BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
September 1, 2018
|
|
March 3, 2018
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
869,297
|
|
|
$
|
346,140
|
|
Short term investment securities
|
205,916
|
|
|
378,039
|
|
Merchandise inventories
|
2,813,588
|
|
|
2,730,874
|
|
Prepaid expenses and other current assets
|
387,343
|
|
|
516,025
|
|
|
|
|
|
Total current assets
|
4,276,144
|
|
|
3,971,078
|
|
|
|
|
|
Long term investment securities
|
19,742
|
|
|
19,517
|
|
Property and equipment, net
|
1,881,957
|
|
|
1,909,289
|
|
Goodwill
|
716,283
|
|
|
716,283
|
|
Other assets
|
425,737
|
|
|
424,639
|
|
|
|
|
|
Total assets
|
$
|
7,319,863
|
|
|
$
|
7,040,806
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
1,366,161
|
|
|
$
|
1,197,504
|
|
Accrued expenses and other current liabilities
|
748,629
|
|
|
633,100
|
|
Merchandise credit and gift card liabilities
|
329,227
|
|
|
335,081
|
|
|
|
|
|
Total current liabilities
|
2,444,017
|
|
|
2,165,685
|
|
|
|
|
|
Deferred rent and other liabilities
|
427,118
|
|
|
431,592
|
|
Income taxes payable
|
54,010
|
|
|
62,823
|
|
Long term debt
|
1,492,310
|
|
|
1,492,078
|
|
|
|
|
|
Total liabilities
|
4,417,455
|
|
|
4,152,178
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
Preferred stock - $0.01 par value; authorized - 1,000 shares; no shares issued or
outstanding
|
—
|
|
|
—
|
|
Common stock - $0.01 par value; authorized - 900,000 shares; issued 342,708 and
341,795, respectively; outstanding 138,051 and 140,498 shares, respectively
|
3,427
|
|
|
3,418
|
|
Additional paid-in capital
|
2,096,282
|
|
|
2,057,975
|
|
Retained earnings
|
11,386,561
|
|
|
11,343,503
|
|
Treasury stock, at cost; 204,657 and 201,297 shares, respectively
|
(10,530,712
|
)
|
|
(10,467,972
|
)
|
Accumulated other comprehensive loss
|
(53,150
|
)
|
|
(48,296
|
)
|
|
|
|
|
Total shareholders' equity
|
2,902,408
|
|
|
2,888,628
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
7,319,863
|
|
|
$
|
7,040,806
|
|
See accompanying Notes to Consolidated Financial Statements.
BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
September 1, 2018
|
|
August 26, 2017
|
|
September 1, 2018
|
|
August 26, 2017
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,935,018
|
|
|
$
|
2,936,357
|
|
|
$
|
5,688,685
|
|
|
$
|
5,678,498
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
1,946,457
|
|
|
1,867,798
|
|
|
3,735,276
|
|
|
3,609,824
|
|
|
|
|
|
|
|
|
|
Gross profit
|
988,561
|
|
|
1,068,559
|
|
|
1,953,409
|
|
|
2,068,674
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
909,703
|
|
|
899,712
|
|
|
1,793,322
|
|
|
1,752,816
|
|
|
|
|
|
|
|
|
|
Operating profit
|
78,858
|
|
|
168,847
|
|
|
160,087
|
|
|
315,858
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
14,611
|
|
|
19,166
|
|
|
31,343
|
|
|
35,746
|
|
|
|
|
|
|
|
|
|
Earnings before provision for income taxes
|
64,247
|
|
|
149,681
|
|
|
128,744
|
|
|
280,112
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
15,608
|
|
|
55,451
|
|
|
36,529
|
|
|
110,599
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
48,639
|
|
|
$
|
94,230
|
|
|
$
|
92,215
|
|
|
$
|
169,513
|
|
|
|
|
|
|
|
|
|
Net earnings per share - Basic
|
$
|
0.36
|
|
|
$
|
0.67
|
|
|
$
|
0.68
|
|
|
$
|
1.21
|
|
Net earnings per share - Diluted
|
$
|
0.36
|
|
|
$
|
0.67
|
|
|
$
|
0.68
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic
|
135,410
|
|
|
139,868
|
|
|
135,698
|
|
|
140,599
|
|
Weighted average shares outstanding - Diluted
|
135,675
|
|
|
140,211
|
|
|
136,138
|
|
|
141,176
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
0.16
|
|
|
$
|
0.15
|
|
|
$
|
0.32
|
|
|
$
|
0.30
|
|
See accompanying Notes to Consolidated Financial Statements.
BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
September 1, 2018
|
|
August 26, 2017
|
|
September 1, 2018
|
|
August 26, 2017
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
48,639
|
|
|
$
|
94,230
|
|
|
$
|
92,215
|
|
|
$
|
169,513
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in temporary impairment of auction rate securities, net of taxes
|
(150
|
)
|
|
44
|
|
|
165
|
|
|
210
|
|
Pension adjustment, net of taxes
|
657
|
|
|
405
|
|
|
793
|
|
|
604
|
|
Currency translation adjustment
|
(1,682
|
)
|
|
16,636
|
|
|
(5,812
|
)
|
|
10,798
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
(1,175
|
)
|
|
17,085
|
|
|
(4,854
|
)
|
|
11,612
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
47,464
|
|
|
$
|
111,315
|
|
|
$
|
87,361
|
|
|
$
|
181,125
|
|
See accompanying Notes to Consolidated Financial Statements.
BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
September 1, 2018
|
|
August 26, 2017
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
92,215
|
|
|
$
|
169,513
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
161,668
|
|
|
148,497
|
|
Stock-based compensation
|
37,043
|
|
|
36,904
|
|
Deferred income taxes
|
(4,074
|
)
|
|
(10,707
|
)
|
Other
|
(1,029
|
)
|
|
182
|
|
(Increase) decrease in assets, net of effect of acquisitions:
|
|
|
|
|
|
Merchandise inventories
|
(85,805
|
)
|
|
31,852
|
|
Trading investment securities
|
(4,174
|
)
|
|
(9,221
|
)
|
Other current assets
|
175,479
|
|
|
10,590
|
|
Other assets
|
1,475
|
|
|
(4,052
|
)
|
Increase (decrease) in liabilities, net of effect of acquisitions:
|
|
|
|
|
|
Accounts payable
|
218,945
|
|
|
22,004
|
|
Accrued expenses and other current liabilities
|
51,734
|
|
|
2,723
|
|
Merchandise credit and gift card liabilities
|
5,774
|
|
|
8,604
|
|
Income taxes payable
|
(7,268
|
)
|
|
(46,766
|
)
|
Deferred rent and other liabilities
|
(2,967
|
)
|
|
4,578
|
|
|
|
|
|
Net cash provided by operating activities
|
639,016
|
|
|
364,701
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase of held-to-maturity investment securities
|
(121,625
|
)
|
|
—
|
|
Redemption of held-to-maturity investment securities
|
298,125
|
|
|
—
|
|
Capital expenditures
|
(181,541
|
)
|
|
(176,955
|
)
|
Payment for acquisition, net of cash acquired
|
—
|
|
|
(5,207
|
)
|
|
|
|
|
Net cash used in investing activities
|
(5,041
|
)
|
|
(182,162
|
)
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
—
|
|
|
10,161
|
|
Payment of dividends
|
(43,401
|
)
|
|
(39,241
|
)
|
Repurchase of common stock, including fees
|
(62,740
|
)
|
|
(183,715
|
)
|
|
|
|
|
Net cash used in financing activities
|
(106,141
|
)
|
|
(212,795
|
)
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(4,677
|
)
|
|
5,989
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
523,157
|
|
|
(24,267
|
)
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
346,140
|
|
|
488,329
|
|
End of period
|
$
|
869,297
|
|
|
$
|
464,062
|
|
See accompanying Notes to Consolidated Financial Statements.
BED BATH & BEYOND INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The accompanying consolidated financial statements have been prepared without audit. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals and elimination of intercompany balances and transactions) necessary to present fairly the financial position of Bed Bath & Beyond Inc. and subsidiaries (the "Company") as of
September 1, 2018
and
March 3, 2018
and the results of its operations and comprehensive income for the
three and six months ended September 1, 2018
and
August 26, 2017
, respectively, and its cash flows for the
six months ended September 1, 2018
and
August 26, 2017
, respectively.
The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-Q and consequently do not include all the disclosures normally required by U.S. generally accepted accounting principles ("GAAP"). Reference should be made to Bed Bath & Beyond Inc.'s Annual Report on Form 10-K for the fiscal year ended
March 3, 2018
for additional disclosures, including a summary of the Company's significant accounting policies, and to subsequently filed Form 8-Ks.
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 GAAP and therefore is not a reportable segment. Net sales outside of the U.S. for the Company were not material for the
three and six months ended September 1, 2018
and
August 26, 2017
. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.
2) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 product 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:
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 1, 2018
|
(In thousands)
|
As Reported
|
|
Balances Without Adoption of ASU 2014-09
|
|
Impact of Adoption Increase/(Decrease)
|
|
|
|
|
|
|
Net sales
|
$
|
2,935,018
|
|
|
$
|
2,938,169
|
|
|
$
|
(3,151
|
)
|
Cost of sales
|
1,946,457
|
|
|
1,955,773
|
|
|
(9,316
|
)
|
Gross profit
|
988,561
|
|
|
982,396
|
|
|
6,165
|
|
Selling, general and administrative expenses
|
909,703
|
|
|
905,194
|
|
|
4,509
|
|
Operating profit
|
78,858
|
|
|
77,202
|
|
|
1,656
|
|
Interest expense, net
|
14,611
|
|
|
14,611
|
|
|
—
|
|
Earnings before provision for income taxes
|
64,247
|
|
|
62,591
|
|
|
1,656
|
|
Provision for income taxes
|
15,608
|
|
|
15,190
|
|
|
418
|
|
Net earnings
|
$
|
48,639
|
|
|
$
|
47,401
|
|
|
$
|
1,238
|
|
Net earnings per share - Diluted
|
$
|
0.36
|
|
|
$
|
0.35
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 1, 2018
|
(In thousands)
|
As Reported
|
|
Balances Without Adoption of ASU 2014-09
|
|
Impact of Adoption Increase/(Decrease)
|
|
|
|
|
|
|
Net sales
|
$
|
5,688,685
|
|
|
$
|
5,693,481
|
|
|
$
|
(4,796
|
)
|
Cost of sales
|
3,735,276
|
|
|
3,750,937
|
|
|
(15,661
|
)
|
Gross profit
|
1,953,409
|
|
|
1,942,544
|
|
|
10,865
|
|
Selling, general and administrative expenses
|
1,793,322
|
|
|
1,793,348
|
|
|
(26
|
)
|
Operating profit
|
160,087
|
|
|
149,196
|
|
|
10,891
|
|
Interest expense, net
|
31,343
|
|
|
31,343
|
|
|
—
|
|
Earnings before provision for income taxes
|
128,744
|
|
|
117,853
|
|
|
10,891
|
|
Provision for income taxes
|
36,529
|
|
|
33,780
|
|
|
2,749
|
|
Net earnings
|
$
|
92,215
|
|
|
$
|
84,073
|
|
|
$
|
8,142
|
|
Net earnings per share - Diluted
|
$
|
0.68
|
|
|
$
|
0.62
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2018
|
(In thousands)
|
As Reported
|
|
Balances Without Adoption of ASU 2014-09
|
|
Impact of Adoption Increase/(Decrease)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Merchandise inventories
|
$
|
2,813,588
|
|
|
$
|
2,815,569
|
|
|
$
|
(1,981
|
)
|
Prepaid expenses and other current assets
|
387,343
|
|
|
285,663
|
|
|
101,680
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
748,629
|
|
|
$
|
642,195
|
|
|
$
|
106,434
|
|
Merchandise credit and gift card liabilities
|
329,227
|
|
|
339,883
|
|
|
(10,656
|
)
|
Retained earnings
|
11,386,561
|
|
|
11,382,640
|
|
|
3,921
|
|
The Company expects the impact of the adoption of the new standard to be immaterial to the Company's full year fiscal 2018 consolidated financial statements.
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 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. 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 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.
