ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Bed
Bath & Beyond Inc. and subsidiaries (the “Company”) is a retailer which operates under the names Bed Bath
& Beyond (“BBB”), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively,
“CTS”), Harmon or Harmon Face Values (collectively, “Harmon”), buybuy BABY (“Baby”) and
World Market, Cost Plus World Market or Cost Plus (collectively, “Cost Plus World Market”). Customers can
purchase products from the Company either in-store, online, with a mobile device or through a 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’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, which was
acquired in the second quarter of fiscal 2015. Subsequent to the end of the first quarter of fiscal 2016, the Company
purchased One Kings Lane, an authority in home décor and design offering a unique collection of select home goods,
designer and vintage items. 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 seven 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
sells a wide 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, consumables and certain juvenile products.
The
Company’s strategy is centered on its customer-centric culture and commitment to customer service, supported by significant
investments to strengthen the Company’s foundation for future growth:
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To
do more for and with its customers wherever, whenever and however they wish to interact
with the Company;
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To
provide its customers a seamless experience whether they interact with the Company in
a store, through one of its contact centers, on a desktop, tablet, smartphone or through
social media;
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To
be viewed as the expert for the home, including the accompanying life stages that make
a house a home, and to become the destination for customers’ needs and wants as
they express their life interests and travel through their life stages; all through the
expanding and differentiated products, services and solutions the Company offers.
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The
Company’s objective is to be its customers’ first choice for products and services in the categories offered, in the
markets, channels and countries in which the Company operates, as those customers express their life interests and travel through
their various life stages. The Company strives to accomplish this objective through excellent customer service, including new
products, services and solutions, and by offering an extensive breadth and depth of differentiated merchandise at the right value.
The Company is also enhancing its ability to achieve this objective through its ongoing commitment to a world class information
technology system, comprehensive analytics and targeted marketing and communications.
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, 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; potential supply chain disruption; the ability to find suitable locations at acceptable occupancy
costs and other terms to support the Company’s plans for new stores; and the ability to assess and implement technologies
in support of the Company’s development of its omnichannel capabilities. The Company cannot predict whether, when or the
manner in which these factors could affect the Company’s operating results.
The following
represents an overview of the Company’s financial performance for the periods indicated:
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For
the three months ended May 28, 2016 and May 30, 2015, the Company’s net sales were
$2.738 billion.
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Comparable
sales for the three months ended May 28, 2016 decreased by approximately 0.5%, as compared
to an increase of approximately 2.2% for the three months ended May 30, 2015. For the
three months ended May 28, 2016, comparable sales consummated through customer facing
online websites and mobile applications increased in excess of 20% over the corresponding
three month period in the prior year, while comparable sales consummated in-store declined
in the low single-digit percentage range.
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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 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’s
distribution facilities, stores or vendors.
Sales
consummated on a mobile device while physically in a store location are recorded as customer facing online websites and mobile
applications sales. Customer orders reserved online and picked up in a store are recorded as in-store sales. In-store sales are
reduced by sales originally consummated from customer facing online websites and mobile applications and subsequently returned
in-store.
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. Of a Kind is excluded from the comparable sales calculation for first quarter of fiscal 2016, and
will continue to be excluded until after the anniversary of the acquisition. 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.
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Gross
profit for the three months ended May 28, 2016 was $1.024 billion, or 37.4% of net sales,
compared with $1.044 billion, or 38.1% of net sales, for the three months ended May 30,
2015.
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Selling,
general and administrative expenses (“SG&A”) for the three months ended
May 28, 2016 were $810.6 million, or 29.6% of net sales, compared with $770.9 million,
or 28.1% of net sales, for the three months ended May 30, 2015.
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Interest
expense for the three months ended May 28, 2016 was $16.3 million compared with $19.9
million for the three months ended May 30, 2015.
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The
effective tax rate for the three months ended May 28, 2016 was 37.7% compared with 37.5%
for the three months ended May 30, 2015. The tax rates included discrete tax items resulting
in net benefits of approximately $0.5 million and $1.5 million, respectively, for the
three months ended May 28, 2016 and May 30, 2015.
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For
the three months ended May 28, 2016, net earnings per diluted share were $0.80 ($122.6
million) as compared with net earnings per diluted share of $0.93 ($158.5 million) for
the three months ended May 30, 2015. The decrease in net earnings per diluted share for
the three months ended May 28, 2016 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.
