Annual Reports

  • 10-K (Apr 1, 2014)
  • 10-K (Apr 2, 2013)
  • 10-K (Mar 26, 2012)
  • 10-K (Mar 30, 2011)
  • 10-K (Mar 30, 2010)
  • 10-K (Mar 30, 2009)

 
Quarterly Reports

 
8-K

 
Other

Big Lots 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 2, 2008

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 1-8897

BIG LOTS, INC.
(Exact name of registrant as specified in its charter)

Ohio
06-1119097
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

300 Phillipi Road, P.O. Box 28512, Columbus, Ohio
43228-5311
(Address of principal executive offices)
(Zip Code)

(614) 278-6800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o Noþ

The number of the registrant’s common shares, $0.01 par value, outstanding as of August 29, 2008, was 82,025,708.
 


 
 

 

FORM 10-Q
FOR THE FISCAL QUARTER ENDED AUGUST 2, 2008
TABLE OF CONTENTS
 
       
Page
         
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b)
 
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c)
 
4
         
 
d)
 
5
         
 
e)
 
6
         
13
         
19
         
20
         
20
         
20
         
20
         
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21
         
21
         
21
         
22





Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)



   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
August 2, 2008
   
August 4, 2007
   
August 2, 2008
   
August 4, 2007
 
                         
Net sales
  $ 1,105,189     $ 1,084,891     $ 2,256,778     $ 2,213,290  
Cost of sales
    670,385       663,817       1,358,183       1,345,303  
Gross margin
    434,804       421,074       898,595       867,987  
Selling and administrative expenses
    370,885       365,823       757,741       748,509  
Depreciation expense
    20,458       21,828       39,236       43,592  
Operating profit
    43,461       33,423       101,618       75,886  
Interest expense
    (1,106 )     (105 )     (2,518 )     (197 )
Interest and investment income
    14       1,592       26       4,602  
Income from continuing operations before income taxes
    42,369       34,910       99,126       80,291  
Income tax expense
    16,222       12,775       38,493       29,132  
Income from continuing operations
    26,147       22,135       60,633       51,159  
Income (loss) from discontinued operations, net of tax expense (benefit) of $(73), $795, $(59), and $629, respectively
    (122 )     1,249       (99 )     989  
Net income
  $ 26,025     $ 23,384     $ 60,534     $ 52,148  
                                 
Earnings per common share - basic
                               
Continuing operations
  $ 0.32     $ 0.21     $ 0.75     $ 0.47  
Discontinued operations
    -       0.01       -       0.01  
    $ 0.32     $ 0.22     $ 0.75     $ 0.48  
                                 
Earnings per common share - diluted
                               
Continuing operations
  $ 0.32     $ 0.21     $ 0.74     $ 0.47  
Discontinued operations
    -       0.01       -       0.01  
    $ 0.32     $ 0.22     $ 0.74     $ 0.48  
                                 
Weighted-average common shares outstanding:
                               
Basic
    80,772       106,490       80,937       108,204  
Dilutive effect of share-based awards
    1,196       1,262       1,027       1,497  
Diluted
    81,968       107,752       81,964       109,701  


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


Consolidated Balance Sheets
(In thousands, except par values)


 
   
(Unaudited)
August 2, 2008
   
February 2,
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 43,521     $ 37,131  
Inventories
    698,392       747,942  
Deferred income taxes
    53,040       53,178  
Other current assets
    69,956       52,859  
Total current assets
    864,909       891,110  
Property and equipment - net
    495,521       481,366  
Deferred income taxes
    48,034       51,524  
Other assets
    22,044       19,815  
Total assets
  $ 1,430,508     $ 1,443,815  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 269,281     $ 260,272  
Property, payroll, and other taxes
    70,153       65,260  
Accrued operating expenses
    55,115       62,978  
Insurance reserves
    35,919       37,762  
Accrued salaries and wages
    32,409       37,531  
Income taxes payable
    -       36,541  
Total current liabilities
    462,877       500,344  
Long-term obligations
    147,700       163,700  
Deferred rent
    31,216       35,955  
Insurance reserves
    44,550       45,092  
Unrecognized tax benefits
    27,221       25,353  
Other liabilities
    35,465       34,885  
Shareholders’ equity:
               
Preferred shares - authorized 2,000 shares; $0.01 par value; none issued
    -       -  
Common shares - authorized 298,000 shares; $0.01 par value; issued 117,495 shares; outstanding 81,138 shares and 82,682 shares, respectively
    1,175       1,175  
Treasury shares - 36,357 shares and 34,813 shares, respectively, at cost
    (808,498 )     (784,718 )
Additional paid-in capital
    497,055       490,959  
Retained earnings
    997,971       937,571  
Accumulated other comprehensive income (loss)
    (6,224 )     (6,501 )
Total shareholders' equity
    681,479       638,486  
Total liabilities and shareholders' equity
    1,430,508     $ 1,443,815  


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

Consolidated Statements of Shareholders’ Equity (Unaudited)
(In thousands)

 

   
Common
   
Treasury
   
Additional Paid-In
   
Retained
   
Accumulated Other Comprehensive
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Total
 
                                                 
Balance - February 3, 2007
    109,633     $ 1,175       7,862     $ (124,182 )   $ 477,318     $ 781,325     $ (5,933 )   $ 1,129,703  
Net income
    -       -       -       -       -       52,148       -       52,148  
Other comprehensive income
                                                               
Amortization of pension, net of tax of $(162)
    -       -       -       -       -       -       259       259  
Comprehensive income
    -       -       -       -       -       -       -       52,407  
Adoption of FIN No. 48
    -       -       -       -       -       (2,215 )     -       (2,215 )
Purchases of common shares
    (10,797 )     -       10,797       (331,119 )     -       -       -       (331,119 )
Exercise of stock options
    2,526       -       (2,526 )     41,121       (8,092 )     -       -       33,029  
Restricted shares awarded
    284       -       (284 )     6,596       (6,596 )     -       -       -  
Tax benefit from share-based awards
    -       -       -       -       18,538       -       -       18,538  
Sale of treasury shares used for deferred compensation plan
    68       -       (68 )     693       1,311       -       -       2,004  
Share-based employee compensation expense
    -       -       -       -       4,707       -       -       4,707  
Balance - August 4, 2007
    101,714       1,175       15,781       (406,891 )     487,186       831,258       (5,674 )     907,054  
Net income
    -       -       -       -       -       106,313       -       106,313  
Other comprehensive income
                                                               