3) Revenue Recognition
Sales are recognized upon purchase by customers at the Company’s retail stores or upon delivery for products purchased from its websites. The value of point-of-sale coupons and 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. For the
six months ended September 1, 2018
, the Company recognized net sales for gift card and merchandise credit redemptions of approximately
$85.5 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
September 1, 2018
, the liability for estimated returns of
$144.6 million
is included in accrued expenses and other current liabilities and the corresponding right of return asset for merchandise of
$104.6 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
38.6%
and
61.4%
of net sales, respectively, for the
three months ended September 1, 2018
, and approximately
39.1%
and
60.9%
of net sales, respectively, for the
three months ended August 26, 2017
. Sales of domestics merchandise and home furnishings accounted for approximately
37.3%
and
62.7%
of net sales, respectively, for the
six months ended September 1, 2018
, and approximately
37.7%
and
62.3%
of net sales, respectively, for the
six months ended August 26, 2017
.
4) Income Taxes
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 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 provides 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.
During the
three and six months ended September 1, 2018
, the Company made
no
adjustments to previously recorded provisional amounts related to the Tax Act. The provisional amounts are 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
. The Company believes the remeasurement of its net deferred tax assets is complete, except for changes in estimates that can result from finalizing the filing of its 2017 U.S. income tax return and changes that may be a direct impact of other provisional amounts due to the enactment of the Tax Act. The estimated transition tax was recorded based on the Company’s initial evaluation of the impact of the Tax Act and is subject to change during fiscal 2018 as the Company continues to refine, analyze and update the underlying data, computations and assumptions used to prepare this provisional amount during the measurement period. In addition, these estimates may be impacted as the Company further analyzes available tax accounting methods and elections, and state tax conformity to the federal tax changes and guidance issued by regulatory bodies that provide interpretive guidance of the Tax Act. Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined within the annual period following the enactment of the Tax Act. Additionally, the Company continues to evaluate the Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act and the impact, if any, on its consolidated financial statements. As a result, the Company has not included any amount related to GILTI in its consolidated financial statements as of
September 1, 2018
.
5) 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
September 1, 2018
, the Company's financial assets utilizing Level 1 inputs included 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 7).
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 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. The fair value of the Company's long term debt is approximately
$1.228 billion
as of
September 1, 2018
, 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
.
6) Cash and Cash Equivalents
Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of
$98.0 million
and
$95.6 million
as of
September 1, 2018
and
March 3, 2018
, respectively.
7) Investment Securities
The Company's investment securities as of
September 1, 2018
and
March 3, 2018
are as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
September 1, 2018
|
|
March 3, 2018
|
Available-for-sale securities:
|
|
|
|
|
|
Long term
|
$
|
19.7
|
|
|
$
|
19.4
|
|
|
|
|
|
Trading securities:
|
|
|
|
|
|
Short term
|
90.5
|
|
|
86.3
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
Short term
|
115.4
|
|
|
291.7
|
|
Total investment securities
|
225.6
|
|
|
397.4
|
|
Auction Rate Securities
As of
September 1, 2018
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
$0.6 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
September 1, 2018
and
March 3, 2018
, the Company’s short term held-to-maturity securities included approximately
$115.4 million
and
$291.7 million
of U.S. Treasury Bills with remaining maturities of less than one year, respectively. 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).
Trading Investment Securities
The Company's trading investment securities, which are provided as investment options to the participants of the nonqualified deferred compensation plan (“NQDC”), are stated at fair market value. The values of these trading investment securities included in the table above are approximately
$90.5 million
and
$86.3 million
as of
September 1, 2018
and
March 3, 2018
, respectively.
On December 27, 2017, the Company terminated its NQDC. After December 27, 2017, no participant deferrals will be accepted and all balances will be liquidated more than 12 months but less than 24 months after December 27, 2017. Until the final payment date, the NQDC will continue to operate in the ordinary course, except that no new participant deferrals will be credited to participant accounts under the NQDC.
8) Property and Equipment
As of
September 1, 2018
and
March 3, 2018
, included in property and equipment, net is accumulated depreciation of approximately
$3.3 billion
and
$3.1 billion
, respectively.
9) 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
,
$300 million
aggregate principal amount of
4.915%
senior unsecured notes due
August 1, 2034
and
$900 million
aggregate principal amount of
5.165%
senior unsecured notes due
August 1, 2044
(collectively, the "Notes"). 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
September 1, 2018
.
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. During the
six months ended September 1, 2018
, the Company did not have any borrowings under the Revolver.
The Revolver contains customary affirmative and negative covenants and also requires the Company to maintain a maximum leverage ratio. The Company was in compliance with all covenants related to the Revolver as of
September 1, 2018
.
Deferred financing costs associated with the Notes and the revolving credit facilities 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 Statements of Earnings. Interest expense related to the Notes and the revolving credit facilities, including the commitment fee and the amortization of deferred financing costs, was approximately
$18.3 million
for both the
three months ended September 1, 2018
and
August 26, 2017
, and
$36.5 million
for both the
six months ended September 1, 2018
and
August 26, 2017
.
Lines of Credit
At
September 1, 2018
, the Company maintained
two
uncommitted lines of credit of
$100 million
each, with expiration dates of
August 30, 2019
and
February 24, 2019
, 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 the first
six
months of fiscal
2018
, the Company did not have any direct borrowings under the uncommitted lines of credit. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.
10) Shareholders' Equity
The Company has authorization to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations.
Between December 2004 and September 2015, the Company's Board of Directors authorized, through several share repurchase programs, the repurchase of
$11.950 billion
of its shares of common stock. The Company also acquires shares of its common stock to cover employee related taxes withheld on vested restricted stock and performance stock unit awards. In the first
six
months of fiscal
2018
, the Company repurchased approximately
3.4 million
shares of its common stock for a total cost of approximately
$62.7 million
, bringing the aggregate total of common stock repurchased to approximately
204.7 million
shares for a total cost of approximately
$10.5 billion
since the initial authorization in December 2004. The Company has approximately
$1.4 billion
remaining of authorized share repurchases as of
September 1, 2018
.
During fiscal 2016, the Company's Board of Directors authorized a quarterly dividend program. During the
six months ended September 1, 2018
and
August 26, 2017
, total cash dividends of
$43.4 million
and
$39.2 million
were paid, respectively. Subsequent to the end of the
second
quarter of fiscal
2018
, on
September 26, 2018
, the Company's Board of Directors declared a quarterly dividend of
$0.16
per share to be paid on
January 15, 2019
to shareholders of record as of the close of business on
December 14, 2018
. 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 retained earnings when declared.
