Notes to Consolidated Financial Statements
Bed Bath & Beyond Inc. and Subsidiaries
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1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
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Bed Bath & Beyond Inc. and subsidiaries (the “Company”) is an omnichannel retailer selling a wide assortment of domestics merchandise and home furnishings 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 (“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; One Kings Lane, an authority in home décor and design, offering a unique collection of select home goods, designer and vintage items; PersonalizationMall.com (“PMall”), an industry-leading online retailer of personalized products; Chef Central, a retailer of kitchenware, cookware and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. The Company also operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates 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
2018
,
2017
, and
2016
. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.
The Company’s fiscal year is comprised of the 52 or 53-week period ending on the Saturday nearest February 28th. Accordingly, fiscal 2018 and fiscal 2016 represented 52 weeks and ended on March 2, 2019 and February 25, 2017, respectively. Fiscal 2017 represented 53 weeks and ended March 3, 2018.
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C.
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Principles of Consolidation
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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.
The fiscal 2017 and 2016 consolidated statements of cash flows were revised to include restricted cash due to the adoption of the Financial Accounting Standards Board ("FASB"), Accounting Standards Update ("ASU") 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
in fiscal 2018.
All significant intercompany balances and transactions have been eliminated in consolidation.
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.
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E.
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Recent Accounting Pronouncements
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In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions, including the
accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 requires, on a prospective basis, recognition of excess tax benefits and tax deficiencies (resulting from an increase or decrease in the fair value of an award from grant date to the vesting or exercise date) in the provision for income taxes as a discrete item in the period in which they occur. The ASU also changes the classification of excess tax benefits from a financing activity to an operating activity in the Company’s consolidated statements of cash flows. In addition, ASU 2016-09 allows companies to make an accounting policy election to either estimate expected forfeitures or account for them as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-09 during the first quarter of fiscal 2017. During the fiscal year ended March 3, 2018, the Company recognized in income tax expense discrete tax expenses of $
13.0 million
related to tax deficiencies. Additionally, the Company elected to account for forfeitures as an estimate of the number of awards that are expected to vest, which is consistent with its accounting policy prior to adoption of ASU 2016-09. The Company adopted the provisions of ASU 2016-09 related to changes in the consolidated statements of cash flows on a retrospective basis. As such, excess tax benefits are now classified as an operating activity in the Company’s Consolidated Statements of Cash Flows instead of as a financing activity. As a result, excess tax benefits of $
1.5 million
for the twelve months
February 25, 2017
were reclassified from financing activities to operating activities. ASU 2016-09 also requires that the value of shares withheld from employees upon vesting of stock awards in order to satisfy any applicable tax withholding requirements is presented within financing activities in the Company’s Consolidated Statements of Cash Flows, which is consistent with the Company’s historical presentation, and therefore had no impact to the Company.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This guidance requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. This guidance deferred the effective date of ASU 2014-09 for one year from the original effective date. In accordance with the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In 2016, the FASB issued several amendments to clarify various aspects of the implementation guidance. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. At the beginning of the first quarter of fiscal 2018, the Company adopted ASU 2014-09 using the modified retrospective transition method and recognized the cumulative effect of applying this standard to opening retained earnings. The Company recorded a net after-tax reduction to opening retained earnings of approximately
$4.2 million
as of March 4, 2018. The comparative financial information has not been adjusted and continues to be reported under ASC Topic 605,
Revenue Recognition (Topic 605)
.
The majority of the Company’s revenue is generated from the sale of products in its retail stores, which will continue to be recognized when control of the product is transferred to the customer. The adoption of ASU 2014-09 resulted in the following changes:
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A change in the timing of recognizing advertising expense related to direct response advertising. These costs that were previously expensed over the period during which the sales were expected to occur will now be expensed on the first day of the direct response advertising event.
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A change in the presentation of the sales return reserve on the consolidated balance sheet, as estimated costs of returns will be recorded as a current asset rather than netted with the sales return reserve.
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Changes in the presentation of certain other revenue streams on the consolidated statement of earnings between net sales, cost of sales, and selling, general and administrative expenses.
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The below tables set forth the adjustments to the Company’s consolidated statement of earnings and consolidated balance sheet as a result of the newly adopted revenue recognition standard.
