Big Lots 2014 Annual Report Download - page 128

50
Cost of Sales
Cost of sales includes the cost of merchandise, net of cash discounts and rebates, markdowns, and inventory shrinkage. Cost of
merchandise includes related inbound freight to our distribution centers, duties, and commissions. We classify warehousing
and outbound distribution and transportation costs as selling and administrative expenses. Due to this classification, our gross
margin rates may not be comparable to those of other retailers that include warehousing and outbound distribution and
transportation costs in cost of sales.
Selling and Administrative Expenses
Selling and administrative expenses include store expenses (such as payroll and occupancy costs) and costs related to
warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance, non-income taxes, and
overhead. Selling and administrative expense rates may not be comparable to those of other retailers that include warehousing,
distribution, and outbound transportation costs in cost of sales. Distribution and outbound transportation costs included in
selling and administrative expenses were $161.1 million, $158.9 million, and $153.4 million for 2014, 2013, and 2012,
respectively.
Rent Expense
Rent expense is recognized over the term of the lease and is included in selling and administrative expenses. We recognize
minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction or
set-up period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we
recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and
the amounts payable under the lease as deferred rent. We also receive tenant allowances, which are recorded in deferred
incentive rent and are amortized as a reduction to rent expense over the term of the lease.
Our leases generally obligate us for our applicable portion of real estate taxes, common area maintenance (“CAM”), and
property insurance that has been incurred by the landlord with respect to the leased property. We maintain accruals for our
estimated applicable portion of real estate taxes, CAM, and property insurance incurred but not settled at each reporting date.
We estimate these accruals based on historical payments made and take into account any known trends. Inherent in these
estimates is the risk that actual costs incurred by landlords and the resulting payments by us may be higher or lower than the
amounts we have recorded on our books.
Certain of our leases provide for contingent rents that are not measurable at the lease inception date. Contingent rent includes
rent based on a percentage of sales that are in excess of a predetermined level. Contingent rent is excluded from minimum rent
but is included in the determination of total rent expense when it is probable that the expense has been incurred and the amount
is reasonably estimable.
Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television and print advertising, internet marketing and
advertising, and in-store point-of-purchase presentations. Advertising expenses are included in selling and administrative
expenses. Advertising expenses were $97.5 million, $97.9 million, and $100.8 million for 2014, 2013, and 2012, respectively.
Store Pre-opening Costs
Pre-opening costs incurred during the construction periods for new store openings are expensed as incurred and included in our
selling and administrative expenses.