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| BBBY > SEC Filings for BBBY > Form 10-Q on 8-Jul-2009 | All Recent SEC Filings |
8-Jul-2009
Quarterly Report
Overview
Bed Bath & Beyond Inc. and subsidiaries (the "Company") is a chain of retail stores, operating under the names Bed Bath & Beyond ("BBB"), Christmas Tree Shops ("CTS"), Harmon and Harmon Face Values ("Harmon") and buybuy BABY. Through a joint venture, the Company also operates two stores in Mexico under the name "Home & More." 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, general economic conditions including the housing market, fuel costs, and the overall macroeconomic environment, unusual weather patterns, consumer preferences and spending habits, competition from existing and potential competitors, and the ability to find suitable locations at acceptable occupancy costs to support the Company's expansion program.
The difficult conditions affecting the overall macroeconomic environment continued to impact the retail sector in general and the Company. The Company believes factors such as the increase in the unemployment rate and issues specific to the housing industry, including a decline in home values in conjunction with a downward trend in home sales, have negatively impacted consumer confidence and the level of discretionary spending by consumers, resulting in an adverse impact on the Company's net sales, net earnings and operating cash flows. The Company cannot predict whether, when or the manner in which these economic conditions will change.
In addition, a number of businesses in the retail industry have liquidated or announced their liquidations. The Company's results have been impacted and may continue to be impacted by these liquidations, including those within its sector of retailing. The Company believes this continued industry consolidation will provide an opportunity to gain market share and to improve its competitive position over the long term; however, the Company cannot, with any level of certainty, estimate the impact these liquidations will have on its future results of operations.
In light of the risks posed by the current macroeconomic environment, the Company continues to work to systematically review all expenditures with the goal of prudently managing its business. At the same time, the Company remains committed to making the required investments in its infrastructure to help position the Company for continued success. The Company continues to scrutinize and prioritize its capital needs while continuing to make investments, principally for new stores, existing store improvements, and other projects whose impact is considered as important to its future.
The following represents an overview of the Company's financial performance for the periods indicated:
† For the three months ended May 30, 2009, the Company's net sales were $1.694 billion, an increase of approximately 2.8% as compared to the three months ended May 31, 2008.
† Comparable store sales for the fiscal first quarter of 2009 decreased by approximately 1.6%, as compared with an increase of approximately 0.8% for the corresponding 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.
† Gross profit for the three months ended May 30, 2009 was $666.8 million or 39.4% of net sales compared with $656.0 million or 39.8% of net sales for the three months ended May 31, 2008.
† Selling, general and administrative expenses ("SG&A") for the three months ended May 30, 2009 were $524.5 million or 31.0% of net sales compared with $537.2 million or 32.6% of net sales for the three months ended May 31, 2008.
† The effective tax rate was 39.5% and 37.8% for the three months ended May 30, 2009 and May 31, 2008, respectively.
† For the three months ended May 30, 2009, the Company's net earnings per diluted share were $0.34 ($87.2 million) compared to net earnings per diluted share of $0.30 ($76.8 million) for the three months ended May 31, 2008. Net earnings per diluted share include the impact of the Company's repurchases of its common stock.
Capital expenditures for the three months ended May 30, 2009 and May 31, 2008 were $26.6 million and $51.7 million, respectively.
Results of Operations
Net Sales
Net sales for the three months ended May 30, 2009 were $1.694 billion, an increase of $45.8 million or approximately 2.8% over net sales of $1.648 billion for the corresponding quarter last year. For the three months ended May 30, 2009, the increase in net sales was generated by the Company's new store sales increase of 4.3% partially offset by the decrease in comparable store sales.
For the three months ended May 30, 2009, comparable store sales for 944 stores represented $1.597 billion of net sales and for the three months ended May 31, 2008, comparable store sales for 877 stores represented $1.526 billion of net sales. The number of stores includes only those which constituted a comparable store for the entire respective fiscal period. The decrease in comparable store sales for the three months ended May 30, 2009 was approximately 1.6%, as compared with an increase of approximately 0.8% for the comparable period last year. Net sales and comparable store sales continued to be negatively affected by the economic slowdown, including issues specific to the housing industry.
Sales of domestics merchandise and home furnishings for the Company accounted for approximately 42% and 58% of net sales, respectively, for the three months ended May 30, 2009 and approximately 44% and 56% of net sales, respectively, for the three months ended May 31, 2008.