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Twelve months ended March 2, 2019
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(In thousands)
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As Reported
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Balances Without Adoption of ASU 2014-09
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Impact of Adoption Increase/(Decrease)
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Net sales
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$
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12,028,797
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$
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12,038,964
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$
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(10,167
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)
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Cost of sales
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7,924,817
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7,960,335
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(35,518
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)
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Gross profit
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4,103,980
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4,078,629
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25,351
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Selling, general and administrative expenses
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3,681,210
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3,657,157
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24,053
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Goodwill and other impairments
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509,905
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509,905
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—
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Operating (loss) profit
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(87,135
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)
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(88,433
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)
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1,298
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Interest expense, net
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69,474
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69,474
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—
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(Loss) earnings before provision for income taxes
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(156,609
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)
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(157,907
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)
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1,298
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(Benefit) provision for income taxes
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(19,385
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)
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(19,696
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)
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311
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Net (loss) earnings
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$
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(137,224
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)
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$
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(138,211
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)
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$
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987
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Net (loss) earnings per share - Diluted
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$
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(1.02
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)
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$
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(1.03
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)
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$
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0.01
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March 2, 2019
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(In thousands)
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As Reported
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Balances Without Adoption of ASU 2014-09
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Impact of Adoption Increase/(Decrease)
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Assets
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Merchandise inventories
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$
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2,618,922
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$
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2,620,679
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$
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(1,757
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)
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Prepaid expenses and other current assets
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296,280
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253,431
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42,849
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Liabilities and Shareholders' Equity
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Accrued expenses and other current liabilities
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$
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623,734
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$
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566,902
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$
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56,832
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Merchandise credit and gift card liabilities
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339,322
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350,567
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(11,245
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)
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Retained earnings
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11,112,887
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11,116,121
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(3,234
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)
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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 Company adopted this guidance at the beginning of the first quarter of fiscal 2018 and it did not have a material 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 Company adopted this guidance in the fourth quarter of fiscal 2018 and performed its annual goodwill impairment test in accordance with ASU 2017-04, which resulted in a non-cash pre-tax goodwill impairment charge of
$325.2 million
.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which requires entities to include restricted cash with cash and cash equivalents when reconciling the beginning-of -period and end-of period total amounts presented in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard in fiscal 2018 on a retrospective basis, which did not result in a material impact the Company's consolidated statements of cash flows.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings. Based on the effective dates, the Company will adopt the new guidance at the beginning of the first quarter of fiscal 2019 using the new transition election to not restate comparative periods. The Company will elect the package of practical expedients upon adoption, which permits the Company to not reassess under the new standard the Company's prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the Company will elect not to separate lease and non-lease components for all real estate leases and does not expect to elect the hindsight practical expedient. Lastly, the Company expects to elect a short-term lease exception policy, permitting it to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less. Upon adoption, the Company expects to recognize right-of-use assets of approximately
$1.8 billion
to
$2.2 billion
and operating lease liabilities of approximately
$2.0 billion
to
$2.4 billion
on its consolidated balance sheet, with no significant change to its consolidated statements of operations or cash flows. In addition, the actual right-of-use asset amount will depend on the finalization of any impairment of the right-of-use assets, which is currently being reviewed by the Company and this adjustment will be recorded as a cumulative-effect adjustment to retained earnings upon adoption.
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F.
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Cash and Cash Equivalents
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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
$92.9 million
and
$95.6 million
as of
March 2, 2019
and
March 3, 2018
, respectively.
Investment securities consist primarily of U.S. Treasury Bills with remaining maturities of less than
one year
and auction rate securities, which are securities with interest rates that reset periodically through an auction process. 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. 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
March 2, 2019
and
March 3, 2018
, but do not affect the underlying collateral of the securities. (See “Fair Value Measurements,” Note 4 and “Investment Securities,” Note 5). All income from these investments is recorded as interest income.
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.
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.
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I.
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Property and Equipment
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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
$132.4 million
,
$125.7 million
, and
$131.6 million
for fiscal
2018
,
2017
and
2016
, respectively.
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J.
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Impairment of Long-Lived Assets
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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. In fiscal 2018, the Company recorded a
$23.0 million
non-cash pre-tax impairment charge within goodwill and other impairments in the consolidated statement of operations for certain store-level assets. There were no impairments to long-lived assets in fiscal 2017 or 2016. 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.
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K.
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Goodwill and Other Indefinite Lived Intangible Assets
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The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of the end of the fiscal year or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results. In addition, sustained declines in the Company's stock price and related market capitalization could impact key assumptions in the overall estimated fair values of its reporting units and could result in non-cash impairment charges that could be material to the Company's consolidated balance sheet or results of operations. Prior to March 2, 2019, the Company has not historically recorded an impairment to its goodwill and other indefinite lived intangible assets.
As of
March 2, 2019
, the Company completed a quantitative impairment analysis of goodwill related to its reporting units by comparing the fair value of a reporting unit with its carrying amount. The Company performed a discounted cash flow analysis and market multiple analysis for each reporting unit. Based upon the analysis performed, the Company recognized non-cash pre-tax goodwill impairment charges of
$285.1 million
and
$40.1 million
for the North American Retail and Institutional Sales reporting units, respectively. The non-cash pre-tax impairment charges were primarily the result of a sustained decline in the Company's market capitalization.
Other indefinite-lived intangible assets were recorded as a result of acquisitions and primarily consist of tradenames. The Company values its tradenames using a relief-from-royalty approach, which assumes the value of the tradename is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the tradename and instead licensed the tradename from another company. As of
March 2, 2019
, for certain other indefinite lived intangible assets, the Company completed a quantitative impairment analysis by comparing the fair value of the tradenames to their carrying value and recognized a non-cash pre-tax tradename impairment charge of
$161.7 million
, within goodwill and other impairments in the consolidated statement of
operations, for certain of the tradenames within the North American Retail reporting unit. As of March 2, 2019, for the remaining other indefinite lived intangibles assets, the Company assessed qualitative factors in order to determine wither any events and circumstances existed which indicated that it was more likely than not that the fair value of these other indefinite lived assets did not exceed their carrying values and concluded no such events or circumstances existed which would require an impairment test be performed. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.
