Notes to Consolidated Financial Statements
(unaudited)
The accompanying consolidated financial statements have been prepared without audit. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals and elimination of intercompany balances and transactions) necessary to present fairly the financial position of Bed Bath & Beyond Inc. and subsidiaries (the "Company") as of May 30, 2020 and February 29, 2020 and the results of its operations, shareholders' equity, comprehensive loss and cash flows for the three months ended May 30, 2020 and June 1, 2019.
The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-Q and consequently do not include all of the disclosures normally required by U.S. generally accepted accounting principles ("GAAP"). Reference should be made to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2020 for additional disclosures, including a summary of the Company’s significant accounting policies, and to subsequently filed Form 8-Ks.
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 GAAP and therefore is not a reportable segment. Net sales outside of the U.S. for the Company were not material for the three months ended May 30, 2020 and June 1, 2019. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.
2) Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. That same month, as a result of the COVID-19 pandemic, 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 were temporarily closed except for most stand-alone buybuy BABY and Harmon store locations, subject to state and local regulations. On May 8, 2020, the Company announced a phased approach to fully re-open a number of stores, subject to state and local regulations, and on May 22, 2020 the Company announced its plan to re-open additional stores as part of the phased approach to re-opening stores across North America, subject to state and local regulations. As of May 30, 2020, the majority of the Company’s stores remained temporarily closed. The Company expects nearly all stores to re-open during July 2020, subject to state and local regulations. In addition, the Company expects to expand its recently rolled out Buy-Online-Pick-Up-In-Store (“BOPIS”) and contactless Curbside Pickup services to cover the vast majority of stores.
The consequences of the pandemic and impact to the economy continue to evolve and the full extent of the impact is uncertain as of the date of this filing. To date, the pandemic has materially disrupted the operations of the Company and has resulted in the recording of additional non-cash impairment charges. The Company has proactively taken steps to strengthen its financial position and liquidity. including, among other things: (i) renegotiating payment terms for goods, services and rent, managing to lower inventory levels, and reducing discretionary spending such as business travel, advertising and expenses associated with the maintenance of stores that are temporarily closed; (ii) deferring other previously planned capital expenditures; (iii) postponing its plans for share repurchases and suspending dividends and planned debt reductions; and (iv) prioritizing spending on essential capital expenditures to drive strategic growth plans, including investments in digital, BOPIS and contactless Curbside Pickup services.
There can be no assurance that the Company will be able to successfully renegotiate payment terms with its business partners, and the ultimate outcomes of these activities, including the responses of business partners, are not yet known. The COVID-19 pandemic has materially impacted the Company’s results of operations and cash flows for its first quarter of fiscal 2020, and it could continue to impact results of operations and cash flows, as well as the Company’s financial condition. Given the uncertainty regarding the spread of this virus and the timing of the economic recovery, the ultimate financial impact cannot be reasonably predicted or estimated at this time.
Further, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in the United States. The CARES Act is an emergency economic aid package to help mitigate the impact of the COVID-19 pandemic. Among other things, the CARES Act provides certain changes to tax laws, which may impact the Company’s results of operations, financial position and cash flows. The Company is currently implementing certain provisions of the CARES Act, such as deferring employer payroll taxes and utilizing the ability to carry back and deduct losses to offset prior income in previously filed tax returns.
As of May 30, 2020, the Company has deferred $5.9 million of employer payroll taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. During the three months ended May 30, 2020, the Company recorded an additional $43.0 million benefit as a result of the fiscal 2019 net operating losses that can now be carried back to prior years during which the federal tax rate was 35% under the CARES Act. In addition, the Company recorded a credit of $22.9 million as an offset to selling, general and administrative expenses as a result of the employee retention credits made available under the CARES Act for US employees and under the Canada Emergency Wage Subsidy for Canadian employees during the three months ended May 30, 2020.
3) Revenue Recognition
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. For the three months ended May 30, 2020, the Company recognized net sales for gift card and merchandise credit redemptions of approximately $32.1 million, which were included in merchandise credit and gift card liabilities on the consolidated balance sheet as of February 29, 2020.
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 the returns activity, the liability for estimated returns and the corresponding right of return asset will be adjusted accordingly. As of May 30, 2020 and February 29, 2020, the Company recorded a liability for estimated returns of $91.2 million and $71.6 million, respectively within accrued expenses and other current liabilities and the corresponding right of return asset for merchandise of $63.0 million and $42.5 million, respectively, within prepaid expenses and other current assets.
