Notes to Consolidated Financial Statements
Bed Bath & Beyond Inc. and Subsidiaries
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1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
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Bed Bath & Beyond Inc. and subsidiaries (the "Company") is an omnichannel retailer that makes it easy for its customers to feel at home. The Company sells a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond ("BBB"), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively, "CTS"), Harmon, Harmon Face Values, or 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 either in-store, online, with a mobile device or through a customer contact center. The Company generally has the 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 Decorist, an online interior design platform that provides personalized home design services. In addition, the Company operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates retail stores in Mexico under the name Bed Bath & Beyond. The Company also operates PersonalizationMall.com (“PMall”), an industry-leading online retailer of personalized products.
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. Net sales outside of the U.S. for the Company were not material for fiscal 2019, 2018, and 2017. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.
The Company’s fiscal year is comprised of the 52 or 53-week period ending on the Saturday nearest February 28th. Accordingly, fiscal 2019 and fiscal 2018 represented 52 weeks and ended on February 29, 2020 and March 2, 2019, respectively. Fiscal 2017 represented 53 weeks and ended March 3, 2018.
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C.
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Principles of Consolidation
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The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company accounts for its investment in the joint venture under the equity method.
All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In particular, judgment is used in areas such as inventory valuation, impairment of long-lived assets, impairment of auction rate securities, goodwill and other indefinite lived intangible assets, accruals for self-insurance, litigation, store opening, expansion, relocation and closing costs, the provision for sales returns, vendor allowances, stock-based compensation and income and certain other taxes. Actual results could differ from these estimates.
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E.
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Recent Accounting Pronouncements
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In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance that allows companies the option of using the effective date of the new standard as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a cumulative effect adjustment to the opening balance
sheet or retained earnings. The Company adopted this accounting standard at the beginning of the first quarter of fiscal 2019 using the new transition election to not restate comparative periods. The Company elected the package of practical expedients upon adoption, which permits the Company to not reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to separate lease and non-lease components for all real estate leases and did not elect the hindsight practical expedient. Lastly, the Company elected the short-term lease exception policy, permitting it to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less. Upon adoption, the Company recognized operating lease assets of approximately $2.0 billion and operating lease liabilities of approximately $2.2 billion on its consolidated balance sheet. In addition, upon adoption deferred rent and various lease incentives which were recorded as of March 2, 2019 were reclassified as a component of the right-of-use assets. Upon adoption, the Company recognized a cumulative adjustment decreasing opening retained earnings by approximately $40.7 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on the consolidated statements of operations or cash flows.
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F.
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Cash and Cash Equivalents
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The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $79.7 million and $92.9 million as of February 29, 2020 and March 2, 2019, respectively.
Investment securities consist primarily of U.S. Treasury Bills with remaining maturities of less than one year and auction rate securities, which are securities with interest rates that reset periodically through an auction process. The U.S. Treasury Bills are classified as short term held-to-maturity securities and are stated at their amortized cost which approximates fair value. Auction rate securities are classified as available-for-sale and are stated at fair value, which had historically been consistent with cost or par value due to interest rates which reset periodically, typically every 7, 28 or 35 days. As a result, there generally were no cumulative gross unrealized holding gains or losses relating to these auction rate securities. However, beginning in mid-February 2008 due to market conditions, 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 and affect their estimated fair values at February 29, 2020 and March 2, 2019, but do not affect the underlying collateral of the securities. (See “Fair Value Measurements,” Note 4 and “Investment Securities,” Note 5). All income from these investments is recorded as interest income.
Those investment securities which the Company has the ability and intent to hold until maturity are classified as held-to-maturity investments and are stated at amortized cost. Those investment securities which are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are stated at fair market value.
Premiums are amortized and discounts are accreted over the life of the security as adjustments to interest income using the effective interest method. Dividend and interest income are recognized when earned.
Merchandise inventories are stated at the lower of cost or market. Inventory costs are primarily calculated using the weighted average retail inventory method.
Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail values of inventories. The cost associated with determining the cost-to-retail ratio includes: merchandise purchases, net of returns to vendors, discounts and volume and incentive rebates; inbound freight expenses; duty, insurance and commissions.
The retail inventory method contains certain management judgments that may affect inventory valuation. At any one time, inventories include items that have been written down to the Company’s best estimate of their realizable value. Judgment is required in estimating realizable value and factors considered are the age of merchandise, anticipated demand based on factors such as customer preferences and fashion trends, as well as anticipated markdowns to reduce the price of merchandise from its recorded retail price to a retail price at which it is expected to be sold in the future. These estimates are based on historical experience and current information about future events which are inherently uncertain. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions.
The Company estimates its reserve for shrinkage throughout the year based on historical shrinkage and any current trends, if applicable. Actual shrinkage is recorded at year end based upon the results of the Company’s physical inventory counts for locations at which counts were conducted. For locations where physical inventory counts were not conducted in the fiscal year, an estimated shrink
reserve is recorded based on historical shrinkage and any current trends, if applicable. Historically, the Company’s shrinkage has not been volatile.
The Company accrues for merchandise in transit once it takes legal ownership and title to the merchandise; as such, an estimate for merchandise in transit is included in the Company’s merchandise inventories.
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I.
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Property and Equipment
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Property and equipment are stated at cost and are depreciated primarily using the straight-line method over the estimated useful lives of the assets (forty years for buildings; five to twenty years for furniture, fixtures and equipment; and three to ten years for computer equipment and software). Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful life or the life of the lease. Depreciation expense is primarily included within selling, general and administrative expenses.
The cost of maintenance and repairs is charged to earnings as incurred; significant renewals and betterments are capitalized. Maintenance and repairs amounted to $133.9 million, $132.4 million, and $125.7 million for fiscal 2019, 2018 and 2017, respectively.
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J.
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Impairment of Long-Lived Assets
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The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Judgment is required in estimating the fair value of the assets including assumptions related to sales growth rates and market rental rates. These estimates are based on historical experience and current information about future events which are inherently uncertain. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. In fiscal 2019, the Company recorded $75.1 million non-cash pre-tax impairment charges within goodwill and other impairments in the consolidated statement of operations for certain store-level assets, including leasehold improvements and operating lease assets. In fiscal 2018, the Company recorded a $23.0 million non-cash pre-tax impairment charge within goodwill and other impairments in the consolidated statement of operations for certain store-level assets. There were no impairments to long-lived assets in fiscal 2017. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.
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K.
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Goodwill and Other Indefinite Lived Intangible Assets
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The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of the end of the fiscal year or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates, margins, growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.
As of June 1, 2019, the Company completed a quantitative impairment analysis of goodwill related to its reporting units by comparing the fair value of a reporting unit with its carrying amount. The Company performed a discounted cash flow analysis and market multiple analysis for each reporting unit. Based upon the analysis performed, the Company recognized non-cash pre-tax goodwill impairment charges of $391.1 million for the North American Retail reporting unit. In fiscal 2018, the Company recognized non-cash pre-tax goodwill impairment charges of $285.1 million and $40.1 million for the North American Retail and Institutional Sales reporting units, respectively. Cumulatively, the Company has recognized non-cash pre-tax goodwill impairment charges of $676.2 million and $40.1 million for the North American Retail and Institutional Sales reporting units, respectively. The non-cash pre-tax impairment charge was primarily the result of a sustained decline in the Company's market capitalization.
Other indefinite-lived intangible assets were recorded as a result of acquisitions and primarily consist of tradenames. The Company values its tradenames using a relief-from-royalty approach, which assumes the value of the tradename is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the tradename and instead licensed the tradename from another company. For the fiscal years ended February 29, 2020 and March 2, 2019, for certain other indefinite lived intangible assets, the Company completed a quantitative impairment analysis by comparing the fair value of the tradenames to their carrying value and recognized non-cash pre-tax tradename impairment charges of $41.8 million and $161.7 million, respectively,
within goodwill and other impairments in the consolidated statement of operations. As of February 29, 2020, for the remaining other indefinite lived intangibles assets, the Company assessed qualitative factors in order to determine whether any events and circumstances existed which indicated that it was more likely than not that the fair value of these other indefinite lived assets did not exceed their carrying values and concluded no such events or circumstances existed which would require an impairment test be performed. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.
Included within other assets in the accompanying consolidated balance sheets as of February 29, 2020 and March 2, 2019, respectively, are $91.2 million and $143.8 million for indefinite lived tradenames and trademarks.
