Big Lots 2013 Annual Report Download - page 170

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offerings. Additionally, throughout 2013, we began to narrow our product offerings in our electronics department in order to
appropriately react to our customer's response and overall trends for this category in the retail marketplace.
For 2014, we expect net sales to be in the range of a slight increase to a slight decrease to 2013, which is based on overall
comps that range from flat to an increase of 2% and an expected overall lower store count. We expect above average comps
from our Furniture & Home Décor and Food categories, driven by our chain wide roll-out of our lease-to-own program and
investments in coolers and freezers. Additionally, we anticipate below average comps in our Hard Home and Electronics &
Accessories categories due to our downsizing of numerous departments as we Edit to Amplify other categories.
Gross Margin
Gross margin dollars decreased $47.3 million or 2.3% to $2,007.4 million in 2013, compared to $2,054.7 million in 2012. The
decrease in gross margin dollars was principally due to both a decrease in net sales, which decreased gross margin dollars by
approximately $34.5 million, and a lower gross margin rate, which decreased gross margin dollars by approximately $12.8
million. Gross margin as a percentage of net sales decreased 20 basis points to 39.2% in 2013 compared to 39.4% in
2012. The gross margin rate decrease was principally due to a higher markdown rate during the fourth quarter of 2013 as
compared to the fourth quarter of 2012. During the fourth quarter of 2013, we began implementing the “Edit” portion of our
Edit to Amplify strategy, which involved conducting significant promotional activities to reduce our inventory in certain
departments, including auto, tools, and home maintenance, as a result of our planned reductions in the focus and square footage
we intend to dedicate to those departments as well as editing merchandise within other departments.
For 2014, we expect our gross margin rate to be slightly higher than 2013, as we anticipate lower levels of markdowns will be
necessary to achieve our planned sales.
Selling and Administrative Expenses
Selling and administrative expenses were $1,664.2 million in 2013, compared to $1,639.8 million in 2012. The increase of
$24.4 million or 1.5% was primarily due to increases in store occupancy expenses of $18.5 million, distribution and
transportation expenses of $6.9 million, corporate office payroll of $4.8 million, and a non-recurring litigation settlement of
$4.4 million, partially offset by decreases in professional fees of $5.3 million and share-based compensation expense of $4.7
million, and a gain on the sale of real estate of $3.6 million. The increase in store occupancy expenses was primarily the result
of an increase in the average number of stores operating per month in 2013 as compared to 2012. The increase in distribution
and transportation expenses was primarily due to an increased number of merchandise cartons flowing from our distribution
centers to our stores. The increase in general office payroll expenses was primarily driven by separation activities that occurred
during the second, third, and fourth quarters of 2013 combined with annual merit increases. The non-recurring litigation
settlement was the result of a loss contingency for a legal matter that was finalized in the second quarter of 2013. The decrease
in share-based compensation expense was primarily driven by the forfeiture of awards by individuals affected by separation
activities and the associated reversal of costs. The decrease in professional fees was primarily driven by decreased consulting
fees related to various ongoing information systems projects and decreased legal expenses related to pending litigation and
other matters. The gain on sale of real estate resulted from our sale of an owned store location in the third quarter of 2013.
As a percentage of net sales, selling and administrative expenses increased by 100 basis points to 32.5% in 2013 compared to
31.5% in 2012. The primary drivers of the 100 basis point deleverage in selling and administrative expenses were the 2.7%
decrease in overall comp performance, as the percentage increase in expense dollars was commensurate with the growth in
store count, and the increase in our distribution and transportation expenses. Our future selling and administrative expense as a
percentage of net sales rate is dependent upon many factors including our level of net sales, our ability to implement additional
efficiencies, principally in our store and distribution center operations, and fluctuating commodity prices, such as diesel fuel,
which directly affects our outbound transportation cost.
For 2014, we are forecasting an expense rate slightly higher than the rate achieved in 2013. Store expenses and distribution and
transportation expenses are expected to leverage as dollar growth in these areas is forecasted to be at a slower rate than our
anticipated sales growth. These leveraged expenses are expected to be offset by higher healthcare expenses from the enactment
of the Affordable Care Act, higher bonus expenses as we expect to achieve our corporate financial goals in 2014 as compared to
2013 when those goals were not achieved, and certain operational investments in e-commerce activities.