Included within other assets in the accompanying consolidated balance sheets as of
March 2, 2019
and
March 3, 2018
, respectively, are
$143.8 million
and
$305.4 million
for indefinite lived tradenames and trademarks.
The Company utilizes a combination of insurance and self insurance for a number of risks including workers’ compensation, general liability, cyber liability, property 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.
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
$75.2 million
and
$81.6 million
as of
March 2, 2019
and
March 3, 2018
, 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
$127.4 million
and
$133.4 million
as of
March 2, 2019
and
March 3, 2018
, respectively.
The Company has authorization to make repurchases of its common shares 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 its shares of common stock. Since 2004 through the end of fiscal
2018
, the Company has repurchased approximately
$10.6 billion
of its common stock through share repurchase programs. 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
2018
, the Company repurchased approximately
9.1 million
shares of its common stock at a total cost of approximately
$148.1 million
. During fiscal
2017
, the Company repurchased approximately
8.0 million
shares of its common stock at a total cost of approximately
$252.4 million
. During fiscal
2016
the Company repurchased approximately
12.3 million
shares of its common stock at a total cost of approximately
$547.0 million
. The Company has approximately
$1.3 billion
remaining of authorized share repurchases as of
March 2, 2019
.
During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During fiscal
2018
and
2017
, total cash dividends of
$86.3 million
and
$80.9 million
were paid, respectively. Subsequent to the end of the fourth quarter of fiscal
2018
, on
April 10, 2019
, the Company’s Board of Directors declared a quarterly dividend increase to
$0.17
per share to be paid on
July 16, 2019
to shareholders of record at the close of business on
June 14, 2019
. The Company expects to pay quarterly cash dividends on its common stock in the future, subject to the determination by the Board of Directors, based on an evaluation of the Company’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.
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O.
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Fair Value of Financial Instruments
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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 U.S. Treasury securities, which are stated at
amortized cost, and auction rate securities, which are stated at their approximate fair value. The book value of the financial instruments, excluding the Company’s long term debt, is representative of their fair values (See “Fair Value Measurements,” Note 4). The fair value of the Company’s long term debt is approximately
$1.157 billion
as of
March 2, 2019
, which is based on quoted prices in active markets for identical instruments (i.e., Level 1 valuation), compared to the carrying value of approximately
$1.495 billion
.
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. In fiscal 2018, the Company recognized net sales for gift card and merchandise credit redemptions of approximately
$126.3 million
which were included in merchandise credit and gift card liabilities on the consolidated balance sheet as of
March 3, 2018
.
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 is required due to material changes in the returns activity, the liability for estimated returns and the corresponding right of return asset will be adjusted accordingly. As of
March 2, 2019
, the liability for estimated returns of
$90.4 million
is included in accrued expenses and other current liabilities and the corresponding right of return asset for merchandise of
$53.4 million
is included in prepaid expenses and other current assets.
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 (including furniture and wall décor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings accounted for approximately
35.4%
and
64.6%
of net sales, respectively, for fiscal
2018
,
35.5%
and
64.5%
of net sales, respectively, for fiscal
2017
and
36.8%
and
63.2%
of net sales, respectively, for fiscal
2016
.
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.
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
$37.0 million
,
$38.5 million
, and
$37.4 million
for fiscal
2018
,
2017
, and
2016
, respectively.
|
|
S.
|
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.
Prior to fiscal 2018, expenses associated with direct response advertising were expensed over the period in which the sales were expected to occur, generally five to eight weeks. Beginning in fiscal 2018, due to the adoption of ASU 2014-09, advertising expense related to direct response advertising are expensed on the first day of the direct response advertising event. All other expenses associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to
$463.2 million
,
$444.4 million
, and
$381.1 million
for fiscal
2018
,
2017
, and
2016
, respectively.
|
|
U.
|
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.
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.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, (the “Tax Act”). The Tax Act included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been previously accrued has now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to reinvest the unremitted earnings of its Canadian subsidiary. Accordingly, no additional provision has been made for U.S. or additional non-U.S. taxes with respect to these earnings, except for the transition tax resulting from the Tax Act. In the event of repatriation to the U.S., it is expected that such earnings would be subject to non-U.S. withholding taxes offset, in whole or in part, by U.S. foreign tax credits.
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.
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
8.2 million
,
8.0 million
, and
4.4 million
shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for fiscal
2018
,
2017
, and
2016
, respectively.
2. RESTRUCTURING ACTIVITIES
In the second quarter of fiscal 2017, the Company accelerated the realignment of its store management structure to support its customer-focused initiatives and omnichannel growth and expensed pre-tax cash restructuring charges of approximately
$16.9 million
, primarily for severance and related costs in conjunction with this realignment. During fiscal 2017, the Company paid
$16.7 million
of these costs.
3. ACQUISITIONS
On June 13, 2016, the Company acquired One Kings Lane, Inc., an 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 and no proforma disclosure of financial information has been presented. 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
$190.3 million
. Since the date of acquisition, the result of PMall’s
operations, which were not material, have been included in the results of operations and no proforma disclosure of financial information has been presented. PMall is included in the North American Retail operating segment.
