KB Warrant). At the time of the sale (the fourth
quarter of fiscal year 2000), the Company evaluated the fair value of the HCC Note received as
consideration in the transaction and recorded the HCC Note at its then estimated fair value of
$13.2 million. The estimated fair value of the HCC Note was based on several factors, including
fair market evaluations obtained from independent financial advisors at the time of the sale, the
Companys knowledge of the underlying KB Toys business and industry, and the risks inherent in
receiving no cash payments until the HCC Note matured in 2010. During fiscal year 2002 and until
KBs bankruptcy filing, the Company recorded the interest earned and accretion of the discount
utilizing the effective interest rate method and provided necessary reserves against such amounts
as a result of its evaluations of the carrying value of the HCC Note. For tax purposes, the HCC
Note was originally recorded at its face value of $45.0 million, and the Company incurred tax
liability on the interest, which was accrued but was not payable. This resulted in the HCC Note
having a tax basis that was greater than the carrying value on the Companys books.
The HCC Note became immediately due and payable at the time of KBs bankruptcy filing. The Company
engaged an independent investment advisory firm to assist the Company in estimating the fair value
of the HCC Note and KB Warrant for both book and tax purposes. As a result, the Company charged off
a portion of the HCC Note and wrote down the full value of the KB Warrant resulting in a book value
of the HCC Note of $7.3 million, and accordingly recorded a net charge (before tax) to continuing
operations in the fourth quarter of fiscal year 2003 in the amount of $9.6 million. In addition, as
a result of the bankruptcy filing and the partial charge-off, the Company recorded a tax benefit of
$20.2 million in the fourth quarter of fiscal year 2003. A substantial portion of this tax benefit
reflects the charge-off of the higher tax basis of the HCC Note. The book value of the HCC Note was
$7.3 million at January 29, 2005, and $0.9 million at October 29, 2005, following the partial
pre-tax charge-off of $6.4 million recorded in the second quarter of fiscal 2005. The HCC Note is
recorded as a component of long-term assets on the Consolidated Balance Sheets at October 29, 2005
and January 29, 2005.
When the Company acquired the KB Toys business from CVS in May 1996, the Company provided, among
other things, an indemnity to CVS with respect to any losses resulting from KBs failure to pay all
monies due and owing under any KB lease or mortgage obligation guaranteed by CVS. The typical form
of the CVS guarantee provides that the terms of the underlying lease may be extended, amended,
modified or in any way changed without the consent of the guarantor. While the Company controlled
the KB Toys business, the Company provided guarantees containing terms similar to the CVS
guarantees with respect to a limited number of additional store leases. As part of the KB sale, and
in accordance with the terms of the KB Stock Purchase Agreement, KB similarly agreed to indemnify
the Company with respect to all lease and mortgage obligations, including those guaranteed by CVS
and those guaranteed by the Company. The Company believes, at the time of KBs bankruptcy filing,
it had guarantee or indemnification obligations with respect to: a) approximately 390 KB store
leases; b) two distribution center leases; and c) KBs main office building lease.
On February 25, 2004, the Company announced that KB had rejected 389 store leases, of which the
Company believes it had guarantee or indemnification obligations relating to approximately 90. The
Company engaged an independent real estate
16
valuation firm to assist in the analysis of the Companys potential liability with respect to the
90 guaranteed leases. Based upon analysis of the information then available, the Company recorded a
charge to discontinued operations for rent and legal expenses in the fourth quarter of fiscal year
2003 in the amount of $14.3 million (net after a $9.7 million tax benefit) to reflect its best
estimate of this loss contingency.
On October 26, 2004, KB announced its intent to close an additional 141 to 238 underperforming
stores and reject those leases by January 31, 2005. At October 30, 2004, the Company believed that
KB had rejected approximately 598 store leases and that the Company has guarantee or
indemnification obligations relating to approximately 162 of those leases (including 72 resulting
from KBs October 26, 2004, announcement). Using the same methodology to analyze the Companys
potential liability with respect to these additional guaranteed leases, the Company recorded a
charge to discontinued operations in the third quarter of fiscal year 2004 in the amount of $4.9
million (net after a $3.7 million tax benefit) to reflect its best estimate of this loss
contingency. Since then, the Company believes that KB both rejected a limited number of additional
store leases and withdrew its previous rejection of certain other store leases. KBs actions
resulted in a net increase of approximately six store lease rejections (bringing the total
rejections to approximately 168) for which the Company believes it has guarantee or indemnification
obligations. No additional charges related to the guarantee obligations have been recorded by the
Company since October 30, 2004.
On August 16, 2005, KB filed notice of its final lease rejections. Included on the list were four
additional store leases (including one which the Company has a guarantee or indemnification
obligation), the impact of which has been reflected in the store lease rejection discussion above.
Additionally, the list included both the prime leases and sub-leases relating to two distribution
centers. As previously disclosed, the Company has indemnification obligations relating to both of
the distribution center leases. The Company believes these distribution centers were no longer
being used by KB and had both been sublet to unrelated third parties for rents in excess of the
rents due under the terms of KBs prime leases. The Company is unable to determine at this time
whether any additional liability will result from these rejections or the future default on any
remaining leases guaranteed by the Company or CVS that were not rejected by KB. Moreover, since the
typical form of guarantee permits an extension, amendment, modification or other change, the
Company is unable to estimate its maximum potential amount of future payments, if any, required to
satisfy lease guarantees. In the event any liability arises from the rejection of the distribution
centers or additional leases are defaulted upon, any related charge would be to discontinued
operations. Management does not believe that such a charge would have a material adverse effect on
the Companys financial condition, results of continuing operations, or liquidity.
On March 10, 2004, the Company announced that it had received notice of a default relating to a
first mortgage on a distribution center located in Pittsfield, Massachusetts (the Pittsfield DC).
As a result of KBs bankruptcy filing, the mortgage holder declared an event of default and
claimed that the loan had become immediately due and payable (the Pittsfield DC Note). The
Company was informed that, as of January 14, 2004, the Pittsfield DC Note had an outstanding
principal balance of approximately $6.3 million plus accrued interest of approximately $21,000.
Additionally, the mortgage holder claimed that a make-whole premium of approximately $1.5 million
was also due and payable. On November 5, 2004, the Company satisfied its indemnity obligation with
respect to the Pittsfield DC Note at a cost of $8.4 million. The Company engaged an independent
real estate valuation firm to assist it in the analysis of the Companys potential loss arising
from the indemnification payment related to the Pittsfield DC Note. Based upon analysis of the
information then available, the Company recorded a charge to discontinued operations in the third
quarter of fiscal year 2004 in the amount of $1.7 million (net after a $1.0 million tax benefit) to
reflect its best estimate of the difference between the subrogation rights ($6.1 million) flowing
from the indemnification payment and the net realizable value of the Pittsfield DC.
On May 13, 2005, KB Toys and the Official Committee of Unsecured Creditors filed a Joint Plan of
Reorganization (the KB Plan), which was later amended on July 24, 2005. On July 28, 2005, the
Company, along with KB Toys and the Official Committee of Unsecured Creditors entered into a
Stipulation and Agreed Order which, among other things, caused the KB Plan to be further amended.
In final form, the KB Plan was based on a plan funding agreement which KB entered into with an
affiliate of Prentice Capital Management, LP (the Prentice Affiliate). Under the terms of the KB
Plan, the Prentice Affiliate invested $20 million in the reorganized KB Toys and provided a $25
million seasonal credit facility in exchange for 90% of the common stock and 100% of the preferred
stock of the reorganized KB Toys. The remaining common stock is being held by a trust for the
benefit of the unsecured creditors of those KB Toys entities being reorganized under the KB Plan.
The KB Plan was confirmed by the United States Bankruptcy Court for the District of Delaware on
August 18, 2005.
17
Under the KB Plan, the Company will be treated on a consolidated basis with all other unsecured
operating subsidiary creditors for purposes of its lease obligations and the Pittsfield DC Note,
and expects to receive approximately 8% on its allowed unsecured claims relating to these items.
Additionally, the Company expects to receive approximately 1.6%, or $0.9 million, of its unsecured
claim related to the HCC Note. Because the HCC Note had a net book value of $7.3 million following
the partial charge-off recorded in the fourth quarter of fiscal 2003, the Company recorded an
additional $6.4 million pre-tax charge (before a $2.6 million tax benefit) related to the HCC Note
in the second quarter of fiscal 2005. The Company has not reflected any benefit arising from the KB
Plan as part of its reserve for the lease obligations and the Pittsfield DC Note.
In addition to including KBs indemnity of the Company with respect to lease and mortgage
obligations, the KB Stock Purchase Agreement contains mutual indemnifications of KB by the Company
and of the Company by KB. These indemnifications relate primarily to losses arising out of general
liability claims, breached or inaccurate representations or warranties, shared litigation expenses,
other payment obligations, and taxes. Under a tax indemnification provision in the KB Stock
Purchase Agreement, the Company is to indemnify KB for tax losses generally related to the periods
prior to the Companys sale of KB. The Company continues to assess the effect of the KB bankruptcy
on such mutual indemnification obligations and has not made any provision for loss contingencies
with respect to any non-lease or non-tax related indemnification obligations. At this time,
management does not believe that the impact would have a material adverse effect on the Companys
financial condition, results of continuing operations, or liquidity.
