Big Lots (BIGGQ) 10-K2020 FY Annual report

Big Lots, Inc., an Ohio corporation, through its wholly owned subsidiaries is a neighborhood discount retailer operating in the United States (“U.S.”). At January 30, 2021, we operated a total of 1,408 stores and an e-commerce platform. Our mission is to help people live BIG and save LOTS by providing our customers with the right product at the right price. Our vision is to be the BIG difference for a better life by delivering unmatched value through surprise and delight, building a “Best Places to Work” culture, rewarding shareholders with consistent growth and top tier returns, and doing good as we do well. Our values are leading with our core customer (whom we refer to as Jennifer), treating all like friends, succeeding together, and playing to win.

Our principal executive offices are located at 4900 E. Dublin-Granville Road, Columbus, Ohio 43081, and our telephone number is (614) 278‑6800.

Unless this Annual Report on Form 10-K (“Form 10-K”) otherwise indicates or the context otherwise requires, the terms the “Company,” “we,” “us,” and “our” refer to Big Lots, Inc. and its subsidiaries.

Similar to many other retailers, our fiscal year ends on the Saturday nearest to January 31, which results in some fiscal years being comprised of 52 weeks and some fiscal years being comprised of 53 weeks. Unless otherwise stated, references to years in this Form 10-K relate to fiscal years rather than to calendar years. The following table provides a summary of our fiscal year calendar and the associated number of weeks in each fiscal year:

We manage our business on the basis of one segment: discount retailing. In 2020, we evaluated and reported overall sales and merchandise performance based on the following key merchandising categories: Furniture; Seasonal; Soft Home; Food; Consumables; Hard Home; and Electronics, Toys, & Accessories. The Furniture category includes our upholstery; mattress; case goods; and ready-to-assemble departments. The Seasonal category includes our lawn & garden; summer; Christmas; and other holiday departments. The Soft Home category includes our fashion bedding; utility bedding; bath; window; decorative textile; home organization; area rugs; home décor; and frames departments. The Food category includes our beverage & grocery; candy & snacks; and specialty foods departments. The Consumables category includes our health, beauty and cosmetics; plastics; paper; chemical; and pet departments. The Hard Home category includes our small appliances; table top; food preparation; stationery; and home maintenance departments. The Electronics, Toys, & Accessories category includes our electronics; toys; jewelry; apparel; and hosiery departments.

We focus our merchandising strategy on (1) being the authority on price and value to Jennifer in all of our merchandise categories and (2) surprising and delighting Jennifer with our product assortment. We utilize traditional sourcing methods and in certain merchandise categories, we also take advantage of closeout channels to enhance our ability to offer outstanding value and bring surprise and delight into our product offerings. We evaluate our product offerings to ensure we are providing quality and value. This process requires us to focus our product offering decisions on our customer’s expectations and enables us to compare the potential performance of traditionally-sourced merchandise, either domestic or import, to closeout merchandise, which is generally sourced from production overruns, packaging changes, discontinued products, order cancellations, liquidations, returns, and other disruptions in the supply chain of manufacturers. We believe that focusing on our customers’ expectations has improved our ability to provide a desirable assortment of offerings in our merchandise categories.

We source our merchandise through both closeout opportunities and planned purchases to provide Jennifer with the novelty of closeouts and the consistency of staple product offerings. Our planned purchases in the Food, Consumables, Soft Home, and Furniture merchandise categories provide a merchandise assortment that our customers expect us to consistently offer in our stores at a significant value. Over the last two years, we have focused on increasing our sourcing and purchasing of quality closeout merchandise directly from manufacturers and other vendors, typically at prices lower than those paid by traditional discount retailers. We believe that our strong vendor relationships and our strong credit profile support this sourcing model. We expect that the unpredictability of the retail and manufacturing environments coupled with what we believe is our significant purchasing power position will continue to support our ability to source quality closeout merchandise at competitive prices. As a result of our renewed focus on closeouts, our 2020 closeout-related net sales increased by approximately 37% compared to 2019.

Our global sourcing department and overseas vendor relationships represent important components of our merchandising strategy. We expect our import partners to responsibly source goods that our merchandising teams identify as having our desired mix of quality, fashion, and value. During 2020, we purchased approximately 21% of our merchandise, at cost, directly from overseas vendors, including approximately 13% from vendors located in China. Additionally, a significant amount of our domestically-purchased merchandise is manufactured abroad. As a result, a significant portion of our merchandise supply is subject to certain risks described in “Item 1A. Risk Factors” of this Form 10-K.

Our brand image is an important part of our marketing program. We use a variety of marketing vehicles to promote our brand awareness, including television, internet, social media, e-mail, in-store point-of-purchase, and print media.

Over the past few years, we have refined our brand identity to accentuate our friendly service and community orientation. We focus on serving Jennifer with a friendly approach and an easy, positive shopping experience. We believe our approach to retailing differentiates us from the competition and allows us to make a difference in the communities we serve. Our community-oriented approach to retailing includes “doing good as we do well,” which means supporting both local and national causes that aid the communities in which we do business. In our local markets, we invest in point of sale campaigns in each of our geographic regions, the beneficiaries of which are selected based on their impacts on local customers and associates. We serve the community on a national level through our Big Lots Foundation, which focuses on healthcare, housing, hunger, and education. In addition, we are pleased to support our local community in Columbus, OH through our partnership with Nationwide Children’s Hospital, to which the Company committed $40 million and the Big Lots Foundation committed additional funds to open the Big Lots Behavioral Health Pavilion, a state-of-the-art medical facility dedicated to child and adolescent mental and behavioral health.

In all of our markets, we design and distribute printed advertising circulars, through newspaper insertions and mailings. In 2020, we distributed multi-page circulars representing 23 weeks of advertising coverage, compared to 29 circulars in 2019. We create regional versions of these circulars to tailor our advertising message based on market differences caused by product availability, climate, and customer preferences.

Our customer database is an important marketing tool that allows us to communicate in a cost-effective manner with our customers, including through e-mail delivery of our circulars, announcement of flash sales, and product-specific promotions. In addition, our BIG Rewards program rewards our customers for making frequent and high-ticket purchases and offers a special birthday reward. We utilize insights gained through the BIG Rewards program to evaluate the effectiveness of our promotions and tailor promotions to our customers’ desires. At January 30, 2021, our BIG Rewards program included nearly 21 million active members who had made a purchase in our stores in the last 12 months.

We operate in the highly competitive retail industry. We face strong sales competition from other general merchandise, discount, food, furniture, arts and crafts, and dollar store retailers, which operate in traditional brick and mortar stores and/or online. Additionally, we compete with a number of companies for retail site locations, to attract and retain quality employees, and to acquire our broad merchandising assortment from vendors. We operate an e-commerce platform which faces additional competition from a wider range of retailers in a highly competitive marketplace, where we compete for customers, fulfillment capabilities, and technological innovation.

The following table compares the number of our stores in operation at the beginning and end of each of the last five fiscal years:

For additional information about our real estate strategy, see the discussion under the caption “Operating Strategy - Real Estate” in the accompanying “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) in this Form 10-K.

The following table details our U.S. stores by state at January 30, 2021:

Of our 1,408 stores, 33% operate in four states: California, Texas, Florida, and Ohio, and net sales from stores in these states represented 33% of our 2020 net sales. We have a concentration in these states based on their size, population, and customer base.