The Company utilizes a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability, cyber liability, property liability, automobile liability and employee related health care benefits (a portion of which is paid by its employees). Liabilities associated with the risks that the Company retains are estimated by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Although the Company’s claims experience has not displayed substantial volatility in the past, actual experience could materially vary from its historical experience in the future. Factors that affect these estimates include but are not limited to: inflation, the number and severity of claims and regulatory changes. In the future, if the Company concludes an adjustment to self-insurance accruals is required, the liability will be adjusted accordingly.
The Company has authorization to make repurchases of its common shares from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations.
Between December 2004 and September 2015, the Company’s Board of Directors authorized, through several share repurchase programs, the repurchase of $11.95 billion of its shares of common stock. Since 2004 through the end of fiscal 2019, the Company has repurchased approximately $10.7 billion of its common stock through share repurchase programs. The Company also acquires shares of its common stock to cover employee related taxes withheld on vested restricted stock and performance stock unit awards.
During fiscal 2019, the Company repurchased approximately 6.8 million shares of its common stock at a total cost of approximately $99.7 million. During fiscal 2018, the Company repurchased approximately 9.1 million shares of its common stock at a total cost of approximately $148.1 million. During fiscal 2017 the Company repurchased approximately 8.0 million shares of its common stock at a total cost of approximately $252.4 million. The Company has approximately $1.2 billion remaining of authorized share repurchases as of February 29, 2020. The Company's share repurchase program could change, and would be influenced by several factors, including business and market conditions, such as the impact of the COVID-19 pandemic on the Company's stock price.
During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During fiscal 2019, 2018 and 2017, total cash dividends of $85.5 million, $86.3 million and $80.9 million were paid, respectively. As a result of the COVID-19 pandemic, the Company has suspended its quarterly cash dividend payments. Any quarterly cash dividends to be paid in the future are subject to the determination by the Board of Directors, based on an evaluation of the Company’s earnings, financial condition and requirements, business conditions and other factors.
Cash dividends, if any, are accrued as a liability on the Company’s consolidated balance sheets and recorded as a decrease to additional paid-in capital when declared.
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N.
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Fair Value of Financial Instruments
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The Company’s financial instruments include cash and cash equivalents, investment securities, accounts payable, long term debt and certain other liabilities. The Company’s investment securities consist primarily of U.S. Treasury securities, which are stated at amortized cost, and auction rate securities, which are stated at their approximate fair value. The book value of the financial instruments, excluding the Company’s long term debt, is representative of their fair values (See “Fair Value Measurements,” Note 4). The fair value of the Company’s long term debt is approximately $1.126 billion as of February 29, 2020, which is based on quoted prices in active markets for identical instruments (i.e., Level 1 valuation), compared to the carrying value of approximately $1.495 billion.
The Company determines if an arrangement is a lease or contains a lease at the inception of the contract. The Company’s leases generally contain fixed and variable components. Variable components are primarily contingent rents based upon store sales exceeding stipulated amounts. Lease agreements may also include non-lease components, such as certain taxes, insurance and common area
maintenance, which the Company combines with the lease component to account for both as a single lease component. Lease liabilities, which represent the Company’s obligation to make lease payments arising from the lease, and corresponding right-of-use assets, which represent the Company’s right to use an underlying asset for the lease term, are recognized at the commencement date of the lease, which is typically the date the Company obtains possession of the leased premises, based on the present value of fixed future payments over the lease term. The Company utilizes the lease term for which it is reasonably certain to use the underlying asset, including consideration of options to extend or terminate the lease. Incentives received from landlords are recorded as a reduction to the lease right-of-use assets. The Company does not recognize lease right-of-use assets and corresponding lease liabilities for leases with initial terms of 12 months or less.
The Company calculates the present value of future payments using the discount rate implicit in the lease, if available, or its incremental borrowing rate. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determined discount rates based on the rates of its unsecured borrowings, which are then adjusted for the appropriate lease term and effects of full collateralization. In determining the Company's operating lease assets and operating lease liabilities, the Company applied these incremental borrowing rates to the minimum lease payments within each lease agreement.
For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term and lease expense relating to variable payments is expensed as incurred. For finance leases, the amortization of the asset is recognized over the shorter of the lease term or useful life of the underlying asset.
The Company classifies long-lived assets or disposal groups as held for sale in the period when the following held for sale criteria are met: (i) the Company commits to a plan to sell; (ii) the long-lived asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such long-lived assets or disposal groups; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale is probable within one year; (v) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Long-lived assets and disposal groups classified as held for sale are measured at the lower of their carrying amount or fair value less costs to sell.
Sales are recognized upon purchase by customers at the Company’s retail stores or upon delivery for products purchased from its websites. The value of point-of-sale coupons and point-of-sale rebates that result in a reduction of the price paid by the customer are recorded as a reduction of sales. Shipping and handling fees that are billed to a customer in a sale transaction are recorded in sales. Taxes, such as sales tax, use tax and value added tax, are not included in sales.
Revenues from gift cards, gift certificates and merchandise credits are recognized when redeemed. Gift cards have no provisions for reduction in the value of unused card balances over defined time periods and have no expiration dates. In fiscal 2019 and fiscal 2018, the Company recognized net sales for gift card and merchandise credit redemptions of approximately $121.9 million and $126.3 million, which were included in merchandise credit and gift card liabilities on the consolidated balance sheet as of March 2, 2019 and March 3, 2018, respectively.
Sales returns are provided for in the period that the related sales are recorded based on historical experience. Although the estimate for sales returns has not varied materially from historical provisions, actual experience could vary from historical experience in the future if the level of sales return activity changes materially. In the future, if the Company concludes that an adjustment is required due to material changes in sales return activity, the liability for estimated returns and the corresponding right of return asset will be adjusted accordingly. As of February 29, 2020 and March 2, 2019, the liability for estimated returns of $71.6 million and $90.4 million is included in accrued expenses and other current liabilities and the corresponding right of return asset for merchandise of $42.5 million $53.4 million is included in prepaid expenses and other current assets, respectively.
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 (including furniture and wall décor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings accounted for approximately 35.2% and 64.8% of net sales, respectively, for fiscal 2019, 35.4% and 64.6% of net sales, respectively, for fiscal 2018 and 35.5% and 64.5% of net sales, respectively, for fiscal 2017.
Cost of sales includes the cost of merchandise, buying costs and costs of the Company’s distribution network including inbound freight charges, distribution facility costs, receiving costs, internal transfer costs and shipping and handling costs.
The Company receives allowances from vendors in the normal course of business for various reasons including direct cooperative advertising, purchase volume and reimbursement for other expenses. Annual terms for each allowance include the basis for earning the allowance and payment terms, which vary by agreement. All vendor allowances are recorded as a reduction of inventory cost, except for direct cooperative advertising allowances which are specific, incremental and identifiable. The Company recognizes purchase volume allowances as a reduction of the cost of inventory in the quarter in which milestones are achieved. Advertising costs were reduced by direct cooperative allowances of $30.9 million, $37.0 million, and $38.5 million for fiscal 2019, 2018, and 2017, respectively.
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T.
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Store Opening, Expansion, Relocation and Closing Costs
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Store opening, expansion, relocation and closing costs, including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
Prior to fiscal 2018, expenses associated with direct response advertising were expensed over the period in which the sales were expected to occur, generally five to eight weeks. Beginning in fiscal 2018, due to the adoption of Financial Accounting Standards Board, Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606), advertising expense related to direct response advertising are expensed on the first day of the direct response advertising event. All other expenses associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to $478.5 million, $463.2 million, and $444.4 million for fiscal 2019, 2018, and 2017, respectively.
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V.
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Stock-Based Compensation
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The Company measures all employee stock-based compensation awards using a fair value method and records such expense in its consolidated financial statements. Currently, the Company’s stock-based compensation relates to restricted stock awards, stock options and performance stock units. The Company’s restricted stock awards are considered nonvested share awards.
The Company files a consolidated federal income tax return. Income tax returns are also filed with each taxable jurisdiction in which the Company conducts business.
The Company accounts for its income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, (the “Tax Act”). The Tax Act included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been previously accrued has now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to reinvest the unremitted earnings of its Canadian subsidiary. Accordingly, no additional provision has been made for U.S. or additional non-U.S. taxes with respect to these earnings, except for the transition tax resulting from the Tax Act. In the event of repatriation to the U.S., it is expected that such earnings would be subject to non-U.S. withholding taxes offset, in whole or in part, by U.S. foreign tax credits.