On February 9, 2005, the Company commenced a suit in the Delaware Chancery Court against certain of
the officers, directors and shareholders of KB alleging fraud, breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, unjust enrichment, and civil conspiracy. On March 3, 2005, the
United States Bankruptcy Court for the District of Delaware, finding that litigating the state
court action would distract KBs management and thereby hinder its ability to focus on a successful
reorganization, temporarily enjoined the Companys suit. Once permitted by the court, the Company
intends to vigorously prosecute this action to recover its damages arising from defendants actions
resulting in KBs inability to satisfy the HCC Note.
NOTE 4
REAL ESTATE STRATEGY
On October 6, 2005, the Company announced its decision to close approximately 126 underperforming
closeout stores in addition to the 40 stores previously planned for
closure in fiscal year 2005. The closure
of these stores is expected to be completed by the end of fiscal year 2005. The Company expects to
record approximately $58.0 million in charges in connection with these store closures. The table
below summarizes the type and amount of total estimated expenses anticipated to be recorded as a
result of these store closures and identifies the cash components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash |
|
Cash |
|
Total |
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Lease related obligations |
|
$ |
|
|
|
$ |
26,000 |
|
|
$ |
26,000 |
|
Severance and other |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
Inventory liquidation |
|
|
21,000 |
|
|
|
|
|
|
|
21,000 |
|
Asset write-downs |
|
|
7,000 |
|
|
|
|
|
|
|
7,000 |
|
|
Total |
|
$ |
28,000 |
|
|
$ |
30,000 |
|
|
$ |
58,000 |
|
|
Asset write-downs include assets used in normal operations of retail stores and include remaining
unrecoverable net book values of fixtures, racking, equipment and signs. The table does not
include the cash impact of the tax benefit, which generally will be realized when the lease and
severance obligations are paid or the asset is disposed of or sold.
In connection with the announcement to close stores, the Company recorded severance and benefits of
$0.6 million, included in selling and administrative expenses, and additional depreciation expense
of $1.8 million in the thirteen weeks ended October 29, 2005. The additional depreciation expense
resulted from changing the estimated useful life of the property and equipment at stores planned
for closure in order to depreciate these assets to their estimated salvage value at the store
closing date.
18
NOTE 5
LONG-TERM OBLIGATIONS
On October 29, 2004, the Company entered into a $500.0 million unsecured credit facility with a
syndicate of lenders (the 2004 Credit Agreement). The 2004 Credit Agreement is scheduled to
mature on October 28, 2009. The proceeds of the 2004 Credit Agreement are available for general
corporate purposes, working capital, and to repay certain indebtedness of the Company, including
amounts that were outstanding related to the $204.0 million in senior notes privately placed in
2001 (the Senior Notes) and the $300.0 million secured revolving credit agreement entered into in
2001 (the 2001 Credit Agreement). The pricing and fees related to the 2004 Credit Agreement
fluctuate based on the Companys debt rating. Loans made under the 2004 Credit Agreement may be
prepaid by the Company without penalty. The 2004 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 these covenants could result in a default under the 2004 Credit Agreement,
which would permit the lenders to restrict the Companys ability to further access the 2004 Credit
Agreement for loans and letters of credit, and require the immediate repayment of any outstanding
loans under the 2004 Credit Agreement. On October 25, 2005, the Company and the lenders entered
into an amendment to the 2004 Credit Agreement in order to eliminate the impact on the covenant
calculations of the estimated charges related to the store closing plan discussed in Note 4. The
Company was in compliance with its financial covenants at October 29, 2005.
The 2004 Credit Agreement permits, at the Companys option, borrowings at various interest rate
options based on the prime rate or London InterBank Offering Rate plus applicable margin. The 2004
Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually
agreed upon by the Company and the lenders. The weighted average interest rate of the outstanding
loans at October 29, 2005 was 4.6%. The Company typically repays and/or borrows on a daily basis
in accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of
the Companys liquidity position, which is generally affected by: a) cash inflows such as store
cash and other miscellaneous deposits; and b) cash outflows such as check clearings, wire and other
electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the 2004 Credit Agreement includes a $30.0 million swing
loan sub-limit, a $50.0 million bid loan sub-limit, and a $150.0 million letter of credit
sub-limit. At October 29, 2005, the total borrowings outstanding under the 2004 Credit Agreement
were $253.2 million, which total amount was comprised of $225.0 million in revolving credit loans,
$28.2 million in swing loans, and no bid loans. At January 29, 2005, the total borrowings
outstanding under the 2004 Credit Agreement were $159.2 million, which total amount was comprised
of $129.2 million in revolving credit loans, $30.0 million in swing loans, and no bid loans. The
borrowings available under the 2004 Credit Agreement, after taking into account the reduction of
availability resulting from outstanding letters of credit totaling $66.8 million, were $180.0
million at October 29, 2005.
Due to the early termination of the Senior Notes and the 2001 Credit Agreement, interest expense
included debt prepayment charges of $8.9 million for the third quarter of fiscal year 2004.
NOTE 6
COMMITMENTS AND CONTINGENCIES
In addition to short-term purchase obligations (i.e., obligations due within one year of October
29, 2005) for retail merchandise issued in the ordinary course of the Companys business, the
Company has an obligation to make future inventory purchases totaling $272.6 million at October 29,
2005. The Company is not required to meet any periodic minimum purchase requirements under this
commitment. The term of the commitment extends until the purchase requirements of the commitment
are satisfied.
The Company is involved in legal actions and claims, including various employment-related matters,
arising in the ordinary course of business. The Company currently believes that such actions and
claims, both individually and in the aggregate, will be resolved without material effect on the
Companys 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
adverse effect on the Companys financial condition, results of operations, and liquidity.
For a discussion of discontinued operations, including KB bankruptcy matters, see Note 3.
In November 2004, the Company was served a civil complaint wherein it was alleged that the Company
has violated Fair Labor Standards Act regulations by misclassifying as exempt employees its
furniture department managers, sales managers, and assistant managers. This lawsuit was filed as a
putative collective action in the United States District Court for the Eastern
19
District of Texas, Texarkana Division. A similar action was filed at the end of November 2004, in
the United States District Court for the Eastern District of Louisiana. This lawsuit was also filed
as a putative collective action alleging that the Company violated the Fair Labor Standards Act by
misclassifying assistant managers as exempt. The plaintiffs in both cases are seeking to recover,
on behalf of themselves and all other individuals who are similarly situated, alleged unpaid
overtime compensation, as well as liquidated damages, attorneys fees and costs. On July 5, 2005,
the District Court in Louisiana issued an order conditionally certifying a class of all current and
former assistant store managers who have worked for the Company since November 23, 2001. As a
result of that order, notice of the lawsuit was sent to approximately 5,500 individuals who had the
right to opt-in to the lawsuit. On August 8, 2005, the District Court in Texas issued an order
conditionally certifying a class of all current and former employees who worked for the Company as
a furniture department manager at any time between November 2, 2001 and October 1, 2003. As a
result of that order, notice was sent to approximately 1,300 individuals who had the right to
opt-in to the lawsuit. The Texas case will include furniture department managers only, whereas the
Louisiana case will include only assistant store managers. While the original period to opt-in to
the lawsuits has passed, the period is expected to be extended for certain individuals based on
several factors, the most significant of which is the impact that hurricanes had on mail delivery
in certain areas of the Gulf Coast states. Until such time as the opt-in period has fully lapsed,
the Company will be unable to determine the number of individuals that will be included in each
lawsuit. The Company has the right to file a motion seeking to decertify the classes after
discovery has been conducted. Pending discovery on the plaintiffs claims, the Company cannot make
a determination as to the probability of a loss contingency resulting from either of these lawsuits
or the estimated range of possible loss, if any. The Company intends to vigorously defend itself
against the allegations levied in both lawsuits. However, the ultimate resolution of these matters
could have a material adverse effect on the Companys financial condition, results of operations,
and liquidity.
On October 13, 2005, the Company was served a civil complaint wherein it was alleged that the
Company had violated certain California wage and hour laws. This class action lawsuit was filed in
the Superior Court of the State of California, County of Ventura. The plaintiff is seeking to
recover, on behalf of herself and all other individuals who are similarly situated, alleged unpaid
wages and rest and meal period compensation, as well as penalties, injunctive and other equitable
relief, reasonable attorneys fees and costs. Pending discovery on the plaintiffs claims, the
Company cannot make a determination as to the probability of a loss contingency resulting from this
lawsuit or the estimated range of possible loss, if any. The Company intends to vigorously defend
itself against the allegations levied in this lawsuit. However, the ultimate resolution of this
matter could have a material adverse effect on the Companys financial condition, results of
operations, and liquidity.
The Company is self-insured for certain losses relating to general liability, workers
compensation, and employee medical and dental benefit claims, and the Company has 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. With the exception of self-insured claims, taxes, and the
liabilities described above that relate to the KB bankruptcy, the Company has not recorded any
additional significant liabilities for other commitments and contingencies.
NOTE 7
ADDITIONAL DATA
The following schedule is a summary of other current assets, property and equipment net, accrued
liabilities, and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
January 29, 2005 |
(In thousands) |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
19,451 |
|
|
$ |
13,185 |
|
Refundable and prepaid income taxes |
|
|
32,090 |
|
|
|
6,351 |
|
Prepaid expenses and other current assets |
|
|
46,001 |
|
|
|
43,864 |
|
|
Other current assets |
|
$ |
97,542 |
|
|
$ |
63,400 |
|
|
The increase in other current assets was primarily due to an increase of $25.7 million in current
prepaid income taxes as the first two required installments of estimated taxes paid were based on
annualized first quarter profit.
