See accompanying Notes to Consolidated Financial Statements.
4)2) Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This guidance requires an entity to classify deferred tax assets and liabilities as noncurrent assets and liabilities on the balance sheet. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption permitted. ASU 2015-17 can be adopted either prospectively or retrospectively to each prior reporting period presented. At the beginning of the first quarter of fiscal 2017, the Company adopted this guidance retrospectively, which resulted in decreases to other current assets of $218.8million and deferred rent and other liabilities of $23.4 million and an increase to other assets of $195.5 million as of February 25, 2017.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 requires, on a prospective basis, recognition of excess tax benefits and tax deficiencies (resulting from an increase or decrease in the fair value of an award from grant date to the vesting or exercise date) in the provision for income taxes as a discrete item in the period in which they occur. The ASU also changes the classification of excess tax benefits from a financing activity to an operating activity in the Company’s consolidated statements of cash flows. In addition, ASU 2016-09 allows companies to make an accounting policy election to either estimate expected forfeitures or account for them as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-09 during the first quarter of fiscal 2017. During the three and six months ended August 26, 2017, the Company recognized in income tax expense discrete tax expenses of $1.4 million and $9.0 million related to tax deficiencies, respectively. Additionally, the Company elected to account for forfeitures as an estimate of the number of awards that are expected to vest, which is consistent with its accounting policy prior to adoption of ASU 2016-09. The Company adopted the provisions of ASU 2016-09 related to changes in the consolidated statements of cash flows on a retrospective basis. As such, excess tax benefits are now classified as an operating activity in the Company’s Consolidated Statements of Cash Flows instead of as a financing activity. As a result, excess tax benefits of $1.5 million for the six months ended August 27, 2016 were reclassified from financing activities to operating activities. ASU 2016-09 also requires that the value of shares withheld from employees upon vesting of stock awards in order to satisfy any applicable tax withholding requirements is presented within financing activities in the Company’s Consolidated Statements of Cash Flows, which is consistent with the Company’s historical presentation, and therefore had no impact to the Company.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This guidance deferred the effective date of ASU 2014-09 for one year from the original effective date. In accordance with the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In 2016, the FASB issued several amendments to clarify various aspects of the implementation guidance. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company does not expect to adopt this ASU until required, and has not yet selected the transition method. The Company is in the process of analyzing its revenue streams and quantifying the effects to the areas discussed above, and expects the adoption to result in a change in the timing of revenue recognition for merchandise shipped to a customer and for its customer loyalty and rewards programs, as well as a change in the timing of recognizing advertising expense related to direct response advertising. The Company currently does not expect the adoption of this standard will have a material impact on its consolidated financial position, results of operations, or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU 2016-02 must beas a cumulative effect adjustment to the opening balance sheet or retained earnings.
The Company adopted this accounting standard at the beginning of the first quarter of fiscal 2019 using a modified retrospective approachthe new transition election to not restate comparative periods. The Company elected the package of practical expedients upon adoption, which permits the Company to not reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to separate lease and non-lease components for all real estate leases existing at, or entered into afterand did not elect the date of initial adoption, with an optionhindsight practical expedient. Lastly, the Company elected the short-term lease exception policy, permitting it to elect to use certain transition relief. The Company is currently evaluatingexclude the impactrecognition requirements of this new standard from leases with initial terms of 12 months or less. Upon adoption, the Company recognized operating lease assets of approximately $2.0 billion and operating lease liabilities of approximately $2.2 billion on its consolidated financialbalance sheet. In addition, upon adoption deferred rent and various lease incentives which were recorded as of March 2, 2019 were reclassified as a component of the right-of-use assets. Upon adoption, the Company recognized a cumulative adjustment decreasing opening retained earnings by approximately $40.7 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on the consolidated statements of operations or cash flows.
3) Revenue Recognition
Sales are recognized upon purchase by customers at the Company’s retail stores or upon delivery for products purchased from its websites. The value of point-of-sale coupons and related disclosures, but expectspoint-of-sale rebates that it will result in a significant increasereduction of the price paid by the customer are recorded as a reduction of sales. Shipping and handling fees that are billed to a customer in a sale transaction are recorded in sales. Taxes, such as sales tax, use tax and value added tax, are not included in sales.
Revenues from gift cards, gift certificates and merchandise credits are recognized when redeemed. Gift cards have no provisions for reduction in the
assetsvalue of unused card balances over defined time periods and
have no expiration dates. For the six months ended August 31, 2019, the Company recognized net sales for gift card and merchandise credit redemptions of approximately $81.3 million which were included in merchandise credit and gift card liabilities
recorded on the consolidated balance
sheet.sheet as of March 2, 2019.
Sales returns are provided for in the period that the related sales are recorded based on historical experience. Although the estimate for sales returns has not varied materially from historical provisions, actual experience could vary from historical experience in the future if the level of sales return activity changes materially. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifyingfuture, if the DefinitionCompany concludes that an adjustment is required due to material changes in the returns activity, the liability for estimated returns and the corresponding right of return asset will be adjusted accordingly. As of August 31, 2019, the liability for estimated returns of $81.6 million is included in accrued expenses and other current liabilities and the corresponding right of return asset for merchandise of $49.3 million is included in prepaid expenses and other current assets.
The Company sells a
Business. ASU 2017-01 requires that when substantially allwide assortment of
domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings (including furniture and wall décor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings accounted for approximately 38.7% and 61.3% of net sales, respectively, for the
fair valuethree months ended August 31, 2019, and approximately 38.6% and 61.4% of
net sales, respectively, for the
gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a groupthree months ended September 1, 2018. Sales of
identifiable assets,domestics merchandise and home furnishings accounted for approximately 37.2% and 62.8% of net sales, respectively, for the
setsix months ended August 31, 2019, and approximately 37.3% and 62.7% of
assets would not represent a business. Also, in order to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute tonet sales, respectively, for the
ability to produce outputs. Under the update, fewer sets of assets are expected to be considered businesses. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The adoption of this guidance is not expected to have a significant effect on the Company's consolidated financial position, results of operations, or cash flows.In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. Under the update, the goodwill impairment loss would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance is not expected to have a significant effect on the Company's consolidated financial position, results of operations, or cash flows.
-9-
six months ended September 1, 2018.
4) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e.,
“the"the exit
price”price") in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The hierarchy for inputs used in measuring fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a
company’scompany's judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability must be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
•
Level 1
–- Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
•
Level 2
–- Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3
–- Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
As of August 26, 2017, the Company’s financial assets utilizing Level 1 inputs included long term trading investment securities traded on active securities exchanges.
The Company did not have any financial assets utilizing Level 2 inputs. Financial assets utilizing Level 3 inputs included long term investments in auction rate securities consisting of preferred shares of closed end municipal bond funds (See
“Investment"Investment Securities,
”" Note
7)6).
Fair Value of Financial Instruments
The Company’sCompany's financial instruments include cash and cash equivalents, investment securities, accounts payable, long term debt and certain other liabilities. The Company’sCompany's investment securities includeconsist primarily of U.S. Treasury securities, which are stated at amortized cost, and auction rate securities, which are stated at their approximate fair value. The book value of the financial instruments, excluding the Company’sCompany's long term debt, is representative of their fair values. The fair value of the Company’sCompany's long term debt is approximately $1.402$1.146 billion as of August 26, 2017,31, 2019, which is based on quoted prices in active markets for identical instruments (i.e., Level 1 valuation), compared to the carrying value of approximately $1.500$1.495 billion.
5) Cash and Cash Equivalents
Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $104.6$92.7 million and $86.6$92.9 million as of August 26, 201731, 2019 and February 25, 2017,March 2, 2019, respectively.
The
Company’sCompany's investment securities as of August
26, 201731, 2019 and
February 25, 2017March 2, 2019 are as follows:
| (in millions) | | August 26,
2017 | | February 25,
2017 |
| Available-for-sale securities: | | | | | | | | |
| Long term | | $ | 19.6 | | | $ | 19.3 | |
| | | | | | | | | |
| Trading securities: | | | | | | | | |
| Long term | | | 79.6 | | | | 70.3 | |
| Total investment securities | | $ | 99.2 | | | $ | 89.6 | |
|
| | | | | | | |
| (in millions) | August 31, 2019 | | March 2, 2019 |
| Available-for-sale securities: | |
| | |
|
| Long term | $ | 20.4 |
| | $ | 19.9 |
|
| | | | |
| Held-to-maturity securities: | | | |
| Short term | — |
| | 485.8 |
|
| Total investment securities | $ | 20.4 |
| | $ | 505.7 |
|
As of August
26, 201731, 2019 and
February 25, 2017,March 2, 2019, the
Company’sCompany's long term available-for-sale investment securities represented approximately $20.3 million par value of auction rate securities consisting of preferred shares of closed end municipal bond funds, less temporary valuation adjustments of approximately
$0.7$0.1 million and
$1.0$(0.4) million, respectively. Since these valuation adjustments are deemed to be temporary, they are recorded in accumulated other comprehensive loss, net of a related tax benefit, and did not affect the
Company’sCompany's net earnings.
Long Term Trading Investment
U.S. Treasury Securities
The
As of August 31, 2019, the Company did not hold any short term held-to maturity securities. As of March 2, 2019, the Company’s longshort term trading investmentheld-to-maturity securities which are provided as investment options to the participantsincluded approximately $485.8 million of the nonqualified deferred compensation plan,U.S. Treasury Bills with remaining maturities of less than one year. These securities are stated at their amortized cost which approximates fair market value. value, which is based on quoted prices in active markets for identical instruments (i.e., Level 1 valuation).
7) Impairment of Long-Lived Assets
The valuesCompany reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these trading investment securities includedassets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the table abovebalance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are approximately $79.6no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. In the three and six months ended August 31, 2019, the Company recorded a $28.4 million non-cash pre-tax impairment charge within goodwill and $70.3 million asother impairments in the consolidated statement of August 26, 2017operations for certain store-level assets, including leasehold improvements, and February 25, 2017, respectively.operating lease assets. There were 0 impairments to long-lived assets in the three and six months ended September 1, 2018. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.
8) Property and Equipment
As of August 26, 201731, 2019 and February 25, 2017,March 2, 2019, included in property and equipment, net is accumulated depreciation of approximately $3.0$2.2 billion and $2.8$3.5 billion, respectively.
9) Leases
The Company leases retail stores, as well as distribution facilities, offices and equipment, under agreements expiring at various dates through 2041. The leases provide for original lease terms that generally range from 10 to 15 years and most leases provide for a series of five year renewal options, often at increased rents, the exercise of which is at the Company's sole discretion. In recognizing the lease right-of-use assets and lease liabilities, the Company utilizes the lease term for which it is reasonably certain to use the underlying asset, including consideration of options to extend or terminate the lease. Certain leases provide for contingent rents (which are based upon store sales exceeding stipulated amounts and are immaterial for the three and six months ended August 31, 2019 and September 1, 2018), scheduled rent increases and renewal options. The Company is obligated under a majority of the leases to pay for taxes, insurance and common area maintenance charges.
