UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 2, 2007
Commission File Number 0-20214
BED BATH & BEYOND INC.
(Exact name of
registrant as specified in its charter)
|
New York |
|
11-2250488 |
|
(State of incorporation) |
|
(IRS Employer 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
|
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 o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer x Accelerated filer o Non-accelerated filer o |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
Yes o No x |
Number of shares outstanding of the issuer’s Common Stock:
|
Class |
|
Outstanding at June 2, 2007 |
|
Common Stock - $0.01 par value |
|
271,346,564 |
|
PART I - FINANCIAL INFORMATION |
|
|
|
Item 1. Financial Statements |
|
|
|
Consolidated Balance Sheets June 2, 2007 (unaudited) and March 3, 2007 |
|
|
|
|
|
|
|
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
|
|
|
|
|
|
|
|
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
|
|
|
|
|
|
|
|
|
Certifications |
2
BED BATH & BEYOND INC. AND SUBSIDIARIES
(in thousands, except per share data)
|
|
|
June 2, |
|
March 3, |
|
||
|
|
|
2007 |
|
2007 |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
Assets |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
183,131 |
|
$ |
213,381 |
|
|
Short term investment securities |
|
512,022 |
|
774,881 |
|
||
|
Merchandise inventories |
|
1,558,478 |
|
1,505,800 |
|
||
|
Other current assets |
|
274,795 |
|
204,552 |
|
||
|
|
|
|
|
|
|
||
|
Total current assets |
|
2,528,426 |
|
2,698,614 |
|
||
|
|
|
|
|
|
|
||
|
Long term investment securities |
|
74,937 |
|
102,692 |
|
||
|
Property and equipment, net |
|
954,620 |
|
929,507 |
|
||
|
Other assets |
|
310,657 |
|
228,491 |
|
||
|
|
|
|
|
|
|
||
|
Total assets |
|
$ |
3,868,640 |
|
$ |
3,959,304 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
608,982 |
|
$ |
615,156 |
|
|
Accrued expenses and other current liabilities |
|
244,612 |
|
245,267 |
|
||
|
Merchandise credit and gift card liabilities |
|
151,547 |
|
143,737 |
|
||
|
Current income taxes payable |
|
67,866 |
|
140,913 |
|
||
|
|
|
|
|
|
|
||
|
Total current liabilities |
|
1,073,007 |
|
1,145,073 |
|
||
|
|
|
|
|
|
|
||
|
Deferred rent and other liabilities |
|
170,274 |
|
165,080 |
|
||
|
Income taxes payable |
|
124,465 |
|
— |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities |
|
1,367,746 |
|
1,310,153 |
|
||
|
|
|
|
|
|
|
||
|
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 311,091 and 309,750 shares, respectively; outstanding 271,347 and 277,074 shares, respectively |
|
3,111 |
|
3,098 |
|
||
|
Additional paid-in capital |
|
760,476 |
|
737,209 |
|
||
|
Retained earnings |
|
3,271,605 |
|
3,153,856 |
|
||
|
Treasury stock, at cost; 39,744 and 32,676 shares, respectively |
|
(1,538,612 |
) |
(1,249,397 |
) |
||
|
Accumulated other comprehensive income |
|
4,314 |
|
4,385 |
|
||
|
|
|
|
|
|
|
||
|
Total shareholders’ equity |
|
2,500,894 |
|
2,649,151 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities and shareholders’ equity |
|
$ |
3,868,640 |
|
$ |
3,959,304 |
|
See accompanying Notes to Consolidated Financial Statements.
3
BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share data)
(unaudited)
|
|
|
Three Months Ended |
|
||||
|
|
|
June 2, |
|
May 27, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Net sales |
|
$ |
1,553,293 |
|
$ |
1,395,963 |
|
|
|
|
|
|
|
|
||
|
Cost of sales |
|
907,184 |
|
805,865 |
|
||
|
|
|
|
|
|
|
||
|
Gross profit |
|
646,109 |
|
590,098 |
|
||
|
|
|
|
|
|
|
||
|
Selling, general and administrative expenses |
|
491,718 |
|
441,348 |
|
||
|
|
|
|
|
|
|
||
|
Operating profit |
|
154,391 |
|
148,750 |
|
||
|
|
|
|
|
|
|
||
|
Interest income |
|
9,890 |
|
9,659 |
|
||
|
|
|
|
|
|
|
||
|
Earnings before provision for income taxes |
|
164,281 |
|
158,409 |
|
||
|
|
|
|
|
|
|
||
|
Provision for income taxes |
|
59,634 |
|
57,978 |
|
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
104,647 |
|
$ |
100,431 |
|
|
|
|
|
|
|
|
||
|
Net earnings per share - Basic |
|
$ |
0.38 |
|
$ |
0.36 |
|
|
Net earnings per share - Diluted |
|
$ |
0.38 |
|
$ |
0.35 |
|
|
|
|
|
|
|
|
||
|
Weighted average shares outstanding - Basic |
|
273,564 |
|
280,202 |
|
||
|
Weighted average shares outstanding - Diluted |
|
278,249 |
|
285,153 |
|
||
See accompanying Notes to Consolidated Financial Statements.