Amortization of pension, net of tax of $(766)
    -       -       -       -       -       -       987       987  
Valuation adjustment of pension, net of tax of $1,245
    -       -       -       -       -       -       (1,814 )     (1,814 )
Comprehensive income
    -       -       -       -       -       -       -       105,486  
Purchases of common shares
    (19,262 )     -       19,262       (383,792 )     -       -               (383,792 )
Exercise of stock options
    216       -       (216 )     5,825       (2,931 )     -       -       2,894  
Restricted shares awarded
    2       -       (2 )     66       (66 )     -       -       -  
Tax benefit from share-based awards
    -       -       -       -       1,283       -       -       1,283  
Sale of treasury shares used for deferred compensation plan
    12       -       (12 )     74       287       -       -       361  
Share-based employee compensation expense
    -       -       -       -       5,200       -               5,200  
Balance - February 2, 2008
    82,682       1,175       34,813       (784,718 )     490,959       937,571       (6,501 )     638,486  
Net income
    -       -       -       -       -       60,534       -       60,534  
Other comprehensive income
                                                               
Amortization of pension, net of tax of $(165)
    -       -       -       -       -       -       237       237  
Comprehensive income
    -       -       -       -       -       -       -       60,771  
Adoption of SFAS No. 158 - measurement date
    -       -       -       -       -       (134 )     40       (94 )
Purchases of common shares
    (2,170 )     -       2,170       (37,508 )     -       -       -       (37,508 )
Exercise of stock options
    611       -       (611 )     13,593       (4,938 )     -       -       8,655  
Restricted shares awarded
    2       -       (2 )     40       (40 )     -       -       -  
Tax benefit from share-based awards
    -       -       -       -       3,367       -       -       3,367  
Sale of treasury shares used for deferred compensation plan
    13       -       (13 )     95       257       -       -       352  
Share-based employee compensation expense
    -       -       -       -       7,450       -       -       7,450  
Balance - August 2, 2008
    81,138     $ 1,175       36,357     $ (808,498 )   $ 497,055     $ 997,971     $ (6,224 )   $ 681,479  


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


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)


 
   
Twenty-Six Weeks Ended
 
   
August 2, 2008
   
August 4, 2007
 
Operating activities:
           
Net income
  $ 60,534     $ 52,148  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization expense
    37,092       40,718  
Deferred income taxes
    3,525       (3,396 )
Loss on disposition of equipment
    1,020       1,394  
KB Toys matters
    -       (1,342 )
Non-cash share-based compensation expense
    7,450       4,707  
Pension
    (197 )     956  
Change in assets and liabilities:
               
Inventories
    49,550       44,347  
Accounts payable
    9,009       15,393  
Current income taxes
    (49,659 )     (31,891 )
Other current assets
    (3,056 )     (5,269 )
Other current liabilities
    (10,001 )     (16,476 )
Other assets
    (2,450 )     (1,211 )
Other liabilities
    (2,218 )     (2,398 )
Net cash provided by operating activities
    100,599       97,680  
                 
Investing activities:
               
Capital expenditures
    (52,848 )     (19,775 )
Purchase of short-term investments
    -       (436,040 )
Redemption of short-term investments
    -       436,040  
Cash proceeds from sale of equipment
    327       377  
Other
    (1 )     (13 )
Net cash used in investing activities
    (52,522 )     (19,411 )
                 
Financing activities:
               
Proceeds from long-term obligations
    1,066,900       -  
Payment of long-term obligations
    (1,082,900 )     -  
Payment of capital lease obligations
    (553 )     (158 )
Proceeds from the exercise of stock options
    8,655       33,029  
Excess tax benefit from share-based awards
    3,367       18,538  
Payment for treasury shares acquired
    (37,508 )     (304,700 )
Treasury shares sold for deferred compensation plan
    352       2,004  
Net cash used in financing activities
    (41,687 )     (251,287 )
                 
Increase (decrease) in cash and cash equivalents
    6,390       (173,018 )
Cash and cash equivalents:
               
Beginning of period
    37,131       281,657  
End of period
  $ 43,521     $ 108,639  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, including capital leases
  $ 2,582     $ 19  
Cash paid for income taxes, excluding impact of refunds
  $ 81,264     $ 45,529  
Non-cash activity:
               
Assets acquired under capital leases
  $ 1,670     $ 2,539  
Treasury shares acquired, but not settled
  $ -     $ 26,419  
Accrued property and equipment
  $ 8,119     $ 9,029  


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


Notes to Consolidated Financial Statements (Unaudited)

 
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

All references in this report to “we,” “us,” or “our” are to Big Lots, Inc. and its subsidiaries.  We are the nation’s largest broadline closeout retailer.  At August 2, 2008, we operated 1,355 stores in 47 states.  We manage our business on the basis of one segment, broadline closeout retailing.  We have historically experienced, and expect to continue to experience, seasonal fluctuations, with a larger percentage of our net sales and operating profit realized in our fourth fiscal quarter.  We make available, free of charge, through the “Investor Relations” section of our website (www.biglots.com) under the “SEC Filings” caption, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).  The contents of our websites are not part of this report.

The accompanying consolidated financial statements and these notes have been prepared in accordance with the rules and regulations of the SEC for interim financial information. The consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly our financial condition, results of operations, and cash flows for all periods presented. These statements, however, do not include all information necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  Interim results may not necessarily be indicative of results that may be expected for, or actually result during, any other interim period or for the year as a whole.  The accompanying consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008 (“2007 Form 10-K”).

Fiscal Periods
We follow the concept of a 52-53 week fiscal year, which ends on the Saturday nearest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years.  Fiscal year 2008 (“2008”) is comprised of the 52 weeks that began on February 3, 2008 and will end on January 31, 2009. Fiscal year 2007 (“2007”) was comprised of the 52 weeks that began on February 4, 2007 and ended on February 2, 2008.  The fiscal quarters ended August 2, 2008 (“second quarter of 2008”) and August 4, 2007 (“second quarter of 2007”) were both comprised of 13 weeks.  The year to date periods ended August 2, 2008 (“year to date 2008”) and August 4, 2007 (“year to date 2007”) were both comprised of 26 weeks.

