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BBBY > SEC Filings for BBBY > Form 10-K on 29-Apr-2014All Recent SEC Filings

Show all filings for BED BATH & BEYOND INC

Form 10-K for BED BATH & BEYOND INC


29-Apr-2014

Annual Report


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Bed Bath & Beyond Inc. and subsidiaries (the "Company") is a retailer which operates under the names Bed Bath & Beyond ("BBB"), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively, "CTS"), Harmon or Harmon Face Values (collectively, "Harmon"), buybuy BABY ("Baby") and World Market, Cost Plus World Market and Cost Plus (collectively, "Cost Plus World Market"). Customers can purchase products from the Company either in store, online or through a mobile device. The Company has the developing ability to fulfill customer purchases by in store customer pick up or by direct shipment to the customer from the Company's distribution facilities, stores or vendors. The Company also operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, food service, healthcare and other industries. (See "Acquisitions," Note 2 in the consolidated financial statements for the acquisitions of Cost Plus World Market and Linen Holdings). Additionally, the Company is a partner in a joint venture which operates four retail stores in Mexico under the name Bed Bath & Beyond.

The Company accounts for its operations as two operating segments: North American Retail and Institutional Sales. The Institutional Sales operating segment, which is comprised of Linen Holdings, does not meet the quantitative thresholds under U.S. generally accepted accounting principles and therefore is not a reportable segment.

The Company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products.

The Company's objective is to be a customer's first choice for products and services in the categories offered, in the markets, channels and countries in which the Company operates. The Company's strategy is to achieve this objective through excellent customer service, an extensive breadth, depth and differentiated assortment in an omnichannel retail environment and the introduction of new merchandising offerings, supported by the continuous development and improvement 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, relatively high unemployment and historically high commodity prices; the overall macroeconomic environment and related changes in the retailing environment; consumer preferences and spending habits; unusual weather patterns and natural disasters; competition from existing and potential competitors; evolving technology; and the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company's expansion program. The Company cannot predict whether, when or the manner in which these factors could affect the Company's operating results.

For fiscal 2013, the results of operations include Linen Holdings and Cost Plus World Market from the beginning of the fiscal year. For fiscal 2012, the results of operations include Linen Holdings since the date of acquisition on June 1, 2012 and Cost Plus World Market since the date of acquisition on June 29, 2012.

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

Net sales in fiscal 2013 (fifty-two weeks) increased approximately 5.4% to $11.504 billion; net sales in fiscal 2012 (fifty-three weeks) increased approximately 14.9% to $10.915 billion over net sales of $9.500 billion in fiscal 2011 (fifty-two weeks).


Comparable sales for fiscal 2013 increased by approximately 2.4% as compared with an increase of approximately 2.7% in fiscal 2012 and an increase of approximately 5.9% in fiscal 2011. Comparable sales percentages are calculated based on an equivalent number of weeks for each annual period.

Comparable sales include sales for stores and websites which have been operating for twelve full months following the opening period (typically four to six weeks). Stores relocated or expanded are excluded from comparable sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store's sales are not considered comparable once the store closing process has commenced. Linen Holdings is excluded from the comparable sales calculations and will continue to be excluded on an ongoing basis as it represents non-retail activity. Cost Plus World Market was excluded from the comparable sales calculations through the end of the fiscal first half of 2013, and is included beginning with the fiscal third quarter of 2013.

Gross profit for fiscal 2013 was $4.566 billion or 39.7% of net sales compared with $4.389 billion or 40.2% of net sales for fiscal 2012 and $3.931 billion or 41.4% of net sales for fiscal 2011.

Selling, general and administrative expenses ("SG&A") for fiscal 2013 were $2.951 billion or 25.7% of net sales compared with $2.751 billion or 25.2% of net sales for fiscal 2012 and $2.363 billion or 24.9% of net sales for fiscal 2011.

The effective tax rate was 36.6%, 36.5% and 37.0% for fiscal years 2013, 2012 and 2011, respectively. The tax rate included discrete tax items resulting in net benefits of approximately $20.0 million, $26.7 million and $20.7 million, respectively, for fiscal 2013, 2012 and 2011.