During the third quarter of fiscal 2017, the Company finalized the valuation of assets acquired and liabilities assumed. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.
|
|
|
|
|
(in millions)
|
As of November 23, 2016
|
|
|
|
Current assets
|
$
|
15.5
|
|
Property and equipment and other non-current assets
|
9.3
|
|
Goodwill
|
194.2
|
|
Intangible assets
|
10.4
|
|
Total assets acquired
|
229.4
|
|
|
|
Accounts payable and other liabilities
|
(39.1
|
)
|
|
|
Total net assets acquired
|
$
|
190.3
|
|
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 and no proforma disclosure of financial information has been presented. Chef Central is included in the North American Retail operating segment. (See “Transactions and Balances with Related Parties,” Note 9).
On March 6, 2017, the Company acquired Decorist, Inc., an online interior design platform that provides personalized home design services. Since the date of acquisition, the results of Decorist’s operations, which were not material, have been included in the Company’s results of operations and no proforma disclosure of financial information has been presented. Decorist is included in the North American Retail operating segment.
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the 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
March 2, 2019
, the Company’s financial assets utilizing Level 1 inputs include short 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 5).
The Company’s investment securities as of
March 2, 2019
and
March 3, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 2, 2019
|
|
March 3, 2018
|
Available-for-sale securities:
|
|
|
|
|
Long term
|
|
$
|
19.9
|
|
|
$
|
19.4
|
|
|
|
|
|
|
Trading securities:
|
|
|
|
|
Short term
|
|
—
|
|
|
86.3
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
Short term
|
|
485.8
|
|
|
291.7
|
|
Total investment securities
|
|
$
|
505.7
|
|
|
$
|
397.4
|
|
Auction Rate Securities
As of
March 2, 2019
and
March 3, 2018
, 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
$0.4 million
and
$0.9 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.
U.S. Treasury Securities
As of
March 2, 2019
, the Company’s short term held-to-maturity securities included approximately
$485.8 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). As of
March 3, 2018
, the Company had
$291.7
short term held-to-maturity securities.
Trading Investment Securities
The Company’s trading investment securities, which are provided as investment options to the participants of the nonqualified deferred compensation plan, are stated at fair market value (See “Employee Benefit Plans,” Note 11). The value of these trading investment securities included in the table above was approximately
$86.3 million
as of
March 3, 2018
.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 2, 2019
|
|
March 3, 2018
|
Land and buildings
|
$
|
587,684
|
|
|
$
|
588,115
|
|
Furniture, fixtures and equipment
|
1,469,835
|
|
|
1,409,157
|
|
Leasehold improvements
|
1,623,015
|
|
|
1,543,452
|
|
Computer equipment and software
|
1,659,589
|
|
|
1,500,199
|
|
|
5,340,123
|
|
|
5,040,923
|
|
|
|
|
|
Less: Accumulated depreciation
|
(3,487,032
|
)
|
|
(3,131,634
|
)
|
Property and equipment, net
|
$
|
1,853,091
|
|
|
$
|
1,909,289
|
|
7. 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”). Interest on the Notes is payable semi-annually on February 1 and August 1 of each year. In fiscal 2018, the Company purchased and retired
$4.6 million
of senior unsecured notes due
August 1, 2024
.
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
March 2, 2019
.
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
On
November 14, 2017
, the Company replaced its existing
$250 million
five
year senior unsecured revolving credit facility agreement with various lenders with a new
$250 million
five
year senior unsecured revolving credit facility agreement ("Revolver") with various lenders maturing
November 14, 2022
. The new Revolver has essentially the same terms and requirements as the prior revolving credit facility agreement. For fiscal
2018
and
2017
, 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 operations. The Revolver contains customary affirmative and negative covenants and also requires the Company to maintain a maximum leverage ratio. The Company was in compliance with all covenants related to the Revolver as of
March 2, 2019
.
Deferred financing costs associated with the Notes and the current and former Revolvers of approximately
$10.5 million
were capitalized. In the accompanying consolidated balance sheets, the deferred financing costs are included in long term debt, net of amortization, for the Notes and are included in other assets, net of amortization, for the Revolver. These deferred financing costs for the Notes and the Revolver are being amortized over the term of each of the Notes and the term of the Revolver and such amortization is included in interest expense, net in the consolidated statement of operations. Interest expense related to the Notes and the Revolver, including the commitment fee and the amortization of the deferred financing costs, was approximately
$73.0 million
,
$74.4 million
, and
$73.4 million
for fiscal
2018
,
2017
and
2016
, respectively.
Lines of Credit
At
March 2, 2019
, the Company maintained
two
uncommitted lines of credit of
$100 million
each, with expiration dates of August 30, 2019 and
February 23, 2020
, 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
2018
and
2017
, the Company did not have any direct borrowings under the uncommitted lines of credit. As of
March 2, 2019
, there was approximately
$18.8 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
March 2, 2019
, the Company maintained unsecured standby letters of credit of
$47.0 million
, primarily for certain insurance programs.
|
|
8.
|
PROVISION FOR INCOME TAXES
|
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act significantly revised the U.S. tax code by, among other things, (i) reducing the federal corporate income tax rate, effective January 1, 2018, from 35% to 21%, (ii) imposing a one-
time transition tax on earnings of foreign subsidiaries deemed to be repatriated and (iii) implementing a modified territorial tax system.