The Company recognizes the tax benefit from an uncertain tax position only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities.
Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the
Company’s tax returns are subject to audit by various tax authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding, including the dilutive effect of stock-based awards as calculated under the treasury stock method.
Stock-based awards of approximately 5.4 million, 8.2 million, and 8.0 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for fiscal 2019, 2018, and 2017, respectively.
2. RESTRUCTURING ACTIVITIES
During fiscal 2019, the Company expensed pre-tax restructuring charges of approximately $102.5 million, primarily for severance and related costs in conjunction with its transformation initiatives and extensive leadership changes, within selling, general and administrative expenses. As of February 29, 2020, the accrual for the pre-tax restructuring charges was approximately $73.4 million.
In the second quarter of fiscal 2017, the Company accelerated the realignment of its store management structure to support its customer-focused initiatives and omnichannel growth and expensed pre-tax cash restructuring charges of approximately $16.9 million, primarily for severance and related costs in conjunction with this realignment. During fiscal 2017, the Company paid $16.7 million of these costs.
3. ACQUISITIONS
On March 6, 2017, the Company acquired Decorist, Inc., an online interior design platform that provides personalized home design services. Since the date of acquisition, the results of Decorist’s operations, which were not material, have been included in the Company’s results of operations and no proforma disclosure of financial information has been presented. Decorist is included in the North American Retail operating segment.
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The hierarchy for inputs used in measuring fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability must be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
• Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
• Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
As of February 29, 2020, the Company’s financial assets utilizing Level 1 inputs include short term trading investment securities traded on active securities exchanges. The Company did not have any financial assets utilizing Level 2 inputs. Financial assets utilizing Level 3 inputs included long term investments in auction rate securities consisting of preferred shares of closed end municipal bond funds (See “Investment Securities,” Note 5).
The Company’s investment securities as of February 29, 2020 and March 2, 2019 are as follows:
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(in millions)
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February 29, 2020
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March 2, 2019
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Available-for-sale securities:
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Long term
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$
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20.3
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$
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19.9
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Held-to-maturity securities:
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Short term
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385.6
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485.8
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Total investment securities
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$
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405.9
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$
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505.7
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Auction Rate Securities
As of February 29, 2020 and March 2, 2019, the Company’s long term available-for-sale investment securities represented approximately $20.3 million par value of auction rate securities, consisting of preferred shares of closed end municipal bond funds, less temporary valuation adjustments of approximately $5,000 and $365,000, respectively. Since these valuation adjustments are deemed to be temporary, they are recorded in accumulated other comprehensive loss, net of a related tax benefit, and did not affect the Company’s net earnings.
U.S. Treasury Securities
As of February 29, 2020, the Company’s short term held-to-maturity securities included approximately $385.6 million of U.S. Treasury Bills with remaining maturities of less than one year. These securities are stated at their amortized cost which approximates fair value, which is based on quoted prices in active markets for identical instruments (i.e., Level 1 valuation). As of March 2, 2019, the Company had $485.8 million short term held-to-maturity securities.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
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(in thousands)
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February 29, 2020
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March 2, 2019
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Land and buildings
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$
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261,743
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$
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587,684
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Furniture, fixtures and equipment
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718,159
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1,469,835
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Leasehold improvements
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1,082,765
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1,623,015
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Computer equipment and software
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1,376,931
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1,659,589
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3,439,598
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5,340,123
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Less: Accumulated depreciation
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(2,008,994
|
)
|
|
(3,487,032
|
)
|
|
Property and equipment, net
|
$
|
1,430,604
|
|
|
$
|
1,853,091
|
|
7. LONG TERM DEBT
Senior Unsecured Notes
On July 17, 2014, the Company issued $300 million aggregate principal amount of 3.749% senior unsecured notes due August 1, 2024 (the “2024 Notes”), $300 million aggregate principal amount of 4.915% senior unsecured notes due August 1, 2034 (the “2034 Notes”) and $900 million aggregate principal amount of 5.165% senior unsecured notes due August 1, 2044 (the “2044 Notes” and, together with the 2024 Notes and the 2034 Notes, the “Notes”). Interest on the Notes is payable semi-annually on February 1 and August 1 of each year. In fiscal 2018, the Company purchased and retired $4.6 million of senior unsecured notes due August 1, 2024.
The Notes were issued under an indenture (the “Base Indenture”), as supplemented by a first supplemental indenture (together, with the Base Indenture, the “Indenture”), which contains various restrictive covenants, which are subject to important limitations and
exceptions that are described in the Indenture. The Company was in compliance with all covenants related to the Notes as of February 29, 2020.
The Notes are unsecured, senior obligations and rank equal in right of payment to any of the Company’s existing and future senior unsecured indebtedness. The Company may redeem the Notes at any time, in whole or in part, at the redemption prices described in the Indenture plus accrued and unpaid interest to the redemption date. If a change in control triggering event, as defined by the Indenture governing the Notes, occurs unless the Company has exercised its right to redeem the Notes, the Company will be required to make an offer to the holders of the Notes to purchase the Notes at 101% of their principal amount, plus accrued and unpaid interest.
Revolving Credit Agreement
On November 14, 2017, the Company replaced its existing $250 million five year senior unsecured revolving credit facility agreement with various lenders with a new $250 million five year senior unsecured revolving credit facility agreement ("Revolver") with various lenders maturing November 14, 2022. The new Revolver has essentially the same terms and requirements as the prior revolving credit facility agreement. For fiscal 2019 and fiscal 2018, the Company did not have any borrowings under the Revolver and had outstanding letters of credit of $5.1 million as of February 29, 2020.
Borrowings under the Revolver accrue interest at either (1) a fluctuating rate equal to the greater of the prime rate, as defined in the Revolver, the Federal Funds Rate plus 0.50%, or one-month LIBOR plus 1.0% and, in each case, plus an applicable margin based upon the Company’s leverage ratio which is calculated quarterly, (2) a periodic fixed rate equal to LIBOR plus an applicable margin based upon the Company’s leverage ratio which is calculated quarterly or (3) an agreed upon fixed rate. In addition, a commitment fee is assessed, which is included in interest expense, net in the consolidated statement of operations. The Revolver contains customary affirmative and negative covenants and also requires the Company to maintain a maximum leverage ratio. The Company was in compliance with all covenants related to the Revolver as of February 29, 2020. Given the current economic environment, the pendency of the COVID-19 pandemic, and the temporary closure of a substantial majority of the Company’s stores, the Company may be unable to maintain compliance with the maximum leverage ratio covenant contained in the Revolver in future periods, which would result in an event of default under the Revolver and could, at the direction of the requisite lenders, result in the acceleration of the obligation to repay the outstanding amounts thereunder if not waived by the applicable lenders.
Deferred financing costs associated with the Notes and the current and former Revolvers of approximately $10.5 million were capitalized. In the accompanying consolidated balance sheets, the deferred financing costs are included in long term debt, net of amortization, for the Notes and are included in other assets, net of amortization, for the Revolver. These deferred financing costs for the Notes and the Revolver are being amortized over the term of each of the Notes and the term of the Revolver and such amortization is included in interest expense, net in the consolidated statement of operations. Interest expense related to the Notes and the Revolver, including the commitment fee and the amortization of the deferred financing costs, was approximately $73.0 million, $73.0 million, and $74.4 million for fiscal 2019, 2018 and 2017, respectively.
Lines of Credit
At February 29, 2020, the Company maintained two uncommitted lines of credit of $100 million each, with expiration dates of August 30, 2020 and February 21, 2021, 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 2019 and 2018, the Company did not have any direct borrowings under the uncommitted lines of credit. As of February 29, 2020, there was approximately $29.1 million of outstanding letters of credit issued under the uncommitted lines of credit, consisting of $0.7 million of unsecured standby letters of credit and $28.4 million of commercial letters of credit for the importation of merchandise. Given the current economic environment, there can be no assurance of the Company’s ability to secure additional funding under its uncommitted lines of credit or on its ability to renew either or both or the uncommitted lines of credit before their respective expiration dates.