For the fiscal year ended March 1, 2014 (fifty-two weeks), net earnings per diluted share were $4.79 ($1.022 billion), an increase of approximately 5%, as compared with net earnings per diluted share of $4.56 ($1.038 billion) for fiscal 2012 (fifty-three weeks), which was an increase of approximately 12% from net earnings per diluted share of $4.06 ($989.5 million) for fiscal 2011 (fifty-two weeks). For the fiscal year ended March 1, 2014, the increase in net earnings per diluted share is the result of the items described above and the impact of the Company's repurchases of its common stock, partially offset by a reduction of approximately $0.06 to $0.07 per diluted share as a result of the disruptive weather in the fiscal fourth quarter. For the fiscal year ended March 2, 2013, the increase in net earnings per diluted share is the result of the items described above, which includes an estimated $0.05 benefit related to the fifty-third week in fiscal year 2012 and the impact of the Company's repurchases of its common stock, partially offset by the negative impact of Hurricane Sandy in the fiscal third quarter.

During fiscal 2013, the Company continued the integration of the two fiscal 2012 acquisitions as well as advanced initiatives including: enhanced the omnichannel experience for its customers by replatforming and adding improved functionality to its Baby and BBB websites, replatforming its mobile sites and applications and growing and developing its information technology, analytics, marketing and e-commerce groups; completed the construction of a new information technology data center and are engaged in equipping the facility which will enhance the Company's disaster recovery capabilities and support its overall information technology systems; installed energy efficient lighting, and heating and cooling systems in the Company's stores; and continued the ongoing deployment of new and enhanced systems and equipment to allow its stores to take advantage of new technologies and processes.

Capital expenditures for fiscal 2013, 2012 and 2011 were $317.2 million, $314.7 million and $243.4 million, respectively. The Company remains committed to making the required investments in its infrastructure to help position the Company for continued growth and success. The Company continues to review and prioritize its capital needs while continuing to make investments, principally for information technology enhancements, including omnichannel capabilities, new stores, existing store improvements, and other projects whose impact is considered important to its future.


During fiscal 2013, 2012 and 2011, the Company repurchased 18.3 million, 16.1 million and 21.5 million shares, respectively, of its common stock at a total cost of approximately $1.284 billion, $1.001 billion and $1.218 billion, respectively. Since the end of fiscal 2011, the Company has returned approximately 89% of its cash flows from operations to its shareholders through share repurchase programs.

During fiscal 2013, the Company opened a total of 33 new stores. In addition, the Company continued to optimize its operations in a number of trade areas through renovating and repositioning stores in various markets, which also included the closing of eight stores during fiscal 2013. The Company plans to continue to expand its operations and invest in its infrastructure to reach its long term objectives. In fiscal 2014, the Company expects to open approximately 30 new stores company-wide and will continue to renovate stores or reposition stores within various markets, when appropriate. Additionally, during fiscal 2014, the Company will continue to enhance its omnichannel capabilities, through, among other things, continuing to add new functionality and assortment to its selling websites, mobile sites and applications and opening an additional distribution facility for both direct to customer and store fulfillment.

RESULTS OF OPERATIONS

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

                                                                           Fiscal Year Ended
                                                               Percentage                          Percentage Change
                                                              of Net Sales                          from Prior Year
                                                March 1,       March 2,      February 25,      March 1,         March 2,
                                                  2014           2013            2012            2014             2013

Net sales                                           100.0 %        100.0 %           100.0 %         5.4 %           14.9 %

Cost of sales                                        60.3           59.8              58.6           6.3             17.2

Gross profit                                         39.7           40.2              41.4           4.0             11.6

Selling, general and administrative expenses         25.7           25.2              24.9           7.3             16.4

Operating profit                                     14.0           15.0              16.5          (1.4 )            4.5

Earnings before provision for income taxes           14.0           15.0              16.5          (1.3 )            4.1

Net earnings                                          8.9            9.5              10.4          (1.5 )            4.9

Net Sales

Since fiscal 2012 was a fifty-three week year, fiscal 2013 started a week later than fiscal 2012. The comparable sales calendar compares the same calendar weeks. The table below summarizes by fiscal quarter the time period for the financial reporting calendar and the comparable sales calendar.