In March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 118 ("SAB 118").
This update provided guidance on income tax accounting implications under the Tax Act. SAB 118 addressed the application of GAAP to situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows companies to record provisional amounts during a remeasurement period not to exceed one year after the enactment date while the accounting impact remains under analysis.
The Company has reasonably estimated the impact of the Tax Act in its fiscal 2017 provision for income taxes in accordance with its interpretation of the Tax Act and available guidance. The Tax Act resulted in a net unfavorable tax impact of approximately
$10.5 million
recorded in the fiscal fourth quarter of 2017.
As of December 22, 2018, the Company completed its review of the previously recorded provisional amounts related to the Tax Act and recorded an immaterial favorable adjustment to these amounts during fiscal 2018. The provisional amounts were related to the remeasurement of the Company’s net deferred tax assets and the transition tax on accumulated foreign earnings, which collectively totaled approximately
$26.8 million
as of March 3, 2018.
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
(in thousands)
|
March 2, 2019
|
|
March 3, 2018
|
|
February 25, 2017
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
61,721
|
|
|
$
|
82,044
|
|
|
$
|
313,571
|
|
State and local
|
22,995
|
|
|
13,554
|
|
|
42,101
|
|
|
84,716
|
|
|
95,598
|
|
|
355,672
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(83,576
|
)
|
|
157,057
|
|
|
20,295
|
|
State and local
|
(20,525
|
)
|
|
18,147
|
|
|
4,580
|
|
|
(104,101
|
)
|
|
175,204
|
|
|
24,875
|
|
|
$
|
(19,385
|
)
|
|
$
|
270,802
|
|
|
$
|
380,547
|
|
At
March 2, 2019
and
March 3, 2018
, included in other assets is a net deferred income tax asset of
$115.1 million
and
$11.0 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:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 2, 2019
|
|
March 3, 2018
|
Deferred tax assets:
|
|
|
|
|
|
Inventories
|
$
|
24,292
|
|
|
$
|
26,657
|
|
Deferred rent and other rent credits
|
42,147
|
|
|
47,893
|
|
Insurance
|
23,300
|
|
|
22,274
|
|
Stock-based compensation
|
16,097
|
|
|
23,690
|
|
Nonqualified deferred compensation plan
|
6,771
|
|
|
19,671
|
|
Merchandise credits and gift card liabilities
|
43,630
|
|
|
36,793
|
|
Accrued expenses
|
26,550
|
|
|
29,557
|
|
Obligations on distribution facilities
|
26,618
|
|
|
26,210
|
|
Carryforwards and other tax credits
|
48,115
|
|
|
48,221
|
|
Other
|
26,400
|
|
|
28,972
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
(132,120
|
)
|
|
(125,067
|
)
|
Goodwill
|
(3,337
|
)
|
|
(54,254
|
)
|
Intangibles
|
(19,414
|
)
|
|
(55,091
|
)
|
Prepaid expenses
|
(854
|
)
|
|
(52,723
|
)
|
Other
|
(13,115
|
)
|
|
(11,778
|
)
|
|
$
|
115,080
|
|
|
$
|
11,025
|
|
At
March 2, 2019
, the Company has federal net operating loss carryforwards of
$3.4 million
(tax effected), which will begin expiring in 2025, state net operating loss carryforwards of
$3.5 million
(tax effected), which will expire between 2018 and 2031, California state enterprise zone credit carryforwards of
$2.2 million
(tax effected), which will expire in 2023, but require taxable income in the enterprise zone to be realizable.
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:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 2, 2019
|
|
March 3, 2018
|
Balance at beginning of year
|
$
|
75,443
|
|
|
$
|
76,415
|
|
|
|
|
|
Increase related to current year positions
|
6,490
|
|
|
11,437
|
|
Increase related to prior year positions
|
2,822
|
|
|
4,128
|
|
Decrease related to prior year positions
|
(6,128
|
)
|
|
(1,823
|
)
|
Settlements
|
(2,338
|
)
|
|
(1,448
|
)
|
Lapse of statute of limitations
|
(14,352
|
)
|
|
(13,266
|
)
|
|
|
|
|
Balance at end of year
|
$
|
61,937
|
|
|
$
|
75,443
|
|
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
March 2, 2019
and
March 3, 2018
, approximately
$61.9 million
and
$75.4 million
, respectively, of gross unrecognized tax benefits would impact the Company’s effective tax rate. As of
March 2, 2019
and
March 3, 2018
, the liability for gross unrecognized tax benefits included approximately
$8.3 million
and
$9.6 million
, respectively, of accrued interest. The Company recorded a decrease of interest of approximately
$0.9 million
for the fiscal year ended
March 2, 2019
and an increase of approximately
$1.5 million
for the fiscal year ended
March 3, 2018
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
$4 million
in the next twelve months. However, actual results could differ from those currently anticipated.
As of
March 2, 2019
, 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 currently under examination by the Internal Revenue Service for the tax year 2015. The Company is open to examination for state, foreign and local jurisdictions with varying statutes of limitations, generally ranging from
three
to
five years
.
