Big Lots 2008 Annual Report Download - page 91

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are calculated by using all stores that were open for at least two fiscal years as of the beginning of 2008. This
calculation may not be comparable to other retailers who calculate comparable store sales based on other
methods or criteria. Following a comparable store sales increase of 3.1% in the first half of 2008, sales trends
softened resulting in a comparable store sales decrease of 1.9% in the second half of 2008. We believe that
our comparable store sales results in the third and fourth quarters were in part due to the worsening general
economic trends. As a result of the current general economic trends, consumers may elect to forego purchases
in response to tighter credit and negative financial news. Reduced consumer spending may reduce our net
sales. Based on sales trends in January and February 2009, and on current general economic trends, we expect
comparable store sales to be flat to a decline of 2% in 2009.
From a merchandise perspective, the Consumables, Hardlines, and Furniture categories net sales increased while
net sales of Home, Other, and Seasonal declined. Consumables continued its consistent sales growth throughout
the year. As the year progressed, consumers chose to seek out value when shopping for the everyday household use
items that we offer in our Consumables business. We believe our strategy of offering name brands at competitive
prices has led to this consistently positive net sales performance in the Consumables category. The Hardlines
category increase in net sales was driven by the availability in the second half of 2008 of multiple closeout deals
containing higher ticket electronics, highlighted by significant values on items such as popular video games
and personal computer laptops from national brand manufacturers. The Furniture category increase was driven
by sales of mattresses, which were attributable to the customer response throughout the year especially when
promotional pricing was coupled with holiday events such as the Labor Day mattress promotion. The Home
category net sales consistently underperformed throughout the year continuing a trend which began in the first
half of 2007. We believe our customers have elected to defer purchases of this type of merchandise; however, we
have new merchant management in place for this category and intend to focus our efforts on the brand names and
value propositions that have been successful in other merchandise categories. The Other category sales decline is
primarily due to lower sales of toys principally in the latter half of the year, when toys represent a relatively larger
portion of our total net sales. The lower toys sales results were partially offset within the Other category by higher
sales driven by closeout deals of licensed kids underwear during the first half of the year. The Seasonal category
net sales produced positive results in the first half of the year for lawn & garden and summer merchandise;
however, the second half of the year’s net sales underperformed due to lower comparable store sales for Christmas,
Halloween, and harvest. Because the Christmas selling season represents a higher portion of the total year’s sales
in this category, the decline in Christmas merchandise sales drove the category sales lower for the year.
Gross Margin
Gross margin dollars increased $17.1 million (0.9%) to $1,857.4 million in 2008 compared to $1,840.3 million
in 2007. Gross margin as a percentage of net sales was 40.0% in 2008 compared to 39.5% in 2007. The increase
in gross margin dollars was principally due to the higher gross margin rate, which increased gross margin
dollars by approximately $21 million. Partially offsetting the higher gross margin rate was lower net sales of
$11.0 million, which reduced gross margin dollars by approximately $4 million. The gross margin rate increase
of 50 basis points was primarily due to higher initial markup on merchandise and favorable shrink results
partially offset by higher markdowns and the mix impact of our higher net sales in merchandise categories,
such as Consumables, that have lower gross margin rates. The improvement in initial markup was due in part
to a drugstore liquidation deal, a furniture closeout from a large national brand, and an overall favorable deal
environment for closeout merchandise. In addition, initial markup was higher in 2008 due to our Home Event,
which we offered in our stores principally during the first half of the year. The Home Event merchandise was
included in the Furniture category and Home category. Shrink was lower principally due to favorable physical
inventory results. Higher markdowns were attributable in part to planned markdowns associated with a
drugstore liquidation deal, a furniture closeout from a large national brand, and our Home Event merchandise.
Our inventory turnover improved to 3.6 turns in 2008 compared to 3.5 turns in 2007. Based on historical results
and current economic conditions, we expect our 2009 gross margin rate to be approximately 40.0%. Based on
the current general economic trends, our vendors may be negatively impacted by insufficient availability of
credit to fund their operations or insufficient demand for their products, which may affect their ability to fulfill
their obligations to us. Additionally, the general economic conditions have caused a higher level of uncertainty
of our forecasted sales results, and thus, demand for our merchandise could differ materially from our
expectation causing us to under or over buy certain merchandise, which may result in customer dissatisfaction
or excessive markdowns required to liquidate the merchandise.