Gross Profit
Gross profit for the three months ended May 30, 2009 was $666.8 million or 39.4% of net sales compared with $656.0 million or 39.8% of net sales for the three months ended May 31, 2008. The decrease in gross profit as a percentage of net sales for the three months ended May 30, 2009 was primarily due to an increase in inventory acquisition costs, an increase in coupon redemptions and a shift in the mix of merchandise sold to lower margin categories.
Selling, General and Administrative Expenses
SG&A for the three months ended May 30, 2009 was $524.5 million or 31.0% of net sales compared with $537.2 million or 32.6% of net sales for the three months ended May 31, 2008. SG&A as a percentage of net sales decreased for the three months ended May 30, 2009 compared to May 31, 2008 primarily due to a relative decrease in payroll expense, a relative decrease in advertising expenses due to a decrease in distribution of advertising pieces and a relative decrease in other controllable expenses.
Operating Profit
Operating profit for the three months ended May 30, 2009 was $142.3 million or 8.4% of net sales compared to $118.8 million or 7.2% of net sales during the comparable period in 2008. The increase in operating profit as a percentage of net sales in the comparable periods reflects the relative decrease in SG&A as a percentage of net sales, partially offset by the deleverage in the gross profit margin.
Interest Income
Interest income was $1.8 million for the three months ended May 30, 2009 compared to $4.5 million for the three months ended May 31, 2008. The decrease in interest income was primarily due to lower interest rates.
Income Taxes
The effective tax rate for the three months ended May 30, 2009 was 39.5% compared to 37.8% for the three months ended May 31, 2008. The tax rate for the three months ended May 30, 2009 included an approximate $0.9 million expense as compared to an approximate $0.6 million benefit for the three months ended May 31, 2008 due to the recognition of certain discrete tax items. The remaining increase in the 2009 effective tax rate was primarily due to slightly higher state taxes.
The Company expects that Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" will continue to create 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 were $87.2 million for the first quarter of fiscal 2009 compared to $76.8 million for the first quarter of fiscal 2008.
Expansion Program
The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets, the expansion or relocation of existing stores and the continuous review of strategic acquisitions.
As a result of this program, the Company operated 935 BBB stores, 53 CTS stores, 40 Harmon stores and 16 buybuy BABY stores at the end of the fiscal first quarter of 2009, compared with 890 BBB stores, 41 CTS stores, 40 Harmon stores and 10 buybuy BABY stores at the end of the corresponding quarter last year. At May 30, 2009, Company-wide total store square footage was approximately 32.2 million square feet. Since May 2008, the Company, through a joint venture, operates two stores in Mexico under the name "Home & More."
The Company plans to continue to expand its operations and invest in its infrastructure to reach its long-term objectives. During the fiscal first quarter of 2009, the Company opened six BBB stores, including its fifth store in Canada, one CTS store and one buybuy BABY store and closed one BBB store. For all of fiscal 2009, the Company expects to open approximately 35 new BBB stores throughout the United States and Canada, approximately seven new CTS stores, approximately 12 new buybuy BABY stores and approximately three new Harmon stores. The continued growth of the Company is dependent, in large part, upon the Company's ability to execute its expansion program successfully. The Company currently has no outstanding bank borrowings, and for fiscal 2009, expects its operations to be entirely funded from internally generated sources.
Liquidity and Capital Resources
Fiscal 2009 compared to Fiscal 2008
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 May 30, 2009 was $194.3 million as compared with $65.8 million in the corresponding period of fiscal 2008. Year over year, the Company experienced a decrease in cash used for the net components of working capital (primarily accounts payable, merchandise inventories, and income taxes payable) and an increase in cash provided by net earnings.
Inventory per square foot was $52.90 as of May 30, 2009, a decrease of approximately 6.7% from $56.72 as of May 31, 2008. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales.
Net cash used in investing activities for the three months ended May 30, 2009 was $19.0 million as compared with $51.5 million in the corresponding period of fiscal 2008. The $32.5 million decrease in net cash used in investing activities is primarily due to a $25.1 million decrease in capital expenditures, a $4.7 million investment in the Company's unconsolidated joint venture in the prior fiscal year, and a $2.8 million increase in redemptions of investment securities.