Selling and Administrative Expenses
Selling and administrative expenses include store expenses (such as payroll and occupancy costs), costs related to warehousing, distribution and outbound transportation to our stores, advertising, purchasing, insurance and insurance-related costs, non-income taxes, and overhead costs.  Our selling and administrative expense rate may not be comparable to the selling and administrative expense rates of other retailers that include distribution and outbound transportation costs in cost of sales.  Distribution and outbound transportation costs included in selling and administrative expenses were $44.9 million and $47.0 million for the second quarter of 2008 and the second quarter of 2007, respectively, and $95.3 million and $101.4 million for the year to date 2008 and year to date 2007, respectively.

Advertising Expense
Advertising costs, which are expensed as incurred, consist primarily of television, internet, in-store point of purchase and print media, and are included in selling and administrative expenses.  Advertising expenses were $20.0 million and $19.7 million for the second quarter of 2008 and the second quarter of 2007, respectively, and $45.3 million and $46.3 million for the year to date 2008 and the year to date 2007, respectively.

Recent Accounting Pronouncements
Effective February 3, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, for financial assets and liabilities on a prospective basis.  The Financial Accounting Standards Board (“FASB”) deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis, which we will adopt effective the beginning of 2009.  SFAS No. 157 addresses how companies should approach measuring fair value and expands disclosures about fair value measurements under other accounting pronouncements that require or permit fair value measurements.  The standard provides a single definition of fair value that is to be applied consistently for all accounting applications and also generally describes and prioritizes according to reliability the methods and inputs used in fair value measurements.  SFAS No. 157 prescribes additional disclosures regarding the extent of fair value measurements included in a company’s financial statements and the methods and inputs used to arrive at these values.  The adoption of this statement for financial assets and liabilities did not have any impact on our financial condition, results of operations, or liquidity.  The adoption of this statement for non-financial assets and liabilities in 2009 is not expected to have a material impact on our financial condition, results of operations, or liquidity.  See note 2 to these consolidated financial statements for additional information about our adoption of SFAS No. 157.


Effective February 3, 2008, we adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), which require us to measure defined benefit plan assets and obligations as of the date of our year-end consolidated balance sheet.  Previously, our pension plans had a measurement date of December 31.  Switching to the new measurement date required one-time adjustments of $0.1 million to retained earnings and less than $0.1 million to accumulated other comprehensive income in the first quarter of 2008 per the transition guidance of SFAS No. 158.  We adopted the funding recognition provisions of SFAS No. 158 in 2006 to reflect on our balance sheet the funded status of our qualified defined benefit plan and nonqualified supplemental defined benefit plan.  See note 5 to these financial statements for additional information about our employee benefit plans.

Effective February 3, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  SFAS No. 159 permits us to choose to measure certain financial instruments and other items at fair value.  We did not elect to measure any additional financial assets or liabilities at fair value.
 
NOTE 2 – FAIR VALUE MEASUREMENTS

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Level 1, defined as observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2, defined as observable inputs other than Level 1 inputs.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of August 2, 2008, we had $13.8 million of mutual fund assets and a $14.9 million nonqualified deferred compensation plan liability.  The fair value of the mutual fund assets was based on each funds’ quoted market value per share in an active market and was a Level 1 valuation.  Although we are under no obligation to fund employees’ nonqualified deferred compensation accounts, the  fair value of the related nonqualified deferred compensation plan liability was based on the fair value of the mutual fund assets and our common shares, which represent investment account elections made by the plan participants.  We report our common shares held in connection with the nonqualified deferred compensation plan as treasury shares.  The fair value measurement of the nonqualified deferred compensation plan liability was a Level 1 valuation because the liability was measured by quoted prices in an active market.

NOTE 3 – SHAREHOLDERS’ EQUITY

Earnings per Share
There were no adjustments required to be made to the weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share and there were no securities outstanding at August 2, 2008 or August 4, 2007 which were excluded from the computation of earnings per share other than antidilutive stock options and restricted stock awards.  For the second quarter of 2008 and the second quarter of 2007, 1.2 million and 1.5 million, respectively, of our outstanding stock options were antidilutive and excluded from the computation of diluted earnings per share. For the year to date 2008 and the year to date 2007, 2.0 million and 1.3 million, respectively, of our outstanding stock options were antidilutive and excluded from the computation of diluted earnings per share.  Antidilutive stock options are generally outstanding stock options where the exercise price is greater than the weighted-average market price of our common shares for the applicable period.  Antidilutive stock options and restricted stock awards are excluded from the calculation because they decrease the number of diluted shares outstanding under the treasury share method.


Share Repurchase Program
In the first quarter of 2008, we acquired approximately 2.2 million of our outstanding common shares for $37.5 million, which completed the $150.0 million share repurchase program previously approved by our Board of Directors that we announced on November 30, 2007 (collectively with the $600.0 million share repurchase program approved by our Board of Directors that we announced on March 9, 2007 and completed during the fourth quarter of 2007 referred to as the “2007 Repurchase Programs”).  We recorded the shares acquired in the first quarter of 2008 as treasury shares, at cost, and these shares are available to meet obligations under our equity compensation plans and for general corporate purposes.
 
NOTE 4 – SHARE-BASED PLANS

We have issued nonqualified stock options and restricted stock awards under our equity compensation plans approved by our shareholders.  Our restricted stock awards, as described below and in note 7 to the consolidated financial statements in our 2007 Form 10-K, are expensed over the estimated vesting period based on the estimated achievement date of the performance objective, and are reported as nonvested shares as that term is defined in SFAS No. 123(R).  We recognized share-based compensation expense of $4.3 million and $2.4 million in the second quarter of 2008 and the second quarter of 2007, respectively and $7.5 million and $4.7 million in the year to date 2008 and the year to date 2007, respectively.  The expense in each period is less than what would have been recognized due to the accelerated vesting of stock options prior to the adoption of SFAS No. 123(R) (as discussed in more detail in note 7 to the consolidated financial statements in our 2007 Form 10-K).

