Notes to Consolidated Financial
Statements
Bed Bath & Beyond Inc. and
Subsidiaries
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
A. Nature of Operations
Bed Bath & Beyond Inc. and subsidiaries (the “Company”)
is an omnichannel retailer which operates under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops, Christmas
Tree Shops andThat! or andThat! (collectively, “CTS”), Harmon, Harmon Face Values or Face Values (collectively, “Harmon”),
buybuy 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 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’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. The Company purchased One Kings Lane, an online authority in home décor and design, offering a unique collection of
select home goods, designer and vintage items, during the second quarter of fiscal 2016; PersonalizationMall.com (“PMall”),
an industry-leading online retailer of personalized products, during the third quarter of fiscal 2016; and certain assets of Chef
Central, a retailer of kitchenware, cookware and homeware items catering to cooking and baking enthusiasts, during the fourth quarter
of fiscal 2016. (See “Acquisitions,” Note 2). 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. Net sales outside of the U.S. for the Company were not material for fiscal 2016, 2015 and 2014.
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. Sales of domestics merchandise and home furnishings accounted for
approximately 36.8% and 63.2% of net sales, respectively, for fiscal 2016 and approximately 35.9% and 64.1% of net sales, respectively
for fiscal 2015 and 2014. As the Company operates in the retail industry, its results of operations are affected by general economic
conditions and consumer spending habits.
B. Fiscal Year
The Company’s fiscal year is comprised of
the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2016, fiscal 2015 and fiscal 2014 represented
52 weeks and ended on February 25, 2017, February 27, 2016 and February 28, 2015, respectively.
C. Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The Company accounts for its investment in the joint venture
under the equity method.
Certain reclassifications have been made to the
fiscal 2015 consolidated balance sheet to conform to the fiscal 2016 consolidated balance sheet presentation, as well as to the
fiscal 2014 consolidated statement of cash flows to conform to the fiscal 2016 and 2015 consolidated statements of cash flows presentation.
All significant intercompany balances and transactions
have been eliminated in consolidation.
D. Use of Estimates
The preparation of consolidated financial statements
in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make
estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under
the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. In particular, judgment is used in areas such as inventory valuation, impairment
of long-lived assets, impairment of auction rate securities, goodwill and other indefinite lived intangible assets, accruals for
self insurance, litigation, store opening, expansion, relocation and closing costs, the provision for sales returns, vendor allowances,
stock-based compensation and income and certain other taxes. Actual results could differ from these estimates.
E. Cash and Cash Equivalents
The Company considers all highly liquid instruments
purchased with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents are credit
and debit card receivables from banks, which typically settle within five business days, of $86.6 million and $89.4 million as
of February 25, 2017 and February 27, 2016, respectively.
F. Investment Securities
Investment securities consist primarily of auction
rate securities, which are securities with interest rates that reset periodically through an auction process. Auction rate securities
are classified as available-for-sale and are stated at fair value, which had historically been consistent with cost or par value
due to interest rates which reset periodically, typically every 7, 28 or 35 days. As a result, there generally were no cumulative
gross unrealized holding gains or losses relating to these auction rate securities. However, beginning in mid-February 2008 due
to market conditions, the auction process for the Company’s auction rate securities failed and continues to fail. These failed
auctions result in a lack of liquidity in the securities, and affect their estimated fair values at February 25, 2017 and February
27, 2016, but do not affect the underlying collateral of the securities. (See “Fair Value Measurements,” Note 3 and
“Investment Securities,” Note 4). All income from these investments is recorded as interest income. In fiscal 2015,
the Company also had investments in U.S. Treasury Bills with remaining maturities of less than one year. The U.S. Treasury Bills
are classified as short term held-to-maturity securities and are stated at their amortized cost which approximates fair value.
Those investment securities which the Company
has the ability and intent to hold until maturity are classified as held-to-maturity investments and are stated at amortized cost.
Those investment securities which are bought and held principally for the purpose of selling them in the near term are classified
as trading securities and are stated at fair market value.
Premiums are amortized and discounts are accreted
over the life of the security as adjustments to interest income using the effective interest method. Dividend and interest income
are recognized when earned.
G. Inventory Valuation
Merchandise inventories are stated at the lower of cost or market.
Inventory costs are primarily calculated using the weighted average retail inventory method.
Under the retail inventory method, the valuation of inventories
at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail values of inventories.
The cost associated with determining the cost-to-retail ratio includes: merchandise purchases, net of returns to vendors, discounts
and volume and incentive rebates; inbound freight expenses; duty, insurance and commissions.
At any one time, inventories include items that have been written
down to the Company’s best estimate of their realizable value. Judgment is required in estimating realizable value and factors
considered are the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate
based upon future customer demand or economic conditions.
The Company estimates its reserve for shrinkage throughout the year
based on historical shrinkage and any current trends, if applicable. Actual shrinkage is recorded at year end based upon the results
of the Company’s physical inventory counts for locations at which counts were conducted. For locations where physical inventory
counts were not conducted in the fiscal year, an estimated shrink reserve is recorded based on historical shrinkage and any current
trends, if applicable. Historically, the Company’s shrinkage has not been volatile.
The Company accrues for merchandise in transit
once it takes legal ownership and title to the merchandise; as such, an estimate for merchandise in transit is included in the
Company’s merchandise inventories.
H. Property and Equipment
Property and equipment are stated at cost and
are depreciated primarily using the straight-line method over the estimated useful lives of the assets (forty years for buildings;
five to twenty years for furniture, fixtures and equipment; and three to ten years for computer equipment and software). Leasehold
improvements are amortized using the straight-line method over the lesser of their estimated useful life or the life of the lease.
Depreciation expense is primarily included within selling, general and administrative expenses.