For fiscal
2018
, the effective tax rate is comprised of the federal statutory income tax rate of
21.00%
, the State income tax rate, net of federal benefit, of
1.38%
, provision for uncertain tax positions of
7.24%
, the impact of the Tax Act of
2.70%
, the impact of goodwill non-deductible impairment charges of
18.64%
, the impact of tax deficiencies related to stock-based compensation of
6.48%
, the impact of various tax credits of
4.53%
and other income taxes benefits of
3.41%
. For fiscal
2017
, the effective tax rate is comprised of the federal statutory income tax rate of
32.66%
, the State income tax rate, net of federal benefit, of
4.12%
, the net impact of the Tax Act of
3.86%
, provision for uncertain tax positions of
0.32%
, the impact of tax deficiencies related to stock-based compensation of
1.39%
, the benefit of various tax credits of
0.96%
and other income tax benefits of
2.46%
. 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%
, the benefit of various tax credits of
0.64%
and other income tax benefits of
2.18%
.
|
|
9.
|
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-Founders 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-Founders and their spouses were terminated in fiscal 2003. Upon termination in fiscal 2003, the Co-Founders 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-Founders in substitution for the aforementioned terminated agreements, the Company has agreed to pay to the Co-Founders, at a future date, an aggregate amount of
$4.2 million
, which is included in accrued expenses and other current liabilities as of
March 2, 2019
and
March 3, 2018
.
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-Founder, 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 3).
On April 21, 2019, Warren Eisenberg and Leonard Feinstein transitioned to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company. As a result of this transition, Mr. Eisenberg and Mr. Feinstein ceased to be officers of the Company effective as of April 21, 2019.
The Company leases retail stores, as well as distribution facilities, offices and equipment, under agreements expiring at various dates through 2041. Certain leases provide for contingent rents (which are based upon store sales exceeding stipulated amounts and are immaterial in fiscal
2018
,
2017
, and
2016
), 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
March 2, 2019
, future minimum lease payments under non-cancelable operating leases were as follows:
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
Fiscal Year:
|
|
|
|
2019
|
|
$
|
609,613
|
|
2020
|
|
534,055
|
|
2021
|
|
434,908
|
|
2022
|
|
334,587
|
|
2023
|
|
241,863
|
|
Thereafter
|
|
616,170
|
|
Total future minimum lease payments
|
|
$
|
2,771,196
|
|
Expenses for all operating leases were
$593.3 million
,
$614.1 million
, and
$582.2 million
for fiscal
2018
,
2017
, and
2016
, respectively.
As of
March 2, 2019
and
March 3, 2018
, the capital lease obligations were approximately
$3.8 million
and
$4.5 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
$0.3 million
,
$0.3 million
, and
$0.4 million
for fiscal
2018
,
2017
, and
2016
, respectively. The minimum capital lease payments, including interest, by fiscal year are:
$0.9 million
in fiscal 2019,
$0.8 million
in fiscal 2020,
$0.7 million
in fiscal 2021,
$0.6 million
in fiscal 2022,
$0.6 million
in fiscal 2023 and
$1.0 million
thereafter.
The Company has financing obligations, related to
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
March 2, 2019
and
March 3, 2018
, the sale/leaseback financing obligations were approximately
$101.7 million
and
$102.5 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 lease payments are accounted for as principal and interest payments (at approximate annual interest rates of
7.2%
and
10.6%
). These sale/leaseback financing obligations, excluding the residual fair value at the end of the lease term, mature as follows:
$0.8 million
in fiscal 2019,
$0.9 million
in fiscal 2020,
$0.9 million
in fiscal 2021,
$1.0 million
in fiscal 2022,
$1.0 million
in fiscal 2023 and
$75.4 million
thereafter.
|
|
11.
|
EMPLOYEE BENEFIT PLANS
|
Defined Contribution Plans
The Company has three 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
$15.5 million
,
$16.4 million
, and
$15.2 million
for fiscal
2018
,
2017
, and
2016
, respectively, which was expensed as incurred.
Nonqualified Deferred Compensation Plan
On December 27, 2017, the Company terminated its nonqualified deferred compensation plan (“NQDC”). After December 27, 2017, no participant deferrals were accepted and all balances were to be liquidated more than 12 months but less than 24 months after December 27, 2017. During fiscal 2018, all participants balances were liquidated and disbursed to those participants.
The Company’s NQDC was for the benefit of employees who are defined by the Internal Revenue Service as highly compensated. Participants of the NQDC were able to defer annual pre-tax compensation subject to statutory and plan limitations. In addition, a certain percentage of an employee’s contributions may have been matched by the Company and vested over a specified period of time, subject to certain plan limitations. The Company’s match was approximately
$0.6 million
,
$0.6 million
, and
$0.5 million
in fiscal
2018
,
2017
, and
2016
, 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
March 2, 2019
,
March 3, 2018
and
February 25, 2017
, the net periodic pension cost was not material to the Company’s results of operations. The Company has a
$1.6 million
asset, which is included in other assets as of
March 2, 2019
and
$14.3 million
liability, which is included in deferred rent and other liabilities as of
March 3, 2018
. In addition, as of
March 2, 2019
and
March 3, 2018
, the Company recognized a loss of
$3.7 million
, net of taxes of
$1.3 million
, and a loss of
$3.2 million
, net of taxes of
$1.1 million
, respectively, within accumulated other comprehensive loss.