The weighted-average fair value of stock options granted and assumptions used in the model to estimate the fair value of stock options granted during each of the respective periods were as follows:

   
Second Quarter
   
Year to Date
 
   
2008
   
2007
   
2008
   
2007
 
                         
Weighted-average fair value of stock options granted
  $ 11.52     $ 12.63     $ 8.71     $ 11.54  
Risk-free interest rate
    3.1 %     4.9 %     2.2 %     4.4 %
Expected life (years)
    4.2       4.4       4.3       4.4  
Expected volatility
    48.9 %     42.0 %     48.7 %     42.5 %
Expected annual forfeiture rate
    3.0 %     3.0 %     3.0 %     3.0 %
 

A summary of the stock option activity for the year to date 2008 is as follows:

   
Number of Options
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term (years)
   
Aggregate Intrinsic Value (000's)
 
Outstanding stock options at February 2, 2008
    4,124,470     $ 19.20              
Granted
    930,000       21.06              
Exercised
    (85,795 )     13.20              
Forfeited
    (301,540 )     36.18              
Outstanding stock options at May 3, 2008
    4,667,135     $ 18.58       5.6     $ 46,074  
Granted
    52,500       28.15                  
Exercised
    (525,005 )     14.33                  
Forfeited
    (15,850 )     30.11                  
Outstanding stock options at August 2, 2008
    4,178,780     $ 19.20       5.6     $ 50,027  
Vested and expected to vest at August 2, 2008
    3,964,401     $ 19.10       5.6     $ 47,838  
Exercisable at August 2, 2008
    1,615,030     $ 15.67       5.0     $ 25,041  
 
The stock options granted in 2008 vest in equal amounts on the first four anniversaries of the grant date and have a contractual term of seven years.  The number of stock options expected to vest was based on our annual forfeiture rate assumption.

A summary of the restricted stock awards activity for the year to date 2008 is as follows:

   
Number of Shares
   
Weighted Average Grant-Date Fair Value
 
Restricted stock awards at February 2, 2008
    320,900     $ 28.72  
Granted
    370,000       21.06  
Vested
    (1,800 )     26.43  
Forfeited
    (7,500 )     28.73  
Restricted stock awards at May 3, 2008
    681,600     $ 24.57  
Granted
    37,100       29.61  
Vested
    -       -  
Forfeited
    (900 )     23.19  
Restricted stock awards at August 2, 2008
    717,800     $ 24.83  
 
The restricted stock awards granted in 2008 vest if certain financial performance objectives are achieved.  If we meet a threshold financial performance objective and the grantee remains employed by us, the restricted stock awards will vest on the opening of our first trading window five years after the grant date of the award.  If we meet a higher financial performance objective and the grantee remains employed by us, the restricted stock awards will vest on the first trading day after we file our Annual Report on Form 10-K with the SEC for the fiscal year in which the higher objective is met. The restricted stock awards will also vest on a prorated basis in the event that the recipient dies or becomes disabled after we meet the first trigger but before the lapse of five years.  On the grant date, we estimated a three-year period for vesting of the restricted stock awards granted in 2008 based on the assumed achievement of the higher financial performance objective.  In the second quarter of 2008, we changed the estimated achievement date for the higher financial performance objective from three years to two years due to better operating results than initially anticipated, resulting in $0.3 million of incremental expense in the second quarter of 2008.


The following activity occurred under our share-based plans during the respective periods shown:

   
Second Quarter
   
Year to Date
 
   
2008
   
2007
   
2008
   
2007
 
(In thousands)
                       
Total intrinsic value of stock options exercised
  $ 8,871     $ 3,627     $ 9,725     $ 42,508  
Total fair value of restricted stock vested
    -       9,022       37       11,021  
 
The total unearned compensation cost related to all share-based awards outstanding at August 2, 2008 was approximately $27.9 million.  This compensation cost is expected to be recognized through July 2012 based on existing vesting terms with the weighted-average remaining expense recognition period being approximately 2.3 years from August 2, 2008.

NOTE 5 – EMPLOYEE BENEFIT PLANS

We maintain a qualified defined benefit pension plan and a nonqualified supplemental defined benefit pension plan covering certain employees whose hire date was before April 1, 1994.

Weighted-average assumptions used to determine net periodic pension cost for 2008 and 2007 were:

   
2008
   
2007
 
Discount rate
  6.5 %   5.9 %
Rate of increase in compensation levels
  3.5 %   3.5 %
Expected long-term rate of return
  8.5 %   8.5 %
Measurement date for plan assets  and benefit obligations
 
12/31/07
   
12/31/06
 
 
The components of net periodic pension cost were as follows:

   
Second Quarter
   
Year to Date
 
   
2008
   
2007
   
2008
   
2007
 
(In thousands)
                       
Service cost - benefits earned in the period
  $ 609     $ 658     $ 1,219     $ 1,316  
Interest cost on projected benefit obligation
    833       788       1,666       1,575  
Expected investment return on plan assets
    (1,005 )     (1,072 )     (1,982 )     (2,144 )
Amortization of actuarial loss
    206       172       412       346  
Amortization of prior service cost
    (8 )     34       (17 )     68  
Amortization of transition obligation
    4       4       7       7  
Net periodic pension cost
  $ 639     $ 584     $ 1,305     $ 1,168  
 
In the second quarter of 2008 and the year to date 2008, we contributed $0.7 million and $1.5 million, respectively, to the qualified defined benefit pension plan.  We expect to contribute an additional $1.5 million to the qualified defined benefit pension plan in the second half of 2008.  These contributions are due in part to lower year to date investment performance than previously expected.


NOTE 6 – INCOME TAXES

The effective income tax rate for income from continuing operations was 38.3% and 38.8% during the second quarter of 2008 and the year to date 2008, respectively.  The effective income tax rate for income from continuing operations was 36.6% and 36.3% during the second quarter of 2007 and the year to date 2007, respectively, and benefited from the settlement of certain income tax matters, the reduction in a valuation allowance related to a capital loss carryover, primarily due to realized investment gains and the effect of nontaxable municipal interest income.

There was no material change in the net amount of unrecognized tax benefits in the year to date 2008.  We have estimated the reasonably possible expected net change in unrecognized tax benefits through August 1, 2009 based on 1) anticipated positions taken in the next 12 months, 2) expected settlements or payments of uncertain tax positions, and 3) lapses of the applicable statutes of limitations of unrecognized tax benefits.  The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4 million.  Actual results may differ materially from this estimate.
 