The cost of maintenance and repairs is charged
to earnings as incurred; significant renewals and betterments are capitalized. Maintenance and repairs amounted to $131.6 million,
$130.9 million and $120.3 million for fiscal 2016, 2015 and 2014, respectively.
I. Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment when events
or changes in circumstances indicate the carrying value of these assets 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 assets.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell, and are no 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. The Company has not
historically recorded any material impairment to its long-lived assets. 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.
J. Goodwill and Other Indefinite Lived Intangible Assets
The Company reviews goodwill and other intangibles
that have indefinite lives for impairment annually 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. The Company
has not historically recorded an impairment to its goodwill and other indefinite lived intangible assets. As of February 25, 2017,
for goodwill related to the North American Retail operating segment and the Institutional Sales operating segment and certain other
indefinite lived intangible assets, 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 indefinite lived intangible assets did not
exceed its carrying value and concluded no such events or circumstances existed which would require an impairment test being 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.
Included within other assets in the accompanying
consolidated balance sheets as of February 25, 2017 and February 27, 2016, respectively, are $305.3 million and $291.4 million
for indefinite lived tradenames and trademarks.
K. Self Insurance
The Company utilizes a combination of insurance
and self insurance for a number of risks including workers’ compensation, general liability, automobile liability and employee
related health care benefits (a portion of which is paid by its employees). Liabilities associated with the risks that the Company
retains are estimated by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.
Although the Company’s claims experience has not displayed substantial volatility in the past, actual experience could materially
vary from its historical experience in the future. Factors that affect these estimates include but are not limited to: inflation,
the number and severity of claims and regulatory changes. In the future, if the Company concludes an adjustment to self insurance
accruals is required, the liability will be adjusted accordingly.
L. Deferred Rent
The Company accounts for scheduled rent increases contained in
its leases on a straight-line basis over the term of the lease beginning as of the date the Company obtained possession of the
leased premises. Deferred rent amounted to $80.3 million and $77.3 million as of February 25, 2017 and February 27, 2016, respectively.
Cash or lease incentives (“tenant allowances”) received
pursuant to certain store leases are recognized on a straight-line basis as a reduction to rent over the lease term. The unamortized
portion of tenant allowances is included in deferred rent and other liabilities. The unamortized portion of tenant allowances amounted
to $119.4 million and $119.8 million as of February 25, 2017 and February 27, 2016, respectively.
M. 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’s Board of Directors authorized, through several share repurchase programs, the repurchase of $11.950 billion of
the Company’s shares of common stock. On July 17, 2014, the Company entered into an accelerated share repurchase agreement
(“ASR”) with an investment bank to repurchase an aggregate $1.1 billion of the Company’s common stock. The ASR
was completed in December 2014. The total number of shares repurchased under the ASR was 16.8 million shares at a weighted average
share price of $65.41. Since 2004 through the end of fiscal 2016, the Company has repurchased approximately $10.2 billion of its
common stock through share repurchase programs, which include the shares repurchased under the ASR. The Company also acquires shares
of its common stock to cover employee related taxes withheld on vested restricted stock and performance stock unit awards.
During fiscal 2016, the Company repurchased approximately
12.3 million shares of its common stock at a total cost of approximately $547.0 million. During fiscal 2015 the Company repurchased
approximately 18.4 million shares of its common stock at a total cost of approximately $1.101 billion. During fiscal 2014, including
the shares repurchased under the ASR, the Company repurchased approximately 33.0 million shares of its common stock at a total
cost of approximately $2.251 billion. The Company has approximately $1.7 billion remaining of authorized share repurchases as of
February 25, 2017.
The Company’s Board of Directors authorized
a quarterly dividend program and declared quarterly dividends of $0.125 per share in each quarter of fiscal 2016, totaling $0.50
per share for fiscal 2016. Subsequent to the end of the fourth quarter of fiscal 2016, on April 5, 2017, the Company’s Board
of Directors declared a quarterly dividend of $0.15 per share to be paid on July 18, 2017 to shareholders of record at the close
of business on June 16, 2017. 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.
Cash dividends, if any, are accrued as a liability
on the Company’s consolidated balance sheets and recorded as a decrease to additional paid-in capital when declared.
N. Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash
equivalents, investment securities, accounts payable, long term debt and certain other liabilities. The Company’s investment
securities consist primarily of auction rate securities, which are stated at their approximate fair value. In fiscal 2015, the
Company also had investments in U.S. Treasury securities, which are stated at amortized cost. The book value of the financial instruments,
excluding the Company’s long term debt, is representative of their fair values (See “Fair Value Measurements,”
Note 3). The fair value of the Company’s long term debt is approximately $1.418 billion, as of February 25, 2017 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 billion.
O. 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 point-of-sale rebates that result in a reduction 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 value of unused card balances
over defined time periods and have no expiration dates.
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 the future, if the Company concludes that an adjustment to the sales return accrual is required
due to material changes in the returns activity, the reserve will be adjusted accordingly.
P. Cost of Sales
Cost of sales includes the cost of merchandise,
buying costs and costs of the Company’s distribution network including inbound freight charges, distribution facility costs,
receiving costs, internal transfer costs and shipping and handling costs.
Q. Vendor Allowances
The Company receives allowances from vendors in
the normal course of business for various reasons including direct cooperative advertising, purchase volume and reimbursement for
other expenses. Annual terms for each allowance include the basis for earning the allowance and payment terms, which vary by agreement.
All vendor allowances are recorded as a reduction of inventory cost, except for direct cooperative advertising allowances which
are specific, incremental and identifiable. The Company recognizes purchase volume allowances as a reduction of the cost of inventory
in the quarter in which milestones are achieved. Advertising costs were reduced by direct cooperative allowances of $37.4 million,
$31.7 million and $25.6 million for fiscal 2016, 2015 and 2014, respectively.
