UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

__________________________

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the fiscal year ended March 3, 2018

 

Commission File Number 0-20214

 

BED BATH & BEYOND INC.

(Exact name of registrant as specified in its charter)

 

New York  11-2250488
(State or other jurisdiction of  (IRS Employer
incorporation or organization)  Identification No.)

 

650 Liberty Avenue, Union, New Jersey 07083

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: 908/688-0888

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  Name of each exchange on which registered
Common stock, $.01 par value  The Nasdaq Stock Market LLC
   (Nasdaq Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No __

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No__

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer X  Accelerated filer __ (do not check if a smaller reporting company)
Non-accelerated filer __  Smaller reporting company ___
Emerging growth company ___   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X

 

As of August 26, 2017, the aggregate market value of the common stock held by non-affiliates (which was computed by reference to the closing price on such date of such stock on the Nasdaq Global Select Market) was $3,804,085,623.*

 

 

 

The number of shares outstanding of the registrant’s common stock (par value $0.01 per share) at March 31, 2018: 140,311,297.

 

Documents Incorporated by Reference

 

Portions of the Registrant’s definitive proxy statement for the 2018 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III hereof.

 

*For purposes of this calculation, all outstanding shares of common stock have been considered held by non-affiliates other than the 7,089,619 shares beneficially owned by directors and executive officers, including trusts and foundations affiliated with them. In making such calculation, the Registrant does not determine the affiliate or non-affiliate status of any shares for any other purpose.

 

 

 

 

 

 

 

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TABLE OF CONTENTS

 

 

Form 10-K    
Item No.   Name of Item
     
    PART I
Item 1.   Business
Item 1A.   Risk Factors
Item 1B.   Unresolved Staff Comments
Item 2.   Properties
Item 3.   Legal Proceedings
Item 4.   Mine Safety Disclosures
     
    PART II
Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6.   Selected Financial Data
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
Item 8.   Financial Statements and Supplementary Data
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.   Controls and Procedures
Item 9B.   Other Information
     
    PART III
Item 10.   Directors, Executive Officers and Corporate Governance
Item 11.   Executive Compensation
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.   Certain Relationships and Related Transactions, and Director Independence
Item 14.   Principal Accounting Fees and Services
     
    PART IV
Item 15.   Exhibits, Financial Statement Schedules
Item 16.   Form 10-K Summary

 

 3 

 

PART I

 

Unless otherwise indicated, the term "Company" refers collectively to Bed Bath & Beyond Inc. and subsidiaries as of March 3, 2018. The Company’s fiscal year is comprised of the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2017, fiscal 2016 and fiscal 2015 represented 53 weeks, 52 weeks, and 52 weeks, respectively, and ended on March 3, 2018, February 25, 2017 and February 27, 2016, respectively. Unless otherwise indicated, all references herein to periods of time (e.g., quarters and years) are to fiscal periods.

 

ITEM 1 – BUSINESS

 

Overview

 

Bed Bath & Beyond Inc. is an omnichannel retailer offering high quality and differentiated products, and services and solutions 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 commenced operations in 1971 with the opening of two stores, which primarily sold bed linens and bath accessories. The first store carrying a full line of domestics merchandise and home furnishings was introduced in 1985 using the name "Bed Bath & Beyond" in order to reflect the expanded product offering. In 1992, the Company became a public company, with 34 stores, and began trading on The Nasdaq Global Select Market under the ticker symbol ‘BBBY.’ In 1999, the Company launched its first e-commerce website, www.bedbathandbeyond.com.

 

Since then, the Company has grown both organically and via acquisition. In 2002, the Company acquired Harmon Stores, Inc., a health and beauty care retailer, which operated 27 stores at the time located in three states. In 2003, the Company acquired Christmas Tree Shops, Inc., a retailer of giftware and household items, which operated 23 stores at the time located in six states. In 2007, the Company acquired Buy Buy Baby, Inc., a retailer of infant and toddler merchandise, which operated eight stores at the time located in four states. In 2007, the Company opened its first international Bed Bath & Beyond store in Ontario, Canada. In 2008, the Company became a partner in a joint venture which operated two stores at the time in the Mexico City market under the name “Home & More,” which were rebranded as Bed Bath & Beyond in 2012. In 2012, the Company acquired Linen Holdings, LLC (“Linen Holdings,” operating as Harbor Linen and T-Y Group), a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries, and Cost Plus, Inc., an omnichannel retailer selling a wide range of home decorating items, furniture, gifts, holiday and other seasonal items, and specialty food and beverages, which operated 258 stores at the time located in 30 states under the names of World Market, Cost Plus World Market or Cost Plus. In 2014, the Company opened its first international buybuy BABY store in Alberta, Canada. In 2015, the Company acquired Of a Kind, Inc., an e-commerce website that features specially commissioned, limited edition items from emerging fashion and home designers. In 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; PersonalizationMall.com, LLC, an industry-leading online retailer of personalized products; and certain assets of Chef Central, a retailer of kitchenware, cookware and homeware items catering to cooking and baking enthusiasts. In early 2017, the Company acquired Decorist, Inc., an online interior design platform that provides personalized home design services.

 

 4 

 

Through its multiple retail channels, the Company strives to do more for and with its customers wherever, whenever and however they wish to interact with the Company. The Company operates a robust ecommerce platform consisting of various websites and applications including bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, facevalues.com, christmastreeshops.com, andthat.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, worldmarket.com, ofakind.com, onekingslane.com, personalizationmall.com, chefcentral.com and decorist.com. The Company also operates an established retail store base which consists of 1,552 stores, as of March 3, 2018, and includes 1,017 Bed Bath & Beyond (“BBB”) stores in all 50 states, the District of Columbia, Puerto Rico and Canada, 276 stores under the names of World Market, Cost Plus World Market or Cost Plus (collectively, “Cost Plus World Market”), 119 buybuy BABY (“Baby”) stores in 35 states and Canada, 83 stores under the names Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively, “CTS”), and 57 stores under the names Harmon, Harmon Face Values or Face Values (collectively, “Harmon”). In addition, the Company is a partner in a joint venture which operates eight 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 2017, 2016 and 2015.

 

Strategy

 

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 omnichannel 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.

 

By remaining grounded in its customer-centric culture, along with maintaining strong financial discipline, the Company believes it will achieve its mission to be the trusted expert for the home and heart-felt life events and continue to achieve long-term success.

 

Pricing. The Company believes in offering its customers high quality and differentiated products, and services and solutions at the right price and value. The Company regularly monitors price levels at its competitors in order to ensure that its prices are in accordance with its pricing philosophy. The Company believes that the application of its pricing philosophy is a significant factor in its ability to establish trust among customers as the expert for the home and heart-felt life events.

 

Merchandising. 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. The Company strives to present an exciting and engaging assortment of products to its customers, including name brands, proprietary and exclusive brands, as well as personalized products. The Company pursues product differentiation in several ways, including its own product development, and exclusivity and limited distribution with its vendor partners. Some examples of the Company’s proprietary brands include Wamsutta, Real Simple, SALT and Artisanal Kitchen Supply. The Company, on an ongoing basis, tests new merchandise categories and adjusts the categories of merchandise carried in-store and online and may add new product categories or expand its merchandise assortment as appropriate. Additionally, the Company continues to integrate its merchandise assortments among its concepts.

 

 5 

 

The Company is evolving toward providing a more inspirational and personal shopping experience with an expanded offering, which includes a more differentiated product mix, and enhanced services and solutions for customers, both in-store and across its customer facing digital channels.

 

As consumer shopping preferences continue to shift to customer facing digital channels, the Company believes its investments are driving a better omnichannel experience. The Company continues to improve the presentation and content as well as the functionality, general search and navigation features across its customer facing digital channels. The Company is also adapting its physical channels to further integrate its omnichannel capabilities to enhance the in-store customer experience by bringing products, and services and solutions, as well as the Company’s brand, to life. This includes services such as, reserve online and pickup in-store, purchase online and return in-store, and online appointment scheduling for one of the Company’s various registry services. In addition, the Company has introduced new technology in some stores which enables a customer to further engage with its products, obtain product ideas and answers to product questions.

 

Marketing. The Company’s marketing efforts include a full-range of online and off-line vehicles, including email, mobile SMS, social, search, digital display and online affiliate programs, as well as traditional print media such as postcards, newspaper inserts, circulars, and catalogs, all of which often include coupon offers. The Company is making significant investments to further develop and integrate its expansive customer data with other relevant third-party data and technology tools to develop and scale tailored and personalized marketing communications, and further its efforts to be trusted as the expert for the home and heart-felt life events.

 

Customer Service. The Company’s customer-centric culture is rooted in creating a noticeably better shopping experience for each and every customer. The Company invests in its people and in delivering high-quality products, and services and solutions. As part of its objective to take care of its customers, the Company strives to make returns and exchanges hassle-free, whether in store or online. The Company’s best-in-class registry services for wedding, baby, college and other heart-felt life events provide a unique opportunity to deepen customer relationships by demonstrating a high level of customer service during important life stages. Also, the Company continues to invest in the technology necessary to enable a more seamless interaction between its associates and its customers wherever, whenever and however they wish to interact with the Company. The Company’s customer contact centers provide 24/7 customer service and support either by phone, email or live chat. During the second quarter of fiscal 2017, the Company opened its newest customer contact center in the Orlando, Florida area. The Company continues to focus its efforts and investments to strengthen its position as a leader in customer service.

 

Suppliers

 

The Company purchases substantially all of its merchandise in the United States, the majority from domestic sources (who may manufacture overseas) and the balance from importers. The Company purchases a small amount of its merchandise directly from overseas sources. In fiscal 2017, the Company purchased its merchandise from approximately 11,100 suppliers with its largest supplier accounting for approximately 3% of its merchandise purchases with the 10 largest suppliers accounting for approximately 16% of such purchases. The Company has no long term contracts for the purchases of merchandise. The Company believes that most merchandise, other than brand name goods, is available from a variety of sources and that most brand name goods can be replaced with comparable merchandise.

 

 6 

 

Distribution

 

A substantial portion of the Company’s merchandise is shipped to stores through a combination of third party facilities, including cross dock locations, or Company operated distribution facilities which are located throughout the United States. The remaining merchandise for stores is shipped directly from vendors. Merchandise is shipped directly to customers from one of the Company’s operated distribution facilities, stores or from vendors. The majority of the Company’s shipments are made by contract carriers depending upon location.

 

See “Item 2 – Properties” for additional information regarding the Company’s distribution facilities.

 

Associates

 

As of March 3, 2018, the Company employed approximately 65,000 regular full-time and part-time associates. The Company believes that its employee relations are very good and that the labor turnover rate among its management employees is lower than that generally experienced within the industry.

 

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.

 

Growth

 

In the 25-year period from the beginning of fiscal 1992 to the end of fiscal 2017, the Company has grown from 34 stores to 1,552 stores, plus its interactive platforms, including websites and applications, and distribution facilities. Total store square footage, net of openings and closings, grew from approximately 0.9 million square feet at the beginning of fiscal 1992 to approximately 43.7 million square feet at the end of fiscal 2017. Over the past several years, sales from the Company’s customer facing digital channels have continued to experience strong growth.

 

In addition, as of March 3, 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. During the third quarter of fiscal 2017, the Company’s newest distribution facility in Las Vegas, Nevada began shipping to customers. This new facility replaced a smaller distribution facility in that area, which closed in late 2017, and provides additional capacity to support the growth of the Company’s customer facing digital channels.

 

Over the next several years, the Company expects to make heavy 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 expects company-wide to open approximately 20 new stores, and close approximately 40 stores in fiscal 2018, unless it can negotiate more favorable lease terms with landlords. Additionally, in connection with leveraging its merchandise offerings and optimizing its operations, the Company continues to expand, across selected stores, the number of specialty departments such as health and beauty care, baby, specialty food, and beverage. Also, the Company is committed to the continued growth of its merchandise categories and channels and is growing the number of items it is able to have shipped directly to customers from a vendor. The continued growth of the Company is dependent, in part, upon the Company’s ability to execute these and other key initiatives successfully.

 

The Company has built its management structure with a view towards its growth and believes that, as a result, it has the necessary management depth.

 

 7 

 

Competition

 

The Company operates in a highly competitive business environment and competes with other national, regional, local and online retailers that may carry similar lines of merchandise, including department stores, specialty stores, off-price stores, mass merchandise stores and online only retailers. The Company believes the key to competing in its industry is to provide best-in-class customer service and customer experiences in stores and online, which includes compelling price and value, high-quality and differentiated products, services and solutions, convenience, technology, personalization, and appealing and experiential store environments.

 

Tradenames and Service Marks

 

The Company uses the service marks “Bed Bath & Beyond,” “buybuy BABY,” “Christmas Tree Shops,” “andThat!,” “Harmon,” “Face Values,” “Cost Plus,” “World Market,” “Cost Plus World Market,” “Of a Kind,” “One Kings Lane,” “PersonalizationMall.com,” “PMall,” “Chef Central,” and “Decorist,” in connection with its retail services. The Company also uses the service marks “Harbor Linen” and “TY Group” in connection with its institutional sales segment. The Company has registered trademarks and service marks or is seeking registrations for these and other trademarks and service marks with the United States Patent and Trademark Office. In addition, the Company has registered or has applications pending with the trademark registries of several foreign countries, including having registered the “Bed Bath & Beyond” name and logo in Canada and Mexico and having registered the “buybuy BABY” name and logo in Canada. The Company also owns a number of product trademarks. The Company files patent applications and seeks copyright registrations where it deems such to be advantageous to the business. The Company believes that its name recognition and service marks are important elements of the Company’s merchandising strategy.

 

Available Information

 

The Company makes available as soon as reasonably practicable after filing with the Securities and Exchange Commission (“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(a) or 15(d) of the Securities Exchange Act of 1934.

 

 

 

 

 

 

 

 8 

 

ITEM 1A – RISK FACTORS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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 the following:

 

General economic factors beyond the Company’s control and changes in the economic climate could adversely affect the Company’s performance.

 

General economic factors that are beyond the Company’s control could impact the Company’s forecasts and actual performance. These factors include housing markets, recession, inflation, deflation, consumer credit availability, consumer debt levels, fuel and energy costs, interest rates, tax rates and policy, unemployment trends, the impact of natural disasters, civil disturbances and terrorist activities, foreign currency exchange rate fluctuations, conditions affecting the retail environment for products sold by the Company and other matters that influence consumer spending. Changes in the economic climate could adversely affect the Company’s performance.

 

The Company operates in the highly competitive retail business where the use of emerging technologies as well as unanticipated changes in the pricing and other practices of competitors may adversely affect the Company’s performance.

 

The retail business is highly competitive. The Company competes for customers, employees, locations, merchandise, technology, services and other important aspects of the business with many other local, regional and national retailers. Those competitors range from specialty retailers to department stores and discounters as well as online and multichannel retailers. Specifically, rapidly evolving technologies are altering the manner in which the Company and its competitors communicate and transact with customers. The Company’s execution of its own omnichannel strategy to adapt to these changes, in relation to its competitors’ actions as well as to its customers adoption of new technology, presents a specific risk. Further, unanticipated changes in pricing and other practices of the Company’s competitors, including promotional activity, such as thresholds for free shipping and rapid price fluctuation enabled by technology, may adversely affect the Company’s performance.