Letters of Credit
In addition, as of February 29, 2020, the Company maintained unsecured standby letters of credit of $43.1 million, primarily for certain insurance programs and custom bonds.
|
|
|
|
8.
|
PROVISION FOR INCOME TAXES
|
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act significantly revised the U.S. tax code by, among other things, (i) reducing the federal corporate income tax rate, effective January 1, 2018, from 35% to 21%, (ii) imposing a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated and (iii) implementing a modified territorial tax system.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 118 ("SAB 118"). This update provided guidance on income tax accounting implications under the Tax Act. SAB 118 addressed the application of generally accepted accounting principles to situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows companies to record provisional amounts during a remeasurement period not to exceed one year after the enactment date while the accounting impact remains under analysis.
The Company had reasonably estimated the impact of the Tax Act in its fiscal 2017 provision for income taxes in accordance with its interpretation of the Tax Act and available guidance. The Tax Act resulted in a net unfavorable tax impact of approximately $10.5 million recorded in the fiscal fourth quarter of 2017.
As of December 22, 2018, the Company completed its review of the previously recorded provisional amounts related to the Tax Act and recorded an immaterial favorable adjustment to these amounts during fiscal 2018. The provisional amounts were related to the remeasurement of the Company’s net deferred tax assets and the transition tax on accumulated foreign earnings, which collectively totaled approximately $26.8 million as of March 3, 2018.
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
(in thousands)
|
February 29, 2020
|
|
March 2, 2019
|
|
March 3, 2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
2,455
|
|
|
$
|
61,721
|
|
|
$
|
82,044
|
|
|
State and local
|
(7,973
|
)
|
|
22,995
|
|
|
13,554
|
|
|
|
(5,518
|
)
|
|
84,716
|
|
|
95,598
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
(124,578
|
)
|
|
(83,576
|
)
|
|
157,057
|
|
|
State and local
|
(20,941
|
)
|
|
(20,525
|
)
|
|
18,147
|
|
|
|
(145,519
|
)
|
|
(104,101
|
)
|
|
175,204
|
|
|
|
$
|
(151,037
|
)
|
|
$
|
(19,385
|
)
|
|
$
|
270,802
|
|
At February 29, 2020 and March 2, 2019, included in other assets are net deferred income tax assets of $276.5 million and $115.1 million, respectively. These amounts represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 29, 2020
|
|
March 2, 2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Inventories
|
$
|
35,665
|
|
|
$
|
24,292
|
|
|
Deferred rent and other rent credits
|
45,736
|
|
|
42,147
|
|
|
Insurance
|
20,208
|
|
|
23,300
|
|
|
Stock-based compensation
|
5,115
|
|
|
16,097
|
|
|
Nonqualified deferred compensation plan
|
—
|
|
|
6,771
|
|
|
Merchandise credits and gift card liabilities
|
47,742
|
|
|
43,630
|
|
|
Accrued expenses
|
51,334
|
|
|
26,550
|
|
|
Obligations on distribution facilities
|
26,126
|
|
|
26,618
|
|
|
Goodwill
|
44,332
|
|
|
—
|
|
|
Carryforwards and other tax credits
|
118,478
|
|
|
48,115
|
|
|
Other
|
29,539
|
|
|
26,400
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation
|
(110,864
|
)
|
|
(132,120
|
)
|
|
Goodwill
|
—
|
|
|
(3,337
|
)
|
|
Intangibles
|
(10,251
|
)
|
|
(19,414
|
)
|
|
Prepaid expenses
|
(2,364
|
)
|
|
(854
|
)
|
|
Other
|
(24,268
|
)
|
|
(13,115
|
)
|
|
|
$
|
276,528
|
|
|
$
|
115,080
|
|
At February 29, 2020, the Company has federal net operating loss carryforwards of $44.4 million (tax effected), of which $38.8 million have an indefinite life and $5.6 million will expire between 2025 and 2039, state net operating loss carryforwards of $12.6 million (tax effected), which will expire between 2019 and 2039, California state enterprise zone credit carryforwards of $2.1 million (tax effected), which will expire in 2023, but require taxable income in the enterprise zone to be realizable.
The Company has not established a valuation allowance for the net deferred tax asset as it is considered more likely than not that it is realizable through a combination of future taxable income, tax planning strategies and the deductibility of future net deferred tax liabilities.
The following table summarizes the activity related to the gross unrecognized tax benefits from uncertain tax positions:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
February 29, 2020
|
|
March 2, 2019
|
|
Balance at beginning of year
|
$
|
61,937
|
|
|
$
|
75,443
|
|
|
|
|
|
|
|
Increase related to current year positions
|
5,009
|
|
|
6,490
|
|
|
Increase related to prior year positions
|
3,857
|
|
|
2,822
|
|
|
Decrease related to prior year positions
|
(15,162
|
)
|
|
(6,128
|
)
|
|
Settlements
|
(203
|
)
|
|
(2,338
|
)
|
|
Lapse of statute of limitations
|
(3,657
|
)
|
|
(14,352
|
)
|
|
|
|
|
|
|
Balance at end of year
|
$
|
51,781
|
|
|
$
|
61,937
|
|
Gross unrecognized tax benefits are classified in non-current income taxes payable (or a contra deferred tax asset) on the consolidated balance sheet for uncertain tax positions taken (or expected to be taken) on a tax return. As of February 29, 2020 and March 2, 2019, approximately $51.8 million and $61.9 million, respectively, of gross unrecognized tax benefits would impact the Company’s effective tax rate. As of February 29, 2020 and March 2, 2019, the liability for gross unrecognized tax benefits included approximately $9.6 million and $8.3 million, respectively, of accrued interest. The Company recorded an increase to accrued interest of approximately $1.3 million for the fiscal year ended February 29, 2020 and a decrease of approximately $0.9 million for the fiscal year ended March 2, 2019 for gross unrecognized tax benefits in the consolidated statement of earnings.
The Company anticipates that any adjustments to gross unrecognized tax benefits which will impact income tax expense, due to the expiration of statutes of limitations, could be approximately $3 million in the next twelve months. However, actual results could differ from those currently anticipated.
As of February 29, 2020, the Company operated in all 50 states, the District of Columbia, Puerto Rico, Canada and several other international countries and files income tax returns in the United States and various state, local and international jurisdictions. The Company is currently under examination by the Internal Revenue Service for the tax year 2017. The Company is open to examination for state, foreign and local jurisdictions with varying statutes of limitations, generally ranging from three to five years.
The following table summarizes the reconciliation between the effective income tax rate and the federal statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
|
|
February 29, 2020
|
March 2, 2019
|
March 3, 2018
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
21.00
|
%
|
21.00
|
%
|
32.66
|
%
|
|
State income tax rate, net of federal impact
|
|
4.28
|
|
(1.38
|
)
|
4.12
|
|
|
Uncertain tax positions
|
|
1.33
|
|
7.24
|
|
0.32
|
|
|
Impact of the Tax Act
|
|
—
|
|
2.70
|
|
3.86
|
|
|
Goodwill non-deductible impairment charges
|
|
(4.84
|
)
|
(18.64
|
)
|
—
|
|
|
Tax deficiencies related to stock-based compensation
|
|
(3.07
|
)
|
(6.48
|
)
|
1.39
|
|
|
Tax credits
|
|
0.49
|
|
4.53
|
|
(0.96
|
)
|
|
Other
|
|
0.56
|
|
3.41
|
|
(2.46
|
)
|
|
|
|
19.75
|
%
|
12.38
|
%
|
38.93
|
%
|
|
|
|
|
9.
|
TRANSACTIONS AND BALANCES WITH RELATED PARTIES
|
In fiscal 2002, the Company had an interest in certain life insurance policies on the lives of its Co-Founders and their spouses. The Company’s interest in these policies was equivalent to the net premiums paid by the Company. The agreements relating to the Company’s interest in the life insurance policies on the lives of its Co-Founders and their spouses were terminated in fiscal 2003. Upon termination in fiscal 2003, the Co-Founders paid to the Company $5.4 million, representing the total amount of premiums paid by the Company under the agreements and the Company was released from its contractual obligation to make substantial future premium payments. In order to confer a benefit to its Co-Founders in substitution for the aforementioned terminated agreements, as of February 27, 2004, the Company agreed to pay to the Co-Founders, at a future date, an aggregate amount of $4.2 million, which is included in accrued expenses and other current liabilities as of February 29, 2020 and March 2, 2019. Subsequent to the end of fiscal 2019 and effective February 29, 2020, the Company paid the Co-Founders this amount in accordance with the terms of the prior agreements entered into as February 27, 2004. The Company has no further obligations to Messrs. Eisenberg or Feinstein in respect of the aforementioned agreements.
