Big Lots(BIG) - 2022 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The company's unaudited consolidated financial statements detail its operational results, financial position, and cash flows Consolidated Statements of Operations and Comprehensive Income This statement outlines the company's revenues, expenses, and resulting net income for the specified periods Consolidated Statements of Operations and Comprehensive Income (Unaudited) | Metric | Thirteen Weeks Ended July 31, 2021 ($ in thousands) | Thirteen Weeks Ended August 1, 2020 ($ in thousands) | Twenty-Six Weeks Ended July 31, 2021 ($ in thousands) | Twenty-Six Weeks Ended August 1, 2020 ($ in thousands) | | :------------------------------------------------------- | :---------------------------------------------------- | :--------------------------------------------------- | :---------------------------------------------------- | :--------------------------------------------------- | | Net Sales | 1,457,374 | 1,644,197 | 3,082,926 | 3,083,346 | | Gross Margin | 577,797 | 683,564 | 1,231,744 | 1,254,320 | | Operating Profit | 53,850 | 608,643 | 176,402 | 683,078 | | Net Income and Comprehensive Income | 37,707 | 451,972 | 132,270 | 501,295 | | Basic EPS | 1.11 | 11.52 | 3.81 | 12.79 | | Diluted EPS | 1.09 | 11.29 | 3.75 | 12.66 | | Cash Dividends Declared per Common Share | 0.30 | 0.30 | 0.60 | 0.60 | Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and shareholders' equity Consolidated Balance Sheets (Unaudited) | Metric | July 31, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | | :--------------------------------------- | :----------------------------- | :------------------------------ | | Cash and Cash Equivalents | 293,322 | 559,556 | | Inventories | 943,776 | 940,294 | | Total Current Assets | 1,379,164 | 1,585,789 | | Total Assets | 3,822,725 | 4,037,257 | | Total Current Liabilities | 959,613 | 1,000,624 | | Long-term Debt | — | 35,764 | | Total Shareholders' Equity | 1,153,369 | 1,277,731 | | Total Liabilities and Shareholders' Equity | 3,822,725 | 4,037,257 | Consolidated Statements of Shareholders' Equity This statement details the changes in the company's equity accounts over the specified period Consolidated Statements of Shareholders' Equity (Unaudited) - Twenty-Six Weeks Ended July 31, 2021 | Metric | January 30, 2021 ($ in thousands) | July 31, 2021 ($ in thousands) | | :---------------------------------- | :------------------------------ | :----------------------------- | | Balance | 1,277,731 | 1,153,369 | | Comprehensive Income | 132,270 | 132,270 | | Dividends Declared | (21,817) | (21,817) | | Purchases of Common Shares | (257,818) | (257,818) | | Share-based Employee Compensation Expense | 22,944 | 22,944 | Consolidated Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities Consolidated Statements of Cash Flows (Unaudited) - Twenty-Six Weeks Ended | Metric | July 31, 2021 ($ in thousands) | August 1, 2020 ($ in thousands) | | :------------------------------------------ | :----------------------------- | :------------------------------ | | Net Income | 132,270 | 501,295 | | Net Cash Provided by Operating Activities | 142,158 | 468,384 | | Net Cash (Used in) Provided by Investing Activities | (77,086) | 517,586 | | Net Cash Used in Financing Activities | (331,306) | (140,131) | | (Decrease) Increase in Cash and Cash Equivalents | (266,234) | 845,839 | | Cash and Cash Equivalents: End of Period | 293,322 | 898,560 | Notes to Consolidated Financial Statements These notes provide supplementary information and disclosures related to the consolidated financial statements NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company operates as a neighborhood discount retailer with 1,418 stores and an e-commerce platform - As of July 31, 2021, Big Lots, Inc operated 1,418 stores in 47 states and an e-commerce platform[15] - In year-to-date 2021, Big Lots realigned its merchandise categories, renaming 'Electronics, Toys, & Accessories' to 'Apparel, Electronics, & Other' and reclassifying several departments to better align with management reporting[22][23] Warehousing, Distribution, and Outbound Transportation Costs | Period | 2021 ($ in millions) | 2020 ($ in millions) | | :------- | :------------------- | :------------------- | | Q2 | 71.9 | 59.7 | | YTD | 138.1 | 112.0 | Advertising Expenses | Period | 2021 ($ in millions) | 2020 ($ in millions) | | :------- | :------------------- | :------------------- | | Q2 | 21.9 | 21.9 | | YTD | 43.8 | 44.8 | NOTE 2 – DEBT The company maintains a $700 million