20
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
January 29, 2005 |
(In thousands) |
|
|
|
|
|
|
|
|
Land and land improvements |
|
$ |
39,882 |
|
|
$ |
39,913 |
|
Buildings and leasehold improvements |
|
|
671,629 |
|
|
|
649,618 |
|
Fixtures and equipment |
|
|
694,063 |
|
|
|
664,352 |
|
Transportation equipment |
|
|
21,696 |
|
|
|
22,741 |
|
Construction-in-progress |
|
|
1,342 |
|
|
|
10,336 |
|
|
Property and equipment cost |
|
|
1,428,612 |
|
|
|
1,386,960 |
|
Less accumulated depreciation |
|
|
814,582 |
|
|
|
738,219 |
|
|
Property and equipment net |
|
$ |
614,030 |
|
|
$ |
648,741 |
|
|
|
The increase in accumulated depreciation of $76.4 million is comprised of depreciation expense of
$86.3 million offset by disposals of $9.9 million. |
|
|
October 29, 2005 |
|
January 29, 2005 |
(In thousands) |
|
|
|
|
|
|
|
|
Property, payroll, and other taxes |
|
$ |
111,142 |
|
|
$ |
102,118 |
|
Insurance reserves |
|
|
45,708 |
|
|
|
45,255 |
|
Operating expenses |
|
|
53,429 |
|
|
|
58,792 |
|
KB bankruptcy non-tax related reserves |
|
|
31,739 |
|
|
|
32,498 |
|
Salaries and wages |
|
|
25,160 |
|
|
|
20,860 |
|
Interest and income taxes |
|
|
3,040 |
|
|
|
3,213 |
|
|
Accrued liabilities |
|
$ |
270,218 |
|
|
$ |
262,736 |
|
|
|
|
|
October 29, 2005 |
|
January 29, 2005 |
(In thousands) |
|
|
|
|
|
|
|
|
Insurance reserves |
|
$ |
41,552 |
|
|
$ |
35,955 |
|
Deferred incentive rent |
|
|
43,831 |
|
|
|
39,533 |
|
Other long-term liabilities |
|
|
11,696 |
|
|
|
10,893 |
|
|
Other liabilities |
|
$ |
97,079 |
|
|
$ |
86,381 |
|
|
The following analysis supplements changes in assets and liabilities, presented in the
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 29, 2005
and October 30, 2004:
21
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended |
|
|
October 29, 2005 |
|
October 30, 2004 |
(In thousands) |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
(194,857 |
) |
|
$ |
(238,917 |
) |
Other current assets |
|
|
(34,142 |
) |
|
|
(30,272 |
) |
Other assets |
|
|
1,212 |
|
|
|
(1,991 |
) |
Accounts payable |
|
|
121,800 |
|
|
|
61,904 |
|
Accrued operating expenses |
|
|
15,051 |
|
|
|
8,119 |
|
Interest and income taxes |
|
|
(173 |
) |
|
|
(13,781 |
) |
Other liabilities |
|
|
15,615 |
|
|
|
14,367 |
|
|
Change in assets and liabilities |
|
$ |
(75,494 |
) |
|
$ |
(200,571 |
) |
|
For the thirty-nine weeks ended October 29, 2005, the $194.9 million change in inventories,
partially offset by the $121.8 million change in accounts payable, was primarily due to the opening
of 48 net new stores. In addition, the increase in accounts payable for the thirty-nine weeks
ended October 29, 2005 of $121.8 million compared to $61.9 million for the thirty-nine weeks ended
October 30, 2004, was impacted by the timing of payments made to merchandise vendors. Inventory on
a per store basis is down 1% as compared to October 30, 2004. In addition, other current assets
changed by $34.1 million primarily due to an increase of $25.7 million in current prepaid income
taxes.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the 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. The Company wishes to take advantage of the safe harbor
provisions of the Act.
This report, as well as other verbal or written statements or reports made by or on the behalf of
the Company, may contain or may incorporate material by reference which includes forward-looking
statements within the meaning of the Act. By their nature, all forward-looking statements involve
risks and uncertainties. Statements, other than those based on historical facts, which address
activities, events, or developments that the Company expects or anticipates will or may occur in
the future, including such things as future capital expenditures (including the amount and nature
thereof), business strategy, expansion and growth of the Companys business and operations, future
earnings, store openings and new market entries, anticipated inventory turn, and other similar
matters, as well as statements expressing optimism or pessimism about future operating results or
events, are forward-looking statements, which are based upon a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. The words believe, anticipate,
project, plan, expect, estimate, objective, forecast, goal, intend, and similar
expressions generally identify forward-looking statements. The forward-looking statements are and
will be based upon managements then-current views and assumptions regarding future events and
operating performance, and are applicable only as of the dates of such statements. Although the
Company believes the expectations expressed in forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of its business, actual events and results may
materially differ from anticipated results described in such statements.
The Companys ability to achieve the results contemplated by forward-looking statements is subject
to a number of factors, any one, or a combination, of which could materially affect the Companys
business, financial condition, results of operations, or liquidity. These factors may include, but
are not limited to:
22
|
|
|
|
|
the impact of recent hurricanes on the Companys customers, stores, inventory,
associates, and distribution network; |
|
|
|
|
|
|
the Companys ability to source and purchase merchandise on favorable terms; |
|
|
|
|
|
|
interruptions and delays in merchandise supply from the Companys and its vendors
foreign and domestic sources; |
|
|
|
|
|
|
risks associated with purchasing, directly or indirectly, merchandise from foreign
sources, including increased import duties and taxes, imposition of more restrictive
quotas, loss of most favored nation trading status, currency fluctuations, work
stoppages, transportation delays, foreign government regulations, political unrest,
natural disasters, war, terrorism, and trade restrictions, including retaliation by the
United States against foreign practices; |
|
|
|
|
|
|
the ability to attract new customers and retain existing customers; |
|
|
|
|
|
|
the Companys ability to establish effective advertising, marketing, and promotional programs; |
|
|
|
|
|
|
economic and weather conditions which affect buying patterns of the Companys customers; |
|
|
|
|
|
|
changes in consumer spending and consumer debt levels; |
|
|
|
|
|
|
the Companys ability to anticipate buying patterns and implement appropriate inventory strategies; |
|
|
|
|
|
|
continued availability of capital and financing on favorable terms; |
|
|
|
|
|
|
competitive pressures and pricing pressures, including competition from other retailers; |
|
|
|
|
|
|
the Companys ability to comply with the terms of its credit facilities (or obtain waivers for noncompliance); |
|
|
|
|
|
|
significant interest rate fluctuations and changes in the Companys credit rating; |
|
|
|
|
|
|
the creditworthiness of the Companys former KB Toys business; |
|
|
|
|
|
|
the Companys indemnification and guarantee obligations with respect to
approximately 390 KB Toys store leases and other real property leases, some or all of
which may have been rejected or materially modified in connection with the KB Toys
bankruptcy proceedings, as well as other potential costs arising out of the KB Toys
bankruptcy; |
|
|
|
|
|
|
litigation risks and changes in laws and regulations, including changes in
accounting standards, the interpretation and application of accounting standards, and
tax laws; |
|
|
|
|
|
|
transportation and distribution delays or interruptions that adversely impact the
Companys ability to receive and/or distribute inventory; |
|
|
|
|
|
|
the impact on transportation costs from the driver hours of service regulations
adopted by the Federal Motor Carriers Safety Administration that became effective in
January 2004; |
|
|
|
|
|
|
the effect of fuel price fluctuations on the Companys transportation costs and customer purchases; |
|
|
|
|
|
|
interruptions in suppliers businesses; |
|
|
|
|
|
|
the Companys ability to achieve cost efficiencies and other benefits from various
operational initiatives and technological enhancements; |
|
|
|
|
|
|
the costs, interruptions, and problems associated with the implementation of, or
failure to implement, new or upgraded systems and technology; |
|
|
|
|
|
|
the effect of international freight rates and domestic transportation costs on the Companys profitability; |
|
|
|
|
|
|
the Companys ability to secure suitable new store locations under favorable lease terms; |
|
|
|
|
|
|
the Companys ability to successfully enter new markets; |
|
|
|
|
|
|
delays associated with constructing, opening, and operating new stores; |
|
|
|
|
|
|
the Companys ability to attract and retain suitable employees; and |
|
|
|
|
|
|
other risks described from time to time in the Companys filings with the SEC, in
its press releases, and in other communications. |
The foregoing list is not exhaustive. There can be no assurances that the Company has correctly and
completely identified, assessed, and accounted for all factors that do or may affect its business,
financial condition, results of operations, and liquidity. Additional risks not presently known to
the Company or that it believes to be immaterial also may adversely impact the Company. Should any
risks or uncertainties develop into actual events, these developments could have material adverse
effects on the Companys business, financial condition, results of operations, and liquidity.
Consequently, all of the forward-looking statements are qualified by these cautionary statements,
and there can be no assurance that the results or developments anticipated by the Company will be
realized or that they will have the expected effects on the Company or its business or operations.