                                        Financial Reporting Calendar
                     Fiscal 2013 (fifty-two weeks)         Fiscal 2012 (fifty-three weeks)

First Quarter    March 3, 2013 - June 1, 2013            February 26, 2012 - May 26, 2012

Second Quarter   June 2, 2013 - August 31, 2013          May 27, 2012 - August 25, 2012

Third Quarter    September 1, 2013 - November 30, 2013   August 26, 2012 - November 24, 2012

Fourth Quarter   December 1, 2013 - March 1, 2014        November 25, 2012 - March 2, 2013



                                          Comparable Sales Calendar
                     Fiscal 2013 (fifty-two weeks)          Fiscal 2012 (fifty-two weeks)

First Quarter    March 3, 2013 - June 1, 2013            March 4, 2012 - June 2, 2012

Second Quarter   June 2, 2013 - August 31, 2013          June 3, 2012 - September 1, 2012

Third Quarter    September 1, 2013 - November 30, 2013   September 2, 2012 - December 1, 2012

Fourth Quarter   December 1, 2013 - March 1, 2014        December 2, 2012 - March 2, 2013

Net sales in fiscal 2013 (fifty-two weeks) increased $589.4 million to $11.504 billion, representing an increase of 5.4% over $10.915 billion of net sales in fiscal 2012 (fifty-three weeks), which increased $1.415 billion or 14.9% over the $9.500 billion of net sales in fiscal 2011 (fifty-two weeks). For fiscal 2013, approximately 62% of the increase in net sales was attributable to the inclusion of Cost Plus World Market prior to its inclusion in comparable sales and Linen Holdings prior to the anniversary of its acquisition, approximately 42% of the increase was attributable to an increase in comparable sales and 26% of the increase was primarily attributable to an increase in the Company's new store sales and the post-acquisition period for Linen Holdings, partially offset by a decrease of approximately 30% as a result of the non-comparable additional week in fiscal 2012.

For fiscal 2013, comparable sales, which includes 1,412 stores, represented $10.661 billion of net sales; for fiscal 2012, comparable sales, which includes, 1,122 stores, represented $9.820 billion of net sales; and for fiscal 2011, comparable sales, which includes 1,076 stores, represented $9.157 billion of net sales. The number of stores includes only those which constituted a comparable store for the entire respective fiscal period. The increase in comparable sales, which includes Cost Plus World Market beginning with the fiscal third quarter and excludes Linen Holdings, was approximately 2.4% for fiscal 2013, as compared with an increase of approximately 2.7% for fiscal 2012. The increase in comparable sales for fiscal 2013 was due to an increase in the average transaction amount and a slight increase in the number of transactions. The increase in comparable sales for fiscal 2012 was due to an increase in the average transaction amount partially offset by a decrease in the number of transactions. Comparable sales are calculated based on an equivalent number of weeks for each annual period.

Sales of domestics merchandise accounted for approximately 36%, 39% and 40% of net sales in fiscal 2013, 2012 and 2011, respectively, of which the Company estimates that bed linens accounted for approximately 12% of net sales in fiscal 2013, 2012 and 2011, respectively. The remaining net sales in fiscal 2013, 2012 and 2011 of 64%, 61% and 60%, respectively, represented sales of home furnishings. No other individual product category accounted for 10% or more of net sales during fiscal 2013, 2012 or 2011.

Gross Profit

Gross profit in fiscal 2013, 2012 and 2011 was $4.566 billion or 39.7% of net sales, $4.389 billion or 40.2% of net sales and $3.931 billion or 41.4% of net sales, respectively. The decreases in the gross profit margin as a percentage of net sales between fiscal 2013 and 2012 and between fiscal 2012 and 2011 were primarily attributed to an increase in coupons, due to increases in both redemptions and the average coupon amount, and a shift in the mix of merchandise sold to lower margin categories.