11) 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
three and six months ended September 1, 2018
was approximately
$13.4 million
(
$10.2 million
after tax or
$0.08
per diluted share) and approximately
$37.0 million
(
$26.5 million
after tax or
$0.19
per diluted share), respectively. Stock-based compensation expense for the
three and six months ended August 26, 2017
was approximately
$15.4 million
(
$9.7 million
after tax or
$0.07
per diluted share) and approximately
$36.9 million
(
$22.4 million
after tax or
$0.16
per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the
six months ended September 1, 2018
and
August 26, 2017
was approximately
$1.3 million
and
$1.0 million
, respectively.
Incentive Compensation Plans
The Company 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.
On May 22, 2018, the Company adopted the Bed Bath & Beyond 2018 Incentive Compensation Plan (the “2018 Plan”), subject to and effective upon shareholder approval, which was obtained on June 29, 2018. The 2018 Plan is generally based on the provisions of the 2012 Plan as currently in effect and also includes an aggregate share reserve of
4.6 million
shares of common stock. The 2012 Plan will continue in effect without modification in accordance with its existing terms. The 2012 Plan and the 2018 Plan have a total of
47.8 million
shares authorized for issuance.
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, 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
September 1, 2018
, unrecognized compensation expense related to the unvested portion of the Company's stock options was
$15.9 million
, which is expected to be recognized over a weighted average period of
3.1 years
.
The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.
|
|
|
|
|
|
|
|
Six Months Ended
|
Black-Scholes Valuation Assumptions (1)
|
September 1, 2018
|
|
August 26, 2017
|
Weighted Average Expected Life (in years) (2)
|
6.7
|
|
|
6.7
|
|
Weighted Average Expected Volatility (3)
|
34.96
|
%
|
|
26.49
|
%
|
Weighted Average Risk Free Interest Rates (4)
|
2.92
|
%
|
|
2.17
|
%
|
Expected Dividend Yield (5)
|
3.80
|
%
|
|
1.60
|
%
|
(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
six months ended September 1, 2018
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
|
(781
|
)
|
|
48.13
|
|
Options outstanding, end of period
|
4,525
|
|
|
$
|
47.92
|
|
Options exercisable, end of period
|
2,439
|
|
|
$
|
61.75
|
|
The weighted average fair value for the stock options granted during the first
six
months of fiscal
2018
and
2017
was
$4.31
and
$9.50
, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of
September 1, 2018
was
4.7 years
and
$1.2 million
, respectively. The weighted average remaining contractual term for options exercisable as of
September 1, 2018
was
2.9 years
and the aggregate intrinsic value was
$0
. There were
no
stock options exercised during the first
six
months of fiscal
2018
. The total intrinsic value for stock options exercised during the first
six
months of fiscal
2017
was
$3.9 million
.
Restricted Stock
Restricted stock awards are issued and measured at fair market value on the date of grant and generally become vested in five to seven equal annual installments beginning
one
to
three
years from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Vesting of restricted stock is based solely on time vesting. As of
September 1, 2018
, unrecognized compensation expense related to the unvested portion of the Company's restricted stock awards was
$123.3 million
, which is expected to be recognized over a weighted average period of
4.3 years
.
Changes in the Company's restricted stock for the
six months ended September 1, 2018
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
|
659
|
|
|
18.27
|
|
Vested
|
(737
|
)
|
|
58.34
|
|
Forfeited
|
(210
|
)
|
|
43.06
|
|
Unvested restricted stock, end of period
|
4,023
|
|
|
$
|
41.57
|
|
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 Company's estimate of the percentage of the award that will be achieved. The Company evaluates the estimate on these awards on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. As of
September 1, 2018
, unrecognized compensation expense related to the unvested portion of the Company's performance stock units was
$29.4 million
, which is expected to be recognized over a weighted average period of
2.0 years
.
Changes in the Company's PSUs for the
six months ended September 1, 2018
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
|
|
12) Earnings per Share
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding, including the dilutive effect of stock-based awards as calculated under the treasury stock method.
Stock-based awards for the
three and six months ended September 1, 2018
of approximately
7.6 million
and
8.1 million
, respectively, and
August 26, 2017
of approximately
8.2 million
and
7.7 million
, respectively, were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive.
13) Supplemental Cash Flow Information
The Company paid income taxes of
$34.9 million
and
$170.7 million
in the first
six
months of fiscal
2018
and
2017
, respectively. In addition, the Company had interest payments of approximately
$40.7 million
in both the first
six
months of fiscal
2018
and
2017
.
The Company recorded an accrual for capital expenditures of
$13.8 million
and
$24.9 million
as of
September 1, 2018
and
August 26, 2017
, respectively. In addition, the Company recorded an accrual for dividends payable of
$27.0 million
and
$24.2 million
as of
September 1, 2018
and
August 26, 2017
, respectively.
14) Acquisition
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.
15) 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.
16) Subsequent Event
Subsequent to the end of the second quarter of fiscal 2018, the Company sold a building that was not utilized in its operations and recorded a pre-tax gain of approximately
$28.0 million
.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 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.
The Company's mission is to be trusted by its customers as the expert for the home and heart-felt life events. These include certain life events that evoke strong emotional connections such as getting married, moving to a new home, having a baby, going to college and decorating a room, which the Company supports through its wedding and baby registries, mover and student life programs, and its design consultation services. The Company's ability to achieve its mission is driven by three broad objectives: first, to present a meaningfully differentiated and complete product assortment for the home, of the right quality, at the right value; second, to provide services and solutions that enhance the usage and enjoyment of its offerings; and third, to deliver a convenient, engaging, and inspiring shopping experience that is intelligently personalized over time. The Company is undertaking a number of strategic initiatives to support each of these objectives, as well as to drive change across the organization in order to improve operational efficiencies and to create future growth. Through this focused approach, the Company believes it will further its efforts to be trusted as the expert for the home and heart-felt life events.
