UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 3, 20071, 2008
Commission File Number0-20214
BED BATH & BEYOND INC.
(Exact name of registrant as specified in its charter)
New York |
| 11-2250488 |
(State of incorporation) | | (IRS Employer Identification No.) |
650 Liberty Avenue, Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 908/688-0888
Securities registered pursuant to Section 12(b) of the Act:
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650 Liberty Avenue, Union, New Jersey 07083
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(Address of principal executive offices) (Zip Code)
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Registrant’s telephone number, including area code: 908/688-0888
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Securities registered pursuant to Section 12(b) of the Act:
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| Name of each exchange on |
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| which registered |
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None | | None |
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Securities registered pursuant to Section 12(g) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock (par value $ 0.01 per share) |
(Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | | Accelerated filer x Accelerated filer o Non-accelerated filer o |
Non-accelerated filer o | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 26, 2006,September 1, 2007, the aggregate market value of the common stock held by non-affiliates (which was computed by reference to the closing price on such date of such stock on the NASDAQ National Market) was $8,785,134,704$8,587,093,469.*
The number of shares outstanding of the issuer’s common stock (par value $0.01 per share) at March 31, 2007: 277,125,199.29, 2008: 258,923,423.
Documents Incorporated by Reference
Portions of the Registrant’s definitive proxy statement for the 20072008 Annual Meeting of Shareholders pursuant to Regulation 14A are incorporated by reference in Part III hereof.
* For purposes of this calculation, all outstanding shares of common stock have been considered held by non-affiliates other than the 16,541,77916,925,965 shares beneficially owned by directors and executive officers, including in the case of the Co-Chairmen trusts and foundations affiliated with them. In making such calculation, the Registrant does not determine the affiliate or non-affiliate status of any shares for any other purpose.
PART I
Unless otherwise indicated, the term “Company” refers collectively to Bed Bath & Beyond Inc. and subsidiaries as of March 3, 2007.1, 2008. The Company’s fiscal year is comprised of the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2007 and fiscal 2005 represented 52 weeks and ended on March 1, 2008 and February 25, 2006, respectively. Fiscal 2006 represented 53 weeks and ended on March 3, 2007. Fiscal 2005 and 2004 represented 52 weeks and ended on February 25, 2006 and February 26, 2005, respectively. Unless otherwise indicated, all references herein to periods of time (e.g., quarters and years) are to fiscal periods.
ITEM 1 —- BUSINESS
Introduction
Bed Bath & Beyond Inc. and subsidiaries (the “Company”) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops (“CTS”), Harmon and Harmon Face Values (“Harmon”) and buybuy BABY.BABY (acquired on March 22, 2007). The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. The Company believes that it is the nation’s largest operator of stores selling predominantly domestics merchandise and home furnishings while offering a breadth and depth of selection in most of its product categories that exceeds what is generally available in department stores or other specialty retail stores.
History
The Company was founded in 1971 by Leonard Feinstein and Warren Eisenberg, the Co-Chairmen of the Company. Each has more than 4647 years of experience in the retail industry.
The Company commenced operations in 1971 with the opening of two stores, which primarily sold bed linens and bath accessories. In 1985, the Company introduced its first store carrying a full line of domestics merchandise and home furnishings. The Company began using the name “Bed Bath & Beyond” in 1987 in order to reflect the expanded product line offered by its stores and to distinguish its stores from conventional specialty retail stores offering only domestics merchandise or home furnishings. In March 2002, the Company acquired Harmon, a health and beauty care retailer, which operated 27 stores at the time located in Connecticut, New Jersey and New York. In June 2003, the Company acquired CTS, a retailer of giftware and household items, which operated 23 stores at the time located in Connecticut, Maine, Massachusetts, New Hampshire, New York and Rhode Island.
In March 2007, subsequent to the end of fiscal 2006, the Company acquired buybuy BABY, a privately held retailer of infant and toddler merchandise, which operates a total ofoperated 8 stores at the time located in Maryland, New Jersey, New York and Virginia. See “Acquisition of buybuy BABY” below for more information.In December 2007, the Company opened its first international BBB store in Ontario, Canada.
Operations
It is the Company’s goal to offer quality merchandise at everyday low prices; to maintain a wide assortment of merchandise; to present merchandise in a distinctive manner designed to maximize customer convenience and reinforce customer perception of wide selection; and to emphasize dedication to customer service and satisfaction.