credit facility and prepaid its remaining term note in June 2021 - As of July 31, 2021, Big Lots had no borrowings outstanding under its $700 million unsecured credit facility, with $690.9 million available[27] - The company prepaid the remaining $44.3 million principal balance of the 2019 Term Note on June 7, 2021, incurring a $0.4 million prepayment fee and recognizing a $0.5 million loss on debt extinguishment[28] Total Debt | Instrument | July 31, 2021 ($ in thousands) | January 30, 2021 ($ in thousands) | | :----------- | :----------------------------- | :------------------------------ | | 2019 Term Note | — | 50,264 | | Credit Agreement | — | — | | Total Debt | — | 50,264 | NOTE 3 – FAIR VALUE MEASUREMENTS The company's investments in money market and mutual funds are recorded at fair value using Level 1 inputs Fair Value of Investments (July 31, 2021) | Asset | Balance Sheet Location | Fair Value ($ in thousands) | | :---------------------------------- | :----------------------- | :-------------------------- | | Money market funds | Cash and cash equivalents | 35,038 | | Mutual funds - deferred compensation plan | Other current assets | 27,354 | Fair Value of Investments (January 30, 2021) | Asset | Balance Sheet Location | Fair Value ($ in thousands) | | :---------------------------------- | :----------------------- | :-------------------------- | | Money market funds | Cash and cash equivalents | 175,113 | | Mutual funds - deferred compensation plan | Other Assets | 32,484 | NOTE 4 – SHAREHOLDERS' EQUITY The company executed share repurchases under a $500 million program and paid consistent quarterly dividends - The Board of Directors authorized a $500 million share repurchase program on August 27, 2020, with no scheduled termination date[37] - As of July 31, 2021, $96.8 million was available for future repurchases under the 2020 Repurchase Authorization[38] Common Shares Repurchased (Year-to-Date 2021) | Period | Number of Shares Repurchased (in thousands) | Amount of Repurchased Shares (in thousands) | | :--------------- | :---------------------------------------- | :------------------------------------------ | | First quarter | 1,149 | 77,533 | | Second quarter | 2,405 | 152,883 | | Total | 3,554 | 230,416 | Cash Dividends Declared and Paid (2021) | Period | Dividends Per Share | Amount Declared ($ in thousands) | Amount Paid ($ in thousands) | | :--------------- | :------------------ | :----------------------------- | :--------------------------- | | First quarter | $0.30 | 11,206 | 12,460 | | Second quarter | $0.30 | 10,611 | 10,204 | | Total | $0.60 | 21,817 | 22,664 | NOTE 5 – SHARE-BASED PLANS Share-based compensation expense increased significantly year-over-year due to vesting of performance-based awards - All Performance Restricted Share Units (PRSUs) awarded in 2020 vested in the year-to-date 2021[45] - The total unearned compensation cost related to all share-based awards outstanding (excluding 2021 PSUs) at July 31, 2021, was approximately $37.0 million, with a weighted-average remaining expense recognition period of approximately 1.6 years[53] Share-based Compensation Expense | Period | Q2 2021 ($ in millions) | Q2 2020 ($ in millions) | YTD 2021 ($ in millions) | YTD 2020 ($ in millions) | | :------- | :---------------------- | :---------------------- | :----------------------- | :----------------------- | | Expense | 11.0 | 4.5 | 22.9 | 7.4 | Non-vested Restricted Stock Units Activity (Year-to-Date 2021) | Activity | Number of Shares | Weighted Average Grant-Date Fair Value Per Share | | :------------------------------------------------ | :--------------- | :----------------------------------------------- | | Outstanding at January 30, 2021 | 1,214,212 | $22.71 | | Granted | 241,532 | $69.07 | | Vested | (427,570) | $24.27 | | Forfeited | (44,032) | $25.35 | | Outstanding at July 31, 2021 | 984,142 | $33.77 | NOTE 6 – INCOME TAXES The company anticipates a net decrease in unrecognized tax benefits over the next 12 months - The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0 million[54] NOTE 7 – CONTINGENCIES The company is involved in various legal actions which are not expected to have a material financial impact - Management believes current legal actions and claims will be resolved without a material effect on the company's financial condition, results of operations, or liquidity[55] NOTE 8 – BUSINESS SEGMENT DATA Net sales are reported across seven merchandise categories, with most showing a decline in Q2 2021 - The company's seven merchandise categories