The integration of retail store and customer facing digital channels allows the Company to provide its customers with a seamless shopping experience. In-store purchases are primarily fulfilled from that store's inventory, or may also be shipped to a customer from one of the Company's distribution facilities, from a vendor, or from another store. Purchases, including web and mobile, can be shipped to a customer from the Company's distribution facilities, directly from vendors, or from a store. The Company's customers can also choose to pick up online orders in a store, as well as return online purchases to a store. Customers can also make purchases through one of the Company's customer contact centers and in-store through The Beyond Store, the Company's proprietary, web-based platform. These capabilities allow the Company to better serve customers across various channels.
Operating in the highly competitive retail industry, the Company, along with other retail companies, is influenced by a number of factors including, but not limited to: general economic conditions including the housing market, unemployment levels and commodity prices; the overall macroeconomic environment and related changes in the retailing environment; consumer preferences, spending habits and adoption of new technologies; unusual weather patterns and natural disasters; competition from existing and potential competitors across all channels; potential supply chain disruption; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company's plans for new stores; and the ability to assess and implement technologies in support of the Company's development of its omnichannel capabilities. The Company cannot predict whether, when or the manner in which these factors could affect the Company's operating results.
The following represents an overview of the Company's financial performance for the periods indicated:
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Net sales for the
three months ended September 1, 2018
of
$2.935 billion
, were flat compared to net sales for the
three months ended August 26, 2017
. Net sales for the
six months ended September 1, 2018
were
$5.689 billion
, an increase of approximately
0.2%
as compared with the
six months ended August 26, 2017
.
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Comparable sales for both the
three and six months ended September 1, 2018
decreased by approximately
0.6%
, as compared to a decrease of approximately
2.6%
and
2.4%
, respectively for the
three and six months ended August 26, 2017
. For the
three and six months ended September 1, 2018
, comparable sales consummated through customer facing digital channels continued to have strong growth over the corresponding period in the prior year, while comparable sales consummated in-store declined in the mid-single-digit percentage range.
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Comparable sales include sales consummated through all retail channels which have been operating for twelve full months following the opening period (typically four to six weeks). The Company is an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store, online, with a mobile device or through a customer contact center, and have it fulfilled, in most cases, either through in-store customer pickup or by direct shipment to the customer from one of the Company's distribution facilities, stores or vendors.
Sales consummated on a mobile device while physically in a store location are recorded as customer facing digital channel sales. Customer orders taken in-store by an associate through The Beyond Store, the Company's proprietary, web-based platform, are recorded as in-store sales. Customer orders reserved online and picked up in a store are recorded as in-store sales. Sales originally consummated from customer facing digital channels and subsequently returned in-store are recorded as a reduction of in-store sales.
Stores relocated or expanded are excluded from comparable sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store’s sales are not considered comparable once the store closing process has commenced. Stores impacted by unusual and unexpected events outside the Company’s control, including severe weather, fire or floods, are excluded from comparable sales for the period of time that such event would cause a meaningful disparity in sales over the prior period. PMall is included in the comparable sales calculation beginning in the fourth quarter of fiscal 2017. One Kings Lane, Chef Central and Decorist are included in the comparable sales calculation beginning in the first quarter of fiscal 2018. Linen Holdings is excluded from the comparable sales calculations and will continue to be excluded on an ongoing basis as it represents non-retail activity.
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Gross profit for the
three months ended September 1, 2018
was
$988.6 million
, or
33.7%
of net sales, compared with
$1.069 billion
, or
36.4%
of net sales, for the
three months ended August 26, 2017
. Gross profit for the
six months ended September 1, 2018
was
$1.953 billion
, or
34.3%
of net sales, compared with
$2.069 billion
, or
36.4%
of net sales, for the
six months ended August 26, 2017
.
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Selling, general and administrative expenses ("SG&A") for the
three months ended September 1, 2018
were
$909.7 million
, or
31.0%
of net sales, compared with
$899.7 million
, or
30.6%
of net sales, for the
three months ended August 26, 2017
. SG&A for the
six months ended September 1, 2018
were
$1.793 billion
, or
31.5%
of net sales, compared with
$1.753 billion
, or
30.9%
of net sales, for the
six months ended August 26, 2017
.
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Interest expense, net for the
three and six months ended September 1, 2018
was
$14.6 million
and
$31.3 million
, respectively, compared with
$19.2 million
and
$35.7 million
for the
three and six months ended August 26, 2017
.
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The effective tax rate for the
three and six months ended September 1, 2018
was
24.3%
and
28.4%
, respectively, as compared with
37.0%
and
39.5%
for the
three and six months ended August 26, 2017
. The decrease in the effective tax rate was primarily due to the reduction of the U.S. federal corporate income tax rate due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). The tax rates included discrete tax items resulting in net after tax benefits of approximately
$1.8 million
and
$1.5 million
, respectively, for the
three months ended September 1, 2018
and
August 26, 2017
, and net after tax costs of approximately
$1.5 million
and
$4.1 million
, respectively, for the
six months ended September 1, 2018
and
August 26, 2017
.
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For the
three and six months ended September 1, 2018
, net earnings per diluted share were
$0.36
(
$48.6 million
) and
$0.68
(
$92.2 million
), respectively, as compared with net earnings per diluted share of
$0.67
(
$94.2 million
) and
$1.20
(
$169.5 million
), respectively, for the
three and six months ended August 26, 2017
. The decreases in net earnings per diluted share for the
three and six months ended September 1, 2018
are the result of the decreases in net earnings due to the items described above, partially offset by the impact of the Company's repurchases of its common stock. In addition, for the six months ended September 1, 2018, net earnings per diluted share included the favorable impact of approximately $0.06 from the adoption of Accounting Standard Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
.
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Capital expenditures for the
six months ended September 1, 2018
and
August 26, 2017
were
$181.5 million
and
$177.0 million
, respectively. In the first
six
months of fiscal
2018
, approximately 70% of the capital expenditures were for technology projects,
including investments in the Company's digital capabilities, and the development and deployment of new systems and equipment in its stores. The remaining capital expenditures were primarily related to new store openings and investments in existing stores.