R. Store Opening, Expansion, Relocation and Closing Costs
Store opening, expansion, relocation and closing
costs, including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
S. Advertising Costs
Expenses associated with direct response advertising
are expensed over the period during which the sales are expected to occur, generally four to seven weeks, and all other expenses
associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to $381.1 million, $338.1
million and $308.4 million for fiscal 2016, 2015 and 2014, respectively.
T. Stock-Based Compensation
The Company measures all employee stock-based
compensation awards using a fair value method and records such expense in its consolidated financial statements. Currently, the
Company’s stock-based compensation relates to restricted stock awards, stock options and performance stock units. The Company’s
restricted stock awards are considered nonvested share awards.
U. Income
Taxes
The Company files a consolidated Federal income
tax return. Income tax returns are also filed with each taxable jurisdiction in which the Company conducts business.
The Company accounts for its income taxes using
the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the
enactment date.
The Company intends to reinvest the unremitted
earnings of its Canadian subsidiary. Accordingly, no provision has been made for U.S. or additional non-U.S. taxes with respect
to these earnings. In the event of repatriation to the U.S., in most cases such earnings would be subject to U.S. income taxes.
The Company recognizes the tax benefit from an uncertain tax position
only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured
based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing
authorities.
Judgment is required in determining the provision for income taxes
and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations
where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax
authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.
V. Earnings per Share
The Company presents earnings per share on a basic
and diluted basis. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding.
Diluted earnings per share is 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 of approximately 4.4 million,
2.6 million and 1.7 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive
for fiscal 2016, 2015 and 2014, respectively.
W. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
. 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, if any, to the
areas discussed above, and 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 April 2015, the FASB issued ASU 2015-03,
Interest-Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. This guidance requires an entity to present
debt issuance costs related to a recognized debt liability on the balance sheet as a direct deduction from the carrying amount
of that debt liability, consistent with debt discounts. Costs associated with line-of-credit arrangements may continue to be recorded
as deferred assets. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim
periods within that reporting period, with earlier adoption permitted. ASU 2015-03 must be adopted retrospectively to each prior
reporting period presented. The Company adopted this guidance at the beginning of the first quarter of fiscal 2016 and reclassified
debt issuance costs from other assets to long term debt on a retrospective basis. The adoption of this guidance and prior fiscal
year reclassifications did not have a material impact on the Company's consolidated financial position, results of operations,
or cash flows.
In November 2015, the FASB issued 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. The Company will adopt
this ASU in the first quarter of fiscal 2017. 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 February 2016, the FASB issued ASU 2016-02,
Leases
.
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. ASU 2016-02 must
be adopted using a modified retrospective approach for all leases existing at, or entered into after the date of initial adoption,
with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on
its consolidated financial statements and related disclosures, but expects that it will result in a significant increase in the
assets and liabilities recorded on the consolidated balance sheet.
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 will also change 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 will adopt this ASU in the first quarter
of fiscal 2017. The Company is currently evaluating the adoption of this guidance on its consolidated financial position, results
of operations and cash flows. However, the Company currently expects the change relating to excess tax benefits or deficiencies
will introduce increased volatility to the provision for income taxes, as the recognition of these amounts are dependent on exercise
patterns which are inherently unpredictable.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. ASU 2017-01 requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of
identifiable assets, the set 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 to 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.
2. ACQUISITIONS
During the second quarter of fiscal 2015,
the Company acquired Of a Kind, Inc., an e-commerce website that features specially commissioned, limited edition items
from emerging fashion and home designers. Since the date of acquisition, the results of Of a Kind’s operations, which
were not material, have been included in the Company’s results of operations for the fiscal years ended February 25,
2017 and February 27, 2016. Of a Kind is included in the North American Retail operating segment.
On June 14, 2016, the Company acquired One Kings Lane, Inc.,
an online authority in home décor and design, offering a unique collection of select home goods, designer and vintage items.
Since the date of acquisition, the results of One Kings Lane’s operations, which were not material, have been included in
the Company’s results of operations for the fiscal year ended February 25, 2017. One Kings Lane is included in the North
American Retail operating segment.
On November 23, 2016, the Company acquired PersonalizationMall.com,
LLC, an industry-leading online retailer of personalized products, for an aggregate purchase price of approximately $189.4 million.
Since the date of acquisition, the result of PMall’s operations, which were not material, have been included in the results
of operations for the fiscal year ended February 25, 2017 and no proforma disclosure of financial information has been presented.
PMall is included in the North American Retail operating segment.
The following table summarizes the preliminary estimated fair
value of the assets acquired and liabilities assumed at the date of acquisition for PMall. The Company is in the process of finalizing
the valuation of certain assets acquired and liabilities assumed; thus, the amounts below are subject to change until the anniversary
of the acquisition.
(in millions)
|
|
As of November 23, 2016
|
|
|
|
Current assets
|
|
$
|
15.1
|
|
Property and equipment and other non-current assets
|
|
|
15.1
|
|
Goodwill
|
|
|
178.1
|
|
Intangible assets
|
|
|
12.0
|
|
Total assets acquired
|
|
|
220.3
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
|
(30.9
|
)
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
189.4
|
|
Included within intangible assets above is approximately $10.0
million for tradenames, which is not subject to amortization. The tradenames and goodwill are expected to be deductible for tax
purposes.
On January 27, 2017, the Company acquired certain assets including
the brand, website and certain intellectual property assets and assumed certain contractual obligations of Chef Central, a retailer
of kitchenware, cookware and homeware items catering to cooking and baking enthusiasts. Since the date of acquisition, the results
of Chef Central’s operations, which were not material, have been included in the Company’s results of operations for
the fiscal year ended February 25, 2017. Chef Central is included in the North American Retail operating segment. (See “Transactions
and Balances with Related Parties,” Note 8).