23
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only
as of the date thereof. The Company undertakes no obligation to publicly release any revisions to
the forward-looking statements contained in this report, or to update them to reflect events or
circumstances occurring after the date of this report, or to reflect the occurrence of
unanticipated events. Readers are advised, however, to consult any further disclosures the Company
may make on related subjects in its public announcements and SEC filings.
RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying Managements Discussion and Analysis of Financial Condition and Results of
Operations gives effect to the restatement of the Companys Condensed Consolidated Financial
Statements for the thirteen and thirty-nine weeks ended October 30, 2004, as appropriate, to
correct the Companys accounting treatment for leases, depreciation of related leasehold
improvements, non-qualified deferred compensation plan assets and liabilities, and reclassification
of auction rate preferred securities and municipal auction rate securities as described in Note 2
to the Condensed Consolidated Financial Statements. Throughout this report, all referenced amounts
for prior periods and prior period comparisons reflect the balances and amounts on a restated
basis.
OVERVIEW
The discussion and analysis presented below should be read in conjunction with the Condensed
Consolidated Financial Statements and related Notes.
Closeout retailers provide a market to manufacturers by purchasing excess product that generally
results from production overruns, packaging changes, discontinued products, or returns. The Company
also purchases closeout merchandise through other channels, including liquidations, bankruptcies,
and insurance claim settlements. As a result of the lower purchase costs, closeout retailers can
generally offer most merchandise at prices lower than those offered by traditional retailers.
The Company is the nations largest broadline closeout retailer. At October 29, 2005, the Company
operated a total of 1,550 stores in 47 states with 1,511 stores under the name Big Lots®
and 39 stores under the name Big Lots Furniture®. The following table compares the
number of stores in operation at the beginning and end of the thirty-nine weeks ended October 29,
2005, and October 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
October 30, 2004 |
|
Stores open at the beginning of the fiscal year |
|
|
1,502 |
|
|
|
1,430 |
|
Stores opened during the period |
|
|
65 |
|
|
|
98 |
|
Stores closed during the period |
|
|
(17 |
) |
|
|
(17 |
) |
|
Stores open at the end of the period |
|
|
1,550 |
|
|
|
1,511 |
|
|
The Company believes its stores are known for their wide assortment of closeout merchandise.
Certain core categories of merchandise, such as consumables, hardlines, and toys, are carried on a
continual basis, although the specific brand-names offered may change frequently. The Companys
stores also offer a small but consistent line of basic items, which the Company believes
strengthens its role as a dependable, one-stop shop for everyday needs. In addition, the stores
feature seasonal items for every major holiday, as well as a wide assortment of merchandise for the
home, including furniture, home décor, and domestics.
The Companys Web site is located at www.biglots.com. Wholesale operations are conducted through
Big Lots Wholesale, Consolidated International, Wisconsin Toy, and with online sales at
www.biglotswholesale.com. The contents of the Companys Web sites are not part of this report.
The Company has historically experienced, and expects to continue to experience, seasonal
fluctuations, with a larger percentage of its net sales and operating profit being realized in the
fourth fiscal quarter. In addition, the Companys quarterly
24
results can be affected by the timing of new store openings and store closings, the amount of sales
contributed by new and existing stores, the timing of television and circular advertising, and the
timing of certain holidays. The Company purchases substantial amounts of inventory and incurs
higher shipping costs and higher payroll costs in the third fiscal quarter in anticipation of the
increased sales activity during the fourth fiscal quarter.
The seasonality of the Companys business also influences the Companys demand for seasonal
borrowings. The Company historically has drawn upon its credit facilities to fund seasonal working
capital needs and has substantially repaid these seasonal borrowings during the fourth fiscal
quarter. The Company expects that it will maintain borrowings under the 2004 Credit Agreement
throughout fiscal year 2005. Given the seasonality of the Companys business, the amount of
borrowings under the 2004 Credit Agreement may fluctuate materially depending on various factors,
including the time of the year and the Companys need to acquire merchandise inventory.
RECENT DEVELOPMENTS
Whats
Important Now (WIN) Strategy
The Company is engaged in a strategic assessment of its operations. Specifically, the Company is
focusing on opportunities for improved financial performance resulting from a continuing detailed
analysis of real estate, operating expenses, and merchandising. This strategic assessment is
resulting in specific initiatives collectively referred to by the Company as its WIN strategy.
As part of the real estate strategy, the Company announced the closure of approximately 126
underperforming stores in addition to the 40 stores previously planned for closure in fiscal year
2005. The closure of these stores is expected to be completed by the end of fiscal year 2005. The
Company expects to record approximately $58.0 million in charges in connection with these store
closures. The table below summarizes the type and amount of total estimated expenses anticipated
to be recorded as a result of these store closures and identifies the cash components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash |
|
Cash |
|
Total |
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Lease related obligations |
|
$ |
|
|
|
$ |
26,000 |
|
|
$ |
26,000 |
|
Severance and other |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
Inventory liquidation |
|
|
21,000 |
|
|
|
|
|
|
|
21,000 |
|
Asset write-downs |
|
|
7,000 |
|
|
|
|
|
|
|
7,000 |
|
|
Total |
|
$ |
28,000 |
|
|
$ |
30,000 |
|
|
$ |
58,000 |
|
|
Asset write-downs include assets used in normal operations of retail stores and include remaining
unrecoverable net book values of fixtures, racking, equipment and signs. The table does not
include the cash impact of the tax benefit, which generally will be realized when the lease and
severance obligations are paid or the asset is disposed of or sold.
In connection with the announcement to close stores, the Company recorded severance and benefits of
$0.6 million, included in selling and administrative expenses, and additional depreciation expense
of $1.8 million in the thirteen weeks ended October 29, 2005.
The Companys review of its operating expenses has produced some items available for near term
action and other items that are longer term opportunities. Near term action items can reasonably
be expected to impact current results and fiscal year 2006 results. Longer term action items are
expected to impact fiscal year 2007 and beyond. In the near term, action is being taken to reduce
general office costs, store expenses, and distribution center costs. The Company has made some
organizational and process changes in the general office and distribution centers and continues to
closely manage store payroll.
As part of a review of its merchandising strategy, the Company plans to: 1) close its stand-alone
furniture stores; 2) execute a series of markdowns in an effort to lower in-store inventory levels
in certain categories and improve inventory turnover; and 3) exit the frozen foods business. The
Company is continuing to develop its merchandise strategy with the goals of growing sales per
square foot and increasing gross profit dollars.
25
KB Toys
Update
On August 16, 2005, KB filed its final lease rejections, which included leases relating to four
additional KB retail stores and two distribution centers sublet by KB to unrelated third parties.
On August 18, 2005, the KB Plan was confirmed by the United States Bankruptcy Court for the
District of Delaware. For a discussion of these matters and other matters related to the KB
bankruptcy, see Note 3.
Amendment
to the 2004 Credit Agreement
On October 25, 2005, the Company and its lenders entered into an amendment to the 2004 Credit
Agreement in order to eliminate the impact on the covenant calculations of the estimated charges
related to the store closing plan discussed in Note 4.
RESULTS OF OPERATIONS
The following table compares components of the Condensed Consolidated Statements of Operations of
the Company as a percentage of net sales at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
Thirty-Nine Weeks Ended |
|
|
October 29, 2005 |
|
October 30, 2004 |
|
October 29, 2005 |
|
October 30, 2004 |
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
60.9 |
|
|
|
59.6 |
|
|
|
60.0 |
|
|
|
59.2 |
|
|
|
|
|
|
Gross profit |
|
|
39.1 |
|
|
|
40.4 |
|
|
|
40.0 |
|
|
|
40.8 |
|
Selling and administrative expenses |
|
|
39.4 |
|
|
|
40.4 |
|
|
|
38.6 |
|
|
|
39.0 |
|
Depreciation expense |
|
|
3.0 |
|
|
|
2.8 |
|
|
|
2.7 |
|
|
|
2.6 |
|
|
|
|
|
|
Operating profit (loss) |
|
|
(3.3 |
) |
|
|
(2.8 |
) |
|
|
(1.3 |
) |
|
|
(0.7 |
) |
Interest expense |
|
|
0.2 |
|
|
|
1.4 |
|
|
|
0.2 |
|
|
|
0.8 |
|
Interest income |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
Loss before income taxes |
|
|
(3.6 |
) |
|
|
(4.2 |
) |
|
|
(1.4 |
) |
|
|
(1.5 |
) |
Income tax benefit |
|
|
(1.8 |
) |
|
|
(1.6 |
) |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
Loss from continuing operations |
|
|
(1.8 |
) |
|
|
(2.6 |
) |
|
|
(0.8 |
) |
|
|
(0.9 |
) |
Discontinued operations |
|
|
0.0 |
|
|
|
(0.7 |
) |
|
|
0.0 |
|
|
|
(0.2 |
) |
|
|
|
|
|
Net loss |
|
|
(1.8 |
)% |
|
|
(3.3 |
)% |
|
|
(0.8 |
)% |
|
|
(1.1 |
)% |
|
|
|
|
|
THIRTEEN WEEKS ENDED OCTOBER 29, 2005 AND OCTOBER 30, 2004
Net
Sales
Net sales increased to $1,041.0 million for the thirteen weeks ended October 29, 2005, compared to
$980.0 million for the thirteen weeks ended October 30, 2004. This net sales increase of $61.0
million, or 6.2%, resulted from the net addition year over year of 39 stores, or 2.6% store growth,
and an increase in comparable store sales for the third quarter of fiscal year 2005 of 1.7%.