 

The Company’s failure to anticipate and respond in a timely fashion to changes in consumer preferences and demographic factors may adversely affect the Company’s financial condition and results of operations.

 

The Company’s success depends on its ability to anticipate and respond in a timely manner to changing merchandise trends, customer demands and demographics. The Company’s failure to anticipate, identify or react appropriately to changes in customer tastes, preferences, shopping and spending patterns and other life interest decisions could lead to, among other things, excess inventories or a shortage of products and may adversely affect the Company’s financial condition and results of operations.

 

Unusual weather patterns could adversely affect the Company’s performance.

 

The Company’s operating results could be negatively impacted by unusual weather patterns. Frequent or unusually heavy snow, ice or rain storms, hurricanes, floods, tornados or extended periods of unseasonable temperatures could adversely affect the Company’s performance.

 

 9 

 

A major disruption of the Company’s information technology systems could negatively impact operating results.

 

The Company’s operating results could be negatively impacted by a major disruption of the Company’s information technology systems. The Company relies heavily on these systems to process transactions, manage inventory replenishment, summarize results and control distribution of products. Despite numerous safeguards and careful contingency planning, these systems are still subject to power outages, telecommunication failures, cybercrimes, cybersecurity attacks and other catastrophic events. A major disruption of the systems and their backup mechanisms may cause the Company to incur significant costs to repair the systems, experience a critical loss of data and/or result in business interruptions.

 

A breach of the Company’s data security systems or those of its third party service providers could have a negative impact on the Company's operating results and financial performance due to possible loss of consumer confidence, as well as potential government penalties and private litigation.

 

The Company processes, transmits, stores and maintains certain information about its customers and employees in the ordinary course of business. In connection with certain activities, including without limitation credit card processing, website hosting, data encryption and software support, the Company utilizes third party service providers, and the Company believes it takes appropriate steps to require such providers to secure such information and to assess their ability to do so. The Company invests considerable resources in protecting this sensitive information but is still subject to a possible security event, including but not limited to cybercrimes or cybersecurity attacks which may not be detected for a period of time. A breach of its security systems or those of its third party service providers resulting in unauthorized access to stored personal information could negatively impact the Company’s operating results and financial performance. Certain aspects of the business, particularly the Company’s websites, heavily depend on consumers entrusting personal financial information to be transmitted securely over public networks. A loss of consumer confidence from such a breach could result in lost future sales and have a material adverse effect on the Company’s reputation. In addition, a breach or other type of cybercrime or cybersecurity attack could cause the Company to incur significant costs to restore the integrity of its data and systems, could require the devotion of significant management resources, and could result in significant costs in government penalties and private litigation.

 

A failure of the Company’s suppliers to adhere to appropriate laws, regulations or standards could negatively impact its reputation.

 

The Company purchases substantially all of its merchandise in the United States, the majority from domestic sources (who may manufacture overseas) and the balance from importers. The Company purchases a small amount of its merchandise directly from overseas sources. The failure of one of the Company’s domestic or foreign suppliers to adhere to labor, environmental, privacy, health and safety laws, regulations and standards could negatively impact the Company’s reputation and have an adverse effect on the Company’s results of operations.

 

Damage to the reputation of the Company in any aspect of its operations could potentially impact its operating and financial results.

 

The Company’s reputation is based, in part, on perceptions of subjective qualities, so incidents involving the Company, its products or the retail industry in general that erode customer trust or confidence could adversely affect the Company’s reputation and its business. As the Company increases the number of items it is able to have shipped directly from a vendor to a customer for home delivery or in home assembly, any deficiencies in the performance of these third party merchandise vendors and service providers could also have an adverse effect on the Company’s reputation, despite the Company’s monitoring controls and procedures. In addition, challenges to the Company’s compliance with a variety of social, product, labor and environmental standards could also jeopardize its reputation and lead to adverse publicity, especially in social media. The use of social media by the Company and consumers has also increased the risk that the Company’s reputation could be negatively impacted. The availability of information and opinion on social media is immediate, as is its impact. The opportunity for dissemination of information, including inaccurate and inflammatory information and opinion, is virtually limitless. Information about or affecting the Company is easily accessible and rapidly disseminated.

 

 10 

 

Damage to the reputation of the Company in any aspect of its operations could potentially impact its operating and financial results as well as require additional resources to rebuild its reputation.

 

Changes in statutory, regulatory, and other legal requirements at a local, state or provincial and national level, or deemed noncompliance with such requirements, could potentially impact the Company’s operating and financial results.

 

The Company is subject to numerous statutory, regulatory and legal requirements at a local, state or provincial and national level, and this regulatory environment is subject to constant change. The Company’s operating results could be negatively impacted by developments in these areas due to the costs of compliance in addition to possible government penalties and litigation in the event of deemed noncompliance. Changes in the law or the regulatory environment in the areas of product safety, environmental protection, privacy and information security, wage and hour laws, and international trade policy, among others, could potentially impact the Company’s operations and financial results.

 

Changes to accounting rules, regulations and tax laws, or new interpretations of existing accounting standards or tax laws could negatively impact the Company’s operating results and financial position.

 

The Company’s operating results and financial position could be negatively impacted by changes to accounting rules and regulations or new interpretations of existing accounting standards. The Company’s effective income tax rate could be impacted by changes in accounting standards as well as changes in tax laws or the interpretations of these tax laws by courts and taxing authorities which could negatively impact the Company’s financial results. Such changes would include for example, the possible adoption by the United States of additional tariffs, or the disallowance of tax deductions, with respect to imported merchandise.

 

New, or developments in existing, litigation, claims or assessments could potentially impact the Company’s operating and financial results.

 

The Company is involved in litigation, claims and assessments incidental to the Company’s business, the disposition of which is not expected to have a material effect on the Company’s financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions related to these matters. While outcomes of such actions vary, any such claim or assessment against the Company could potentially impact the Company’s operations and financial results.

 

The success of the Company is dependent, in part, on managing costs of labor, merchandise and other expenses that are subject to factors beyond the Company’s control.

 

The Company’s success depends, in part, on its ability to manage operating costs and to look for opportunities to reduce costs. The Company’s ability to meet its labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, labor organizing activities and changing demographics. The Company’s ability to find qualified merchandise vendors and service providers and obtain access to products in a timely and efficient manner can be adversely affected by trade restrictions, political instability, the financial instability of suppliers, suppliers’ noncompliance with applicable laws, transportation costs, disruptions to its supply chain network serving the Company’s stores, distribution facilities and customers due to labor disturbances and other items, and other factors beyond the Company’s control.

 

 11 

 

Disruptions of the Company’s supply chain could have an adverse effect on the Company’s operating and financial results.

 

Disruption of the Company’s supply chain capabilities due to trade restrictions, political instability, weather, natural disaster, terrorism, product recalls, labor supply or stoppages, the financial and/or operational instability of key suppliers and carriers, or other reasons could impair the Company’s ability to distribute its products. To the extent the Company is unable to mitigate the likelihood or potential impact of such events, there could be an adverse effect on the Company’s operating and financial results.

 

The success of the Company is dependent, in part, on the ability of its employees in all areas of the organization to execute its business plan and, ultimately, to satisfy its customers.

 

The Company’s ability to attract and retain qualified employees in all areas of the organization may be affected by a number of factors, including geographic relocation of employees, operations or facilities and the highly competitive markets in which the Company operates, including the markets for the types of skilled individuals needed to support the Company's continued success.

 

The success of the Company is dependent, in part, on its ability to establish and profitably maintain the appropriate mix of digital and physical presence in the markets it serves.

 

The Company’s success depends, in part, on its ability to develop its digital capabilities in conjunction with optimizing its physical store operations and market coverage, while maintaining profitability. The Company’s ability to develop these capabilities will depend on a number of factors, including its assessment and implementation of emerging technologies. The Company’s ability to optimize its store operations and market coverage requires active management of its real estate portfolio in a manner that permits store sizes, layouts, locations and offerings to evolve over time, which to the extent it involves the relocation of existing stores or the opening of additional stores will depend on a number of factors, including its identification and availability of suitable locations; its success in negotiating leases on acceptable terms; and its timely development of new stores, including the availability of construction materials and labor and the absence of significant construction and other delays based on weather or other events. These factors could potentially increase the cost of doing business and the risk that the Company’s business practices could result in liabilities that may adversely affect its performance, despite the exercise of reasonable care.

 

Disruptions in the financial markets could have an adverse effect on the Company’s ability to access its cash and cash equivalents.

 

The Company may have amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. While the Company closely manages its cash and cash equivalents balances to minimize risk, if there were disruptions in the financial markets, the Company cannot be assured that it will not experience losses on its deposits.

 

The Company’s stock price has been and may continue to be subject to volatility, and this and other factors may affect elements of the Company’s capital allocation strategy such as share repurchases and dividends.

The Company’s stock price has experienced volatility over time and this volatility may continue, in part due to factors such as those mentioned in this Item 1A. Stock volatility in itself may adversely affect shareholder confidence as well as employee morale and retention for those associates who receive equity grants as part of their compensation packages. The impact on employee morale and retention could adversely affect the Company’s business performance and financial results. Stock volatility and other factors may also affect elements of the Company’s capital allocation strategy.

 

 12 

 

As part of its capital allocation strategy, since December 2004, the Company’s Board of Directors has authorized several share repurchase programs, and in April 2016, the Board of Directors authorized a quarterly dividend program. Decisions regarding share repurchases and dividends are within the discretion of the Board of Directors, and will be influenced by a number of factors, including the price of the Company’s common stock, general business and economic conditions, the Company’s financial condition and operating results, the emergence of alternative investment or acquisition opportunities, changes in business strategy and other factors. Changes in, or the elimination of, the Company’s share repurchase programs or its dividend could have an adverse effect on the price of the Company’s common stock.

 

The Company’s business would be adversely affected if the Company is unable to service its debt obligations.

 

The Company has incurred indebtedness under senior unsecured notes and has entered into a senior unsecured revolving credit facility. The Company’s ability to pay interest and principal when due, comply with debt covenants or repurchase the senior unsecured notes if a change of control occurs, will depend upon, among other things, sales and cash flow levels and other factors that affect its future financial and operating performance, including prevailing economic conditions and financial and business factors, many of which are beyond the Company’s control.

 

If the Company becomes unable in the future to generate sufficient cash flow to meet its debt service requirements, it may be forced to take remedial actions such as restructuring or refinancing its debt; seeking additional debt or equity capital; reducing or delaying its business activities, or selling assets. There can be no assurance that any such measures would be successful.

 

The Company has acquired several businesses and continues to evaluate potential business initiatives, including acquisitions, any of which could adversely impact the Company’s performance.

 

The Company believes it carefully evaluates and plans for the integration of newly acquired businesses, as well as carefully prepares for and executes on other business combinations and strategic initiatives that are part of the success of its business. However, such activities involve certain inherent risks, including the failure to retain key personnel from an acquired business; undisclosed or subsequently arising liabilities; challenges in the successful integration of operations, aligning standards, policies and systems; and the potential diversion of management resources from existing operations to respond to unforeseen issues arising in the context of the integration of a new business or initiative.

 

ITEM 1B – UNRESOLVED STAFF COMMENTS

 

None.

 

 

 

 

 

 13 

 

ITEM 2 – PROPERTIES

 

Most of the Company’s stores are located in suburban areas of medium and large-sized cities. These stores are situated in strip and power strip shopping centers, as well as in major off-price and conventional malls, and in free standing buildings.

 

The Company’s 1,552 stores are located in all 50 states, the District of Columbia, Puerto Rico and Canada and range in size from approximately 5,000 to 100,000 square feet, but are predominantly between 18,000 and 50,000 square feet. Approximately 85% to 90% of store space is used for selling areas.

 

The table below sets forth the locations of the Company’s stores as of March 3, 2018:

 

STORE LOCATIONS  
         
Alabama 24   New York 103
Alaska 2   North Carolina 45
Arizona 43   North Dakota 3
Arkansas 8   Ohio 48
California 185   Oklahoma 10
Colorado 34   Oregon 16
Connecticut 24   Pennsylvania 43
Delaware 6   Rhode Island 5
Florida 97   South Carolina 24
Georgia 39   South Dakota 3
Hawaii 2   Tennessee 28
Idaho 9   Texas 119
Illinois 53   Utah 16
Indiana 23   Vermont 3
Iowa 11   Virginia 49
Kansas 12   Washington 36
Kentucky 11   West Virginia 3
Louisiana 21   Wisconsin 16
Maine 8   Wyoming 2
Maryland 23   District of Columbia 3
Massachusetts 44   Puerto Rico 3
Michigan 44   Alberta, Canada 12
Minnesota 15   British Columbia, Canada 12
Mississippi 7   Manitoba, Canada 1
Missouri 23   New Brunswick, Canada 2
Montana 9   Nova Scotia, Canada 2
Nebraska 8   Ontario, Canada 26
Nevada 15   Prince Edward Island, Canada 1
New Hampshire 15   Saskatchewan, Canada 1
New Jersey 93   Total          1,552
New Mexico 9      

 

 14 

 

The Company leases substantially all of its existing stores. The leases provide for original lease terms that generally range from 10 to 15 years and most leases provide for a series of five year renewal options, often at increased rents. The Company evaluates leases on an ongoing basis which may lead to renegotiated lease provisions, including rent and term duration, during renewal options, or the possible relocation of stores. The Company has approximately 400 stores across its retail fleet that will come up for renewal at the natural lease expiration over the next two years, of which the Company expects to permanently close approximately 40 stores in fiscal 2018, unless it is able to negotiate more favorable lease terms with its landlords. Certain leases provide for scheduled rent increases (which, in the case of fixed increases, the Company accounts for on a straight-line basis over the committed lease term, beginning when the Company obtains possession of the premises) and/or for contingent rent (based upon store sales exceeding stipulated amounts).

 

The Company has distribution facilities, which ship merchandise to stores and customers, totaling approximately 7.2 million square feet consisting of three owned and 16 leased facilities. During the third quarter of fiscal 2017, the Company’s newest distribution facility in Las Vegas, Nevada began shipping to customers. The new facility replaced a smaller distribution facility in that area, which closed in late 2017, and provides additional capacity to support the growth of the Company’s customer facing digital channels.

 

As of March 3, 2018, the Company has approximately 990,000 square feet within 22 leased and owned facilities for procurement and corporate office functions. In addition, the Company has five locations, totaling approximately 12,000 square feet, which are utilized primarily for sales related functions for its institutional sales segment.

 

ITEM 3 LEGAL PROCEEDINGS

 

The Company is party to various legal proceedings arising in the ordinary course of business, which the Company does not believe to be material to the Company’s business or financial condition.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 

 

 

 

 

 

 

 15 

 

PART II

 

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table sets forth the high and low reported closing prices of the Company’s common stock on the Nasdaq Global Select Market for the periods indicated.

