Big Lots 2008 Annual Report Download - page 92

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Selling and Administrative Expenses
Selling and administrative expenses increased $8.5 million (0.6%) to $1,523.9 million in 2008 compared to
$1,515.4 million in 2007. The increase in selling and administrative expenses was principally caused by an
increase in medical plan expenses of $9.7 million, higher share-based compensation expense of $5.5 million,
the 2007 partial recovery of the HCC Note investment of $5.2 million (see note 11 to the accompanying
consolidated financial statements for additional discussion of the HCC Note), the 2007 reduction in selling and
administrative expenses due to the receipt of insurance proceeds for 2005 hurricane claims of $4.9 million, and
higher store utilities of $3.4 million. These items were partially offset by a $17.1 million decrease in distribution
and outbound transportation costs and a $15.8 million decrease in store payroll costs. The increase in medical
plan expenses is principally due to higher paid claims. The increase in share-based compensation is principally
due to our adoption of SFAS No. 123(R) under the modified prospective method of accounting in the first
quarter of 2006 and our acceleration of vesting of stock options in the fourth quarter of 2005. We expect share-
based compensation expense to increase in 2009 due to the continued increase in unvested options expected
to be outstanding; however, this impact is expected to level off after 2009 because the stock options that have
been granted since 2006 vest over a four year period. Higher store utilities costs were driven by colder weather
this winter and higher average commodity rates throughout the majority of 2008. The decline in distribution
and outbound transportation costs is a result of lower inventory levels, fewer cartons processed through our
distribution centers (as discussed above), more one-way trips to the stores resulting in higher shipping cost per
mile but fewer miles traveled and, beginning in July 2008, the integration of our Ohio furniture distribution
operation into four of our regional distribution centers. Partially offsetting these favorable distribution and
outbound transportation costs was the impact of higher diesel fuel prices. Store payroll is lower due to fewer
stores and employees and fewer cartons of merchandise resulting from the $11.0 million decline in net sales and
the merchandise strategy that involves offering merchandise with slightly higher average item retails.
Selling and administrative expenses as a percentage of net sales were 32.8% in 2008 compared to 32.5% in
2007. Excluding the impact of the $5.2 million partial recovery of the HCC Note and the receipt of hurricane
insurance proceeds of $4.9 million, both of which reduced 2007 selling and administrative expenses, selling
and administrative expenses as a percentage of net sales would have been approximately flat in 2008 compared
to 2007. Our future selling and administrative expense as a percentage of net sales rate is dependent upon many
factors including our level of net sales, our ability to implement additional efficiencies, principally in our store
and distribution center operations, and fluctuating commodity prices, such as diesel fuel, which directly affects
our outbound transportation cost. Based on our expectation of flat to a decline of 2% for comparable store sales
in 2009, we expect selling and administrative expenses to increase in 2009 as a percent of sales, principally
as a result of the impact of our fixed costs such as rent, employee salaries, insurance, and benefits over flat
to lower sales dollars. As stated in the discussion of our operating expense strategy above, we expect lower
distribution and outbound transportation costs in the first half of 2009, when compared to the first half of 2008,
due to the integration of the Ohio furniture distribution center into four of our regional distribution centers.
The full quarterly effect of this reduction in cost did not occur until the third quarter of 2008. We believe we
have additional opportunities for future reductions in selling and administrative expenses in store operations
and supply chain, which may offset other inflationary factors. During 2008, we experienced volatility in the
price of diesel fuel, which drove our costs higher than expected for the first three quarters and lower than
expected for the fourth quarter. Based on current diesel fuel costs, we expect this element of our selling and
administrative expenses will be lower in the first quarter of 2009 because the current price of diesel fuel is
lower than the price of diesel fuel in the first quarter of 2008. We expect the de-leveraging impact of flat to
negative 2% comparable store sales to be greater than the favorable impact of the furniture integration and the
lower diesel fuel cost factors in 2009, resulting in our guidance of higher selling and administrative expenses as
a percent of sales for 2009.
Depreciation Expense
Depreciation expense decreased $9.9 million (11.2 %) to $78.6 million in 2008 compared to $88.5 million for
2007. The decrease was principally related to the five-year service life store remodel program assets that were
placed in service in 2002 and 2003 and a lower level of capital expenditures in 2006 and 2007. The lower capital
expenditures in 2006 and 2007 are principally related to opening seven stores in 2007 and 11 stores in 2006