NOTE 7 – CONTINGENCIES

In October 2005, a class action complaint was served upon us for adjudication in the Superior Court of California, Ventura County, alleging that we violated certain California wage and hour laws (“Espinosa matter”). The plaintiff seeks to recover, on her own behalf and on behalf of all other individuals who are similarly situated, alleged unpaid wages and rest and meal period compensation, as well as penalties, injunctive and other equitable relief, reasonable attorneys’ fees and costs. In the third quarter of 2006, we reached a tentative settlement with the plaintiff concerning the Espinosa matter. On November 6, 2006, the court issued an order granting preliminary approval of the tentative settlement. On April 30, 2007, the court entered the final order approving the class action settlement and judgment of dismissal with prejudice.  Two class members whose objections to the settlement were overruled by the court appealed the final order to the California Court of Appeal, challenging the settlement.  The same two objectors also filed a separate class action in federal court in the Northern District of California alleging the same class claims that were tentatively settled through the Espinosa matter.  The federal court stayed the federal action pending resolution of the appeal before the California Court of Appeal.  During the second quarter of 2008, the objectors dismissed the federal action with prejudice and their appeal.  In the third quarter of 2006, we recorded a pretax charge of $6.5 million included in selling and administrative expenses for the agreed-upon settlement amount of the Espinosa matter.  We funded the settlement to the claims administrator in the second quarter of 2008. Administration of the settlement is ongoing and expected to conclude in the fourth quarter of 2008.

In November 2004, a civil collective action complaint was filed against us in the United States District Court for the Eastern District of Louisiana, alleging that we violated the Fair Labor Standards Act by misclassifying assistant store managers as exempt employees (“Louisiana matter”). The plaintiffs seek to recover, on behalf of themselves and all other individuals who are similarly situated, alleged unpaid overtime compensation, as well as liquidated damages, attorneys’ fees and costs. On July 5, 2005, the District Court in Louisiana issued an order conditionally certifying a class of all current and former assistant store managers who have worked for us since November 23, 2001. As a result of that order, notice of the lawsuit was sent to approximately 5,500 individuals who had the right to opt-in to the Louisiana matter. As of November 3, 2007, approximately 1,100 individuals had joined the Louisiana matter. We filed a motion to decertify the class and the motion was denied on August 24, 2007. The trial began on May 7, 2008 and concluded on May 15, 2008.  On June 20, 2008, the court issued an Order decertifying the action and dismissed, without prejudice, the claims of the opt-in plaintiffs. Remaining before the court are individual claims of approximately 20 named-plaintiffs. We cannot make a determination as to the probability of a loss contingency resulting from the Louisiana matter or the estimated range of possible loss; however, the ultimate resolution of this matter could have a material adverse effect on our financial condition, results of operations, and liquidity.

In September 2006, a class action complaint was filed against us in the Superior Court of California, Los Angeles County, alleging that we violated certain California wage and hour laws by misclassifying California store managers as exempt employees ("Seals matter"). The plaintiffs seek to recover, on their own behalf and on behalf of all other individuals who are similarly situated, damages for alleged unpaid overtime, unpaid minimum wages, wages not paid upon termination, improper wage statements, missed rest breaks, missed meal periods, reimbursement of expenses, loss of unused vacation time, and attorneys’ fees and costs.  The court has not determined whether the case may proceed as a class action, and has not set any deadlines for class certification or trial.  We cannot make a determination as to the probability of a loss contingency resulting from this lawsuit or the estimated range of possible loss, if any.  We intend to vigorously defend ourselves against the allegations levied in this lawsuit; however, the ultimate resolution of this matter could have a material adverse effect on our financial condition, results of operations, and liquidity.


In May 2007, two class action complaints were filed against us, one in the Superior Court of California, Orange County (“Stary matter”), and one in the Superior Court of California, San Diego County (“Christopher matter”), alleging that we violated California law by requesting certain customer information in connection with the return of merchandise for which the customer sought to receive a refund to a credit card.  The plaintiffs seek to recover, on their own behalf and on behalf of a California statewide class of all other individuals who are similarly situated, statutory penalties, costs and attorneys' fees and seek injunctive relief.  We believe that substantially all of the purported class members of the Christopher matter are within the purported class of the Stary matter. The Stary matter has been transferred to the Superior Court of California, San Diego County, where it is being coordinated with the Christopher matter before the same judge.  Both matters were stayed pending the ruling of the California Court of Appeals, Fourth Appellate Division Three in a similar case involving another retailer.  The appellate court recently ruled in favor of the other retailer, holding that the California law at issue does not apply to merchandise return transactions.  After the opinion in that matter becomes final and the remittitur issues, which may not occur for some time, we anticipate seeking the dismissal of the Stary and Christopher matters based on the appellate court ruling.  In the interim, we will request that both matters remain stayed pending finality and the remittitur issuing.  We cannot make a determination as to the probability of a loss contingency resulting from these lawsuits or the estimated range of possible loss, if any.  We intend to vigorously defend ourselves against the allegations levied in these lawsuits; however, the ultimate resolution of these matters could have a material adverse effect on our financial condition, results of operations, and liquidity.

In February 2008, three alleged class action complaints were filed against us by a California resident (the “Caron matters”). The first was filed in the Superior Court of California, Orange County. This action is similar in nature to the Seals matter, which allowed us to successfully coordinate this matter with the Seals matter in the Superior Court of California, Los Angeles County. The second and third matters, filed in the United States District Court, Central District of California, and the Superior Court of California, Riverside County, respectively, allege that we violated certain California wage and hour laws for missed meal and rest periods and other wage and hour claims.  The plaintiff seeks to recover, on her own behalf and on behalf of a California statewide class of all other individuals who are similarly situated, damages resulting from improper wage statements, missed rest breaks, missed meal periods, non-payment of wages at termination, reimbursement of expenses, loss of unused vacation time, and attorneys’ fees and costs. We believe these two matters overlap and we intend to consolidate the two cases before one court.  The allegations also overlap some portion of the claims released through the class action settlement in the Espinosa matter.  We cannot make a determination as to the probability of a loss contingency resulting from this lawsuit or the estimated range of possible loss, if any.  We intend vigorously to defend ourselves against the allegations levied in this lawsuit; however, the ultimate resolution of this matter could have a material adverse effect on our financial condition, results of operations, and liquidity.

We are involved in other legal actions and claims, including various additional employment-related matters, arising in the ordinary course of business. We currently believe that such actions and claims, both individually and in the aggregate, will be resolved without material adverse effect on our financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty.  Future developments could cause these actions or claims to have a material adverse effect on our financial condition, results of operations, and liquidity.