Subsequent to the end of fiscal 2016, the Company acquired Decorist,
Inc., an online interior design platform that provides personalized home design services. The acquisition had no effect on the
Company’s fiscal 2016 results since the transaction occurred during fiscal 2017. The Company believes the benefit of this
acquisition will not have a material effect on the overall results or financial condition of the Company for fiscal 2017.
3. 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 exit 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’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 February 25, 2017, the Company’s financial assets
utilizing Level 1 inputs include 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 Securities,”
Note 4).
4.
INVESTMENT SECURITIES
The Company’s investment securities as of February 25, 2017 and February 27,
2016 are as follows:
(in millions)
|
|
February 25,
2017
|
|
February 27,
2016
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Long term
|
|
$
|
19.3
|
|
|
$
|
19.8
|
|
|
|
|
|
|
|
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
Long term
|
|
|
70.3
|
|
|
|
51.5
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
Short term
|
|
|
-
|
|
|
|
86.2
|
|
Total investment securities
|
|
$
|
89.6
|
|
|
$
|
157.5
|
|
Auction Rate Securities
As of February 25, 2017 and February 27, 2016, the Company’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 $1.0 million
and $0.5 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’s net earnings.
In fiscal 2015, approximately $30.7 million of these securities
were tendered at a price of approximately 94% of par value for which the Company incurred a realized loss of approximately $1.8
million, which is included within interest expense, net in the consolidated statement of earnings for fiscal 2015.
U.S. Treasury Securities
As of February 25, 2017, the Company had no short term held-to-maturity
securities. As of February 27, 2016, the Company’s short term held-to-maturity securities included approximately $86.2 million
of U.S. Treasury Bills with remaining maturities of less than one year. These securities are stated at their amortized cost which
approximates fair value, which is based on quoted prices in active markets for identical instruments (i.e., Level 1 valuation).
Long Term Trading Investment Securities
The Company’s long term trading investment securities,
which are provided as investment options to the participants of the nonqualified deferred compensation plan, are stated at fair
market value. The values of these trading investment securities included in the table above are approximately $70.3 million and
$51.5 million as of February 25, 2017 and February 27, 2016, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
February 25,
|
|
February 27,
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Land and buildings
|
|
$
|
579,514
|
|
|
$
|
567,602
|
|
Furniture, fixtures and equipment
|
|
|
1,332,038
|
|
|
|
1,240,181
|
|
Leasehold improvements
|
|
|
1,454,749
|
|
|
|
1,341,596
|
|
Computer equipment and software
|
|
|
1,290,690
|
|
|
|
1,106,812
|
|
|
|
|
4,656,991
|
|
|
|
4,256,191
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(2,819,862
|
)
|
|
|
(2,531,148
|
)
|
Property and equipment, net
|
|
$
|
1,837,129
|
|
|
$
|
1,725,043
|
|
6. LONG TERM DEBT
Senior Unsecured Notes
On July 17, 2014, the Company issued $300 million aggregate principal
amount of 3.749% senior unsecured notes due August 1, 2024 (the “2024 Notes”), $300 million aggregate principal amount
of 4.915% senior unsecured notes due August 1, 2034 (the “2034 Notes”) and $900 million aggregate principal amount
of 5.165% senior unsecured notes due August 1, 2044 (the “2044 Notes” and, together with the 2024 Notes and the 2034
Notes, the “Notes”). The aggregate net proceeds from the Notes were approximately $1.5 billion, which was used for
share repurchases of the Company’s common stock and for general corporate purposes. Interest on the Notes is payable semi-annually
on February 1 and August 1 of each year.
The Notes were issued under an indenture (the “Base Indenture”),
as supplemented by a first supplemental indenture (together, with the Base Indenture, the “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 February 25, 2017.
The Notes are unsecured, senior obligations and rank equal in
right of payment to any of the Company’s existing and future senior unsecured indebtedness. The Company may redeem the Notes
at any time, in whole or in part, at the redemption prices described in the Indenture plus accrued and unpaid interest to the redemption
date. If a change in control triggering event, as defined by the Indenture governing the Notes, occurs unless the Company has exercised
its right to redeem the Notes, the Company will be required to make an offer to the holders of the Notes to purchase the Notes
at 101% of their principal amount, plus accrued and unpaid interest.
Revolving Credit Agreement
The Company has a $250 million five year senior unsecured revolving
credit facility agreement (“Revolver”), expiring in August 2019, with various lenders. For fiscal 2016 and 2015, the
Company did not have any borrowings under the Revolver.
Borrowings under the Revolver accrue interest at either (1) a
fluctuating rate equal to the greater of the prime rate, as defined in the Revolver, the Federal Funds Rate plus 0.50%, or one-month
LIBOR plus 1.0% and, in each case, plus an applicable margin based upon the Company’s leverage ratio which is calculated
quarterly, (2) a periodic fixed rate equal to LIBOR plus an applicable margin based upon the Company’s leverage ratio which
is calculated quarterly or (3) an agreed upon fixed rate. In addition, a commitment fee is assessed, which is included in interest
expense, net in the consolidated statement of earnings. The Revolver contains customary affirmative and negative covenants and
also requires the Company to maintain a minimum leverage ratio. The Company was in compliance with all covenants related to the
Revolver as of February 25, 2017.
Deferred financing costs associated with the Notes and the Revolver
of approximately $10.1 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 statement of earnings.
Interest expense related to the Notes and the Revolver, including the commitment fee and the amortization of the deferred financing
costs, was approximately $73.4 million for fiscal 2016, $73.0 million for fiscal 2015 and $44.9 million for the period from July
17, 2014 through February 28, 2015.
Lines of Credit
At February 25, 2017, the Company maintained two
uncommitted lines of credit of $100 million each, with expiration dates of August 30, 2017 and February 25, 2018, respectively.
