Big Lots 2012 Annual Report Download - page 115

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When management determines the saleability of merchandise inventories is diminished, markdowns for
clearance activity and the related cost impact are recorded at the time the price change decision is made. Factors
considered in the determination of markdowns include current and anticipated demand, customer preferences,
the age of merchandise, and seasonal trends. Timing of holidays within fiscal periods, weather, and customer
preferences could cause material changes in the amount and timing of markdowns from year to year.
The inventory allowance for shrinkage is recorded as a reduction to inventories, charged to cost of sales, and
calculated as a percentage of sales for the period from the last physical inventory date to the end of the reporting
period. Such estimates are based on both our current year and historical inventory results. Independent physical
inventory counts are taken at each store once a year. During calendar 2013, the majority of these counts will
occur between January and August. As physical inventories are completed, actual results are recorded and new
go-forward shrink accrual rates are established based on individual store historical results. Thus, the shrink
accrual rates will be adjusted throughout the January through August inventory cycle based on actual results. At
February 2, 2013, a 10% difference in our shrink reserve would have affected gross margin, operating profit and
income from continuing operations before income taxes by approximately $3.0 million. While it is not possible
to quantify the impact from each cause of shrinkage, we have loss prevention programs and policies aimed at
minimizing shrinkage.
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. Generally, all other property and equipment is reviewed for impairment
at the enterprise 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 within the past two years. For each store with 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 through 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 $1.0 million and less than $0.1 million in 2012 and 2010, respectively.
We did not recognize an impairment charge in 2011, related to our stores. In our U.S. segment, we identified
two stores with impairment indicators as a result of our annual store impairment tests in 2012. One of these
stores was closed by the end of 2012. For the other store, we recognized an impairment charge of $0.6 million in
2012. 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 2012. In our Canadian
segment, we identified four stores in our impairment review, which resulted in a fourth quarter impairment
charge of $0.4 million in 2012.
If our future operating results decline significantly, we may be exposed to impairment losses that could
be material (for additional discussion of this risk, see “Item 1A. Risk Factors - A significant decline in our
operating profit and taxable income may impair our ability to realize the value of our long lived assets and
deferred tax assets.”).
In addition to our annual store impairment reviews, we evaluate our other long-lived assets at each reporting
period to determine whether impairment indicators are present. In 2011, we reviewed our operational needs
surrounding travel and determined that we needed to replace an aircraft due in part to the repair costs and
declining reliability of the aging aircraft. As a result of this decision, we both purchased a new aircraft to
meet our needs and placed an older aircraft in the market as available-for-sale. We recorded a $2.2 million
impairment charge on the held-for-sale aircraft, based on market conditions at the time the decision
was executed.