The majority of our merchandise offerings are processed for retail sale and distributed to our stores from five regional distribution centers located in Alabama, California, Ohio, Oklahoma, and Pennsylvania.

We select the locations of our distribution centers to help manage transportation costs and to minimize the distance from our distribution centers to our stores. While certain of our merchandise vendors deliver directly to our stores, the large majority of our inventory is staged and delivered from our distribution centers to facilitate prompt and efficient distribution and transportation of merchandise to our stores and help maximize our sales and inventory turnover.

In addition to our regional distribution centers that handle store merchandise, we operate two warehouses within our Ohio distribution center. One warehouse distributes fixtures and supplies to our stores and our five regional distribution centers and the other warehouse supplements our fulfillment center for our e-commerce operations. In 2020, to supplement our e-commerce fulfillment center, we began fulfilling direct-ship e-commerce orders from 47 of our store locations, which we strategically selected based on geographic location, size, and other relevant factors. We continue to evaluate our e-commerce fulfillment capabilities to reduce shipping times.

In 2021, we intend to expand our distribution network by opening two small-format distribution centers, which will be operated by a third party, to increase the efficiency and capacity of our supply chain, and support future growth. These small-format distribution centers will process full-pallet shipments and other bulky items, particularly furniture, which will allow our regional distribution centers to focus on standard carton processing.

For additional information regarding our warehouses and distribution facilities and related initiatives, see the discussion under the caption “Warehouse and Distribution” in “Item 2. Properties” of this Form 10-K.

We have historically experienced seasonal fluctuations in our sales and profitability, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter, which includes the Christmas holiday selling season. In addition, our quarterly net sales and operating profits can be affected by the timing of new store openings and store closings, advertising, and certain holidays. We historically receive a higher proportion of merchandise, carry higher inventory levels, and incur higher outbound shipping and payroll expenses as a percentage of sales in our third fiscal quarter in anticipation of increased sales activity during our fourth fiscal quarter. Performance during our fourth fiscal quarter typically reflects a leveraging effect which has a favorable impact on our operating results because net sales are higher and certain of our costs, such as rent and depreciation, are fixed and do not vary as sales levels escalate. If our sales performance is significantly better or worse during the Christmas holiday selling season, we would expect a more pronounced impact on our annual financial results than if our sales performance is significantly better or worse in a different season. Our net sales as a percentage of full year in the second quarter of 2020 were disproportionately higher as a result of increased demand arising from the COVID-19 pandemic. Due to the ongoing COVID-19 pandemic and the demand volatility we have experienced during the COVID-19 pandemic, the seasonality of our 2021 results may also differ from historical experience.

The following table sets forth the seasonality of net sales and operating profit (loss) for 2020, 2019, and 2018 by fiscal quarter:

(a) The second quarter of 2020 included a gain on sale of distribution centers and related expenses of $459.1 million related to the sale and leaseback of four distribution centers, which significantly increased second quarter operating profit as a percentage of full year in comparison to 2019 and 2018.

(b) The third quarter of 2019 included a gain on sale of distribution center of $178.5 million, which significantly increased third quarter operating profit as a percentage of full year in comparison to 2018 and 2020.

At January 30, 2021, we had approximately 37,000 active associates comprised of 10,800 full-time and 26,200 part‑time associates. Approximately 71% of the associates we employed during 2020 were employed on a part-time basis. Temporary associates hired for the holiday selling season increased the total number of associates to a peak of approximately 39,100 in 2020. We are not a party to any labor agreements. We require all of our associates to adhere to our code of ethics and workplace safety protocols.

We believe our associates are among our most important resources. We evaluate our human capital management at our stores, distribution centers, and corporate headquarters on the basis of associate engagement, diversity, equity, and inclusion, compensation and benefits, and talent development.

We send an associate engagement survey to each of the associates in our corporate headquarters and to our field and distribution center leadership on an annual basis to assess our associate engagement and ask those associates their thoughts on manager effectiveness, performance enablement, and our diversity and inclusion efforts. In 2020, 93% of the associates surveyed responded to the survey with an 82% favorable engagement rate. Based on results of the annual survey, our leaders create action plans to address areas where our associates have told us we can improve.

We recognize the value of creating a diverse, equitable, and inclusive workplace. As a result, diversity, equity, and inclusion (“DEI”) is a significant component of our human capital management. In 2020, we established our Diversity, Equity, and Inclusion Council (“DEI Council”), which is comprised of associates from our stores, distribution centers, and corporate headquarters who represent various job levels, locations, ages, genders, languages, work shifts, races, sexual orientations, and leadership styles. The DEI Council’s mission is to lead the development and advancement of our DEI strategy. Additionally, we formed a Diversity, Equity, and Inclusion Executive Advisory Committee, which is comprised of senior leaders who provide guidance to the DEI Council, as well as approve our DEI strategy and promote its achievement throughout our organization. In 2021, our DEI strategy for human capital includes, among other things, a focus on recruitment and development of diverse talent, conscious inclusion training, and policy review to prevent bias.

We offer a competitive compensation and benefits package to our eligible associates including, among other benefits, incentive compensation, performance-based merit pay, paid holidays, paid vacation, 401(k) match, and healthcare coverage, including medical, dental, and vision insurance with health savings account and flexible savings account options. Our compensation and benefits packages are designed to attract and retain high-performing talent. Additionally, we provide our associates with a company discount on our merchandise and our associates redeemed approximately $37 million in corporate discounts in 2020.

Talent development is critical to developing the high-performance culture that we seek to foster. Each of our associates participates in an annual goal-setting process and completes an annual performance review, which is followed by periodic discussions throughout the year to assess progress. Each of our managers also completes an individual development plan on an annual basis to set and track long-term goals. Additionally, our business leaders participate in a succession planning process that serves as a tool for identifying and developing high-potential individuals within our organization as well as ensuring business continuity. We also offer a robust catalog of training and development programs to our associates through our Big Lots University training tool, which covers topics including, but not limited to, workplace harassment, safety, ethics, and job skills.

One of our key business goals during 2020 was to ensure the safety and well-being of our associates during the COVID-19 pandemic. To provide a safe working environment for our associates and our customers, we increased sanitation protocols, secured personal protective equipment for our associates, installed plexiglass at all registers, implemented social distancing and mask protocols at our stores and distribution centers, and implemented daily health screens and temperature checks for all associates. From March 2020 through July 2020, we also provided our non-exempt store and distribution center associates with a $2 per hour wage increase and, in the second quarter of 2020, we made additional bonus payments to our associates. In 2020, we spent more than $50 million on these and other COVID-19 related response efforts.

The statements in this item describe material risks to our business and should be considered carefully. In addition, these statements constitute cautionary statements under the Private Securities Litigation Reform Act of 1995.

This Form 10-K contains forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements that may be made by us. Such forward-looking statements give our current expectations or forecasts of future events. They do not relate strictly to historical or current facts. Such statements are commonly identified by using words such as “anticipate,” “estimate,” “approximate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions in connection with any discussion of future operating or financial performance. In particular, forward-looking statements include statements relating to future actions, future performance, or results of current and anticipated products, sales efforts, expenses, interest rates, the outcome of contingencies, such as legal proceedings, and financial results.