On April 21, 2019, Warren Eisenberg and Leonard Feinstein transitioned to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company. As a result of this transition, Messrs. Eisenberg and Feinstein ceased to be officers of the Company effective as of April 21, 2019, and became entitled to the payments and benefits provided under their employment agreements that apply in the case of termination without cause, which generally include continued senior status payments until May 2027 and continued participation for them (and their spouses, if applicable) at the Company’s expense, in medical, dental, hospitalization and life insurance (collectively, “Health and Life Benefits”) and in all other employee plans and programs in which they (or their families) were participating as of the date of termination and other or additional benefits in accordance with the applicable plans and programs until the earlier of death of the survivor of the applicable Co-Chairman Emeritus and his spouse or the date(s) he receives equivalent coverage and benefits from a subsequent employer. On February 26, 2020, each of Messrs. Eisenberg and Feinstein entered into agreements (the “Co-Founder settlement agreements”) with the Company in settlement of claims relating to the continued benefits
beyond the Health and Life Benefits totaling $4.1 million, which is included in accrued expenses and other current liabilities as of February 29, 2020.
The Company leases retail stores, as well as distribution facilities, offices and equipment, under agreements expiring at various dates through 2041. The leases provide for original lease terms that generally range from 10 to 15 years and most leases provide for a series of five year renewal options, often at increased rents, the exercise of which is at the Company's sole discretion. Certain leases provide for contingent rents (which are based upon store sales exceeding stipulated amounts and are immaterial in fiscal 2019, 2018, and 2017), scheduled rent increases and renewal options. The Company is obligated under a majority of the leases to pay for taxes, insurance and common area maintenance charges.
The components of total lease cost for the fiscal year ended February 29, 2020 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Statement of Operations Location
|
Fiscal year ended February 29, 2020
|
|
Operating lease cost
|
Cost of sales and SG&A
|
$
|
581,061
|
|
|
Finance lease cost:
|
|
|
|
Depreciation of property
|
SG&A
|
2,591
|
|
|
Interest on lease liabilities
|
Interest expense, net
|
8,927
|
|
|
Variable lease cost
|
Cost of sales and SG&A
|
203,526
|
|
|
Sublease income
|
SG&A
|
(1,112
|
)
|
|
Total lease cost
|
|
$
|
794,993
|
|
As of February 29, 2020, assets and liabilities related to the Company's operating and finance leases were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Consolidated Balance Sheet Location
|
February 29, 2020
|
|
Assets
|
|
|
|
Operating leases
|
Operating lease assets
|
$
|
2,006,966
|
|
|
Finance leases
|
Property and equipment, net
|
69,287
|
|
|
Total Lease assets
|
|
$
|
2,076,253
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Current:
|
|
|
|
Operating leases
|
Current operating lease liabilities
|
$
|
463,005
|
|
|
Finance leases
|
Accrued expenses and other current liabilities
|
1,541
|
|
|
Noncurrent:
|
|
|
|
Operating leases
|
Operating lease liabilities
|
1,818,783
|
|
|
Finance leases
|
Other liabilities
|
102,412
|
|
|
Total lease liabilities
|
|
$
|
2,385,741
|
|
As of February 29, 2020, the Company's lease liabilities mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Fiscal Year:
|
|
|
|
|
2020
|
$
|
588,116
|
|
|
$
|
10,470
|
|
|
2021
|
512,291
|
|
|
10,434
|
|
|
2022
|
418,411
|
|
|
10,407
|
|
|
2023
|
328,039
|
|
|
10,524
|
|
|
2024
|
253,656
|
|
|
10,702
|
|
|
Thereafter
|
712,142
|
|
|
248,882
|
|
|
Total lease payments
|
$
|
2,812,655
|
|
|
$
|
301,419
|
|
|
Less imputed interest
|
(530,867
|
)
|
|
(197,466
|
)
|
|
Present value of lease liabilities
|
$
|
2,281,788
|
|
|
$
|
103,953
|
|
As of February 29, 2020, the Company has entered leases which have not yet commenced for 14 new or relocated locations planned for opening in fiscal 2020, for which aggregate minimum rental payments over the term of the leases are approximately $40.2 million.
The Company's lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
|
|
February 29, 2020
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
Operating leases
|
|
6.6
|
|
|
Finance leases
|
|
25.7
|
|
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
|
6.2
|
%
|
|
Finance leases
|
|
9.0
|
%
|
Other information with respect to the Company's leases is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fiscal year ended February 29, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
580,030
|
|
|
Operating cash flows from finance leases
|
|
10,401
|
|
|
Operating lease assets obtained in exchange for new operating lease liabilities
|
|
548,856
|
|
During December 2019, the Company completed a sale-leaseback transaction on approximately 2.1 million square feet of owned real estate, which generated approximately $267.3 million in proceeds. As a result of the transaction, the Company recorded a loss, including transaction costs of approximately $5.7 million, of approximately $33.1 million which is included in selling, general and administrative expenses in the consolidated statement of operations. All leases entered into as a result of the sale-leaseback transaction were classified as operating leases. For certain assets included in the transaction, the Company determined that the fair value of the assets was less than the consideration received. As a result, the Company recognized a financing obligation in the amount of $14.5 million, for the additional financing obtained from the buyer. As of February 29, 2020, the financing obligation amounted to $14.4 million.
At the beginning of fiscal 2019, the Company adopted ASU 2016-02, and as required, the following disclosure is provided for periods prior to adoption. As of March 2, 2019, future minimum lease payments under non-cancelable operating leases were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
|
Fiscal Year:
|
|
|
2019
|
$
|
609,613
|
|
|
2020
|
534,055
|
|
|
2021
|
434,908
|
|
|
2022
|
334,587
|
|
|
2023
|
241,863
|
|
|
Thereafter
|
616,170
|
|
|
Total future minimum lease payments
|
$
|
2,771,196
|
|
As of March 2, 2019, the capital lease obligations were approximately $3.8 million, for which the current and long-term portions were included within accrued expenses and other current liabilities and other liabilities, respectively, in the consolidated balance sheet. Expenses for all operating leases were $593.3 million and $614.1 million for fiscal 2018 and 2017, respectively. Monthly minimum lease payments are accounted for as principal and interest payments. The minimum capital lease payments, including interest, by fiscal year were: $0.9 million in fiscal 2019; $0.8 million in fiscal 2020; $0.7 million in fiscal 2021; $0.6 million in fiscal 2022; $0.6 million in fiscal 2023; and $1.0 million thereafter.
During fiscal 2018, the Company had financing obligations related to two sale-leaseback agreements, which approximated the discounted fair value of the minimum lease payments, had a residual fair value at the end of the lease term and are being amortized over the term of the respective agreements, including option periods, of 32 and 37 years. As of March 2, 2019, the sale-leaseback financing obligations were approximately $101.7 million, for which the current and long-term portions were included within accrued expenses and other current liabilities and other liabilities, respectively, in the consolidated balance sheet. Monthly lease payments are accounted for as principal and interest payments (at approximate annual interest rates of 7.2% and 10.6%). These sale-leaseback financing obligations, excluding the residual fair value at the end of the lease term, mature as follows: $0.8 million in fiscal 2019; $0.9 million in fiscal 2020; $0.9 million in fiscal 2021; $1.0 million in fiscal 2022; $1.0 million in fiscal 2023; and $75.4 million thereafter.
|
|
|
|
11.
|
EMPLOYEE BENEFIT PLANS
|
Defined Contribution Plans
The Company has three defined contribution savings plans covering all eligible employees of the Company (“the Plans”). Participants of the Plans may defer annual pre-tax compensation subject to statutory and Plan limitations. In addition, a certain percentage of an employee’s contributions are matched by the Company and vest over a specified period of time, subject to certain statutory and Plan limitations. The Company’s match was approximately $13.7 million, $15.5 million, and $16.4 million for fiscal 2019, 2018, and 2017, respectively, which was expensed as incurred.