Selling, General and Administrative Expenses

SG&A was $2.951 billion or 25.7% of net sales in fiscal 2013, $2.751 billion or 25.2% of net sales in fiscal 2012 and $2.363 billion or 24.9% of net sales in fiscal 2011. The increase in SG&A between fiscal 2013 and 2012 as a percentage of net sales was primarily due to higher technology expenses and depreciation and a relative increase in payroll and payroll-related items (including salaries, workers' compensation and medical insurance). The inclusion of the financial results of the acquisitions for the periods prior to each of their one year anniversaries, which occurred in the first half of fiscal 2013, also contributed to the increase in SG&A as a percentage of net sales. The increase in SG&A between fiscal 2012 and 2011 as a percentage of net sales was primarily due to a relative increase in advertising expenses. As a percentage of net sales, the relative increase in advertising expenses was higher due to the inclusion of the financial results of the acquisitions completed in fiscal 2012. In addition, the fifty-third week has relatively higher SG&A than the year to date fifty-two weeks and increased SG&A by approximately 10 basis points.

Operating Profit

Operating profit for fiscal 2013 was $1.615 billion or 14.0% of net sales, $1.638 billion or 15.0% of net sales in fiscal 2012 and $1.568 billion or 16.5% of net sales in fiscal 2011. The changes in operating profit as a percentage of net sales between fiscal 2013 and 2012 and between fiscal 2012 and 2011 were the result of the changes in gross profit margin and SG&A as a percentage of net sales as described above.

Interest (Expense) Income

Interest expense was $1.1 million and $4.2 million in fiscal 2013 and fiscal 2012, respectively and interest income was $1.1 million in fiscal 2011. Interest expense for fiscal 2012 increased from fiscal 2011 primarily due to the inclusion of interest expense related to the sale/leaseback obligations on the distribution facilities acquired as part of the fiscal 2012 acquisitions.

Income Taxes

The effective tax rate was 36.6% for fiscal 2013, 36.5% for fiscal 2012 and 37.0% for fiscal 2011. For fiscal 2013 and fiscal 2012, the tax rate included a net benefit of approximately $20.0 million and $26.7 million, respectively, primarily due to the recognition of favorable discrete state tax items. For fiscal 2011, the tax rate included an approximate $20.7 million net benefit primarily due to the settlement of certain discrete tax items from on-going examinations, the recognition of favorable discrete state tax items and from changing the blended state tax rate of deferred income taxes.

The Company expects continued volatility in the effective tax rate from year to year because the Company is required each year to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.

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 renovation of existing stores, the repositioning of stores within markets when appropriate, the evolution of its omnichannel shopping environment and the continuous review of strategic acquisitions.

In the 22-year period from the beginning of fiscal 1992 to the end of fiscal 2013, the chain has grown from 34 to 1,496 stores plus its various websites, other interactive platforms and distribution facilities. Total store square footage grew from approximately 0.9 million square feet at the beginning of fiscal 1992 to approximately 42.6 million square feet at the end of fiscal 2013. During fiscal 2013, the Company opened a total of 33 new stores. In addition, the Company continued to optimize its operations in a number of trade areas through renovating and repositioning stores in various markets, which included the closing of eight stores. In fiscal 2013, consolidated store space, net of openings and closings for all concepts, increased by 0.6 million square feet. Additionally, the Company is a partner in a joint venture which opened one store during fiscal 2013 and as of March 1, 2014, operated a total of four retail stores in Mexico under the name Bed Bath & Beyond.


During fiscal 2012, the Company acquired Linen Holdings and Cost Plus World Market.

The Company plans to continue to expand its operations and invest in its infrastructure to reach its long term objectives. In fiscal 2014, the Company expects to open approximately 30 new stores company-wide and will continue to renovate stores or reposition stores within various markets, when appropriate. Additionally, the Company will continue to place health and beauty care offerings in selected stores as well as specialty food and beverage departments in selected BBB stores. The continued growth of the Company is dependent, in part, upon the Company's ability to execute its expansion program successfully. Additionally, during fiscal 2014, the Company plans to enhance its omnichannel capabilities by continuing to add new functionality and assortment to its selling websites, mobile sites and applications; furthering the development work necessary for a new and more robust point of sale system; continuing the deployment of systems and equipment to allow the Company's stores to take advantage of new technologies and processes; continuing to strengthen its information technology, analytics, marketing and e-commerce groups and opening an additional distribution facility for both direct to customer and store fulfillment.