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 30.6% and 69.4% of net sales, respectively, for the three months ended May 30, 2020, and approximately 35.6% and 64.4% of net sales, respectively, for the three months ended June 1, 2019.
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:
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•
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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.
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•
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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.
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•
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Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
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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 6).
Fair Value of Financial Instruments
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. The fair value of the Company’s long term debt is approximately $832.9 million as of May 30, 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.
5) Cash and Cash Equivalents
Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $44.4 million and $79.7 million as of May 30, 2020 and February 29, 2020, respectively.
6) Investment Securities
The Company’s investment securities as of May 30, 2020 and February 29, 2020 are as follows:
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(in millions)
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May 30, 2020
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February 29, 2020
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Available-for-sale securities:
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Long term
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$
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19.8
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$
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20.3
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Held-to-maturity securities:
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Short term
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29.5
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385.6
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Total investment securities
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$
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49.3
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$
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405.9
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Auction Rate Securities
As of May 30, 2020 and February 29, 2020, 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 $447,000 and $5,000, 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 May 30, 2020 and February 29, 2020, the Company’s short term held-to-maturity securities included approximately $29.5 million and $385.6 million of U.S. Treasury Bills with remaining maturities of less than one year, respectively. 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).
7) Impairment of Long-Lived Assets
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 asset. 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. For the three months ended May 30, 2020, the Company recorded $80.4 million of 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. There were no impairments to long-lived assets in the three months ended June 1, 2019. 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.
8) Property and Equipment
As of May 30, 2020 and February 29, 2020, included in property and equipment, net is accumulated depreciation of approximately $2.1 billion and $2.0 billion, respectively.
9) Leases
The Company leases retail stores, 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 for the three months ended May 30, 2020 and June 1, 2019), 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.
Similar to other retailers, during the three months ended May 30, 2020, the Company has withheld portions of and/or delayed payments to certain of its landlords as the Company seeks to renegotiate payment terms, in order to further maintain liquidity given the temporary store closures. In some instances, the renegotiations have led to agreements with landlords for rent abatements or rental deferrals. Total payments withheld and/or delayed or deferred as of May 30, 2020 were approximately $83.4 million and are included in current lease liabilities. Additional negotiations of payment terms are still in process.
In accordance with the Financial Accounting Standards Board’s recent Staff Q&A regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has elected to account for the concessions agreed to by landlords that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee as though enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected to not remeasure the related lease liabilities and right-of-use assets. For qualifying rent abatement concessions, the Company has recorded negative lease expense for the amount of the concession during the period of relief, and for qualifying deferrals of rental payments, the Company has recognized a non-interest bearing payable in lieu of recognizing a decrease in cash for the lease payment that would have been made based on the original terms of the lease agreement, which will be reduced when the deferred payment is made in the future. During the three months ended May 30, 2020, the Company did not recognize a material amount of negative lease expense related to rent abatement concessions.
The components of total lease cost for the three months ended May 30, 2020, were as follows.