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Capital
expenditures for the three months ended May 28, 2016 and May 30, 2015 were $89.5 million and $72.4 million, respectively. In the
first quarter of fiscal 2016 capital expenditures included expenditures for enhancements to the Company’s digital, web and
mobile capabilities, ongoing investments in data analytics, expenditures for the continued development and deployment of new systems
and equipment in stores including a new POS system, spending related to the new distribution facility in Lewisville, Texas, investments
in new stores, store relocations and store refurbishments and other projects. The Company continues to review and prioritize its
capital needs and remains committed to making the required investments in its infrastructure to help position the Company for
continued growth and success.
Several
of the Company’s key initiatives include: continuing to add new functionality and assortment to its selling websites, mobile
sites and applications; 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’s delivery capabilities and lower the
Company’s shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling
customer experience across the Company’s physical and digital shopping environments.
During
the three months ended May 28, 2016, the Company opened a total of four new stores and closed one store. The Company plans to
continue to actively manage its real estate portfolio in order to permit store sizes, layouts, locations and offerings to evolve
over time to optimize market profitability and will renovate or reposition stores within markets when appropriate. During fiscal
2016, including the stores opened through May 28, 2016, the Company expects company-wide to open approximately 30 new stores,
most of which are planned for new markets, close approximately 15 stores and open a new distribution facility. Additionally, during
fiscal 2016, the Company expects to continue to invest in technology related projects and new stores, store relocations and store
refurbishments.
During
the three months ended May 28, 2016 and May 30, 2015, the Company repurchased approximately 3.8 million and 5.3 million shares,
respectively, of its common stock at a total cost of approximately $178.1 million and $385.3 million, respectively.
On April
6, 2016, the Company’s Board of Directors authorized a quarterly dividend program, and declared an initial quarterly dividend
of $0.125 per share to be paid on July 19, 2016 to shareholders of record as of the close of business on June 17, 2016. Subsequent
to the end of the first quarter of fiscal 2016, on June 22, 2016, the Company’s Board of Directors declared a quarterly
dividend of $0.125 per share to be paid on October 18, 2016 to shareholders of record as of the close of business on September
16, 2016. 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’s earnings, financial condition and requirements, business
conditions and other factors.
In addition
to the quarterly dividend program, the Company’s share repurchase program may be influenced by several factors, including
business and market conditions. In addition, the Company reviews its alternatives with respect to its capital structure on an
ongoing basis.
Results of Operations
Net
Sales
Net sales
for the three months ended May 28, 2016 were $2.738 billion, flat compared to the net sales for the corresponding quarter last
year, due to an increase in net sales from new stores offset by a decrease in comparable sales.
The decrease
in comparable sales for the three months ended May 28, 2016 was approximately 0.5% as compared to an increase of approximately
2.2%, for the three months ended May 30, 2015. The decrease in comparable sales for the three months ended May 28, 2016 was due
to a decrease in the number of transactions, partially offset by an increase in the average transaction amount.
The Company’s
comparable sales metric considers sales consummated through all retail channels – in-store, online, with a mobile device
or through a contact center. Customers today may take advantage of the Company’s omnichannel environment by using more than
one channel when making a purchase. The Company believes an integrated experience must exist among these channels to provide a
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’s websites; or, a customer may research a particular
item, and read other customer reviews on the Company’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 online websites and mobile applications. As the Company’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 May 28, 2016, comparable sales consummated through customer facing online websites and mobile applications
increased in excess of 20% over the corresponding three month period in the prior year, while comparable sales consummated in-store
declined in the low single-digit percentage range.
For the
three months ended May 28, 2016 and May 30, 2015, comparable sales represented $2.651 billion and $2.649 billion of net sales,
respectively.
Sales of
domestics merchandise and home furnishings for the Company accounted for approximately 36.6% and 63.4% of net sales, respectively,
for the three months ended May 28, 2016 and May 30, 2015.