We cannot guarantee that any forward-looking statement will be actualized. Achievement of future results is subject to risks, uncertainties, and potentially inaccurate assumptions. If known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results or those anticipated, estimated, or projected results set forth in the forward-looking statements. You should bear this in mind as you consider forward-looking statements made or to be made by us.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

The following cautionary discussion of material risks, uncertainties, and assumptions relevant to our businesses describes factors that, individually or in the aggregate, we believe could cause our actual results to differ materially from expected and historical results. Additional risks not presently known to us or that we presently believe to be immaterial also may adversely impact us. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, results of operations, and liquidity. Consequently, all forward-looking statements made or to be made by us are qualified by these cautionary statements, and there can be no assurance that the results or developments we anticipate will be realized or that they will have the expected effects on our business or operations. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Our ability to achieve the results contemplated by forward-looking statements is subject to a number of factors, any one or a combination of which could materially affect our business, financial condition, results of operations, or liquidity. These factors may include, but are not limited to:

There is a risk that we will be unable to meet or exceed our operating performance targets and goals in the future if our strategies and initiatives are unsuccessful. Our ability to execute and/or refine our operating and strategic plans, as necessary, including cost savings initiatives, could impact our ability to meet our operating performance targets. Additionally, we must be able to effectively adjust our operating and strategic plans over time to adapt to an ever-changing marketplace. See the MD&A in this Form 10-K for additional information concerning our operating strategy.

We must maintain sufficient inventory levels to successfully operate our business. However, we also must seek to avoid accumulating excess inventory to maintain appropriate in-stock levels based on evolving customer demands. We obtain slightly less than one quarter of our merchandise directly from vendors outside of the U.S. These foreign vendors often require us to order merchandise and enter into purchase order contracts for the purchase of such merchandise well in advance of the time we offer these products for sale. As a result, we may experience difficulty in rapidly responding to a changing retail environment, which makes us vulnerable to changes in price and in consumer preferences. In addition, we attempt to maximize our operating

profit and operating efficiency by delivering proper quantities of merchandise to our stores in a timely manner. If we do not accurately anticipate future demand for a particular product or the time it will take to replenish inventory levels, our inventory levels may not be appropriate and our results of operations may be negatively impacted.

We rely on our ability to replenish depleted merchandise inventory through deliveries to our distribution centers and from the distribution centers to our stores by various means of transportation, including shipments by sea, rail and truck carriers. A decrease in the capacity of carriers and/or labor strikes, disruptions or shortages in the transportation industry could negatively affect our distribution network, our timely receipt of merchandise and/or our transportation costs. In addition, disruptions to the U.S. and international transportation infrastructure from wars, political unrest, terrorism, natural disasters, pandemic diseases, governmental budget constraints and other significant events that lead to delays or interruptions of service could adversely affect our business. Also, a fire, earthquake, or other disaster at one of our distribution centers could disrupt our timely receipt, processing and shipment of merchandise to our stores which could adversely affect our business. Additionally, as we seek to expand our operation through the implementation of our online retail capabilities, we may face increased or unexpected demands on distribution center operations, as well as new demands on our distribution network. Lastly, global pandemics, such as the COVID-19 pandemic, could lead to the shutdown of parts, or all, of our distribution network and generally disrupt our ability to receive, process, and ship merchandise to our stores and meet the demand of our customers.

We depend on a variety of information technology and computer systems for the efficient functioning of our business. We rely on certain hardware, telecommunications and software vendors to maintain and periodically upgrade many of these systems so that we can continue to support our business. Various components of our information technology and computer systems, including hardware, networks, and software, are licensed to us by third party vendors. We rely extensively on our information technology and computer systems to process transactions, summarize results, and manage our business, including management and distribution of our inventory. Our information technology and computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyberattacks or other security breaches, obsolescence, catastrophic events such as fires, floods, earthquakes, tornados, hurricanes, acts of war or terrorism, and usage errors by our employees or our contractors. In recent years, we have begun using vendor-hosted solutions for certain of our information technology and computer systems, which are more exposed to telecommunication failures.

If our information technology or computer systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations as a result. Any material interruption experienced by our information technology or computer systems could negatively affect our business and results of operations. Costs and potential interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of our existing systems could disrupt or reduce the efficiency of our business.

Our customers expect a positive shopping experience, which is driven by a high level of customer service from our associates and a quality presentation of our merchandise. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of highly qualified associates, while at the same time control labor costs. We compete with other retail businesses for many of our associates in hourly and part-time positions. These positions have historically had high turnover rates, which can lead to increased training and retention costs. In addition, our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of federal, state, or local minimum wage legislation (including the increased possibility of federal, state, and/or local wage rate legislation in 2021), the impact of legislation or regulations governing labor relations or benefits, and health insurance costs.

We believe that we benefit substantially from the leadership and experience of our senior executives. The loss of the services of these individuals could have a material adverse impact on our business and results of operations. Competition for key personnel in the retail industry is intense, and our future success will depend on our ability to recruit, train, and retain our senior executives and other qualified personnel.

With the saturation of mobile devices, competition from other retailers in the online retail marketplace is very high and growing. Certain of our competitors, and a number of pure online retailers, have established online operations against which we compete for customers and products. It is possible that the competition in the online retail space may reduce our market share, gross margin, and operating margin, and may materially adversely affect our business and results of operations in other ways. Our operations include an e-commerce platform with multiple fulfillment options to enhance our omnichannel experience. Operating an e-commerce platform is a complex undertaking and there is no guarantee that the resources we have applied to this effort will result in increased revenues or improved operating performance. If our online retailing initiatives do not meet our customers’ expectations, the initiatives may reduce our customers’ desire to purchase goods from us both online and at our brick and mortar stores and may materially adversely affect our business and results of operations.

Our results of operations can be directly impacted by the health of the U.S. economy. Our business and financial performance may be adversely impacted by current and future economic conditions, including factors that may restrict or otherwise negatively impact consumer financing, disposable income levels, unemployment levels, energy costs, interest rates, recession, and inflation, and other matters, such as tax reform, natural disasters, pandemic diseases, or terrorist activities, that influence consumer spending. Specifically, our Soft Home, Hard Home, Furniture and Seasonal merchandise categories may be threatened when disposable income levels are negatively impacted by economic conditions. Additionally, the net sales of cyclical product offerings in our Seasonal category may be threatened when we experience extended periods of unseasonable weather. Inclement weather can also negatively impact our Furniture category, as many customers transport the product home

personally. In particular, the economic conditions and weather patterns of four states (California, Texas, Florida, and Ohio) are important as approximately 33% of our current stores operate and 33% of our 2020 net sales occurred in these states.

In the normal course of business, we process and collect relevant data about our customers, employees and vendors. The protection of our customer, employee, vendor and company data and information is critical to us. We have implemented procedures, processes and technologies designed to safeguard our customers’ debit and credit card information and other private data, our employees’ and vendors’ private data, and our records and intellectual property. We utilize third-party service providers in connection with certain technology related activities, including credit card processing, website hosting, data encryption and software support. We require these providers to take appropriate measures to secure such data and information and assess their ability to do so.

Despite our procedures, technologies and other information security measures, we cannot be certain that our information technology systems or the information technology systems of our third-party service providers are or will be able to prevent, contain or detect all cyberattacks, cyberterrorism, or security breaches. As evidenced by other retailers who have suffered serious security breaches, we may be vulnerable to data security breaches and data loss, including cyberattacks. A material breach of our security measures or our third-party service providers’ security measures, the misuse of our customer, employee, vendor and company data or information or our failure to comply with applicable privacy and information security laws and regulations could result in the exposure of sensitive data or information, attract a substantial amount of negative media attention, damage our customer or employee relationships and our reputation and brand, distract the attention of management from their other responsibilities, subject us to government enforcement actions, private litigation, penalties and costly response measures, and result in lost sales and a reduction in the market value of our common shares. While we have taken action to mitigate our financial risk, in the event we experience a material data or information security breach, our protection may not be sufficient to cover the impact to our business.