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(in thousands)
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Statement of Operations Location
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Three Months Ended May 30, 2020
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Three Months Ended June 1, 2019
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Operating lease cost
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Cost of sales and SG&A
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$
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148,383
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$
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143,900
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Finance lease cost:
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Depreciation of property
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SG&A
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648
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648
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Interest on lease liabilities
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Interest expense, net
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2,233
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2,222
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Variable lease cost
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Cost of sales and SG&A
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50,458
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47,895
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Sublease income
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SG&A
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(278
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)
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(278
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)
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Total lease cost
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$
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201,444
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$
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194,387
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As of May 30, 2020, assets and liabilities related to the Company’s operating and finance leases are as follows:
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(in thousands)
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Consolidated Balance Sheet Location
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May 30, 2020
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February 29, 2020
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Assets
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Operating leases
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Operating lease assets
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$
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1,903,380
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2,006,966
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Finance leases
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Property and equipment, net
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68,639
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69,287
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Total lease assets
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$
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1,972,019
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2,076,253
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Liabilities
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Current:
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Operating leases
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Current operating lease liabilities
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$
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545,547
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463,005
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Finance leases
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Accrued expenses and other current liabilities
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2,418
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1,541
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Noncurrent:
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Operating leases
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Operating lease liabilities
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1,792,187
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1,818,783
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Finance leases
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Other liabilities
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102,041
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102,412
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Total lease liabilities
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$
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2,442,193
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2,385,741
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As of May 30, 2020, the Company’s lease liabilities mature as follows:
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(in thousands)
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Operating Leases
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Finance Leases
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Fiscal Year:
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Remainder of 2020
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$
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534,959
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$
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7,954
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2021
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527,508
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10,434
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2022
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434,859
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10,407
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2023
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344,536
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10,524
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2024
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270,139
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10,702
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2025
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195,533
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10,503
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Thereafter
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581,665
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238,378
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Total lease payments
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$
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2,889,199
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$
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298,902
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Less imputed interest
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(551,465
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)
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(194,443
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)
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Present value of lease liabilities
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$
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2,337,734
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$
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104,459
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At May 30, 2020, the Company has entered into leases that have not commenced at 7 new or relocated locations planned for opening in fiscal 2020, for which aggregate minimum rental payments over the term of the leases were approximately $35.0 million.
The Company’s lease terms and discount rates were as follows:
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May 30, 2020
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February 29, 2020
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Weighted-average remaining lease term (in years)
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Operating leases
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6.6
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6.6
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Finance leases
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25.5
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25.7
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Weighted-average discount rate
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Operating leases
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6.5
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%
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6.2
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%
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Finance leases
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9.0
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%
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9.0
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%
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Other information with respect to the Company’s leases is as follows:
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(in thousands)
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Three Months Ended May 30, 2020
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Three Months Ended June 1, 2019
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Cash paid for amounts included in the measurement of lease liabilities
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Operating cash flows from operating leases
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$
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140,977
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166,514
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Operating cash flows from finance leases
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2,515
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2,580
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Operating lease assets obtained in exchange for new operating lease liabilities
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76,462
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109,647
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10) Goodwill and Other Indefinite Lived Intangible Assets
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 and terminal 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. In the three months ended June 1, 2019, the Company recognized a non-cash pre-tax goodwill impairment charge of $391.1 million for its North American Retail reporting unit and as of June 1, 2019, the Company did not have any goodwill recorded on its consolidated balance sheet.
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. As of May 30, 2020 and June 1, 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 a non-cash pre-tax tradename impairment charge of $5.5 million and $10.2 million, respectively, within goodwill and other impairments in the consolidated statement of operations, for certain tradenames. As of May 30, 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 May 30, 2020 and February 29, 2020, respectively, are $85.7 million and $91.2 million for indefinite lived tradenames and trademarks.
11) 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, $300 million aggregate principal amount of 4.915% senior unsecured notes due August 1, 2034 and $900 million aggregate principal amount of 5.165% senior unsecured notes due August 1, 2044 (collectively, 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 approximately $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 May 30, 2020.
Revolving Credit Agreement
On November 14, 2017, the Company replaced its existing $250 million five year senior unsecured revolving credit facility with various lenders with a new $250 million five year senior unsecured revolving credit facility ("Revolver") with various lenders maturing November 14, 2022. The Revolver had essentially the same terms and requirements as the prior revolving credit facility. During the three months ended May 30, 2020, the Company drew down the remaining $236.4 million of available funds under the Revolver, after giving effect to outstanding letters of credit. Subsequent to May 30, 2020, on June 19, 2020, the Revolver was replaced with a secured asset-based revolving credit facility (See “Subsequent Events,” Note 19).
Deferred financing costs associated with the Notes and the Revolver 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 Statements of Earnings. Interest expense related to the Notes and the Revolver, including the commitment fee and the amortization of deferred financing costs, was approximately $18.2 million for both the three months ended May 30, 2020 and June 1, 2019.
Lines of Credit
At May 30, 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 the first three months of fiscal 2020, the Company did not have any direct borrowings under the uncommitted lines of credit. Subsequent to May 30, 2020, both lines of credit were canceled as a result of the secured asset-based revolving credit facility (See “Subsequent Events,” Note 19).