Comparable store sales are calculated using all stores that have been open for at least two years
as of the beginning of the fiscal year. The comparable store sales increase of 1.7% consisted of a
5.0% increase in the dollar value of the average basket offset by a 3.3% decrease in the number of
customer transactions. While customer traffic continued its negative trend, the consistency of the
basket growth was comprised of both higher units sold per transaction and slightly higher average
item retail selling price when compared to the prior fiscal year. Furniture, Home and Consumables
were the categories that drove the increase in comparable store sales in the third quarter of
fiscal year 2005, offset by a decline in Seasonal and toys. Even though the Company announced the
closure of its stand-alone furniture stores, Furniture remains a very important part of the
Companys planned business through more than 1,100 furniture departments in its closeout stores.
The Company believes that future sales growth is dependent upon increases in the number of customer
transactions and/or increases in the dollar value of the average basket. While the current
economic environment (primarily higher energy prices) continues to impact the Companys core
customer and the discount retail sector, the Company believes opportunities exist to
26
improve customer traffic through more effective advertising circulars, a higher concentration
of closeout merchandise, and more consistent merchandising across all categories in the store. The
following table summarizes the comparable store sales results for the thirteen-week periods as well
as comparable results in customer transactions and in the value of the average basket:
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
October 30, 2004 |
|
Comparable store sales |
|
|
1.7 |
% |
|
|
(1.4 |
)% |
Customer transactions |
|
|
(3.3 |
)% |
|
|
(2.9 |
)% |
Value of the average basket |
|
|
5.0 |
% |
|
|
1.5 |
% |
|
The following table details net sales by product category with the percentage of each category
to total net sales and the net sales change in dollars and percentage from the third quarter of
fiscal year 2005 to the same period in fiscal year 2004 in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
October 30, 2004 |
|
Change |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
|
$ |
334,782 |
|
|
|
32.1 |
% |
|
$ |
312,927 |
|
|
|
31.9 |
% |
|
$ |
21,855 |
|
|
|
7.0 |
% |
Home |
|
|
349,723 |
|
|
|
33.6 |
|
|
|
306,478 |
|
|
|
31.3 |
|
|
|
43,245 |
|
|
|
14.1 |
|
Seasonal and toys |
|
|
127,686 |
|
|
|
12.3 |
|
|
|
138,333 |
|
|
|
14.1 |
|
|
|
(10,647 |
) |
|
|
(7.7 |
) |
Other |
|
|
228,855 |
|
|
|
22.0 |
|
|
|
222,289 |
|
|
|
22.7 |
|
|
|
6,566 |
|
|
|
3.0 |
|
|
Net sales |
|
$ |
1,041,046 |
|
|
|
100.0 |
% |
|
$ |
980,027 |
|
|
|
100.0 |
% |
|
$ |
61,019 |
|
|
|
6.2 |
% |
|
The Home category includes furniture, domestics, and home décor departments. The Other
category primarily includes electronics, small appliances, home maintenance, and tools. The Company
internally evaluates and externally communicates overall sales and merchandise performance based on
these key merchandising categories and believes that these categories facilitate analysis of the
Companys results.
Gross Profit
Gross profit increased to $406.7 million for the thirteen weeks ended October 29, 2005, compared to
$396.2 million for the thirteen weeks ended October 30, 2004, an increase of $10.5 million or 2.7%.
Gross profit as a percentage of net sales decreased to 39.1% in the third quarter of fiscal year
2005 compared to 40.4% in the third quarter of fiscal year 2004. The gross profit rate decrease for
the comparable quarter is principally a result of lower initial
markup (IMU) and higher costs for
domestic inbound freight due to increased fuel prices. The Companys IMU continues to be
challenged by several factors including mix within categories, higher raw material costs in
resin-based products such as plastics and chemicals, and a competitive pricing environment in the
consumables category.
Selling and Administrative Expenses
Selling and administrative expenses increased to $410.6 million for the thirteen weeks ended
October 29, 2005, compared to $396.1 million for the thirteen weeks ended October 30, 2004, an
increase of $14.5 million or 3.7%. As a percentage of net sales, selling and administrative
expenses were 39.4% for the third quarter of fiscal year 2005 compared to 40.4% for the third
quarter of fiscal year 2004. Leverage was achieved primarily through tightly managed store,
distribution center, and general office payroll. Additionally, the Company decided to forgo
approximately $3.0 million in third quarter advertising cost, shifting the planned spend into the
fourth quarter of fiscal year 2005. These cost savings were partially offset by higher outbound
transportation costs, rising utility rates, and WIN strategy-related charges associated with
severance and benefits.
27
Outbound distribution and transportation costs, which were included in selling and administrative
expenses (see Note 1) increased to $57.6 million for the third quarter of fiscal year 2005 compared
to $56.1 million for the third quarter of fiscal year 2004. As a percentage of net sales, however,
outbound distribution and transportation costs decreased by 20 basis points to 5.5% of net sales in
the third quarter of fiscal year 2005 as compared to 5.7% for the same period in fiscal year 2004.
The rate decrease is a function of higher productivity in the distribution system partially offset
by the impact of higher fuel prices.
Depreciation Expense
Depreciation expense for the third quarter of fiscal year 2005 was $30.8 million compared to $27.1
million for the same period of fiscal year 2004. The $3.7 million increase is primarily related to
additional capital assets placed in service and, for those stores that will be closing during this
fiscal year, the accelerated depreciation expense of assets as a result of the change in their
estimated useful lives.
Interest Expense
Interest expense, including the amortization of debt issuance costs, was $2.4 million for the
thirteen weeks ended October 29, 2005, compared to $14.0 million for the thirteen weeks ended
October 30, 2004. Interest expense for the thirteen weeks ended October 30, 2004 included $8.9
million of debt prepayment charges incurred in connection with the early termination of the Senior
Notes and the 2001 Credit Agreement. Excluding the $8.9 million charge, interest expense decreased
from 0.5% of net sales in the third quarter of fiscal year 2004 to 0.2% in the third quarter of
fiscal year 2005. This decline in the interest expense rate was primarily due to a combination of
lower average borrowings and the lower average interest rate associated with the 2004 Credit
Agreement that was entered into in the third quarter of fiscal year 2004. The borrowings under the
2004 Credit Agreement had an average interest rate of 4.4% during the third quarter of fiscal year
2005, compared to a 6.4% average rate under the Senior Notes and the 2001 Credit Agreement, which
were in place during the third quarter of fiscal year 2004. Average borrowings were $197.3 million
in the third quarter of fiscal year 2005 compared to $278.9 million in the same period in 2004.
Income Taxes
The effective income tax benefit rate for the thirteen weeks ended October 29, 2005 was 49.3%,
compared to an effective income tax benefit rate of 38.0% for the same period in fiscal year 2004.
The tax benefit rate increase was primarily attributable to a) an increase in anticipated losses in
entities with higher marginal income tax rates due to the additional expected charges for the
Companys WIN strategy initiatives; b) the settlement of a state
income tax loss contingency; c)
the release of loss contingencies due to the expiration of the
statute of limitations; offset by d)
an increase in the valuation allowance for state net operating loss (NOL) deferred tax assets due
to the decrease in forecasts of income in certain entities and jurisdictions in light of the
expected charges for the Companys WIN strategy initiatives.
In regards
to the increased valuation allowance, the Company updated its forecasts of
jurisdictional earnings in conjunction with other positive and negative evidence surrounding the
realization of deferred tax assets. The Company has taken into
account a tax planning
strategy for fiscal year 2007 to generate significant state jurisdictional income within the NOL
carryforward period in determining the valuation allowance required.
Discontinued Operations
The Companys discontinued operations relate to the KB Toys business which was sold by the Company
in December 2000 (see Note 3). The Company recorded charges of $4.9 million (net of a $3.7 million
tax benefit) related to lease indemnifications and $1.7 million (net of a $1.0 million tax benefit)
related to a mortgage guarantee of the Pittsfield DC in discontinued operations in the third
quarter of fiscal year 2004. These charges reflect the Companys best estimate of these lease
obligations and subrogation value on the Pittsfield DC. Actual results could differ from these
estimates.
THIRTY-NINE WEEKS ENDED OCTOBER 29, 2005 AND OCTOBER 30, 2004
Net Sales
Net sales increased to $3,191.2 million for the thirty-nine weeks ended October 29, 2005, compared
to $2,994.2 million for the thirty-nine weeks ended October 30, 2004. This net sales increase of
$197.0 million, or 6.6%, resulted from the net addition year over year of 39 stores, or 2.6% store
growth, and an increase in comparable store sales of 1.5%. The comparable store sales increase of
1.5% consisted of a 4.4% increase in the dollar value of the average basket offset by a 2.9%
decrease in the
28
number of customer transactions. The increase in the dollar value of the average basket was
primarily driven by an increase in the average item retail sales price. The strongest product
category for 2005 has been Home.
