Big Lots 2008 Annual Report Download - page 102

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Long-Lived Assets
Our long-lived assets primarily consist of property and equipment. We perform annual impairment reviews of
our long-lived assets at the store level. When we perform the annual impairment reviews, we first determine
which stores had impairment indicators present. We use actual historical cash flows to determine which stores
had negative cash flows in each of the past two years (on a rolling basis). For each store with two years of
negative cash flows, we obtain future cash flow estimates based on operating performance estimates specific
to each store’s operations that are based on assumptions currently being used to develop our company level
operating plans. If the net book value of a store’s long-lived assets is not recoverable by the expected future
cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for
the excess net book value of the store’s long-lived assets over their fair value. The fair value of store assets is
estimated based on information available in the marketplace for similar assets.
We recognized impairment charges of $0.1 million, $0.8 million, and $7.7 million in 2008, 2007, and 2006,
respectively. We believe that our impairment charges are trending lower because we closed a number of
underperforming stores at the end of 2005, and continued to close (primarily through non-renewal of leases)
underperforming stores in 2006, 2007 and 2008. We only identified seven stores with impairment indicators
as a result of our annual store impairment tests in 2008 and we recognized impairment charges on six of those
stores. Therefore, we do not believe that varying the assumptions used to test for recoverability to estimate fair
value of our long-lived assets would have a material impact on the impairment charges we incurred in 2008.
However, if our future operating results decline significantly, we may be exposed to impairment losses that
could be material (see Item 1A, Risk Factors, for additional discussion of this risk).
In addition to our annual store impairment reviews, we evaluate our long-lived assets at each reporting period
to determine whether impairment indicators are present. In 2008, we recorded impairment to the assets of one
store as a result of a casualty loss due to hurricane damage. The amount of this impairment is included in the
$0.1 million 2008 impairment charge discussed above.
Share-Based Compensation
We grant stock options and performance-based nonvested restricted stock to our employees under shareholder
approved incentive plans. Share-based compensation expense was $15.5 million, $9.9 million, and $6.6 million
in 2008, 2007, and 2006, respectively. The increase in share-based compensation expense in each of the
last three years is principally due to our adoption of SFAS No. 123(R) in the first quarter of 2006, when we
began recognizing expense in our consolidated statements of operations for the fair value of stock options.
Additionally, in the fourth quarter of 2005, we accelerated the vesting of certain stock options, but not those
granted after February 21, 2005, in order to reduce future expense on these options. The majority of our stock
options granted in 2006 and subsequent years vest on a pro-rata basis over a four-year period. Assuming that we
grant a similar number of stock options in 2009 to the number we granted in 2008, we would expect share-based
compensation expense to increase in 2009, to reflect the additional options outstanding that have unrecognized
compensation expense. Because 2009 is the fourth year of expensing stock options and the majority of our stock
options vest on a pro-rata basis over four years, we do not expect the number of unvested options to continue to
increase beyond 2009 unless the number of stock options granted increases in the future. Future share-based
compensation expense for stock options is dependent upon the number and terms of future stock option awards
and many estimates, judgments and assumptions used in arriving at the fair value of stock options. Future
expense related to stock options may vary materially from currently amortizing options.
We estimate the fair value of our stock options using a binomial model. The binomial model takes into account
estimates, assumptions, and judgments about our stock price volatility, our dividend yield rate, the risk-free rate
of return, 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 retirement of the option holder in computing the value of the option.
Expected volatility is based on historical and current implied volatilities from traded options on our common
shares. The dividend yield rate on our common shares is assumed to be zero since we have not paid dividends
and have no immediate plans to do so. The risk-free rate is based on U.S. Treasury security yields at the time of
the grant. The expected life is determined from the application of the binomial model and includes assumptions
such as the expected employee exercise behavior and our expected turnover rate, which is based on analysis of
historical data.