In addition, the regulatory environment surrounding data and information security and privacy is increasingly demanding, as new and revised requirements are frequently imposed across our business. Compliance with more demanding privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.

 

Global sourcing of many of the products we sell is an important factor in driving higher operating profit. During 2020, we purchased approximately 21% of our products, at cost, directly from overseas vendors, including 13% from vendors located in China. Additionally, a significant amount of our domestically-purchased merchandise is manufactured abroad. Our ability to identify qualified vendors and to access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside of the U.S. Global sourcing and foreign trade involve numerous risks and uncertainties beyond our control, including increased shipping costs, increased import duties, more restrictive quotas, loss of most favored nation trading status, currency and exchange rate fluctuations, work stoppages, transportation delays, economic uncertainties such as inflation, foreign government regulations, political unrest, pandemic diseases, natural disasters, war, terrorism, trade restrictions and tariffs (including retaliation by the U.S. against foreign practices or by foreign countries against U.S. practices), the financial stability of vendors, or merchandise quality issues. U.S. policy on trade restrictions is ever-changing and may result in new laws, regulations, or treaties that increase the costs of importing goods and/or limit the scope of available foreign vendors. These and other issues affecting our international vendors could materially adversely affect our business and financial performance.

The COVID-19 pandemic has led to general manufacturing and supply chain disruption in the U.S. and globally, including manufacturers and supply chains that produce our retail merchandise, supplies, and fixtures. To the extent our manufacturers, supply chain and associated costs are negatively affected by the COVID-19 pandemic, including delayed shipment of seasonally sensitive product offerings, our business, financial condition, results of operations, and liquidity may be materially adversely affected.

We are exposed to the risk that new federal or state legislation, including new product safety and hazardous material laws and regulations, may negatively impact our operations, increase our cost of doing business and adversely affect our operating performance. Changes in product safety legislation or regulations may lead to product recalls and the disposal or write-off of merchandise, as well as fines or penalties and reputational damage. If our merchandise and food products do not meet applicable governmental safety standards or our customers’ expectations regarding quality or safety, we could experience lost sales, increased costs and be exposed to legal and reputational risk.

In addition, if we discard or dispose of our merchandise, particularly that which is non-salable, in a fashion that is inconsistent with jurisdictional standards, we could expose ourselves to certain fines and litigation costs related to hazardous material regulations. Our inability to comply on a timely basis with regulatory requirements, execute product recalls in a timely manner, or consistently implement waste management standards, could result in fines or penalties which could have a material adverse effect on our financial results. In addition, negative customer perceptions regarding the safety of the products we sell could cause us to lose market share to our competitors. If this occurs, it may be difficult for us to regain lost sales.

Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent based on our overall operations. We may incur certain types of losses that we cannot insure or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime, some natural disasters, and pandemic diseases. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative cost trends in the insurance market, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, general liability, including automobile, and group health insurance programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these self-insured losses, including potential increases in medical and indemnity costs, could result in significantly different expenses than expected under these programs, which could have a material adverse effect on our financial condition and results of operations. Although we continue to maintain property insurance for catastrophic events, we are self-insured for losses up to the amount of our deductibles. If we experience a greater number of self-insured losses than we anticipate, our financial performance could be adversely affected.

We may need to borrow funds under our $700 million five-year unsecured credit facility (“2018 Credit Agreement”) from time to time, depending on operating or other cash flow requirements. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens, and investments, as well as the maintenance of a leverage ratio and a fixed charge coverage ratio. Additionally, we are subject to cross-default provisions under the synthetic lease agreement (the “Synthetic Lease”) that we entered in connection with our distribution center in California. A violation of any of these covenants may permit the lenders to restrict our ability to borrow additional funds, provide letters of credit under the 2018 Credit Agreement and may require us to immediately repay any outstanding loans. Our failure to comply with these covenants may have a material adverse effect on our capital resources, financial condition, results of operations, and liquidity.

We are required by accounting rules to periodically assess our property and equipment and intangible assets for impairment and recognize an impairment loss, if necessary. In performing these assessments, we use our historical financial performance to determine whether we have potential impairments or valuation concerns and as evidence to support our assumptions about future financial performance. A significant decline in our financial performance could negatively affect the results of our assessments of the recoverability of our property and equipment, deferred tax assets, and our intangible assets and trigger the impairment of these assets. Impairment charges taken against property and equipment and intangible assets could be material and could have a material adverse impact on our capital resources, financial condition, results of operations, and liquidity.

None.

All of our stores are located in the U.S., predominantly in strip shopping centers, and have an average store size of approximately 32,700 square feet, of which an average of 22,700 is selling square feet. For additional information about the properties in our retail operations, see the discussion under the caption “Real Estate” in “Item 1. Business” and under the caption “Real Estate” in MD&A in this Form 10-K.

The average cost to open a new store in a leased facility during 2020 was approximately $1.7 million, including the cost of construction, fixtures, and inventory. All of our stores are leased, except for the 50 stores we own in the following states:

Additionally, we own two closed sites which we are not currently operating and one of those sites is available for sale. Since these owned sites are no longer operating as active stores, they have been excluded from our store counts at January 30, 2021.

Store leases generally obligate us for fixed monthly rental payments plus the payment, in most cases, of our applicable portion of real estate taxes, common area maintenance costs (“CAM”), and property insurance. Some leases require the payment of a percentage of sales in addition to minimum rent. Such payments generally are required only when sales exceed a specified level. Our typical store lease is for an initial minimum term of approximately ten years with multiple five-year renewal options. Twenty-six store leases have sales termination clauses that allow us to exit the location at our option if we do not achieve certain sales volume results.

The following table summarizes the number of store lease expirations in each of the next five fiscal years and the total thereafter. As stated above, many of our store leases have renewal options. The table also includes the number of leases that are scheduled to expire each year that do not have a renewal option. The table includes leases for stores with more than one lease and leases for stores not yet open and excludes 18 month-to-month leases and 50 owned locations.

At January 30, 2021, we leased and operated approximately 9.0 million square feet of distribution center and warehouse space in five distribution facilities strategically located across the United States. In the first quarter of 2020, we completed the transition of operations from our former Rancho Cucamonga, CA distribution center to our Apple Valley, CA distribution center, which we opened in the fourth quarter of 2019. The regional distribution centers utilize warehouse management technology, which we believe enables highly accurate and efficient processing of merchandise from vendors to our retail stores. The combined output of our regional distribution centers was approximately 2.4 million merchandise cartons per week in 2020.

Certain vendors deliver merchandise directly to our stores when it supports our operational goal to deliver merchandise from our vendors to the sales floor in the most efficient manner. We operate an e-commerce fulfillment center out of our Columbus, OH warehouse. In 2020, to supplement our Columbus, OH e-commerce fulfillment center, we began fulfilling direct-ship e-commerce orders from 47 of our store locations, which we strategically selected based on geographic location, size, and other relevant factors.

Distribution centers and warehouse space, and the corresponding square footage of the facilities, by location at January 30, 2021, were as follows:

In 2018, we moved our corporate headquarters to a new leased facility within Columbus, Ohio. In 2019, we exercised our purchase option to acquire our headquarters facility and completed the purchase transaction in October 2019.