Nonqualified Deferred Compensation Plan
On December 27, 2017, the Company terminated its nonqualified deferred compensation plan (“NQDC”). After December 27, 2017, no participant deferrals were accepted and all balances were to be liquidated more than 12 months but less than 24 months after December 27, 2017. During fiscal 2018, all participants' balances were liquidated and disbursed to those participants.
The Company’s NQDC was for the benefit of employees who are defined by the Internal Revenue Service as highly compensated. Participants of the NQDC were able to defer annual pre-tax compensation subject to statutory and plan limitations. In addition, a certain percentage of an employee’s contributions may have been matched by the Company and vested over a specified period of time, subject to certain plan limitations. The Company’s match was approximately $0.6 million and $0.6 million in fiscal 2018, and 2017, respectively, which was expensed as incurred.
Changes in the fair value of the trading securities related to the NQDC and the corresponding change in the associated liability are included within interest income and selling, general and administrative expenses respectively, in the consolidated statements of earnings. Historically, these changes have resulted in no net impact to the consolidated statements of earnings.
Defined Benefit Plan
The Company has a non-contributory defined benefit pension plan for the CTS employees, hired on or before July 31, 2003, who meet specified age and length-of-service requirements. The benefits are based on years of service and the employee’s compensation
up until retirement. The Company recognizes the overfunded or underfunded status of the pension plan as an asset or liability in its statement of financial position and recognizes changes in the funded status in the year in which the changes occur. For the years ended February 29, 2020, March 2, 2019 and March 3, 2018, the net periodic pension cost was not material to the Company’s results of operations. The Company has a $3.2 million liability, which is included in other liabilities as of February 29, 2020 and a $1.6 million asset which is included in other assets as of March 2, 2019. In addition, as of February 29, 2020 and March 2, 2019, the Company recognized a loss of $8.5 million, net of taxes of $3.0 million, and a loss of $3.7 million, net of taxes of $1.3 million, respectively, within accumulated other comprehensive loss.
|
|
|
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
A putative securities class action was filed on April 14, 2020 against the Company and three of its officers and/or directors (Mark Tritton, Mary Winston (the Company’s former Interim Chief Executive Officer) and Robyn D’Elia) in the United States District Court for the District of New Jersey. The case, which is captioned Vitiello v. Bed Bath & Beyond Inc., et al., Case No. 2:20-cv-04240-MCA-MAH, asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of the Company’s securities from October 2, 2019 through February 11, 2020. The Complaint alleges that certain of the Company’s disclosures about financial performance and certain other public statements during the putative class period were materially false or misleading.
On April 1, 2020, the Company commenced an action against 1-800-FLOWERS.COM, Inc. and its subsidiary, 800-Flowers Inc., in the Court of Chancery for the State of Delaware, which is captioned Bed Bath & Beyond Inc. v. 1-800-Flowers.com, et ano., C.A. No. 2020-0245-SG. The Company seeks specific performance of the defendants’ obligation to close on their purchase of the Company’s subsidiary, Personalizationmall.com, LLC, for approximately $252 million, which defendants failed to do on the closing date of March 30, 2020 pursuant to the parties’ Equity Purchase Agreement dated February 14, 2020. The case is expedited, and trial is scheduled for September 23-25, 2020.
The District Attorney's office for the County of Ventura, together with District Attorneys for other counties in California (together, the “District Attorneys"), recently concluded an investigation regarding the management and disposal at the Company's stores in California of certain materials that may be deemed hazardous or universal waste under California law. On March 19, 2019, the District Attorneys provided the Company with a settlement demand that included a proposed civil penalty, reimbursement of investigation costs, and certain injunctive relief, including modifications to the Company's existing compliance program, which already includes associate training, on-going review of disposal rules applicable to various product categories, and specialized third-party disposal. Subsequent to the end of fiscal 2019, the Company and the District Attorneys agreed to final terms on a settlement payment of approximately $1.5 million to resolve the matter. The Company has also agreed to spend $171,000 over the next 36 months on refinements to its compliance program. The Company expects to execute a Stipulated Judgment to this effect in the near term. As of February 29, 2020 and March 2, 2019, the Company had recorded an accrual for the estimated probable loss for this matter.
On April 21, 2019, Warren Eisenberg and Leonard Feinstein transitioned to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company. As a result of this transition, Mr. Eisenberg and Mr. Feinstein ceased to be officers of the Company effective as of April 21, 2019, and became entitled to the payments and benefits provided under their employment agreements that apply in the case of a termination without cause, which generally include continued senior status payments until May 2027 and continued participation for the Co-Founders (and their spouses, if applicable) at the Company's expense in employee plans and programs. In addition, the Co-Founders remain entitled to supplemental pension payments specified in their employment agreements of $200,000 per year (as adjusted for a cost of living increase), until the death of the survivor of the applicable Co-Founder and his spouse, reduced by the continued senior status payments referenced above.
Pursuant to their respective restricted stock and performance stock unit agreements, shares of restricted stock and performance-based stock units granted to Messrs. Eisenberg and Feinstein vested upon their resignation as members of the Board of Directors effective May 1, 2019, subject, however, to attainment of any applicable performance goals and the certification of the applicable performance-based tests by the Compensation Committee, as provided under their award agreements.
The Company's former Chief Executive Officer ("Former CEO") departed the Company effective as of May 12, 2019. In accordance with the terms of the Former CEO's employment and equity award agreements, the Former CEO was entitled to three times his then-current salary, payable over three years in normal payroll installments, except that any amount due prior to the six months after his departure, was paid in a lump sum after such six-month period. Such amounts will be reduced by any compensation earned with any subsequent employer or otherwise and will be subject to the Former CEO's compliance with a one-year non-competition and non-solicitation covenant. On October 21, 2019, the Former CEO entered into an agreement (the “Former CEO PSU settlement agreement”) with the Company to reduce the performance stock units (“PSUs”) held by him by an excess amount of outstanding PSUs granted
to the Former CEO in the Company’s 2018 fiscal year as a result of the use of the fiscal 2017 peer group in lieu of the fiscal 2018 peer group. Further, as a result of this departure, the time-vesting component of the Former CEO's stock-based awards accelerated, including (i) stock options (which were “underwater” and expired without having been exercised by the Former CEO), (ii) PSU awards which had previously met the related performance-based test, had been certified by the Compensation Committee, and remained subject solely to time-vesting, and (iii) PSU awards (assuming target level of performance) which remain subject to attainment of any performance goals and the certification of the applicable performance-based tests by the Compensation Committee, as provided under his award agreements and subject to the terms of the Former CEO PSU settlement agreement.
The Former CEO was also party to a supplemental executive retirement benefit agreement (“SERP”) and a related escrow agreement, pursuant to which the Former CEO was entitled to receive a supplemental retirement benefit as a result of the separation from service from the Company. Pursuant to the SERP, as a result of the separation from service with the Company as of May 12, 2019 being treated as a termination without cause, the Former CEO is entitled to a lump sum payment equal to the present value of an annual amount equal to 50% of the Former CEO's annual base salary on the date of termination of employment if such annual amount were paid for a period of 10 years in accordance with the Company’s normal payroll practices, subject to the Former CEO's timely execution and non-revocation of a release of claims in favor of the Company (which occurred). This amount was paid on November 13, 2019, the first business day following the six-month anniversary of the Former CEO's termination of service. The Company has no further obligations to the Former CEO under the SERP.
The Company has expensed pre-tax charges related to both the transition of Messrs. Eisenberg and Feinstein to the role of Co-Founders and Co-Chairmen Emeriti of the Board of Directors of the Company and the departure of the Former CEO of approximately $37.0 million.
In addition, the Company maintains employment agreements with other executives which provide for severance pay.
The Company records an estimated liability related to its various claims and legal actions arising in the ordinary course of business when and to the extent that it concludes a liability is probable and the amount of the loss can be reasonably estimated. Such estimated loss is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company reassesses the potential liability related to claims and legal actions and revises its estimated liabilities, as appropriate. The Company expects the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. The Company also cannot predict the nature and validity of claims which could be asserted in the future, and future claims could have a material impact on its earnings.
|
|
|
|
13.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
The Company paid income taxes of $44.8 million, $61.3 million, and $203.9 million in fiscal 2019, 2018, and 2017, respectively. In addition, the Company had interest payments of approximately $81.2 million, $81.4 million, and $81.3 million in fiscal 2019, 2018, and 2017, respectively.
