Big Lots 2008 Annual Report Download - page 75

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to meet these targets and goals by 2009. As a result of achieving these targets and goals one year early, we
developed an updated strategic plan in 2008 that we intend to use as our roadmap for the next three years (see
the accompanying MD&A for additional information concerning our operating strategy). The new plan includes
a continued focus on merchandising, real estate, and cost structure.
If we are unable to compete effectively in the highly competitive discount retail industry, our business and
results of operations may be materially adversely affected.
The discount retail business is highly competitive. As discussed in Item 1 of this Form 10-K, we compete
for customers, employees, products, real estate, and other aspects of our business with a number of other
companies. Certain of our competitors have greater financial, distribution, marketing, and other resources that
may be devoted to sourcing, promoting, and selling their merchandise. It is possible that increased competition
or improved performance by our competitors may reduce our market share, gross margin, operating margin, and
projected operating results, and may materially adversely affect our business and results of operations in other
ways.
Further declines in general economic condition, consumer spending levels, and other conditions could lead
to reduced consumer demand for our merchandise thereby materially adversely affecting our revenues and
gross margin.
Our results of operations can be directly impacted by the health of the United States’ economy. Our business
and financial performance may be adversely impacted by current and future economic conditions, including
factors that may restrict or otherwise negatively impact consumer financing, disposable income levels,
unemployment levels, energy costs, interest rates, recession, inflation, the impact of natural disasters and
terrorist activities, and other matters that influence consumer spending. The economies of four states (Ohio,
Texas, California, and Florida) are particularly important as approximately 37% of our current stores operate in
these states and 38% of our 2008 net sales occurred in these states.
Changes by vendors related to the management of their inventories may reduce the quantity and quality of
brand-name closeout merchandise available to us or may increase our cost to acquire brand-name closeout
merchandise, either of which may materially adversely affect our revenues and gross margin.
The products we sell are sourced from a variety of vendors with approximately half of our merchandise
assortment being pre-planned and made according to our specifications and approximately half of our
merchandise sourced on a closeout basis. The portion of our assortment that is pre-planned and made according
to our specifications consists of imported merchandise (primarily furniture, seasonal, and portions of our
home categories along with certain other classifications like toys) or merchandise that is re-orderable upon
demand. For the closeout component of our business, we do not control the supply, design, function, availability,
or cost of many of the products that we offer for sale. We depend upon the sufficient availability of closeout
merchandise that we can acquire and offer at prices that represent a value to our customers, in order to meet or
exceed our operating performance targets for gross margin. In addition, we rely on our vendors to provide us
with quality merchandise. To the extent that certain of our vendors are better able to manage their inventory
levels and reduce the amount of their excess inventory, the amount of closeout merchandise available to us could
be materially reduced. If shortages or disruptions occur in the availability of closeout merchandise or if the
quality of such merchandise is not acceptable to our customers or us, it is likely to have a material adverse effect
on our sales and gross margin and may result in customer dissatisfaction.
We rely on vendors located in foreign countries for significant amounts of merchandise. Additionally, a
significant amount of our domestically-purchased merchandise is manufactured abroad. Our business may
be materially adversely affected by risks associated with international trade.
Global sourcing of many of the products we sell is an important factor in driving higher gross margin. During
2008, we purchased approximately 27% of our products directly from overseas vendors including 21% from
vendors located in China. Our ability to find qualified vendors and to access products in a timely and efficient
manner is a significant challenge, especially with respect to goods sourced outside of the United States. Factors
relating to foreign trade that are beyond our control include increased import duties, increased shipping costs,
more restrictive quotas, loss of “most favored nation” trading status, currency and exchange rate fluctuations,