NOTE 8 – DISCONTINUED OPERATIONS

In the second quarter of 2008 and year to date 2008, we recorded $0.2 million, pretax, as loss from discontinued operations principally due to continuing costs associated with the stores we closed in 2005 that have lease terms remaining, which we continue to classify in discontinued operations.

In the second quarter of 2007, we recorded $2.0 million, pretax, as income from discontinued operations to reflect favorable settlements of KB Toys lease obligations.  We sold the KB Toys business to KB Acquisition Corporation in December 2000, but we have certain continuing indemnification and guarantee obligations with respect to the KB Toys business.  See note 11 to the consolidated financial statements and Risk Factors in our 2007 Form 10-K for further discussion of KB Toys matters.


NOTE 9 – BUSINESS SEGMENT DATA

We manage our business based on one segment, broadline closeout retailing.  We report the following six merchandise categories:  Consumables, Home, Furniture, Hardlines, Seasonal, and Other.  The Consumables category includes the food, health and beauty, plastics, paper, and pet departments.  The Home category includes the domestics, stationery, and home decorative departments. The Furniture category includes the upholstery, mattresses, ready-to-assemble, and case goods departments.  Case goods consist of bedroom, dining room, and occasional furniture.  The Hardlines category includes the electronics, appliances, tools, and home maintenance departments.  The Seasonal category includes the lawn & garden, Christmas, summer, and other holiday departments.  The Other category includes the toy, jewelry, infant accessories, and apparel departments.   Other also includes the results of certain large closeout deals that are typically acquired through our alternate product sourcing operations.

The following is net sales data by category:
   
Second Quarter
   
Year to Date
 
   
2008
   
2007
   
2008
   
2007
 
(In thousands)
                       
Consumables
  $ 347,805     $ 320,027     $ 685,968     $ 637,228  
Home
    171,327       180,405       341,604       367,588  
Furniture
    160,755       153,587       363,012       342,266  
Hardlines
    152,454       154,836       288,623       299,503  
Seasonal
    159,063       148,704       328,617       318,905  
Other
    113,785       127,332       248,954       247,800  
Net sales
  $ 1,105,189     $ 1,084,891     $ 2,256,778     $ 2,213,290  
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.

Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words "anticipate," "estimate," "expect," "objective," "goal," "project," "intend," "plan," "believe," "will," “should,” “may,” "target," "forecast," “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy. Forward-looking statements are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although we believe the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

Forward-looking statements that we make herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including, but not limited to, the cost of goods, our inability to successfully execute strategic initiatives, competitive pressures, economic pressures on our customers and us, the availability of brand name closeout merchandise, trade restrictions, freight costs, the risks discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, and other factors discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report should be read in conjunction with such filings, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.


Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.
 
OVERVIEW

The discussion and analysis presented below should be read in conjunction with the accompanying consolidated financial statements and related notes.  Each term defined in the notes has the same meaning in this item and the balance of this report.

The following are the results from the second quarter of 2008 that we believe are key indicators of our operating performance when compared to the operating performance from the second quarter of 2007:

 
·
Comparable store sales for stores open at least two years at the beginning of 2008 increased 2.8%.

 
·
Gross margin dollars increased $13.7 million.

 
·
Selling and administrative expenses as a percent of sales decreased 10 basis points to 33.6% of sales versus 33.7% of sales.

 
·
Depreciation expense as a percent of sales decreased 10 basis points to 1.9% of sales versus 2.0% of sales.

 
·
Interest expense increased to $1.1 million from $0.1 million.  Interest and investment income decreased to less than $0.1 million from $1.6 million.

 
·
Diluted earnings per share from continuing operations improved to $0.32 per share compared to $0.21 per share.  The $0.11 per share increase was driven by an increase of income from continuing operations of $4.0 million and a decrease of 25.8 million in outstanding weighted-average diluted shares due to share repurchases under the 2007 Repurchase Programs.

 
·
Net cash provided by operating activities declined in the second quarter of 2008 primarily due to higher receipts of merchandise inventory and higher income taxes paid in the second quarter of 2008.

 
·
Average inventory levels were lower throughout the second quarter of 2008 compared to the second quarter of 2007 and, combined with the 2.8% increase in comparable store sales, resulted in a higher inventory turnover rate in the second quarter of 2008 than the second quarter of 2007.

See the discussion and analysis below for additional details of our operating results.


STORES

The following table presents stores opened and closed during the year to date 2008 and the year to date 2007:
 
   
2008
   
2007
 
             
Stores open at the beginning of the fiscal year
    1,353       1,375  
Stores opened during the period
    5       3  
Stores closed during the period
    (3 )     (9 )
Stores open at the end of the period
    1,355       1,369  
 
RESULTS OF OPERATIONS

The following table compares components of our consolidated statements of operations as a percentage of net sales at the end of each period:

   
Second Quarter
   
Year to Date
 
   
2008
   
2007
   
2008
   
2007
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    60.7       61.2       60.2       60.8  
Gross margin
    39.3       38.8       39.8       39.2  
Selling and administrative expenses
    33.6       33.7       33.6       33.8  
Depreciation expense
    1.9       2.0       1.7       2.0  
Operating profit
    3.9       3.1       4.5       3.4  
Interest expense
    (0.1 )     0.0       (0.1 )     0.0  
Interest and investment income
    0.0       0.1       0.0       0.2  
Income from continuing operations before income taxes
    3.8       3.2       4.4       3.6  
Income tax expense
    1.5       1.2       1.7       1.3  
Income from continuing operations
    2.4       2.0       2.7       2.3  
Discontinued operations
    0.0       0.1       0.0       0.0  
Net income
    2.4 %     2.2 %     2.7 %     2.4 %

SECOND QUARTER OF 2008 COMPARED TO SECOND QUARTER OF 2007

Net Sales
Net sales increased 1.9% to $1,105.2 million for the second quarter of 2008, compared to $1,084.9 million for the second quarter of 2007.  The $20.3 million increase in net sales was due to the comparable store sales increase of 2.8% for stores open at least two years at the beginning of 2008, partially offset by fewer open stores.  Comparable store sales in the second quarter of 2008 were primarily driven by an increase in the value of the average basket as our “raise the ring” strategy continued to deliver positive results.  From a merchandising perspective, Consumables, Seasonal, and Furniture were the best performing categories.  The Consumables category comparable store sales increased in the low-double digits with strong performance in each of its departments.  The Seasonal category, primarily the lawn & garden and summer departments, experienced comparable store sales increases in the high-single digits.  The Furniture category continued to be a leading category driven by comparable store sales increases in the mid-single digits with particular strength in the mattress department.  Additionally, sales from a drugstore liquidation deal and our home event during the second quarter of 2008 essentially offset a large closeout deal from a major home furnishings retailer during the second quarter of 2007.  Sales and comparable store sales declined in the Home and Hardlines categories.