The Company continues to review and prioritize its capital needs and remains committed to making the required investments in its infrastructure, including adding resources, to help position the Company for continued growth and success. Key areas of investment include: continuing to improve the presentation and content as well as the functionality, general search and navigation across its customer facing digital channels; improving customer data integration and customer relations management capabilities; continuing to enhance service offerings to its customers; continuing to strengthen and deepen its information technology, analytics, marketing and e-commerce groups; and creating more flexible fulfillment options that will improve the Company's delivery capabilities and lower the Company's shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling customer experience across the Company's omnichannel retail platform.
During the
six months ended September 1, 2018
, the Company opened
ten
new stores and closed
two
stores. The Company plans to continue to actively manage its real estate portfolio in order to permit store sizes, layouts, locations and offerings to evolve over time to optimize market profitability and will renovate or reposition stores within markets when appropriate. Over the past several years, the Company's pace of its store openings has slowed, and the Company has increased the number of store closings. The Company has approximately
400
stores across its retail fleet that will come up for renewal at the natural lease expiration date in fiscal 2018 or 2019, including approximately 270 BBB stores. In fiscal 2018, the Company expects to close approximately
40
stores, unless it is able to negotiate more favorable lease terms with its landlords, and open approximately
20
new stores, with the majority being Baby and Cost Plus World Market stores. Additionally, the Company expects to continue to invest in technology related projects, including the deployment of new systems and equipment in its stores, enhancements to the Company’s customer facing digital channels, ongoing investment in its data warehouse and data analytics and the continued deployment of a new point of sale system.
During fiscal 2016, the Company's Board of Directors authorized a quarterly dividend program. During the
six months ended September 1, 2018
and
August 26, 2017
, total cash dividends of
$43.4 million
and
$39.2 million
were paid, respectively. Subsequent to the end of the
second
quarter of fiscal
2018
, on
September 26, 2018
, the Company's Board of Directors declared a quarterly dividend of
$0.16
per share to be paid on
January 15, 2019
to shareholders of record as of the close of business on
December 14, 2018
. 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.
During the
three and six months ended September 1, 2018
, the Company repurchased approximately
2.2 million
and
3.4 million
shares, respectively, of its common stock at a total cost of approximately
$40.6 million
and
$62.7 million
, respectively. During the
three and six months ended August 26, 2017
, the Company repurchased approximately
1.8 million
and
5.1 million
shares, respectively, of its common stock at a total cost of approximately
$56.4 million
and
$183.7 million
, respectively. The Company's share repurchase program may be influenced by several factors, including business and market conditions. The Company reviews its alternatives with respect to its capital structure on an ongoing basis.
Subsequent to the end of the second quarter of fiscal 2018, the Company sold a building that was not utilized in its operations and recorded a pre-tax gain of approximately
$28.0 million
. The gain on the sale of this building was included in the Company's fiscal 2018 modeling assumptions.
Results of Operations
Net Sales
Since fiscal 2017 was a fifty-three week year, fiscal 2018 started one calendar week later than fiscal 2017. The comparable sales calendar compares the same calendar weeks. The table below summarizes by fiscal quarter the time period for the financial reporting calendar and the comparable sales calendar.
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Financial Reporting Calendar
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Fiscal 2018 (fifty-two weeks)
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Fiscal 2017 (fifty-three weeks)
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First Quarter
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March 4, 2018 - June 2, 2018
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February 26, 2017 - May 27, 2017
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Second Quarter
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June 3, 2018 - September 1, 2018
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May 28, 2017 - August 26, 2017
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Third Quarter
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September 2, 2018 - December 1, 2018
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August 27, 2017 - November 25, 2017
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Fourth Quarter
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December 2, 2018 - March 2, 2019
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November 26, 2017 - March 3, 2018
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Comparable Sales Calendar
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Fiscal 2018 (fifty-two weeks)
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Fiscal 2017 (fifty-two weeks)
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First Quarter
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March 4, 2018 - June 2, 2018
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March 5, 2017 - June 3, 2017
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Second Quarter
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June 3, 2018 - September 1, 2018
|
June 4, 2017 - September 2, 2017
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Third Quarter
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September 2, 2018 - December 1, 2018
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September 3, 2017 - December 2, 2017
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Fourth Quarter
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December 2, 2018 - March 2, 2019
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December 3, 2017 - March 3, 2018
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Net sales for the
three months ended September 1, 2018
were
$2.935 billion
, a slight decrease of
$1.3 million
over net sales of
$2.936 billion
for the corresponding quarter last year. Net sales for the
six months ended September 1, 2018
were
$5.689 billion
, an increase of
$10.2 million
, or approximately
0.2%
, over net sales of
$5.678 billion
for the corresponding
six
months last year.
The decrease in comparable sales for both the
three and six months ended September 1, 2018
was approximately
0.6%
, as compared to a decrease of approximately
2.6%
and
2.4%
, respectively, for the
three and six months ended August 26, 2017
. The decrease in comparable sales for the
three and six months ended September 1, 2018
was due to a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amount.
The Company's comparable sales metric considers sales consummated through all retail channels - in-store, online, with a mobile device or through a customer contact center. Customers today may take advantage of the Company's omnichannel environment by using more than one channel when making a purchase. The Company believes in an integrated and seamless customer experience. A few examples are: a customer may be assisted by an in-store associate to create a wedding or baby registry, while the guests may ultimately purchase a gift from the Company's websites; or a customer may research a particular item, and read other customer reviews on the Company's websites before visiting a store to consummate the actual purchase; or a customer may reserve an item online for in-store pick up; or while in a store, a customer may make the purchase on a mobile device for in home delivery from either a distribution facility, a store or directly from a vendor. In addition, the Company accepts returns in-store without regard to the channel in which the purchase was consummated, therefore resulting in reducing store sales by sales originally consummated through customer facing digital channels. As the Company's retail operations are integrated and it cannot reasonably track the channel in which the ultimate sale is initiated, the Company can however provide directional information on where the sale was consummated.
For the
three and six months ended September 1, 2018
, comparable sales consummated through customer facing digital channels continued to have strong growth over the corresponding period in the prior year, while comparable sales consummated in-store declined in the mid-single-digit percentage range.
For the
three and six months ended September 1, 2018
, comparable sales represented
$2.831 billion
and
$5.499 billion
of net sales, respectively. For the
three and six months ended August 26, 2017
, comparable sales represented
$2.818 billion
and
$5.431 billion
of net sales, respectively.
Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings (including furniture and wall décor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings accounted for approximately
38.6%
and
61.4%
of net sales, respectively, for the
three months ended September 1, 2018
, and approximately
39.1%
and
60.9%
of net sales, respectively, for the
three months ended August 26, 2017
. Sales of domestics merchandise and home furnishings accounted for approximately
37.3%
and
62.7%
of net sales, respectively, for the
six months ended September 1, 2018
, and approximately
37.7%
and
62.3%
of net sales, respectively, for the
six months ended August 26, 2017
.
Gross Profit
Gross profit for the
three months ended September 1, 2018
was
$988.6 million
, or
33.7%
of net sales, compared with
$1.069 billion
, or
36.4%
of net sales, for the
three months ended August 26, 2017
. Gross profit for the
six months ended September 1, 2018
was
$1.953 billion
, or
34.3%
of net sales, compared with
$2.069 billion
, or
36.4%
of net sales, for the
six months ended August 26, 2017
. In order of magnitude, the decreases in the gross profit margin as a percentage of net sales for the
three and six months ended September 1, 2018
were primarily attributed to an increase in coupon expense, a decrease in merchandise margin, and an increase in net direct to customer shipping expense. The increases in coupon expense were the result of an increase in the average coupon amount partially offset by a decrease in the number of redemptions.
In addition, the Company is investing in the lifetime value of its customers through its annual Beyond-Plus membership and College Savings Pass programs. The richer benefits of these programs, including twenty percent off entire purchase and free shipping, are realized immediately upon sale and had, and will continue to have, an impact on the Company’s gross margin during the period of increasing enrollment. The Beyond Plus membership fee of $29 is currently amortized over the one-year membership period. The Company estimated that the impact of these programs reduced gross margin as a percentage of net sales by approximately 40 and 30 basis points, respectively, for the
three and six months ended September 1, 2018
.
Selling, General and Administrative Expenses
SG&A for the
three months ended September 1, 2018
was
$909.7 million
, or
31.0%
of net sales, compared with
$899.7 million
, or
30.6%
of net sales, for the
three months ended August 26, 2017
. The increase in SG&A as a percentage of net sales was primarily attributable to, in order of magnitude, an increase in technology expenses, including related depreciation; an increase in management consulting expenses related to the Company's merchandising improvement, marketing personalization, and other initiatives; and an increase in advertising expenses, due in part to the growth in digital advertising. Also, contributing to the increase in SG&A was a non-recurring charge related to a real estate decision to rightsize certain leased office space. These increases are partially offset by a decrease in payroll and payroll related items (including severance costs), primarily due to the store management restructuring charges that occurred in the
three months ended August 26, 2017
.
SG&A for the
six months ended September 1, 2018
was
$1.793 billion
, or
31.5%
of net sales, compared with
$1.753 billion
, or
30.9%
of net sales, for the
six months ended August 26, 2017
. The increase in SG&A as a percentage of net sales was primarily attributable to, in order of magnitude, an increase in technology expenses, including related depreciation; an increase in management consulting expenses related to the Company's merchandising improvement, marketing personalization, and other initiatives; and an increase in advertising expenses, due in part to the growth in digital advertising. These increases are partially offset by a decrease in payroll and payroll related items (including severance costs), primarily due to the store management restructuring charges that occurred in the
six months ended August 26, 2017
.
Operating Profit
Operating profit for the
three months ended September 1, 2018
was
$78.9 million
, or
2.7%
of net sales, compared with
$168.8 million
, or
5.8%
of net sales, during the comparable period last year. For the
six months ended September 1, 2018
, operating profit was
$160.1 million
, or
2.8%
of net sales, compared with
$315.9 million
, or
5.6%
of net sales, during the comparable period last year. The changes in operating profit as a percentage of net sales were the result of the reductions in gross profit margin and the increases in SG&A as a percentage of net sales as described above.
The Company believes operating margin compression is likely to continue in fiscal
2018
, however, it is expected to be less than the Company experienced in fiscal 2017. This is largely due to gross margin deleverage, primarily due to the Company's continued investment in its customer value proposition, and the ongoing shift to its digital channels, as well as SG&A deleverage primarily due to investments it is making to transform the Company.
Interest Expense, net
Interest expense, net for the
three and six months ended September 1, 2018
was
$14.6 million
and
$31.3 million
, respectively, as compared to
$19.2 million
and
$35.7 million
, respectively, for the
three and six months ended August 26, 2017
.
For the
three and six months ended September 1, 2018
and
August 26, 2017
, interest expense, net primarily related to interest on the senior unsecured notes issued by the Company in July 2014.
Income Taxes
The effective tax rate for the
three months ended September 1, 2018
was
24.3%
compared with
37.0%
for the
three months ended August 26, 2017
. The decrease in the effective tax rate was primarily due to the reduction of the U.S. federal corporate income tax rate due to the enactment of the Tax Act. The tax rate for the
three months ended September 1, 2018
and
August 26, 2017
included net after tax benefits of approximately
$1.8 million
and
$1.5 million
, respectively, due to discrete federal and state tax items occurring during these quarters.
The effective tax rate for the
six months ended September 1, 2018
was
28.4%
, compared with
39.5%
for the
six months ended August 26, 2017
. The decrease in the effective tax rate was primarily due to the reduction of the U.S. federal corporate income tax rate due to the enactment of the Tax Act. The tax rate for the
six months ended September 1, 2018
and
August 26, 2017
included net after tax costs of approximately
$1.5 million
and
$4.1 million
, respectively, due to discrete federal and state tax items occurring during these quarters.
Potential volatility in the effective tax rate from year to year may occur as the Company is required each year to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.
Net Earnings
As a result of the factors described above, net earnings for the
three and six months ended September 1, 2018
were
$48.6 million
and
$92.2 million
, compared with
$94.2 million
and
$169.5 million
, respectively, for the corresponding period in fiscal
2017
.
Growth
In the 25-year period from the beginning of fiscal 1992 to the end of the
second
quarter of fiscal
2018
, the Company has grown from 34 stores to
1,560
stores plus the Company's interactive platforms, including websites and applications, and distribution facilities. Total store square footage, net of openings and closings, grew from approximately
0.9
million square feet at the beginning of fiscal 1992 to approximately
43.8 million
square feet at the end of the
second
quarter of fiscal
2018
. The Company expects company-wide to open approximately
20
new stores, and close approximately
40
stores in fiscal
2018
, unless it is able to negotiate more favorable lease terms with landlords. Over the past several years, sales from the Company’s customer facing digital channels have continued to experience strong growth.