The Company recorded an accrual for capital expenditures of $36.9 million, $51.7 million, and $63.7 million as of February 29, 2020, March 2, 2019 and March 3, 2018, respectively. In addition, the Company recorded an accrual for dividends payable of $26.4 million and $28.3 million as of February 29, 2020 and March 2, 2019, respectively. The Company did not declare any dividends prior to fiscal 2016. In fiscal 2018, the Company recorded a $31.1 million note receivable in connection with the sale of a building.
|
|
|
|
14.
|
STOCK-BASED COMPENSATION
|
The Company measures all employee stock-based compensation awards using a fair value method and records such expense, net of estimated forfeitures, in its consolidated financial statements. Currently, the Company’s stock-based compensation relates to restricted stock awards, stock options and performance stock units. The Company’s restricted stock awards are considered nonvested share awards.
Stock-based compensation expense for the fiscal year ended February 29, 2020, March 2, 2019 and March 3, 2018 was approximately $45.7 million ($36.7 million after tax or $0.29 per diluted share), $58.5 million ($51.3 million after tax or $0.38 per diluted share), and approximately $70.5 million ($43.1 million after tax or $0.31 per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the years ended February 29, 2020 and March 2, 2019 was approximately $0.5 million and $2.3 million, respectively.
Incentive Compensation Plans
The Company currently grants awards under the Bed Bath & Beyond 2018 Incentive Compensation Plan (the “2018 Plan”), which includes an aggregate of 4.6 million shares of common stock authorized for issuance of awards permitted under the 2018 Plan,
including stock options, stock appreciation rights, restricted stock awards, performance awards and other stock based awards. The 2018 Plan supplements the Bed Bath & Beyond 2012 Incentive Compensation Plan (the "2012 Plan"), which amended and restated the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2012 Plan includes an aggregate of 43.2 million common shares authorized for issuance of awards permitted under the 2012 Plan (similar to the 2018 Plan). Outstanding awards that were covered by the 2004 Plan continue to be in effect under the 2012 Plan.
The terms of the 2012 Plan and the 2018 Plan are substantially similar and enable the Company to offer incentive compensation through stock options (whether nonqualified stock options or incentive stock options), restricted stock awards, stock appreciation rights, performance awards, and other stock-based awards and cash-based awards. Grants are determined by the Compensation Committee of the Board of Directors of the Company for those awards granted to executive officers, and by the Board of Directors of the Company for awards granted to non-employee directors. Stock option grants generally become exercisable in either three or five equal annual installments beginning one year from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Restricted stock awards generally become vested in five to seven equal annual installments beginning one to three years from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Performance stock units generally vest over a period of three to four years from the date of grant dependent on the Company's achievement of performance-based tests and subject, in general, to the executive remaining in the Company's service on specified vesting dates.
The Company generally issues new shares for stock option exercises, restricted stock awards and vesting of performance stock units. No grants have been made to date under the 2018 Plan, which expires in May 2028. The 2012 Plan expires in May 2022.
As described in further detail below, in fiscal 2019, the Company granted stock-based awards to the Company's new President and Chief Executive Officer as an inducement material to his commencement of employment and entry into an employment agreement with the Company. The inducement awards were made in accordance with Nasdaq Listing Rule 5635(c)(4) and were not made under the 2012 Plan or the 2018 Plan.
Stock Options
Stock option grants are issued at fair market value on the date of grant and generally become exercisable in either three or five equal annual installments beginning one year from the date of grant, subject, in general, to the recipient remaining in the Company’s service on specified vesting dates. Option grants expire eight years after the date of grant. All option grants are nonqualified. As of February 29, 2020, there was no unrecognized compensation expense related to the unvested portion of the Company’s stock options.
The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Black-Scholes Valuation Assumptions (1)
|
|
February 29, 2020
|
|
March 2, 2019
|
|
March 3, 2018
|
|
Weighted Average Expected Life (in years) (2)
|
|
7.6
|
|
|
6.7
|
|
|
6.7
|
|
|
Weighted Average Expected Volatility (3)
|
|
39.41
|
%
|
|
34.96
|
%
|
|
26.49
|
%
|
|
Weighted Average Risk Free Interest Rates (4)
|
|
2.39
|
%
|
|
2.92
|
%
|
|
2.17
|
%
|
|
Expected Dividend Yield (5)
|
|
4.34
|
%
|
|
3.80
|
%
|
|
1.60
|
%
|
(1) Forfeitures are estimated based on historical experience.
(2) The expected life of stock options is estimated based on historical experience.
(3) Expected volatility is based on the average of historical and implied volatility. The historical volatility is determined by observing actual prices of the Company’s stock over a period commensurate with the expected life of the awards. The implied volatility represents the implied volatility of the Company’s call options, which are actively traded on multiple exchanges, had remaining maturities in excess of twelve months, had market prices close to the exercise prices of the employee stock options and were measured on the stock option grant date.
(4) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
(5) Expected dividend yield is estimated based on anticipated dividend payouts.
Changes in the Company’s stock options for the fiscal year ended February 29, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
|
|
Options outstanding, beginning of period
|
|
4,395
|
|
|
$
|
47.53
|
|
|
Granted
|
|
144
|
|
|
15.68
|
|
|
Exercised
|
|
(139
|
)
|
|
16.85
|
|
|
Forfeited or expired
|
|
(3,577
|
)
|
|
49.13
|
|
|
Options outstanding, end of period
|
|
823
|
|
|
40.19
|
|
|
Options exercisable, end of period
|
|
823
|
|
|
$
|
40.19
|
|
The weighted average fair value for the stock options granted in fiscal 2019, 2018, and 2017 was $4.18, $4.31, and $9.50, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding and exercisable as of February 29, 2020 was 0.8 years and the aggregate intrinsic value was $0. The total intrinsic value for stock options exercised during fiscal 2019 and 2017 was $0.1 million and $3.9 million, respectively. No stock options were exercised during fiscal 2018.
Restricted Stock
Restricted stock awards are issued and measured at fair market value on the date of grant and generally become vested in five to seven equal annual installments beginning one to three years from the date of grant, subject, in general, to the recipient remaining in the Company’s service on specified vesting dates. Vesting of restricted stock is based solely on time vesting. As of February 29, 2020, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock awards was $55.4 million, which is expected to be recognized over a weighted average period of 3.6 years.
Changes in the Company’s restricted stock for the fiscal year ended February 29, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Restricted Shares
|
|
Weighted Average Grant-Date Fair
Value
|
|
Unvested restricted stock, beginning of period
|
|
3,747
|
|
|
$
|
41.73
|
|
|
Granted
|
|
896
|
|
|
13.51
|
|
|
Vested
|
|
(1,093
|
)
|
|
38.57
|
|
|
Forfeited
|
|
(1,105
|
)
|
|
35.76
|
|
|
Unvested restricted stock, end of period
|
|
2,445
|
|
|
$
|
35.50
|
|
Performance Stock Units ("PSUs")
PSUs are issued and measured at fair market value on the date of grant. Vesting of PSUs awarded to certain of the Company’s executives is dependent on the Company’s achievement of a performance-based test during a one-year period from the date of grant and during a three-year period from the date of grant and, assuming achievement of the performance-based test, time vesting over periods of up to four years, subject, in general, to the executive remaining in the Company’s service on specified vesting dates. For PSUs granted in fiscal 2019, performance during the one-year period is based on Earnings Before Interest and Taxes (“EBIT”) relative to a target amount and performance during the three-year period is based on a combination of total shareholder return relative to a peer group of the Company and cumulative EBIT relative to a target amount. The achievement of PSU awards range from a floor of zero to a cap of 150% of target achievement. For awards granted in fiscal 2018 and prior, performance during the three-year period were based on Return on Invested Capital ("ROIC") or a combination of EBIT margin and ROIC relative to a peer group. PSUs are converted into shares of common stock upon payment following vesting. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on the Company's estimate of the percentage of the award that will be achieved. The Company evaluates the estimate on these awards on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. As of February 29, 2020, unrecognized compensation expense related to the unvested portion of the Company’s performance stock units was $1.1 million, which is expected to be recognized over a weighted average period of 1.8 years.