 

   High  Low
Fiscal 2017:          
1st Quarter  $41.90   $34.70 
2nd Quarter   36.49    27.21 
3rd Quarter   29.50    19.26 
4th Quarter   24.57    20.52 

 

   High  Low
Fiscal 2016:          
1st Quarter  $52.09   $42.00 
2nd Quarter   46.50    41.86 
3rd Quarter   46.37    38.67 
4th Quarter   48.08    39.26 

 

The common stock is quoted under the symbol BBBY. On March 29, 2018, there were approximately 6,100 shareholders of record of the common stock (without including individual participants in nominee security position listings). On March 29, 2018, the last reported sale price of the common stock was $20.99.

 

During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During fiscal 2017 and 2016, total cash dividends of $80.9 million and $55.6 million were paid, respectively. Subsequent to the end of the fourth quarter of fiscal 2017, on April 11, 2018, the Company’s Board of Directors declared a quarterly dividend increase to $0.16 per share to be paid on July 17, 2018 to shareholders of record at the close of business on June 15, 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.

 

Since 2004 through the end of fiscal 2017, the Company has repurchased approximately $10.5 billion of its common stock through share repurchase programs. The Company’s purchases of its common stock during the fourth quarter of fiscal 2017 were as follows:

 

Period  Total Number of
Shares Purchased (1)
  Average Price
Paid per Share (2)
  Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (1)
  Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs (1) (2)
November 26, 2017 - December 23, 2017   89,500   $22.81    89,500   $1,527,307,982 
December 24, 2017 - January 20, 2018   588,600   $22.07    588,600   $1,514,316,652 
January 21, 2018 - March 3, 2018   1,350,100   $22.30    1,350,100   $1,484,213,062 
Total   2,028,200   $22.25    2,028,200   $1,484,213,062 

 

(1) Between December 2004 and September 2015, the Company's Board of Directors authorized, through several share repurchase programs, the repurchase of $11.950 billion of its shares of common stock. The Company has authorization to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. Shares purchased, as indicated in this table, also include shares withheld to cover employee related taxes on vested restricted shares and performance stock unit awards.

 

(2) Excludes brokerage commissions paid by the Company.

 

 16 

 

Stock Price Performance Graph

 

The graph shown below compares the performance of the Company’s common stock with that of the S&P 500 Index, the S&P Specialty Retail Index and the S&P Retail Composite Index over the same period (assuming the investment of $100 in the Company’s common stock and each of the three Indexes on March 2, 2013, and the reinvestment of dividends, if any).

 

 

 

 17 

 

ITEM 6 – SELECTED FINANCIAL DATA.

 

Consolidated Selected Financial Data  Fiscal Year Ended (1)
(in thousands, except per share  March 3,  February 25,  February 27,  February 28,  March 1,
and selected operating data)  2018 (2)  2017 (3)  2016  2015  2014
                
Statement of Earnings Data:                         
                          
Net sales  $12,349,301   $12,215,757   $12,103,887   $11,881,176   $11,503,963 
                          
Gross profit   4,443,015    4,576,350    4,620,310    4,619,779    4,565,582 
                          
Operating profit   761,321    1,135,210    1,414,903    1,554,293    1,614,587 
                          
Net earnings   424,858    685,108    841,489    957,474    1,022,290 
                          
Net earnings per share - Diluted  $3.04   $4.58   $5.10   $5.07   $4.79 
                          
Dividends declared per share (6)  $0.60   $0.50   $-   $-   $- 
                          
Selected Operating Data:                         
                          
Number of stores open (at period end)   1,552    1,546    1,530    1,513    1,496 
                          
Total square feet                         
of store space (at period end)   43,681,000    43,619,000    43,274,000    43,041,000    42,619,000 
                          
Percentage (decrease) increase in comparable sales (4)   (1.3%)   (0.6%)   1.0%   2.4%   2.4%
                          
Comparable sales (in 000's) (4)  $11,813,092   $11,701,042   $11,722,973   $11,517,454   $10,660,573 
                          
Balance Sheet Data (at period end):                         
                          
Working capital  $1,805,393   $1,559,400   $1,757,282   $1,933,647   $1,752,639 
                          
Total assets   7,040,806    6,822,655    6,487,677    6,749,665    6,356,033 
                          
Long-term sale/leaseback and capital lease                         
obligations   105,614    107,136    109,274    106,948    108,046 
                          
Long-term debt (5)   1,492,078    1,491,603    1,491,137    1,490,672    - 
                          
Shareholders' equity (6) (7)  $2,888,628   $2,719,277   $2,559,540   $2,743,190   $3,941,287 

 

(1) Each fiscal year represents 52 weeks, except for fiscal 2017 (ended March 3, 2018) which represents 53 weeks.

(2) The Company acquired Decorist, Inc. on March 6, 2017.

(3) The Company acquired One Kings Lane, Inc. on June 13, 2016, PersonalizationMall.com, LLC ("PMall") on November 23, 2016, and certain assets of Chef Central on January 27, 2017.

(4) 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). Of a Kind was excluded from the comparable sales calculations through the end of the first fiscal half of 2016, and is included beginning with the fiscal third quarter of 2016. One Kings Lane is excluded from the comparable sales calculation for fiscal 2017 and will continue to be excluded until after the currently in process re-platforming of One Kings Lane’s systems and integration of its support services have been in place for a period of time such that there would be a meaningful comparison in One Kings Lane’s sales over the prior period. Chef Central and Decorist are also excluded from the comparable sales calculation for fiscal 2017 and will continue to be excluded until after the anniversary of the respective acquisition. PMall is included in the comparable sales calculation beginning in the fourth quarter of fiscal 2017, as the anniversary of the acquisition occurred in November 2017. 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.

(5) 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. Amounts shown are net of unamortized deferred financing costs.

(6) The Company’s Board of Directors declared quarterly dividends of $0.150 per share in each quarter of fiscal 2017, totaling $0.60 per share or approximately $86 million for the fiscal year 2017 and $0.125 per share in each quarter of fiscal 2016, totaling $0.50 per share or approximately $76 million for the fiscal year 2016. The Company had not declared any cash dividends in any of the fiscal years prior to fiscal 2016.

(7) In fiscal 2017, 2016, 2015, 2014, and 2013, the Company repurchased approximately $0.252 billion, $0.547 billion, $1.101 billion, $2.251 billion and $1.284 billion of its common stock, respectively.

 

 

 18 

 

ITEM 7 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.

 

 19 

 

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 results of operations for the fiscal year ended March 3, 2018 included Decorist since the date of acquisition, March 6, 2017. The results of operations for the fiscal year ended February 25, 2017 include One Kings Lane since the date of acquisition, June 13, 2016, and PMall since the date of acquisition, November 23, 2016. The results of operations for the fiscal year ended February 27, 2016 include Of a Kind since the date of acquisition in the second quarter of fiscal 2015.

 

The following represents an overview of the Company’s financial performance for the periods indicated:

 

·Net sales in fiscal 2017 (fifty-three weeks) increased approximately 1.1% to $12.349 billion; net sales in fiscal 2016 (fifty-two weeks) increased approximately 0.9% to $12.216 billion over net sales of $12.104 billion in fiscal 2015 (fifty-two weeks).

 

·Comparable sales in fiscal 2017 (fifty-three weeks) decreased by approximately 1.3%, as compared to a decrease of approximately 0.6% for fiscal 2016 (fifty-two weeks) and an increase of approximately 1.0% for fiscal 2015 (fifty-two weeks). Comparable sales percentages are calculated based on an equivalent number of weeks in each annual period. For fiscal 2017, comparable sales consummated through customer facing digital channels continued the trend of year over year strong growth consistent with fiscal 2016, while comparable sales consummated in-store declined in the mid-single-digit percentage range from the corresponding period in the prior year. For fiscal 2016, comparable sales consummated through customer facing digital channels experienced strong growth in excess of 20%, over the corresponding period in the prior year, while comparable sales consummated in-store declined in the low single-digit percentage range from the corresponding period in the prior year.

 

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. Of a Kind was excluded from the comparable sales calculations through the end of the first fiscal half of 2016, and is included beginning with the fiscal third quarter of 2016. One Kings Lane is excluded from the comparable sales calculation for fiscal 2017 and will continue to be excluded until after the currently in process re-platforming of One King Lane’s systems and integration of its support services have been in place for a period of time such that there would be a meaningful comparison in One Kings Lane’s sales over the prior period. Chef Central and Decorist are also excluded from the comparable sales calculation for fiscal 2017 and will continue to be excluded until after the anniversary of the respective acquisition. PMall is included in the comparable sales calculation beginning in the fourth quarter of fiscal 2017, as the anniversary of the acquisition occurred in November 2017. 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.

 

 20 

 

·Gross profit for fiscal 2017 was $4.443 billion or 36.0% of net sales, compared with $4.576 billion or 37.5% of net sales for fiscal 2016 and $4.620 billion or 38.2% of net sales for fiscal 2015.

 

·Selling, general and administrative expenses (“SG&A”) for fiscal 2017 were $3.682 billion or 29.8% of net sales compared with $3.441 billion or 28.2% of net sales for fiscal 2016 and $3.205 billion or 26.5% of net sales for fiscal 2015.

 

·Interest expense, net was $65.7 million, $69.6 million, and $87.5 million in fiscal 2017, 2016 and 2015, respectively.

 

·The effective tax rate was 38.9%, 35.7%, and 36.6% for fiscal years 2017, 2016 and 2015, respectively.

 

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 from 35% to 21%, effective January 1, 2018, (ii) imposing a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated and (iii) implementing a modified territorial tax system. The Company’s effective tax rate for fiscal 2017 included a net increase of approximately 1.5%, resulting from the impacts of the Tax Act. The net unfavorable tax impact included the following: (1) re-measurement of the Company’s net deferred tax assets that existed on December 22, 2017; (2) deferred taxes that were created after December 22, 2017 that were deducted at the federal statutory rate of 32.66%, but will reverse at the newly enacted 21% federal statutory rate; (3) the transition tax on accumulated foreign earnings; and (4) the decrease in the federal statutory tax rate in fiscal 2017.

 

Additionally in fiscal 2017, the effective tax rate included the effect of the adoption of Accounting Standards Update (“ASU 2016-09”), Compensation – Stock Compensation (Topic 718): Improvements to Share-Based Payment Accounting, (“ASU 2016-09, Stock Compensation”), which increased the effective tax rate by approximately 1.4%. The effective rate also included approximately 1.9% of favorable tax benefits occurring during fiscal 2017.

 

The effective tax rates for fiscal 2016 and 2015 included discrete tax items resulting in net benefits of approximately $18.5 million and $14.8 million, respectively.

 

·For the fiscal year ended March 3, 2018 (fifty-three weeks), net earnings per diluted share were $3.04 ($424.9 million), a decrease of approximately 33.6%, as compared with net earnings per diluted share of $4.58 ($685.1 million) for fiscal 2016 (fifty-two weeks), which was a decrease of approximately 10.2% from net earnings per diluted share of $5.10 ($841.5 million) for fiscal 2015 (fifty-two weeks).

 

For the fiscal year ended March 3, 2018, the decrease in net earnings per diluted share is the result of the decrease in net earnings due to the items described above, partially offset by an estimated $0.05 benefit related to the fifty-third week in fiscal 2017 and the benefit of the Company’s repurchases of its common stock. In addition, fiscal 2017 net earnings per diluted share included the net unfavorable impact of the Tax Act of approximately $0.08, the unfavorable impact of the adoption of ASU 2016-09, Stock Compensation of approximately $0.07 and the cash restructuring charges associated with the acceleration of the realignment of its store management structure of approximately $0.04.

 

 21 

 

For the fiscal year ended February 25, 2017, the decrease in net earnings per diluted share is the result of the decrease in net earnings due to the items described above, partially offset by the Company’s repurchases of its common stock.

 

Capital expenditures for fiscal 2017, 2016, and 2015 were $375.8 million, $373.6 million and $328.4 million, respectively. Approximately 50% of the current year 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 investments in stores, the Company’s new Las Vegas distribution facility, which began shipping to customers during the third quarter of fiscal 2017, and its new customer contact center in Florida. The Company continues to review and prioritize its capital needs and remains committed to making the required investments in its infrastructure to help position the Company for continued growth and success.

 

The Company continues to make the investments and add the resources necessary to position itself for long-term 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 fiscal 2017, the Company opened a total of 22 new stores and closed 16 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 over the next two years, of which the Company expects to permanently close approximately 40 stores in fiscal 2018, unless it is able to negotiate more favorable lease terms with its landlords. These expected closures are primarily Bed Bath & Beyond stores. In fiscal 2018, the Company expects to open approximately 20 new stores, primarily 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 2017, 2016 and 2015, the Company repurchased 8.0 million, 12.3 million, and 18.4 million shares, respectively, of its common stock at a total cost of approximately $252.4 million, $547.0 million and $1.101 billion, 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.

 

During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During fiscal 2017 and 2016, total cash dividends of $80.9 million and $55.6 million were paid, respectively. Subsequent to the end of the fourth quarter of fiscal 2017, on April 11, 2018, the Company’s Board of Directors declared a quarterly dividend increase to $0.16 per share to be paid on July 17, 2018 to shareholders of record at the close of business on June 15, 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.

 

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RESULTS OF OPERATIONS

 

The following table sets forth for the periods indicated (i) selected statement of earnings data of the Company expressed as a percentage of net sales and (ii) the percentage change in dollar amounts from the prior year in selected statement of earnings data:

 

   Fiscal Year Ended
   Percentage  Percentage Change
   of Net Sales  from Prior Year
   March 3,  February 25,  February 27,  March 3,  February 25,
   2018  2017  2016  2018  2017
                
Net sales   100.0%   100.0%   100.0%   1.1%   0.9%
                          
Cost of sales   64.0    62.5    61.8    3.5    2.1 
                          
Gross profit   36.0    37.5    38.2    (2.9)   (1.0)
                          
Selling, general and administrative                         
expenses   29.8    28.2    26.5    7.0    7.4 
                          
Operating profit   6.2    9.3    11.7    (32.9)   (19.8)
                          
Interest expense, net   0.5    0.6    0.7    (5.6)   (20.5)
                          
Earnings before provision for income                         
taxes   5.6    8.7    11.0    (34.7)   (19.7)
                          
Provision for income taxes   2.2    3.1    4.0    (28.8)   (21.7)
                          
Net earnings   3.4    5.6    7.0    (38.0)   (18.6)

 

Net Sales

 

Net sales in fiscal 2017 (fifty-three weeks) increased $133.5 million to $12.349 billion, representing an increase of 1.1% over $12.216 billion of net sales in fiscal 2016 (fifty-two weeks), which increased $111.9 million or 0.9% over the $12.104 billion of net sales in fiscal 2015 (fifty-two weeks). For fiscal 2017, the increase was attributable to an increase of approximately 1.8% due to the fifty-third week and approximately 0.8% in the Company’s non-comparable sales, partially offset by a decrease of approximately 1.5% in comparable sales, adjusted to compare fifty-three weeks to fifty-two weeks. For fiscal 2016, the increase was attributable to a 1.5% increase in the Company’s non-comparable sales, including One Kings Lane, PMall and new store sales, partially offset by a 0.6% decrease in comparable sales.