4
BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands, unaudited)
|
|
|
Three Months Ended |
|
||||
|
|
|
June 2, |
|
May 27, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
104,647 |
|
$ |
100,431 |
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
||
|
Depreciation |
|
37,339 |
|
30,775 |
|
||
|
Amortization of bond premium |
|
671 |
|
1,037 |
|
||
|
Stock-based compensation |
|
10,022 |
|
12,977 |
|
||
|
Excess tax benefit from stock-based compensation |
|
545 |
|
1,204 |
|
||
|
Deferred income taxes |
|
(15,551 |
) |
(10,425 |
) |
||
|
(Increase) decrease in assets, net of effect of acquisition: |
|
|
|
|
|
||
|
Merchandise inventories |
|
(38,169 |
) |
(89,328 |
) |
||
|
Trading investment securities |
|
(1,418 |
) |
(754 |
) |
||
|
Other current assets |
|
(26,783 |
) |
(14,503 |
) |
||
|
Other assets |
|
13 |
|
(6 |
) |
||
|
Increase (decrease) in liabilities, net of effect of acquisition: |
|
|
|
|
|
||
|
Accounts payable |
|
12,180 |
|
38,419 |
|
||
|
Accrued expenses and other current liabilities |
|
(2,736 |
) |
(8,555 |
) |
||
|
Merchandise credit and gift card liabilities |
|
4,270 |
|
6,529 |
|
||
|
Income taxes payable |
|
28,913 |
|
6,660 |
|
||
|
Deferred rent and other liabilities |
|
3,674 |
|
7,583 |
|
||
|
|
|
|
|
|
|
||
|
Net cash provided by operating activities |
|
117,617 |
|
82,044 |
|
||
|
|
|
|
|
|
|
||
|
Cash Flows from Investing Activities: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Purchase of held-to-maturity investment securities |
|
— |
|
(97,194 |
) |
||
|
Redemption of held-to-maturity investment securities |
|
94,666 |
|
55,715 |
|
||
|
Purchase of available-for-sale investment securities |
|
(315,780 |
) |
(396,175 |
) |
||
|
Redemption of available-for-sale investment securities |
|
512,475 |
|
267,450 |
|
||
|
Capital expenditures |
|
(76,523 |
) |
(78,722 |
) |
||
|
Payment for acquisition, net of cash acquired |
|
(85,893 |
) |
— |
|
||
|
|
|
|
|
|
|
||
|
Net cash provided by (used in) investing activities |
|
128,945 |
|
(248,926 |
) |
||
|
|
|
|
|
|
|
||
|
Cash Flows from Financing Activities: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Proceeds from exercise of stock options |
|
9,720 |
|
6,229 |
|
||
|
Excess tax benefit from stock-based compensation |
|
2,683 |
|
1,508 |
|
||
|
Repurchase of common stock, including fees |
|
(289,215 |
) |
(757 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash (used in) provided by financing activities |
|
(276,812 |
) |
6,980 |
|
||
|
|
|
|
|
|
|
||
|
Net decrease in cash and cash equivalents |
|
(30,250 |
) |
(159,902 |
) |
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Beginning of period |
|
213,381 |
|
247,697 |
|
||
|
End of period |
|
$ |
183,131 |
|
$ |
87,795 |
|
See accompanying Notes to Consolidated Financial Statements.
5
BED BATH & BEYOND INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1) Basis of Presentation
The accompanying consolidated financial statements, except for the March 3, 2007 consolidated balance sheet, have been prepared without audit. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals and elimination of intercompany balances and transactions) necessary to present fairly the financial position of Bed Bath & Beyond Inc. and subsidiaries (the “Company”) as of June 2, 2007 and March 3, 2007 and the results of its operations and its cash flows for the three months ended June 2, 2007 and May 27, 2006, respectively.