Pricing. The Company believes in maintaining everyday low prices. The Company regularly monitors price levels at its competitors in order to ensure that its prices are in accordance with its pricing philosophy. The Company believes that the application of its everyday low price philosophy is an important factor in establishing its reputation among customers.
Merchandise Assortment. The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings includes categories such as kitchen and tabletop items, fine tabletop, basic
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housewares and general home furnishings. The Company encourages local store personnel to tailor the merchandise mix as appropriate to respond to changing trends and conditions. The factors taken into account in selecting the merchandise mix for a particular store include store size and configuration and local market conditions such as climate and demographics. The Company, on an ongoing basis, tests new merchandise categories and adjusts the categories of merchandise carried in its stores and may add new departments or adjust the size of existing departments as required. Additionally, the Company continues to integrate the merchandise assortments within its concepts. The Company believes that the process of adding new departments, integrating the Company’s merchandise within concepts, and expanding or reducing the size of various departments in response to changing conditions is an important part of its merchandising strategy.
Merchandise Presentation. BBB has developed a distinctive style of merchandise presentation. Primarily all of the BBB stores have groups of related product lines presented together in separate areas of each store, creating the appearance that the store is comprised of several individual specialty stores for different product lines. BBB believes that its format of merchandise presentation makes it easy for customers to locate products, reinforces customer perception of wide selection and communicates to customers that its stores offer a level of customer service generally associated with smaller specialty stores.
BBB believes that its extensive merchandise selection, rather than fixturing, should be the focus of customer attention and, accordingly, typicallyprimarily uses simple modular fixturing throughout its stores. This fixturing is primarily designed so that it can be easily reconfigured to adapt to changes in the store’s merchandise mix and presentation. BBB believes that its merchandise displays create an exciting and attractive shopping environment that encourages impulse purchases of additional items.
Advertising. In general, the Company relies on “word of mouth advertising” andadvertising,” its reputation for offering a wide assortment of quality merchandise at everyday low prices supplemented byand the use of paid advertising. The Company distributes full-color circulars and other advertising pieces as its primary vehicles of paid advertising.advertising via direct mail or inserts. Also, to support the opening of new stores, the Company primarily uses “grand opening” circulars and newspaper advertising.
Customer Service. The Company places a strong focus on customer service and seeks to make shopping at its stores as pleasant and convenient as possible. Most stores are open seven days (and six evenings) a week in order to enable customers to shop at times that are convenient for them. In addition, the Company’s websites, www.bedbathandbeyond.com, www.christmastreeshops.com, www.harmondiscount.com, www.facevalues.com and www.buybuybaby.com are available for customers to access 24 hours a day, seven days a week.
Suppliers
In fiscal 2006,2007, the Company purchased its merchandise from approximately 4,6005,800 suppliers. In fiscal 2006,2007, the Company’s largest supplier accounted for approximately 4%3% of the Company’s merchandise purchases and the Company’s 10 largest suppliers accounted for approximately 19% of such purchases. The Company purchases substantially all of its merchandise in the United States, the majority from domestic sources and the balance from importers. The Company purchases a small amount of its merchandise directly from overseas sources. The Company has no long-term contracts for the purchase of merchandise. The Company believes that most merchandise, other than brand name goods, is available from a variety of sources and that most brand name goods can be replaced with comparable merchandise.
Warehousing
The Company’s merchandise displays allow a substantial amount of merchandise to be displayed on the sales floor at all times. Merchandise not displayed on the sales floor is typically stored in warehouse space within the store. In addition, the Company maintains 13twelve supplemental storage locations as well as twothree central distribution centers. Merchandise is shipped directly to stores from vendors through a network of third party carriers, service providers and the central distribution centers.
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In addition, the Company maintains twothree E-Service fulfillment centers.
Employees
As of March 3, 2007,1, 2008, the Company employed over 35,000approximately 39,000 persons in full-time and part-time positions. The Company believes that its relations with its employees are very good and that the labor turnover rate among its management employees is lower than that generally experienced within the industry.
Seasonality
The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December, and generally lower in February and April.