Net sales by merchandise category, net sales by merchandise category as a percentage of total net sales, and net sales change in dollars and percentage from the second quarter of 2008 to the second quarter of 2007 were as follows:

   
Second Quarter
 
   
2008
   
2007
   
Change
 
($ in thousands)
                                   
Consumables
  $ 347,805       31.5 %   $ 320,027       29.5 %   $ 27,778       8.7 %
Home
    171,327       15.5       180,405       16.6       (9,078 )     (5.0 )
Furniture
    160,755       14.5       153,587       14.2       7,168       4.7  
Hardlines
    152,454       13.8       154,836       14.3       (2,382 )     (1.5 )
Seasonal
    159,063       14.4       148,704       13.7       10,359       7.0  
Other
    113,785       10.3       127,332       11.7       (13,547 )     (10.6 )
Net sales
  $ 1,105,189       100.0 %   $ 1,084,891       100.0 %   $ 20,298       1.9 %
 
Gross Margin
Gross margin increased to $434.8 million for the second quarter of 2008, compared to $421.1 million for the second quarter of 2007, an increase of $13.7 million or 3.3%. The increase in gross margin was principally due to increased net sales of $20.3 million and a higher gross margin rate.  Gross margin as a percentage of net sales increased to 39.3% in the second quarter of 2008 compared to 38.8% in the second quarter of 2007. The gross margin rate increase was principally due to higher initial markup on merchandise.

Selling and Administrative Expenses
Selling and administrative expenses increased to $370.9 million for the second quarter of 2008, compared to $365.8 million for the second quarter of 2007, an increase of $5.1 million or 1.4%.  As a percentage of net sales, selling and administrative expenses were 33.6% for the second quarter of 2008 compared to 33.7% for the second quarter of 2007.  The increase in selling and administrative expenses was principally due to higher insurance and insurance-related costs, share-based compensation expense, and utilities.  Partially offsetting these items were lower store payroll, lower distribution and outbound transportation costs, and amortization of proceeds related to an early lease termination buy out.  Distribution and outbound transportation costs, which are included in selling and administrative expenses, decreased to $44.9 million for the second quarter of 2008 compared to $47.0 million for the second quarter of 2007. As a percentage of net sales, distribution and outbound transportation costs decreased by 20 basis points to 4.1% of net sales in the second quarter of 2008 as compared to 4.3% for the second quarter of 2007. The rate decrease was primarily a result of lower inventory levels, fewer cartons processed through our distribution centers due to the “raise the ring” merchandising strategy, and more one-way trips to the stores resulting in a higher shipping cost per mile but fewer miles traveled.   During the second quarter of 2008, we completed the integration of our Ohio furniture distribution operations into our regional distribution centers, which, beginning in July 2008, is expected to result in distribution and outbound transportation savings when compared to the results of prior periods. Partially offsetting these favorable distribution and outbound transportation items was the impact of higher fuel prices.

Depreciation Expense
Depreciation expense for the second quarter of 2008 was $20.5 million compared to $21.8 million for the second quarter of 2007. The $1.3 million decrease in depreciation expense was primarily due to the low level of capital expenditures in 2006 and 2007 and a decrease in depreciation expense related to the 5-year service life store remodel program assets, which were placed in service in 2002 and 2003.  Capital expenditures in 2006 and 2007 were lower than previous years principally because of fewer new store openings.  In 2008 the increase in capital expenditures partially offsets these items and was driven by the completion of installation of our new point-of-sale register system, hardware, development and licensing cost associated with our SAP for Retail system implementation, and the acquisition of two store properties we were previously leasing.


Interest Expense
Interest expense increased to $1.1 million for the second quarter of 2008, compared to $0.1 million for the second quarter of 2007.   The increase was principally due to increased weighted-average borrowings, which were $131.6 million in the second quarter of 2008 and zero in the second quarter of 2007.   Higher borrowings in the current year were the result of the $750 million of common share repurchases under our 2007 Repurchase Programs.

Interest and Investment Income
Interest and investment income was less than $0.1 million for the second quarter of 2008, compared to $1.6 million for the second quarter of 2007.  The decrease in interest and investment income was principally due to lower levels of cash and cash equivalents available for investment in the second quarter of 2008 resulting from the $750 million of common share repurchases under our 2007 Repurchase Programs.

Income Taxes
The effective income tax rate for the second quarter of 2008 for income from continuing operations was 38.3%.  The effective income tax rate for the second quarter of 2007 for income from continuing operations was 36.6%, and was comparably lower due to more favorable settlement of certain income tax matters and the effect of nontaxable municipal interest income.


YEAR TO DATE 2008 COMPARED TO YEAR TO DATE 2007

Net Sales
Net sales increased 2.0% to $2,256.8 million for the year to date 2008, compared to $2,213.3 million for the year to date 2007.  The $43.5 million increase in net sales was due to an increase of 3.1% in comparable store sales for stores open at least two years at the beginning of 2008, partially offset by fewer open stores.  Comparable store sales for the year to date 2008 were driven by an increase in the value of the average basket as our “raise the ring” merchandise strategy continued to deliver positive results.  From a merchandising perspective, Consumables, Furniture and Seasonal were the best performing categories with comparable store sales for these categories increasing in the mid-single digits to high-single digits.  The Consumables category sales performance produced positive results across most of its departments.  The Furniture category sales performance was driven by the mattress and casegoods departments.  The Seasonal category was strongest in the lawn & garden and summer departments.  Sales and comparable store sales declined in the Home and Hardlines categories.