 

The decrease in comparable sales for fiscal 2017 (fifty-three weeks) was approximately 1.3% as compared with a decrease of approximately 0.6% for fiscal 2016 (fifty-two weeks). Comparable sales percentages are calculated based on an equivalent number of weeks in each annual period. The decrease in comparable sales for fiscal 2017 was due to a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amount. The decrease in comparable sales for fiscal 2016 was due to a decrease in the number of transactions, partially offset by an increase in the average transaction amount.

 

The Company’s comparable sales metric considers sales consummated through all retail channels – in-store, online, with a mobile device or through a 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.

 

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For fiscal 2017, comparable sales consummated through customer facing digital channels continued the trend of year over year strong growth consistent with fiscal 2016, while comparable sales consummated in-store declined in the mid-single-digit percentage range from the corresponding period in the prior year. For fiscal 2016, comparable sales consummated through customer facing digital channels experienced strong growth in excess of 20%, over the corresponding period in the prior year, while comparable sales consummated in-store declined in the low single-digit percentage range from the corresponding period in the prior year.

 

Comparable sales represented $11.813 billion, $11.701 billion, and $11.723 billion of net sales for fiscal 2017, 2016 and 2015, respectively. Comparable sales dollars are calculated based on an equivalent number of weeks in each annual period.

 

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 accounted for approximately 35.5%, 36.8%, and 35.9% of net sales in fiscal 2017, 2016 and 2015, respectively, of which the Company estimates that bed linens accounted for approximately 11% of net sales in both fiscal 2017 and 2016 and 12% of net sales in fiscal 2015. The remaining net sales in fiscal 2017, 2016, and 2015 of 64.5%, 63.2%, and 64.1%, respectively, represented sales of home furnishings. No other individual product category accounted for 10% or more of net sales during fiscal 2017, 2016 or 2015.

 

Gross Profit

 

Gross profit in fiscal 2017, 2016, and 2015 was $4.443 billion or 36.0% of net sales, $4.576 billion or 37.5% of net sales, and $4.620 billion or 38.2% of net sales, respectively. The decrease in the gross profit margin as a percentage of net sales between fiscal 2017 and 2016 was primarily attributed to, in order of magnitude: a decrease in merchandise margin; an increase in coupon expense, resulting from increases in redemptions and the average coupon amount; and an increase in net direct to customer shipping expense. The decrease in the gross profit margin as a percentage of net sales between fiscal 2016 and 2015 was primarily attributed to, in order of magnitude: an increase in coupon expense, resulting from increases in redemptions and the average coupon amount; and an increase in net direct to customer shipping expense.

 

Selling, General and Administrative Expenses

 

SG&A was $3.682 billion or 29.8% of net sales in fiscal 2017, $3.441 billion or 28.2% of net sales in fiscal 2016, and $3.205 billion or 26.5% of net sales in fiscal 2015. The percentage of net sales increase in SG&A between fiscal 2017 and 2016 was primarily attributable to, in order of magnitude: an increase in payroll and payroll related items (including salaries and store management restructuring charges); an increase in advertising expenses, due in part to the growth in digital advertising; and an increase in technology expenses and related depreciation. The percentage of net sales increase in SG&A between fiscal 2016 and 2015 was primarily attributable to, in order of magnitude: an increase in payroll and payroll related expense (including salaries); increased advertising expenses, due in part to the growth in digital advertising; and an increase in technology expenses and related depreciation.

 

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Operating Profit

 

Operating profit for fiscal 2017 was $761.3 million or 6.2% of net sales, $1.135 billion or 9.3% of net sales for fiscal 2016, and $1.415 billion or 11.7% of net sales in fiscal 2015. The changes in operating profit as a percentage of net sales between 2017 and 2016 and between fiscal 2016 and 2015 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 the investments it is making to transform the Company.

 

Interest Expense, net

 

Interest expense, net was $65.7 million, $69.6 million, and $87.5 million in fiscal 2017, 2016 and 2015, respectively. For fiscal 2017, 2016 and 2015, interest expense, net primarily related to interest on the senior unsecured notes issued in July 2014. For fiscal 2017 and 2016, also included in interest expense, net were net benefits of $13.3 million and $11.5 million, respectively, related to changes in the Company’s nonqualified deferred compensation plan (“NQDC”) investments. These favorable changes were fully offset by corresponding unfavorable changes in the NQDC liability recorded in SG&A and resulted in no net impact to the consolidated statement of earnings.

 

Income Taxes

 

The effective tax rate was 38.9% for fiscal 2017, 35.7% for fiscal 2016, and 36.6% for fiscal 2015. For fiscal 2017, the effective tax rate includes a net increase of approximately 1.5%, resulting from the Tax Act. The fiscal 2017 effective tax rate also includes the effect of the adoption of ASU 2016-09, Stock Compensation, which increased the effective tax rate by approximately 1.4%. The effect of this adoption in fiscal 2017 varied by quarter, and as anticipated, was heavily weighted toward the first quarter. The adoption of the standard did not affect the Company’s cash outflows for income taxes. Additionally, the fiscal 2017 effective rate included approximately 1.9% of net benefits primarily due to the recognition of favorable discrete federal and state tax items.

 

For fiscal 2016, the tax rate included net benefits of approximately $18.5 million, primarily due to the recognition of favorable discrete federal and state tax items. For fiscal 2015, the tax rate included net benefits of approximately $14.8 million, primarily due to the recognition of favorable discrete state tax items.

 

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.

 

GROWTH

 

In the 25-year period from the beginning of fiscal 1992 to the end of fiscal 2017, the Company has grown from 34 stores to 1,552 stores, plus its interactive platforms, including websites and applications, and distribution facilities. Total store square footage, net of openings and closings, grew from approximately 0.9 million square feet at the beginning of fiscal 1992 to approximately 43.7 million square feet at the end of fiscal 2017. Over the past several years, sales from the Company’s customer facing digital channels have continued to experience strong growth.

 

In addition, as of March 3, 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. During the third quarter of fiscal 2017, the Company’s newest distribution facility in Las Vegas, Nevada began shipping to customers. This new facility replaced a smaller distribution facility in that area, which closed in late 2017, and provides additional capacity to support the growth of the Company’s customer facing digital channels.

 

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Over the next several years, the Company expects to make heavy 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 expects company-wide to open approximately 20 new stores, and close approximately 40 stores in fiscal 2018, unless it can negotiate more favorable lease terms with landlords. Additionally, in connection with leveraging its merchandise offerings and optimizing its operations, the Company continues to expand, across selected stores, the number of specialty departments such as health and beauty care, baby, specialty food, and beverage. Also, the Company is committed to the continued growth of its merchandise categories and channels and is growing the number of items it is able to have shipped directly to customers from a vendor. The continued growth of the Company is dependent, in part, upon the Company’s ability to execute these and other key initiatives successfully.

 

The Company has built its management structure with a view towards its growth and believes that, as a result, it has the necessary management depth.

 

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 fiscal 2017 in a very 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 March 3, 2018, the Company had approximately $744 million in cash and investment securities, an increase of approximately $166 million compared with $578 million as of February 25, 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 modeled to be in the range of approximately $375 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 2017 compared to Fiscal 2016

 

Net cash provided by operating activities in fiscal 2017 was $859.7 million, compared with $1.043 billion in fiscal 2016. Year over year, the Company experienced a decrease in net earnings, as adjusted for non-cash expenses (primarily deferred income taxes), and an increase in cash used in the net components of working capital (primarily prepaid expenses and other current assets, largely due to the prepayment of certain operating expenses associated with tax planning strategies, partially offset by merchandise inventories).

 

Retail inventory, which includes inventory in the Company’s distribution facilities for direct to customer shipments, was approximately $2.7 billion at March 3, 2018, a decrease of approximately 6.0% compared to retail inventory at February 25, 2017. The percentage decrease was due, in part, to the favorable impact of the Company’s inventory optimization strategies.

 

Net cash used in investing activities in fiscal 2017 was $674.4 million, compared with $491.9 million in fiscal 2016. In fiscal 2017, net cash used in investing activities was primarily due to $375.8 million of capital expenditures and $292.5 million of purchases of investment securities. In fiscal 2016, net cash used in investing activities was primarily due to $373.6 million of capital expenditures and $201.3 million of payments related to acquisitions, net of acquired cash, partially offset by $86.2 million of redemptions of investment securities.

 

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Net cash used in financing activities for fiscal 2017 was $323.4 million, compared with $582.2 million in fiscal 2016. The decrease in net cash used in financing activities was primarily due to a decrease in common stock repurchases of $294.6 million partially offset by an increase of $25.3 million for the payment of dividends.

 

Fiscal 2016 compared to Fiscal 2015

 

Net cash provided by operating activities in fiscal 2016 was $1.043 billion, compared with $1.023 billion in fiscal 2015. Year over year, the Company experienced a decrease in cash used in the net components of working capital (primarily merchandise inventories and accounts payable), partially offset by a decrease in net earnings.

 

Retail inventory, which includes inventory in the Company’s distribution facilities for direct to customer shipments, was approximately $2.9 billion, an increase of approximately 2.2% compared to retail inventory at February 27, 2016. The percentage increase was due, in part, to the growth in the inventory in the Company’s distribution facilities for direct to customer shipments as well as the inventory balances from PMall and One Kings Lane.

 

Net cash used in investing activities in fiscal 2016 was $491.9 million, compared with $275.6 million in fiscal 2015. In fiscal 2016, net cash used in investing activities was primarily due to $373.6 million of capital expenditures and $201.3 million of payments related to acquisitions, net of acquired cash, partially offset by $86.2 million of redemptions of investment securities. In fiscal 2015, net cash used by investing activities was primarily due to $328.4 million of capital expenditures, partially offset by $52.8 million of redemptions of investment securities, net of purchases. 

 

Net cash used in financing activities for fiscal 2016 was $582.2 million, compared with $1.099 billion in fiscal 2015. The decrease in net cash used in financing activities was primarily due to a decrease in common stock repurchases of $553.6 million partially offset by $55.6 million for the payment of dividends.

 

Other Fiscal 2017 Information

 

At March 3, 2018, the Company maintained two uncommitted lines of credit of $100 million each, with expiration dates of August 29, 2018 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 fiscal 2017, 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.

 

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 2017 and 2016, the Company did not have any borrowings under the Revolver.

 

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 common stock. Since 2004 through the end of fiscal 2017, the Company has repurchased approximately $10.5 billion of its common stock through share repurchase programs. The Company has approximately $1.5 billion remaining of authorized share repurchases as of March 3, 2018. 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. The Company’s share repurchase program could change, and would be influenced by several factors, including business and market conditions.

 

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During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During fiscal 2017 and 2016, total cash dividends of $80.9 million and $55.6 million were paid, respectively. Subsequent to the end of the fourth quarter of fiscal 2017, on April 11, 2018, the Company’s Board of Directors declared a quarterly dividend increase to $0.16 per share to be paid on July 17, 2018 to shareholders of record at the close of business on June 15, 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.

 

The Company has contractual obligations consisting mainly of principal and interest related to the senior unsecured notes, operating leases for stores, offices, distribution facilities and equipment, purchase obligations, long-term sale/leaseback and capital lease obligations and other long-term liabilities which the Company is obligated to pay as of March 3, 2018 as follows:

 

(in thousands)  Total  Less than 1 year  1-3 years  4-5 years  After 5
years
                
Senior unsecured notes (1)  $1,500,000   $-   $-   $-   $1,500,000 
Interest on senior unsecured notes (1)    1,548,251    72,477    144,954    144,954    1,185,866 
Operating lease obligations (2)   3,041,505    612,097    1,035,593    661,796    732,019 
Purchase obligations (3)   1,050,107    1,050,107    -    -    - 
Long-term sale/leaseback and capital lease obligations(4)   322,047    10,284    20,815    20,841    270,107 
Other long-term liabilities (5)   388,801    -    -    -    - 
                          
Total Contractual Obligations  $7,850,711   $1,744,965   $1,201,362   $827,591   $3,687,992 

 

(1)  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.

(2)  The amounts presented represent the future minimum lease payments under non-cancelable operating leases.  In addition to minimum rent, certain of the Company's leases require the payment of additional costs for insurance, maintenance and other costs.  These additional amounts are not included in the table of contractual commitments as the timing and/or amounts of such payments are not known.  As of March 3, 2018, the Company has leased sites for 23 new or relocated locations planned for opening in fiscal 2018 or 2019, for which aggregate minimum rental payments over the term of the leases are approximately $126.5 million and are included in the table above.

(3)  Purchase obligations primarily consist of purchase orders for merchandise.

(4)  Long-term sale/leaseback and capital lease obligations represent future minimum lease payments under the sale/leaseback and capital lease agreements.

(5)  Other long-term liabilities are primarily comprised of income taxes payable, deferred rent, workers' compensation and general liability reserves and various other accruals and are recorded as Deferred Rent and Other Liabilities and Income Taxes Payable in the consolidated balance sheet as of March 3, 2018.  The amounts associated with these other long-term liabilities have been reflected only in the Total Column in the table above as the timing and / or amount of any cash payment is uncertain.

 

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.

 

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INFLATION

 

The Company does not believe that its operating results have been materially affected by inflation during the past year. There can be no assurance; however, that the Company’s operating results will not be affected by inflation in the future.

 

CRITICAL ACCOUNTING POLICIES

 

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, goodwill and other indefinite lived intangible assets, accruals for self-insurance and income and certain other taxes. Actual results could differ from these estimates.

 

Inventory Valuation: Merchandise inventories are stated at the lower of cost or market. Inventory costs are primarily calculated using the weighted average retail inventory method.

 

Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail values of inventories. The cost associated with determining the cost-to-retail ratio includes: merchandise purchases, net of returns to vendors, discounts and volume and incentive rebates; inbound freight expenses; duty, insurance and commissions.

 

At any one time, inventories include items that have been written down to the Company’s best estimate of their realizable value. Judgment is required in estimating realizable value and factors considered are the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions.

 

The Company estimates its reserve for shrinkage throughout the year based on historical shrinkage and any current trends, if applicable. Actual shrinkage is recorded at year end based upon the results of the Company’s physical inventory counts for locations at which counts were conducted. For locations where physical inventory counts were not conducted in the fiscal year, an estimated shrink reserve is recorded based on historical shrinkage and any current trends, if applicable. Historically, the Company’s shrinkage has not been volatile.

 

The Company accrues for merchandise in transit once it takes legal ownership and title to the merchandise; as such, an estimate for merchandise in transit is included in the Company’s merchandise inventories.

 

Impairment of Long-Lived Assets: The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. The Company has not historically recorded any material impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.

