Big Lots 2007 Annual Report Download - page 121

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inventory, the estimated allowance for shrinkage, and the estimated amount of excess or obsolete inventory,
which may impact the ending inventory valuation and prior or future gross margin. These estimates are based
on historical experience and current information.
Cost reductions in inventory valuation as a result of permanent sales markdowns, which are typically related to
end of season clearance events, are recorded as a charge to cost of sales in the period of management’s decision
to initiate sales price reductions with the intent not to return the price to regular retail. Promotional markdowns
are typically related to specific marketing efforts with respect to products maintained continuously in our
stores or products that are only available in limited quantities but represent substantial value to our customers.
Promotional markdowns are principally used to drive higher sales volume during a defined promotional period,
and were recorded as a charge to net sales in the period the merchandise is sold. Factors considered in the
estimate of the reduction to cost of inventory for permanent markdowns at the end of each reporting period
include current and anticipated demand for the merchandise, customer preferences, quantity of merchandise, age
of the merchandise, and seasonal trends such as customer buying patterns, competitive pressures, weather, and
the desire to keep merchandise in the stores fresh and inventory turning.
The inventory allowance for shrinkage is recorded as a reduction to inventories and charged to cost of sales
and is estimated 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 our historical experience and current year experience based on
a sample of recent physical inventory results. 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.
The inventory allowance for excess or obsolete inventory is estimated based on a review of our aged inventory
and takes into account any items that have already received a cost reduction as a result of the permanent
markdown process discussed above. We estimate an allowance for excess or obsolete inventory based on
historical sales trends, age and quantity of product on hand, and anticipated future sales.
If any of the estimates, judgments, or assumptions related to the valuation of inventory are incorrect, the actual
inventory value on our consolidated balance sheet and the gross margin on our consolidated statement of
operations could materially differ from the reported results.
Long-Lived Assets
Our long-lived assets primarily consist of property and equipment. In order to determine if impairment
indicators are present on store property and equipment, we review historical operating results at the store level.
Generally, all other property and equipment are reviewed for impairment at the enterprise level. Impairment is
recorded if impairment indicators are present and if the carrying values of the long-lived assets exceeded their
anticipated undiscounted future net cash flows. Our assumptions related to estimates of future cash flows are
based on historical results of cash flows adjusted for management projections for future periods. We estimated
the fair value of our long-lived assets using readily available market information for similar assets.
When material, we classify the results of operations of closed stores to discontinued operations when the
operations and cash flows of the stores have been (or will be) eliminated from ongoing operations and we
no longer have any significant continuing involvement in the operations associated with the stores after
closure. We generally meet the second criteria on all closed stores as, upon closure, operations ceased and we
have no continuing involvement. To determine if cash flows have been (or will be) eliminated from ongoing
operations, we evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity
to remaining open stores and estimated sales migration from the closed store to any stores remaining open.
Estimated sales migration is based on our historical experiences of our sales migration upon opening or
closing a store in a similar market. For purposes of reporting the operations of stores meeting the criteria for
discontinued operations, we reported net sales, gross margin, and related operating costs that are directly related
to and specifically identifiable with respect to those stores’ operations as discontinued operations. Certain
corporate-level charges, such as general office cost, field operations, national advertising, fixed distribution
costs, and interest cost are not allocated to discontinued operations because we believe that these costs are not
specific to the stores’ operations.