These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business.
During fiscal 2016 and 2015, the Company did not have any direct borrowings under the uncommitted lines of credit. As of February
25, 2017, there was approximately $14.0 million of outstanding letters of credit. Although no assurances can be provided, the Company
intends to renew both uncommitted lines of credit before the respective expiration dates. In addition, as of February 25, 2017,
the Company maintained unsecured standby letters of credit of $44.9 million, primarily for certain insurance programs.
7.
PROVISION FOR INCOME TAXES
The components of the provision
for income taxes are as follows:
|
|
FISCAL YEAR ENDED
|
(in thousands)
|
|
February 25,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
313,571
|
|
|
$
|
389,039
|
|
|
$
|
504,154
|
|
State and local
|
|
|
42,101
|
|
|
|
39,991
|
|
|
|
64,486
|
|
|
|
|
355,672
|
|
|
|
429,030
|
|
|
|
568,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
20,295
|
|
|
|
42,592
|
|
|
|
(18,245
|
)
|
State and local
|
|
|
4,580
|
|
|
|
14,334
|
|
|
|
(4,034
|
)
|
|
|
|
24,875
|
|
|
|
56,926
|
|
|
|
(22,279
|
)
|
|
|
$
|
380,547
|
|
|
$
|
485,956
|
|
|
$
|
546,361
|
|
At February 25, 2017 and February 26, 2016, included
in other current assets is a net current deferred income tax asset of $218.9 million and $201.5 million, respectively, and included
in deferred rent and other liabilities is a net noncurrent deferred income tax liability of $23.4 million and $2.4 million, respectively.
These amounts represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred
tax assets and liabilities consist of the following:
|
|
February 25,
|
|
February 27,
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
33,120
|
|
|
$
|
30,470
|
|
Deferred rent and other rent credits
|
|
|
73,577
|
|
|
|
74,182
|
|
Insurance
|
|
|
60,789
|
|
|
|
51,238
|
|
Stock-based compensation
|
|
|
41,715
|
|
|
|
39,417
|
|
Nonqualified deferred compensation plan
|
|
|
27,857
|
|
|
|
21,688
|
|
Merchandise credits and gift card liabilities
|
|
|
63,031
|
|
|
|
66,496
|
|
Accrued expenses
|
|
|
57,401
|
|
|
|
46,226
|
|
Obligations on distribution facilities
|
|
|
40,363
|
|
|
|
40,704
|
|
Net operating loss carryforwards and other tax credits
|
|
|
18,186
|
|
|
|
22,253
|
|
Other
|
|
|
84,232
|
|
|
|
69,088
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(137,144
|
)
|
|
|
(104,781
|
)
|
Goodwill
|
|
|
(69,127
|
)
|
|
|
(62,252
|
)
|
Intangibles
|
|
|
(82,688
|
)
|
|
|
(81,150
|
)
|
Other
|
|
|
(15,843
|
)
|
|
|
(14,525
|
)
|
|
|
$
|
195,469
|
|
|
$
|
199,054
|
|
At February 25, 2017, the Company has federal
net operating loss carryforwards of $9.6 million (tax effected), which will begin expiring in 2025, state net operating loss carryforwards
of $4.5 million (tax effected), which will expire between 2016 and 2031, California state enterprise zone credit carryforwards
of $3.1 million (tax effected), which will expire in 2023, but require taxable income in the enterprise zone to be realizable and
other tax credits of $1.0 million (tax effected).
The Company has not established a valuation allowance
for the net deferred tax asset as it is considered more likely than not that it is realizable through a combination of future taxable
income and the deductibility of future net deferred tax liabilities.
The following table summarizes the activity related to the gross
unrecognized tax benefits from uncertain tax positions:
|
|
February 25,
|
|
February 27,
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
72,807
|
|
|
$
|
79,985
|
|
|
|
|
|
|
|
|
|
|
Increase related to current year positions
|
|
|
14,491
|
|
|
|
16,662
|
|
Increase related to prior year positions
|
|
|
413
|
|
|
|
2,104
|
|
Decrease related to prior year positions
|
|
|
(4,202
|
)
|
|
|
(14,698
|
)
|
Settlements
|
|
|
-
|
|
|
|
(5,865
|
)
|
Lapse of statute of limitations
|
|
|
(7,094
|
)
|
|
|
(5,381
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
76,415
|
|
|
$
|
72,807
|
|
Gross unrecognized tax benefits are classified
in non-current income taxes payable (or a contra deferred tax asset) on the consolidated balance sheet for uncertain tax positions
taken (or expected to be taken) on a tax return. As of February 25, 2017 and February 27, 2016, approximately $76.3 million and
$72.7 million, respectively, of gross unrecognized tax benefits would impact the Company’s effective tax rate. As of February
25, 2017 and February 27, 2016, the liability for gross unrecognized tax benefits included approximately $8.1 million and $10.5
million, respectively, of accrued interest. The Company recorded a decrease of interest of approximately $2.4 million and $2.5
million, respectively, for the years ended February 25, 2017 and February 27, 2016 for gross unrecognized tax benefits in the consolidated
statement of earnings.
The Company anticipates that any adjustments to gross unrecognized
tax benefits which will impact income tax expense, due to the expiration of statutes of limitations, could be approximately $3
to $4 million in the next twelve months. However, actual results could differ from those currently anticipated.
As of February 25, 2017, the Company operated in all 50 states,
the District of Columbia, Puerto Rico, Canada and several other international countries and files income tax returns in the United
States and various state, local and international jurisdictions. The Company is open to examination for state and local jurisdictions
with varying statutes of limitations, generally ranging from three to five years.