Gross
Profit
Gross profit
for the three months ended May 28, 2016 was $1.024 billion, or 37.4% of net sales, compared with $1.044 billion, or 38.1% of net
sales, for the three months ended May 30, 2015. The decrease in the gross profit margin as a percentage of net sales for the three
months ended May 28, 2016 was primarily attributed to, in order of magnitude, a decrease in merchandise margin and an increase
in coupon expense, resulting from increases in both redemptions and the average coupon amount. Also contributing to the decrease
in gross profit margin as a percentage of net sales, to a lesser extent, was an increase in net direct to customer shipping expense.
Selling,
General and Administrative Expenses
SG&A
for the three months ended May 28, 2016 was $810.6 million, or 29.6% of net sales, compared with $770.9 million, or 28.1% of net
sales, for the three months ended May 30, 2015. The increase in SG&A, as a percentage of net sales, in order of magnitude,
was attributable to an increase in payroll and payroll related items (including salaries) and an increase in technology expenses
and related depreciation. Also contributing to the increase in SG&A as a percentage of net sales, to a lesser extent, was
an increase in advertising expense due in part to the growth in digital advertising.
Operating
Profit
Operating
profit for the three months ended May 28, 2016 was $213.0 million, or 7.8% of net sales, compared with $273.3
million,
or 10.0% of net sales, during the comparable period last year. The changes in operating profit as a percentage of net sales were
the result of the changes in gross profit margin and SG&A as a percentage of net sales as described above.
The Company
believes operating margin compression is likely to continue in fiscal 2016 as a result of several items, including increases in,
as a percentage of net sales, coupon expense, net direct to customer shipping expense, additional payroll start-up costs associated
with the opening of the Company’s Lewisville, Texas distribution facility, investments in compensation and benefits, and
technology-related expenses, including depreciation related to the Company’s ongoing investments. In addition, the year-over-year
comparison of operating margin will be impacted by the non-recurring benefit related to the state audit settlement which occurred
in fiscal 2015.
Interest Expense, net
Interest
expense, net for the three months ended May 28, 2016 was $16.3 million compared to $19.9 million for the three months ended May
30, 2015. For the three months ended May 28, 2016 and May 30, 2015, 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 May 28, 2016 was 37.7% compared with 37.5% for the three months ended May 30, 2015. The tax
rate for the three months ended May 28, 2016 included a net benefit of approximately $0.5 million and the tax rate for the three
months ended May 30, 2015 included a net benefit of approximately $1.5 million, primarily due to the recognition of favorable
discrete state tax items.
Potential
volatility in the effective tax rate from quarter to quarter may occur as the Company is required each quarter 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.
Net
Earnings
As a result
of the factors described above, net earnings for the three months ended May 28, 2016 were $122.6 million compared with $158.5
million for the corresponding period in fiscal 2015.
Growth
The Company
strives to do more for and with its customers by: offering an extensive breadth and depth of differentiated assortment of merchandise
at the right value; presenting merchandise in a distinctive manner designed to maximize customer convenience and reinforce customer
perception of a wide selection; and providing excellent customer service, including new products, services and solutions. The
Company is pursuing its growth objectives by investing in its omnichannel capabilities, optimizing its store operations and market
coverage, including international expansion; leveraging its combined expertise and product knowledge to provide products and services
to hospitality, travel and other institutional customers; and continuously reviewing opportunities for strategic acquisitions.
The Company
continues to expand, differentiate and leverage its merchandise assortment across all channels, concepts and countries in which
it operates, to better engage with its customers wherever, whenever and however they express their life interests and travel through
their life stages. Through its growing analytic capabilities and omnichannel marketing approaches, the Company strives to more
efficiently and effectively understand and satisfy its customers’ needs.
As of May
28, 2016, the Company operated 1,533 stores plus its various websites, other interactive platforms and distribution facilities.
The Company’s 1,533 stores operate in all 50 states, the District of Columbia, Puerto Rico and Canada, including: 1,021
BBB stores, 277 Cost Plus World Market stores, 105 Baby stores, 79 CTS stores and 51 Harmon stores. During the three months ended
May 28, 2016, the Company opened a total of four new stores and closed one store. At the end of the first quarter of 2016, Company-wide
total store square footage, net of openings and closings, for all of its concepts, was approximately 43.4 million square feet.
In addition, the Company has distribution facilities totaling 6.1 million square feet. In addition, the Company has entered into
a lease for a new distribution facility in Lewisville, Texas, which is planned to open in the fall of 2016, which will be approximately
800,000 square feet. The Company will continue to assess sites throughout the country in order to gain greater distribution efficiencies.