The following table summarizes the comparable store sales results for the thirty-nine week periods
as well as comparable results in customer transactions and in the value of the average basket:
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
October 30, 2004 |
|
Comparable store sales |
|
|
1.5 |
% |
|
|
0.6 |
% |
Customer transac tions |
|
|
(2.9 |
)% |
|
|
(1.6 |
)% |
Value of the average basket |
|
|
4.4 |
% |
|
|
2.2 |
% |
|
Net sales by product category in dollars and as a percentage of total net sales, and the net
sales change in dollars and percentage from the thirty-nine weeks ended October 29, 2005 to the
same period in fiscal year 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
October 30, 2004 |
|
Change |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
|
$ |
963,699 |
|
|
|
30.2 |
% |
|
$ |
946,984 |
|
|
|
31.6 |
% |
|
$ |
16,715 |
|
|
|
1.8 |
% |
Home |
|
|
1,001,303 |
|
|
|
31.4 |
|
|
|
884,218 |
|
|
|
29.5 |
|
|
|
117,085 |
|
|
|
13.2 |
|
Seasonal and toys |
|
|
512,559 |
|
|
|
16.1 |
|
|
|
502,055 |
|
|
|
16.8 |
|
|
|
10,504 |
|
|
|
2.1 |
|
Other |
|
|
713,628 |
|
|
|
22.3 |
|
|
|
660,918 |
|
|
|
22.1 |
|
|
|
52,710 |
|
|
|
8.0 |
|
|
Net sales |
|
$ |
3,191,189 |
|
|
|
100.0 |
% |
|
$ |
2,994,175 |
|
|
|
100.0 |
% |
|
$ |
197,014 |
|
|
|
6.6 |
% |
|
Gross Profit
Gross profit increased to $1,277.1 million for the thirty-nine weeks ended October 29, 2005,
compared to $1,222.7 million for the thirty-nine weeks ended October 30, 2004, an increase of $54.4
million or 4.4%. Gross profit as a percentage of net sales decreased to 40.0% in the thirty-nine
weeks ended October 29, 2005 compared to 40.8% in the thirty-nine weeks ended October 30, 2004. The
decline in the gross profit rate for the thirty-nine weeks is principally a result of lower IMU and
higher cost for domestic inbound freight due to increased fuel prices.
Selling and Administrative Expenses
Selling and administrative expenses increased to $1,231.3 million for the thirty-nine weeks ended
October 29, 2005, compared to $1,167.1 million for the thirty-nine weeks ended October 30, 2004, an
increase of $64.2 million or 5.5%. As a percentage of net sales, selling and administrative
expenses were 38.6% for the thirty-nine weeks ended October 29, 2005 compared to 39.0% for the
thirty-nine weeks ended October 30, 2004. The 40 basis point decrease was a result of efficiencies
in store payroll management and a reduction of outbound distribution and transportation costs
further discussed below, partially offset by the $6.4 million partial charge-off of the HCC Note
(see Note 3).
Outbound distribution and transportation costs, which were included in selling and administrative
expenses (see Note 1) increased to $174.5 million for the thirty-nine weeks ended October 29, 2005
compared to $169.9 million for the thirty-nine weeks ended October 30, 2004. As a percentage of net
sales, however, outbound distribution and transportation costs decreased by 20 basis points to 5.5%
of net sales in the thirty-nine weeks ended October 29, 2005 as compared to 5.7% for the same
period in fiscal year 2004. The rate decrease is a function of higher productivity in the
distribution system partially offset by the impact of higher fuel prices.
Depreciation Expense
Depreciation expense for the thirty-nine weeks ended October 29, 2005 was $86.3 million compared to
$77.3 million for the same period of fiscal year 2004. The $9.0 million increase is primarily
related to additional capital assets placed in service and, for those stores that will be closing
during fiscal year 2005, the accelerated depreciation expense of assets as a result of changing
their estimated useful lives.
29
Interest Expense
Interest expense, including the amortization of debt issuance costs, was $4.8 million for the
thirty-nine weeks ended October 29, 2005, compared to $23.2 million for the thirty-nine weeks ended
October 30, 2004, a decrease of $18.4 million. Interest expense for 2004 included $8.9 million of
debt prepayment charges incurred in connection with the early termination of the Senior Notes and
the 2001 Credit Agreement. Excluding the $8.9 million charge, interest expense decreased from 0.5%
of net sales in the thirty-nine weeks ended October 30, 2004 to 0.2% in the thirty-nine weeks ended
October 29, 2005. This decline in the interest expense rate was primarily due to a combination of
lower average borrowings and the lower average interest rate associated with the 2004 Credit
Agreement that was entered into in the third quarter of fiscal year 2004. The borrowings under the
2004 Credit Agreement had an average interest rate of 4.0% during the thirty-nine weeks ended
October 29, 2005, compared to a 7.5% average rate under the Senior Notes and the 2001 Credit
Agreement, which were in place during the thirty-nine weeks ended October 29, 2004. Average
borrowings for the thirty-nine weeks ended October 29, 2005 were $150.6 million compared to $229.0
million for the same period of fiscal year 2004.
Income Taxes
The effective income tax benefit rate for the thirty-nine weeks ended October 29, 2005 was 45.4%,
compared to an effective income tax benefit rate of 39.6% for the same period in fiscal year 2004.
The effective tax benefit rate increase was primarily attributable
to: a) an increase in
anticipated losses in entities with higher marginal income tax rates due to the additional expected
charges for the Companys WIN Strategy initiatives (discussed
above); b) increased benefit from
settlement of state income tax loss contingencies; c) the release of loss contingencies due to the
expiration of the statute of limitations; offset by d) an increase in the valuation allowance for
state NOL deferred tax assets due to the decrease in forecasts of income in certain entities and
jurisdictions in light of the expected charges for the companys
WIN Strategy initiatives; and e)
the write-down of deferred income tax assets as a result of Ohio tax reform enacted during the
second quarter of fiscal year 2005.
In regards
to the increased valuation allowance, the Company updated its forecasts of
jurisdictional earnings in conjunction with other positive and negative evidence surrounding the
realization of deferred tax assets. The Company has taken into
account a tax planning
strategy for fiscal year 2007 to generate significant state jurisdictional income within the NOL
carryforward period in determining the valuation allowance required.
As the Company has historically experienced and expects to continue to experience, seasonal
fluctuations, with a larger percentage of its net sales and operating profit being realized in the
fourth fiscal quarter, the Company will re-evaluate (as it has done in previous fiscal years) the
evidence surrounding the realization of deferred tax assets in the fourth fiscal quarter.
Discontinued Operations
The Companys discontinued operations relate to the KB Toys business which was sold by the Company
in December 2000 (see Note 3). The Company recorded charges of $4.9 million (net of a $3.7 million
tax benefit) related to lease indemnifications and $1.7 million (net of a $1.0 million tax benefit)
related to a mortgage guarantee of the Pittsfield DC in discontinued operations in the third
quarter of fiscal year 2004. These charges reflect the Companys best estimate of these lease
obligations and subrogation value on the Pittsfield DC. Actual results could differ from these
estimates.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
On October 29, 2004, the Company entered into the 2004 Credit Agreement. The 2004 Credit Agreement
is scheduled to mature on October 28, 2009. The proceeds of the 2004 Credit Agreement are available
for general corporate purposes, working capital, and to repay certain indebtedness of the Company,
including amounts that were outstanding related to the Senior Notes and the 2001 Credit Agreement.
The pricing and fees related to the 2004 Credit Agreement fluctuate based on the Companys debt
rating. Loans made under the 2004 Credit Agreement may be prepaid by the Company without penalty.
The 2004 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 these covenants could
result in a default under the 2004 Credit Agreement, which would permit the lenders to restrict the
Companys ability to further access the 2004 Credit Agreement for loans and letters of credit, and
require the immediate repayment of any outstanding loans under the 2004 Credit Agreement. On
October 29, 2005, the Company and the lenders entered into an amendment to the 2004 Credit
Agreement in order to eliminate the impact on the covenant calculations of the
30
charges related to the store closing plan, discussed in Note 4. The Company was in compliance with
its financial covenants at October 29, 2005.
The 2004 Credit Agreement permits, at the Companys option, borrowings at various interest rate
options based on the prime rate or London InterBank Offering Rate plus applicable margin. The 2004
Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually
agreed upon by the Company and the lenders. The weighted average interest rate of the outstanding
loans at October 29, 2005 was 4.6%. The Company typically repays and/or borrows on a daily basis in
accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of the
Companys liquidity position, which is generally affected by: a) cash inflows such as store cash
and other miscellaneous deposits; and b) cash outflows such as check clearings, wire and other
electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the 2004 Credit Agreement includes a $30.0 million swing
loan sub-limit, a $50.0 million bid loan sub-limit, and a $150.0 million letter of credit
sub-limit. At October 29, 2005, the total borrowings outstanding under the 2004 Credit Agreement
were $253.2 million, which total amount was comprised of $225.0 million in revolving credit loans,
$28.2 million in swing loans, and no bid loans. At January 29, 2005, the total borrowings
outstanding under the 2004 Credit Agreement were $159.2 million, which total amount was comprised
of $129.2 million in revolving credit loans, $30.0 million in swing loans, and no bid loans. The
borrowings available under the 2004 Credit Agreement, after taking into account the reduction of
availability resulting from outstanding letters of credit totaling $66.8 million, were $180.0
million at October 29, 2005.
The Company utilizes its credit facility primarily to manage ongoing and seasonal working capital
needs. Given the seasonality of the Companys business, the amount of borrowings under the 2004
Credit Agreement may fluctuate materially depending on various factors, including the time of year
and the Companys need to acquire merchandise inventory. In order to prepare for the 2005 holiday
season, the Company saw its borrowings and letters of credit peak at $341.5 million during the
first half of November 2005. The Company anticipates that borrowings will decline through December
2005.