For fiscal 2016, the effective tax rate is comprised
of the Federal statutory income tax rate of 35.00%, the State income tax rate, net of Federal benefit, of 3.25%, provision for
uncertain tax positions of 0.28% and other income tax benefits of 2.82%. For fiscal 2015, the effective tax rate is comprised of
the Federal statutory income tax rate of 35.00%, the State income tax rate, net of Federal benefit, of 3.07%, provision for uncertain
tax positions of 0.07% and other income tax benefits of 1.53%. For fiscal 2014, the effective tax rate is comprised of the Federal
statutory income tax rate of 35.00%, the State income tax rate, net of Federal benefit, of 3.01%, provision for uncertain tax positions
of 0.04% and other income tax benefits of 1.72%.
8.
TRANSACTIONS AND BALANCES WITH RELATED PARTIES
In fiscal 2002, the Company had an interest in
certain life insurance policies on the lives of its Co-Chairmen and their spouses. The Company’s interest in these policies
was equivalent to the net premiums paid by the Company. The agreements relating to the Company’s interest in the life insurance
policies on the lives of its Co-Chairmen and their spouses were terminated in fiscal 2003. Upon termination in fiscal 2003, the
Co-Chairmen paid to the Company $5.4 million, representing the total amount of premiums paid by the Company under the agreements
and the Company was released from its contractual obligation to make substantial future premium payments. In order to confer a
benefit to its Co-Chairmen in substitution for the aforementioned terminated agreements, the Company has agreed to pay to the Co-Chairmen,
at a future date, an aggregate amount of $4.2 million, which is included in accrued expenses and other current liabilities as of
February 25, 2017 and February 27, 2016.
On January 27, 2017, the Company acquired
certain assets including the brand, website and certain intellectual property assets and assumed certain contractual
obligations of Chef Central, a retailer of kitchenware, cookware and homeware items catering to cooking and baking
enthusiasts. Ron Eisenberg, the son of Warren Eisenberg, the Company’s Co-Chairman, was the founder and owner of Chef
Central, and joined the Company as an employee to build Chef Central branded stores or departments. Mr. Eisenberg brought
more than 30 years of specialty retail experience and the transaction also added knowledgeable and talented associates to the
Company with great culinary retailing expertise. Warren Eisenberg recused himself from Board of Director deliberations
relating to the transaction (See “Acquisitions,” Note 2).
9.
LEASES
The Company leases retail stores, as well as distribution
facilities, offices and equipment, under agreements expiring at various dates through 2042. Certain leases provide for contingent
rents (which are based upon store sales exceeding stipulated amounts and are immaterial in fiscal 2016, 2015 and 2014), 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.
As of February 25, 2017, future minimum lease
payments under non-cancelable operating leases were as follows:
|
|
Operating
|
(in thousands)
|
|
Leases
|
Fiscal Year:
|
|
|
|
|
2017
|
|
$
|
614,148
|
|
2018
|
|
|
563,682
|
|
2019
|
|
|
502,371
|
|
2020
|
|
|
419,526
|
|
2021
|
|
|
323,809
|
|
Thereafter
|
|
|
902,983
|
|
Total future minimum lease payments
|
|
$
|
3,326,519
|
|
Expenses for all operating leases were $582.2
million, $568.1 million and $566.0 million for fiscal 2016, 2015 and 2014, respectively.
As of February 25, 2017 and February 27, 2016, the capital lease
obligations were approximately $5.1 million and $6.5 million, respectively, for which the current and long-term portions are included
within accrued expenses and other current liabilities and deferred rent and other liabilities, respectively, in the consolidated
balance sheet. Monthly minimum lease payments are accounted for as principal and interest payments. Interest expense for all capital
leases was $0.4 million, $0.4 million and $0.5 million for fiscal 2016, 2015 and 2014, respectively. The minimum capital lease
payments, including interest, by fiscal year are: $1.0 million in fiscal 2017, $0.9 million in fiscal 2018, $0.9 million in fiscal
2019, $0.8 million in fiscal 2020, $0.7 million in fiscal 2021 and $2.1 million thereafter.
The Company has financing obligations, related to two 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 February 25, 2017 and February 27, 2016, the sale/leaseback financing obligations were approximately $103.3 million and $104.0
million, respectively, for which the current and long-term portions are included within accrued expenses and other current liabilities
and deferred rent 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: $0.7 million in fiscal 2017, $0.8
million in fiscal 2018, $0.8 million in fiscal 2019, $0.9 million in fiscal 2020, $0.9 million in fiscal 2021 and $77.4 million
thereafter.
10.
EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company has five defined contribution savings
plans covering all eligible employees of the Company (“the Plans”). Participants of the Plans may defer annual pre-tax
compensation subject to statutory and Plan limitations. In addition, a certain percentage of an employee’s contributions
are matched by the Company and vest over a specified period of time, subject to certain statutory and Plan limitations. The Company’s
match was approximately $15.2 million, $13.9 million and $13.2 million for fiscal 2016, 2015 and 2014, respectively, which was
expensed as incurred.
Nonqualified Deferred Compensation Plan
The Company has a nonqualified deferred compensation
plan (“NQDC”) for the benefit of employees who are defined by the Internal Revenue Service as highly compensated. Participants
of the NQDC may defer annual pre-tax compensation subject to statutory and plan limitations. In addition, a certain percentage
of an employee’s contributions may be matched by the Company and vest over a specified period of time, subject to certain
plan limitations. The Company’s match was approximately $0.5 million, $0.6 million and $0.7 million in fiscal 2016, 2015
and 2014, respectively, which was expensed as incurred.
Changes in the fair value of the trading securities
related to the NQDC and the corresponding change in the associated liability are included within interest income and selling, general
and administrative expenses respectively, in the consolidated statements of earnings. Historically, these changes have resulted
in no net impact to the consolidated statements of earnings.