Expansion Program
The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets, the expansion or relocation of existing stores and the continuous review of strategic acquisitions. In the fifteensixteen year period from the beginning of fiscal 1992 to the end of fiscal 2006,2007, the Company has grown from 34 stores to 888971 stores. The Company’s 888971 stores operate in 4849 states, the District of Columbia, and Puerto Rico and Canada, including: 815881 BBB stores operating in 4849 states, the District of Columbia, Puerto Rico and Puerto Rico; 34Canada; 41 CTS stores operating in 810 states; and 3940 Harmon stores operating in 3 states; and 9 buybuy BABY stores operating in 4 states. Total square footage grew from approximately 917,000 square feet at the beginning of fiscal 1992 to approximately 27.830.2 million square feet at the end of fiscal 2006.2007. During fiscal 2006,2007, the Company opened 7466 BBB stores, 67 CTS stores, and 1 Harmon store and closed 1 BBBbuybuy BABY store, and 1 CTS store,in addition to acquiring 8 buybuy BABY stores in March 2007, all of which resulted in the aggregate addition of approximately 2.32.4 million square feet of store space.
The Company intends to continue its expansion program and believes that the continued growth of the Company is dependent, in large part, on the success of this program. As part of its expansion program, the Company expects to open new stores and expand existing stores as opportunities arise. The Company alsoopened its first international store in Canada in December 2007 and is actively pursuing its expansion opportunities in Canada. In addition, the Company continues to actively explore other international expansion (including Canada).opportunities.
In determining where to open new stores, the Company evaluates a number of factors, including the availability of real estate, demographic information (such as data relating to income and education levels, age and occupation) and distribution. The Company has built its management structure with a view toward its expansion and believes that, as a result, it has the management depth necessary to support its anticipated expansion program.
Competition
The Company believes it is the preeminent retailer in its segment of the home goods industry, which is fragmented and highly competitive. In addition, the BBB stores compete with many different types of retail stores that sell many or most of the same products. Such competitors include: (i) department stores, which often carry many of the same product lines as the Company’s stores but do not typically have the same depth or breadth of product selection, (ii) specialty stores, which often have a depth of product selection but typically carry only a limited portion of the product lines carried by the Company’s stores, (iii) discount and mass merchandise stores and (iv) national chains. In addition, the Company’s stores compete, to a more limited extent, with factory outlet stores that typically offer limited quantities or limited lines of quality merchandise at discount prices.
The visibility of the Company has encouraged competitors to imitate its stores’ format and methods.
Other retail chains continue to introduce new store concepts that include many of the product lines carried by the Company’s stores. There can be no assurance that the operation of store competitors will not have a material effect on the Company.
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Tradenames and Service Marks
The Company uses the nationally recognized “Bed Bath & Beyond” name and logo and the “Beyond any store of its kind” tag line as service marks in connection with retail services. The Company has registered these marks and others, including names and logos of CTS, Harmon and buybuy BABY, with the United States Patent and Trademark Office. The Company also has registered or has applications pending with the trademark registries of several foreign countries.countries, including having registered the “Bed Bath & Beyond” name and logo and the “Beyond any store of its kind” tag line in Canada. Management believes that its name recognition and service marks are important elements of the Company’s merchandising strategy.
Acquisition of buybuy BABY
On March 22, 2007, subsequent to the end of fiscal 2006, the Company completed and announced the acquisition of buybuy BABY, a privately held retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. Based in Garden City, New York, buybuy BABY operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products.
buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Company’s Co-Chairmen. The acquisition was approved by a special committee of independent members of the Board of Directors of the Company. The special committee retained Merrill Lynch & Co. to serve as its independent financial advisor and render a fairness opinion in connection with the transaction, as well as Chadbourne & Parke LLP to serve as independent legal counsel to oversee the acquisition negotiations. The aforementioned repayment of approximately $19 million of debt results in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Company’s Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
The acquisition of buybuy BABY had no effect on the Company’s fiscal 2006 results since the transaction occurred during fiscal 2007. The Company believes the benefit of this acquisition will not have a material effect on the overall results or financial conditionof the Company for fiscal 2007.