Companies are required to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determined discount rates based on the rates of its unsecured borrowings, which are then adjusted for the appropriate lease term and effects of full collateralization. In determining the Company's operating lease assets and operating lease liabilities, the Company applied these incremental borrowing rates to the minimum lease payments within each lease agreement.
The components of total lease cost for the three and six months ended August 31, 2019, were as follows.
|
| | | | | | | | |
| (in thousands) | Statement of Operations Location | Three months ended August 31, 2019 | | Six months ended August 31, 2019 |
| Operating lease cost | Cost of sales and SG&A | $ | 143,773 |
| | $ | 287,673 |
|
| Finance lease cost: |
|
| | |
| Depreciation of property | SG&A | 648 |
| | 1,296 |
|
| Interest on lease liabilities | Interest expense, net | 2,214 |
| | 4,436 |
|
| Variable lease cost | Cost of sales and SG&A | 50,275 |
| | 98,170 |
|
| Sublease income | SG&A | (278 | ) | | (556 | ) |
| Total lease cost |
| $ | 196,632 |
| | $ | 391,019 |
|
As of August 31, 2019, assets and liabilities related to the Company's operating and finance leases are as follows:
|
| | | | |
| (in thousands) | Consolidated Balance Sheet Location | August 31, 2019 |
| Assets | | |
| Operating leases | Operating lease assets | $ | 2,012,681 |
|
| Finance leases | Property and equipment, net | 70,583 |
|
| Total Lease assets | | $ | 2,083,264 |
|
| | | |
| Liabilities | | |
| Current: | | |
| Operating leases | Current operating lease liabilities | $ | 456,324 |
|
| Finance leases | Accrued expenses and other current liabilities | 1,547 |
|
| Noncurrent: | | |
| Operating leases | Operating lease liabilities | 1,813,015 |
|
| Finance leases | Other liabilities | 103,172 |
|
| Total lease liabilities | | $ | 2,374,058 |
|
As of August 31, 2019, the Company's lease liabilities mature as follows:
|
| | | | | | | |
| (in thousands) | Operating Leases | | Finance Leases |
| Fiscal Year: | | | |
| Remainder of 2019 | $ | 286,430 |
| | $ | 5,221 |
|
| 2020 | 576,119 |
| | 10,469 |
|
| 2021 | 481,833 |
| | 10,434 |
|
| 2022 | 387,133 |
| | 10,407 |
|
| 2023 | 294,998 |
| | 10,524 |
|
| Thereafter | 722,013 |
| | 259,584 |
|
| Total lease payments | $ | 2,748,526 |
| | $ | 306,639 |
|
| Less imputed interest | (479,187 | ) | | (201,920 | ) |
| Present value of lease liabilities | $ | 2,269,339 |
| | $ | 104,719 |
|
The Company's lease terms and discount rates are as follows:
|
| | | |
| | August 31, 2019 |
| Weighted-average remaining lease term (in years) | | |
| Operating leases | | 6.1 |
|
| Finance leases | | 26.2 |
|
| Weighted-average discount rate | | |
| Operating leases | | 6.1 | % |
| Finance leases | | 9.0 | % |
Other information for the Company's leases is as follows:
|
| | | | |
| (in thousands) | | Six months ended August 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash flows from operating leases | | $ | 271,669 |
|
| Operating cash flows from finance leases | | 5,160 |
|
| Operating lease assets obtained in exchange for new operating lease liabilities | | 262,315 |
|
At the beginning of fiscal 2019, the Company adopted ASU2016-02, and as required, the following disclosure is provided for periods prior to adoption. As of March 2, 2019, future minimum lease payments under non-cancelable operating leases were as follows:
|
| | |
| (in thousands) | Operating Leases |
| Fiscal Year: | |
| 2019 | 609,613 |
|
| 2020 | 534,055 |
|
| 2021 | 434,908 |
|
| 2022 | 334,587 |
|
| 2023 | 241,863 |
|
| Thereafter | 616,170 |
|
| Total future minimum lease payments | 2,771,196 |
|
As of March 2, 2019, the capital lease obligations were approximately $3.8 million for which the current and long-term portions were included within accrued expenses and other current liabilities and other liabilities, respectively, in the consolidated balance sheet. Monthly minimum lease payments are accounted for as principal and interest payments. The minimum capital lease payments, including interest, by fiscal year were: $0.9 million in fiscal 2019; $0.8 million in fiscal 2020; $0.7 million in fiscal 2021; $0.6 million in fiscal 2022; $0.6 million in fiscal 2023; and $1.0 million thereafter.
The Company has financing obligations, related to 2 sale/leaseback agreements, which approximated the discounted fair value of the minimum lease payments, had a residual fair value at the end of the lease term and are being amortized over the term of the respective agreements, including option periods, of 32 and 37 years. As of March 2, 2019, the sale/leaseback financing obligations were approximately $101.7 million, for which the current and long-term portions were included within accrued expenses and other current liabilities and other liabilities, respectively, in the consolidated balance sheet. Monthly lease payments are accounted for as principal and interest payments (at approximate annual interest rates of 7.2% and 10.6%). These sale/leaseback financing obligations, excluding the residual fair value at the end of the lease term, mature as follows: $0.8 million in fiscal 2019; $0.9 million in fiscal 2020; $0.9 million in fiscal 2021; $1.0 million in fiscal 2022; $1.0 million in fiscal 2023; and $75.4 million thereafter.
10) Goodwill and Other Indefinite Lived Intangible Assets
The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of the end of the fiscal year or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.
Prior to March 2, 2019, the Company had not historically recorded an impairment to its goodwill and other indefinite lived intangible assets. In fiscal 2018, the Company recognized non-cash pre-tax goodwill impairment charges of $285.1 million and $40.1 million for the North American Retail and Institutional Sales reporting units, respectively. As of June 1, 2019, the Company completed a quantitative impairment analysis of goodwill related to its reporting units by comparing the fair value of a reporting unit with its carrying amount. The Company performed a discounted cash flow analysis and market multiple analysis for each reporting unit. Based upon the analysis performed, the Company recognized a non-cash pre-tax goodwill impairment charge of $391.1 million for the North American Retail reporting unit. The non-cash pre-tax impairment charge was primarily the result of a sustained decline in the Company's market capitalization.
Other indefinite lived intangible assets were recorded as a result of acquisitions and primarily consist of tradenames. The Company values its tradenames using a relief-from-royalty approach, which assumes the value of the tradename is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the tradename and instead licensed the tradename from another company. As of June 1, 2019, for certain other indefinite lived intangible assets, the Company completed a quantitative impairment analysis by comparing the fair value of the tradenames to their carrying value and recognized a non-cash pre-tax tradename impairment charge of $10.2 million, within goodwill and other impairments in the consolidated statement of operations, for certain tradenames. As of August 31, 2019, the Company assessed qualitative factors in order to determine whether any events and circumstances existed which indicated that it was more likely than not that the fair value of these other indefinite lived assets did not exceed their carrying values and concluded no such events or circumstances existed which would require an impairment test be performed. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.
There were no impairments of indefinite lived intangible assets in the three months ended August 31, 2019. Included within other assets in the accompanying consolidated balance sheets as of August 31, 2019 and March 2, 2019, respectively, are $133.6 million and $143.8 million for indefinite lived tradenames and trademarks.
On July 17, 2014, the Company issued $300 million aggregate principal amount of 3.749% senior unsecured notes due August 1, 2024, $300 million aggregate principal amount of 4.915% senior unsecured notes due August 1, 2034 and $900 million aggregate principal amount of 5.165% senior unsecured notes due August 1, 2044 (collectively, the
“Notes”"Notes"). Interest on the Notes is payable semi-annually on February 1 and August 1 of each year.
In fiscal 2018, the Company purchased and retired approximately $4.6 million of senior unsecured notes due August 1, 2024.
The Notes were issued under an indenture (the “Base Indenture”"Base Indenture"), as supplemented by a first supplemental indenture (together, with the Base Indenture, the “Indenture”"Indenture"), which contains various restrictive covenants, which are subject to important limitations
and exceptions that are described in the Indenture. The Company was in compliance with all covenants related to the Notes as of August
26, 2017.31, 2019.
Revolving Credit Agreement
The
On November 14, 2017, the Company
has areplaced its existing $250 million five year senior unsecured revolving credit facility agreement
(“Revolver”), expiring in August 2019, with various
lenders.lenders with a new $250 million five year senior unsecured revolving credit facility agreement ("Revolver") with various lenders maturing November 14, 2022. The new Revolver has essentially the same terms and requirements as the prior revolving credit facility agreement. During the six months ended August
26, 2017,31, 2019, the Company did not have any borrowings under the Revolver.
The Revolver contains customary affirmative and negative covenants and also requires the Company to maintain a
minimummaximum leverage ratio. The Company was in compliance with all covenants related to the Revolver as of August
26, 2017.31, 2019.
Deferred financing costs associated with the Notes and the
Revolverrevolving credit facilities of approximately
$10.1$10.5 million were capitalized. In the accompanying Consolidated Balance Sheets, the deferred financing costs are included in long term debt, net of amortization, for the Notes, and are included in other assets, net of amortization, for the Revolver. These deferred financing costs for the Notes and the Revolver are being amortized over the term of each of the Notes and the term of the Revolver and such amortization is included in interest expense, net in the
Consolidated Statementsconsolidated statements of
Earnings.operations. Interest expense related to the Notes and the
Revolver,revolving credit facilities, including the commitment fee and the amortization of deferred financing costs, was approximately
$18.3$18.2 million and
$18.1$18.3 million for the three months ended August
26, 201731, 2019 and
August 27, 2016,September 1, 2018, respectively, and
$36.5$36.4 million and
$36.8$36.5 million for the six months ended August
26, 201731, 2019 and
August 27, 2016,September 1, 2018, respectively.
At August 26, 2017,31, 2019, the Company maintained two2 uncommitted lines of credit of $100 million each, with expiration dates of February 23, 2020 and August 30, 2017 and February 25, 2018,2020, respectively. Subsequent to the end of the second quarter of fiscal 2017, the line of credit with an expiration date of August 30, 2017 was extended through August 29, 2018. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. During the first six months of fiscal 2017,2019, the Company did not have any direct borrowings under the uncommitted lines of credit. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.
12) Shareholders' Equity
10) Shareholders’ Equity
The Company has authorization to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations.
Between December 2004 and September 2015, the
Company’sCompany's Board of Directors authorized, through several share repurchase programs, the repurchase of $11.950 billion of its shares of common stock. The Company also acquires shares of its common stock to cover employee related taxes withheld on vested restricted stock and performance stock unit awards. In the first six months of fiscal
2017,2019, the Company repurchased approximately
5.16.7 million shares of its common stock for a total cost of approximately
$183.7$98.0 million, bringing the aggregate total of common stock repurchased to approximately
198.3217.0 million shares for a total cost of approximately
$10.4$10.7 billion since the initial authorization in December 2004. The Company has approximately
$1.6$1.2 billion remaining of authorized share repurchases as of August
26, 2017.31, 2019.