The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-Q and consequently do not include all the disclosures normally required by U.S. generally accepted accounting principles. Reference should be made to Bed Bath & Beyond Inc.’s Annual Report on Form 10-K for the fiscal year ended March 3, 2007 for additional disclosures, including a summary of the Company’s significant accounting policies and subsequently filed Forms 8-K.
The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December and generally lower in February and April.
2) Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the “fair value option”). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
6
accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.
3) Cash and Cash Equivalents
Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within 5 business days, of $49.2 million and $44.3 million as of June 2, 2007 and March 3, 2007, respectively.
4) Property and Equipment
As of June 2, 2007 and March 3, 2007, included in property and equipment, net is accumulated depreciation and amortization of $757.4 million and $720.6 million, respectively.
5) Stock-Based Compensation
The Company records stock-based compensation under the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. The Company adopted SFAS No. 123R on August 28, 2005 (the “date of adoption”), under the modified prospective application. Under this application, the Company records stock-based compensation expense for all awards granted on or after the date of adoption and for the portion of previously granted awards that remained unvested at the date of adoption. Currently, the Company’s stock-based compensation relates to restricted stock awards and stock options. The Company’s restricted stock awards are considered nonvested share awards as defined under SFAS No. 123R.
The Company recorded stock-based compensation expense of $10.0 million ($6.4 million after tax or $0.02 per diluted share) and $13.0 million ($8.2 million after tax or $0.03 per diluted share) for the first quarter of 2007 and 2006, respectively. In addition, the amount of stock-based compensation cost capitalized for the first quarter of 2007 and 2006 was approximately $0.3 million and $0.4 million, respectively.
Incentive Compensation Plans
The Company currently grants awards under the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2004 Plan is a flexible compensation plan that enables the Company to offer incentive compensation through stock options, stock appreciation rights, restricted stock awards and performance awards, including cash awards.
Prior to fiscal 2004, the Company had adopted various stock option plans (the “Prior
7
Plans”), all of which solely provided for the granting of stock options. Upon adoption of the 2004 Plan, the common stock available under the Prior Plans became available for issuance under the 2004 Plan. No further option grants may be made under the Prior Plans, although outstanding awards under the Prior Plans will continue to be in effect.
Under the 2004 Plan and the Prior Plans, an aggregate of 83.4 million shares of common stock were authorized for issuance. The Company generally issues new shares for stock option exercises and restricted stock awards. Under the 2004 Plan, grants are determined by the Compensation Committee for those awards granted to executive officers and other key executives and by an appropriate committee for all other awards granted.
As of June 2, 2007, unrecognized compensation expense related to the unvested portion of the Company’s stock options and restricted stock awards, based on the Company’s historical treatment of options and awards as having been granted at fair market value, was $72.4 million and $86.6 million, respectively, which is expected to be recognized over a weighted average period of 3.2 years and 5.3 years, respectively.
Stock Options
The Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). The option grants generally become exercisable in five equal annual installments beginning one to three years from the date of grant. Option grants for stock options issued prior to May 10, 2004 expire ten years after the date of grant. Option grants for stock options issued since May 10, 2004 expire eight years after the date of grant. All option grants are non-qualified.
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. Approximately 0.6 million options were granted during the first quarter of fiscal 2007.
|
|
|
THREE MONTHS ENDED |
|
||
|
Black-Scholes Valuation Assumptions (1) |
|
June 2, 2007 |
|
May 27, 2006 |
|
|
|
|
|
|
|
|
|
Weighted Average Expected Life (in years)(2) |
|
6.43 |
|
6.33 |
|
|
Weighted Average Expected Volatility(3) |
|
25.00 |
% |
25.00 |
% |
|
Weighted Average Risk Free Interest Rates (4) |
|
4.58 |
% |
4.95 |
% |
|
Expected Dividend Yield |
|
— |
|
— |
|
(1) Forfeitures are estimated based on historical experience.
(2) The expected life of stock options is estimated based on historical experience.
(3) The expected volatility is estimated based on implied volatility.
