Big Lots 2010 Annual Report Download - page 102

28
Gross Margin
Gross margin dollars increased $61.9 million, or 3.3%, to $1,919.3 million in 2009 compared to $1,857.4 million
in 2008. Gross margin as a percentage of net sales was 40.6% in 2009 compared to 40.0% in 2008. The
increase in gross margin dollars was due to the higher gross margin rate and the increase in sales. The increase
in gross margin rate increased gross margin dollars by approximately $29 million. Also contributing to the
increased gross margin dollars was higher net sales of $81.5 million, which increased gross margin dollars by
approximately $33 million. The gross margin rate increase was principally due to higher initial mark up on
merchandise sold, lower inbound freight costs and a lower shrink accrual rate. We achieved lower inbound
freight costs in 2009 because of lower diesel fuel costs, lower ocean freight rates, renegotiated carrier rates, and
careful review of the mode of transportation to find the most efficient method to ship goods to our distribution
centers. The gross margin rate also benefitted from favorable adjustments to the shrink accrual as physical
inventories were completed at our stores. Our inventory turnover improved to 3.7 turns in 2009 compared to
3.6 turns in 2008.
Selling and Administrative Expenses
Selling and administrative expenses increased $8.5 million, or 0.6%, to $1,532.4 million in 2009 compared to
$1,523.9 million in 2008. The increase in selling and administrative expenses was principally caused by an
increase in store occupancy expenses of $15.5 million, higher employee benefit expenses of $7.7 million, higher
share-based compensation expense of $4.8 million, litigation-related expenses of $4.6 million, and bonuses
of $4.4 million. These items were partially offset by a $23.4 million decrease in distribution and outbound
transportation costs and a $6.1 million decrease in advertising expenses. The increase in store occupancy
expenses is primarily due to higher rents and real estate taxes related to the leases of the 73 new stores opened
in 2009 and 2008. The increase in employee benefits is principally due to higher paid health insurance claims
and pension expense. The increase in share-based compensation is primarily due to our acceleration of vesting
of restricted stock grants based on our profit performance in 2009. In 2009, we accrued $4.0 million for a
certain legal settlement agreement (see note 10 to the accompanying consolidated financial statements). The
$4.4 million increase of bonuses was directly related to our performance. The decline in distribution and
outbound transportation costs is a result of lower inventory levels, the integration of our Ohio and California
furniture distribution operations into our regional distribution centers in July 2008 and 2009, respectively, the
renegotiation of dedicated carrier contracts with more favorable rates starting in August 2009, more efficient
operations due to increased volume of cartons, and the impact of decreased diesel fuel costs. Advertising
expenses decreased due to renegotiated printing contracts with more favorable terms, reduced local advertising,
and reduced newspaper distributions.
Selling and administrative expenses as a percentage of net sales were 32.4% in 2009 compared to 32.8%
in 2008. The decrease of 0.4% is primarily due to the effect of the increase in sales of 1.8% as selling and
administrative expense dollars increased 0.6% as discussed above.
Depreciation Expense
Depreciation expense decreased $3.7 million, or 4.7%, to $74.9 million in 2009 compared to $78.6 million for
2008. The decrease in depreciation expense was principally related to our stores and was due to assets becoming
fully depreciated since the prior year. Many of these fully depreciated assets were placed in service in 2003
or 2004 and had five-year estimated service lives. Compared to more recent years, capital expenditures were
significantly higher in 2003 and 2004, principally due to store remodels and a higher number of store openings
in 2003 and 2004.
Interest Expense
Interest expense decreased $3.5 million to $1.8 million in 2009 compared to $5.3 million in 2008. The decrease
in interest expense was principally due to lower average borrowings (including capital leases) of $8.6 million in
2009 compared to average borrowings of $151.8 million in 2008. The higher average borrowings in 2008 were
driven principally by the acquisition of our common shares under our publicly announced share repurchase
programs which were completed in 2008. In 2009, cash flow provided by operations was sufficient to repay the