12) Shareholders' Equity
The Company has authorization to make repurchases of shares of the Company’s common stock 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 up to $11.950 billion of the Company’s shares of common stock. The Company also acquires shares of its common stock to cover employee related taxes withheld on vested restricted stock, restricted stock units and performance stock unit awards. In the first three months of fiscal 2020, the Company repurchased approximately 0.5 million shares of its common stock, all of which related to taxes withheld on vested awards, for a total cost of approximately $2.5 million, bringing the aggregate total of common stock repurchased to approximately 217.6 million shares for a total cost of approximately $10.7 billion since the initial authorization in December 2004. The Company has approximately $1.2 billion remaining of authorized share repurchases as of May 30, 2020. The Company reviews its alternatives with respect to its capital structure on an ongoing basis. The Company has postponed its plans for share repurchases as a result of the COVID-19 pandemic. Any future share repurchases will be subject to the determination of the Board of Directors, based on an evaluation of the Company’s earnings, financial condition and requirements, business conditions and other factors, including the restrictions on share repurchases under the secured asset-based revolving credit facility (see “Subsequent Events,” Note 19).
During fiscal 2016, the Company’s Board of Directors authorized a quarterly dividend program. During the three months ended May 30, 2020 and June 1, 2019, total cash dividends of $21.2 million and $21.9 million were paid, respectively. In March 2020, the Company suspended its future quarterly declarations of cash dividends as a result of the COVID-19 pandemic. Any future quarterly cash dividend payments on its common stock will be 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, including the restrictions on the payment of dividends contained in the asset-based revolving credit facility agreement (See “Subsequent Events,” Note 19).
Cash dividends, if any, are accrued as a liability on the Company’s consolidated balance sheets and recorded as a decrease to retained earnings when declared.
13) Stock-Based Compensation
The Company measures all stock-based compensation awards for employees and non-employee directors 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, restricted stock units and performance stock units. The Company’s restricted stock awards are considered nonvested share awards.
Stock-based compensation expense for the three months ended May 30, 2020 was approximately $7.7 million ($4.9 million after tax or $0.04 per diluted share). Stock-based compensation expense for the three months ended June 1, 2019 was approximately $19.3 million ($17.0 million after tax or $0.13 per diluted share). In addition, the amount of stock-based compensation cost capitalized for the three months ended May 30, 2020 and June 1, 2019 was approximately $0.2 million and $0.3 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. Restricted stock units generally become vested in one to three 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. 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 restricted stock units and 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 2020 and 2019, the Company granted stock-based awards to certain of the Company’s new executive officers as inducements material to their 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 were issued at fair market value on the date of grant and generally became 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 expired eight years after the date of grant. All option grants were nonqualified. During the three months ended May 30, 2020, the remaining 822,633 options outstanding were forfeited and there were no options outstanding as of May 30, 2020.
Restricted Stock Awards
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 awards is based solely on time vesting. As of May 30, 2020, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock awards was $49.3 million, which is expected to be recognized over a weighted average period of 3.4 years.
Changes in the Company’s restricted stock awards for the three months ended May 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Restricted
Shares
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Unvested restricted stock awards, beginning of period
|
|
2,445
|
|
|
$
|
35.50
|
|
|
Granted
|
|
1
|
|
|
8.80
|
|
|
Vested
|
|
(406
|
)
|
|
44.45
|
|
|
Forfeited
|
|
(109
|
)
|
|
32.16
|
|
|
Unvested restricted stock awards, end of period
|
|
1,931
|
|
|
$
|
33.79
|
|
Restricted Stock Units ("RSUs")
RSUs are issued and measured at fair market value on the date of grant and generally become vested in one to three 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. RSUs are converted into shares of common stock upon vesting. During the three months ended May 30, 2020, the Company granted 194,509 of RSUs with a weighted average grant-date fair value of $7.78. As of May 30, 2020, unrecognized compensation expense related to the unvested portion of the Company’s RSUs was $1.4 million, which is expected to be recognized over a weighted average period of 2.0 years.
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 was 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 May 30, 2020, there was no unrecognized compensation expense associated with these awards.
Changes in the Company’s PSUs for the three months ended May 30, 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
|
|
1,414
|
|
|
$
|
21.57
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
Vested
|
|
(343
|
)
|
|
37.50
|
|
|
Forfeited or performance condition adjustments
|
|
(249
|
)
|
|
17.96
|
|
|
Unvested performance stock units, end of period
|
|
822
|
|
|
$
|
16.02
|
|
Inducement Awards
In fiscal 2020 and 2019, the Company granted stock-based awards to certain of the Company’s new executive officers as inducements material to their 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).