(4) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
8
Changes in the Company’s stock options for the three months ended June 2, 2007 were as follows:
|
(Shares in thousands) |
|
Number of Stock Options |
|
Weighted Average |
|
|
|
Options outstanding, beginning of period |
|
19,836 |
|
$ |
29.99 |
|
|
Granted |
|
550 |
|
41.12 |
|
|
|
Exercised |
|
(533 |
) |
18.23 |
|
|
|
Forfeited or expired |
|
(236 |
) |
36.35 |
|
|
|
Options outstanding, end of period |
|
19,617 |
|
$ |
30.55 |
|
|
Options exercisable, end of period |
|
12,938 |
|
$ |
27.13 |
|
The weighted average fair value for the stock options granted through the first three months of fiscal 2007 and fiscal 2006 was $15.07 and $14.24, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of June 2, 2007 was 4.57 years and $196.9 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of June 2, 2007 was 4.05 years and $173.8 million, respectively. The total intrinsic value for stock options exercised during the first three months of fiscal 2007 and fiscal 2006 was $12.0 million and $7.4 million, respectively.
Net cash proceeds from the exercise of stock options were $9.7 million and $6.2 million and the associated income tax benefits were $3.2 million and $2.7 million for first quarter of 2007 and 2006, respectively.
Restricted Stock
The Company historically has treated its restricted stock awards as having been issued and measured at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). The restricted stock awards generally become exercisable in five equal annual installments beginning one to three years from the date of grant.
Vesting of restricted stock awarded to all executive officers and certain of the Company’s other executives is dependent on the Company’s achievement of a performance-based test for the fiscal year of grant, and assuming achievement of the performance-based test, time vesting, subject, in general, to the executive remaining in the Company’s employ on specified vesting dates. The Company recognizes compensation expense related to these awards based on the assumption that the performance-based test will be achieved. Vesting of restricted stock awarded to the Company’s other employees is based solely on time vesting.
9
Changes in the Company’s restricted stock for the three months ended June 2, 2007 were as follows:
|
(Shares in thousands) |
|
Number of Restricted |
|
Weighted Average Grant- |
|
|
|
Unvested restricted stock, beginning of period |
|
1,931 |
|
$ |
37.25 |
|
|
Granted |
|
866 |
|
41.10 |
|
|
|
Vested |
|
(132 |
) |
37.44 |
|
|
|
Forfeited |
|
(56 |
) |
37.40 |
|
|
|
Unvested restricted stock, end of period |
|
2,609 |
|
$ |
38.51 |
|
Review of Equity Grants and Procedures and Related Matters
As described in a Form 8-K dated October 10, 2006, in June 2006, the Company’s Board of Directors appointed a special committee of independent directors to carry out a review with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares, as a result of which the measurement dates for various grants were revised. As a consequence, as described in the Company’s Form 10-K for fiscal 2006, the Company (i) recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, and pursuant to Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements,” decreased beginning retained earnings for fiscal 2006 by such amount, and (ii) recorded $8.2 million of expense for fiscal 2006. As described in a Form 8-K dated December 28, 2006 and the Company’s 2006 Form 10-K, the Company’s Board of Directors also approved during fiscal 2006 a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences arising under Section 409A of the Internal Revenue Code. No executive officers received any payments under such remediation program. The Company continues to cooperate with the inquiries of the SEC and United States Attorney’s office for the District of New Jersey regarding the Company’s stock option grant practices.
6) Income Taxes
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”). The Company adopted FIN 48 on March 4, 2007. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from uncertain tax positions 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 should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. FIN 48 also provided guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Upon adoption of FIN 48, the Company recognized a $13.1 million increase to retained earnings to reflect the change to its liability for unrecognized tax benefits as required. The Company also recorded additional unrecognized tax benefits, and corresponding higher deferred tax assets of $35.6 million as a result of the adoption. At March 4, 2007 the total amount of gross unrecognized tax
10
benefits was $163.3 million, of which $119.9 million would impact the Company’s effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of March 4, 2007, the liability for gross unrecognized tax benefits included approximately $27.5 million of interest.
The Company files income tax returns in the United States and various state and local jurisdictions. The Company is currently under examination by the Internal Revenue Service for tax years 2001 through 2005. The Company is also open to examination for state and local jurisdictions with varying statutes of limitations, ranging from three to five years.
The Company anticipates that any adjustments to unrecognized tax benefits which will impact income tax expense, due to the settlement of audits and the expiration of statutes of limitations, will not exceed $6 million in the next 12 months. However, actual results could differ from those currently anticipated.
During the first quarter of 2007, additional reserves for tax uncertainties totaling approximately $2.3 million and additional interest totaling approximately $2.6 million were provided by the Company. As of June 2, 2007, the Company has recorded approximately $42.0 million and $124.5 million of unrecognized tax benefits in current and non-current income taxes payable, respectively, on the consolidated balance sheet.