Liquidity
The primary sources of liquidity for the Company are cash flows from operations and, as necessary,
borrowings under the 2004 Credit Agreement. At October 29, 2005, working capital was $737.5
million.
Cash flows used in operating activities were $26.7 million for the thirty-nine weeks ended October
29, 2005, and resulted primarily from a net loss of $24.7 million and the seasonal build in
inventories of $194.9 million, partially offset by the increase in accounts payable of $121.8
million and depreciation and amortization of $80.4 million. Cash flows used in operating
activities were $153.4 million for the thirty-nine weeks ended October 30, 2004, and resulted
primarily from an increase in inventories of $238.9 million partially offset by the increase in
accounts payable of $61.9 million and depreciation and amortization of $76.5 million.
Cash flows used in investing activities were $57.2 million for the thirty-nine weeks ended October
29, 2005 compared to $100.6 million for the thirty-nine weeks ended October 30, 2004. The
difference of $43.4 million was primarily due to a decreased level of capital spending in fiscal
year 2005, during which no stores were remodeled, compared to 66 store remodels in fiscal year 2004
and lower distribution center capital spending in fiscal year 2005 as compared to fiscal year 2004.
Capital expenditure requirements in fiscal year 2005 are anticipated to be approximately $70 to
$80 million, and will consist primarily of investments in new stores, the completion of the
Columbus, Ohio distribution center re-engineering project, and maintenance of existing stores,
distribution centers, and the Companys general office.
Cash flows provided by financing activities were $96.4 million for the thirty-nine weeks ended
October 29, 2005, relating primarily to borrowings of outstanding debt of $1,967.7 million offset
by repayments of $1,873.7 million. All of the borrowings and repayments were a result of activity
associated with daily cash needs of the Company. For the thirty-nine weeks ended October 30, 2004,
cash flows provided by financing activities were $98.6 million, due primarily to $893.9 million of
borrowings offset by the $726.8 million of repayments and the purchase of 5.4 million of the
Companys common shares for an aggregate cost of $75.0 million, or $13.82 average per share price
paid. Of the total borrowings and repayments, $204.0 million and $153.3 million were attributable
to the early termination of the Senior Notes and the 2001 Credit Agreement, respectively.
Cash paid for income taxes (excluding refunds) of $22.3 million for the thirty-nine week period
ended October 29, 2005, was $1.0 million lower when compared to the same period last year.
31
The Company continues to believe that it has, or, if necessary, has the ability to obtain adequate
resources to fund ongoing operating requirements, future capital expenditures, development of new
projects, and currently maturing obligations. Additionally, management is not aware of any current
trends, events, demands, commitments, or uncertainties which reasonably can be expected to have a
material impact on the Companys capital resources or liquidity.
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 and
assumptions about future events that affect the amounts reported in the financial statements and
accompanying notes. Actual results could materially differ from those estimates.
The Companys accounting policies and other disclosures required by GAAP are also described in Note
1 to the Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q. The items listed below are not intended to be a
comprehensive list of all the Companys accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by GAAP, with no need for
managements judgment in the principles application. There are also areas in which managements
judgment in selecting any available alternative would not produce a materially different result.
The Company has certain critical accounting policies and accounting estimates, which are described
below.
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. Under the average cost retail inventory method, inventory is
segregated into departments of merchandise having similar characteristics at its current retail
selling value. Inventory retail selling values are converted to a cost basis by applying specific
average cost factors for each merchandise department. Cost factors represent the average
cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal
year purchase activity. The average cost retail inventory method requires management to make
judgments and contains estimates, such as the amount and timing of markdowns to clear unproductive
or slow-moving inventory, which may impact the ending inventory valuation and gross profit. These
assumptions are based on historical experience and current information.
Permanent markdowns are recorded as a gross profit reduction in the period of managements decision
to initiate price reductions with the intent not to return the price to regular retail. Promotional
markdowns are recorded as a gross profit reduction in the period the merchandise is sold. Factors
considered in the determination of markdowns include current and anticipated demand, customer
preferences, age of the merchandise, and seasonal trends.
Shrinkage is recorded as a reduction to inventories and gross profit and is estimated 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 the Companys actual experience and the Companys
most recent physical inventory results. While it is not possible to quantify the impact from each
cause of shrinkage, the Company has loss prevention programs and policies that it believes minimize
shrinkage.
Due to the nature of the Companys purchasing practices for closeout and deeply discounted
merchandise, vendors and merchandise suppliers generally do not offer the Company incentives such
as slotting fees, cooperative advertising allowances, buy down agreements, or other forms of
rebates that could materially reduce its cost of sales.
Property and Equipment Net
Property and equipment are stated at cost. Depreciation and amortization expense are recorded using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful life or the lease
term.
32
The estimated useful lives by major asset category are as follows:
|
|
|
|
|
Land improvements |
|
15 years |
Buildings and leasehold improvements |
|
5 - 40 years |
Fixtures and equipment |
|
5 - 15 years |
Transportation equipment |
|
3 - 20 years |
There was no capitalized interest for the thirteen and thirty-nine weeks ended October 29,
2005. Capitalized interest was $0.3 and $0.6 million for the thirteen and thirty-nine weeks ended
October 30, 2004, respectively.
Impairment
The Company has long-lived assets that consist primarily of property and equipment. The Company
estimates useful lives on buildings and equipment using assumptions based on historical data and
industry trends. Impairment is recorded if the carrying value of the long-lived asset exceeds its
anticipated undiscounted future net cash flows. The Companys assumptions related to estimates of
future cash flows are based on historical results of cash flows adjusted for management projections
for future periods. The Company estimates the fair value of its long-lived assets using readily
available market information for similar assets.
Insurance Reserves
The Company is self-insured for certain losses relating to general liability, workers
compensation, and employee medical and dental benefit claims, and the Company has purchased
stop-loss coverage to limit significant exposure in these areas. Accrued insurance liabilities are
based on claims filed and estimates of claims incurred but not reported. Such amounts are
determined by applying actuarially-based calculations taking into account known trends and
projections of future results. Actual claims experience can impact these calculations and, to the
extent that subsequent claim costs vary from estimates, future earnings could be impacted and the
impact could be material.
Income Taxes
The Company has generated deferred tax assets and liabilities due to temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company assesses the adequacy and need for a valuation allowance
for deferred tax assets. The Company also considers SFAS No. 109
tax planning strategies in
determining the amount of valuation allowance required. The Company has established a valuation
allowance to reduce its deferred tax assets to the balance that is more likely than not to be
realized.
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), tax
planning strategies, changes in the income tax laws (which may be retroactive to the beginning of
the fiscal year), changes in the expected outcome or settlement of an income tax contingency,
changes in the deferred tax valuation allowance, and adjustments of a deferred tax asset or
liability for enacted changes in tax laws or rates.
The Companys income tax accounts reflect estimates of the outcome or settlement of various
asserted and unasserted income tax contingencies including tax audits and administrative appeals.
At any point in time, several tax years may be in various stages of audit or appeal or could be
subject to audit by various taxing jurisdictions. This requires a periodic identification and
evaluation of significant doubtful or controversial issues. The results of the audits, appeals, and
expiration of the statute of limitations are reflected in the income tax accounts accordingly.
Pension Liabilities
Pension and other retirement benefits, including all relevant assumptions required by GAAP, are
evaluated each year. Outside actuaries are used to provide assistance in calculating the future
obligations for pension and other retirement benefits. Since there are many assumptions used to
estimate the Companys obligations for retirement benefits, differences between actual future
events and prior estimates and assumptions could result in adjustments to pension expenses and
obligations. Certain actuarial assumptions, such as the discount rate and expected long-term rate
of return, have a significant effect on the amounts reported for net periodic pension cost and the
related benefit obligations. The Company reviews external data and historical
33
trends to help
determine the discount rate and expected long-term rate of return. The Companys objective in
selecting a discount rate is to identify the best estimate of the rate at which the benefit
obligations would be settled on the measurement
date. In making this estimate, the Company reviews rates of return on high-quality, fixed-income
investments currently available and expected to be available during the period to maturity of the
benefits. This process includes a review of the bonds available on the measurement date with a
quality rating of at least Aa. To develop the expected long-term rate of return on assets, the
Company considers the historical returns and the future expectations for returns for each asset
class, as well as the current or anticipated future allocation of the pension portfolio.
Commitments and Contingencies
In the ordinary course of its business, the Company is or may be subject to various legal actions
and claims. In connection with such actions and claims, the Company must make estimates of
potential legal obligations and liabilities, which require the use of managements judgment on the
outcome of various issues. Management may also use outside legal counsel to assist in the
estimating process; however, the ultimate outcome of various legal issues could be materially
different from managements estimates and adjustments to income could be required. The assumptions
used by management are based on the requirements of SFAS No. 5, Accounting for Contingencies. The
Company will record, if material, a liability when it has determined that the occurrence of a loss
contingency is probable and the loss can be reasonably estimated, and it will disclose the related
facts in the notes to its financial statements. If the Company determines that the occurrence of a
loss contingency is reasonably possible or that it is probable but the loss cannot be reasonably
estimated, the Company will, if material, disclose the nature of the loss contingency and the
estimated range of possible loss or include a statement that no estimate of loss can be made. The
Company makes these determinations in consultation with its attorneys.