RSUs granted as inducement awards are issued and measured at fair market value on the date of grant and generally become vested in one to three 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. Changes in the RSUs granted as inducement awards for the three months ended May 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of Restricted
Stock Units
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Unvested restricted stock units, beginning of period
|
|
579
|
|
|
$
|
13.65
|
|
|
Granted
|
|
816
|
|
|
6.33
|
|
|
Vested
|
|
(274
|
)
|
|
13.65
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
Unvested restricted stock units, end of period
|
|
1,121
|
|
|
$
|
8.32
|
|
On November 4, 2019, in connection with the appointment of the Company’s new President and Chief Executive Officer, the Company granted inducement awards consisting of 578,753 RSUs, which are included in the table above, and 273,735 PSU awards. The PSUs 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 and PSUs are converted into shares of common stock upon payment following vesting. As of May 30, 2020, unrecognized compensation expense related to the unvested portion of the inducement awards comprised of RSUs was $8.4 million, which is expected to be recognized over a weighted average period of 2.1 years, and unrecognized compensation expense related to the unvested portion of the inducement awards comprised of PSUs was $2.7 million, which is expected to be recognized over a weighted average period of 1.4 years. Each inducement award recipient must hold at least fifty percent (50%) of the after-tax shares of common stock received pursuant to the inducement awards until they have satisfied the terms of the Company’s stock ownership guidelines.
14) Earnings per Share
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been 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 2.2 million and 7.7 million were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for the three months ended May 30, 2020 and June 1, 2019, respectively.
15) Supplemental Cash Flow Information
The Company paid income taxes of approximately $0.4 million and $3.8 million in the first three months of fiscal 2020 and 2019, respectively. In addition, the Company had interest payments of approximately $2.3 million and $2.2 million in the first three months of fiscal 2020 and 2019, respectively.
The Company recorded an accrual for capital expenditures of $25.4 million and $35.8 million as of May 30, 2020 and June 1, 2019, respectively. In addition, the Company recorded an accrual for dividends payable of $5.2 million and $28.0 million as of May 30, 2020 and June 1, 2019, respectively.
16) 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 May 30, 2020 and February 29, 2020, the accrual for the pre-tax restructuring charges was approximately $47.7 million and $73.4 million, respectively, reflecting payments of $25.7 million during the three months ended May 30, 2020.
17) Divestitures and Assets Held-For-Sale
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 May 30, 2020, certain assets and liabilities related to PMall were classified as held-for-sale on the Company’s consolidated balance sheet. The Company expects to complete the sale of this disposal group within the next 12 months. The business classified as held-for-sale was classified in continuing operations as the disposition does not represent a strategic shift that will have a major effect on the Company’s operations and financial results.
18) 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 (the Company’s former Chief Financial Officer and Treasurer)) 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. A similar putative securities class action, asserting the same claims on behalf of the same putative class against the same defendants, was filed on April 30, 2020. That case, captioned Kirkland v. Bed Bath & Beyond Inc., et al., Case No. 1:20-cv-05339-MCA-MAH, is also pending in the United States District Court for the District of New Jersey.
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. During the three months ended May 30, 2020, 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 has executed a Stipulated Judgment to this effect and expects it to be executed by the District Attorneys and filed with the court in the near term. As of May 30, 2020 and February 29, 2020, 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 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 was 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.
During fiscal 2019, the Company 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 $36.8 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.
19) Subsequent Events
Asset-Based Credit Agreement
On June 19, 2020, the Company entered into a secured asset-based credit agreement (the “Credit Agreement”) among the Company, certain of the Company’s US and Canadian subsidiaries party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the “Agent”), and the lenders party thereto. A portion of the proceeds advanced under the Credit Agreement were used to refinance the Company’s existing Revolver.
The Credit Agreement provides for a secured asset-based revolving credit facility (the “ABL Facility”) with aggregate revolving commitments established at closing of $850 million, including a swingline subfacility and a letter of credit subfacility. The Credit Agreement has an uncommitted expansion feature which allows the borrowers to request, at any time following the delivery of an initial field exam and appraisal, an increase in aggregate revolving commitments under the ABL Facility or elect to enter into a first-in-last-out loan facility, collectively, in an aggregate amount of up to $375 million, subject to certain customary conditions. The Credit Agreement matures on June 19, 2023.