7) Shareholders’ Equity
The Company’s Board of Directors has authorized repurchases of shares of its common stock for $1 billion in December 2006, for $200 million in January 2006, for $400 million in October 2005 and for $350 million in December 2004, or $1.95 billion in total. The Company was authorized 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 also purchases shares of its common stock to cover employee related taxes withheld on vested restricted shares. During the fiscal first quarter of 2007, the Company repurchased approximately 7.1 million shares of its common stock for an aggregate price of approximately $289 million, bringing the aggregate total of common stock repurchased to 39.7 million shares for an aggregate price of $1.5 billion since the initial authorization in December 2004.
8) Earnings Per Share
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding including the dilutive effect of stock-based awards as calculated under the treasury stock method.
Stock-based awards of approximately 6.5 million and 8.2 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for
11
the three months ended June 2, 2007 and May 27, 2006, respectively.
9) Lines of Credit
At June 2, 2007, the Company maintained two uncommitted lines of credit of $100 million and $75 million, with expiration dates of September 3, 2007 and February 28, 2008, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. As of June 2, 2007, the Company did not have any direct borrowings under the uncommitted lines of credit. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.
10) Supplemental Cash Flow Information
The Company paid income taxes of $39.1 million and $59.6 million in the first three months of fiscal 2007 and 2006, respectively.
The Company recorded an accrual for capital expenditures of $31.0 million and $27.5 million as of June 2, 2007 and May 27, 2006, respectively.
11) Acquisition
On March 22, 2007, the Company completed and announced the acquisition of buybuy BABY, a privately held retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. Based in Garden City, New York, buybuy BABY operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products.
buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Company’s Co-Chairmen. The acquisition was approved by a special committee of independent members of the Board of Directors of the Company. The special committee retained Merrill Lynch & Co. to serve as its independent financial advisor and render a fairness opinion in connection with the transaction, as well as Chadbourne & Parke LLP to serve as independent legal counsel to oversee the acquisition negotiations. The aforementioned repayment of approximately $19 million of debt results in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Company’s Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
The results of buybuy BABY’s operations have been included in the consolidated financial statements since the date of acquisition.
12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Bed Bath & Beyond Inc. and subsidiaries (the “Company”) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops (“CTS”), Harmon and buybuy BABY (See “Acquisition”, Note 11). The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. The Company’s objective is to be a customer’s first choice for products and services in the categories offered, in the markets in which the Company operates.
The Company’s strategy is to achieve this objective through excellent customer service, an extensive breadth and depth of assortment, everyday low prices, introduction of new merchandising offerings and development of its infrastructure.
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, consumer preferences and spending habits, general economic conditions, unusual weather patterns, competition from existing and potential competitors and the ability to find suitable locations at acceptable occupancy costs to support the Company’s expansion program.
For the three months ended June 2, 2007, the Company’s consolidated net sales increased by 11.3% as compared to the corresponding period last year. This increase in net sales was primarily attributable to the continuing BBB store expansion program, an increase in comparable store sales and the recent acquisition of buybuy BABY. Comparable store sales for the fiscal three months of 2007 increased by approximately 1.6%, as compared with an increase of approximately 4.9%, for the comparable period last year.
A store is considered a comparable store when it has been open for twelve full months following its grand opening period (typically four to six weeks). Stores relocated or expanded are excluded from comparable store 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.
For the three months ended June 2, 2007, the Company’s earning per share increased to $0.38 per diluted share as compared to $0.35 per diluted share for the corresponding period last year.
Fiscal 2007 will be a 52 week period ending March 1, 2008.
Review of Equity Grants and Procedures and Related Matters
As described in a Form 8-K dated October 10, 2006, in June 2006, the Company’s Board of Directors appointed a special committee of independent directors to carry out a review with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and
13
documenting stock options and restricted shares, as a result of which the measurement dates for various grants were revised. As a consequence, as described in the Company’s Form 10-K for fiscal 2006, the Company (i) recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, and pursuant to Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements,” decreased beginning retained earnings for fiscal 2006 by such amount, and (ii) recorded $8.2 million of expense for fiscal 2006. As described in a Form 8-K dated December 28, 2006 and the Company’s 2006 Form 10-K, the Company’s Board of Directors also approved during fiscal 2006 a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences arising under Section 409A of the Internal Revenue Code. No executive officers received any payments under such remediation program. The Company continues to cooperate with the inquiries of the SEC and United States Attorney’s office for the District of New Jersey regarding the Company’s stock option grant practices.
