Big Lots 2007 Annual Report Download - page 115

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Selling and Administrative Expenses
Selling and administrative expenses increased 1.6% to $1,622.3 million in 2006 compared to $1,596.1 million in
2005. While net sales increased $313.1 million, selling and administrative expenses increased only $26.2 million
and as a result, selling and administrative expenses as a percentage of net sales were 34.2% in 2006 compared to
36.0% in 2005. The following items contributed to the 180 basis point improvement in selling and administrative
expense leverage: 1) the 4.6% increase in comparable store sales, which was above our expense leverage point;
2) our “raise the ring” merchandising strategy which delivered higher sales results with fewer cartons processed
by the distribution centers and stores; 3) reduction in general office and field operations headcount primarily
due to the elimination of some redundancies between closeout and furniture store operations; and 4) various
initiatives aimed at improving efficiency at our stores and distribution centers including tightly managed
payroll budgets, the initiation of a vendor compliance program, and merchandising strategies aimed at getting
merchandise delivered that is more efficiently able to be displayed on the selling floor, for example, pre-ticketed
items and improved packaging (ready-to-display packaging, palletized end cap displays, etc.).
Some of the increases in selling and administrative expense components from 2005 to 2006 were bonus expense
of $22.0 million, wage litigation charges of $9.7 million, utilities of $6.5 million, stock-based compensation
expense of $5.7 million, and asset impairment charges of $5.0 million. These increases were partially offset by
decreases in store hourly wages of $10.7 million, general office wages of $5.2 million, field operations cost of
$4.2 million, and proceeds received as a result of the Visa/MasterCard antitrust settlement of $2.6 million. The
bonus expense increase is due primarily to our improved financial performance in 2006 and compares to 2005
when no general office bonuses were paid. The wage litigation charges are discussed in more detail in note 10 to
the accompanying consolidated financial statements. Higher utilities costs are primarily a result of higher utility
rates. Stock-based compensation expense increased primarily as a result of adopting SFAS No. 123(R) (See note
1 to the accompanying consolidated financial statements) and the achievement of a performance-based target
with respect to nonvested restricted stock awards granted in the first quarter of 2006. The asset impairment
charges relate primarily to charges taken on certain underperforming stores that were opened in 2004 and 2005.
Lower store hourly wages, even with the $313.1 million increase in sales, are a result of improved productivity in
the stores primarily due to lower inventory levels at the stores and our “raise the ring” merchandising strategy.
The decline in general office and field operations expenses was primarily a result of the reduction in headcount
which included the elimination of some redundancies in the furniture and closeout operations.
Distribution and outbound transportation costs, which were included in selling and administrative expenses
(see note 1 to the accompanying consolidated financial statements), decreased 0.8% to $222.1 million in 2006
compared to $223.8 million in 2005. Distribution and outbound transportation expenses as a percentage of net
sales were 4.7% in 2006 compared to 5.1% in 2005. The 40 basis point decrease was primarily due to our “raise
the ring” merchandising strategy which resulted in fewer cartons being processed through the distribution
centers with higher carton values. In addition, our emphasis on improved inventory turnover led to lower
inventory levels maintained in the distribution centers.
Depreciation Expense
Depreciation expense for 2006 was $101.3 million compared to $108.7 million for 2005. The $7.4 million
decrease was principally related to a declining amount of capital expenditures in 2005 and 2006. The lower
capital expenditures are principally related to opening 11 stores in 2006 and a conservative approach to
capital investments aimed primarily at the development of a new point-of-sale register system and other items
generally considered “maintenance capital” items for our distribution centers and stores in 2006. 2005 capital
expenditures included capital related to the completion of reengineering of our Columbus, Ohio distribution
center.
Upon the successful completion of a pilot program in 32 of our stores and the decision to move forward with
the implementation of a new point-of-sale system in all of our stores, we reduced the remaining estimated
service life on approximately $6.9 million of certain point-of-sale equipment. The impact of this service life
reduction was to recognize approximately $2.3 million of depreciation expense in the fourth quarter of 2006.
The estimated remaining service life was based on our projected roll out schedule to all remaining stores,
approximately one-half in 2007 and one-half in 2008.