|
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
The District Attorney's office for the County of Ventura, California, together with District Attorneys for other counties in California (together, the “District Attorneys"), recently concluded an investigation regarding the management and disposal at the Company's stores in California of certain materials that may be deemed hazardous or universal waste under California law. On March 19, 2019, the District Attorneys provided the Company with a settlement demand that included a proposed civil penalty, reimbursement of investigation costs, and certain injunctive relief, including modifications to the Company's existing compliance program, which already includes associate training, on-going review of disposal rules applicable to various product categories, and specialized third-party disposal. The Company is working with the District Attorneys towards a resolution of this matter and has recorded an accrual for the estimated probable loss for this matter as of March 2, 2019. While no assurance can be given as to its ultimate outcome, the Company does not believe that the final resolution of this matter will have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
The Company maintains employment agreements with its Co-Founders. Under these agreements, the Co-Founders could at any time elect senior status (i.e., to be continued to be employed to provide non-line executive consultative services). On May 11, 2017, the Co-Founders notified the Company that they elected to commence their Senior Status Period, effective May 21, 2017. The Co-Founders are entitled to a base salary, termination payments, postretirement benefits and other terms and conditions of employment, pursuant to the senior status provisions of these employment agreements. On April 21, 2019, Warren Eisenberg and Leonard Feinstein transitioned to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company. As a result of this transition, Mr. Eisenberg and Mr. Feinstein ceased to be officers of the Company effective as of April 21, 2019, and became entitled to the payments and benefits provided under their employment agreements that apply in the case of a termination without cause, which generally include continued senior status payments until May 2027 and continued participation for the Co-Founders (and their spouses, if applicable) at the Company’s expense, in medical, dental, hospitalization and life insurance and in all other employee plans and programs in which the Co-Founders (or their family) were participating as of the date of termination and other or additional benefits in accordance with the applicable plans and programs until the earlier of death of the survivor of the Co-Founder and his spouse or the date(s) he receives equivalent coverage and benefits from a subsequent employer. In addition, the Co-Founders are entitled to supplemental pension payments specified in their employment agreements until the death of the survivor of the Co-Founder and his spouse, reduced by the continued senior status payments referenced in the foregoing sentence.
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.
|
|
13.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
The Company paid income taxes of
$61.3 million
,
$203.9 million
, and
$364.4 million
in fiscal
2018
,
2017
, and
2016
, respectively. In addition, the Company had interest payments of approximately
$81.4 million
,
$81.3 million
, and
$81.4 million
in fiscal
2018
,
2017
, and
2016
, respectively.
The Company recorded an accrual for capital expenditures of
$51.7 million
,
$63.7 million
, and
$59.0 million
as of
March 2, 2019
,
March 3, 2018
and
February 25, 2017
, respectively. In addition, the Company recorded an accrual for dividends payable of
$28.3 million
and
$25.5 million
as of
March 2, 2019
and
March 3, 2018
, respectively. The Company did not declare any dividends prior to fiscal 2016. In fiscal 2018, the Company recorded a
$31.1 million
note receivable in connection with the sale of a building.
|
|
14.
|
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
March 2, 2019
,
March 3, 2018
and
February 25, 2017
was approximately
$58.5 million
(
$51.3 million
after tax or
$0.38
per diluted share),
$70.5 million
(
$43.1 million
after tax or
$0.31
per diluted share), and approximately
$71.9 million
(
$46.3 million
after tax or
$0.31
per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the years ended
March 2, 2019
and
March 3, 2018
was approximately
$2.3 million
and
$2.4 million
, respectively.
Incentive Compensation Plans
The Company currently grants awards under the Bed Bath & Beyond 2018 Incentive Compensation Plan (the “2018 Plan”), which includes an aggregate of
4.6 million
shares of common stock authorized for issuance of awards permitted under the 2018 Plan, including stock options, stock appreciation rights, restricted stock awards, performance awards and other stock based awards. The 2018 Plan supplements 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 of awards permitted under the 2012 Plan (similar to the 2018 Plan). Outstanding awards that were covered by the 2004 Plan continue to be in effect under the 2012 Plan.
