Big Lots 2007 Annual Report Download - page 96

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and realigned general office, field operations, and distribution centers resources to more appropriately fit
our business requirements. In 2006, we tested and executed newly developed merchandising and marketing
approaches and focused on improving efficiencies in our purchasing and distribution practices. In March 2007,
we announced certain operating performance targets and goals for the period 2007 through 2009 that we refer
to collectively as our “Long Range Plan” (see the accompanying Management’s Discussion and Analysis of
Financial Condition and Results of Operations for additional information concerning our operating strategy).
We are attempting to continue to improve our recent operating trends of 2006 and 2007 through the execution
of a number of strategies in our merchandising, marketing, and real estate areas. These strategies are aimed at
driving comparable store sales growth, higher inventory turns, and higher gross margin dollars while reducing
selling and administrative costs. In 2006 and 2007, we were able to meet or exceed many of our operating
performance targets and goals. There is a risk that we will be unable to continue to meet or exceed these
operating performance targets and goals in the future if our strategies are not successful.
If we are unable to compete effectively in the highly competitive discount retail industry, our business and
results of operations may be materially adversely affected.
The discount retail business is highly competitive. As discussed in Item 1 of this Form 10-K, we compete for
customers, employees, products, real estate, and other aspects of our business with a number of other companies.
Certain of our competitors have greater financial, distribution, marketing, and other resources that may be devoted
to sourcing, promoting, and selling their merchandise. It is possible that increased competition or improved
performance by our competitors may reduce our market share, gross margin, operating margin, and projected
operating results, and may materially adversely affect our business and results of operations in other ways.
A decline in general economic condition, consumer spending levels, and other conditions could lead to reduced
consumer demand for our merchandise thereby materially adversely affecting our revenues and gross margin.
Our results of operations can be directly impacted by the health of the United States’ economy. Our business and
financial performance may be adversely impacted by current and future economic conditions, including factors
that may restrict or otherwise negatively impact consumer financing, disposable income levels, unemployment
levels, energy costs, interest rates, recession, inflation, the impact of natural disasters and terrorist activities,
and other matters that influence consumer spending. The economies of four states (Ohio, Texas, California, and
Florida) are particularly important as approximately 37% of our current stores operate in these states and 39% of
our 2007 net retail sales occurred in these states.
Changes by vendors related to the management of their inventories may reduce the quantity and quality of
brand-name closeout merchandise available to us or may increase our cost to acquire brand-name closeout
merchandise, either of which may materially adversely affect our revenues and gross margin.
The products we sell are sourced from a variety of vendors. In the closeout business, we cannot control the
supply, design, function, availability, or cost of many of the products that we offer for sale. We depend upon the
sufficient availability of closeout merchandise that we can acquire and offer at prices that represent a value to
our customers, in order to meet or exceed our operating performance targets for gross margin. In addition, we
rely on our vendors to provide us quality merchandise. To the extent that our vendors are better able to manage
their inventory levels and reduce the amount of their excess inventory, the amount of closeout merchandise
available to us could be materially reduced. If shortages or disruptions occur in the availability of closeout
merchandise or if the quality of such merchandise is not acceptable to our customers or us, it is likely to have a
material adverse effect on our sales and gross margin and may result in customer dissatisfaction.
We rely on vendors located in foreign countries for significant amounts of merchandise. In addition, many
of our vendors have foreign manufacturing facilities. Our business may be materially adversely affected by
risks associated with international trade.
Global sourcing of many of the products we sell is an important factor in driving higher gross margin. During
2007, we purchased approximately 25% of our products directly from overseas vendors including 21% from
vendors located in China. Our ability to find qualified vendors and to access products in a timely and efficient
manner is a significant challenge, especially with respect to goods sourced outside of the United States.
Increased import duties, increased shipping costs, more restrictive quotas, loss of “most favored nation” trading