The ABL Facility is secured on a first priority basis (subject to customary exceptions) on all accounts receivable (including credit card receivables), inventory, certain deposit accounts and securities accounts, and certain related assets, of the Company and its subsidiaries that are borrowers or guarantors under the ABL Facility. Amounts available to be drawn from time to time under the ABL Facility (including, in part, in the form of letters of credit) are equal to the lesser of (i) outstanding revolving commitments under the Credit Agreement and (ii) a borrowing base equal to the sum of (a) 70% of eligible credit card receivables (which will increase automatically to 90% upon the satisfaction of certain conditions, including the delivery of an initial field exam and appraisal), plus (b) 70% of eligible inventory (which will increase automatically to 90% upon the satisfaction of certain conditions, including the delivery of an initial field exam and appraisal), valued at the lower of cost or market value, determined on a weighted average cost basis, minus (c) customary reserves. The borrowing base will reduce automatically to zero if the delivery of an initial field exam and appraisal does not occur on or prior to the later of (x) 90 days after the effective date of the Credit Agreement (which date may be extended by the Agent up to an additional 90 days, subject to certain conditions set forth in the Credit Agreement) and (y) 30 days after the date on which at least 80% of the stores, in the aggregate, of the Company and its subsidiaries that are loan parties under the Credit Agreement that are located in the United States and Canada, which are currently closed due to government restrictions in place as a result of the COVID-19 pandemic, are permitted to open for operation under applicable laws.
Subject to customary exceptions and restrictions, the Company may voluntarily repay outstanding amounts under the ABL Facility at any time without premium or penalty. Any voluntary prepayments made will not reduce commitments under the ABL Facility. If at any time the outstanding amount under the ABL Facility exceeds the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base, the Company will be required to prepay outstanding amounts or cash collateralize letter of credit obligations under the ABL Facility.
The Credit Agreement contains a mandatory prepayment provision which provides that if at any time (i) the aggregate amount of unrestricted cash and cash equivalents of the Company and its consolidated subsidiaries would exceed $100 million and (ii) the aggregate principal amount of all loans (other than incremental first-in-last-out loans borrowed under the expansion feature of the Credit Agreement) exceeds $600 million, then the borrowers must repay outstanding obligations under the Credit Agreement in an aggregate amount equal to the amount in excess of $600 million.
Outstanding amounts under the Credit Agreement bear interest at a rate per annum equal to, at the applicable borrower’s election: (i) in the case of loans denominated in US dollars, LIBOR or an alternate base rate and (ii) for loans denominated in Canadian dollars, CDOR or the Canadian prime rate, in each case as set forth in the Credit Agreement, plus an interest rate margin based on average quarterly availability ranging from (i) in the case of LIBOR loans and CDOR loans, 2.25% to 2.75%; provided that if LIBOR or CDOR is less than 1.00%, such rate shall be deemed to be 1.00%, as applicable, and (ii) in the case of alternate base rate loans and Canadian prime rate loans, 1.25% to 1.75%; provided that if the alternate base rate or Canadian prime rate is less than 2.00%, such rate shall be deemed to be 2.00%, as applicable.
The Credit Agreement contains customary representations and warranties, events of default and financial, affirmative and negative covenants for facilities of this type, including but not limited to a springing financial covenant relating to a fixed charge coverage ratio, which will become effective if availability under the ABL Facility falls below a specified threshold, and restrictions on indebtedness, liens, investments and acquisitions, asset dispositions, restricted payments (including dividends and share repurchases) and prepayment of certain indebtedness.
Real Estate Optimization Program
As part of the Company's ongoing business transformation, on July 6, 2020, the Board of Directors of the Company approved the planned closure of approximately 200 mostly Bed Bath & Beyond stores over the next two years as part of the Company's real estate optimization program. At this initial stage of the program, a reasonable estimate of the amount or range of amounts expected to be incurred in connection with these restructuring activities, both with respect to each major type of cost associated therewith and with respect to the total cost or estimated range of total cost, or an estimate of the amount or range of amounts that will result in future cash expenditures, cannot be made at this time.