 

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Goodwill and Other Indefinite Lived Intangible Assets: The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. The Company has not historically recorded an impairment to its goodwill and other indefinite lived intangible assets. As of March 3, 2018, the Company completed a quantitative impairment analysis of goodwill related to its reporting units. In completing this analysis, 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. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results. Based upon the analysis performed, the Company concluded that no goodwill impairment existed as the fair value of each reporting unit was in excess of its carrying value. As of March 3, 2018, for certain other indefinite lived intangible assets, the Company assessed qualitative factors in order to determine whether any events and circumstances existed which indicated that it was more likely than not that the fair value of its other indefinite lived intangible assets did not exceed their carrying values and concluded no such events or circumstances existed which would require an impairment test being performed. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.

 

Self Insurance: 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.

 

Taxes: 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 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.

 

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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.

 

The Company also accrues for certain other taxes as required by its operations.

 

Judgment is required in determining the provision for income and other taxes and related accruals, and 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 various 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.

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements related to future, not past, events. In this context, forward-looking statements often address the Company’s expected future business, financial performance and financial condition, and often contain 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.

 

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 3, 2018, the Company’s investments include cash and cash equivalents of approximately $346.1 million, short-term investment securities of $291.7 million and long term investments in auction rate securities of approximately $19.4 million at weighted average interest rates of 0.84%, 1.39% and 0.15%, respectively. The book value of these investments is representative of their fair values.

 

The Company’s senior unsecured notes have fixed interest rates and are not subject to interest rate risk. As of March 3, 2018, the fair value of the senior unsecured notes was $1.310 billion, which is based on quoted prices in active markets for identical instruments compared to the carrying value of approximately $1.500 billion.

 

 31 

 

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following are included herein:

 

1)Consolidated Balance Sheets as of March 3, 2018 and February 25, 2017

 

2)Consolidated Statements of Earnings for the fiscal years ended March 3, 2018, February 25, 2017, and February 27, 2016

 

3)Consolidated Statements of Comprehensive Income for the fiscal years ended March 3, 2018, February 25, 2017, and February 27, 2016

 

4)Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 3, 2018, February 25, 2017, and February 27, 2016

 

5)Consolidated Statements of Cash Flows for the fiscal years ended March 3, 2018, February 25, 2017, and February 27, 2016

 

6)Notes to Consolidated Financial Statements

 

7)Reports of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

 32 

 

BED BATH & BEYOND INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share data)

 

   March 3,
2018
  February 25,
2017
       
Assets          
Current assets:          
Cash and cash equivalents  $346,140   $488,329 
Short term investment securities   378,039    - 
Merchandise inventories   2,730,874    2,905,660 
Prepaid expenses and other current assets   516,025    197,912 
           
Total current assets   3,971,078    3,591,901 
           
Long term investment securities   19,517    89,592 
Property and equipment, net   1,909,289    1,837,129 
Goodwill   716,283    697,085 
Other assets   424,639    606,948 
           
Total assets  $7,040,806   $6,822,655 
           
Liabilities and Shareholders' Equity          
Current liabilities:          
Accounts payable  $1,197,504   $1,179,088 
Accrued expenses and other current liabilities   633,100    484,114 
Merchandise credit and gift card liabilities   335,081    309,478 
Current income taxes payable   -    59,821 
           
Total current liabilities   2,165,685    2,032,501 
           
Deferred rent and other liabilities   431,592    511,303 
Income taxes payable   62,823    67,971 
Long term debt   1,492,078    1,491,603 
           
Total liabilities   4,152,178    4,103,378 
           
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 341,795 and 339,533 shares, respectively; outstanding 140,498 and 146,274 shares, respectively   3,418    3,395 
Additional paid-in capital   2,057,975    1,974,781 
Retained earnings   11,343,503    11,003,890 
Treasury stock, at cost   (10,467,972)   (10,215,539)
Accumulated other comprehensive loss   (48,296)   (47,250)
           
Total shareholders' equity   2,888,628    2,719,277 
           
Total liabilities and shareholders' equity  $7,040,806   $6,822,655 

 

See accompanying Notes to Consolidated Financial Statements.

 

 33 

 

BED BATH & BEYOND INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(in thousands, except per share data)

 

   Twelve Months Ended
   March 3, 2018  February 25, 2017  February 27, 2016
          
          
Net sales  $12,349,301   $12,215,757   $12,103,887 
                
Cost of sales   7,906,286    7,639,407    7,483,577 
                
Gross profit   4,443,015    4,576,350    4,620,310 
                
Selling, general and administrative expenses   3,681,694    3,441,140    3,205,407 
                
Operating profit   761,321    1,135,210    1,414,903 
                
Interest expense, net   65,661    69,555    87,458 
                
Earnings before provision for income taxes   695,660    1,065,655    1,327,445 
                
Provision for income taxes   270,802    380,547    485,956 
                
Net earnings  $424,858   $685,108   $841,489 
                
Net earnings per share - Basic  $3.05   $4.61   $5.15 
Net earnings per share - Diluted  $3.04   $4.58   $5.10 
                
Weighted average shares outstanding - Basic   139,238    148,590    163,257 
Weighted average shares outstanding - Diluted   139,739    149,708    165,016 
                
Dividends declared per share  $0.60   $0.50   $- 

 

See accompanying Notes to Consolidated Financial Statements.

 

 34 

 

BED BATH & BEYOND INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

 

   Twelve Months Ended
   March 3, 2018  February 25, 2017  February 27, 2016
          
Net earnings  $424,858   $685,108   $841,489 
                
Other comprehensive (loss) income:               
                
Change in temporary impairment of auction rate securities, net of taxes   95    (351)   1,584 
Pension adjustment, net of taxes   2,021    1,710    (351)
Currency translation adjustment   (2,548)   6,389    (13,918)
Reclassification due to the adoption of ASU 2018-02   (614)   -    - 
                
Other comprehensive (loss) income   (1,046)   7,748    (12,685)
                
Comprehensive income  $423,812   $692,856   $828,804 

 

See accompanying Notes to Consolidated Financial Statements.

 

 35 

 

BED BATH & BEYOND INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

(in thousands)

 

   Common Stock  Additional Paid-  Retained  Treasury Stock  Accumulated Other Comprehensive   
   Shares  Amount  in Capital  Earnings  Shares  Amount  Loss  Total
Balance at February 28, 2015   336,667   $3,367   $1,796,692   $9,553,376    (162,489)  $(8,567,932)  $(42,313)  $2,743,190 
                                         
Net earnings                  841,489                   841,489 
                                         
Other comprehensive loss, net of tax                                 (12,685)   (12,685)
                                         
Shares sold under employee stock option plans, net of taxes   255    3    18,944                        18,947 
                                         
Issuance of restricted shares, net   590    6    (6)                       - 
                                         
Payment and vesting of performance stock units   98    1    (1)                       - 
                                         
Stock-based compensation expense, net             69,017                        69,017 
                                         
Director fees paid in stock   3         167                        167 
                                         
Repurchase of common stock, including fees                       (18,434)   (1,100,585)        (1,100,585)
Balance at February 27, 2016   337,613    3,377    1,884,813    10,394,865    (180,923)   (9,668,517)   (54,998)   2,559,540 
                                         
Net earnings                  685,108                   685,108 
                                         
Other comprehensive income, net of tax                                 7,748    7,748 
                                         
Dividend declared                  (76,083)                  (76,083)
                                         
Shares sold under employee stock option plans, net of taxes   634    6    15,700                        15,706 
                                         
Issuance of restricted shares, net   1,102    11    (11)                       - 
                                         
Payment and vesting of performance stock units   180    1    (1)                       - 
                                         
Stock-based compensation expense, net             74,114                        74,114 
                                         
Director fees paid in stock   4         166                        166 
                                         
Repurchase of common stock, including fees                       (12,336)   (547,022)        (547,022)
Balance at February 25, 2017   339,533    3,395    1,974,781    11,003,890    (193,259)   (10,215,539)   (47,250)   2,719,277 
                                         
Net earnings                  424,858                   424,858 
                                         
Other comprehensive loss, net of tax                  614              (1,046)   (432)
                                         
Dividend declared                  (85,859)                  (85,859)
                                         
Shares sold under employee stock option plans, net of taxes   359    4    10,157                        10,161 
                                         
Issuance of restricted shares, net   1,575    16    (16)                       - 
                                         
Payment and vesting of performance stock units   321    3    (3)                       - 
                                         
Stock-based compensation expense, net             72,904                        72,904 
                                         
Director fees paid in stock   7    -    152                        152 
                                         
Repurchase of common stock, including fees                       (8,038)   (252,433)        (252,433)
Balance at March 3, 2018   341,795   $3,418   $2,057,975   $11,343,503    (201,297)  $(10,467,972)  $(48,296)  $2,888,628 

 

See accompanying Notes to Consolidated Financial Statements.

 

 36 

 

BED BATH & BEYOND INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

 

   Twelve Months Ended
   March 3, 2018  February 25, 2017  February 27, 2016
          
Cash Flows from Operating Activities:               
Net earnings  $424,858   $685,108   $841,489 
Adjustments to reconcile net earnings to net cash provided by operating activities:               
Depreciation and amortization   313,107    290,914    273,947 
Stock-based compensation   70,510    71,911    66,965 
Deferred income taxes   175,351    24,878    56,997 
Other   (69)   (1,032)   398 
Decrease (increase) in assets, net of effect of acquisitions:               
Merchandise inventories   176,672    (38,493)   (121,748)
Trading investment securities   (16,036)   (18,780)   (2,270)
Other current assets   (258,853)   (18,464)   (16,171)
Other assets   (4,754)   (14,480)   (27,904)
Increase (decrease) in liabilities, net of effect of acquisitions:               
Accounts payable   13,210    49,458    (48,148)
Accrued expenses and other current liabilities   80,375    (8,586)   6,694 
Merchandise credit and gift card liabilities   25,510    11,390    (7,872)
Income taxes payable   (64,941)   (8,307)   (15,036)
Deferred rent and other liabilities   (75,251)   17,754    15,213 
                
Net cash provided by operating activities   859,689    1,043,271    1,022,554 
                
Cash Flows from Investing Activities:               
                
Purchase of held-to-maturity investment securities   (292,500)   -    (103,017)
Redemption of held-to-maturity investment securities   -    86,240    126,875 
Redemption of available-for-sale investment securities   -    -    28,905 
Capital expenditures   (375,793)   (373,574)   (328,395)
Investment in unconsolidated joint venture   -    (3,318)   - 
Payment for acquisitions, net of cash acquired   (6,119)   (201,277)   - 
                
Net cash used in investing activities   (674,412)   (491,929)   (275,632)
                
Cash Flows from Financing Activities:               
                
Proceeds from exercise of stock options   10,313    20,424    9,109 
Payment of other liabilities   (434)   -    (7,646)
Payment of dividends   (80,877)   (55,612)   - 
Repurchase of common stock, including fees   (252,433)   (547,022)   (1,100,585)
                
Net cash used in financing activities   (323,431)   (582,210)   (1,099,122)
                
Effect of exchange rate changes on cash and cash equivalents   (4,035)   3,624    (7,801)
                
Net decrease in cash and cash equivalents   (142,189)   (27,244)   (360,001)
                
Cash and cash equivalents:               
                
Beginning of period   488,329    515,573    875,574 
End of period  $346,140   $488,329   $515,573 

 

See accompanying Notes to Consolidated Financial Statements.

 

 37 

 

Notes to Consolidated Financial Statements

Bed Bath & Beyond Inc. and Subsidiaries

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS

 

A.Nature of Operations

 

Bed Bath & Beyond Inc. and subsidiaries (the “Company”) is an omnichannel retailer 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 2017, 2016, and 2015.

 

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 35.5% and 64.5% of net sales, respectively, for fiscal 2017, 36.8% and 63.2% of net sales, respectively, for fiscal 2016 and 35.9% and 64.1% of net sales, respectively, for fiscal 2015. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.

 

B.Fiscal Year

 

The Company’s fiscal year is comprised of the 52 or 53-week period ending on the Saturday nearest February 28th. Accordingly, fiscal 2017 represented 53 weeks and ended March 3, 2018. Fiscal 2016 and fiscal 2015 represented 52 weeks and ended on February 25, 2017 and February 27, 2016, respectively.

 

C.Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company accounts for its investment in the joint venture under the equity method.

 

Certain reclassifications have been made to the fiscal 2016 consolidated balance sheet to conform to the fiscal 2017 consolidated balance sheet presentation, as well as to the fiscal 2016 and 2015 consolidated statements of cash flows to conform to the fiscal 2017 consolidated statement of cash flows presentation.

 

 38 

 

All significant intercompany balances and transactions have been eliminated in consolidation.

 

D.Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In particular, judgment is used in areas such as inventory valuation, impairment of long-lived assets, impairment of auction rate securities, goodwill and other indefinite lived intangible assets, accruals for self insurance, litigation, store opening, expansion, relocation and closing costs, the provision for sales returns, vendor allowances, stock-based compensation and income and certain other taxes. Actual results could differ from these estimates.

 

E.Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $95.6 million and $86.6 million as of March 3, 2018 and February 25, 2017, respectively.

 

F.Investment Securities

 

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 3, 2018 and February 25, 2017, 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.

 

G.Inventory Valuation

 

Merchandise inventories are stated at the lower of cost or market. Inventory costs are primarily calculated using the weighted average retail inventory method.

 

Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail values of inventories. The cost associated with determining the cost-to-retail ratio includes: merchandise purchases, net of returns to vendors, discounts and volume and incentive rebates; inbound freight expenses; duty, insurance and commissions.

 

 39 

 

At any one time, inventories include items that have been written down to the Company’s best estimate of their realizable value. Judgment is required in estimating realizable value and factors considered are the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions.

 

The Company estimates its reserve for shrinkage throughout the year based on historical shrinkage and any current trends, if applicable. Actual shrinkage is recorded at year end based upon the results of the Company’s physical inventory counts for locations at which counts were conducted. For locations where physical inventory counts were not conducted in the fiscal year, an estimated shrink reserve is recorded based on historical shrinkage and any current trends, if applicable. Historically, the Company’s shrinkage has not been volatile.

 

The Company accrues for merchandise in transit once it takes legal ownership and title to the merchandise; as such, an estimate for merchandise in transit is included in the Company’s merchandise inventories.

 

H.Property and Equipment

 

Property and equipment are stated at cost and are depreciated primarily using the straight-line method over the estimated useful lives of the assets (forty years for buildings; five to twenty years for furniture, fixtures and equipment; and three to ten years for computer equipment and software). Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful life or the life of the lease. Depreciation expense is primarily included within selling, general and administrative expenses.

 

The cost of maintenance and repairs is charged to earnings as incurred; significant renewals and betterments are capitalized. Maintenance and repairs amounted to $125.7 million, $131.6 million, and $130.9 million for fiscal 2017, 2016 and 2015, respectively.

 

I.Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. The Company has not historically recorded any material impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.