Available Information
The Company makes available as soon as reasonably practicable after filing with the Securities and Exchange Commission (“SEC”), free of charge, through its website, www.bedbathandbeyond.com, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, electronically filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
ITEM 1A —– RISK FACTORS
FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
This Form 10-K contains forward lookingforward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company’s actual results and future financial condition may differ materially from those expressed in any such forward lookingforward-looking statements as a result of many factors that may be outside the Company’s control. Such factors include the following:
General Economic Conditions
General economic factors that are beyond the Company’s control impact the Company’s forecasts and actual performance. These factors include housing markets, recession, inflation, deflation, consumer credit availability, consumer debt levels, fuel and energy costs, interest rates, tax rates and policy, unemployment trends, the impact of natural disasters and terrorist activities, conditions affecting the retail environment for the home and other matters that influence consumer spending. Changes in the economic climate could adversely affect the Company’s performance.
Competition and Pricing Pressures
The retail business is highly competitive. The Company competes for customers, associates, locations, merchandise, services and other important aspects of the business with many other local, regional and national retailers. Those competitors range from specialty retail stores to department stores and discounters. Unanticipated changes in the pricing and other practices of those competitors, including promotional activity, may adversely affect the Company’s performance.
Consumer Preferences and Demographic Factors
The Company’s success depends on our ability to anticipate and respond in a timely manner to changing
merchandise trends, customer demands and demographics. The Company’s failure to anticipate, identify or react appropriately to changes in customer tastes, preferences, spending patterns and other lifestyle decisions could lead to, among other things, excess inventories or a shortage of products and could have a material adverse affect on the Company’s financial condition and results of operations.
General Economic Conditions
General economic factors that are beyond the Company’s control impact the Company’s forecasts and actual performance. These factors include interest rates, recession, inflation, deflation, consumer credit availability, consumer debt levels, fuel and energy costs, tax rates and policy, unemployment trends, the impact of natural disasters and terrorist activities, and other matters that influence consumer spending. Changes in the economic climate could adversely affect the Company’s performance.6
Unusual Weather Patterns
The Company’s operating results could be negatively impacted by unusual weather patterns. Frequent or unusually heavy snow, ice or rain storms, hurricanes, floods, tornados or extended periods of unseasonable temperatures could adversely affect the Company’s performance.
Competition and Pricing Pressures
The retail business is highly competitive. The Company competes for customers, associates, locations, merchandise, services and other important aspects of the business with many other local, regional and national retailers. Those competitors range from specialty retail stores to department stores and discounters. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Company’s performance.
Cost of Labor, Merchandise and Other Expenses
The Company’s success depends, in part, on our ability to manage operating costs and to look for opportunities to reduce costs. The Company’s ability to meet its labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. The Company’s ability to find qualified vendors and obtain access to products in a timely and efficient manner can be adversely affected by political instability, the financial instability of suppliers, suppliers’ noncompliance with applicable laws, transportation costs and other factors beyond the Company’s control.
Expansion Program
The Company’s growth depends, in part, on our ability to open new stores and operate profitably. Our ability to open additional stores successfully will depend on a number of factors, including our identification and availability of suitable store locations; our success in negotiating leases on acceptable terms; our hiring and training of skilled store operating personnel, especially management; and our timely development of new stores, including the availability of construction materials and labor and the absence of significant construction and other delays in store openings based on weather or other events. In addition, as our business continues to grow, we are subject to more complex state and federal regulations and may be the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could result in liabilities that may adversely affect the Company’s performance, despite the exercise of reasonable care.
Auction Rate Securities
The Company has investments in auction rate securities. These securities are invested in preferred shares of closed end municipal bond funds, which are required, pursuant to the Investment Company Act of 1940, to maintain minimum asset coverage ratios of 200% and also are invested in securities collateralized by student loans which are currently more than 100% collateralized and with approximately 90% of such collateral in the aggregate being guaranteed by the United States government. None of the auction rate securities held by the Company are mortgage-backed debt obligations. Due to current market conditions, these investments have experienced failed auctions beginning in mid-February 2008. These failed auctions result in a lack of liquidity in the securities, but do not affect the underlying collateral of the securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies and the Company believes that given their high credit quality, it will ultimately recover at par all amounts invested in these securities. Included in its long term investment securities are approximately $326.7 million par value of auction rate securities, less a temporary valuation adjustment of approximately $7.2 million to reflect the current lack of liquidity of these investments. The Company recorded this temporary valuation adjustment in other comprehensive income, net of the related tax benefit of $2.7 million, which did not affect fiscal 2007 earnings, and reclassified these investments to long term investment securities to reflect the current lack of liquidity of these investments. The Company does not anticipate that any potential lack of liquidity in these auction rate securities, even for an extended period of time, will affect its ability to finance its operations, including its expansion program and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments, including the recent announcements by certain asset managers to redeem a portion of their outstanding auction rate securities. However, if the interest rate environment changes, the Company may incur further unrealized losses. If uncertainties in the credit and capital markets continue and these markets deteriorate further, the Company may conclude that the decline in value is other than temporary and incur realized losses, including up to the full amount of the investments in auction rate securities, which could negatively affect the Company’s financial condition, cash flow and results of operations.