During fiscal 2016, the
Company’sCompany's Board of Directors authorized a quarterly dividend program. During the six months ended August
26, 201731, 2019 and
August 27, 2016, quarterlySeptember 1, 2018, total cash dividends
totaling $0.30 and $0.25 per shareof $43.4 million were
declared by the Company’s Board of Directors, of which $0.15 and $0.125 per share was paid, respectively. Subsequent to the end of the second quarter of fiscal
2017,2019, on
September 19, 2017,October 2, 2019, the
Company’sCompany's Board of Directors declared a quarterly dividend of
$0.15$0.17 per share to be paid on January
16, 201814, 2020 to shareholders of record as of the close of business on December
15, 2017.13, 2019. The Company expects to pay quarterly cash dividends on its common stock in the future, subject to the determination by the Board of Directors, based on an evaluation of the
Company’sCompany's earnings, financial condition and requirements, business conditions and other factors.
Cash dividends, if any, are accrued as a liability on the Company’sCompany's consolidated balance sheets and recorded as a decrease to additional paid-in capitalretained earnings when declared.
13) Stock-Based Compensation
The Company measures all employee stock-based compensation awards using a fair value method and records such expense, net of estimated forfeitures, in its consolidated financial statements. Currently, the Company’sCompany's stock-based compensation relates to
restricted stock awards, stock options and performance stock units. The
Company’sCompany's restricted stock awards are considered nonvested share awards.
Stock-based compensation expense for the three and six months ended August
26, 201731, 2019 was approximately
$15.4$12.1 million ($
9.78.4 million after tax or $0.07 per diluted share) and approximately
$36.9$31.4 million ($
22.425.8 million after tax or
$0.16$0.20 per diluted share), respectively. Stock-based compensation expense for the three and six months ended
August 27, 2016September 1, 2018 was approximately
$16.8$13.4 million ($
10.710.2 million after tax or
$0.07$0.08 per diluted share) and approximately
$37.6$37.0 million ($
23.726.5 million after tax or
$0.16$0.19 per diluted share), respectively.
In addition, the amount of stock-based compensation cost capitalized for the six months ended August 26, 201731, 2019 and August 27, 2016September 1, 2018 was approximately $1.0$0.5 million and $1.1$1.3 million, respectively.
Incentive Compensation Plans
The Company currently grants awards under the Bed Bath & Beyond 2012 Incentive Compensation Plan (the “2012 Plan”"2012 Plan"), which amended and restated the Bed Bath & Beyond 20042018 Incentive Compensation Plan (the “2004 Plan”"2018 Plan")., which was adopted by the Company and approved by shareholders in 2018. The 2012 Plan includes an aggregate of 43.2 million common shares authorized for issuance and the ability to grant incentive2018 Plan includes an aggregate share reserve of 4.6 million shares of common stock, options. Outstanding awards that were covered by the 2004 Plan continue to beresulting in effecta total of 47.8 million shares authorized for issuance under both plans.
The terms of the 2012
Plan.The 2012 Plan is a flexible compensation plan that enablesand the 2018 Plan are substantially similar and enable the Company to offer incentive compensation through stock options (whether nonqualified stock options or incentive stock options), restricted stock awards, stock appreciation rights, performance awards and other stock based awards, including cash awards. Under the 2012 Plan, grantsGrants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted. AwardsStock option grants generally become exercisable in either 3 or 5 equal annual installments beginning one year from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Restricted stock options and restricted stockawards generally vestbecome vested in five5 to 7 equal annual installments beginning one to three years from the date of grant. Awards of performancegrant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Performance stock units generally vest over a period of three to four years from the date of grant dependent on the Company’sCompany's achievement of performance-based tests and subject, in general, to the executive remaining in the Company’sCompany's service on specified vesting dates.
The Company generally issues new shares for stock option exercises, restricted stock awards and vesting of performance stock units.
NaN grants have been made to date under the 2018 Plan, which expires in May 2028. The 2012 Plan expires in May 2022.
Stock option grants are issued at fair market value on the date of grant and generally become exercisable in either
three3 or
five5 equal annual installments beginning one year from the date of grant,
for options issued since May 10, 2010, and beginning one to three years from the date of grant for options issued prior to May 10, 2010, in each case, subject, in general, to the recipient remaining in the
Company’sCompany's service on specified vesting dates. Option grants expire eight years after the date of grant. All option grants are nonqualified. As of August
26, 2017,31, 2019, unrecognized compensation expense related to the unvested portion of the
Company’sCompany's stock options was
$22.6$3.7 million, which is expected to be recognized over a weighted average period of
3.23.4 years.
The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.
| | | Six Months Ended |
| Black-Scholes Valuation Assumptions (1) | | August 26,
2017 | | August 27,
2016 |
| | | | | |
| Weighted Average Expected Life (in years) (2) | | | 6.7 | | | | 6.6 | |
| Weighted Average Expected Volatility (3) | | | 26.49 | % | | | 26.96 | % |
| Weighted Average Risk Free Interest Rates (4) | | | 2.17 | % | | | 1.46 | % |
| Expected Dividend Yield (5) | | | 1.60 | % | | | 1.10 | % |
|
| | | | | |
| | Six Months Ended |
| Black-Scholes Valuation Assumptions (1) | August 31, 2019 | | September 1, 2018 |
| Weighted Average Expected Life (in years) (2) | 7.6 |
| | 6.7 |
|
| Weighted Average Expected Volatility (3) | 39.41 | % | | 34.96 | % |
| Weighted Average Risk Free Interest Rates (4) | 2.39 | % | | 2.92 | % |
| Expected Dividend Yield (5) | 4.34 | % | | 3.80 | % |
(1) Forfeitures are estimated based on historical experience.
(2) The expected life of stock options is estimated based on historical experience.
(3) Expected volatility is based on the average of historical and implied volatility. The historical volatility is determined by observing actual prices of the
Company’sCompany's stock over a period commensurate with the expected life of the awards. The implied volatility represents the implied volatility of the
Company’sCompany's call options, which are actively traded on multiple exchanges, had remaining maturities in excess of twelve months, had market prices close to the exercise prices of the employee stock options and were measured on the stock option grant date.
(4) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
(5) Expected dividend yield is estimated based on anticipated dividend payouts.
Changes in the
Company’sCompany's stock options for the six months ended August
26, 201731, 2019 were as follows:
| | | (Shares in thousands) | | Number of Stock Options | | Weighted Average
Exercise Price | Number of Stock Options | | Weighted Average Exercise Price |
| Options outstanding, beginning of period | | | 3,906 | | | $ | 56.48 | | 4,395 |
| | $ | 47.53 |
|
| Granted | | | 694 | | | | 37.50 | | 144 |
| | 15.68 |
|
| Exercised | | | (359 | ) | | | 28.33 | | — |
| | — |
|
| Forfeited or expired | | | - | | | | - | | (2,607 | ) | | 53.86 |
|
| Options outstanding, end of period | | | 4,241 | | | $ | 55.76 | | 1,932 |
| | $ | 36.62 |
|
| Options exercisable, end of period | | | 2,447 | | | $ | 60.38 | | 1,094 |
| | $ | 45.83 |
|
The weighted average fair value for the stock options granted during the first six months of fiscal
20172019 and
20162018 was
$9.50$4.18 and
$11.87,$4.31, respectively. The weighted average remaining contractual term
and the aggregate intrinsic value for options outstanding as of August
26, 201731, 2019 was
4.65.3 years and
the aggregate intrinsic value was $0.$0, respectively. The weighted average remaining contractual term for options exercisable as of August
26, 201731, 2019 was
3.14.4 years and the aggregate intrinsic value was $0.
The total intrinsic value forThere were 0 stock options exercised during the first six months of fiscal
20172019 and
2016 was $3.9 million and $9.0 million, respectively.2018.Restricted Stock
Net cash proceeds from the exercise of stock options for the first six months of fiscal 2017 were $10.2 and the net associated income tax expense was $0.2 million.
Restricted Stock
Restricted stock awards are issued and measured at fair market value on the date of grant and generally become vested in five
to seven equal annual installments beginning one to three years from the date of grant, subject, in general, to the recipient remaining in the
Company’sCompany's service on specified vesting dates. Vesting of restricted stock is based solely on time vesting. As of August
26, 2017,31, 2019, unrecognized compensation expense related to the unvested portion of the
Company’sCompany's restricted stock awards was
$159.6$88.4 million, which is expected to be recognized over a weighted average period of
4.83.9 years.
Changes in the
Company’sCompany's restricted stock for the six months ended August
26, 201731, 2019 were as follows:
| | | (Shares in thousands) | | Number of Restricted
Shares | | Weighted Average
Grant-Date Fair
Value | Number of Restricted Shares | | Weighted Average Grant-Date Fair Value |
| Unvested restricted stock, beginning of period | | | 3,492 | | | $ | 58.12 | | 3,747 |
| | $ | 41.73 |
|
| Granted | | | 1,561 | | | | 36.89 | | 880 |
| | 13.52 |
|
| Vested | | | (693 | ) | | | 59.53 | | (689 | ) | | 50.47 |
|
| Forfeited | | | (187 | ) | | | 51.59 | | (424 | ) | | 36.73 |
|
| Unvested restricted stock, end of period | | | 4,173 | | | $ | 50.24 | | 3,514 |
| | $ | 33.56 |
|
Performance stock units
(“PSUs”("PSUs") are issued and measured at fair market value on the date of grant. Vesting of PSUs awarded to certain of the
Company’sCompany's executives is dependent on the
Company’sCompany's achievement of a performance-based test during a one-year period from the date of grant and during a three-year period from the date of grant and, assuming achievement of the performance-based test, time vesting over periods of up to four years, subject, in general, to the executive remaining in the
Company’sCompany's service on specified vesting dates.
PerformanceFor awards granted in fiscal 2018 and prior, performance during the
one-yearthree-year period
will bewere based on
Return on Invested Capital ("ROIC") or a combination of Earnings Before Interest and Taxes
(“EBIT”("EBIT") margin
and ROIC relative to a peer
group of thegroup. For awards granted in fiscal 2019, performance during a one-year period is based on a one-year Company
EBIT goal and performance during the three-year period
will beis based on
a three-year cumulative Company EBIT goal and a relative three-year Total Shareholder Return
on Invested Capital (“ROIC”("TSR")
or a combination of EBIT margin and ROICgoal relative to
sucha peer group. The
PSU awards
based on EBIT margin and ROIC range from a floor of
zero0 to a cap of 150% of target achievement. PSUs are converted into shares of common stock upon payment following vesting. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on the
assumption that 100%Company's estimate of the
targetpercentage of the award
that will be achieved. The Company evaluates the
target assumptionestimate on these awards on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. As of August
26, 2017,31, 2019, unrecognized compensation expense related to the unvested portion of the
Company’sCompany's performance stock units was
$35.3$7.5 million, which is expected to be recognized over a weighted average period of 2.0 years.