 

J.Goodwill and Other Indefinite Lived Intangible Assets

 

The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available, including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. The Company has not historically recorded an impairment to its goodwill and other indefinite lived intangible assets. As of March 3, 2018, the Company completed a quantitative impairment analysis of goodwill related to its reporting units. In completing this analysis, 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. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results. Based upon the analysis performed, the Company concluded that no goodwill impairment existed as the fair value of each reporting unit was in excess of its carrying value. As of March 3, 2018, for certain other indefinite lived intangible assets, the Company assessed qualitative factors in order to determine whether any events and circumstances existed which indicated that it was more likely than not that the fair value of its indefinite lived intangible assets did not exceed their carrying values and concluded no such events or circumstances existed which would require an impairment test being performed. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.

 

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Included within other assets in the accompanying consolidated balance sheets as of March 3, 2018 and February 25, 2017, respectively, are $305.4 million and $305.3 million for indefinite lived tradenames and trademarks.

 

K.Self Insurance

 

The Company utilizes a combination of insurance and self insurance for a number of risks including workers’ compensation, general liability, 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.

 

L.Deferred Rent

 

The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease beginning as of the date the Company obtained possession of the leased premises. Deferred rent amounted to $81.6 million and $80.3 million as of March 3, 2018 and February 25, 2017, 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 $133.4 million and $119.4 million as of March 3, 2018 and February 25, 2017, respectively.

 

M.Shareholders’ Equity

 

The Company has authorization to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations.

 

Between December 2004 and September 2015, the Company’s Board of Directors authorized, through several share repurchase programs, the repurchase of $11.950 billion of its shares of common stock. Since 2004 through the end of fiscal 2017, the Company has repurchased approximately $10.5 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 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. During fiscal 2015 the Company repurchased approximately 18.4 million shares of its common stock at a total cost of approximately $1.101 billion. The Company has approximately $1.5 billion remaining of authorized share repurchases as of March 3, 2018.

 

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During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During fiscal 2017 and 2016, total cash dividends of $80.9 million and $55.6 million were paid, respectively. Subsequent to the end of the fourth quarter of fiscal 2017, on April 11, 2018, the Company’s Board of Directors declared a quarterly dividend increase to $0.16 per share to be paid on July 17, 2018 to shareholders of record at the close of business on June 15, 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 additional paid-in capital when declared.

 

N.Fair Value of Financial Instruments

 

The Company’s financial instruments include cash and cash equivalents, investment securities, accounts payable, long term debt and certain other liabilities. The Company’s investment securities consist primarily of 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 $1.310 billion as of March 3, 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.

 

O.Revenue Recognition

 

Sales are recognized upon purchase by customers at the Company’s retail stores or upon delivery for products purchased from its websites. The value of point-of-sale coupons and point-of-sale rebates that result in a reduction of the price paid by the customer are recorded as a reduction of sales. Shipping and handling fees that are billed to a customer in a sale transaction are recorded in sales. Taxes, such as sales tax, use tax and value added tax, are not included in sales.

 

Revenues from gift cards, gift certificates and merchandise credits are recognized when redeemed. Gift cards have no provisions for reduction in the value of unused card balances over defined time periods and have no expiration dates.

 

Sales returns are provided for in the period that the related sales are recorded based on historical experience. Although the estimate for sales returns has not varied materially from historical provisions, actual experience could vary from historical experience in the future if the level of sales return activity changes materially. In the future, if the Company concludes that an adjustment to the sales return accrual is required due to material changes in the returns activity, the reserve will be adjusted accordingly.

 

P.Cost of Sales

 

Cost of sales includes the cost of merchandise, buying costs and costs of the Company’s distribution network including inbound freight charges, distribution facility costs, receiving costs, internal transfer costs and shipping and handling costs.

 

Q.Vendor Allowances

 

The Company receives allowances from vendors in the normal course of business for various reasons including direct cooperative advertising, purchase volume and reimbursement for other expenses. Annual terms for each allowance include the basis for earning the allowance and payment terms, which vary by agreement. All vendor allowances are recorded as a reduction of inventory cost, except for direct cooperative advertising allowances which are specific, incremental and identifiable. The Company recognizes purchase volume allowances as a reduction of the cost of inventory in the quarter in which milestones are achieved. Advertising costs were reduced by direct cooperative allowances of $38.5 million, $37.4 million, and $31.7 million for fiscal 2017, 2016, and 2015, respectively.

 

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R.Store Opening, Expansion, Relocation and Closing Costs

 

Store opening, expansion, relocation and closing costs, including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.

 

S.Advertising Costs

 

Expenses associated with direct response advertising are expensed over the period during which the sales are expected to occur, generally five to eight weeks, and all other expenses associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to $444.4 million, $381.1 million, and $338.1 million for fiscal 2017, 2016, and 2015, respectively.

 

T.Stock-Based Compensation

 

The Company measures all employee stock-based compensation awards using a fair value method and records such expense in its consolidated financial statements. Currently, the Company’s stock-based compensation relates to restricted stock awards, stock options and performance stock units. The Company’s restricted stock awards are considered nonvested share awards.

 

U.Income Taxes

 

The Company files a consolidated federal income tax return. Income tax returns are also filed with each taxable jurisdiction in which the Company conducts business.

 

The Company accounts for its income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

 

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.

 

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Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.

 

V.Earnings per Share

 

The Company presents earnings per share on a basic and diluted basis. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding, including the dilutive effect of stock-based awards as calculated under the treasury stock method.

 

Stock-based awards of approximately 8.0 million, 4.4 million, and 2.6 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for fiscal 2017, 2016, and 2015, respectively.

 

W.Recent Accounting Pronouncements

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This guidance requires an entity to classify deferred tax assets and liabilities as noncurrent assets and liabilities on the balance sheet. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption permitted. ASU 2015-17 can be adopted either prospectively or retrospectively to each prior reporting period presented. At the beginning of the first quarter of fiscal 2017, the Company adopted this guidance retrospectively, which resulted in decreases to other current assets of $218.8 million and deferred rent and other liabilities of $23.4 million and an increase to other assets of $195.5 million as of February 25, 2017.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 requires, on a prospective basis, recognition of excess tax benefits and tax deficiencies (resulting from an increase or decrease in the fair value of an award from grant date to the vesting or exercise date) in the provision for income taxes as a discrete item in the period in which they occur. The ASU also changes the classification of excess tax benefits from a financing activity to an operating activity in the Company’s consolidated statements of cash flows. In addition, ASU 2016-09 allows companies to make an accounting policy election to either estimate expected forfeitures or account for them as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-09 during the first quarter of fiscal 2017. During the 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 and $10.3 million for the twelve months ended February 25, 2017 and February 27, 2016, respectively, 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.

 

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In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Act. The amount of the reclassification is calculated based on the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of the enactment of the Tax Act related to items that remained in accumulated other comprehensive income (loss) at that time. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018 and early adoption is permitted. The Company early adopted this ASU in the fourth quarter of fiscal 2017 and reclassified $0.6 million of stranded deferred tax benefits from accumulated other comprehensive income (loss) to retained earnings.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This guidance deferred the effective date of ASU 2014-09 for one year from the original effective date. In accordance with the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In 2016, the FASB issued several amendments to clarify various aspects of the implementation guidance. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.

 

The 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 Company has substantially completed its analysis of its revenue streams and expects the adoption to result 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 the first time the advertising takes place.
·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 Company will adopt this standard in the first quarter of fiscal 2018 using the modified retrospective method and will record the cumulative effect of applying this standard to opening retained earnings. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations, or cash flows on an ongoing basis, including any changes in its consolidated balance sheet or statements of earnings.

 

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.

 

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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 adoption of this guidance is not expected to have a significant effect on the Company's consolidated financial position, results of operations, or cash flows.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. Under the update, the goodwill impairment loss would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance is not expected to have a significant effect on the Company's consolidated financial position, results of operations, or cash flows.

 

2. 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

 

During the second quarter of fiscal 2015, the Company acquired Of a Kind, Inc., an e-commerce website that features specially commissioned, limited edition items from emerging fashion and home designers. Since the date of acquisition, the results of Of a Kind’s operations, which were not material, have been included in the Company’s results of operations and no proforma disclosure of financial information has been presented. Of a Kind is included in the North American Retail operating segment.

 

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.

 

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(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.

 

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• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

As of March 3, 2018, 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). 

 

5.INVESTMENT SECURITIES

 

The Company’s investment securities as of March 3, 2018 and February 25, 2017 are as follows:

 

(in millions)  March 3, 2018  February 25, 2017
Available-for-sale securities:          
Long term  $19.4   $19.3 
           
Trading securities:          
Short term   86.3    - 
Long term   -    70.3 
           
Held-to-maturity securities:          
Short term   291.7    - 
Total investment securities  $397.4   $89.6 

 

Auction Rate Securities

 

As of March 3, 2018 and February 25, 2017, 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 $0.9 million and $1.0 million, respectively. Since these valuation adjustments are deemed to be temporary, they are recorded in accumulated other comprehensive loss, net of a related tax benefit, and did not affect the Company’s net earnings.

 

In fiscal 2015, approximately $30.7 million of these securities were tendered at a price of approximately 94% of par value for which the Company incurred a realized loss of approximately $1.8 million, which is included within interest expense, net in the consolidated statement of earnings for fiscal 2015.

 

U.S. Treasury Securities

 

As of March 3, 2018, the Company’s short term held-to-maturity securities included approximately $291.7 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 February 25, 2017, the Company had no 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 values of these trading investment securities included in the table above are approximately $86.3 million and $70.3 million as of March 3, 2018 and February 25, 2017, respectively.

 

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6. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

(in thousands)  March 3, 2018  February 25, 2017
       
Land and buildings  $588,115   $579,514 
Furniture, fixtures and equipment   1,409,157    1,332,038 
Leasehold improvements   1,543,452    1,454,749 
Computer equipment and software   1,500,199    1,290,690 
    5,040,923    4,656,991 
           
Less: Accumulated depreciation   (3,131,634)   (2,819,862)
Property and equipment, net  $1,909,289   $1,837,129 

 

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.

 

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 3, 2018.

 

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 2017 and 2016, the Company did not have any borrowings under the Revolver.

 

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Borrowings under the Revolver accrue interest at either (1) a fluctuating rate equal to the greater of the prime rate, as defined in the Revolver, the Federal Funds Rate plus 0.50%, or one-month LIBOR plus 1.0% and, in each case, plus an applicable margin based upon the Company’s leverage ratio which is calculated quarterly, (2) a periodic fixed rate equal to LIBOR plus an applicable margin based upon the Company’s leverage ratio which is calculated quarterly or (3) an agreed upon fixed rate. In addition, a commitment fee is assessed, which is included in interest expense, net in the consolidated statement of earnings. The Revolver contains customary affirmative and negative covenants and also requires the Company to maintain a maximum leverage ratio. The Company was in compliance with all covenants related to the Revolver as of March 3, 2018.

 

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 earnings. Interest expense related to the Notes and the Revolver, including the commitment fee and the amortization of the deferred financing costs, was approximately $74.4 million, $73.4 million, and $73.0 million for fiscal 2017, 2016 and 2015, respectively.

 

Lines of Credit

 

At March 3, 2018, the Company maintained two uncommitted lines of credit of $100 million each, with expiration dates of August 29, 2018 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 fiscal 2017 and 2016, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 3, 2018, there was approximately $29.8 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 3, 2018, the Company maintained unsecured standby letters of credit of $39.4 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.

 

Subsequent to the Tax Act, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which 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. The net unfavorable tax impact included the following: (1) re-measurement of the Company’s net deferred tax assets that existed on December 22, 2017; (2) deferred taxes that were created after December 22, 2017 that were deducted at the federal statutory rate of 32.66%, but will reverse at the newly enacted 21% federal statutory rate; (3) the transition tax on accumulated foreign earnings; and (4) the decrease in the federal statutory tax rate in fiscal 2017.

 

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The Company has made reasonable estimates of the impact of the Tax Act; however some aspects of these estimates are provisional and subject to adjustment in fiscal 2018 under the measurement period allowed by the SEC. 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 March 3, 2018.

 

The components of the provision for income taxes are as follows:

 

   FISCAL YEAR ENDED
(in thousands)  March 3, 2018  February 25, 2017  February 27, 2016
          
Current:               
Federal  $82,044   $313,571   $389,039 
State and local   13,554    42,101    39,991 
    95,598    355,672    429,030 
                
Deferred:               
Federal   157,057    20,295    42,592 
State and local   18,147    4,580    14,334 
    175,204    24,875    56,926 
   $270,802   $380,547   $485,956 

 

At March 3, 2018 and February 25, 2017, included in other assets is a net deferred income tax asset of $11.0 million and $195.5 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:

 

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(in thousands)  March 3, 2018  February 25, 2017
       
Deferred tax assets:          
Inventories  $26,657   $33,120 
Deferred rent and other rent credits   47,893    73,577 
Insurance   22,274    60,789 
Stock-based compensation   23,690    41,715 
Nonqualified deferred compensation plan   19,671    27,857 
Merchandise credits and gift card liabilities   36,793    63,031 
Accrued expenses   29,557    57,401 
Obligations on distribution facilities   26,210    40,363 
Carryforwards and other tax credits   48,221    40,481 
Other   28,972    61,937 
           
Deferred tax liabilities:          
Depreciation   (125,067)   (137,144)
Goodwill   (54,254)   (69,127)
Intangibles   (55,091)   (82,688)
Prepaid expenses   (52,723)   - 
Other   (11,778)   (15,843)
   $11,025   $195,469 

 

At March 3, 2018, the Company has federal net operating loss carryforwards of $4.6 million (tax effected), which will begin expiring in 2025, state net operating loss carryforwards of $4.0 million (tax effected), which will expire between 2018 and 2031, California state enterprise zone credit carryforwards of $2.3 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.

 

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The following table summarizes the activity related to the gross unrecognized tax benefits from uncertain tax positions:

 

(in thousands)  March 3, 2018  February 25, 2017
       
Balance at beginning of year  $76,415   $72,807 
           
Increase related to current year positions   11,437    14,491 
Increase related to prior year positions   4,128    413 
Decrease related to prior year positions   (1,823)   (4,202)
Settlements   (1,448)   - 
Lapse of statute of limitations   (13,266)   (7,094)
           
Balance at end of year  $75,443   $76,415 

 

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 3, 2018 and February 25, 2017, approximately $75.4 million and $76.3 million, respectively, of gross unrecognized tax benefits would impact the Company’s effective tax rate. As of March 3, 2018 and February 25, 2017, the liability for gross unrecognized tax benefits included approximately $9.6 million and $8.1 million, respectively, of accrued interest. The Company recorded an increase of interest of approximately $1.5 million for the fiscal year ended March 3, 2018 and a decrease of interest of $2.4 million for the fiscal year ended February 25, 2017 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 $12 million in the next twelve months. However, actual results could differ from those currently anticipated.

 

As of March 3, 2018, the Company operated in all 50 states, the District of Columbia, Puerto Rico, Canada and several other international countries and files income tax returns in the United States and various state, local and international jurisdictions. The Company is open to examination for state and local jurisdictions with varying statutes of limitations, generally ranging from three to five years.