Net cash provided by financing activities for the three months ended May 30, 2009 was $11.9 million as compared with $1.9 million in the corresponding period of 2008. The increase in net cash provided was primarily attributable to a $12.1 million increase in cash proceeds from the exercise of stock options.
Auction Rate Securities
As of May 30, 2009, the Company held approximately $209.2 million of net investments in auction rate securities. Beginning in mid-February 2008, 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 but do not affect the underlying collateral of the securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies and the Company believes that given their high credit quality, it will ultimately recover at par all amounts invested in these securities.
During the third quarter of fiscal 2008, the Company entered into an agreement with the investment firm that sold the Company a portion of its auction rate securities to redeem at par approximately $43.2 million of these securities. This agreement provides for, among other things, the option to redeem these securities at par during fiscal 2010. During the first quarter of fiscal 2009, the Company recorded an unrealized loss of approximately $0.1 million related to these securities and also recorded $0.1 million of pre-tax income to reflect the increase in fair value of the option to redeem these securities at par value. This resulted in no impact on the Company's net earnings. As of May 30, 2009, the fair value of this option was $1.9 million. The Company anticipates that any future changes in the fair value of the related auction rate securities will be offset by the changes in the fair value of the option with no material impact to the Company's net earnings.
The remainder of approximately $168.4 million of these securities at par had a temporary valuation adjustment of approximately $2.4 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed to be temporary, it was recorded in accumulated other comprehensive loss, net of a related tax benefit of approximately $0.9 million, and did not affect the Company's net earnings for the first quarter of fiscal 2009.
The Company does not anticipate that any potential lack of liquidity in its auction rate securities, even for an extended period of time, will affect its ability to finance its operations, including its expansion program and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. These investments are primarily classified as non-current assets until the Company has better visibility as to when their liquidity will be restored. The classification and valuation of these securities will continue to be reviewed quarterly.
During the three months ended May 30, 2009, approximately $7.6 million of auction rate securities were redeemed at par. Subsequent to the end of the fiscal first quarter of 2009 through June 29, 2009, the Company additionally redeemed approximately $1.4 million at par.
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 October.
Recent Accounting Pronouncements
On March 2, 2008 and March 1, 2009, the Company adopted SFAS No. 157, "Fair Value Measurements," for financial assets and liabilities and for non-financial assets and liabilities, respectively. 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. The adoption of SFAS No. 157 for financial and non-financial assets and liabilities did not have a material impact on the Company's consolidated financial statements.
In December 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") SFAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets." FSP SFAS 132(R)-1 amends SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an Amendment of FASB Statements No. 87, 88 and 106." FSP SFAS 132(R)-1 requires more detailed disclosures about the assets of a defined benefit pension or other postretirement plan. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company does not believe FSP SFAS 132(R)-1 will have a material impact on its consolidated financial statements.
In April 2009, the FASB issued FSP SFAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. FSP SFAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not believe FSP SFAS 157-4 will have a material impact on its consolidated financial statements.
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," which amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" and Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting." This FSP requires the annual disclosures about the fair value of financial instruments required by SFAS No. 107 to be presented in interim financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009. The Company does not believe FSP SFAS 107-1 and APB 28-1 will have a material impact on its consolidated financial statements.
In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," which modifies the recognition requirements for other-than-temporary impairments of debt securities and enhances existing disclosures with respect to other-than-temporary impairments of debt and equity securities. FSP SFAS 115-2 and SFAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not believe FSP SFAS 115-2 and SFAS 124-2 will have a material impact on its consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." SFAS No. 165 was issued in order to establish principles and requirements for reviewing and reporting subsequent events and requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements were available for issue (as defined) or were issued. SFAS No. 165 is effective for interim reporting periods ending after June 15, 2009. The Company does not believe SFAS No. 165 will have a material impact on its consolidated financial statements.
Critical Accounting Policies
See "Critical Accounting Policies" under Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2009 ("2008 Form 10-K"), filed with the Securities and Exchange Commission ("SEC") on April 28, 2009 and incorporated by reference herein. There were no changes to the Company's critical accounting policies during the first quarter of fiscal 2009.
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: general economic conditions including the housing market, fuel costs and a declining overall macroeconomic environment; changes in the retailing environment and consumer preferences and spending habits; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; 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; the impact of failed auctions for auction rate securities held by the Company; and matters arising out of or related to the Company's stock option grants and procedures and related matters, including any tax implications relating to the Company's stock option grants. 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.
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