The fair value of the PSUs granted in fiscal 2019 for which performance during the three-year period will be based on a relative three-year Total Shareholder Return ("TSR") goal relative to a peer group was estimated on the date of the grant using a Monte Carlo simulation that uses the assumptions noted in the following table.
|
| | |
| Six Months Ended |
| Monte Carlo Simulation Assumptions | August 31, 2019 |
| Risk Free Interest Rate | 1.7 | % |
| Expected Dividend Yield | — | % |
| Expected Volatility | 43.40 | % |
| Expected Term | 3 years |
|
Changes in the
Company’sCompany's PSUs for the six months ended August
26, 201731, 2019 were as follows:
| | | (Shares in thousands) | | Number of Performance
Stock Units | | Weighted Average
Grant-Date Fair
Value | Number of Performance Stock Units | | Weighted Average Grant-Date Fair Value |
| Unvested performance stock units, beginning of period | | | 1,014 | | | $ | 55.19 | | 2,082 |
| | $ | 27.16 |
|
| Granted | | | 660 | | | | 37.50 | | 821 |
| | 11.02 |
|
| Vested | | | (322 | ) | | | 57.28 | | (557 | ) | | 35.09 |
|
| Forfeited | | | - | | | | - | | |
| Forfeited or performance condition adjustments | | (173 | ) | | 24.87 |
|
| Unvested performance stock units, end of period | | | 1,352 | | | $ | 46.06 | | 2,173 |
| | $ | 19.21 |
|
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding, including the dilutive effect of stock-based awards as calculated under the treasury stock method.
Stock-based awards for the three and six months ended August 26, 201731, 2019 of approximately 8.25.9 million and 7.76.8 million, respectively, and August 27, 2016September 1, 2018 of approximately 4.37.6 million and 4.58.1 million, respectively, were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive.
15) Supplemental Cash Flow Information
The Company paid income taxes of
$170.7$39.6 million and
$193.1$34.9 million in the first six months of fiscal
20172019 and
2016,2018, respectively. In addition, the Company had interest payments of approximately
$40.6 million and $40.7 million in
both the first six months of fiscal
20172019 and
2016.2018, respectively.
The Company recorded an accrual for capital expenditures of $24.9$19.3 million and $12.6$13.8 million as of August 26, 201731, 2019 and August 27, 2016,September 1, 2018, respectively. In addition, the Company recorded an accrual for dividends payable of $24.2$25.6 million and $20.0$27.0 million as of August 26, 201731, 2019 and August 27, 2016,September 1, 2018, respectively.
16) Restructuring Activities
In the first quarter of fiscal 2019, the Company expensed pre-tax restructuring charges of approximately $3.9 million, related to the realignment of its store management structure to support its customer-focused initiatives and omnichannel growth. These charges primarily were for severance and related costs in conjunction with this realignment. The Company paid $2.6 million of these costs during the six months ended August 31, 2019.
During the second quarter of fiscal 2019, the Company expensed pre-tax restructuring charges of approximately $22.5 million, related to a corporate workforce reduction which impacted the Company's corporate staff, including executive officers, vice presidents, directors, managers, and professional staff and the Company's decision to outsource certain transaction processing functions within the business. These charges were primarily for severance and related costs in conjunction with transformation initiatives. The Company paid $1.0 million of these costs during the three months ended August 31, 2019.
17) Commitments and Contingencies
The District Attorney's office for the County of Ventura, together with District Attorneys for other counties in California (together, the “District Attorneys"), recently concluded an investigation regarding the management and disposal at the Company's stores in California of certain materials that may be deemed hazardous or universal waste under California law. On March 19, 2019, the District Attorneys provided the Company with a settlement demand that included a proposed civil penalty, reimbursement of investigation costs, and certain injunctive relief, including modifications to the Company's existing compliance program, which already includes associate training, on-going review of disposal rules applicable to various product categories, and specialized third-party disposal. The Company is working with the District Attorneys towards a resolution of this matter and has recorded an accrual for the estimated probable loss for this matter as of August 31, 2019 and March 2, 2019. While no assurance can be given as to its ultimate outcome, the Company does not believe that the final resolution of this matter will have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
On April 21, 2019, Warren Eisenberg and Leonard Feinstein transitioned to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company. As a result of this transition, Mr. Eisenberg and Mr. Feinstein ceased to be officers of the Company effective as of April 21, 2019, and became entitled to the payments and benefits provided under their employment agreements that apply in the case of a termination without cause, which generally include continued senior status payments until May 2027 and continued participation for the Co-Founders (and their spouses, if applicable) at the Company's expense in employee plans and programs. In addition, the Co-Founders are entitled to supplemental pension payments specified in their employment agreements until the death of the survivor of the Co-Founder and his spouse, reduced by the continued senior status payments referenced in the foregoing sentence.
Pursuant to their respective restricted stock and performance stock unit agreements, shares of restricted stock and performance-based stock units granted to Messrs. Eisenberg and Feinstein vested upon their resignation as members of the Board of Directors effective May 1, 2019, subject, however, to attainment of any applicable performance goals and the certification of the applicable performance-based tests by the Compensation Committee, as provided under their award agreements.
The Company's Chief Executive Officer ("CEO") departed the Company effective as of May 12, 2019. In accordance with the terms of the CEO's employment and equity award agreements, the CEO was entitled to three times the then-current salary, payable over three years in normal payroll installments, except that any amount due prior to the six months after his departure, will be paid in a lump sum after such six-month period. Such amounts will be reduced by any compensation earned with any subsequent employer or otherwise and will be subject to the CEO's compliance with a one-year non-competition and non-solicitation covenant. Further, as a result of this departure, the time-vesting component of the CEO's equity-based awards accelerated, including (i) stock options (which currently are “underwater”), (ii) PSU awards which had previously met the related performance-based test, had been certified by the Compensation Committee, and remained subject solely to time-vesting, and (iii) PSU awards (assuming target level of performance) which remain subject to attainment of any performance goals and the certification of the applicable performance-based tests by the Compensation Committee, as provided under his award agreements.
The CEO was also party to a supplemental executive retirement benefit agreement (“SERP”) and a related escrow agreement, pursuant to which the CEO was entitled to receive a supplemental retirement benefit as a result of the separation from service from the Company. Pursuant to the SERP, as a result of the separation from service with the Company as of May 12, 2019 being treated as a termination without cause, the CEO is entitled to a lump sum payment equal to the present value of an annual amount equal to 50% of the CEO's annual base salary on the date of termination of employment if such annual amount were paid for a period of 10 years in accordance with the Company’s normal payroll practices, subject to the CEO's timely execution and non-revocation of a release of claims in favor of the Company, which will be paid on the first business day following the six-month anniversary of the CEO's termination of service. Although the SERP provides that the CEO will be protected from any impact resulting from the possible application of Section 409A of the Code to the terms of the SERP due to the complexities surrounding Section 409A, the Company believes that no such payment will be required.
The Company has expensed pre-tax charges related to both the transition of Messrs. Eisenberg and Feinstein to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company and the departure of the Company's CEO of approximately $35.2 million.
In addition, the Company maintains employment agreements with other executives which provide for severance pay.
The Company records an estimated liability related to its various claims and legal actions arising in the ordinary course of business when and to the extent that it concludes a liability is probable and the amount of the loss can be reasonably estimated. Such estimated loss is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company reassesses the potential liability related to claims and legal actions and revises its estimated
liabilities, as appropriate. The Company expects the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. The Company also cannot predict the nature and validity of claims which could be asserted in the future, and future claims could have a material impact on its earnings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bed Bath & Beyond Inc. and subsidiaries (the
“Company”"Company") is an omnichannel retailer selling a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond
(“BBB”("BBB"), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively,
“CTS”"CTS"), Harmon, Harmon Face Values, or Face Values (collectively,
“Harmon”"Harmon"), buybuy BABY
(“Baby”("Baby") and World Market, Cost Plus World Market, or Cost Plus (collectively,
“Cost"Cost Plus World
Market”Market"). Customers can purchase products either in-store, online, with a mobile device or through a customer contact center. The Company generally has the ability to have customer purchases picked up in-store or shipped direct to the customer from the
Company’sCompany's distribution facilities, stores or vendors. In addition, the Company operates Of a Kind, an e-commerce website that features specially commissioned, limited edition items from emerging fashion and home designers; One Kings Lane, an authority in home décor and design, offering a unique collection of select home goods, designer and vintage items; PersonalizationMall.com
(“PMall”("PMall"), an industry-leading online retailer of personalized products;
Chef Central, a retailer of kitchenware, cookware and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. The Company also operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates
eight retail stores in Mexico under the name Bed Bath & Beyond.
The Company accounts for its operations as two operating segments: North American Retail and Institutional Sales. The Institutional Sales operating segment, which is comprised of Linen Holdings, does not meet the quantitative thresholds under U.S. generally accepted accounting principles and therefore is not a reportable segment.
The
Company offers an extensive selection of high quality domestics merchandise and home furnishings across all channels, concepts and countries in which it operates and strives to provide a noticeably better shopping experience through best-in-class services and solutions.The Company’sCompany's mission is to be trusted by its customers as the expert for the home and heart-felt life events. These include certain life events that evoke strong emotional connections such as getting married, moving to a new home, having a baby, going to college and decorating a room, which the Company supports through its wedding and baby registries, new mover and student life programs, and its design consultation services. The Company’s ability to achieve
To advance its mission,
the Company is
driven by three broad objectives: first,executing on a comprehensive plan to
havetransform its business and position the Company for long-term success. On May 13, 2019, the Company announced that Mary Winston, a
differentiatedseasoned public company executive who recently joined the Company's Board of Directors (the "Board"), was appointed Interim Chief Executive Officer (CEO), after the then CEO stepped down. The Board has formed a CEO search committee to identify a permanent CEO and
complete product assortment, ofhas made substantial progress toward identifying the
right quality product,Company’s next CEO. During this interim period, the Board and
at the right price; second, to have better services and solutions; and third, to delivermanagement team are taking a more
personalized, entertaining, inspiring,holistic approach to the Company's on-going business transformation and
convenient customer experience. The Company is undertaking a numberhave identified four key near-term priorities that include: 1) stabilizing sales and driving top-line growth; 2) resetting the cost structure; 3) reviewing and optimizing the Company’s asset base, including its portfolio of
strategic initiatives to support each of these objectives, as well as to drive change acrossretail banners; and 4) refining the
Company’s organization
in order to improve operational efficiencies and to create future growth. Through this focused approach, the Company believes it will further strengthen its competitive position to be the customer’s first choice for the home and heart-felt life events.structure.
The integration of retail store and customer facing digital channels allows the Company to provide its customers with a seamless shopping experience. In-store purchases are primarily fulfilled from that
store’sstore's inventory, or may also be shipped to a customer from one of the
Company’sCompany's distribution facilities, from a vendor, or from another store.