The Company also operates websites including bedbathandbeyond.com, bedbathandbeyond.ca, worldmarket.com, buybuybaby.com, buybuybaby.ca,
christmastreeshops.com, harmondiscount.com, ofakind.com, harborlinen.com and t-ygroup.com. Additionally, the Company is a partner
in a joint venture which operated a total of seven stores as of May 28, 2016 in Mexico under the name Bed Bath & Beyond.
The Company
plans to continue to expand its operations and invest in its infrastructure to reach its long-term objectives. During fiscal 2016,
including the stores opened through May 28, 2016, the Company expects company-wide to open approximately 30 new stores, most of
which are planned for new markets, close approximately 15 stores and open a new distribution facility. Additionally, in connection
with leveraging its merchandise offerings and optimizing its operations, the Company continues to expand, across selected stores,
the number of specialty departments such as health and beauty care, baby, specialty food, and beverage. 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 Company is dependent, in part, upon the Company’s ability
to execute these and other key initiatives successfully.
Liquidity
and Capital Resources
The Company
has been able to finance its operations, including its growth, through internally generated funds. For fiscal 2016, the Company
believes that it can continue to finance its operations, including its growth, share repurchases, cash dividends, planned capital
expenditures and debt service obligations, through existing and internally generated funds. In addition, if necessary, the Company
could borrow under its revolving credit facility. Capital expenditures for fiscal 2016 are planned to be approximately $400 million
to $425 million, with a significant portion for technology related projects, which includes enhancements to the Company’s
digital, web and mobile capabilities, the continued deployment of new systems and equipment to the stores and other projects,
and the remainder of the spend would be for the new distribution facility, new stores, store relocations and store refurbishments,
and other projects. These planned capital expenditures are subject to the timing and composition of the projects. In addition,
the Company reviews its alternatives with respect to its capital structure on an ongoing basis.
Fiscal
2016 compared to Fiscal 2015
Net cash
provided by operating activities for the three months ended May 28, 2016 was $207.8 million, compared with $146.9 million in the
corresponding period in fiscal 2015. Year over year, the Company experienced a decrease in cash used in the net components of
working capital (primarily accounts payable and merchandise inventories) partially offset by a decrease in net earnings.
Retail
inventory, which includes inventory in the Company’s distribution facilities for direct to customer shipments, was approximately
$2.9 billion, an increase of approximately 2.3% compared to retail inventory as of May 30, 2015. The percentage increase was due
in part to the growth in the inventory in the Company’s distribution facilities for direct to customer shipments.
Net cash
used in investing activities for the three months ended May 28, 2016 was $25.7 million, compared with $39.2 million in the corresponding
period of fiscal 2015. For the three months ended May 28, 2016, net cash used in investing activities was due to $89.5 million
of capital expenditures, partially offset by $63.7 million of redemptions of investment securities. For the three months ended
May 30, 2015, net cash used in investing activities was primarily due to $72.4 million of capital expenditures, partially offset
by $33.1 million of redemptions of investment securities, net of purchases.
Net cash
used in financing activities for the three months ended May 28, 2016 was $157.6 million, compared with $368.5 million in the corresponding
period of fiscal 2015. The decrease in net cash used in financing activities was primarily due to a decrease in common stock repurchases
of $207.2 million.
Seasonality
The Company’s
sales exhibit seasonality with sales levels generally higher in the calendar months of August, November and December, and generally
lower in February.
Critical
Accounting Policies
See “Critical
Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 27,
2016 (“2015 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) and incorporated by
reference herein. There were no changes to the Company’s critical accounting policies during the first three months of fiscal
2016.
Forward-Looking
Statements
This Form
10-Q may contain forward-looking statements. 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, and similar words and phrases. The
Company’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; pricing pressures;
liquidity; the ability to attract and retain qualified employees in all areas of the organization; the cost of labor, merchandise
and other costs and expenses; potential supply chain disruption due to 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; uncertainty in financial markets; disruptions to
the Company’s information technology systems including but not limited to security breaches of systems protecting consumer
and employee information; reputational risk arising from challenges to the Company’s or a third party 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; new, or developments in existing, litigation, claims or assessments;
changes to, or new, tax laws or interpretation of existing tax laws; 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.