As of
September 1, 2018
, the Company had distribution facilities totaling approximately
7.2 million
square feet, supporting the growth of its customer facing digital channels as well as its stores and its institutional sales segment. In addition, the Company has entered into a lease for a new distribution facility in Monroe, Ohio, which is planned to open in the fall of 2019, which will be approximately 755,000 square feet.
Over the next several years, the Company expects to make additional investments in people, processes and technology as it continues the evolution of its foundational structure to support its mission to be trusted by its customers as the expert for the home and heart-felt life events. The Company continues to leverage its existing associate base and augment talent with specialized new hires in order to effectively execute its long-term strategy, and believes that, as a result, it has the necessary management depth.
Liquidity and Capital Resources
The Company has been able to finance its operations, including its growth and acquisitions, substantially through internally generated funds. The Company ended the
second
quarter of fiscal 2018 in a strong cash position, which it anticipates maintaining, to provide the Company the flexibility to fund its ongoing initiatives and act upon other opportunities that may arise. As of
September 1, 2018
, the Company had approximately
$1.095 billion
in cash and investment securities, an increase of approximately
$532 million
compared with the corresponding period in fiscal
2017
. For fiscal
2018
, the Company believes that it can continue to finance its operations, including its growth, planned capital expenditures, debt service obligations, cash dividends, and share repurchases, through existing and internally generated funds. In addition, if necessary, the Company could borrow under its $250 million revolving credit facility or the available balances under its lines of credit. Capital expenditures for fiscal
2018
are planned to be approximately
$375 million
to
$425 million
, subject to the timing and composition of projects. In addition, the Company reviews its alternatives with respect to its capital structure on an ongoing basis.
Fiscal
2018
compared to Fiscal
2017
Net cash provided by operating activities for the
six months ended September 1, 2018
was
$639.0 million
, compared with
$364.7 million
in the corresponding period in fiscal
2017
. Year over year, the Company experienced an increase in cash provided by the net components of working capital (primarily accounts payable, other current assets and accrued expenses, partially offset by merchandise inventories) and a decrease in net earnings.
Retail inventory, which includes inventory in the Company’s distribution facilities for direct to customer shipments, was approximately
$2.8 billion
at
September 1, 2018
, a decrease of 1.7% compared to retail inventory at
August 26, 2017
. The percentage decrease was due, in part, to the favorable impact of the Company’s inventory optimization strategies where implemented, which were partially offset due to accelerated timing of receipts involving holiday and opportunistic buys.
Net cash used in investing activities for the
six months ended September 1, 2018
was
$5.0 million
, compared with
$182.2 million
in the corresponding period of fiscal
2017
. For the
six months ended September 1, 2018
, net cash used in investing activities was primarily due to
$181.5 million
of capital expenditures, partially offset by
$176.5 million
of redemptions of investment securities, net of purchases. For the
six months ended August 26, 2017
, net cash used in investing activities was primarily due to
$177.0 million
of capital expenditures.
Net cash used in financing activities for the
six months ended September 1, 2018
was
$106.1 million
, compared with
$212.8 million
in the corresponding period of fiscal
2017
. The decrease in net cash used in financing activities was primarily due to a decrease in common stock repurchases of
$121.0 million
offset by a decrease in proceeds from the exercise of stock options.
Seasonality
The Company's business is subject to seasonal influences. Generally, its sales volumes are higher in the calendar months of August, November and December, and lower in February.
Critical Accounting Policies
See "Critical Accounting Policies" under Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended
March 3, 2018
("
2017
Form 10-K"), filed with the Securities and Exchange Commission ("SEC") and incorporated by reference herein. Except for the changes due to the adoption of ASU 2014-09 related to revenue recognition discussed in "Recent Accounting Pronouncements," Note 2, there were no changes to the Company's critical accounting policies during the first
six
months of fiscal
2018
.
Forward-Looking Statements
This Form 10-Q may contain forward-looking statements. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, approximate, estimate, assume, continue, model, project, plan, goal and similar words and phrases. The Company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors. Such factors include, without limitation: general economic conditions including the housing market, a challenging overall macroeconomic environment and related changes in the retailing environment; consumer preferences, spending habits and adoption of new technologies; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; civil disturbances and terrorist acts; unusual weather patterns and natural disasters; competition from existing and potential competitors across all channels; pricing pressures; liquidity; the ability to achieve anticipated cost savings, and to not exceed anticipated costs, associated with organizational changes and investments; the ability to attract and retain qualified employees in all areas of the organization; the cost of labor, merchandise and other costs and expenses; potential supply chain disruption due to trade restrictions, political instability, labor disturbances, product recalls, financial or operational instability of suppliers or carriers, and other items; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company’s plans for new stores; the ability to establish and profitably maintain the appropriate mix of digital and physical presence in the markets it serves; the ability to assess and implement technologies in support of the Company’s development of its omnichannel capabilities; uncertainty in financial markets; volatility in the price of the Company’s common stock and its effect, and the effect of other factors, on the Company’s capital allocation strategy; disruptions to the Company’s information technology systems including but not limited to security breaches of systems protecting consumer and employee information or other types of cybercrimes or cybersecurity attacks; reputational risk arising from challenges to the Company’s or a third party product or service supplier’s compliance with various laws, regulations or standards, including those related to labor, health, safety, privacy or the environment; reputational risk arising from third-party merchandise or service vendor performance in direct home delivery or assembly of product for customers; changes to statutory, regulatory and legal requirements, including without limitation proposed changes affecting international trade, changes to, or new tax laws or interpretation of existing tax laws; new, or developments in existing, litigation, claims or assessments; changes to, or
new, accounting standards; foreign currency exchange rate fluctuations; and the integration of acquired businesses. The Company does not undertake any obligation to update its forward-looking statements.
Available Information
The Company makes available as soon as reasonably practicable after filing with the SEC, free of charge, through its website, www.bedbathandbeyond.com, the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, electronically filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.