LIQUIDITY AND CAPITAL RESOURCES

The Company has been able to finance its operations, including its expansion program, entirely through internally generated funds. For fiscal 2014, the Company believes that it can continue to finance its operations, including its expansion program, share repurchase program and planned capital expenditures, entirely through existing and internally generated funds. Capital expenditures for fiscal 2014, principally for information technology enhancements, including omnichannel capabilities, new stores, existing store improvements, and other projects are planned to be approximately $350 million, subject to the timing and composition of the projects. In addition, the Company periodically reviews its alternatives with respect to optimizing its capital structure.

Fiscal 2013 compared to Fiscal 2012

Net cash provided by operating activities in fiscal 2013 was $1.383 billion, compared with $1.193 billion in fiscal 2012. Year over year, the Company experienced an increase in cash provided by the net components of working capital (primarily merchandise inventories, accounts payable and other current assets) and an increase in net earnings, as adjusted for non-cash expenses (primarily depreciation).

Retail inventory at cost per square foot was $59.68 as of March 1, 2014, as compared to $58.12 as of March 2, 2013.

Net cash used in investing activities in fiscal 2013 was $359.8 million, compared with $665.8 million in fiscal 2012. In fiscal 2013, net cash used in investing activities was primarily due to $317.2 million of capital expenditures and $39.1 million of purchases of investment securities, net of redemptions. In fiscal 2012, net cash used in investing activities was due to payments, net of cash acquired, of $643.1 million related to the Cost Plus World Market and Linen Holdings acquisitions, $314.7 million for capital expenditures and $40.0 million for the acquisition of trademarks, partially offset by redemptions of $332.0 million of investment securities, net of purchases.

Net cash used in financing activities for fiscal 2013 was $1.222 billion, compared with $965.4 million in fiscal 2012. The increase in net cash used was primarily due to an increase in common stock repurchases of $282.7 million, partially offset by a $25.5 million payment in the prior year for a credit facility assumed in connection with an acquisition.


Fiscal 2012 compared to Fiscal 2011

Net cash provided by operating activities in fiscal 2012 was $1.193 billion, compared with $1.225 billion in fiscal 2011. Year over year, the Company experienced an increase in cash used by the net components of working capital (primarily merchandise inventories, other current assets and accrued expenses and other current liabilities, partially offset by accounts payable and income taxes payable) and an increase in net earnings.

Retail inventory at cost per square foot was $58.12 as of March 2, 2013, as compared to $57.35 as of February 25, 2012.

Net cash used in investing activities in fiscal 2012 was $665.8 million, compared with $364.0 million in fiscal 2011. In fiscal 2012, net cash used in investing activities was due to payments, net of cash acquired, of $643.1 million related to the Cost Plus World Market and Linen Holdings acquisitions, $314.7 million for capital expenditures and $40.0 million for the acquisition of trademarks, partially offset by redemptions of $332.0 million of investment securities, net of purchases. In fiscal 2011, net cash used in investing activities was due to $243.4 million of capital expenditures and $120.6 million of purchases of investment securities, net of redemptions.

Net cash used in financing activities for fiscal 2012 was $965.4 million, compared with $1.042 billion in fiscal 2011. The decrease in net cash used was primarily due to a decrease in common stock repurchases of $216.7 million, partially offset by a $114.7 million decrease in cash proceeds from the exercise of stock options and a $25.5 million payment for a credit facility assumed in acquisition.

Auction Rate Securities

As of March 1, 2014, the Company held approximately $47.7 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. As of March 1, 2014, these securities had a temporary valuation adjustment of approximately $3.3 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 fiscal 2013. The Company will continue to monitor the market for these securities and will expense any permanent changes to the value of the remaining securities, if any, as they occur.

The Company does not anticipate that any continuing lack of liquidity in its auction rate securities will affect its ability to finance its operations, including its expansion program, share repurchase 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 will remain 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.

Other Fiscal 2013 Information

At March 1, 2014, the Company maintained two uncommitted lines of credit of $100 million each, with expiration dates of September 2, 2014 and February 28, 2015, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. During fiscal 2013, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 1, 2014, there was approximately $4.5 million of outstanding letters of credit. Although no assurances can be . . .

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