None.

Our executive officers at March 30, 2021 were as follows:

Our common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “BIG.”

The following table sets forth information regarding our repurchase of common shares during the fourth fiscal quarter of 2020:

At the close of trading on the NYSE on March 26, 2021, there were approximately 849 registered holders of record of our common shares.

The following graph and table compares, for the five fiscal years ended January 30, 2021, the cumulative total shareholder return for our common shares, the S&P 500 Index, and the S&P 500 Retailing Index. Measurement points are the last trading day of each of our fiscal years ended January 28, 2017, February 3, 2018, February 2, 2019, February 1, 2020 and January 30, 2021. The graph and table assume that $100 was invested on January 30, 2016, in each of our common shares, the S&P 500 Index, and the S&P 500 Retailing Index and reinvestment of any dividends. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance.

The following statements of operations and balance sheet data have been derived from our consolidated financial statements and should be read in conjunction with MD&A and the consolidated financial statements and related notes included herein.

The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes. Please refer to “Item 1A. Risk Factors” of this Form 10-K for a discussion of forward-looking statements and certain risk factors that may have a material adverse effect on our business, financial condition, results of operations, and/or liquidity.

Our fiscal year ends on the Saturday nearest to January 31, which results in some fiscal years with 52 weeks and some with 53 weeks. Fiscal years 2020, 2019, and 2018 were comprised of 52 weeks. Fiscal year 2021 will also be comprised of 52 weeks.

The following are the results from 2020 that we believe are key indicators of our financial condition and results of operations when compared to 2019.

The following table compares components of our consolidated statements of operations as a percentage of net sales:

See the discussion below under the caption “2020 Compared To 2019” for additional details regarding the specific components of our operating results. See our Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended February 1, 2020 for a comparison of operating results for 2019 to operating results for 2018.

In 2019, the Company completed an initial, comprehensive review of its operating strategy. The outcome of the review was a multi-year plan for a strategic transformation, which we refer to as “Operation North Star.”

Operation North Star has three primary objectives:

The “drive profitable long-term growth” objective of Operation North Star is focused on growing our net sales, which includes:

The “fund the journey” objective of Operation North Star is focused on reducing costs so we can invest those savings in the growth areas of our business, which includes:

The “create long-term shareholder value” objective is the culmination of our “drive profitable long-term growth” and “fund the journey” objectives. If we effectively execute the first two objectives of Operation North Star, we believe that we will deliver value to our shareholders through earnings growth over time. In addition, we continue to optimize our capital allocation to support Operation North Star initiatives while returning capital to our shareholders, when appropriate.

In recognition of the importance of having the appropriate technology and processes in place to achieve our “drive profitable long-term growth” and “fund the journey” objectives, we have established several enabler work streams with the following objectives:

In 2020, we successfully completed the following under our Operation North Star strategy:

In 2021, we plan to implement the following initiatives to achieve our Operation North Star goals:

We focus our merchandising strategy on (1) being the authority on price and value to Jennifer in all of our merchandise categories and (2) providing a merchandise assortment that surprises and delights her. Under Operation North Star, our merchandising strategy is also focused on strengthening our Home offerings. Home is an area where we believe Jennifer gives us the right to play and where we believe we can play to win.

We believe our merchandising strategies for Furniture, Seasonal, and Soft Home position us to surprise and delight Jennifer with our Home offerings:

We consider Food, Consumables, Hard Home, and Electronics, Toys, & Accessories as convenience categories:

Our merchandising management team is aligned with our merchandise categories, and their primary goal is to increase our total company comparable sales (“comp” or “comps”), which includes stores open at least fifteen months, plus our e-commerce operations. Our review of the performance of the members of our merchandise management team focuses on comps by merchandise category, as we believe it is the key metric that will drive our long-term net sales. By focusing on strengthening our Home offerings, and managing our convenience categories, we believe our merchandise management team can effectively address the changing shopping behaviors of our customers and implement more focused offerings within each merchandise category, which we believe will lead to continued comp growth.

The top priority of our marketing activities is to increase our net sales and comps by developing our brand identity as (1) the authority on price and value for Jennifer and (2) a source of surprise and delight. Over the past few years, we have reviewed our brand identity to gain further insights into Jennifer’s perception of us and how best to improve the overall effectiveness of our marketing efforts. Our research has affirmed that Jennifer is deal-driven, enjoys a “treasure hunt,” comes to us for our value-priced merchandise assortment, and appreciates our ability to assist her in fashioning and furnishing her home so that she can feel empowered to enjoy the space with family and friends. We believe our strong price value perception and the surprise and delight factor in our stores enhances our ability to effectively connect with Jennifer in a way that lets her understand when shopping at Big Lots, she can afford to live Big, while saving Lots.

Our BIG Rewards Program allows us to more effectively incentivize our loyal customers and encourage new membership by highlighting the significant features and benefits. Our loyalty program rewards Jennifer with a coupon after every third purchase, a birthday reward offer, and special rewards after large-ticket furniture purchases. Research has shown there is a direct correlation between loyal, frequent shoppers and a larger basket. We believe that growing the membership base of the BIG Rewards Program will provide more opportunities to understand and leverage customer behavior through segmentation. We leverage our rewards program database to gain insights into shopping behaviors, reengage lapsed members, and tailor our assortment and promotions to Jennifer’s desires. At January 30, 2021, our BIG Rewards Program had nearly 21 million active members (defined as having made a purchase in the last 12 months) and we are focused on continuing to grow the membership base of our BIG Rewards Program in 2021.

In addition to electronic, social and digital media, our marketing communication efforts involve a mix of television advertising, printed ad circulars, and in-store signage. The primary goals of our television advertising are to promote our brand and, from time to time, promote products or special discounts in our stores. We have also shifted towards using more digital streaming media in concentrated markets, which allows us to connect more deeply and frequently with Jennifer. Our printed advertising circulars and our in-store signage initiatives focus on promoting our value proposition on our unique merchandise offerings.

One of the core objectives of Operation North Star is to responsibly invest in store presentation initiatives that create an easy shopping experience for our customers.

From 2017 through 2019, we invested heavily in a presentation initiative we called “Store of the Future,” which moved our Furniture department to the front center of the store with Seasonal and Soft Home on either side and moved Food and Consumables to the back of the store, while keeping them visible with clear sight lines from the entrance of the store. Additionally, the Store of the Future concept included improved lighting and new flooring. Prior to 2020, we intended to expand the Store of the Future concept to our entire chain of stores. In 2020, we reevaluated our investment in the Store of the Future concept and chose to shift our focus to smaller scale initiatives, such as The Lot and Queue Line initiatives discussed below, that we believe will have a higher return on our investment. Therefore, we do not plan to invest in the Store of the Future concept going forward.

In 2020, we implemented a presentation solution we call “The Lot” in approximately 50% of our stores. We designed The Lot to add incremental selling space to our store layout and display items from various merchandise categories placed in vignettes to promote life’s occasions, such as fall tailgating. The Lot offers surprise and delight to Jennifer by demonstrating the breadth and value of products that we offer in one convenient experience. Our expectation is to re-introduce Jennifer to the “treasure” that we offer, while removing the challenges of the “hunt” from the experience. In 2021, we plan to expand The Lot to approximately 550 additional stores.