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Review of Equity Grants and Procedures and Related Matters
In June 2006, the Company’s Board of Directors appointed a special committee of independent directors with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of the deficiencies, the Company revised the
measurement dates for various option grants. Counsel to the special committee notified the SEC of the review. Following such self-reporting, the SEC Staff commenced an informal inquiry and the United States Attorney’s officeOffice for the District of New Jersey commenced an inquiry regarding these matters. During fiscal 2007, the United States Attorney’s Office for the District of New Jersey concluded its inquiry and indicated it will take no further action related to this matter. The Company is cooperatingcontinues to cooperate with these inquiries.the SEC in conjunction with its inquiry.
The Company’s past stock option granting process has exposed the Company to risk factors that could have a material adverse affect on the Company’s business and financial condition, including the outcome or any other matters arising out of the inquiriesinformal inquiry commenced by the SEC or the United States Attorney’s office for the District of New Jersey;SEC; the possibility that the SEC or the United States Attorney’s office for the District of New Jersey may not agree with all of the special committee’s findings and recommendations as set forth in the Company’s Form 8-K filed October 10, 2006, and may require additional or different remediation or may bring proceedings in respect of such matters;remediation; any other proceedings which may be brought against the Company by the SEC or other governmental agencies; any tax implications relating to the Company’s stock option grants; the outcome of thea shareholder derivative actionsaction filed against certain of the Company’s officers and its directors;directors and related matters; and the possibility of other private litigation relating to such stock option grants and related matters; and other matters arising out of or related to the Company’s stock option grants and procedures and related matters.
ITEM 1B —– UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
Most of the Company’s stores are located in suburban areas of medium and large-sized cities. These stores are situated in strip and power strip shopping centers, as well as in major off-price and conventional malls, and in free standing buildings.
The Company’s 888971 stores are located in 4849 states, the District of Columbia, and Puerto Rico and Canada and range in size from approximately 5,000 to 100,000 square feet, but are predominantly between 20,000 square feet and 50,000 square feet. Approximately 85% to 90% of store space is used for selling areas and the balance for warehouse, receiving and office space.
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The table below sets forth the numberlocations of the Company’s stores located in each state, district or territory as of March 3, 2007:1, 2008:
BED BATH & BEYOND STORES | BED BATH & BEYOND STORES | | | | | CHRISTMAS TREE SHOPS STORES | BED BATH & BEYOND STORES | CHRISTMAS TREE SHOPS STORES |
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Alabama | Alabama | | 10 | | Nebraska | | 5 | | Connecticut | | 3 | 12 | | | Nebraska | | 5 | | | Connecticut | 4 | |
Alaska | Alaska | | 1 | | Nevada | | 7 | | Maine | | 2 | 2 | | | Nevada | | 8 | | | Delaware | 1 | |
Arizona | Arizona | | 18 | | New Hampshire | | 6 | | Massachusetts | | 15 | 22 | | | New Hampshire | | 6 | | | Maine | 2 | |
Arkansas | Arkansas | | 4 | | New Jersey | | 34 | | New Hampshire | | 2 | 5 | | | New Jersey | | 35 | | | Massachusetts | 16 | |
California | California | | 95 | | New Mexico | | 4 | | New Jersey | | 3 | 101 | | | New Mexico | | 5 | | | New Hampshire | 3 | |
Colorado | Colorado | | 23 | | New York | | 51 | | New York | | 6 | 24 | | | New York | | 57 | | | New Jersey | 3 | |