 

For fiscal 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% and other income tax benefits of 2.03%. For fiscal 2016, the effective tax rate is comprised of the federal statutory income tax rate of 35.00%, the State income tax rate, net of federal benefit, of 3.25%, provision for uncertain tax positions of 0.28% and other income tax benefits of 2.82%. For fiscal 2015, the effective tax rate is comprised of the federal statutory income tax rate of 35.00%, the State income tax rate, net of federal benefit, of 3.07%, provision for uncertain tax positions of 0.07% and other income tax benefits of 1.53%.

 

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-Chairmen and their spouses. The Company’s interest in these policies was equivalent to the net premiums paid by the Company. The agreements relating to the Company’s interest in the life insurance policies on the lives of its Co-Chairmen and their spouses were terminated in fiscal 2003. Upon termination in fiscal 2003, the Co-Chairmen paid to the Company $5.4 million, representing the total amount of premiums paid by the Company under the agreements and the Company was released from its contractual obligation to make substantial future premium payments. In order to confer a benefit to its Co-Chairmen in substitution for the aforementioned terminated agreements, the Company has agreed to pay to the Co-Chairmen, at a future date, an aggregate amount of $4.2 million, which is included in accrued expenses and other current liabilities as of March 3, 2018 and February 25, 2017.

 

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On January 27, 2017, the Company acquired certain assets including the brand, website and certain intellectual property assets and assumed certain contractual obligations of Chef Central, a retailer of kitchenware, cookware and homeware items catering to cooking and baking enthusiasts. Ron Eisenberg, the son of Warren Eisenberg, the Company’s Co-Chairman, was the founder and owner of Chef Central, and joined the Company as an employee to build Chef Central branded stores or departments. Mr. Eisenberg brought more than 30 years of specialty retail experience and the transaction also added knowledgeable and talented associates to the Company with great culinary retailing expertise. Warren Eisenberg recused himself from Board of Director deliberations relating to the transaction (See “Acquisitions,” Note 3).

 

10.LEASES

 

The Company leases retail stores, as well as distribution facilities, offices and equipment, under agreements expiring at various dates through 2042. Certain leases provide for contingent rents (which are based upon store sales exceeding stipulated amounts and are immaterial in fiscal 2017, 2016, and 2015), 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 3, 2018, future minimum lease payments under non-cancelable operating leases were as follows:

 

(in thousands)  Operating Leases
Fiscal Year:     
2018  $612,097 
2019   558,365 
2020   477,228 
2021   379,050 
2022   282,746 
Thereafter   732,019 
Total future minimum lease payments  $3,041,505 

 

Expenses for all operating leases were $614.1 million, $582.2 million, and $568.1 million for fiscal 2017, 2016, and 2015, respectively.

 

As of March 3, 2018 and February 25, 2017, the capital lease obligations were approximately $4.5 million and $5.1 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, $0.4 million, and $0.4 million for fiscal 2017, 2016, and 2015, respectively. The minimum capital lease payments, including interest, by fiscal year are: $0.9 million in fiscal 2018, $0.9 million in fiscal 2019, $0.8 million in fiscal 2020, $0.7 million in fiscal 2021, $0.6 million in fiscal 2022 and $1.6 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 3, 2018 and February 25, 2017, the sale/leaseback financing obligations were approximately $102.5 million and $103.3 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 2018, $0.8 million in fiscal 2019, $0.9 million in fiscal 2020, $0.9 million in fiscal 2021, $1.0 million in fiscal 2022 and $76.5 million thereafter.

 

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11.EMPLOYEE BENEFIT PLANS

 

Defined Contribution Plans

 

The Company has three defined contribution savings plans covering all eligible employees of the Company (“the Plans”). During fiscal 2017, two 401(k) savings plans were merged into one of 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 $16.4 million, $15.2 million, and $13.9 million for fiscal 2017, 2016, and 2015, 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 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.

 

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, $0.5 million, and $0.6 million in fiscal 2017, 2016 and 2015, 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 3, 2018, February 25, 2017 and February 27, 2016, the net periodic pension cost was not material to the Company’s results of operations. The Company has a $14.3 million and $19.3 million liability, which is included in deferred rent and other liabilities as of March 3, 2018 and February 25, 2017, respectively. In addition, as of March 3, 2018 and February 25, 2017, the Company recognized a loss of $3.2 million, net of taxes of $1.1 million, and a loss of $4.7 million, net of taxes of $3.0 million, respectively, within accumulated other comprehensive loss.

 

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12.COMMITMENTS AND CONTINGENCIES

 

The Company maintains employment agreements with its Co-Chairmen. Under these agreements, the Co-Chairmen 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-Chairmen notified the Company that they elected to commence their Senior Status Period, effective May 21, 2017. The Co-Chairmen 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. 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 $203.9 million, $364.4 million, and $442.4 million in fiscal 2017, 2016, and 2015, respectively. In addition, the Company had interest payments of approximately $81.3 million, $81.4 million, and $81.5 million in fiscal 2017, 2016, and 2015, respectively.

 

The Company recorded an accrual for capital expenditures of $63.7 million, $59.0 million, and $51.7 million as of March 3, 2018, February 25, 2017 and February 27, 2016, respectively. In addition, the Company recorded an accrual for dividends payable of $25.5 million and $20.5 million as of March 3, 2018 and February 25, 2017, respectively. The Company did not declare any dividends prior to fiscal 2016.

 

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 3, 2018, February 25, 2017 and February 27, 2016 was approximately $70.5 million ($43.1 million after tax or $0.31 per diluted share), $71.9 million ($46.3 million after tax or $0.31 per diluted share), and approximately $67.0 million ($42.4 million after tax or $0.26 per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the years ended March 3, 2018 and February 25, 2017 was approximately $2.4 million and $2.2 million, respectively.

 

Incentive Compensation Plans

 

The Company currently grants awards under the Bed Bath & Beyond 2012 Incentive Compensation Plan (the “2012 Plan”), which amended and restated the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2012 Plan includes an aggregate of 43.2 million common shares authorized for issuance and the ability to grant incentive stock options. Outstanding awards that were covered by the 2004 Plan continue to be in effect under the 2012 Plan.

 

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The 2012 Plan is a flexible compensation plan that enables the Company to offer incentive compensation through stock options (whether nonqualified stock options or incentive stock options), restricted stock awards, stock appreciation rights, performance awards and other stock based awards, including cash awards. Under the 2012 Plan, grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted. Awards of stock options and restricted stock generally vest in five equal annual installments beginning one to three years from the date of grant. Awards of performance stock units generally vest over a period of four years from the date of grant dependent on the Company’s achievement of performance-based tests and subject, in general, to the executive remaining in the Company’s service on specified vesting dates.

 

The Company generally issues new shares for stock option exercises, restricted stock awards and vesting of performance stock units.

 

Stock Options

 

Stock option grants are issued at fair market value on the date of grant and generally become exercisable in either three or five equal annual installments beginning one year from the date of grant for options issued since May 10, 2010, and beginning one to three years from the date of grant for options issued prior to May 10, 2010, in each case, subject, in general to the recipient remaining in the Company’s service on specified vesting dates. Option grants expire eight years after the date of grant. All option grants are nonqualified. As of March 3, 2018, unrecognized compensation expense related to the unvested portion of the Company’s stock options was $17.6 million, which is expected to be recognized over a weighted average period of 2.9 years.

 

The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.

 

   FISCAL YEAR ENDED
Black-Scholes Valuation Assumptions  (1)  March 3, 2018  February 25, 2017  February 27, 2016
          
Weighted Average Expected Life (in years)  (2)   6.7    6.6    6.7 
Weighted Average Expected Volatility  (3)   26.49%   26.96%   27.59%
Weighted Average Risk Free Interest Rates  (4)   2.17%   1.46%   1.93%
Expected Dividend Yield (5)   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 3, 2018 were as follows:

 

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(Shares in thousands)  Number of Stock Options  Weighted Average Exercise Price
Options outstanding, beginning of period   3,906   $56.48 
Granted   694    37.50 
Exercised   (359)   28.33 
Forfeited or expired   -    - 
Options outstanding, end of period   4,241    55.76 
Options exercisable, end of period   2,447   $60.38 

 

The weighted average fair value for the stock options granted in fiscal 2017, 2016, and 2015 was $9.50, $11.87, and $23.12, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of March 3, 2018 was 4.0 years and the aggregate intrinsic value was $0. The weighted average remaining contractual term for options exercisable as of March 3, 2018 was 2.6 years and the aggregate intrinsic value was $0. The total intrinsic value for stock options exercised during fiscal 2017, 2016, and 2015 was $3.9 million, $9.0 million, and $8.7 million, respectively.

 

Net cash proceeds from the exercise of stock options for fiscal 2017 were $10.2 million and the net associated income tax expense was $0.2 million.

 

Restricted Stock

 

Restricted stock awards are issued and measured at fair market value on the date of grant and generally become vested in five 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 3, 2018, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock awards was $139.0 million, which is expected to be recognized over a weighted average period of 4.5 years.

 

Changes in the Company’s restricted stock for the fiscal year ended March 3, 2018 were as follows:

 

(Shares in thousands)  Number of Restricted Shares  Weighted Average Grant-Date Fair Value
Unvested restricted stock, beginning of period   3,492   $58.12 
Granted   1,919    34.27 
Vested   (761)   58.69 
Forfeited   (339)   49.68 
Unvested restricted stock, end of period   4,311   $48.07 

 

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 3, 2018, unrecognized compensation expense related to the unvested portion of the Company’s performance stock units was $23.0 million, which is expected to be recognized over a weighted average period of 1.8 years.

 

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Changes in the Company’s PSUs for the fiscal year ended March 3, 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   1,014   $55.19 
Granted   660    37.50 
Vested   (322)   57.28 
Forfeited   -    - 
Unvested performance stock units, end of period   1,352   $46.06 

 

15.SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

 

   FISCAL 2017 QUARTER ENDED  FISCAL 2016 QUARTER ENDED
(in thousands, except per share data)  May 27, 2017  August 26, 2017  November 25, 2017  March 3, 2018  May 28,
2016
  August 27, 2016  November 26, 2016  February 25, 2017
                         
Net sales  $2,742,141   $2,936,357   $2,954,539   $3,716,264   $2,738,084   $2,988,235   $2,955,484   $3,533,954 
Gross profit   1,000,115    1,068,559    1,041,061    1,333,280    1,023,592    1,116,893    1,092,774    1,343,091 
Operating profit   147,011    168,847    108,360    337,103    213,026    280,973    211,283    429,928 
Earnings before provision for income taxes   130,431    149,681    94,739    320,809    196,711    262,774    193,029    413,141 
Provision for income taxes   55,148    55,451    33,438    126,765    74,092    95,439    66,605    144,411 
Net earnings  $75,283   $94,230   $61,301   $194,044   $122,619   $167,335   $126,424   $268,730 
EPS-Basic (1)  $0.53   $0.67   $0.44   $1.41   $0.81   $1.12   $0.86   $1.86 
EPS-Diluted (1)  $0.53   $0.67   $0.44   $1.41   $0.80   $1.11   $0.85   $1.84 
Dividends declared per share  $0.150   $0.150   $0.150   $0.150   $0.125   $0.125   $0.125   $0.125 

 

(1) Net earnings per share ("EPS") amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year. 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors
Bed Bath & Beyond Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Bed Bath & Beyond Inc. and subsidiaries (the Company) as of March 3, 2018 and February 25, 2017, the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended March 3, 2018, and the related notes and the consolidated financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 3, 2018 and February 25, 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended March 3, 2018, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 2, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ KPMG LLP

 

We have served as the Company’s auditor since 1992.

 

Short Hills, New Jersey
May 2, 2018

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

To the Shareholders and Board of Directors
Bed Bath & Beyond Inc.:

 

Opinion on Internal Control Over Financial Reporting

 

We have audited Bed Bath & Beyond Inc. and subsidiaries’ (the Company) internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 3, 2018 and February 25, 2017, the related consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended March 3, 2018, and the related notes and consolidated financial statement schedule, (collectively, the consolidated financial statements), and our report dated May 2, 2018 expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

 61 

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ KPMG LLP

 

Short Hills, New Jersey
May 2, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 62 

 

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A – CONTROLS AND PROCEDURES

 

(a) Disclosure Controls and Procedures

 

Based on their evaluation as of March 3, 2018, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by our management in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

 

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives, and our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective at that reasonable assurance level.

 

(b) Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of March 3, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), released in 2013, Internal Control-Integrated Framework.

 

Our management has concluded that, as of March 3, 2018, our internal control over financial reporting is effective based on these criteria.

 

(c) Attestation Report of the Independent Registered Public Accounting Firm

 

KPMG LLP issued an audit report on the effectiveness of our internal control over financial reporting, which is included herein.

 

(d) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the quarter ended March 3, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

ITEM 9B – OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

(a)Directors of the Company

 

Information relative to Directors of the Company is set forth under the section captioned “Election of Directors” in the registrant’s definitive Proxy Statement for the 2018 Annual Meeting of Shareholders (“the Proxy Statement”) and is incorporated herein by reference.

 

(b)Executive Officers of the Company

 

Information relative to Executive Officers of the Company is set forth under the section captioned “Executive Officers” in the Proxy Statement and is incorporated herein by reference.

 

(c)Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

 

(d)Information on our audit committee and the audit committee financial expert is set forth under the section captioned “Audit Committee” in the Proxy Statement and is incorporated herein by reference.

 

(e)The Company has adopted a code of ethics entitled “Policy Of Ethical Standards For Business Conduct” that applies to all of its employees, including Executive Officers, and the Board of Directors, the complete text of which is available through the Investor Relations section of the Company’s website, www.bedbathandbeyond.com.

 

ITEM 11 – EXECUTIVE COMPENSATION

 

The information required by this item is set forth under the section captioned “Executive Compensation” in the Proxy Statement and is incorporated herein by reference.

 

 64 

 

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

The Equity Plan Compensation Information required by this item is included below; all other information required by this item is in the Proxy Statement and is incorporated herein by reference.

 

The following table provides certain information as of March 3, 2018 with respect to the Company’s equity compensation plans:

 

Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)

Weighted-average exercise price of outstanding options, warrants and rights

(b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

Equity compensation plans approved by shareholders (1)

 

5,982,068 (2)

 

$55.76 (3)

 

9,078,459

Equity compensation plans not approved by shareholders

 

-

 

-

 

-

 

Total (4)

 

5,982,068 (2)

 

$55.76 (3)

 

9,078,459

 

(1)These plans consist of the Company’s 2004 Incentive Compensation Plan and the 2012 Incentive Compensation Plan, which amended and restated the 2004 Incentive Compensation Plan.
(2)This amount includes 1,741,062 shares that may be issued upon the vesting of performance stock units granted under the 2012 Incentive Compensation Plan, which represents the estimated maximum number of shares that may be issued upon the vesting of the performance stock units. This amount also includes 4,241,006 of stock options outstanding.
(3)The weighted-average exercise price solely takes into account outstanding stock options as other outstanding awards under the 2004 Incentive Compensation Plan and the 2012 Incentive Compensation Plan do not have an exercise price.
(4)Any shares of common stock that are subject to awards of options or stock appreciation rights under the 2012 Incentive Compensation Plan shall be counted against the aggregate number of shares of common stock that may be issued as one share for every share issued. Any shares of common stock that are subject to awards other than options or stock appreciation rights, including restricted stock awards and performance stock units, shall be counted against this limit as 2.20 shares for every share granted.