Similar to the 2012 Plan, the 2018 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 2018 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
March 2, 2019
, unrecognized compensation expense related to the unvested portion of the Company’s stock options was
$10.1 million
, which is expected to be recognized over a weighted average period of
2.8 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)
|
|
March 2, 2019
|
|
March 3, 2018
|
|
February 25, 2017
|
Weighted Average Expected Life (in years) (2)
|
|
6.7
|
|
|
6.7
|
|
|
6.6
|
|
Weighted Average Expected Volatility (3)
|
|
34.96
|
%
|
|
26.49
|
%
|
|
26.96
|
%
|
Weighted Average Risk Free Interest Rates (4)
|
|
2.92
|
%
|
|
2.17
|
%
|
|
1.46
|
%
|
Expected Dividend Yield (5)
|
|
3.80
|
%
|
|
1.60
|
%
|
|
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
March 2, 2019
were as follows:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
|
Options outstanding, beginning of period
|
|
4,241
|
|
|
$
|
55.76
|
|
Granted
|
|
1,065
|
|
|
16.85
|
|
Exercised
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
|
(911
|
)
|
|
49.96
|
|
Options outstanding, end of period
|
|
4,395
|
|
|
47.53
|
|
Options exercisable, end of period
|
|
2,308
|
|
|
$
|
61.79
|
|
The weighted average fair value for the stock options granted in fiscal
2018
,
2017
, and
2016
was
$4.31
,
$9.50
, and
$11.87
, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of
March 2, 2019
was
4.3 years
and the aggregate intrinsic value was
$0
. The weighted average remaining contractual term for options exercisable as of
March 2, 2019
was
2.6 years
and the aggregate intrinsic value was
$0
. No stock options were exercised during fiscal 2018. The total intrinsic value for stock options exercised during fiscal
2017
and
2016
was
$3.9 million
and
$9.0 million
, respectively.
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 is based solely on time vesting. As of
March 2, 2019
, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock awards was
$99.3 million
, which is expected to be recognized over a weighted average period of
4.0 years
.
Changes in the Company’s restricted stock for the fiscal year ended
March 2, 2019
were as follows:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Restricted Shares
|
|
Weighted Average Grant-Date Fair
Value
|
Unvested restricted stock, beginning of period
|
|
4,311
|
|
|
$
|
48.07
|
|
Granted
|
|
695
|
|
|
18.08
|
|
Vested
|
|
(884
|
)
|
|
54.14
|
|
Forfeited
|
|
(375
|
)
|
|
41.51
|
|
Unvested restricted stock, end of period
|
|
3,747
|
|
|
$
|
41.73
|
|
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”) or a combination of EBIT margin and 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
March 2, 2019
, unrecognized compensation expense related to the unvested portion of the Company’s performance stock units was
$16.3 million
, which is expected to be recognized over a weighted average period of
1.7 years
.
Changes in the Company’s PSUs for the fiscal year ended
March 2, 2019
were as follows:
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Performance Stock Units
|
|
Weighted Average Grant-Date Fair
Value
|
Unvested performance stock units, beginning of period
|
|
1,352
|
|
|
$
|
46.06
|
|
Granted
|
|
1,274
|
|
|
16.90
|
|
Vested
|
|
(492
|
)
|
|
50.82
|
|
Forfeited
|
|
(52
|
)
|
|
43.28
|
|
Unvested performance stock units, end of period
|
|
2,082
|
|
|
$
|
27.16
|
|
|
|
15.
|
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2018 QUARTER ENDED
|
FISCAL 2017 QUARTER ENDED
|
(in thousands, except per share data)
|
June 2, 2018
|
September 1, 2018
|
December 1, 2018
|
March 2, 2019
|
May 27,
2017
|
August 26, 2017
|
November 25, 2017
|
March 3, 2018
|
Net sales
|
$
|
2,753,667
|
|
$
|
2,935,018
|
|
$
|
3,032,231
|
|
$
|
3,307,881
|
|
$
|
2,742,141
|
|
$
|
2,936,357
|
|
$
|
2,954,539
|
|
$
|
3,716,264
|
|
Gross profit
|
964,848
|
|
988,561
|
|
1,003,710
|
|
1,146,861
|
|
1,000,115
|
|
1,068,559
|
|
1,041,061
|
|
1,333,280
|
|
Operating profit (loss)
|
81,229
|
|
78,858
|
|
49,513
|
|
(296,735
|
)
|
147,011
|
|
168,847
|
|
108,360
|
|
337,103
|
|
Earnings (loss) before provision for income taxes
|
64,497
|
|
64,247
|
|
26,822
|
|
(312,175
|
)
|
130,431
|
|
149,681
|
|
94,739
|
|
320,809
|
|
Provision (benefit) for income taxes
|
20,921
|
|
15,608
|
|
2,468
|
|
(58,382
|
)
|
55,148
|
|
55,451
|
|
33,438
|
|
126,765
|
|
Net earnings (loss)
|
$
|
43,576
|
|
$
|
48,639
|
|
$
|
24,354
|
|
$
|
(253,793
|
)
|
$
|
75,283
|
|
$
|
94,230
|
|
$
|
61,301
|
|
$
|
194,044
|
|
EPS-Basic (1)
|
$
|
0.32
|
|
$
|
0.36
|
|
$
|
0.18
|
|
$
|
(1.92
|
)
|
$
|
0.53
|
|
$
|
0.67
|
|
$
|
0.44
|
|
$
|
1.41
|
|
EPS-Diluted (1)
|
$
|
0.32
|
|
$
|
0.36
|
|
$
|
0.18
|
|
$
|
(1.92
|
)
|
$
|
0.53
|
|
$
|
0.67
|
|
$
|
0.44
|
|
$
|
1.41
|
|
Dividends declared per share
|
$
|
0.160
|
|
$
|
0.160
|
|
$
|
0.160
|
|
$
|
0.160
|
|
$
|
0.150
|
|
$
|
0.150
|
|
$
|
0.150
|
|
$
|
0.150
|
|
(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.