Results of Operations
Net Sales
Net sales for the three months ended June 2, 2007 were approximately $1.553 billion, an increase of $157.3 million or approximately 11.3% over net sales of approximately $1.396 billion for the corresponding quarter last year.
Approximately 58.8% of the increase in net sales for the three months ended June 2, 2007 was attributable to an increase in the Company’s new store sales, 15.8% of the increase was attributable to buybuy BABY (acquired on March 22, 2007), and the balance of the increase was primarily attributable to the increase in comparable store sales. The increase in comparable store sales for the fiscal three months of 2007 was 1.6%, as compared with an increase of approximately 4.9% for the comparable period last year. The Company believes the decrease in comparable store sales percentage versus the same period last year is primarily due to the challenging retailing environment related to the home.
Sales of domestics merchandise and home furnishings for the Company accounted for approximately 45% and 55% of net sales, respectively, for the three months ended June 2, 2007. The sales of domestics merchandise and home furnishings accounted for approximately 47% and 53% of net sales, respectively, for the three months ended May 27, 2006.
Gross Profit
Gross profit for the three months ended June 2, 2007 was $646.1 million or 41.6% of net sales compared with $590.1 million or 42.3% of net sales for the three months ended May 27, 2006. The decrease in gross profit as a percentage of net sales for the three months ended June 2, 2007 was primarily attributable to an increase in inventory acquisition costs, a shift in the merchandise mix sold and a heightened promotional environment.
14
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) for the three months ended June 2, 2007 was $491.7 million or 31.7% of net sales compared with $441.3 million or 31.6% of net sales for the three months ended May 27, 2006. SG&A as a percentage of net sales increased for the three months ended June 2, 2007 compared to May 27, 2006 due primarily to a relative increase in advertising expense, although the number of advertising events remained consistent. This was partially offset by relative decreases in payroll and payroll-related items, as well as store pre-opening expenses.
Operating Profit
Operating profit for the three months ended June 2, 2007 increased to $154.4 million, or 9.9% of net sales, compared to $148.8 million, or 10.7% of net sales, during the comparable period in 2006. The decrease in operating profit as a percentage of net sales was a result of the deleverage in the gross margin and SG&A expenses.
Interest Income
Interest income was $9.9 million for the fiscal three month period of 2007 compared to $9.7 million for the corresponding period last year. Interest income remained relatively flat as a result of increases in the Company’s average interest rate offset by a decrease in the cash balance due to share repurchases and the acquisition of buybuy BABY.
Income Taxes
The effective tax rate was 36.3% for the fiscal three month period of 2007 and 36.6% for the fiscal three month period of 2006. The 2007 first quarter tax expense includes a favorable $3.3 million adjustment primarily from changing the blended state tax rate on deferred tax assets.
The Company expects that FIN 48 may, over time, create more volatility in the effective tax rate from quarter to quarter because the Company is required each quarter to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.
Net Earnings
As a result of the factors described above, net earnings increased to $104.6 million for the fiscal three month period of 2007 compared with $100.4 million for the fiscal three month period of 2006.
Expansion Program
The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets and the expansion or relocation of existing stores. As a result of this program, the Company operated 821 BBB stores, 35 CTS stores and 39 Harmon stores at the end of the fiscal first quarter of 2007, compared with 751 BBB
15
stores, 30 CTS stores and 38 Harmon stores at the end of the corresponding quarter last year. Additionally, the Company acquired 8 buybuy BABY stores as of March 22, 2007. At June 2, 2007, Company-wide total store square footage was approximately 28.3 million square feet.
The Company opened 6 BBB stores and 1 CTS store during the first quarter of fiscal 2007. Including the stores opened during the first quarter, the Company plans to open approximately 70 BBB stores and 5 CTS stores in fiscal 2007. The Company also plans to continue to improve and grow its Harmon and buybuy BABY concepts in fiscal 2007. The continued growth of the Company is dependent, in large part, upon the Company’s ability to execute its expansion program successfully.
Liquidity and Capital Resources
The Company has been able to finance its operations, including its expansion program, through internally generated funds. Net cash provided by operating activities for the three months ended June 2, 2007 was $117.6 million as compared with $82.0 million in the corresponding period of fiscal 2006. The increase in net cash provided by operating activities was principally driven by working capital changes primarily due to a favorable change in merchandise inventories partially offset by an unfavorable change in accounts payable, and an increase in income taxes payable (primarily due to the timing of payments).