Online purchases,Purchases, including web and mobile, can be shipped to a customer from the
Company’sCompany's distribution facilities, directly from vendors, or from a store. The
Company’sCompany's customers can also choose to pick up online orders in a store, as well as return online purchases to a store. Customers can also make
online purchases through one of the
Company’sCompany's customer contact centers and in-store through The Beyond Store, the
Company’sCompany's proprietary, web-based platform. These capabilities allow the Company to better serve customers across various channels.
Operating in the highly competitive retail industry, the Company, along with other retail companies, is influenced by a number of factors including, but not limited
to,to: general economic conditions including the housing market, unemployment levels and commodity prices; the overall macroeconomic environment and related changes in the retailing environment; consumer preferences, spending habits and adoption of new technologies; unusual weather patterns and natural disasters; competition from existing and potential competitors across all
channels of distribution;channels; potential supply chain disruption; the ability to find suitable locations at acceptable occupancy costs and other terms to support the
Company’sCompany's plans for new stores; and the ability to assess and implement technologies in support of the
Company’sCompany's development of its omnichannel capabilities. The Company cannot predict whether, when or the manner in which these factors could affect the
Company’sCompany's operating results.
The following represents an overview of the Company's financial performance for the periods indicated:
The results
Net sales for the three months ended August 31, 2019 were $2.719 billion, a decrease of operationsapproximately 7.3% as compared with the three months ended September 1, 2018. Net sales for the six months ended August 31, 2019 were $5.292 billion, a decrease of approximately 7.0% as compared with the six months ended September 1, 2018.
Comparable sales for the three and six months ended August
26, 2017 include Decorist since31, 2019 decreased by approximately 6.7% and 6.6%, respectively, as compared to a decrease of approximately 0.6% for both the
date of acquisition, March 6, 2017.The following represents an overview ofthree and six months ended September 1, 2018. For the Company’s financial performance forthree months ended August 31, 2019, comparable sales consummated in-store declined in the periods indicated:
| · | For the three and six months ended August 26, 2017, the Company’s net sales were $2.936 billion and $5.678 billion, respectively, a decrease of approximately 1.7% and 0.8% as compared with the three and six months ended August 27, 2016. |
| · | Comparable sales for the three and six months ended August 26, 2017 decreased by approximately 2.6% and 2.4%, respectively, as compared to a decrease of approximately 1.2% and 0.9%, respectively, for the three and six months ended August 27, 2016. For the three and six months ended August 26, 2017, comparable sales consummated through customer facing digital channels increased in excess of 20% over the corresponding periods in the prior year, while comparable sales consummated in-store declined in the mid-single-digit percentage range. |
high-single-digit percentage range, while comparable sales consummated through customer facing digital channels declined slightly. For the six months ended August 31, 2019, comparable sales consummated in-store declined in the high-single-digit percentage range, partially offset by a slight increase in comparable sales consummated through customer facing digital channels.
Comparable sales include sales consummated through all retail channels which have been operating for twelve full months following the opening period (typically four to six weeks). The Company is an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store, online, with a mobile device or through a customer contact center, and have it fulfilled, in most cases, either through in-store customer pickup or by direct shipment to the customer from one of the
Company’sCompany's distribution facilities, stores or vendors.
Sales consummated on a mobile device while physically in a store location are recorded as customer facing digital channel sales. Customer orders taken in-store by an associate through The Beyond Store, the
Company’sCompany's proprietary, web-based platform, are recorded as in-store sales. Customer orders reserved online and picked up in a store are recorded as in-store sales.
In-store sales are reduced by salesSales originally consummated from customer facing digital channels and subsequently returned
in-store.in-store are recorded as a reduction of in-store sales.
Stores relocated or expanded are excluded from comparable sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store’s sales are not considered comparable once the store closing process has commenced.
One Kings Lane isStores impacted by unusual and unexpected events outside the Company’s control, including severe weather, fire or floods, are excluded from
the comparable sales
calculation for the
three and six months ended August 26, 2017 and will continue to be excluded until a point following the anniversary of the acquisition, which occurred in the second quarter of fiscal 2017, and after the currently in process re-platforming of One King Lane’s systems and integration of its support services have been in place for a period of time
that such
that thereevent would
because a meaningful
comparisondisparity in
One Kings Lane’s sales over the prior period.
PMall, Chef CentralOne Kings Lane and Decorist are
also excluded fromincluded in the comparable sales calculation
forbeginning in the
three and six months ended August 26, 2017 and will continue to be excluded until after the anniversaryfirst quarter of
the respective acquisition.fiscal 2018. Linen Holdings is excluded from the comparable sales calculations and will continue to be excluded on an ongoing basis as it represents non-retail activity.
| · | Gross profit for the three months ended August 31, 2019 was $727.0 million, or 26.7% of net sales, compared with $988.6 million, or 33.7% of net sales, for the three months ended September 1, 2018. Gross profit for the three months ended August 26, 2017 was $1.069 billion, or 36.4% of net sales, compared with $1.117 billion, or 37.4% of net sales, for the three months ended August 27, 2016. Gross profit for the six months ended August 26, 2017 was $2.069 billion, or 36.4% of net sales, compared with $2.140 billion, or 37.4% of net sales, for the six months ended August 27, 2016. |
| · | Selling, general and administrative expenses (“SG&A”) for the three months ended August 26, 2017 were $899.7 million, or 30.6% of net sales, compared with $835.9 million, or 28.0% of net sales, for the three months ended August 27, 2016. Selling, general and administrative expenses for the six months ended August 26, 2017 were $1.753 billion, or 30.9% of net sales, compared with $1.646 billion, or 28.8% of net sales, for the six months ended August 27, 2016. |
| · | Interest expense, net for the three and six months ended August 26, 2017 was $19.2 million and $35.7 million, respectively, compared with $18.2 million and $34.5 million for the three and six months ended August 27, 2016. |
| · | The effective tax rate for the three and six months ended August 26, 2017 was 37.0% and 39.5%, respectively, compared with 36.3% and 36.9% for the three and six months ended August 27, 2016. For the three and six months ended August 26, 2017, the effective tax rate included the effect of the adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Share-Based Payment Accounting, (“ASU 2016-09, Stock Compensation”), which increased income tax expense by approximately $1.4 million and $9.0 million, respectively. Also, the tax rates included other discrete tax items resulting in net benefits of approximately $2.9 million for both the three months ended August 26, 2017 and August 27, 2016, and net benefits of approximately $4.9 million and $3.4 million, respectively, for the six months ended August 26, 2017 and August 27, 2016. |
| · | For the three months ended August 26, 2017, net earnings per diluted share were $0.67 ($94.2 million), as compared with net earnings per diluted share of $1.11 ($167.3 million) for the three months ended August 27, 2016. The decrease in net earnings per diluted share for the three months ended August 26, 2017 is the result of the decrease in net earnings due to the items described above, partially offset by the impact of the Company’s repurchases of its common stock. For the three months ended August 26, 2017, net earnings per diluted share included the unfavorable impacts of the cash restructuring charges associated with the acceleration of the realignment of its store management structure of approximately $0.08, the estimated costs associated with the impact of Hurricane Harvey, which occurred at the end of the second quarter of fiscal 2017, of approximately $0.02 and the adoption of ASU 2016-09,Stock Compensation of approximately $0.01. |
For the six months ended August 26, 2017,31, 2019 was $1.614 billion, or 30.5% of net earningssales, compared with $1.953 billion, or 34.3% of net sales, for the six months ended September 1, 2018. The decrease in the gross profit margin was primarily attributable to a decrease in merchandise margin, as a result of an incremental reserve for future markdowns of approximately $194.0 million taken in the second quarter of fiscal 2019 related to the Company's transformation initiatives, which was an incremental charge to the actual markdowns recorded in the second quarter of fiscal 2019.
Selling, general and administrative expenses ("SG&A") for the three months ended August 31, 2019 were $880.9 million, or 32.4% of net sales, compared with $909.7 million, or 31.0% of net sales, for the three months ended September 1, 2018. SG&A for the six months ended August 31, 2019 were $1.774 billion, or 33.5% of net sales, compared with $1.793 billion, or 31.5% of net sales, for the six months ended September 1, 2018.
Goodwill and other impairments for the three and six months ended August 31, 2019 were $28.4 million, or 1.0% of net sales and $429.6 million or 8.1% of net sales, respectively. There were no goodwill and other impairments in the three and six months ended September 1, 2018.
Interest expense, net for the three and six months ended August 31, 2019 was $16.3 million and $32.2 million, respectively, compared with $14.6 million and $31.3 million, respectively, for the three and six months ended September 1, 2018.
The effective tax rate for the three and six months ended August 31, 2019 was 30.1% and 17.9%, respectively, as compared with 24.3% and 28.4%, respectively, for the three and six months ended September 1, 2018. For the three months and six months ended August 31, 2019, the effective tax rate reflects the impact of charges for goodwill and other impairments and severance costs, portions of which are non-deductible for tax purposes. The tax rates also included other discrete tax items resulting in net after tax benefits of approximately $5.4 million and $1.8 million, respectively, for the three months ended August 31, 2019 and September 1, 2018 and net after tax costs of approximately $7.0 million and $1.5 million, respectively for the six months ended August 31, 2019 and September 1, 2018.
For the three months ended August 31, 2019, net loss per diluted share were $1.20was $(1.12) ($169.5(138.8) million), as compared with net earnings per diluted share of $1.91$0.36 ($290.048.6 million) for the sixthree months ended August 27, 2016.September 1, 2018. The decrease in net earnings per diluted share for the sixthree months ended August 26, 201731, 2019 is the result of the decrease in net earnings due to the items described above, partially offset by the impact of the Company’sCompany's repurchases of its common stock. In addition, for the three months ended August 31, 2019, net loss per diluted share included the unfavorable impact of approximately $1.46 per diluted share from charges related to the first wave of the Company's transformation initiatives, including severance costs associated with the corporate workforce reduction and the decision to outsource certain functions, and an incremental reserve for future markdowns. This unfavorable impact also included non-cash store impairment charges incurred during the fiscal second quarter of 2019.
For the six months ended August
26, 2017,31, 2019, net
loss per diluted share was $(4.06) ($(509.9) million), as compared with net earnings
per diluted share of $0.68 ($92.2 million) for the six months ended September 1, 2018. The decrease in net earnings per diluted share for the six months ended August 31, 2019 is the result of the decrease in net earnings due to the items described above, partially offset by the impact of the Company's repurchases of its common stock. In addition, for the six months ended August 31, 2019, net loss per diluted share included the unfavorable
impacts of the cash restructuring charges associated with the acceleration of the realignment of its store management structureimpact of approximately
$0.07,$4.52 per diluted share related to goodwill and other impairments charges, including store impairment charges, an incremental reserve for future markdowns related to the
adoption of ASU 2016-09,Stock Compensation of approximately $0.06,Company's transformation initiatives, severance costs and
the estimated costs associated with the impact of Hurricane Harvey of approximately $0.02.shareholder activity costs.