Net sales by merchandise category, net sales by merchandise category as a percentage of total net sales, and net sales change in dollars and percentage from the year to date 2008 to the year to date 2007 were as follows:

   
Year to Date
 
   
2008
   
2007
   
Change
 
($ in thousands)
                                   
Consumables
  $ 685,968       30.4 %   $ 637,228       28.8 %   $ 48,740       7.6 %
Home
    341,604       15.1       367,588       16.6       (25,984 )     (7.1 )
Furniture
    363,012       16.1       342,266       15.5       20,746       6.1  
Hardlines
    288,623       12.8       299,503       13.5       (10,880 )     (3.6 )
Seasonal
    328,617       14.6       318,905       14.4       9,712       3.0  
Other
    248,954       11.0       247,800       11.2       1,154       0.5  
Net sales
  $ 2,256,778       100.0 %   $ 2,213,290       100.0 %   $ 43,488       2.0 %

Gross Margin
Gross margin increased to $898.6 million for the year to date 2008, compared to $868.0 million for the year to date 2007, an increase of $30.6 million or 3.5%. The increase in gross margin was principally due to increased net sales of $43.5 million and a higher gross margin rate.  Gross margin as a percentage of net sales increased to 39.8% in the year to date 2008 compared to 39.2% in the year to date 2007. The gross margin rate increase was principally due to higher initial markup on merchandise and favorable shrink results related to physical inventories taken in 2008.


Selling and Administrative Expenses
Selling and administrative expenses increased to $757.7 million for the year to date 2008, compared to $748.5 million for the year to date 2007, an increase of $9.2 million or 1.2%.  As a percentage of net sales, selling and administrative expenses were 33.6% for the year to date 2008 compared to 33.8% for the year to date 2007.  The increase in selling and administrative expenses was primarily due to higher bonus expense, insurance proceeds we received in 2007 relating to hurricanes occurring in 2005, legal fees related to the Louisiana matter (see note 7 to the accompanying consolidated financial statements for further discussion of the Louisiana matter), higher insurance and insurance-related costs, higher utilities, and higher share-based compensation expense.   Partially offsetting these items were lower store payroll, lower distribution and outbound transportation costs, and amortization of proceeds related to an early lease termination buy out.  Distribution and outbound transportation costs, which are included in selling and administrative expenses, decreased to $95.3 million for the year to date 2008 compared to $101.4 million for the year to date 2007. As a percentage of net sales, distribution and outbound transportation costs decreased by 40 basis points to 4.2% of net sales for the year to date 2008 as compared to 4.6% of net sales for the year to date 2007. The rate decrease was primarily a result of lower inventory levels, fewer cartons processed through the system due to the “raise the ring” merchandising strategy, and more one-way trips to the stores resulting in a higher shipping cost per mile but fewer miles traveled.   During the second quarter of 2008, we completed the integration of our Ohio furniture distribution operations into our regional distribution centers, which, beginning in July 2008, is expected to result in distribution and outbound transportation savings when compared to the results of prior periods.  Partially offsetting these favorable distribution and outbound transportation items was the impact of higher fuel prices.

Depreciation Expense
Depreciation expense for the year to date 2008 was $39.2 million compared to $43.6 million for the year to date 2007. The $4.4 million decrease in depreciation expense was primarily due to the low level of capital expenditures in 2006 and 2007 and a decrease in depreciation expense related to the 5-year service life store remodel program assets, which were placed in service in 2002 and 2003. Capital expenditures in 2006 and 2007 were lower than previous years principally because of fewer new store openings.  In 2008, the increase in capital expenditures partially offsets these items and was driven by the completion of installation of our new point-of-sale register system, hardware, development and licensing cost associated with our SAP for Retail system implementation, and the acquisition of two store properties we were previously leasing.

Interest Expense
Interest expense increased to $2.5 million for the year to date 2008, compared to $0.2 million for the year to date 2007.   The increase was principally due to increased weighted-average borrowings, which were $135.4 million in the year to date 2008 and zero in the year to date 2007.   Higher borrowings in the current year were the result of the $750 million of common share repurchases under our 2007 Repurchase Programs.

Interest and Investment Income
Interest and investment income was less than $0.1 million for the year to date 2008, compared to $4.6 million for the year to date 2007.  The decrease in interest and investment income was principally due to lower levels of cash and cash equivalents available for investment in the year to date 2008 driven by the $750 million of common share repurchases under our 2007 Repurchase Programs.

Income Taxes
The effective income tax rate for the year to date 2008 for income from continuing operations was 38.8%.  The effective income tax rate for the year to date 2007 for income from continuing operations was 36.3%, and was comparably lower due to more favorable settlement of certain income tax matters and the reduction in a valuation allowance related to a capital loss carryover, primarily due to realized investment gains, and the effect of nontaxable municipal interest income.

Capital Resources and Liquidity
The primary source of our liquidity is cash flows from operations and, as necessary, borrowings under our $500.0 million unsecured credit facility entered into in 2004 (“Credit Agreement”).  We use the Credit Agreement, as necessary, to provide funds for ongoing and seasonal working capital, capital expenditures, share repurchase programs, and other expenditures.  At August 2, 2008, borrowings available under the Credit Agreement were $299.4 million, after taking into account outstanding borrowings of $147.7 million and the reduction in availability resulting from outstanding letters of credit totaling $52.9 million.  The weighted-average interest rate on our outstanding borrowings at August 2, 2008 was 3.12%.  We anticipate that total indebtedness under the Credit Agreement will be less than $400 million through the end of the third quarter of 2008.  Our borrowings have historically peaked in the third fiscal quarter as we build inventory levels prior to the Christmas holiday selling season. Given the seasonality of our business, the amount of borrowings under the Credit Agreement may fluctuate materially depending on various factors, including our operating financial performance, the time of year, and our need to increase merchandise inventory levels prior to our peak-selling season.  For additional information about the Credit Agreement, see note 3 to the consolidated financial statements in our 2007 Form 10-K.


Net cash provided by operating activities was $100.6 million for the year to date 2008 compared to net cash provided by operating activities of $97.7 million for the year to date 2007.  The increase in cash provided by operating activities was driven by higher net income and a higher inventory turnover rate.  We paid income taxes of $81.2 million and $45.4 million, net of refunds, in the year to date 2008 and the year to date 2007, respectively.  The increase in the year to date 2008 income taxes paid was caused by improved operating performance and a lower current year tax deduction due to a decline in stock option exercises during 2008.