Big Lots 2008 Annual Report Download - page 95

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partially offset by the impact from larger closeout deals, including a drugstore liquidation deal and a furniture
deal. Similar to other retailers, our toy business was challenged in 2007 principally due to the negative publicity
from certain high profile toy recalls. Merchandise from the drugstore liquidation deal was in about 400 of our
stores and was very similar to a drugstore deal that we had in 2006. The furniture deal was an opportunity
for us to offer branded furniture in about 1,100 of our stores, just in time for the tax refund selling season,
which historically is the highest volume period for sales of furniture. The merchandise from the furniture deal
was largely sold by the end of the first quarter of 2008. Our future net sales results could fluctuate materially
depending on the availability, timing, and/or size of closeout deals.
Gross Margin
Gross margin dollars decreased 2.7% to $1,840.3 million in 2007 compared to $1,891.4 million in 2006. The
decline in gross margin by $51.1 million was principally due to a combination of lower net sales of $86.7
million and a lower gross margin rate of 39.5% in 2007 compared to 39.9% in 2006. The decline in net sales
reduced gross margin dollars in 2007 by approximately $34 million while the gross margin percentage of net
sales decline of 40 basis points reduced gross margin by approximately $17 million. This gross margin rate
decrease of 40 basis points was primarily due to higher markdowns, a shift in the sales mix toward lower
margin categories, such as Consumables, from higher margin categories or departments, such as the Home
category and the toys department, and higher accruals for shrink. Higher markdowns were attributable in part
to slower selling categories and departments, such as the Home category and the toys department, and more
promotional selling in Seasonal and Furniture. The factors decreasing the gross margin rate were partially offset
by an improvement in the initial markup of merchandise purchased in 2007 compared to purchases in 2006.
This improvement in initial markup is primarily attributed to our merchandising strategies as discussed in the
above Merchandising section under Operating Strategy. Our inventory turnover improved to 3.5 turns in 2007
compared to 3.4 turns in 2006.
Selling and Administrative Expenses
Selling and administrative expenses decreased $106.9 million (6.6%) to $1,515.4 million in 2007 compared to
$1,622.3 million in 2006. Selling and administrative expenses as a percentage of net sales were 32.5% in 2007
compared to 34.2% in 2006. In 2007, selling and administrative expenses were reduced by $5.2 million (10 basis
points) of proceeds from the KB Toys bankruptcy trust (see note 11 to the accompanying consolidated financial
statements for additional information) and $4.9 million (10 basis points) of insurance proceeds as recovery for
2005 hurricane insurance claims. In 2006, selling and administrative expenses included charges of $9.7 million
(20 basis points) for the estimated settlement liability for the tentative settlements of two employment-related
civil class actions brought against us (see note 10 to the accompanying consolidated financial statements). In
addition to these specific items, the following items contributed to the 170 basis point improvement in selling
and administrative expense leverage: 1) the 2.0% increase in comparable store sales, which was above our
expense leverage point; 2) a reduction in health and welfare plan expenses of $26.9 million driven by greater
discounts resulting from a change in the plan’s service provider effective February 1, 2007 and fewer plan
participants, 3) a reduction in distribution and outbound transportation costs of $23.8 million, and 4) a reduction
in store payroll and payroll-related expense of $18.3 million. Distribution and outbound transportation costs,
which are included in selling and administrative expenses (see note 1 to the accompanying consolidated
financial statements), decreased 10.7% to $198.3 million in 2007 compared to $222.1 million in 2006.
Distribution and outbound transportation expenses as a percentage of net sales were 4.3% in 2007 compared
to 4.7% in 2006. Distribution and outbound transportation cost savings have been achieved through certain
management initiatives including, but not limited to, improvements in furniture distribution, more efficient
scheduling of labor used in the distribution centers, lower health and welfare plan expense, as discussed above,
and transportation initiatives aimed at optimizing the use of our transportation fleet and the increased usage
of third party one-way carriers. The higher use of third party one-way carriers, which began late in the second
quarter of 2007, has increased our cost per mile while decreasing the overall transportation cost as a result of
fewer miles traveled. Store payroll continues to benefit from merchandising strategies such as acquiring more
floor-ready merchandise that has resulted in a reduction in payroll hours required to process fewer cartons and
improved distribution methods.