Inventory per square foot was $55.08 as of June 2, 2007 and $53.87 as of May 27, 2006. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales growth.
Net cash provided by investing activities for the three months ended June 2, 2007 was $128.9 million as compared with net cash used of $248.9 million in the corresponding period of fiscal 2006. The decrease in net cash used in investing activities was primarily attributable to an increase in the redemptions of investment securities and a decrease in the purchase of investment securities partially offset by the acquisition of buybuy BABY.
Net cash used in financing activities for the three months ended June 2, 2007 was $276.8 million as compared with $7.0 million of net cash provided by financing activities, in the corresponding period of 2006. The net cash used in financing activities was primarily attributable to common stock repurchases of $289.2 million.
Seasonality
The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December and generally lower in February and April.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for
16
Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the “fair value option”). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.
Critical Accounting Policies
See “Critical Accounting Policies” under Item 7 of our Fiscal 2006 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on May 2, 2007 and incorporated by reference herein. There were no changes to our critical accounting policies except as follows.
Inventory Valuation: Merchandise inventories continue to be stated at the lower of cost or market. Inventory costs for buybuy BABY, acquired in March 2007, are calculated using the first-in, first-out cost method.
Income Taxes: During the first quarter of fiscal 2007, the Company adopted FIN 48. Under FIN 48, 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.
The Company expects that FIN 48 may, over time, create more volatility in the effective tax rate from quarter to quarter because the Company is required each quarter to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.
17
Forward-Looking Statements
This Form 10-Q may contain forward-looking statements. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan and similar words and phrases. The Company’s actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the Company’s control. Such factors include, without limitation: changes in the retailing environment and consumer preferences and spending habits; demographics and other macro-economic factors that may impact the level of spending for the types of merchandise sold by the Company; general economic conditions; unusual weather patterns; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the cost of labor, merchandise and other costs and expenses; the ability to find suitable locations at acceptable occupancy costs to support the Company’s expansion program; and matters arising out of or related to the Company’s stock option grants and procedures and related matters, including the outcome of the informal inquiry commenced by the SEC, the possibility that the SEC may not agree with all of the special committee’s findings and recommendations and may require additional or different remediation, any other proceedings which may be brought against the Company by the SEC or other governmental agencies, any matters arising out of the inquiry commenced by the US Attorney for the District of New Jersey relating to the Company’s stock option grants, any tax implications relating to the Company’s stock option grants, the outcome of the shareholder derivative actions filed against certain of the Company’s officers and directors, and the possibility of other private litigation relating to such stock option grants and related matters. The Company does not undertake any obligation to update its forward-looking statements.
Available Information
The Company makes available as soon as reasonably practicable after filing with the SEC, free of charge, through its website, www.bedbathandbeyond.com, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, electronically filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment securities. The Company’s market risks at June 2, 2007 are similar to those disclosed in Item 7a of the Company’s Form 10-K for the year ended March 3, 2007.
Item 4. Controls and Procedures
(a) Review of Equity Grants and Procedures and Related Matters
In June 2006, the Company’s Board of Directors appointed a special committee of independent directors to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters. Among the committee’s findings were that the Company’s stock option granting process had control and other deficiencies. The committee’s report made recommendations for improvements in the process of granting stock options and restricted share awards.
On October 9, 2006, the Board of Directors adopted the special committee’s recommendations, with such additional improvements in the Company’s stock option and restricted stock processes as the Board and special committee may approve. Company management prepared and presented to the Board an implementation plan with respect to the recommendations, which the Board approved on December 8, 2006. Substantially all of the recommendations have been implemented and the Company expects to fully implement the recommendations during fiscal 2007.
The Company filed a Form 8-K dated October 10, 2006, which provides further details regarding the special committee’s review including certain deficiencies in controls and procedures regarding the stock option and restricted share process.
(b) Disclosure Controls and Procedures
The Company’s Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 15d-15(e)) as of June 2, 2007 (the end of the period covered by this quarterly report on Form 10-Q). Based on that evaluation, which took into account the items discussed above in Item 4(a), the Principal Executive Officer and the Principal Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by our management in the reports that it files or submits 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.