Also in 2020, we implemented a streamlined checkout experience in approximately 50% of our stores that we call the “Queue Line,” which features a reconfigured checkout design. The Queue Line both enhances the customer experience and builds a bigger basket as our customers walk by new and expanded convenience offerings as they check out. Furthermore, the Queue Line creates additional selling space for our Furniture merchandise category. In 2021, we plan to expand the Queue Line to approximately 550 additional stores.

As discussed above in “Merchandising,” in 2020, we reallocated space from the Food category to the Consumables category as part of our Pantry Optimization project. This project streamlined our Food assortment and added more staple Consumables offerings to provide the consistency that drives our customers to keep coming back to our stores. We believe this initiative has resonated well with our customers and we are continuing to refine our assortments to meet her needs.

Lastly, we continue to offer a private label credit card and our Easy Leasing lease-to-own solutions for customer financing and a coverage/warranty program, focused on our Furniture and Seasonal merchandise categories, to round out Jennifer’s experience. Our private label credit card provides access to revolving credit, through a third party, for use on both larger ticket items and daily purchases. Our Easy Leasing lease-to-own program provides a single use opportunity for access to third-party financing. Our coverage/warranty program provides a method for obtaining multi-year warranty coverage for Furniture purchases. In 2021, we plan to expand our coverage/warranty program to include additional merchandise categories and offer coverage/warranty plans on our e-commerce platform.

Net sales by merchandise category (in dollars and as a percentage of total net sales), net sales change (in dollars and percentage), and comps in 2020 compared to 2019 were as follows:

 

We periodically assess and make minor adjustments to our product hierarchy, which can impact the roll-up to our merchandise categories. Our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented. Therefore, there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts.

Net sales increased $876.0 million, or 16.5%, to $6,199.2 million in 2020, compared to $5,323.2 million in 2019. The increase in net sales was due to comp increases in each of our merchandise categories, with an overall comp increase of 16.1%, which increased net sales by $816.1 million. Additionally, there was a $59.9 million increase in net sales from our non-comparable stores, driven by increased sales in our new and relocated stores compared to our closed stores and the net increase of four stores in 2020.

In 2020, we experienced a favorable impact to net sales due to our position as an “essential retailer” during the COVID-19 pandemic and an increased demand for our home products as customers were spending more time at home. In the first quarter, we experienced a significant increase in demand for “Essential Products”, which we define as food, consumables, health products, and pet supplies. The primary impact was in our Food and Consumables merchandise categories as customers began stocking up on Essential Products as concern over the COVID-19 pandemic grew. From the end of the first quarter through the second quarter of 2020, we experienced a surge in demand in our Furniture, Seasonal, Soft Home, and Hard Home categories driven by the release of government stimulus and unemployment funds under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. Following the release of government stimulus and unemployment funds, a “nesting” trend emerged. As a result of spending more time at home, customers chose to invest more in their home which drove a continued demand in our Furniture, Soft Home, and Hard Home through the balance of 2020. We experienced earlier-than-usual Christmas holiday sales late in the third quarter of 2020 and early in the fourth quarter of 2020, which, combined with an intentional reduction in Christmas inventory purchases due to demand uncertainty in the Spring of 2020, led to lower levels of Christmas seasonal inventory and had an unfavorable impact on net sales early in the fourth quarter of 2020. Late in the fourth quarter, we experienced a favorable impact to net sales due to the release of a second round of government stimulus funds.

We believe we have successfully retained the new customers we attracted as a result of our position as an essential retailer and we have seen a positive response to our strategic initiatives and our product assortment’s alignment with customer demand.

All of our merchandise categories generated increased net sales and positive comps in 2020 compared to 2019:

Gross margin dollars increased $382.7 million, or 18.1%, to $2,497.4 million in 2020, compared to $2,114.7 million in 2019. The increase in gross margin dollars was primarily due to an increase in net sales, which increased gross margin dollars by $348.0 million. Gross margin as a percentage of net sales, or gross margin rate, increased 60 basis points to 40.3% in 2020 compared to 39.7% in 2019. The gross margin rate increase was primarily due to a lower markdown rate, higher comps in our high margin merchandise categories, and the absence of a $6.0 million impairment of inventory in our greeting cards department, which we chose to exit in the first quarter of 2019. The increase in gross margin rate was partially offset by higher shrink costs and lower initial mark-up compared to 2019, as our receipts skewed towards domestic purchases, which carry a lower average initial markup. Additionally, our lower initial markup was driven by a significant increase in inbound freight costs in the fourth quarter of 2020, which resulted from transportation capacity restraints and processing backlogs at our distribution centers as we worked to restore inventory levels.

Selling and administrative expenses were $1,965.6 million in 2020, compared to $1,823.4 million in 2019. The increase of $142.2 million, or 7.8%, was primarily due to $59.2 million in distribution and transportation costs, store-related payroll of $50.5 million, bonus expense of $34.3 million, $13.1 million of share-based compensation expense, $9.1 million of store occupancy expense, advertising expense of $7.6 million, transaction fees of $8.8 million, $7.0 million in stores supplies expense, $4.6 million of employee retirement and separation costs, $4.0 million of sale and leaseback related expenses, and $3.7 million of proxy contest-related costs, partially offset by the absence of $38.3 million in costs incurred for our transformational restructuring initiative, the absence of a $7.3 million loss contingency recorded in 2019, and a decrease in health benefit costs of $16.4 million. The increase in distribution and transportation expenses was due to the transition from our Rancho Cucamonga, CA distribution center to our Apple Valley, CA distribution center, rent expense on our leased distribution centers, higher outbound rates and volume to support our increased net sales, and a temporary $2 per hour wage increase that began in March 2020 and continued through early July 2020 for most of our non-exempt workforce during the COVID-19 coronavirus pandemic. The increase in store-related payroll was driven by additional payroll hours allocated to stores to support the increased net sales in 2020 and the aforementioned temporary $2 per hour wage increase. The increase in bonus expense was driven by increased performance in 2020 relative to our quarterly and annual operating plans as compared to our performance in 2019 relative to our quarterly and annual operating plans, and a one-time discretionary bonus in the second quarter of 2020 to recognize our non-exempt associates in our stores and distribution centers. Our share-based compensation expense increased as a result of higher grant date fair value and higher estimated performance for the 2018 performance share units (“PSUs”) for which we recognized expense during 2020, compared to the 2017 PSUs for which expense was recognized in 2019. Additionally, our share-based compensation expense increased due to our grant in 2020 of performance share units with a restriction feature to certain members of management, which vest based on the achievement of share price performance goals and a minimum service requirement of one year (“PRSUs”). We began recognizing expense for PRSUs in 2020, compared to our PSU awards, which typically have a deferred grant date. The increase in store occupancy expense was due to new stores opened since the end of 2019, which have higher rents than the stores closed, and normal rent increases resulting from lease renewals. Advertising expense increased due to increased investments in social media engagement and rewards-

As a percentage of net sales, selling and administrative expenses decreased by 260 basis points to 31.7% in 2020 compared to 34.3% in 2019.

Depreciation expense increased $3.3 million to $138.3 million in 2020 compared to $135.0 million in 2019. The increase was primarily driven by the full-year impact of investments in our Apple Valley, CA distribution center, new store build-outs and Store of the Future remodels in 2019, and the acquisition of our corporate headquarters facility in the third quarter of 2019, partially offset by a decrease resulting from the sale of four distribution centers in 2020.

Depreciation expense as a percentage of net sales decreased by 30 basis points compared to 2019.