Capital expenditures for the six months ended August 26, 201731, 2019 and August 27, 2016September 1, 2018 were $177.0$125.2 million and $184.8$181.5 million, respectively. In the first six months of fiscal 2017, more than 40%2019, approximately 50% of the capital expenditures were forrelated to technology projects, including investments in the Company’sCompany's digital capabilities, analytics, logistics, and the development and deployment of new systems and equipment in its stores. The remaining capital expenditures were primarily related to new store openings and investments in stores, the Company’s new Las Vegas distribution facility, and its new customer contact center in Florida. existing stores.
The Company continues to review and prioritize its capital needs and remains committed to making the required investments in its infrastructure,
including adding resources, to
help positionprogress the
Company for continued growth and success.The Company continues to make the investments and add the resources necessary to position itself for long-term success.Company's ongoing business transformation. Key areas of investment include: continuing to improve the presentation and content as well as the functionality, general search and navigation across its customer facing digital channels; improving customer data integration and customer relations management capabilities; continuing to enhance service offerings to its customers; continuing to strengthen and deepen its information technology, analytics, marketing and e-commerce groups; and creating more flexible fulfillment options that will improve the Company’sCompany's delivery capabilities and lower the Company’sCompany's shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling customer experience across the Company’sCompany's omnichannel retail platform.
During the six months ended August
26, 2017,31, 2019, the Company opened
sixthree new stores and closed two stores. The Company
planshas also completed an initial assessment based on the results of a fleet optimization project for all Bed Bath & Beyond stores with the goal to
continuecreate a better balance between its physical and digital presence within the markets it serves. As part of this project, the Company continues to
actively manageanalyze stores' performance, profitability, geographic location and customer demographics to understand how best to position its
real estate portfoliostore locations in
order to permit store sizes, layouts, locations and offerings to evolve over time to optimize market profitability and will renovate or reposition stores withinvarious markets
when appropriate.across the country. Over the past several years, the
Company’sCompany's pace of its store openings has slowed, and the Company has increased the number of store closings.
If the Company cannot reach acceptable terms with its landlords as leases come up for renewal, the Company would expect the pace of store closings to increase as a result of its assumptions regarding bricks and mortar store traffic in future years as well as the continuation of the Company’s market optimization strategy. During fiscal 2017, including the stores opened through August 26, 2017, theThe Company expects
company-wide to
openclose approximately
25 new60 stores in fiscal 2019, including approximately 40 Bed Bath & Beyond stores and
close approximately 15 stores, leading to a net reduction in BBB stores and net increases in stores for20 other
concepts, where the Company is focusing on new markets and formats. Additionally,concept stores. In fiscal 2019, the Company expects to
continue to invest in technology related projects,open approximately 12 new stores. As of August 31, 2019, the Company operated 1,534 stores plus the Company's interactive platforms, including
websites and applications, and distribution facilities and total store square footage, net of openings and closings, was approximately 43.1 million square feet. As of August 31, 2019, the
deployment of new systems and equipment inCompany had distribution facilities totaling approximately 7.2 million square feet, supporting its
stores, enhancements to the Company’s customer facing digital channels
ongoing investment inas well as its
data warehousestores and
data analytics and the continued development and deployment of a new point of sale system.its institutional sales segment.
During fiscal 2016, the
Company’sCompany's Board of Directors authorized a quarterly dividend program. During the six months ended August
26, 201731, 2019 and
August 27, 2016, quarterlySeptember 1, 2018, total cash dividends
totaling $0.30 and $0.25 per shareof $43.4 million were
declared by the Company’s Board of Directors, of which $0.15 and $0.125 per share was paid, respectively. Subsequent to the end of the second quarter of fiscal
2017,2019, on
September 19, 2017,October 2, 2019, the
Company’sCompany's Board of Directors declared a quarterly dividend of
$0.15$0.17 per share to be paid on January
16, 201814, 2020 to shareholders of record as of the close of business on December
15, 2017.13, 2019. The Company expects to pay quarterly cash dividends on its common stock in the future, subject to the determination by the Board of Directors, based on an evaluation of the
Company’sCompany's earnings, financial condition and requirements, business conditions and other factors.
During the three and six months ended August 26, 2017,31, 2019, the Company repurchased approximately 1.81.4 million and 5.16.7 million shares, respectively, of its common stock at a total cost of approximately $56.4$16.5 million and $183.7$98.0 million, respectively. During the three and six months ended August 27, 2016,September 1, 2018, the Company repurchased approximately 2.72.1 million and 6.53.4 million shares, respectively, of its common stock at a total cost of approximately $121.3$40.6 million and $299.5$62.7 million, respectively. The Company’s Company's
share repurchase program may be influenced by several factors, including business and market conditions. The Company reviews its alternatives with respect to its capital structure on an ongoing basis.
Net sales for the three months ended August
26, 201731, 2019 were
$2.936$2.719 billion, a decrease of
$51.9$215.6 million or approximately
1.7%7.3%, compared
withto $2.935 billion of net sales
of $2.988 billion for the corresponding quarter last
year, primarily due to a decrease of approximately 2.6% in comparable sales, partially offset by an increase of approximately 0.9% in the Company’s non-comparable sales including One Kings Lane, PMall and new stores.year. Net sales for the six months ended August 26, 201731, 2019 were $5.678$5.292 billion, a decrease of $47.8$396.2 million, or approximately, 0.8% compared with7.0%, over net sales of $5.726$5.689 billion for the corresponding six months last year,year. The decrease in net sales for the three and six months ended August 31, 2019 was primarily due to a decrease of approximately 2.4% in comparable sales, partially offset by an increase of approximately 1.6% in non-comparable sales including One Kings Lane, PMall and new stores.
sales.
The decrease in comparable sales for the three and six months ended August
26, 201731, 2019 was approximately
2.6%6.7% and
2.4%6.6%, respectively, as compared to a decrease of approximately
1.2% and 0.9%0.6% for the three and six months ended
August 27, 2016.September 1, 2018. The decrease in comparable sales for the three and six months ended August
26, 201731, 2019 was due to a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amount.
The
Company’sCompany's comparable sales metric considers sales consummated through all retail channels
–- in-store, online, with a mobile device or through a customer contact center. Customers today may take advantage of the
Company’sCompany's omnichannel environment by using more than one channel when making a purchase. The Company believes in an integrated and seamless customer experience. A few examples are: a customer may be assisted by an in-store associate to create a wedding or baby registry, while the guests may ultimately purchase a gift from the
Company’sCompany's websites; or a customer may research a particular item, and read other customer reviews on the
Company’sCompany's websites before visiting a store to consummate the actual purchase; or a customer may reserve an item online for in-store pick up; or while in a store, a customer may make the purchase on a mobile device for in home delivery from either a distribution facility, a store or directly from a vendor. In addition, the Company accepts returns in-store without regard to the channel in which the purchase was consummated, therefore resulting in reducing store sales by sales originally consummated through customer facing digital channels. As the
Company’sCompany's retail operations are integrated and it cannot reasonably track the channel in which the ultimate sale is initiated, the Company can, however, provide directional information on where the sale was consummated.
For the three months ended August 31, 2019, comparable sales consummated in-store declined in the high-single-digit percentage range, while comparable sales consummated through customer facing digital channels declined slightly. For the six months ended August 31, 2019, comparable sales consummated in-store declined in the high-single-digit percentage range, partially offset by a slight increase in comparable sales consummated through customer facing digital channels.
For the three and six months ended August
26, 2017, comparable sales consummated through customer facing digital channels increased in excess of 20% over the corresponding period in the prior year, while comparable sales consummated in-store declined in the mid-single-digit percentage range.For the three and six months ended August 26, 2017,31, 2019, comparable sales represented $2.818$2.639 billion and $5.431$5.128 billion of net sales, respectively. For the three and six months ended August 27, 2016,September 1, 2018, comparable sales represented $2.874$2.831 billion and $5.524$5.499 billion of net sales, respectively.
Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings (including furniture and wall décor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings for the Company accounted for approximately 39.1%38.7% and 60.9%61.3% of net sales, respectively, for the three months ended August 26, 201731, 2019, and approximately 38.9%38.6% and 61.1%61.4% of net sales, respectively, for the three months ended September 1, 2018. Sales of domestics merchandise and home furnishings accounted for approximately 37.2% and 62.8% of net sales, respectively, for the six months ended August 31, 2019, and approximately 37.3% and 62.7% of net sales, respectively, for the six months ended September 1, 2018.
Gross Profit
Gross profit for the three months ended August 31, 2019 was $727.0 million, or 26.7% of net sales, compared with $988.6 million, or 33.7% of net sales, for the three months ended
August 27, 2016. Sales of domestics merchandise and home furnishingsSeptember 1, 2018. Gross profit for
the Company accounted for approximately 37.7% and 62.3% of net sales, respectively, for both the six months ended August
26, 2017 and August 27, 2016.Gross Profit
Gross profit for the three months ended August 26, 201731, 2019 was $1.069$1.614 billion, or 36.4%30.5%, of net sales, compared with $1.117$1.953 billion, or 37.4%34.3% of net sales, for the threesix months ended August 27, 2016.September 1, 2018. The decrease in the gross profit margin as a percentage of net sales for the three and six months ended August 26, 201731, 2019 was primarily attributedattributable to in order of magnitude: an increase in net direct to customer shipping; a decrease in merchandise margin; andmargin, as a result of an increase in coupon expense, resulting from an increase in redemptions, partially offset by a decreaseincremental reserve for future markdowns of approximately $194.0 million taken in the average coupon amount. The inclusionsecond quarter of PMall improved gross profit margin by approximately 12 basis points.
Gross profit forfiscal 2019 related to the six months ended August 26, 2017Company's transformation initiatives, which was $2.069 billion, or 36.4% of net sales, compared with $2.140 billion, or 37.4% of net sales, foran incremental charge to the six months ended August 27, 2016. The decreaseactual markdowns recorded in the second quarter of fiscal 2019.
This incremental reserve for future markdowns was the result of the Company's strategic decision to reduce inventory by up to $1.0 billion at retail over the next 18 months. This reduction is being driven by the acceleration of the Company’s inventory rationalization efforts, including reductions of aged and duplicative SKUs within the Company’s assortment. By taking this action, the Company is seeking to reset its inventory levels in both stores and distribution centers, as well as refresh its assortment, providing for newness and higher-margin products, all in an effort to drive customer traffic and support top-line performance.
In addition, the Company is investing in the lifetime value of its customers through its annual Beyond Plus membership program. The richer benefits of this program, including twenty percent off entire purchase and free shipping, are realized immediately upon sale and had, and will continue to have, an impact on the Company's gross
profitmargin during the period of increasing enrollment. The Beyond Plus membership fee is amortized over the one-year membership period. The Company estimated that the impact of these programs reduced gross margin as a percentage of net sales
by approximately 60 basis points for
both the
three and six months ended August
26, 2017 was primarily attributed to, in order of magnitude: an increase in net direct to customer shipping expense; an increase in coupon expense, resulting from an increase in redemptions, partially offset by a decrease in31, 2019 and 40 and 30 basis points for the
average coupon amount;three and
a decrease in merchandise margin. The inclusion of PMall improved gross profit margin by approximately 14 basis points.six months ended September 1, 2018.
