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BBBY > SEC Filings for BBBY > Form 10-Q on 27-Jun-2014All Recent SEC Filings

Show all filings for BED BATH & BEYOND INC

Form 10-Q for BED BATH & BEYOND INC


27-Jun-2014

Quarterly Report


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 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 or 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 have customer purchases picked up in store or shipped direct 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. Additionally, the Company is a partner in a joint venture which operates five 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.

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

For the three months ended May 31, 2014, the Company's net sales were $2.657 billion, an increase of approximately 1.7%, as compared with the three months ended June 1, 2013.

Comparable sales for the fiscal first quarter of 2014 increased by approximately 0.4% as compared with an increase of approximately 3.4% for the corresponding period last year.

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 the three months ended May 31, 2014 was $1.031 billion, or 38.8% of net sales, compared with $1.033 billion, or 39.5% of net sales, for the three months ended June 1, 2013.

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Selling, general and administrative expenses ("SG&A") for the three months ended May 31, 2014 were $730.2 million, or 27.5% of net sales, compared with $709.9 million, or 27.2% of net sales, for the three months ended June 1, 2013.

The effective tax rate for the three months ended May 31, 2014 was 37.4% compared with 37.3% for the three months ended June 1, 2013. The tax rate included discrete tax items resulting in net benefits of approximately $1.8 million and $2.6 million, respectively, for the three months ended May 31, 2014 and June 1, 2013.

For the three months ended May 31, 2014, net earnings per diluted share were $0.93 ($187.1 million) as compared with net earnings per diluted share of $0.93 ($202.5 million) for the three months ended June 1, 2013.

During the three months ended May 31, 2014, the Company made progress on certain initiatives including: 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.

Capital expenditures for the three months ended May 31, 2014 and June 1, 2013 were $67.9 million and $65.0 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, new stores, existing store improvements, and other projects whose impact is considered important to its future.

During the three months ended May 31, 2014 and June 1, 2013, the Company repurchased approximately 4.2 million and 5.0 million shares, respectively, of its common stock at a total cost of approximately $272.9 million and $324.4 million, respectively. Since the end of the fiscal first quarter of 2012, the Company has returned approximately 90% of its cash flows from operations to its shareholders through share repurchase programs. The Company's share repurchase program could change, and would be influenced by several factors, including business and market conditions. In addition, the Company reviews its alternatives with respect to its capital structure on an ongoing basis.

During the three months ended May 31, 2014, the Company opened a total of five new stores. In addition, the Company continued to optimize its operations in a number of trade areas through renovating stores across its concepts and repositioning its stores in various markets, which also included the closing of one store during the fiscal first quarter of 2014. 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 22 new stores company-wide with the potential of up to six additional stores before the end of the fiscal year, 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

Net Sales

Net sales for the three months ended May 31, 2014 were $2.657 billion, an increase of $44.6 million or approximately 1.7% over net sales of $2.612 billion for the corresponding quarter last year. For the three months ended May 31, 2014, approximately 24% of the increase was attributable to an increase in comparable sales and approximately 76% of the increase was primarily attributable to an increase in the Company's new store sales and Linen Holdings.

For the three months ended May 31, 2014, comparable sales, which includes 1,456 stores, represented $2.565 billion of net sales and for the three months ended June 1, 2013, comparable sales, which includes 1,169 stores, represented $2.289 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 for the three months ended May 31, 2014 was approximately 0.4%, as compared with an increase of approximately 3.4% for the comparable period last year. The increase in comparable sales for the fiscal first quarter of 2014 was due to a slight increase in the average transaction amount partially offset by a slight decrease in the number of transactions.

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Sales of domestics merchandise and home furnishings for the Company accounted for approximately 36% and 64% of net sales, respectively, for the three months ended May 31, 2014 and approximately 37% and 63% of net sales, respectively, for the three months ended June 1, 2013.

Gross Profit

Gross profit for the three months ended May 31, 2014 was $1.031 billion, or 38.8% of net sales, compared with $1.033 billion, or 39.5% of net sales, for the three months ended June 1, 2013. The decrease in the gross profit margin as a percentage of net sales for the three months ended May 31, 2014 was primarily attributed to an increase in coupon expense, resulting from an increase in redemptions and a slight increase in the average coupon amount, an increase in net direct to customer shipping expense, which was impacted by the Company's free shipping threshold, 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 31, 2014 was $730.2 million, or 27.5% of net sales, compared with $709.9 million, or 27.2% of net sales, for the three months ended June 1, 2013. The percentage of net sales increase in SG&A for the three months ended May 31, 2014 was primarily due to higher technology expenses and related depreciation.

Operating Profit

Operating profit for the three months ended May 31, 2014 was $300.7 million, or 11.3% of net sales, compared with $323.1 million, or 12.4% of net sales, during the comparable period last year. The change in operating profit as a percentage of net sales was the result of the changes in gross profit margin and SG&A as a percentage of net sales as described above.

