Big Lots 2014 Annual Report Download - page 124

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Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Cost includes
any applicable inbound shipping and handling costs associated with the receipt of merchandise into our distribution centers (see
the discussion below under the caption “Selling and Administrative Expenses” for additional information regarding outbound
shipping and handling costs to our stores). Market is determined based on the estimated net realizable value, which generally is
the merchandise selling price. Under the average cost retail inventory method, inventory is segregated into classes of
merchandise having similar characteristics at its current retail selling value. Current retail selling values are converted to a cost
basis by applying an average cost factor to each specific merchandise class’ retail selling value. Cost factors represent the
average cost-to-retail ratio computed using beginning inventory and all fiscal year-to-date purchase activity specific to each
merchandise class.
Under our previous inventory management system which was used through the end of 2011, we calculated average cost at the
department level which constituted 50 inventory cost pools. On January 29, 2012, the first day of 2012, we completed the
implementation of our new inventory management systems, which has allowed us to more precisely determine our inventory
cost under the average cost retail inventory method. We now calculate average cost at the class level which constitutes
approximately 350 inventory cost pools.
As the impact of the accounting change in the beginning of the 2012 on inventory was immaterial, we recognized the
cumulative effect of the change in accounting principle as an expense in 2012 by recording a reduction in inventory and a
corresponding increase to cost of sales of approximately $5.6 million in the first quarter of 2012. This non-cash charge reduced
the 2012 income from continuing operations and net income by approximately $3.4 million and reduced 2012 basic and diluted
earnings per share from continuing operations by $0.06.
Under the average cost retail inventory method, permanent sales price markdowns result in cost reductions in inventory. Our
permanent sales price markdowns are typically related to end of season clearance events and 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 recorded as a charge to net sales in the period the merchandise is sold. 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.
We record a reduction to inventories and charge to cost of sales for a shrinkage inventory allowance. The shrinkage allowance
is calculated 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 and current year experience based on physical inventory results.
We record a reduction to inventories and charge to cost of sales for any excess or obsolete inventory. The 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 the reduction for excess or
obsolete inventory based on historical sales trends, age and quantity of product on hand, and anticipated future sales.
Payments Received from Vendors
Payments received from vendors relate primarily to rebates and reimbursement for markdowns and are recognized in our
consolidated statements of operations as a reduction to cost of inventory purchases in the period that the rebate or
reimbursement is earned or realized and, consequently, result in a reduction in cost of sales when the related inventory is sold.
Store Supplies
When opening a new store, a portion of the initial shipment of supplies (including primarily display materials, signage,
security-related items, and miscellaneous store supplies) is capitalized at the store opening date. These capitalized supplies
represent more durable types of items for which we expect to receive future economic benefit. Subsequent replenishments of
capitalized store supplies are expensed. The consumable/non-durable type items for which the future economic benefit is less
measurable are expensed upon shipment to the store. Capitalized store supplies are adjusted periodically for changes in
estimated quantities or costs and are included in other current assets in our consolidated balance sheets.