are Food, Consumables, Soft Home, Hard Home, Furniture, Seasonal, and Apparel, Electronics, & Other[56] Net Sales by Merchandise Category (Second Quarter) | Category | 2021 ($ in thousands) | 2020 ($ in thousands) | Change ($ in thousands) | Change (%) | | :---------------------------- | :-------------------- | :-------------------- | :---------------------- | :--------- | | Furniture | 409,078 | 439,737 | (30,659) | (7.0)% | | Seasonal | 259,682 | 299,700 | (40,018) | (13.4)% | | Soft Home | 183,249 | 242,664 | (59,415) | (24.5)% | | Food | 178,167 | 205,797 | (27,630) | (13.4)% | | Consumables | 159,301 | 177,236 | (17,935) | (10.1)% | | Hard Home | 145,241 | 174,291 | (29,050) | (16.7)% | | Apparel, Electronics, & Other | 122,656 | 104,772 | 17,884 | 17.1% | | Net Sales | 1,457,374 | 1,644,197 | (186,823) | (11.4)% | NOTE 9 – GAIN ON SALE OF DISTRIBUTION CENTERS The company generated a significant gain from the sale and leaseback of four distribution centers in 2020 - On June 12, 2020, Big Lots completed sale and leaseback transactions for four distribution centers, with an aggregate sale price of $725.0 million[58] - The transactions resulted in an aggregate gain on sales of $463.1 million and $134.0 million in financing liability proceeds[58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on financial performance, condition, and future outlook CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This section outlines the risks and uncertainties associated with the company's forward-looking statements - Forward-looking statements are identified by terms such as "anticipate," "estimate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "will," "should," "may," "target," "forecast," "guidance," and "outlook"[60] - Actual results may differ materially due to various factors, including developments related to the COVID-19 pandemic, economic conditions, cost of goods, execution of strategic initiatives, competitive pressures, and supply chain issues[61] OVERVIEW This section provides a summary of key operating performance indicators for the second quarter - The Q2 2020 operating profit and diluted EPS were significantly boosted by a $463.1 million pre-tax gain on the sale of distribution centers, which contributed approximately $8.54 per share to diluted EPS[64] Key Operating Performance Indicators (Q2 2021 vs. Q2 2020) | Metric | Q2 2021 | Q2 2020 | Change ($ in millions) | Change (%) | | :------------------------------------ | :------ | :------ | :--------------------- | :--------- | | Net sales | $1,457.4M | $1,644.2M | $(186.8)M | (11.4)% | | Comparable sales | N/A | N/A | $(211.3)M | (13.2)% | | Gross margin dollars | $577.8M | $683.6M | $(105.8)M | (15.5)% | | Gross margin rate | 39.6% | 41.6% | (200 bps) | N/A | | Selling and administrative expenses | $488.7M | $504.0M | $(15.3)M | (3.0)% | | Selling and administrative expenses (% of net sales) | 33.5% | 30.7% | 280 bps | N/A | | Operating profit | $53.9M | $608.6M | $(554.7)M | (91.1)% | | Diluted earnings per share | $1.09 | $11.29 | $(10.20) | (90.3)% | | Cash and cash equivalents | $293.3M | $898.5M | $(605.2)M | (67.4)% | | Inventory | $943.8M | $713.5M | $230.3M | 32.3% | | Long-term debt | $0 | $43.1M | $(43.1)M | (100.0)% | | Cash dividends declared per common share | $0.30 | $0.30 | $0 | 0.0% | | Common shares acquired | 2.4M | N/A | N/A | N/A | STORES This section details the changes in the company's store count during the year-to-date period - The company expects its store count to increase by approximately 20 stores by the end of fiscal year 2021 compared to the end of 2020[66] Stores Opened and Closed (Year-to-Date) | Metric | 2021 | 2020 | | :------------------------------------ | :--- | :--- | | Stores open at the beginning of the fiscal year | 1,408 | 1,404 | | Stores opened during the period | 25 | 11 | | Stores closed during the period | (15) | (11) | | Stores open at the end of the period | 1,418 | 1,404 | RESULTS OF OPERATIONS This section provides a detailed comparison of operational results for the second quarter and year-to-date periods SECOND QUARTER OF 2021 COMPARED TO SECOND QUARTER OF 2020 Q2 net sales and gross margin declined due to lapping prior-year stimulus and rising freight costs - The decrease in net sales and comparable sales was primarily driven by the larger impact of government stimulus on consumer behavior during Q2 2020 and the easing of COVID-19 nesting trends in Q2 2021[71][72] - Gross margin rate decreased 200 basis points to 39.6% primarily due to higher inbound freight