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| BBBY > SEC Filings for BBBY > Form 10-Q on 7-Oct-2009 | All Recent SEC Filings |
7-Oct-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 domestics merchandise and home furnishings, which include 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 and 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, including those within the Company's sector of retailing. The Company believes that this 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 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, information technology enhancements, 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 and six months ended August 29, 2009, the Company's net sales were $1.915 billion and $3.609 billion, respectively, an increase of approximately 3.3% and 3.1%, respectively, as compared to the three and six months ended August 30, 2008.
† Comparable store sales for the fiscal second quarter of 2009 decreased by approximately 0.6% as compared with a decrease of approximately 0.1% for the corresponding period last year. For the six months ended August 29, 2009, comparable store sales decreased by approximately 1.1% as compared with an increase of approximately 0.3% for the six months ended August 30, 2008.
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 August 29, 2009 was $773.4 million or 40.4% of net sales compared with $739.3 million or 39.9% of net sales for the three months ended August 30, 2008. Gross profit for the six months ended August 29, 2009 was $1.440 billion or 39.9% of net sales compared with $1.395 billion or 39.8% of net sales for the six months ended August 30, 2008.
† Selling, general and administrative expenses ("SG&A") for the three months ended August 29, 2009 were $551.4 million or 28.8% of net sales compared with $551.9 million or 29.8% of net sales for the three months ended August 30, 2008. SG&A for the six months ended August 29, 2009 were $1.076 billion or 29.8% of net sales compared with $1.089 billion or 31.1% of net sales for the six months ended August 30, 2008.
† The effective tax rate was 39.4% for the three and six months ended August 29, 2009, and 37.3% and 37.5% for the three and six months ended August 30, 2008, respectively.
† For the three and six months ended August 29, 2009, the Company's net earnings per diluted share were $0.52 ($135.5 million) and $0.86 ($222.7 million), respectively, compared to net earnings per diluted share of $0.46 ($119.3 million) and $0.76 ($196.0 million) for the three and six months ended August 30, 2008, respectively.
Capital expenditures for the six months ended August 29, 2009 and August 30, 2008 were $67.6 million and $106.7 million, respectively.
Results of Operations
Net Sales
Net sales for the three months ended August 29, 2009 were $1.915 billion, an increase of $61.0 million or approximately 3.3% over net sales of $1.854 billion for the corresponding quarter last year. For the three months ended August 29, 2009, the increase in net sales was generated by the Company's new store sales increase of 4.0% partially offset by the decrease in comparable store sales.
For the three months ended August 29, 2009, comparable store sales for 969 stores represented $1.820 billion of net sales and for the three months ended August 30, 2008, comparable store sales for 895 stores represented $1.742 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 August 29, 2009 was approximately 0.6%, as compared with a decrease of approximately 0.1% for the comparable period last year. Net sales and comparable store sales continued to be negatively affected by the economic slowdown.
Sales of domestics merchandise and home furnishings for the Company accounted for approximately 44% and 56% of net sales, respectively, for the three months ended August 29, 2009 and approximately 45% and 55% of net sales, respectively, for the three months ended August 30, 2008.
For the six months ended August 29, 2009, net sales were $3.609 billion, an increase of $106.9 million or approximately 3.1% over net sales of $3.502 billion for the corresponding six months last year. For the six months ended August 29, 2009, the increase in net sales was generated by the Company's new store sales increase of 4.1% partially offset by the decrease in comparable store sales.
For the six months ended August 29, 2009, comparable store sales for 943 stores represented $3.417 billion of net sales and for the six months ended August 30, 2008, comparable store sales for 876 stores represented $3.268 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 fiscal first half of 2009 was 1.1%, as compared with an increase of approximately 0.3% for the comparable period last year. Net sales and comparable store sales were negatively affected by the economic slowdown, in general, and issues specific to the housing industry.
Sales of domestics merchandise and home furnishings for the Company accounted for approximately 43% and 57% of net sales, respectively, for the six months ended August 29, 2009 and approximately 44% and 56% of net sales, respectively, for the six months ended August 30, 2008.
Gross Profit
Gross profit for the three months ended August 29, 2009 was $773.4 million or 40.4% of net sales compared with $739.3 million or 39.9% of net sales for the three months ended August 30, 2008. The increase in gross profit as a percentage of net sales for the three months ended August 29, 2009 was primarily due to a decrease in inventory acquisition costs, partially offset by a shift in the mix of merchandise sold to lower margin categories, and relative increases in markdowns and coupon redemptions.
Gross profit for the six months ended August 29, 2009 was $1.440 billion or 39.9% of net sales compared with $1.395 billion or 39.8% of net sales for the six months ended August 30, 2008. Gross profit as a percentage of net sales was relatively flat primarily due to a decrease in inventory acquisition costs, offset by a shift in the mix of merchandise sold to lower margin categories, and relative increases in markdowns and coupon redemptions.
Selling, General and Administrative Expenses
SG&A for the three months ended August 29, 2009 was $551.4 million or 28.8% of net sales compared with $551.9 million or 29.8% of net sales for the three months ended August 30, 2008. SG&A for the six months ended August 29, 2009 was $1.076 billion or 29.8% of net sales compared with $1.089 billion or 31.1% of net sales for the six months ended August 30, 2008. The decreases in SG&A as a percentage of net sales for the three and six months ended August 29, 2009 compared to August 30, 2008 were primarily due to relative decreases in payroll expenses, relative decreases in advertising expenses due to a decrease in distribution of advertising pieces and relative decreases in other controllable expenses.