Selling, General and Administrative Expenses
SG&A for the three months ended August
26, 201731, 2019 was
$899.7$880.9 million, or
30.6%32.4% of net sales, compared with
$835.9$909.7 million, or
28.0%31.0% of net sales, for the three months ended
August 27, 2016.September 1, 2018. The increase in SG&A as a percentage of net sales was primarily attributable to, in order of
magnitude: an increasemagnitude, increases in
payroll and payroll related items (including salaries); an increase in advertisingtechnology-related expenses,
due in part to the growth in digital advertising; the store management restructuring charges; an increase in occupancy expenses (including rent); an increase in technology expenses and relatedincluding depreciation; and
estimated costs associated with Hurricane Harvey. The inclusion of PMall increased SG&A, as a percentage of net sales, by approximately 6 basis points.occupancy.
SG&A for the six months ended August 26, 201731, 2019 was $1.753$1.774 billion, or 30.9%33.5% of net sales, compared with $1.646$1.793 billion, or 28.8%31.5% of net sales, for the six months ended August 27, 2016.September 1, 2018. The increase in SG&A as a percentage of net sales was primarily attributable to, in order of magnitude: an increasemagnitude, increases in technology-related expenses, including depreciation; payroll and payroll related items (including salaries); an increase in advertisingpayroll-related expenses due in part(due to severance) and occupancy.
Goodwill and other impairments
Goodwill and other impairments for the
growth in digital advertising; the store management restructuring charges;three and
an increase in technology expenses and related depreciation. The inclusion of PMall increased SG&A, as a percentagesix months ended August 31, 2019 was $28.4 million, or 1.0% of net sales
by approximately 5 basis points.and $429.6 million, or 8.1% of net sales, respectively. Goodwill impairments were $391.1 million, tradename impairments were $10.2 million and certain store-level and operating lease assets were $28.4 million. The non-cash pre-tax goodwill impairment charges were primarily the result of a sustained decline in the Company's market capitalization. There were no goodwill or other impairments for the three and six months ended September 1, 2018.
Operating
profitloss for the three months ended August
26, 201731, 2019 was
$168.8$182.3 million, or
5.8%6.7% of net sales, compared with
$281.0operating profit of $78.9 million, or
9.4%2.7% of net sales, during the comparable period last year. For the six months ended August
26, 2017,31, 2019, operating
profitloss was
$315.9$589.1 million, or
5.6%11.1% of net sales, compared with
$494.0operating profit of $160.1 million, or
8.6%2.8% of net sales, during the comparable period last year. The changes in operating
(loss) profit as a percentage of net sales were the result of the reductions in
the gross profit margin and the increases in SG&A as a percentage of net sales
and goodwill and other impairments as described above.
The Company believes operating margin compression is likely to continue in fiscal 2017 as a result of several items, including increases in, as a percentage of net sales, net direct to customer shipping expense; coupon expense; payroll and payroll-related expense; advertising expense; cash restructuring charges associated with the acceleration of the realignment of its store management structure; and technology expenses, including depreciation related to the Company’s ongoing investments. In addition, operating margin compression is likely to continue due to increases in the overall expense structure for the accelerated spending associated with the Company’s organizational changes and transformational initiatives, as well as the unfavorable impacts of Hurricanes Harvey and Irma, which Irma occurred in the third quarter of fiscal 2017.
Interest expense, net for the three
and six months ended August
26, 201731, 2019 was
$19.2$16.3 million
and $32.2 million, respectively, as compared to
$18.2$14.6 million
and $31.3 million, respectively, for the three
and six months ended September 1, 2018. For the three and six months ended August
27, 2016. For the three months ended August 26, 201731, 2019 and
August 27, 2016,September 1, 2018, interest expense, net primarily related to interest on the senior unsecured notes issued
by the Company in July 2014.
Income Taxes
Interest expense, net for the six months ended August 26, 2017 was $35.7 million compared to $34.5 million for the six months ended August 27, 2016. For the six months ended August 26, 2017 and August 27, 2016, interest expense, net primarily related to interest on the senior unsecured notes issued in July 2014.
Income Taxes
The effective tax rate for the three months ended August
26, 201731, 2019 was
37.0%30.1%, compared with
36.3%24.3% for the three months ended September 1, 2018. The tax rate for the three months ended August
27, 2016. For the three months ended August 26, 2017, the effective tax rate included the effect of the adoption of ASU 2016-09,Stock Compensation, which increased income tax expense by approximately $1.4 million. The effect of this adoption in fiscal 2017 is expected to vary by quarter,31, 2019 and
as anticipated, was heavily weighted toward the first quarter. The adoption of the standard does not affect the Company’s cash outflows for income taxes. Also, the tax rate for both the three months ended August 26, 2017 and August 27, 2016September 1, 2018 included net
after tax benefits of approximately
$2.9$5.4 million
and $1.8 million, respectively, due to discrete
federal and state tax
eventsitems occurring during
the first three months of fiscal 2017 and 2016.these quarters.
The effective tax rate for the six months ended August 26, 201731, 2019 was 39.5%17.9%, compared with 36.9%28.4% for the six months ended August 27, 2016.September 1, 2018. For the six months ended August 26, 2017,31, 2019, the effective tax rate includedreflects the effectimpact of the adoptioncharges for goodwill and other impairments and severance costs, potions of ASU 2016-09,Stock Compensation, which increased incomeare non-deductible for tax expense by approximately $9.0 million. Also, thepurposes. The tax rates for the six months
ended August
26, 201731, 2019 and
August 27, 2016September 1, 2018 included net
benefitsafter tax costs of approximately
$4.9$7.0 million and
$3.4$1.5 million, respectively, due to discrete
and federal and state tax
eventsitems occurring during
the first six months of fiscal 2017 and 2016.these quarters.
Potential volatility in the effective tax rate from year to year may occur as the Company is required each year to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.
As a result of the factors described above, net
earningsloss for the three and six months ended August
26, 2017 were $94.231, 2019 was $138.8 million and
$169.5$509.9 million,
respectively, compared with
$167.3net earnings of $48.6 million and
$290.0$92.2 million, respectively, for the corresponding
periodperiods in fiscal
2016.
Growth
In the 24-year period from the beginning of fiscal 19922018.
Transformation
The Company has undertaken significant change to adapt to the enddynamic retail environment and the evolving needs of its customers to improve its competitive position and has been executing on a comprehensive plan to transform its business and position the Company for long-term success. During this interim period as described above, the Board and management team are taking a more holistic approach to the Company's on-going business transformation and have identified four key near-term priorities that include: 1) stabilizing sales and driving top-line growth; 2) resetting the cost structure; 3) reviewing and optimizing the Company’s asset base, including its portfolio of retail banners; and 4) refining the Company’s organization structure.
The long-term success of the
second quarter of fiscal 2017, the chain has grown from 34 stores to 1,550 stores plus the Company’s interactive platforms, including websites and applications, and distribution facilities. Total store square footage, net of openings and closings, grew from approximately 0.9 million square feet at the beginning of fiscal 1992 to approximately 43.7 million square feet at the end of the second quarter of fiscal 2017.In addition, as of August 26, 2017, the Company has distribution facilities totaling approximately 7.3 million square feet, supporting the growth of its customer facing digital channels as well as its stores and its institutional sales segment. During the second quarter of fiscal 2017, the Company’s newest distribution facility in Las Vegas, Nevada opened for inbound freight, and the Company expects to begin shipping to customers from this facility in the third quarter of fiscal 2017. The new facility will replace a smaller distribution facility in that area, which will close in late 2017, and provide additional capacity to support the growth of the Company’s customer facing digital channels.
The Company plans to continue to invest in its infrastructure and its operations, including its digital, web and mobile capabilities, to reach its long-term objectives, including providing a better omnichannel experience for its customers. Sales from the Company’s customer-facing digital channels represent approximately 15% of its net sales. During fiscal 2017, including the stores opened through August 26, 2017, the Company expects company-wide to open approximately 25 new stores and close approximately 15 stores, leading to a net reduction in BBB stores and net increases in stores for other concepts, where the Company is focusing on new markets and formats. Also, the Company is committed to the continued growth of its merchandise categories and channels and is growing the number of items it is able to have shipped directly to customers from a vendor. The continued growth of the CompanyCompany's transformation efforts is dependent, in part, upon the Company’s ability to execute these and other key initiatives successfully.
The Company has built its management structure with a view towards its growth and believes that, as a result, it has the necessary management depth.
-21-
near-term priorities.
Liquidity and Capital Resources
The Company has been able to finance its operations, including its growth and acquisitions, substantially through internally generated funds.
The Company ended the second quarter of fiscal 2019 in a strong cash position, which it anticipates maintaining, to provide the Company the flexibility to fund its ongoing initiatives and act upon other opportunities that may arise. As of August 31, 2019, the Company had approximately $1.004 billion in cash and investment securities, a decrease of approximately $90.6 million compared with the corresponding period in fiscal 2018. For fiscal
2017,2019, the Company believes that it can continue to finance its operations, including its
growth, cash dividends, planned capital expenditures, debt service obligations,
cash dividends, and share repurchases, through existing and internally generated funds.
The Company believes it will end fiscal 2017 with approximately the same or slightly higher cash and investment balances than fiscal 2016. In addition, if necessary, the Company could borrow under its $250 million revolving credit facility or the available balances under its lines of credit. Capital expenditures for fiscal
20172019 are planned to be approximately $350 million to
$400$375 million,
subjectwith approximately 50% related to
the timing and composition of projects, with more than half for information technology projects,
as well as the spend associated with a store refresh program, and investments in
support of the Company’s growing omnichannel capabilities.warehouses for e-commerce distribution and personalized product. In addition, the Company reviews its alternatives with respect to its capital structure on an ongoing basis.
Fiscal 20172019 compared to Fiscal 20162018 Net cash provided by operating activities for the six months ended August
26, 201731, 2019 was
$364.7$255.9 million, compared with
$469.7$639.0 million in the corresponding period in fiscal
2016.2018. Year over year, the Company experienced a decrease in net earnings, as adjusted for non-cash expenses (primarily
goodwill and other impairments and deferred income taxes)
, partially offset by an increase and a decrease in cash provided by the net components of working capital (primarily
merchandise inventoriesprepaid expenses and other current assets,
accounts payable, and accrued expenses and other current liabilities, partially offset by
accounts payable)merchandise inventories).
Retail inventory,
which includes inventory in the Company’s distribution facilities for direct to customer shipments, was approximately
$2.8$2.3 billion
as ofat August
26, 2017, which includes the inventory balance from PMall, which was acquired during the third quarter of fiscal 2016,31, 2019, a decrease of
approximately 1.2%17.8% compared to retail inventory
as of August 27, 2016.at September 1, 2018. The Company continues to focus on its inventory optimization strategies.