The gain on sale of distribution center in 2020 was $463.1 million, compared to $178.5 million in 2019. The gain on sale of distribution centers in 2020 was attributable to the sale and leaseback of our distribution centers in Durant, OK; Tremont, PA; Montgomery, AL; and Columbus, OH. The gain on sale of distribution centers in 2019 was attributable to the sale of our Rancho Cucamonga, CA distribution center.

Operating profit was $856.5 million in 2020 compared to $334.8 million in 2019. The increase in operating profit was primarily driven by the items discussed in the “Net Sales,” “Gross Margin,” “Selling and Administrative Expenses,” “Depreciation Expense,” and “Gain on Sale of Distribution Centers” sections above. In summary, operating profit was driven by the gain on the sale of our distribution centers and an increase in net sales and gross margin rate, partially offset by increases in selling and administrative expenses and depreciation expense.

Interest expense decreased $5.8 million, to $11.0 million in 2020 compared to $16.8 million in 2019. The decrease in interest expense was driven by lower total average borrowings (including finance leases and the sale and leaseback financing liability) and a lower average interest rate on our revolving debt. We had total average borrowings of $257.6 million in 2020 compared to total average borrowings of $461.6 million in 2019. The decrease in total average borrowings was driven by our repayment of all outstanding debt under the 2018 Credit Agreement following the sale and leaseback transactions completed in the second quarter of 2020, partially offset by the timing of our entry into a $70 million term note on August 7, 2019 (“2019 Term Note”), as the 2019 Term Note was only in place for the second half of 2019, and the establishment of a financial liability in connection with the sale and leaseback transactions for our distribution centers in the second quarter of 2020. The average interest rate on our revolving debt, which is variable based on LIBOR and our credit rating, decreased due to a significant decline in the LIBOR rate in 2020 as a result of the COVID-19 coronavirus pandemic, partially offset by the impact of a decrease in our credit rating during the first quarter of 2020.

Other income (expense) was $(0.9) million in 2020, compared to $(0.5) million in 2019. The change was primarily driven by unrealized losses on our diesel fuel derivatives due to a sharp decline in current and forward diesel fuel prices in the first quarter of 2020 as a result of the COVID-19 pandemic.

Our effective income tax rate in 2020 and 2019 was 25.5% and 23.6%, respectively. The increase in the effective income tax rate was primarily attributable to the impact of the sale of our distribution centers. In 2019, the tax rate on the gain on the sale of our California distribution center was less than our normalized rate, thereby reducing our effective tax rate in 2019. In 2020, the tax rate on the gain on sale of our non-California distribution centers was similar to our normalized tax rate, thereby having a more muted impact on our effective tax rate in 2020. Additionally, the impact of our discrete items was similar in value in 2020 compared to 2019, but their impact on the tax rate was significantly curtailed in 2020 by the significant increase in income before income taxes in 2020 as compared to 2019.

On August 31, 2018, we entered into the 2018 Credit Agreement, which provides for a $700 million five-year unsecured credit facility. The 2018 Credit Agreement expires on August 31, 2023. Borrowings under the 2018 Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness. The 2018 Credit Agreement includes a $30 million swing loan sublimit, a $75 million letter of credit sublimit, a $75 million sublimit for loans to foreign borrowers, and a $200 million optional currency sublimit. The interest rates, pricing and fees under the 2018 Credit Agreement fluctuate based on our debt rating. The 2018 Credit Agreement allows us to select our interest rate for each borrowing from multiple interest rate options. The interest rate options are generally derived from the prime rate or LIBOR. We may prepay revolving loans made under the 2018 Credit Agreement without penalty. The 2018 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio. The covenants of the 2018 Credit Agreement do not restrict our ability to pay dividends. Additionally, we are subject to cross-default provisions associated with the synthetic lease for our distribution center in Apple Valley, CA. A violation of any of the covenants could result in a default under the 2018 Credit Agreement that would permit the lenders to restrict our ability to further access the 2018 Credit Agreement for loans and letters of credit and require the immediate repayment of any outstanding loans under the 2018 Credit Agreement. At January 30, 2021, we were in compliance with the covenants of the 2018 Credit Agreement.

On August 7, 2019, we entered into the 2019 Term Note, a $70 million term note agreement, which is secured by the equipment at our California distribution center. The 2019 Term Note will expire on May 7, 2024. We are required to make monthly payments over the term of the 2019 Term Note and are permitted to prepay the note, subject to penalties, at any time. The interest rate on the note is fixed at 3.3%.

The primary source of our liquidity is cash flows from operations and borrowings under the 2018 Credit Agreement, as necessary. Our net income and, consequently, our cash provided by operations are impacted by net sales volume, seasonal sales patterns, and operating profit margins. Our net sales are typically highest during the nine-week Christmas selling season in our fourth fiscal quarter. However, due to demand volatility we have experienced during the COVID-19 pandemic, the seasonality of our 2020 results differed from historical experience and our 2021 results may differ from historical experience. Generally, our working capital requirements peak late in our third fiscal quarter or early in our fourth fiscal quarter. We have historically funded those requirements with borrowings under our credit facility. However, as a result of the sale and leaseback transactions completed in the second quarter of 2020 and our strong cash flow from operations in 2020, we funded our working capital requirements for the second half of 2020 without borrowing under the 2018 Credit Agreement. At January 30, 2021, we had no borrowings under the 2018 Credit Agreement, and the borrowings available under the 2018 Credit Agreement were $693.3 million, after taking into account the reduction in availability resulting from outstanding letters of credit totaling $6.7 million. Currently, we do not anticipate borrowing under the 2018 Credit Agreement during 2021. Cash requirements include among other things, capital expenditures, working capital needs, interest payments, and other contractual commitments.

In 2020, we invested a portion of the proceeds from the sale and leaseback of the four distribution centers in money market funds, commercial paper, and treasury bills, of which only money market funds were held at January 30, 2021. These highly liquid investments were recorded in cash and cash equivalents in our consolidated balance sheets at their fair value. Our aggregate money market fund investments were $175.1 million and $0 at January 30, 2021 and February 1, 2020, respectively.

As a result of the sale and leaseback transactions and our strong cash flow from operations during 2020, our cash and cash equivalents increased $506.9 million to $559.6 million compared to 2019.

In August 2020, our Board of Directors authorized the repurchase of up to $500 million of our common shares (“2020 Repurchase Authorization”). Pursuant to the 2020 Repurchase Authorization, we are authorized to repurchase shares in the open market and/or in privately negotiated transactions at our discretion, subject to market conditions and other factors. Common shares acquired through the 2020 Repurchase Authorization will be available to meet obligations under our equity compensation plans and for general corporate purposes. The 2020 Repurchase Authorization has no scheduled termination date and we intend to fund repurchases under the authorization with cash and cash equivalents on hand and cash generated from operations going forward. During 2020, we purchased 3.8 million of our common shares for $172.8 million under the 2020 Repurchase Authorization, at an average price of $46.05.

In 2020, we declared and paid four quarterly cash dividends of $0.30 per common share for a total paid amount of $47.0 million. The cash dividends declared and paid in 2020 were consistent with the cash dividends declared and paid in 2019.

In March 2021, our Board declared a quarterly cash dividend of $0.30 per common share payable on April 2, 2021 to shareholders of record as of the close of business on March 19, 2021.