Income Taxes

The effective tax rate for the three months ended May 31, 2014 was 37.4% compared with 37.3% for the three months ended June 1, 2013. The tax rate for the three months ended May 31, 2014 and June 1, 2013 included a net benefit of approximately $1.8 million and $2.6 million, respectively, primarily due to the recognition of favorable discrete state tax items.

The Company expects continued 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 for the three months ended May 31, 2014 were $187.1 million compared with $202.5 million for the corresponding period in fiscal 2013.

Expansion Program

The Company is engaged in an ongoing expansion program involving the evolution of its omnichannel shopping environment, 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 and the continuous review of strategic acquisitions.

As a result of this program, as of May 31, 2014, the Company operated 1,500 stores plus its various websites, other interactive platforms and distribution facilities. The Company's 1,500 stores operate in all 50 states, the District of Columbia, Puerto Rico and Canada, including: 1,015 BBB stores, 266 Cost Plus World Market stores, 91 Baby stores, 78 CTS stores and 50 Harmon stores. During the first quarter of 2014, the Company opened a total of five new stores. In addition, the Company continued to optimize its operations in a number of trade areas through renovating stores across its concepts and repositioning its stores in various markets, which also included the closing of one store during the fiscal first quarter of 2014. At the end of the first quarter of 2014, Company-wide total store square footage, net of openings and closings for all concepts, was approximately 42.7 million square feet. Additionally, the Company is a partner in a joint venture which opened one store in the first quarter of fiscal 2014 and as of May 31, 2014, operated a total of five retail stores in Mexico under the name Bed Bath & Beyond.

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The Company plans to continue to expand its operations and invest in its infrastructure to reach its long term objectives. For all of fiscal 2014, the Company expects to open approximately 22 new stores company-wide with the potential of up to six additional stores before the end of the fiscal year, 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 Baby and 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 continue to add new functionality and assortment to its selling websites, mobile sites and applications; further the development work necessary for a new and more robust point of sale system; continue the deployment of systems and equipment to allow the Company's stores to take advantage of new technologies and processes; continue to strengthen its information technology, analytics, marketing and e-commerce groups and open 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 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 reviews its alternatives with respect to its capital structure on an ongoing basis.

Fiscal 2014 compared to Fiscal 2013

Net cash provided by operating activities for the three months ended May 31, 2014 was $186.9 million, compared with $272.5 million in the corresponding period in fiscal 2013. Year over year, the Company experienced an increase in cash used by the net components of working capital (primarily merchandise inventories and accounts payable) and a decrease in net earnings.

Retail inventory at cost per square foot was $62.31 as of May 31, 2014, compared to $59.51 as of June 1, 2013.

Net cash provided by investing activities for the three months ended May 31, 2014 was $245.2 million, compared with net cash used in investing activities of $96.7 million in the corresponding period of fiscal 2013. For the three months ended May 31, 2014, net cash provided by investing activities was primarily due to $313.1 million of redemptions of investment securities, net of purchases, partially offset by $67.9 million of capital expenditures. For the three months ended June 1, 2013, net cash used in investing activities was due to $65.0 million of capital expenditures and $31.8 million of purchases of investment securities, net of redemptions.

Net cash used in financing activities for the three months ended May 31, 2014 was $262.1 million, compared with $300.9 million in the corresponding period of fiscal 2013. The decrease in net cash used was primarily due to a decrease in common stock repurchases of $51.6 million, partially offset by a $12.8 million decrease in cash proceeds from the exercise of stock options.

Seasonality

The Company's sales exhibit seasonality with sales levels generally higher in the calendar months of August, November and December, and generally lower in February.

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 March 1, 2014 ("2013 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 three months of fiscal 2014.

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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, approximate, estimate, assume, continue, model, 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. Such factors include, without limitation: general economic conditions including the housing market, a challenging overall macroeconomic environment and related changes in the retailing environment; consumer preferences and spending habits; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; civil disturbances and terrorist acts; unusual weather patterns and natural disasters; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the ability to attract and retain qualified employees in all areas of the organization; the cost of labor, merchandise and other costs and expenses; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company's expansion program; the ability to assess and implement technologies in support of the Company's development of its omnichannel capabilities; uncertainty in financial markets; disruptions to the Company's information technology systems including but not limited to security breaches of systems protecting consumer and employee information; reputational risk arising from challenges to the Company's or a third party supplier's compliance with various laws, regulations or standards, including those related to labor, health, safety, privacy or the environment; changes to statutory, regulatory and legal requirements; new, or developments in existing, litigation, claims or assessments; changes to, or new, tax laws or interpretation of existing tax laws; changes to, or new, accounting standards including, without limitation, changes to lease accounting standards; and the integration of acquired businesses. 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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