 

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item is set forth under the sections captioned “Director Independence” and “Certain Relationships and Related Transactions” in the Proxy Statement and is incorporated herein by reference.

 

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item is in the Proxy Statement and is incorporated herein by reference.

 

 65 

 

PART IV

 

ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) (1) Consolidated Financial Statements of Bed Bath & Beyond Inc. and subsidiaries are incorporated under Item 8 of this Form 10-K.

 

(a) (2) Financial Statement Schedules

 

For the Fiscal Years Ended March 3, 2018, February 25, 2017 and February 27, 2016.

 

Schedule II – Valuation and Qualifying Accounts

 

(a) (3) Exhibits

 

Unless otherwise indicated, exhibits are incorporated by reference to the correspondingly numbered exhibits to the Company’s Registration Statement on Form S-1 (Commission File No. 33-47250).

 

Exhibit

No.

Exhibit

 

3.1***Restated Certificate of Incorporation

 

3.2Certificate of Amendment to the Company’s Certificate of Incorporation (incorporated by reference to Exhibit 3 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended August 25, 1996)

 

3.3Certificate of Amendment to the Company’s Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997)

 

3.4Certificate of Change of Bed Bath & Beyond Inc. under Section 805-A of the Business Corporation Law (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997)

 

3.5Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 30, 1998)

 

3.6Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 1, 2001)

 

3.7Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K dated July 1, 2009)

 

3.8Amended By-Laws of Bed Bath & Beyond Inc. (as amended effective as of September 23, 2009) (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K dated September 29, 2009)

 

3.9Amended By-Laws of Bed Bath & Beyond Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the Commission on May 16, 2017)

 

 66 

 

3.10Amended By-Laws of Bed Bath & Beyond Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed with the Commission on December 28, 2017)

 

4.1Indenture, dated as of July 17, 2014, relating to the 3.749% senior unsecured notes due 2024, the 4.915% senior unsecured notes due 2034 and the 5.165% senior unsecured notes due 2044, between the Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Commission on July 17, 2014)

 

4.2First Supplemental Indenture, dated as of July 17, 2014, relating to the 3.749% senior unsecured notes due 2024, the 4.915% senior unsecured notes due 2034 and the 5.165% senior unsecured notes due 2044, between the Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed with the Commission on July 17, 2014)

 

4.3Form of 3.749% senior unsecured notes due 2024 (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed with the Commission on July 17, 2014)

 

4.4Form of 4.915% senior unsecured notes due 2034 (incorporated by reference to Exhibit 4.4 to the Company’s Form 8-K filed with the Commission on July 17, 2014)

 

4.5Form of 5.165% senior unsecured notes due 2044 (incorporated by reference to Exhibit 4.5 to the Company’s Form 8-K filed with the Commission on July 17, 2014)

 

10.1*Stock Option Agreement between the Company and Warren Eisenberg, dated as of August 26, 1997 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997)

 

10.2*Stock Option Agreement between the Company and Leonard Feinstein, dated as of August 26, 1997 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997)

 

10.3*Company’s 1992 Stock Option Plan, as amended through August 26, 1997 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997)

 

10.4*Company’s 1996 Stock Option Plan, as amended through August 26, 1997 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997)

 

10.5*Employment Agreement between the Company and Steven H. Temares (dated as of December 1, 1994) (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-K for the year ended February 28, 1998)

 

10.6*Form of Employment Agreement between the Company and the Chief Merchandising Officer and Senior Vice President and Senior Vice President – Stores (dated as of December 1, 1994) (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K for the year ended February 28, 1998)

 

10.7*Company’s 1998 Stock Option Plan (incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 30, 1998)

 

10.8*Stock Option Agreement between the Company and Warren Eisenberg, dated as of August 13, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 27, 1999)

 

 67 

 

10.9*Stock Option Agreement between the Company and Leonard Feinstein, dated as of August 13, 1999 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 27, 1999)

 

10.10*Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 27, 1999)

 

10.11*Company’s 2000 Stock Option Plan (incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 27, 2000 which is incorporated by reference to Exhibit A to the Registrant’s Proxy Statement dated May 22, 2000)

 

10.12*Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2000)

 

10.13*Company’s 2001 Stock Option Plan (incorporated by reference to Exhibit 10.29 to the Company’s Form 10-K for the year ended March 3, 2001)

 

10.14*Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2002)

 

10.15*Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2002)

 

10.16*Agreement Terminating Agreements concerning “Split Dollar” Life Insurance Plan, dated May 9, 1994 and June 16, 1995, among the Company, Jay D. Waxenberg, as trustee of the Warren Eisenberg Life Insurance Trust, Warren Eisenberg and Maxine Eisenberg (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended November 29, 2003)

 

10.17*Agreement Terminating Agreements concerning “Split Dollar” Life Insurance Plan, dated May 9, 1994 and June 16, 1995, among the Company, Jay D. Waxenberg, as trustee of the Leonard Joseph Feinstein Life Insurance Trust and Leonard Feinstein (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended November 29, 2003)

 

10.18*Compensation Agreement concerning Substitute Benefit Payments upon Termination of “Split Dollar” Life Insurance Plan between the Company and Warren Eisenberg, dated as of February 27, 2004 (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-K for the year ended February 28, 2004)

 

10.19*Compensation Agreement concerning Substitute Benefit Payments upon Termination of “Split Dollar” Life Insurance Plan between the Company and Leonard Feinstein, dated as of February 27, 2004 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K for the year ended February 28, 2004)

 

10.20*Employment Agreement between the Company and Eugene A. Castagna (dated as of March 1, 2000) (incorporated by reference to Exhibit 10.22 to the Company’s Form 10-K for the year ended February 28, 2004)

 

10.21*Company’s 2004 Incentive Compensation Plan (incorporated by reference to Exhibit B to the Registrant’s Proxy Statement dated May 28, 2004)

 

 68 

 

10.22*Form of Standard Stock Option Agreement dated as of May 10, 2004 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 29, 2004)

 

10.23*Form of Stock Option Agreement under 2004 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 28, 2004)

 

10.24*Form of Restricted Stock Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 28, 2005)

 

10.25*Performance-Based Form of Restricted Stock Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended May 28, 2005)

 

10.26*Form of Stock Option Agreement under 2004 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 27, 2005)

 

10.27*Company’s Nonqualified Deferred Compensation Plan (effective January 1, 2006) (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated January 5, 2006)

 

10.28*Addendum to Stock Option Agreements for Warren Eisenberg, Leonard Feinstein and Steven H. Temares, dated as of December 27, 2006 (incorporated by reference to Exhibit 10.31 to the Company’s Form 10-K for the year ended March 3, 2007)

 

10.29*Addendum to Stock Option Agreements for Eugene A. Castagna, Matthew Fiorilli and Arthur Stark dated December 28, 2006 (incorporated by reference to Exhibit 10.32 to the Company’s Form 10-K for the year ended March 3, 2007)

 

10.30*Amended and Restated Employment Agreement between the Company and Warren Eisenberg, dated as of December 31, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended November 29, 2008)

 

10.31*Amended and Restated Employment Agreement between the Company and Leonard Feinstein, dated as of December 31, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended November 29, 2008)

 

10.32*Bed Bath & Beyond Inc. Policy on Recovery of Incentive Compensation (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 30, 2009)

 

10.33*Performance-Based Form of Restricted Stock Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended May 30, 2009)

 

10.34*Form of Amendment to Employment Agreement of Steven H. Temares, Eugene A. Castagna, Matthew Fiorilli and Arthur Stark, dated May, 2007 in the case of Messrs. Temares, Fiorilli and Stark, and July, 2007 in the case of Mr. Castagna (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 29, 2009)

 

 69 

 

10.35*Amended and Restated Supplemental Executive Retirement Benefit Agreement between the Company and Steven H. Temares, dated November 16, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 19, 2009)

 

10.36*Escrow Agreement with Respect to Supplemental Executive Retirement Benefit Agreement between the Company and Steven H. Temares, dated November 16, 2009 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K dated November 19, 2009)

 

10.37*Amendment dated as of August 13, 2010 to Amended and Restated Employment Agreement between the Company and Warren Eisenberg, dated as of December 31, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 28, 2010)

 

10.38*Amendment dated as of August 13, 2010 to Amended and Restated Employment Agreement between the Company and Leonard Feinstein, dated as of December 31, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended August 28, 2010)

 

10.39*Bed Bath & Beyond Inc. 2012 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on June 26, 2012)

 

10.40*Performance-Based Form of Restricted Stock Agreement under 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.39 to the Company’s Form 10-K for the year ended March 1, 2013)

 

10.41*Form of Stock Option Agreement under 2012 Stock Option Plan (incorporated by reference to Exhibit 10.40 to the Company’s Form 10-K for the year ended March 1, 2013)

 

10.42*Notice of Amendment to Restricted Stock Agreements, dated on or before June 11, 2012 (incorporated by reference to Exhibit 10.41 to the Company’s Form 10-K for the year ended March 1, 2013)

 

10.43*Letter agreement dated as of June 28, 2013 between the Company and Warren Eisenberg (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on July 2, 2013)

 

10.44*Letter agreement dated as of June 28, 2013 between the Company and Leonard Feinstein (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on July 2, 2013)

 

10.45*Amendment dated as of February 26, 2014 to Amended and Restated Employment Agreement between the Company and Warren Eisenberg, dated as of December 31, 2008, as previously amended as of June 29, 2010 and August 13, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on February 28, 2014)

 

10.46*Amendment dated as of February 26, 2014 to Amended and Restated Employment Agreement between the Company and Leonard Feinstein, dated as of December 31, 2008, as previously amended as of June 29, 2010 and August 13, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on February 28, 2014)

 

 70 

 

10.47*Form of Standard Performance Unit Agreement under 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on May 9, 2014)

 

10.48*Employment Agreement between the Company and Susan E. Lattmann (dated as of October 6, 2014) (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on October 8, 2014)

 

10.49*Form of Performance Stock Unit Agreement under 2012 Incentive Compensation Plan (effective 2015) (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on July 8, 2015)

 

10.50*Amended and Restated Nonqualified Deferred Compensation Plan (effective January 1, 2016) (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on July 6, 2016)

 

10.51*Amended and Restated Nonqualified Deferred Compensation Plan (effective January 1, 2008) (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed with the Commission on July 6, 2016)

 

10.52*Form of Performance Stock Unit Agreement under 2012 Incentive Compensation Plan (effective 2016) (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed with the Commission on July 6, 2016)

 

10.53*Letter agreement dated February 7, 2017 between the Company and Warren Eisenberg (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on February 9, 2017)

 

10.54*Letter agreement dated February 7, 2017 between the Company and Leonard Feinstein (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on February 9, 2017)

 

10.55*Form of Standard Performance Stock Unit Agreement under 2012 Incentive Compensation Plan (effective 2017) (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on June 30, 2017)

 

10.56*Form of Performance Stock Unit Agreement under 2012 Incentive Compensation Plan (effective 2017) for Steven H. Temares (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed with the Commission on June 30, 2017)

 

10.57*Amendment dated as of November 1, 2017 to Employment Agreement between the Company and Susan Lattmann (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on December 28, 2017)

 

10.58**Form of Amendment to Employment Agreement of Matthew Fiorilli and Arthur Stark, dated December 14, 2006 in the case of Mr. Fiorilli and December 22, 2006 in the case of Mr. Stark

 

10.59**Amendment to Employment Agreement of Eugene A. Castagna, dated December 22, 2006

 

10.60**Amendment to Employment Agreement of Steven H. Temares, dated August 21, 2009

 

21**Subsidiaries of the Company

 

 71 

 

23**Consent of Independent Registered Public Accounting Firm

 

31.1**Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

31.2**Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

32**Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

 

101.INS  XBRL Instance Document
    
101.SCH  XBRL Taxonomy Extension Schema Document
    
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
    
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
    
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document
    
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document

 

______________________________

 

*This is a management contract or compensatory plan or arrangement.
**Filed herewith.
 ***This Exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided.

 

 

 72 

 

ITEM 16 – FORM 10-K SUMMARY

 

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 73 

 


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BED BATH & BEYOND INC.

 

By: /s/ Steven H. Temares                         

Steven H. Temares

Chief Executive Officer

May 2, 2018

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature  Capacity  Date
       
/s/ Warren Eisenberg  Co-Chairman and Director  May 2, 2018
Warren Eisenberg      
       
/s/ Leonard Feinstein  Co-Chairman and Director  May 2, 2018
Leonard Feinstein      
       
/s/ Steven H. Temares  Chief Executive Officer  May 2, 2018
Steven H. Temares  and Director   
       
/s/ Susan E. Lattmann  Chief Financial Officer and Treasurer  May 2, 2018
Susan E. Lattmann  (Principal Financial and Accounting Officer)   
       
/s/ Dean S. Adler  Director  May 2, 2018
Dean S. Adler      
       
/s/ Stanley Barshay  Director  May 2, 2018
Stanley Barshay      
       
/s/ Klaus Eppler  Director  May 2, 2018
Klaus Eppler      
       
/s/ Patrick R. Gaston  Director  May 2, 2018
Patrick R. Gaston      
       
/s/ Jordan Heller  Director  May 2, 2018
Jordan Heller      
       
/s/ Victoria A. Morrison  Director  May 2, 2018
Victoria A. Morrison      
       
s/ Johnathan B. Osborne  Director  May 2, 2018
Johnathan B. Osborne      
       
/s/ Virginia P. Ruesterholz  Director  May 2, 2018
Virginia P. Ruesterholz      

 

 

 

 

 

 

 74 

 

Bed Bath & Beyond Inc. and Subsidiaries

 

Schedule II - Valuation and Qualifying Accounts

Fiscal Years Ended March 3, 2018, February 25, 2017 and February 27, 2016

(amounts in millions)

 

Column A  Column B  Column C  Column C  Column D  Column E
Description  Balance at Beginning of Period  Additions Charged to Income  Additions Charged to Other Accounts  Adjustments and/or Deductions  Balance at End of Period
Sales Returns and Allowance                         
                          
Year Ended:                         
March 3, 2018  $45.4   $614.9   $-   $619.1   $41.2 
February 25, 2017   44.5    666.4    1.6(1)   667.1    45.4 
February 27, 2016   45.0    693.3    -    693.8    44.5 

 

(1)  Principally due to acquistions during the fiscal year ended February 25, 2017.

 

 

 

 

 

 

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