The following table compares the primary components of our cash flows from 2020 to 2019:

Cash provided by operating activities increased by $60.4 million to $399.3 million in 2020 compared to $339.0 million in 2019. The increase was primarily driven by our higher net income, after adjusting for non-cash activity such as deferred taxes and the add-back for the gain on disposition of property and equipment, and an increase in income taxes payable, which was principally due to our higher taxable income in 2020 compared to 2019. The increase was partly offset by a decrease in the combined change in inventory and accounts payable, which resulted from our lower inventory position at the end of 2019.

Cash provided by (used in) investing activities increased by $527.5 million to cash provided by investing activities of $453.0 million in 2020 compared to cash used in investing activities of $74.5 million in 2019. The increase was primarily due to an increase in cash proceeds from sale of property and equipment, resulting from the sale of four distribution centers in 2020 compared to the sale of one distribution center in 2019. Additionally, our capital expenditures decreased compared to 2019, which was driven by our decision to reduce our investments in our Store of the Future concept and new stores in 2020 to preserve liquidity and promote safety during the COVID-19 coronavirus pandemic, and a decrease in investments in our Apple Valley, CA distribution center which opened in late 2019.

Cash used in financing activities increased by $87.7 million to $345.5 million in 2020 compared to $257.8 million in cash used in financing activities in 2019. The increase was driven by increases in net repayments of long-term debt resulting from our repayment of all outstanding borrowings under the 2018 Credit Agreement during 2020 and payment for treasury shares acquired, which is due to our repurchase of $172.8 million of our common shares under the 2020 Repurchase Authorization

during 2020, compared to our repurchase of $50.0 million of our common shares under the 2019 Repurchase Program during 2019. The increases were partially offset by an increase in net financing proceeds from sale and leaseback resulting from the sale and leaseback of four distribution centers in 2020 and a decrease in payment of finance lease obligations, which was due to the exercise of a purchase option to acquire our corporate headquarters in 2019.

Based on historical and expected financial results, we believe that we have or, if necessary, have the ability to obtain, adequate resources to fund ongoing and seasonal working capital requirements, proposed capital expenditures, new projects, and currently maturing obligations.

The following table summarizes payments due under our contractual obligations at January 30, 2021:

Not applicable.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. The use of estimates, judgments, and assumptions creates a level of uncertainty with respect to reported or disclosed amounts in our consolidated financial statements or accompanying notes. On an ongoing basis, management evaluates its estimates, judgments, and assumptions, including those that management considers critical to the accurate presentation and disclosure of our consolidated financial statements and accompanying notes. Management bases its estimates, judgments, and assumptions on historical experience, current trends, and various other factors that management believes are reasonable under the circumstances. Because of the inherent uncertainty in using estimates, judgments, and assumptions, actual results may differ from these estimates.

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 allowance for shrinkage, which may impact the ending inventory valuation and current or future gross margin. These estimates are based on historical experience and current information.

When management determines the salability 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 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 typically taken at each store once a year. During 2020, scheduling challenges arising due to COVID-19 resulted in a small number of stores that did not take physical inventory counts in calendar 2020 as initially planned. These stores were prioritized to be counted early in the 2021 physical inventory counting cycle and the allowance for shrinkage associated with these stores at January 30, 2021 was adjusted in consideration of early calendar 2021 results. During calendar 2021, the majority of physical counts will occur between January and June. As physical inventories are completed, actual results are recorded and new go-forward allowance for shrinkage rates are established based on historical results at the individual store level. Thus, the allowance for shrinkage rates will be adjusted throughout the January to June inventory cycle based on actual results. At January 30, 2021, a 10% difference in our shrink accrual would have affected gross margin, operating profit and income before income taxes by approximately $4.1 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.

We are self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical, dental, and prescription drug benefit claims, a portion of which is funded by employees. We purchase stop-loss coverage from third party insurance carriers to limit individual or aggregate loss exposures in these areas. Accrued insurance liabilities and related expenses are based on actual claims reported and estimates of claims incurred but not reported. The estimated loss accruals for claims incurred but not paid are determined by applying actuarially-based calculations taking into account historical claims payment results and known trends such as claims frequency and claims severity. Management makes estimates, judgments, and assumptions with respect to the use of these actuarially-based calculations, including but not limited to, estimated health care cost trends, estimated lag time to report and pay claims, average cost per claim, network utilization rates, network discount rates, and other factors. A 10% change in our self-insured liabilities at January 30, 2021 would have affected selling and administrative expenses, operating profit, and income before income taxes by approximately $7.9 million.

We are subject to market risk from exposure to changes in interest rates on investments and on borrowings under the 2018 Credit Agreement that we make from time to time. We had no borrowings under the 2018 Credit Agreement at January 30, 2021. An increase of 1% in our variable interest rate on our investments and estimated future borrowings would not currently affect our financial condition, results of operations, or liquidity. Additionally, we are subject to cross-default provisions associated with the Synthetic Lease for our distribution center in California. An increase of 1% in this leasing instrument could affect our financial condition, results of operations, or liquidity through higher rent expense by approximately $0.9 million.

We are subject to market risk from exposure to changes in our derivative instruments, associated with diesel fuel. At January 30, 2021, we had outstanding derivative instruments, in the form of collars, covering 3.6 million gallons of diesel fuel. The below table provides further detail related to our current derivative instruments, associated with diesel fuel.

Additionally, at January 30, 2021, a 10% difference in the forward curve for diesel fuel prices could affect unrealized gains (losses) in other income (expense) by approximately $1.1 million.

To the shareholders and the Board of Directors of Big Lots, Inc.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended January 30, 2021, of the Company and our report dated March 30, 2021, expressed an unqualified opinion on those financial statements.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Columbus, Ohio

March 30, 2021

To the shareholders and the Board of Directors of Big Lots, Inc.

We have audited the accompanying consolidated balance sheets of Big Lots, Inc. and subsidiaries (the “Company”) as of January 30, 2021 and February 1, 2020, the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended January 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. The average cost retail inventory method requires management to make judgments and contains estimates, including the amount and timing of markdowns to clear slow-moving inventory and an estimated allowance for shrinkage, which may impact ending inventory valuation. The balance of ending inventory was $940.3 million at January 30, 2021.

When management determines the salability 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, and customer preferences.

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.

Given the significant estimates and assumptions management utilizes to quantify inventory reserves which includes markdowns and the allowance for shrinkage, a high degree of auditor judgment and an increased extent of effort is required when performing audit procedures to evaluate the methodology and reasonableness of the estimates and assumptions. For markdowns, such estimates are based on the timing and completeness of recorded markdowns. For the allowance for shrinkage, such estimates are based on a combination of historical shrinkage experience and current year physical inventory results.

Our audit procedures related to the measurement of the valuation of inventory reserves included the following, among others:

The Company is self-insured for certain losses relating to general liability and workers’ compensation. Accrued insurance liabilities, $92.1 million at January 30, 2021, are based on actual claims reported and estimates of claims incurred but not reported. The estimated loss accruals for claims incurred but not paid are determined by applying actuarially-based calculations taking into account historical claims payment results and known trends such as claims frequency and claims severity.

Given the significant estimates and assumptions in determination of the selected actuarial models management utilizes to quantify insurance reserves, a high degree of auditor judgment and increased extent of effort is required, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether insurance reserves were appropriately valued.

Our audit procedures related to the general liability and workers’ compensation self-insurance reserves included the following, among others:

Columbus, Ohio

March 30, 2021

We have served as the Company’s auditor since 1989.

 

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

The accompanying notes are an integral part of these consolidated financial statements.