19
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
20
Two purported derivative actions were filed in New Jersey Superior Court naming several officers and the directors of the Company as defendants and making allegations concerning alleged historical options backdating practices at the Company. Those two actions were consolidated, and a consolidated complaint was filed in late November 2006. Subsequently, five additional purported derivative actions were filed, all concerning the same subject matter. Wandel v. Eisenberg, et al., was filed on October 19, 2006 in the Supreme Court of the State of New York, County of New York; Jamieson v. Eisenberg, et al. was filed on January 5, 2007 in the New Jersey Superior Court; and three cases were filed in the United States District Court for the District of New Jersey, Snowball Capital Appreciation Fund v. Eisenberg, et al.; Crowley v. Temares, et al.; and Cummings v. Temares, et al. on October 17, 2006, October 24, 2006 and October 25, 2006, respectively. The Snowball Capital Appreciation Fund v. Eisenberg, et al. and Jamieson v. Eisenberg, et al. cases have been voluntarily dismissed. The Crowley v. Temares, et al. and Cummings v. Temares, et al. cases have purportedly been consolidated. During the fiscal first quarter, the Wandel v. Eisenberg, et al case was dismissed by the Supreme Court of the State of New York, but the plaintiff in the case has filed a notice of appeal. In each case the Company is a nominal defendant against which no recovery is sought.
The Company is, in addition, party to various other 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.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in our Form 10-K for the fiscal year ended March 3, 2007 as filed with the SEC, as well as matters arising out of or related to the Company’s stock option grants and procedures and related matters, including the outcome of the informal inquiry commenced by the SEC, the possibility that the SEC may not agree with all of the special committee’s findings and recommendations and may require additional or different remediation, any other proceedings which may be brought against the Company by the SEC or other governmental agencies, any matters arising out of the inquiry commenced by the US Attorney for the District of New Jersey relating to the Company’s stock option grants, any tax implications relating to the Company’s stock option grants, the outcome of the shareholder derivative actions filed against certain of the Company’s officers and directors, and the possibility of other private litigation relating to such stock option grants and related matters. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Review of Equity Grants and Procedures and Related Matters” and “Legal Proceedings.” These risks could materially adversely affect the Company’s business, financial condition and results of operations. These risks are not the only risks the Company faces. The Company’s
21
operations could also be affected by additional factors that are not presently known to the Company or by factors that the Company currently considers immaterial to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company’s purchases of its common stock during the first quarter of fiscal 2007 were as follows:
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
Total Number of |
|
Value of Shares |
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
that May Yet Be |
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Purchased Under |
|
|
|
|
|
Total Number of |
|
Average Price |
|
Announced Plans |
|
the Plans or |
|
|
|
Period |
|
Shares Purchased(1) |
|
Paid per Share |
|
or Programs (1) |
|
Programs (1) (2) |
|
|
|
March 4, 2007 - March 31, 2007 |
|
8,000 |
|
$ |
40.04 |
|
8,000 |
|
700,791,092 |
|
|
April 1, 2007 - April 28, 2007 |
|
2,636,000 |
|
$ |
41.27 |
|
2,636,000 |
|
592,022,385 |
|
|
April 29, 2007 - June 2, 2007 |
|
4,430,000 |
|
$ |
40.65 |
|
4,430,000 |
|
411,948,604 |
|
|
Total |
|
7,074,000 |
|
$ |
40.88 |
|
7,074,000 |
|
411,948,604 |
|
(1) In December 2006, the Company announced that the Board of Directors approved a $1 billion share repurchase program, authorizing the repurchase of its common stock. The Company's Board of Directors previously authorized repurchases of shares of its common stock in the amount of $200 million, $400 million and $350 million in January 2006, October 2005 and December 2004, respectively. The Company was authorized 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 indicated in this table also include the withholding of a portion of restricted shares to cover taxes on vested restricted shares.
(2) Excludes brokerage commissions paid by the Company.
The exhibits to this Report are listed in the Exhibit Index included elsewhere herein.
Pursuant to the requirements 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. |
|
||||
|
|
(Registrant) |
|
|||
|
|
|
||||
|
|
|
|
|||
|
Date: July 11, 2007 |
By: |
/s/ Eugene A. Castagna |
|
||
|
|
|
Eugene A. Castagna |
|||
|
|
|
Chief Financial Officer and |
|||
|
|
|
Treasurer |
|||
22
|
Exhibit No. |
|
Exhibit |
|
|
|
|
|
10.1 |
|
Employment Agreement between the Company and Warren Eisenberg (dated May 31, 2007). |
|
|
|
|
|
10.2 |
|
Employment Agreement between the Company and Leonard Feinstein (dated June 4, 2007). |
|
|
|
|
|
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. |
23