Big Lots 2007 Annual Report Download - page 112

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partially offset by the impact from a couple of larger closeout deals, including a drugstore deal and a furniture
deal. Similar to other retailers, our toy business was challenged in 2007 principally due to the negative publicity
from certain high profile toy recalls.
We manage our business based on one segment, broadline closeout retailing. During the first quarter of 2007, in
connection with the completion of the internal re-alignment of certain merchandising departments and classes
between our divisional merchandising managers, we determined that the following six merchandise categories
most directly match our internal management and reporting of merchandise net sales results: Consumables,
Home, Furniture, Hardlines, Seasonal, and Other. See Item 1, Business of this Form 10-K for a more detailed
description of each category. Effective for the first quarter of 2007, we use these six categories externally to
report net sales information by each merchandise group in accordance with the requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. Prior period amounts presented have
been reclassified to conform to the current year presentation.
Net sales by product category, net sales by product category as a percentage of total net sales, and net sales
change in dollars and percentage in 2007 compared to 2006 were as follows:
2007 2006 Change
($ in thousands)
Consumables ....................... $1,339,433 28.8% $1,317,095 27.8% $ 22,338 1.7%
Home ............................. 783,047 16.8 842,974 17.8 (59,927) (7.1)
Furniture .......................... 687,292 14.8 681,952 14.4 5,340 0.8
Hardlines .......................... 629,119 13.5 645,338 13.6 (16,219) (2.5)
Seasonal ........................... 597,933 12.8 584,762 12.3 13,171 2.3
Other ............................. 619,478 13.3 670,927 14.1 (51,449) (7.7)
Net sales ......................... $4,656,302 100.0% $4,743,048 100.0% $ (86,746) (1.8)%
Gross Margin
Gross margin dollars decreased 2.7% to $1,840.3 million in 2007 compared to $1,891.4 million in 2006. The
decline in gross margin by $51.1 million was principally due to a combination of lower net sales and a lower
gross margin rate. Gross margin as a percentage of net sales was 39.5% in 2007 compared to 39.9% in 2006.
This gross margin rate decrease of 40 basis points was primarily due to higher markdowns, a shift in the sales
mix toward lower margin categories such as Consumables, from higher margin categories or departments,
such as the Home category and the toys department, and higher accruals for shrink. Higher markdowns were
attributable in part to slower selling categories and departments, such as the Home category and the toys
department, and more promotional selling in Seasonal and Furniture. The factors decreasing the gross margin
rate were partially offset by an improvement in the initial mark up of merchandise purchased in 2007 compared
to purchases in 2006. This improvement in initial mark up is primarily attributed to our merchandising
strategies as discussed in the above Merchandising section under Operating Strategy. Our inventory turnover
improved to 3.5 turns in 2007 compared to 3.4 turns in 2006.
Selling and Administrative Expenses
Selling and administrative expenses decreased 6.6% to $1,515.4 million in 2007 compared to $1,622.3 million in
2006. Selling and administrative expenses as a percentage of net sales were 32.5% in 2007 compared to 34.2%
in 2006. In 2007 selling and administrative expenses were reduced by $5.2 million (10 basis points) of proceeds
from the KB Toys bankruptcy trust (see note 11 to the accompanying consolidated financial statements for
additional information) and $4.9 million (10 basis points) of insurance proceeds as recovery for 2005 hurricane
insurance claims. In 2006, selling and administrative expenses included charges of $9.7 million (20 basis points)
for the estimated settlement liability for the tentative settlements of two employment-related civil class actions
brought against us (see note 10 to the accompanying consolidated financial statements). In addition to these
specific items, the following items contributed to the 170 basis point improvement in selling and administrative
expense leverage: 1) the 2.0% increase in comparable store sales, which was above our expense leverage point;
2) a reduction in health and welfare plan expenses of $26.9 million driven by greater discounts resulting from