Big Lots 2007 Annual Report Download - page 113

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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 were 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 “raise the ring”, acquiring more floor-ready merchandise that has resulted
in a reduction in payroll hours required to process fewer cartons, and improved distribution methods.
Depreciation Expense
Depreciation expense for 2007 was $88.5 million compared to $101.3 million for 2006. The $12.8 million
decrease was principally related to the decline in capital expenditures over the last 24 months compared to
earlier fiscal years. The lower capital expenditures are principally related to opening seven stores in 2007 and
11 stores in 2006 compared to opening 73, 103, and 86 stores in 2005, 2004, and 2003, respectively. In addition,
in 2006 and 2007, we took a conservative approach to capital investments aimed primarily at the development
and installation of a new point-of-sale register system, which was installed in approximately 700 of our stores
as of February 2, 2008, and other items generally considered “maintenance capital” items for our distribution
centers and stores. We expect to complete the installation of the new point-of-sale register system in all of our
remaining stores in 2008.
In 2006, upon the successful completion of a pilot program in 32 of our stores and the decision to move forward
with the implementation of a new point-of-sale system in all of our stores, we reduced the remaining estimated
service life on approximately $6.9 million of certain point-of-sale equipment. The impact of this service life
reduction was to recognize approximately $2.3 million in the fourth quarter of 2006 and $4.1 million in 2007 as
additional depreciation expense. The remaining $0.5 million is expected to be depreciated in 2008.
Interest Expense
Interest expense increased to $2.5 million in 2007 compared to $0.6 million in 2006. The $1.9 million increase
in interest expense was principally due to higher average borrowings of $37.9 million in 2007 compared to
average borrowings of $4.8 million in 2006. The higher average borrowings were driven principally by the
acquisition of approximately 30.0 million shares of our common stock for $712.5 million under our publicly
announced share repurchase programs.
Interest and Investment Income
Interest and investment income increased $1.9 million in 2007 to $5.2 million compared to $3.3 million in
2006. Because we began 2007 with cash and cash equivalents of $281.7 million, we were in an invested position
throughout the first half of 2007. We invested primarily in money market type investments that are considered
cash equivalents and other short term high grade bond mutual funds.
Income Taxes
Our effective income tax rate on income from continuing operations was 36.8% for 2007 compared to 33.9% for
2006. The increase in 2007 was driven primarily by less benefit from valuation allowance reductions (relating to
net operating loss deferred tax assets) and the increase in income from continuing operations before income taxes.
We anticipate our 2008 effective income tax rate to be within a range of 38.5% to 39.0%. The 2008 effective
income tax rate is planned to be higher as we anticipate less benefit from valuation allowance reductions in
2008, less nontaxable municipal interest income in 2008 and higher income from continuing operations.