costs, exacerbated by increased ocean carriage rates and domestic transportation rates, partially offset by a lower markdown rate[75] - Selling and administrative expenses decreased by $15.3 million but increased 280 basis points as a percentage of net sales, driven by lower store payroll (absence of temporary wage increase), lower bonus expense, and absence of sale and leaseback transaction expenses, partially offset by increased distribution/transportation costs and share-based compensation[76][78] Net Sales and Comparable Sales by Merchandise Category (Q2 2021 vs. Q2 2020) | Category | Q2 2021 Net Sales ($ in thousands) | Q2 2020 Net Sales ($ in thousands) | Net Sales Change (%) | Comps Change (%) | | :---------------------------- | :--------------------------------- | :--------------------------------- | :------------------- | :--------------- | | Furniture | 409,078 | 439,737 | (7.0)% | (9.5)% | | Seasonal | 259,682 | 299,700 | (13.4)% | (14.6)% | | Soft Home | 183,249 | 242,664 | (24.5)% | (26.1)% | | Food | 178,167 | 205,797 | (13.4)% | (14.9)% | | Consumables | 159,301 | 177,236 | (10.1)% | (11.4)% | | Hard Home | 145,241 | 174,291 | (16.7)% | (18.0)% | | Apparel, Electronics, & Other | 122,656 | 104,772 | 17.1% | 15.2% | | Total Net Sales | 1,457,374 | 1,644,197 | (11.4)% | (13.2)% | YEAR-TO-DATE 2021 COMPARED TO YEAR-TO-DATE 2020 Year-to-date net sales were flat as higher freight and operating costs compressed profitability - Year-to-date net sales were flat, with a 1.7% comparable sales decrease offset by a $51.6 million increase from non-comparable sales (new/relocated stores)[85] - Gross margin rate decreased 70 basis points to 40.0% primarily due to higher inbound freight costs, including ocean carriage rates, domestic transportation rates, fuel costs, and detention/demurrage charges[89] - Selling and administrative expenses increased $23.5 million, or 80 basis points as a percentage of net sales, driven by higher distribution and transportation costs, increased share-based compensation, and higher store occupancy costs, partially offset by lower store-related payroll and the absence of prior year's sale and leaseback transaction expenses and proxy contest costs[90][91] Net Sales and Comparable Sales by Merchandise Category (YTD 2021 vs. YTD 2020) | Category | YTD 2021 Net Sales ($ in thousands) | YTD 2020 Net Sales ($ in thousands) | Net Sales Change (%) | Comps Change (%) | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------------------- | :--------------- | | Furniture | 890,509 | 855,438 | 4.1% | 1.8% | | Seasonal | 563,600 | 496,021 | 13.6% | 12.2% | | Soft Home | 407,103 | 439,416 | (7.4)% | (9.0)% | | Food | 358,464 | 420,911 | (14.8)% | (16.0)% | | Consumables | 321,689 | 372,931 | (13.7)% | (14.8)% | | Hard Home | 297,002 | 304,834 | (2.6)% | (4.0)% | | Apparel, Electronics, & Other | 244,559 | 193,795 | 26.2% | 24.4% | | Total Net Sales | 3,082,926 | 3,083,346 | 0.0% | (1.7)% | 2021 Guidance The company provides its financial outlook for the third quarter and full fiscal year 2021 - The company anticipates significant supply chain challenges (COVID-19 related shutdowns) and a highly competitive domestic labor market (increased payroll expenses) to adversely impact net sales and gross margin in Q3 and Q4 2021[98] Q3 2021 Guidance (excluding share repurchases) | Metric | Guidance | | :------------------------------------ | :------------------------------------ | | Comparable sales | Decline in the mid-single digits | | Gross margin rate | Down approximately 175 basis points (due to freight) | | Selling and administrative expenses | Up slightly | | Diluted loss per share | $0.10 to $0.20 | Full Year 2021 Guidance (excluding share repurchases) | Metric | Guidance | | :------------------------------------ | :------------------------------------ | | Comparable sales | Decline in the low single digits | | Gross margin rate | Down approximately 100 basis points | | Selling and administrative expenses | Up | | Diluted earnings per share | $5.90 to $6.05 | Capital Resources and Liquidity The company maintains strong liquidity through cash on hand and its unsecured credit facility - As of July 31, 2021, Big Lots had $690.9 million available under its $700 million unsecured credit facility and no outstanding borrowings[101] - The company prepaid the remaining $44.3 million principal balance of the 2019 Term Note in Q2 2021[102] - Big Lots intends to fund working capital, capital expenditures, share repurchases, and other commitments using current cash and projected cash flows