Net cash
used inprovided by investing activities for the six months ended August
26, 201731, 2019 was
$182.2$362.8 million, compared with
$113.6net cash used in investing activities of $5.0 million in the corresponding period of fiscal
2016.2018. For the six months ended August
26, 2017,31, 2019, net cash provided by investing activities was primarily due to $488.0 million of redemptions of investment securities, net of purchases, partially offset by $125.2 million of capital expenditures. For the six months ended September 1, 2018, net cash used in investing activities was primarily due to
$177.0 million of capital expenditures. For the six months ended August 27, 2016, net cash used in investing activities was primarily due to $184.8$181.5 million of capital expenditures, partially offset by
$86.2$176.5 million of redemptions of investment
securities.securities, net of purchases.
Net cash used in financing activities for the six months ended August
26, 201731, 2019 was
$212.8$141.3 million, compared with
$298.1$106.1 million in the corresponding period of fiscal
2016.2018. The
decreaseincrease in net cash used in financing activities was primarily due to
a decreasean increase in common stock repurchases of
$115.8 million, partially offset by an increase in the amount paid for dividends of $20.4$35.2 million.
The
Company’sCompany's business is subject to seasonal influences. Generally, its sales volumes are higher in the calendar months of August, November and December, and lower in February.
Critical Accounting Policies
See
“Critical"Critical Accounting
Policies”Policies" under Item 7 of the
Company’sCompany's Annual Report on Form 10-K for the fiscal year ended
February 25, 2017 (“2016March 2, 2019 ("2018 Form
10-K”10-K"), filed with the Securities and Exchange Commission
(“SEC”("SEC")
and incorporated by reference herein. There. Except for the changes due to the adoption of ASU 2016-02 related to leases discussed in "Recent Accounting Pronouncements," Note 2, there were no changes to the
Company’sCompany's critical accounting policies during the first six months of fiscal
2017.2019.
Forward-Looking Statements
This Form 10-Q may contain forward-looking
statements.statements, including, but not limited to, the Company's progress and anticipated progress towards its long-term objectives. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, approximate, estimate, assume, continue, model, project, plan,
goal and similar words and phrases. The
Company’sCompany's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors. Such factors include, without limitation: general economic conditions including the housing market, a challenging overall macroeconomic environment and related changes in the retailing environment; consumer preferences, spending habits and adoption of new technologies; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; civil disturbances and terrorist acts; unusual weather patterns and natural disasters; competition from existing and potential
competitors; competition from other channels of distribution;competitors across all channels; pricing pressures; liquidity; the ability to achieve anticipated cost savings, and to not exceed anticipated costs, associated with organizational
changes;changes and investments; the ability to attract and retain qualified employees in all areas of the
organization;organization, including a permanent Chief Executive Officer; the cost of labor, merchandise and other costs and expenses; potential supply chain disruption due to trade restrictions, political instability, labor disturbances, product recalls, financial or operational instability of suppliers or carriers, and other items; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company’s plans for new stores; the ability to
assess and implement technologies in support of the Company’s development of its omnichannel capabilities; the ability to establish and profitably maintain the appropriate mix of digital and physical presence in the markets it serves;
the ability to assess and implement technologies in support of the Company’s development of its omnichannel capabilities; uncertainty in financial markets; volatility in the price of the Company’s common stock and its effect, and the effect of other factors, on the Company’s capital allocation strategy;
risks associated with the ability to achieve a successful outcome for its business concepts and to otherwise achieve its business strategies; the impact of intangible asset and other impairments; disruptions to the Company’s information technology systems including but not limited to security breaches of systems protecting consumer and employee
information;information or other types of cybercrimes or cybersecurity attacks; reputational risk arising from challenges to the Company’s or a third party
product or service supplier’s compliance with various laws, regulations or standards, including those related to labor, health, safety, privacy or the environment; reputational risk arising from third-party merchandise or service vendor performance in direct home delivery or assembly of product for customers; changes to statutory, regulatory and legal requirements, including without limitation proposed changes affecting international
trade;trade, changes to, or new tax laws or interpretation of existing tax laws; new, or developments in existing, litigation, claims or assessments; changes to, or new, accounting standards; foreign currency exchange rate fluctuations; and the integration of acquired businesses. The Company does not undertake any obligation to update its forward-looking statements.
Available Information
The Company makes available as soon as reasonably practicable after filing with the SEC, free of charge, through its website, www.bedbathandbeyond.com, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, electronically filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The
Company’sCompany's exposure to market risk for changes in interest rates relates primarily to the
Company’sCompany's investment securities. The
Company’sCompany's market risks at August
26, 201731, 2019 are similar to those disclosed in Item 7A of the
Company’s 2016Company's 2018 Form 10-K.
As of August
26, 2017,31, 2019, the
Company’sCompany's investments include cash and cash equivalents of approximately
$464.1$983.8 million and long term investments in auction rate securities of approximately
$19.6$20.4 million at weighted average interest rates of
0.63%1.51% and
0.15%2.29%, respectively. The book value of these investments is representative of their fair values.
The
Company’sCompany's senior unsecured notes have fixed interest rates and are not subject to interest rate risk. As of August
26, 2017,31, 2019, the fair value of the senior unsecured notes was
$1.402$1.146 billion, which is based on quoted prices in active markets for identical instruments compared to the carrying value of approximately
$1.500$1.495 billion.
Item 4. Controls and Procedures
| |
| (a) | Disclosure Controls and Procedures |
The
Company’sCompany's management, with the participation of its Principal Executive Officer and Principal Financial Officer, have reviewed and evaluated the effectiveness of the
Company’sCompany's disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 15d-15(e)) as of August
26, 201731, 2019 (the end of the period covered by this quarterly report on Form 10-Q). Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that the
Company’sCompany's current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the
SEC’sSEC's rules and forms and (ii) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
| |
| (b) | Changes in Internal Control over Financial Reporting |
On March 3, 2019, the Company adopted the new lease accounting standard, ASU 2016-02, Leases (Topic 842). As part of the adoption of the new lease standard, the Company implemented new lease accounting software and updated the Company's internal controls and processes. There were no other changes in the Company’sCompany's internal controls over financial reporting that occurred during the Company’sCompany's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal controls over financial reporting.
PART II - OTHER INFORMATION
The District Attorney's office for the County of Ventura, together with District Attorneys for other counties in California (together, the “District Attorneys"), recently concluded an investigation regarding the management and disposal at the Company's stores in California of certain materials that may be deemed hazardous or universal waste under California law. On March 19, 2019, the District Attorneys provided the Company with a settlement demand that included a proposed civil penalty, reimbursement of investigation costs, and certain injunctive relief, including modifications to the Company's existing compliance program, which already includes associate training, on-going review of disposal rules applicable to various product categories, and specialized third-party disposal. The Company is working with the District Attorneys towards a resolution of this matter and has recorded an accrual for the estimated probably loss for this matter as of August 31, 2019 and as of March 2, 2019. While no assurance can be given as to its ultimate outcome, the Company does not believe that the final resolution of this matter will have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
The Company is party to various legal proceedings arising in the ordinary course of business, which the Company does not believe to be material to the
Company’s businessCompany's consolidated financial position, results of operations or
financial condition.
liquidity.
In addition to the other information set forth in this Form 10-Q, carefully consider the factors discussed under
“Risk Factors”"Risk Factors" in the
Company’s 2016Company's 2018 Form 10-K as filed with the Securities and Exchange Commission. These risks could materially adversely affect the
Company’sCompany's business, financial condition and results of operations. These risks are not the only risks the Company faces. The
Company’sCompany's operations could also be affected by additional factors that are not presently known to the Company or by factors that the Company currently considers immaterial to its business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The
Company’sCompany's purchases of its common stock during the second quarter of fiscal
20172019 were as follows:
| | | | | | | | | |
| | | | | | | | | Approximate Dollar |
| | | | | | | Total Number of | | Value of Shares |
| | | | | | | Shares Purchased as | | that May Yet Be |
| | | | | | | Part of Publicly | | Purchased Under |
| | | Total Number of | | Average Price | | Announced Plans | | the Plans or |
| Period | | Shares Purchased (1) | | Paid per Share (2) | | or Programs (1) | | Programs (1) (2) |
| May 28, 2017 - June 24, 2017 | | | 620,800 | | | $ | 34.94 | | | | 620,800 | | | $ | 1,587,584,981 | |
| June 25, 2017 - July 22, 2017 | | | 524,200 | | | $ | 30.23 | | | | 524,200 | | | $ | 1,571,736,870 | |
| July 23, 2017 - August 26, 2017 | | | 649,000 | | | $ | 29.02 | | | | 649,000 | | | $ | 1,552,901,864 | |
| Total | | | 1,794,000 | | | $ | 31.42 | | | | 1,794,000 | | | $ | 1,552,901,864 | |
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly or Announced Plans Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)(2) |
| June 2, 2019 - June 29, 2019 | 895,000 |
| | $ | 12.21 |
| | 895,000 |
| | $ | 1,325,285,108 |
|
| June 30, 2019 - July 27, 2019 | 480,200 |
| | $ | 11.34 |
| | 480,200 |
| | $ | 1,319,838,739 |
|
| July 28, 2019 - August 31, 2019 | 8,500 |
| | $ | 9.20 |
| | 8,500 |
| | $ | 1,319,760,523 |
|
| Total | 1,383,700 |
| | $ | 11.89 |
| | 1,383,700 |
| | $ | 1,319,760,523 |
|
(1) Between December 2004 and September 2015, the Company's Board of Directors authorized, through several share repurchase programs, the repurchase of $11.950 billion of its shares of common stock. The Company has authorization to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. Shares purchased, as indicated in this table, also include shares withheld to cover employee related taxes on vested restricted shares and performance stock unit awards.
(2) Excludes brokerage commissions paid by the Company.
The exhibits to this Report are
listed in the Exhibit Index included
elsewhere herein.
|
| |
| Exhibit No. | Exhibit |
| |
| 10.1* | |
| |
| 10.2* | |
| |
| 31.1** | |
| |
| 31.2** | |
| |
| 32** | |
| |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| |
| 104 | The cover page of Bed Bath & Beyond Inc.’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2019, formatted in Inline XBRL (included within Exhibit 101 attachments) |
________________
|
| |
| * | This is a management contract or compensatory plan or arrangement. |
| ** | Filed herewith. |
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BED BATH & BEYOND INC. | |
| (Registrant) | | |
| | | | BED BATH & BEYOND INC. |
| | | (Registrant) |
| | | |
Date: October 2, 20179, 2019 | | By: | /s/ Susan E. Lattmann | Robyn M. D'Elia |
| | | Susan E. Lattmann | Robyn M. D'Elia |
| |
| | | Chief Financial Officer and Treasurer |
| | | | (Principal Financial and Accounting Officer) |
| | | |
EXHIBIT INDEX
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