Revenue Recognition
The Company recognizes retail sales in its stores at the time the customer takes possession of
merchandise. All sales are net of discounts and returns and exclude sales tax. The reserve for
retail merchandise returns is based on the Companys prior experience.
Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase
order. Wholesale sales are predominantly recognized under freight on board (FOB) origin where
title and risk of loss pass to the buyer when the merchandise leaves the Companys distribution
facility. However, when the shipping terms are FOB destination, recognition of sales revenue is
delayed until completion of delivery to the designated location.
The Company recognizes gift card sales revenue at the time of redemption. The liability for the
gift cards is established for the cash value at the time of purchase. The liability for outstanding
gift cards is recorded in accrued liabilities.
The Company offers price hold contracts on selected furniture merchandise. Revenue for price hold
contracts is recognized when the customer makes the final payment and takes possession of the
merchandise. Cash paid by the customer is recorded in accrued liabilities. In the event that a
sale is not consummated, liquidated damages are recorded as the lesser of: a) $25; b) 10% of the
merchandise purchase price (exclusive of sales tax); or c) the amounts deposited by the customer.
Cost of Sales
Cost of sales includes the cost of merchandise (including related inbound freight to the Companys
distribution centers, duties, and commissions), markdowns, and inventory shrinkage, net of cash
discounts and rebates. The Company classifies outbound distribution and transportation costs as
selling and administrative expenses. Due to this classification, the Companys gross profit rates
may not be comparable to those of other retailers that include outbound distribution and
transportation costs in cost of sales.
Selling and Administrative Expenses
The Company includes store expenses (such as payroll and occupancy costs), outbound distribution
and transportation costs to the Companys stores, advertising, purchasing, insurance, and overhead
costs in selling and administrative expenses. Selling and administrative expense rates may not be
comparable to those of other retailers that include outbound distribution and transportation costs
in cost of sales.
Rent Expense
Rent expense is recognized over the term of the lease. The Company recognizes minimum rent starting
when possession of the property is taken from the landlord, which normally includes a construction
period prior to store opening. When a lease contains
34
a predetermined fixed escalation of the
minimum rent, the Company recognizes the related rent expense on a straight-line basis and records
the difference between the recognized rental expense and the amounts payable under the lease as
deferred
incentive rent. The Company also receives tenant allowances, which are recorded in deferred
incentive rent and are amortized as a reduction to rent expense over the term of the lease.
Deferred incentive rent is reflected in other liabilities.
Certain leases provide for contingent rents that are not measurable at inception. These contingent
rents are primarily based on a percentage of sales that are in excess of a predetermined level.
These amounts are excluded from minimum rent and are included in the determination of total rent
expense when it is probable that the expense has been incurred and the amount is reasonably
estimable.
Discontinued Operations
The reserve for discontinued operations, which is included in accrued liabilities in the Condensed
Consolidated Balance Sheets, includes managements estimate of the Companys potential liability
under its lease and mortgage obligations which have been rejected by KB as part of its bankruptcy
proceeding. For a discussion of the discontinued operations, see Note 3.
Recent Accounting Pronouncements
In December, 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires an entity
to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award using an option-pricing model. The cost of the
awards, including the related tax effects, will be recognized in the Consolidated Statement of
Operations. This statement eliminates the alternative to use the intrinsic value method for
valuing share-based compensation, which typically resulted in recognition of no compensation cost.
The statement was to become effective for interim or annual periods beginning after June 15, 2005,
with early adoption encouraged. On April 15, 2005, the SEC issued Release No. 33-8568, which
amended the date for compliance with SFAS No. 123(R), to the first interim or annual period of the
first fiscal year beginning after June 15, 2005, with early adoption permitted. On November 21,
2005, the Company announced that the Nominating and Compensation Committee (Committee) of the
Companys Board of Directors, after discussion with the Board of
Directors, approved accelerating the vesting of stock options representing approximately 3.8 million of
the Companys shares awarded on or
before February 21, 2005, under the Big Lots Inc. 1996
performance incentive Plan and the Big Lots, Inc. Amended Restated Director Stock Option Plan.
The Committee did not, however, accelerate the vesting of stock options granted after February 21, 2005, including those granted to the Companys current
Chief Executive Officer, Steven S. Fishman, or the vesting of stock
options granted to the Companys former Chief Executive Officer,
Michael J. Potter. The decision to accelerate vesting of stock options was made primarily
to reduce non-cash compensation expense that would have been recorded in future periods following
the adoption of SFAS No. 123(R) in the first quarter of fiscal year 2006. This action is expected
to enable the Company to eliminate approximately $11.7 million (before tax) of expense over the
five year period during which the stock options would have vested, subject to determination of the
exact number of stock options being accelerated and the impact of additional adjustments related to
cancellation of certain stock options. The Company also believes this action will have a positive
effect on associate morale and retention. Additionally, the Committee imposed a holding period
that requires all directors, executive vice presidents, and senior
vice presidents (including the Companys named executive
officers other than Messrs. Fishman and Potter, whose options were
not accelerated) to refrain from selling net shares acquired upon exercise of
the accelerated stock options until the date on which the exercise would have been permitted under the
stock options original vesting terms or, if earlier, the director or officers death, permanent and total disability or
termination of employment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk from exposure to changes in interest rates associated with
the 2004 Credit Agreement. The Company had no fixed rate long-term debt at October 29, 2005. The
Company does not expect changes in interest rates to have a material adverse effect on the
Companys financial condition, results of operations, or liquidity; however, there can be no
assurances that interest rates will not materially change. The Company does not believe that a
hypothetical adverse change of 10% in interest rates would have a material adverse effect on the
Companys financial condition, results of operations, or liquidity.
The Company purchases approximately 29% of its product directly from overseas suppliers, all of
which are purchased in U.S. dollars.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Companys disclosure controls and
procedures, as that term is defined in Rules 13a-15e and
35
15d-15(e) of the Securities Exchange Act of
1934, as amended (the Exchange Act), as of the end of the period covered by this report. Based on
such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have each
concluded that such disclosure controls and procedures are effective as of the end of the period covered by this
report in order to ensure that information required to be disclosed in the Companys periodic
reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified by the SECs rules, forms, and regulations.
Changes in Internal Control over Financial Reporting
No changes in the Companys internal control over financial reporting, as that term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act, occurred during the Companys most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
36
Part II. Other Information
Item 1. Legal Proceedings.
No response is required under Item 103 of Regulation S-K. For a discussion of certain litigated
matters, see Note 3 and Note 6.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits.
Exhibits marked with an asterisk (*) are filed herewith. Exhibits 10.1 through 10.3 are management
contracts or compensatory plans, contracts, or arrangements.
|
|
|
|
|
Exhibit No. |
|
Document |
|
|
10.1
|
|
Employment Agreement with Kent Larsson (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K dated August 17, 2005). |
|
|
|
|
10.2
|
|
Amendment to the Big Lots, Inc. 1996 Performance Incentive Plan (incorporated
herein by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K dated
August 17, 2005). |
|
|
|
|
10.3
|
|
Employment Agreement with Lisa M. Bachmann (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K dated August 29, 2005). |
|
|
|
|
10.4
|
|
First Amendment to Credit Agreement (incorporated herein by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K dated October 25, 2005). |
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
37
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated:
December 7, 2005
|
|
|
|
|
|
BIG LOTS, INC.
|
|
|
By: |
/s/ Joe R. Cooper
|
|
|
|
|
|
|
Joe R. Cooper
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer, Principal Accounting Officer
and Duly Authorized Officer) |
|
|
|
38
EX-31.1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven S. Fishman, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Big Lots, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, 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; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal control
over financial reporting. |
Dated:
December 7, 2005
|
|
|
|
|
|
|
|
|
By: |
/s/ Steven S. Fishman
|
|
|
Steven S. Fishman
Chairman of the Board, Chief Executive Officer and
President |
|
|
|
39
EX-31.2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joe R. Cooper, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Big Lots, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, 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; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal control
over financial reporting. |
Dated:
December 7, 2005
|
|
|
|
|
|
|
|
|
By: |
/s/ Joe R. Cooper
|
|
|
Joe R. Cooper
Senior Vice President and
Chief Financial Officer |
|
|
|
40
EX-32.1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies
the quarterly report on Form 10-Q (the Report) for the quarter ended October 29, 2005, of Big
Lots, Inc. (the Company). I, Steven S. Fishman, Chairman of the Board, Chief Executive Officer
and President of the Company, certify that:
(i) |
|
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
|
(ii) |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Dated:
December 7, 2005
|
|
|
|
|
|
|
|
|
By: |
/s/ Steven S. Fishman
|
|
|
|
|
|
|
Steven S. Fishman
Chairman of the Board, Chief Executive
Officer and
President |
|
|
41
EX-32.2
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies
the quarterly report on Form 10-Q (the Report) for the quarter ended October 29, 2005, of Big
Lots, Inc. (the Company). I, Joe R. Cooper, Senior Vice President and Chief Financial Officer of
the Company, certify that:
(i) |
|
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
|
(ii) |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Dated:
December 7, 2005
|
|
|
|
|
|
|
|
|
By: |
/s/ Joe R. Cooper
|
|
|
|
|
|
|
Joe R. Cooper
Senior Vice President and
Chief Financial Officer |
|
|
|
42