from operations, without borrowing under the Credit Agreement[103] - Year-to-date 2021, the company purchased 3.6 million common shares for $230.4 million under the 2020 Repurchase Authorization, with $96.8 million remaining available as of July 31, 2021[104] Cash Flow Components (YTD 2021 vs. YTD 2020) | Cash Flow Component | YTD 2021 ($ in thousands) | YTD 2020 ($ in thousands) | Change ($ in thousands) | | :------------------------------------------ | :------------------------ | :------------------------ | :---------------------- | | Net cash provided by operating activities | 142,158 | 468,384 | (326,226) | | Net cash (used in) provided by investing activities | (77,086) | 517,586 | (594,672) | | Net cash used in financing activities | (331,306) | (140,131) | (191,175) | CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements relies on management's estimates, judgments, and assumptions - The preparation of financial statements requires management to make estimates, judgments, and assumptions that are evaluated on an ongoing basis using historical experience, current trends, and other reasonable factors[110] - Critical accounting policies and estimates are outlined in detail in the company's 2020 Form 10-K[111] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk from interest rates and diesel fuel price volatility - An increase of 1% in the variable interest rate on expected future borrowings would not currently materially affect the company's financial condition, results of operations, or liquidity[112] - As of July 31, 2021, the company had outstanding derivative instruments (collars) covering 2.4 million gallons of diesel fuel[113] - A 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $0.8 million[114] Diesel Fuel Derivatives (July 31, 2021) | Calendar Year of Maturity | Diesel Fuel Puts (Gallons, in thousands) | Diesel Fuel Calls (Gallons, in thousands) | Fair Value Asset (Liability) ($ in thousands) | | :------------------------ | :--------------------------------------- | :---------------------------------------- | :-------------------------------------------- | | 2021 | 1,200 | 1,200 | 224 | | 2022 | 1,200 | 1,200 | 404 | | Total | 2,400 | 2,400 | 628 | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective - Management concluded that disclosure controls and procedures were effective as of July 31, 2021[115] - There were no material changes in internal control over financial reporting during the most recent fiscal quarter[116] Part II. Other Information Item 1. Legal Proceedings Legal proceedings are detailed in Note 7 of the financial statements - For information regarding legal proceedings, refer to Note 7 to the accompanying consolidated financial statements[118] Item 1A. Risk Factors There were no material changes to previously disclosed risk factors during the quarter - No material changes to the risk factors previously disclosed in the 2020 Form 10-K occurred during the second quarter of 2021[119] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 2.4 million common shares for approximately $152.9 million in Q2 2021 - During the second quarter of 2021, the company purchased 2.4 million common shares for approximately $152.9 million under the 2020 Repurchase Authorization[119] Common Share Repurchase Activity (Q2 2021) | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (in thousands) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (in thousands) | | :-------------------------- | :-------------------------------------------- | :--------------------------- | :---------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------ | | May 2, 2021 - May 29, 2021 | 46 | $69.07 | 42 | 246,750 | | May 30, 2021 - June 26, 2021 | 1,521 | $65.81 | 1,519 | 146,750 | | June 27, 2021 - July 31, 2021 | 844 | $59.26 | 844 | 96,751 | | Total | 2,411 | $63.58 | 2,405 | 96,751 | Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[120] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - There were no mine safety disclosures[120] Item 5. Other Information The company reported no other information - There was no other information to report[120] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including award agreements and officer certifications - Exhibits include Form of Big Lots 2020 Long-Term Incentive Plan Performance Share Units Award Agreement and Restricted Stock Units Award Agreement[123] - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits[123] - XBRL Taxonomy Definition, Presentation, Labels, Calculation, and Schema Linkbase Documents are included[123]