Defined Benefit Plan
The Company has a non-contributory defined benefit
pension plan for the CTS employees, hired on or before July 31, 2003, who meet specified age and length-of-service requirements.
The benefits are based on years of service and the employee’s compensation up until retirement. The Company recognizes the
overfunded or underfunded status of the pension plan as an asset or liability in its statement of financial position and recognizes
changes in the funded status in the year in which the changes occur. For the years ended February 25, 2017, February 27, 2016 and
February 28, 2015, the net periodic pension cost was not material to the Company’s results of operations. The Company has
a $19.3 million and $20.4 million liability, which is included in deferred rent and other liabilities as of February 25, 2017 and
February 27, 2016, respectively. In addition, as of February 25, 2017 and February 27, 2016, the Company recognized a loss of $4.7
million, net of taxes of $3.0 million, and a loss of $6.5 million, net of taxes of $4.2 million, respectively, within accumulated
other comprehensive loss.
11.
COMMITMENTS AND CONTINGENCIES
The Company maintains employment agreements with
its Co-Chairmen, which extend through May 26, 2017. The agreements provide for a base salary (which may be increased by the Board
of Directors), termination payments, postretirement benefits and other terms and conditions of employment. In addition, the Company
maintains employment agreements with other executives which provide for severance pay and, in some instances, certain other supplemental
retirement benefits.
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.
12.
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of $364.4 million,
$442.4 million and $554.4 million in fiscal 2016, 2015 and 2014, respectively. In addition, the Company had interest payments of
approximately $81.4 million, $81.5 million and $48.2 million in fiscal 2016, 2015 and 2014, respectively.
The Company recorded an accrual for capital expenditures
of $59.0 million, $51.7 million and $57.8 million as of February 25, 2017, February 27, 2016 and February 28, 2015, respectively.
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’s stock-based compensation relates to restricted stock awards, stock options and performance stock units. The
Company’s restricted stock awards are considered nonvested share awards.
Stock-based compensation expense for the fiscal year ended February
25, 2017, February 27, 2016 and February 28, 2015 was approximately $71.9 million ($46.3 million after tax or $0.31 per diluted
share), approximately $67.0 million ($42.4 million after tax or $0.26 per diluted share) and approximately $66.5 million ($42.4
million after tax or $0.22 per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized
for the years ended February 25, 2017 and February 27, 2016 was approximately $2.2 million and $2.1 million, respectively.
Incentive Compensation Plans
The Company currently grants awards under the Bed Bath &
Beyond 2012 Incentive Compensation Plan (the “2012 Plan”), which amended and restated the Bed Bath & Beyond 2004
Incentive Compensation Plan (the “2004 Plan”). The 2012 Plan includes an aggregate of 43.2 million common shares authorized
for issuance and the ability to grant incentive stock options. Outstanding awards that were covered by the 2004 Plan continue to
be in effect under the 2012 Plan.
The 2012 Plan is a flexible compensation plan that enables 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, grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate
committee for all other awards granted. Awards of stock options and restricted stock generally vest in five equal annual installments
beginning one to three years from the date of grant. Awards of performance stock units generally vest over a period of four years
from the date of grant dependent on the Company’s achievement of performance-based tests and subject, in general, to the
executive remaining in the Company’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.
Stock Options
Stock option grants are issued at fair market value on the date
of grant and generally become exercisable in either three or five 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’s service on specified vesting
dates. Option grants expire eight years after the date of grant. All option grants are nonqualified. As of February 25, 2017, unrecognized
compensation expense related to the unvested portion of the Company’s stock options was $21.0 million, which is expected
to be recognized over a weighted average period of 2.9 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.
|
|
FISCAL YEAR ENDED
|
Black-Scholes Valuation Assumptions (1)
|
|
February
25, 2017
|
|
February
27, 2016
|
|
February
28, 2015
|
|
|
|
|
|
|
|
Weighted Average Expected Life (in years) (2)
|
|
|
6.6
|
|
|
|
6.7
|
|
|
|
6.6
|
|
Weighted Average Expected Volatility (3)
|
|
|
26.96
|
%
|
|
|
27.59
|
%
|
|
|
28.31
|
%
|
Weighted Average Risk Free Interest Rates (4)
|
|
|
1.46
|
%
|
|
|
1.93
|
%
|
|
|
2.11
|
%
|
Expected Dividend Yield (5)
|
|
|
1.10
|
%
|
|
|
-
|
|
|
|
-
|
|
(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’s stock over a period commensurate with
the expected life of the awards. The implied volatility represents the implied volatility of the Company’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’s stock options for the fiscal year
ended February 25, 2017 were as follows:
(Shares in thousands)
|
|
Number of Stock Options
|
|
Weighted Average
Exercise Price
|
Options outstanding, beginning of period
|
|
|
3,838
|
|
|
$
|
54.43
|
|
Granted
|
|
|
703
|
|
|
|
45.53
|
|
Exercised
|
|
|
(635
|
)
|
|
|
31.94
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
Options outstanding, end of period
|
|
|
3,906
|
|
|
$
|
56.48
|
|
Options exercisable, end of period
|
|
|
2,262
|
|
|
$
|
55.02
|
|
The weighted average fair value for the stock options granted
in fiscal 2016, 2015 and 2014 was $11.87, $23.12 and $20.96, respectively. The weighted average remaining contractual term and
the aggregate intrinsic value for options outstanding as of February 25, 2017 was 4.0 years and $4.6 million, respectively. The
weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of February 25, 2017 was
2.6 years and $4.6 million, respectively. The total intrinsic value for stock options exercised during fiscal 2016, 2015 and 2014
was $9.0 million, $8.7 million and $33.5 million, respectively.