Changes in the Company’s PSUs for the fiscal year ended February 29, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Performance Stock Units
|
|
Weighted Average Grant-Date Fair
Value
|
|
Unvested performance stock units, beginning of period
|
|
2,082
|
|
|
$
|
27.16
|
|
|
Granted
|
|
821
|
|
|
11.02
|
|
|
Vested
|
|
(580
|
)
|
|
35.50
|
|
|
Forfeited
|
|
(909
|
)
|
|
15.96
|
|
|
Unvested performance stock units, end of period
|
|
1,414
|
|
|
$
|
21.57
|
|
Inducement Awards
On November 4, 2019, in connection with the appointment of the Company's new President and Chief Executive Officer, the Company granted stock-based awards as an inducement material to his commencement of employment and entry into an employment agreement with the Company. These inducement awards were approved by the Compensation Committee of the Board of Directors of the Company and did not require shareholder approval in accordance with Nasdaq Listing Rule 5635(c)(4). The following inducement awards were granted:
|
|
|
|
•
|
Time-vesting restricted stock units ("RSUs") consisting of the following:
|
|
|
|
|
◦
|
39,105 RSUs, which will vest on November 4, 2020, subject, in general, to the new President and CEO remaining in the Company's service through the vesting date;
|
|
|
|
|
◦
|
539,648 RSUs, which will vest on the following schedule (i) 273,734 RSUs will vest on March 31, 2020, (ii) 132,957 RSUs will vest on September 30, 2020, and (iii) 132,957 RSUs will vest on March 31, 2021, and in each case subject, in general, to the new President and CEO remaining in the Company's service through the vesting date,
|
|
|
|
|
•
|
273,735 PSUs, which will vest, if at all, on November 4, 2021, based on performance goals requiring the President and CEO to prepare and deliver to the Board of Directors key objectives and goals for the Company and the strategies and initiatives for the achievement of such objectives and goals, and the President and CEO's provision of updates to the Board of Directors regarding achievement of such goals and objectives, and subject, in general, to the new President and CEO remaining in the Company's service through the vesting date.
|
Other than with respect to the vesting schedule described above, these inducement awards are generally subject to substantially the same terms and conditions as awards that are made under the 2018 Plan. RSUs are converted into shares of common stock upon payment following vesting. The weighted average fair value of these stock-based inducement awards was $13.65. As of February 29, 2020, unrecognized compensation expense related to the unvested portion of the inducement awards comprised of RSUs was $4.77 million, which is expected to be recognized over a weighted average period of 1.1 years and unrecognized compensation expense related to the unvested portion of the inducement awards comprised of PSUs was $3.13 million, which is expected to be recognized over a weighted average period of 1.7 years. Pursuant to the terms of his employment agreement, the President and CEO must hold at least forty percent (40%) of the after-tax shares of common stock he receives pursuant to the inducement awards until he has satisfied the terms of the Company’s stock ownership guidelines.
|
|
|
|
15.
|
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2019 QUARTER ENDED
|
FISCAL 2018 QUARTER ENDED
|
|
(in thousands, except per share data)
|
June 1, 2019
|
August 31, 2019
|
November 30, 2019
|
February 29, 2020
|
June 2, 2018
|
September 1, 2018
|
December 1, 2018
|
March 2, 2019
|
|
Net sales
|
$
|
2,572,989
|
|
$
|
2,719,447
|
|
$
|
2,759,322
|
|
$
|
3,106,822
|
|
$
|
2,753,667
|
|
$
|
2,935,018
|
|
$
|
3,032,231
|
|
$
|
3,307,881
|
|
|
Gross profit
|
887,179
|
|
726,988
|
|
913,837
|
|
1,013,656
|
|
964,848
|
|
988,561
|
|
1,003,710
|
|
1,146,861
|
|
|
Operating profit (loss)
|
(406,842
|
)
|
(182,258
|
)
|
(29,758
|
)
|
(81,206
|
)
|
81,229
|
|
78,858
|
|
49,513
|
|
(296,735
|
)
|
|
Earnings (loss) before provision for income taxes
|
(422,740
|
)
|
(198,600
|
)
|
(46,937
|
)
|
(96,576
|
)
|
64,497
|
|
64,247
|
|
26,822
|
|
(312,175
|
)
|
|
Provision (benefit) for income taxes
|
(51,655
|
)
|
(59,835
|
)
|
(8,385
|
)
|
(31,162
|
)
|
20,921
|
|
15,608
|
|
2,468
|
|
(58,382
|
)
|
|
Net earnings (loss)
|
$
|
(371,085
|
)
|
$
|
(138,765
|
)
|
$
|
(38,552
|
)
|
$
|
(65,414
|
)
|
$
|
43,576
|
|
$
|
48,639
|
|
$
|
24,354
|
|
$
|
(253,793
|
)
|
|
EPS-Basic (1)
|
$
|
(2.91
|
)
|
$
|
(1.12
|
)
|
$
|
(0.31
|
)
|
$
|
0.53
|
|
$
|
0.32
|
|
$
|
0.36
|
|
$
|
0.18
|
|
$
|
(1.92
|
)
|
|
EPS-Diluted (1)
|
$
|
(2.91
|
)
|
$
|
(1.12
|
)
|
$
|
(0.31
|
)
|
$
|
0.53
|
|
$
|
0.32
|
|
$
|
0.36
|
|
$
|
0.18
|
|
$
|
(1.92
|
)
|
|
Dividends declared per share
|
$
|
0.170
|
|
$
|
0.170
|
|
$
|
0.170
|
|
$
|
0.170
|
|
$
|
0.160
|
|
$
|
0.160
|
|
$
|
0.160
|
|
$
|
0.160
|
|
(1) Net earnings per share ("EPS") amounts for each quarter are required to be computed independently and may not equal the amount computed for the total year.
On February 14, 2020, the Company entered into a definitive agreement to sell its PersonalizationMall.com business to 1-800-FLOWERS.COM, Inc. for $252 million, subject to certain working capital and other adjustments. The buyer was required to close the transaction on March 30, 2020, but failed to do so. Accordingly, the Company has filed an action to require the buyer to close the transaction.
On April 13, 2020, the Company completed the sale of One Kings Lane (“OKL”). Proceeds from the sale were not material.
As of February 29, 2020, certain assets and liabilities related to PMall and OKL, were classified as held for sale on the Company’s consolidated balance sheet. The Company expects to complete the sale of these disposal groups within the next 12 months. The businesses classified as held for sale are classified in continuing operations as the dispositions do not represent a strategic shift that will have a major effect on the Company’s operations and financial results.
17. SUBSEQUENT EVENTS
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The consequences of the outbreak and impact to the economy continues to evolve and the full extent of the impact is uncertain as of the date of this filing. To date, the outbreak has already brought a material disruption on the operations of the Company. As a result of the COVID-19 pandemic, in March 2020, the Company began to temporarily close certain store locations that did not have a health and personal care department and as of March 23, 2020, all retail banner stores across the US and Canada have been temporarily closed except for stand-alone BABY and Harmon store locations, subject to state and local regulations.
Further, following the end of fiscal 2019, the Company increased outstanding letters of credit in the amount of $8.5 million and elected to draw down the remaining $236 million of available funds under the Revolver as defined above. The proceeds are available to be used for working capital, general corporate or other purposes, and subject to compliance with financial covenants.
The Company is also implementing other measures to help mitigate impact of the COVID-19 pandemic, including: (i) prioritizing spending in essential capital expenditures to drive strategic growth plans, including investments in digital and Buy Online Pick Up In Store; (ii) deferring other planned capital expenditures; (iii) postponing its plans for share repurchases and suspending dividends and planned debt reductions; and (iv) among other things, renegotiating payment terms for goods, services and rent, managing to lower inventory levels, and reducing discretionary spend such as business travel, advertising and expense associated with the maintenance of stores that are temporarily closed. Similar to other retailers, the Company has also withheld portions of and/or delayed payments to certain of its business partners as the Company seeks to renegotiate payment terms, in order to further maintain liquidity given the temporary store closures. There can be no assurance that the Company will be able to successfully renegotiate payment terms with such business partners, and the ultimate outcome of these activities including the responses of business partners are not yet known. The COVID-19 pandemic could materially impact the Company’s financial position, results of operations and cash flows in fiscal 2020. Given the uncertainty regarding the spread of this virus and the timing of the economic recovery, the related financial impact cannot be reasonably predicted or estimated at this time. In addition, the Company began store closures during the
first quarter of fiscal 2020, and the majority of its stores are now closed. To the extent store closures persist for an extended period of time, the Company's liquidity would be negatively impacted.