Big Lots 2015 Annual Report Download - page 111

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Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Market is
determined based on the estimated net realizable value, which generally is the merchandise selling price at or near the end of
the reporting period. The average cost retail inventory method requires management to make judgments and contains
estimates, such as the amount and timing of markdowns to clear slow-moving inventory and the estimated allowance for
shrinkage, which may impact the ending inventory valuation and prior or future gross margin. These estimates are based on
historical experience and current information.
When management determines the saleability of merchandise inventories is diminished, markdowns for clearance activity and
the related cost impact are recorded at the time the price change decision is made. Factors considered in the determination of
markdowns include current and anticipated demand, customer preferences, the age of merchandise, and seasonal trends.
Timing of holidays within fiscal periods, weather, and customer preferences could cause material changes in the amount and
timing of markdowns from year to year.
The inventory allowance for shrinkage is recorded as a reduction to inventories, charged to cost of sales, and 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 both our current year and historical inventory results. Independent physical inventory counts are taken at each store
once a year. During calendar 2016, the majority of these counts will occur between January and June. As physical inventories
are completed, actual results are recorded and new go-forward shrink accrual rates are established based on historical results at
the individual store level. Thus, the shrink accrual rates will be adjusted throughout the January to June inventory cycle based
on actual results. At January 30, 2016, a 10% difference in our shrink reserve would have affected gross margin, operating
profit and income from continuing operations before income taxes by approximately $3.5 million. While it is not possible to
quantify the impact from each cause of shrinkage, we have asset protection programs and policies aimed at minimizing
shrinkage.
Long-Lived Assets
Our long-lived assets primarily consist of property and equipment. We perform impairment reviews of our long-lived assets at
the store level on an annual basis, or when other impairment indicators are present. Generally, all other property and equipment
is reviewed for impairment at the enterprise level. When we perform our annual impairment reviews, we first determine which
stores had impairment indicators present. We use actual historical cash flows to determine which stores had negative cash
flows within the past two years. For each store with negative cash flows or other impairment indicators, we obtain
undiscounted future cash flow estimates based on operating performance estimates specific to each store’s operations that are
based on assumptions currently being used to develop our company level operating plans. If the net book value of a store’s
long-lived assets is not recoverable through the expected undiscounted future cash flows of the store, we estimate the fair value
of the store’s assets and recognize an impairment charge for the excess net book value of the store’s long-lived assets over their
fair value. The fair value of store assets is estimated based on expected cash flows, including salvage value, which is based on
information available in the marketplace for similar assets.
We identified two stores, three stores, and seven stores in the U.S., in 2015, 2014, and 2013, respectively, with impairment
indicators as a result of our annual store impairment tests. For these stores, we recognized impairment charges of $0.4 million,
$0.2 million, and $1.3 million in 2015, 2014, and 2013, respectively. We do not believe that varying the assumptions used to
test for recoverability to estimate fair value of our long-lived assets would have a material impact on the impairment charges
we incurred in 2015, 2014, or 2013.
If our future operating results decline significantly, we may be exposed to impairment losses that could be material (for
additional discussion of this risk, see “Item 1A. Risk Factors - A significant decline in our operating profit and taxable income
may impair our ability to realize the value of our long-lived assets and deferred tax assets.”).
In addition to our annual store impairment reviews, we evaluate our other long-lived assets at each reporting period to
determine whether impairment indicators are present. In 2014, we reviewed our operational needs surrounding travel and
determined that our travel demands no longer merited the need to own two corporate aircraft. As a result of that decision, we
placed both of our aircraft in the market as available-for-sale during 2014 and recorded impairment charges totaling $3.3
million in 2014.