Net cash proceeds from the exercise of stock options for fiscal
2016 were $20.4 million and the net associated income tax benefit was $0.4 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 equal annual installments beginning one to three years from the
date of grant, subject, in general, to the recipient remaining in the Company’s service on specified vesting dates. Vesting
of restricted stock awarded to certain of the Company’s executives is dependent on the Company’s achievement of a performance-based
test for the fiscal year of grant and, assuming achievement of the performance-based test, time vesting, subject, in general, to
the executive remaining in the Company’s service on specified vesting dates. The Company recognizes compensation expense
related to these awards based on the assumption that the performance-based test will be achieved. Vesting of restricted stock awarded
to the Company’s other employees is based solely on time vesting. As of February 25, 2017, unrecognized compensation expense
related to the unvested portion of the Company’s restricted stock awards was $132.7 million, which is expected to be recognized
over a weighted average period of 4.1 years.
Changes in the Company’s restricted stock for the fiscal
year ended February 25, 2017 were as follows:
(Shares in thousands)
|
|
Number of Restricted Shares
|
|
Weighted Average
Grant-Date Fair
Value
|
Unvested restricted stock, beginning of period
|
|
|
3,230
|
|
|
$
|
62.71
|
|
Granted
|
|
|
1,287
|
|
|
|
44.83
|
|
Vested
|
|
|
(834
|
)
|
|
|
55.13
|
|
Forfeited
|
|
|
(191
|
)
|
|
|
59.29
|
|
Unvested restricted stock, end of period
|
|
|
3,492
|
|
|
$
|
58.12
|
|
Performance Stock Units
Performance stock units (“PSUs”) are issued and measured
at fair market value on the date of grant. Vesting of PSUs awarded to certain of the Company’s executives is dependent on
the Company’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’s service on specified vesting dates. Performance during
the one-year period will be based on Earnings Before Interest and Taxes (“EBIT”) margin relative to a peer group of
the Company and performance during the three-year period will be based on Return on Invested Capital (“ROIC”) relative
to such peer group. The awards based on EBIT margin and ROIC range from a floor of zero 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% of the target award will be achieved. The Company evaluates the
target assumption on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. As of February
25, 2017, unrecognized compensation expense related to the unvested portion of the Company’s performance stock units was
$23.7 million, which is expected to be recognized over a weighted average period of 1.8 years.
Changes in the Company’s PSUs for the fiscal year ended
February 25, 2017 were as follows:
(Shares in thousands)
|
|
Number of Performance
Stock Units
|
|
Weighted Average
Grant-Date Fair
Value
|
Unvested performance stock units, beginning of period
|
|
|
627
|
|
|
$
|
67.15
|
|
Granted
|
|
|
566
|
|
|
|
45.53
|
|
Vested
|
|
|
(179
|
)
|
|
|
66.53
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested performance stock units, end of period
|
|
|
1,014
|
|
|
$
|
55.19
|
|
14. SUMMARY
OF QUARTERLY RESULTS (UNAUDITED)
|
|
FISCAL 2016 QUARTER ENDED
|
|
FISCAL 2015 QUARTER ENDED
|
(in thousands, except per share data)
|
|
May 28,
2016
|
|
August 27, 2016
|
|
November 26, 2016
|
|
February 25, 2017
|
|
May 30,
2015
|
|
August 29, 2015
|
|
November 28, 2015
|
|
February 27, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,738,084
|
|
|
$
|
2,988,235
|
|
|
$
|
2,955,484
|
|
|
$
|
3,533,954
|
|
|
$
|
2,738,495
|
|
|
$
|
2,995,469
|
|
|
$
|
2,952,031
|
|
|
$
|
3,417,892
|
|
Gross profit
|
|
|
1,023,592
|
|
|
|
1,116,893
|
|
|
|
1,092,774
|
|
|
|
1,343,091
|
|
|
|
1,044,133
|
|
|
|
1,140,950
|
|
|
|
1,115,311
|
|
|
|
1,319,916
|
|
Operating profit
|
|
|
213,026
|
|
|
|
280,973
|
|
|
|
211,283
|
|
|
|
429,928
|
|
|
|
273,269
|
|
|
|
350,194
|
|
|
|
292,858
|
|
|
|
498,582
|
|
Earnings before provision for income taxes
|
|
|
196,711
|
|
|
|
262,774
|
|
|
|
193,029
|
|
|
|
413,141
|
|
|
|
253,368
|
|
|
|
325,141
|
|
|
|
274,806
|
|
|
|
474,130
|
|
Provision for income taxes
|
|
|
74,092
|
|
|
|
95,439
|
|
|
|
66,605
|
|
|
|
144,411
|
|
|
|
94,917
|
|
|
|
123,463
|
|
|
|
96,990
|
|
|
|
170,586
|
|
Net earnings
|
|
$
|
122,619
|
|
|
$
|
167,335
|
|
|
$
|
126,424
|
|
|
$
|
268,730
|
|
|
$
|
158,451
|
|
|
$
|
201,678
|
|
|
$
|
177,816
|
|
|
$
|
303,544
|
|
EPS-Basic (1)
|
|
$
|
0.81
|
|
|
$
|
1.12
|
|
|
$
|
0.86
|
|
|
$
|
1.86
|
|
|
$
|
0.94
|
|
|
$
|
1.22
|
|
|
$
|
1.10
|
|
|
$
|
1.93
|
|
EPS-Diluted (1)
|
|
$
|
0.80
|
|
|
$
|
1.11
|
|
|
$
|
0.85
|
|
|
$
|
1.84
|
|
|
$
|
0.93
|
|
|
$
|
1.21
|
|
|
$
|
1.09
|
|
|
$
|
1.91
|
|
Dividends declared per share
|
|
$
|
0.125
|
|
|
$
|
0.125
|
|
|
$
|
0.125
|
|
|
$
|
0.125
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1) Net earnings per share ("EPS") amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year.