Operating Profit
Operating profit for the three months ended August 29, 2009 was $222.0 million or 11.6% of net sales compared to $187.4 million or 10.1% of net sales during the comparable period last year. For the six months ended August 29, 2009, operating profit was $364.3 million or 10.1% of net sales compared to $306.2 million or 8.7% of net sales during the first six months of fiscal 2008. The increases in operating profit as a percentage of net sales in both comparable periods reflects the relative decreases in SG&A as a percentage of net sales and the increases in the gross profit margin.
Interest Income
Interest income was $1.5 million and $3.2 million for the three and six months ended August 29, 2009, respectively, compared to $2.9 million and $7.5 million for the three and six months ended August 30, 2008. The decrease in interest income was primarily due to lower interest rates.
Income Taxes
The effective tax rate for the three months ended August 29, 2009 was 39.4% compared to 37.3% for the three months ended August 30, 2008. The tax rate for the three months ended August 29, 2009 included an approximate $1.4 million expense as compared to an approximate $0.4 million benefit for the three months ended August 30, 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 effective tax rate for the six months ended August 29, 2009 was 39.4% compared to 37.5% for the six months ended August 30, 2008. The tax rate for the six months ended August 29, 2009 included an approximate $2.3 million expense as compared to an approximate $1.0 million benefit for the six months ended August 30, 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 $135.5 million for the second quarter of fiscal 2009 and $222.7 million for the fiscal first half of fiscal 2009, compared with $119.3 million and $196.0 million for the corresponding periods in 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 943 BBB stores, 53 CTS stores, 41 Harmon stores and 19 buybuy BABY stores at the end of the fiscal second quarter of 2009, compared with 903 BBB stores, 41 CTS stores, 40 Harmon stores and 10 buybuy BABY stores at the end of the corresponding quarter last year. At August 29, 2009, Company-wide total store square footage was approximately 32.5 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 second quarter of 2009, the Company opened nine BBB stores, including four additional stores in Canada, three buybuy BABY stores and one Harmon 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 four 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 six months ended August 29, 2009 was $392.4 million as compared with $168.0 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, accrued expenses and income taxes payable) and an increase in net earnings.
Inventory per square foot was $53.97 as of August 29, 2009, a decrease of approximately 8.2% from $58.81 as of August 30, 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 six months ended August 29, 2009 was $40.4 million as compared with $80.1 million in the corresponding period of fiscal 2008. The $39.7 million decrease in net cash used in investing activities is primarily due to a $39.1 million decrease in capital expenditures and a $4.7 million investment in the Company's unconsolidated joint venture in the prior fiscal year, partially offset by a $4.1 million decrease in redemptions of investment securities. Capital expenditures for fiscal 2009, principally for new stores, existing store improvements, and information technology enhancements, are planned to be approximately $250.0 million.
Net cash provided by financing activities for the six months ended August 29, 2009 was $15.4 million as compared with $23.5 million of net cash used in financing activities in the corresponding period of fiscal 2008. The increase in net cash provided was primarily attributable to a $32.9 million increase in cash proceeds from the exercise of stock options and a $7.6 million decrease in common stock repurchases.
Auction Rate Securities
As of August 29, 2009, the Company held approximately $189.7 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 $43.1 million of these securities. This agreement provides for, among other things, the option to redeem these securities at par anytime during the period from June 30, 2010 through July 2, 2012. As of August 29, 2009, the fair value of this option was $1.9 million. Because the Company intends to exercise its right to redeem these securities as soon as practicably possible within one year, the fair value of these securities of $41.2 million and the related option of $1.9 million were classified as short term investment securities as of August 29, 2009.
During the six months ended August 29, 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. 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 $148.9 million of these securities at par had a temporary valuation adjustment of approximately $2.3 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, and did not affect the Company's net earnings for the six months ended August 29, 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 six months ended August 29, 2009, approximately $27.2 million of auction rate securities were redeemed 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 Statement of Financial Accounting Standards ("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 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 Company adopted FSP SFAS 107-1 and APB 28-1 during the second quarter of fiscal 2009. The adoption of FSP SFAS 107-1 and APB 28-1 did not have a material impact on the Company's consolidated financial statements (See "Fair Value Measurements," Note 3).
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. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Company adopted FSP SFAS 115-2 and SFAS 124-2 during the second quarter of fiscal 2009. The adoption of FSP SFAS 115-2 and SFAS 124-2 did not have a material impact on the Company's consolidated financial statements (See "Investment Securities," Note 5).
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 for determining fair value when there is no active market or where the price inputs being used represent distressed sales, and also amends the interim and annual disclosure requirements of SFAS No. 157, "Fair Value Measurements." The Company adopted FSP SFAS 157-4 during the second quarter of fiscal 2009. The adoption of FSP SFAS 157-4 did not have a material impact on the Company's consolidated financial statements (See "Fair Value Measurements," Note 3).
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 or were issued. The Company adopted SFAS No. 165 during the second quarter of fiscal 2009. The adoption of SFAS No. 165 did not have a material impact on the Company's consolidated financial statements (See "Basis of Presentation," Note 1).
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162," which established the FASB Accounting Standards Codification ("Codification") as the exclusive source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC are also considered sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards, however it does not change current GAAP. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not believe SFAS No. 168 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") and incorporated by reference herein. There were no changes to the Company's critical accounting policies during the first half 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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