Connecticut | Connecticut | | 13 | | North Carolina | | 24 | | Rhode Island | | 2 | 16 | | | North Carolina | | 28 | | | New York | 7 | |
Delaware | Delaware | | 1 | | North Dakota | | 2 | | Vermont | | | 1 | 1 | | | North Dakota | | 2 | | | Pennsylvania | 2 | |
Florida | Florida | | 60 | | Ohio | | 34 | | Total | | 34 | 65 | | | Ohio | | 37 | | | Rhode Island | 2 | |
Georgia | Georgia | | 23 | | Oklahoma | | 5 | | | | | 24 | | | Oklahoma | | 5 | | | Vermont | | 1 | |
Idaho | Idaho | | 6 | | Oregon | | 9 | | HARMON STORES | | | 7 | | | Oregon | | 9 | | | Total | | 41 | |
Illinois | Illinois | | 34 | | Pennsylvania | | 27 | | | | | 36 | | | Pennsylvania | | 30 | | | | | |
Indiana | Indiana | | 17 | | Rhode Island | | 3 | | Connecticut | | 2 | 18 | | | Rhode Island | | 3 | | | HARMON STORES |
Iowa | Iowa | | 6 | | South Carolina | | 13 | | New Jersey | | 28 | 7 | | | South Carolina | | 13 | | | | |
Kansas | Kansas | | 7 | | South Dakota | | 1 | | New York | | | 9 | 7 | | | South Dakota | | 1 | | | Connecticut | 2 | |
Kentucky | Kentucky | | 7 | | Tennessee | | 16 | | Total | | 39 | 7 | | | Tennessee | | 17 | | | New Jersey | 29 | |
Louisiana | Louisiana | | 10 | | Texas | | 67 | | | | | 12 | | | Texas | | 68 | | | New York | | 9 | |
Maine | Maine | | 5 | | Utah | | 11 | | | | | 5 | | | Utah | | 11 | | | Total | | 40 | |
Maryland | Maryland | | 16 | | Vermont | | 2 | | | | | 16 | | | Vermont | | 2 | | | | |
Massachusetts | Massachusetts | | 22 | | Virginia | | 23 | | | | | 24 | | | Virginia | | 26 | | | buybuy BABY STORES |
Michigan | Michigan | | 30 | | Washington | | 20 | | | | | 31 | | | Washington | | 21 | | | | |
Minnesota | Minnesota | | 9 | | West Virginia | | 1 | | | | | 9 | | | West Virginia | | 2 | | | Maryland | 1 | |
Mississippi | Mississippi | | 4 | | Wisconsin | | 10 | | | | | 5 | | | Wisconsin | | 10 | | | New Jersey | 3 | |
Missouri | Missouri | | 12 | | District of Columbia | | 1 | | | | | 12 | | | Wyoming | | 2 | | | New York | 4 | |
Montana | | | 3 | | Puerto Rico | | | 3 | | | | | 5 | | | District of Columbia | | 1 | | | Virginia | | 1 | |
| | | | | Total | | 815 | | | | | | | | Puerto Rico | | 3 | | | Total | | 9 | |
| | | | | | | | | | | | | | | | | | | Ontario, Canada | | 1 | | | | |
| | | | | Total | | 881 | | | | |
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The Company leases primarily all of its existing stores. The leases provide for original lease terms that generally range from five10 to twenty20 years and certain leases provide for renewal options, often at increased rents. Certain leases provide for scheduled rent increases (which, in the case of fixed increases, the Company accounts for on a straight-line basis over the expected lease term, beginning when the Company obtains possession of the premises) and/or for contingent rent (based upon store sales exceeding stipulated amounts).
In addition, the Company leases storage space in 1615 locations, totaling approximately 775,0001.2 million square feet, that provide supplemental merchandise storage space and fulfillment of BBB’s E-Service activities. This space is used to supplement the warehouse facilities in the Company’s stores in proximity to these locations. In addition, the Company also owns atwo distribution center ofcenters totaling approximately 770,0001.5 million square feet.
As of March 3, 2007,1, 2008, the Company leased a combined total of approximately 150,000160,000 square feet in twothree locations (Farmingdale, New York andYork; South Yarmouth, Massachusetts)Massachusetts; and Garden City, New York) for its procurement and office functions. The Company purchasedowns the Union, New Jersey corporate office location in fiscal 2006 whichand occupies approximately 140,000170,000 square feet of office space at that location. In fiscal 2007, the Company purchased a building in Union, New Jersey next to the corporate office location to support its continuing headquarters growth.
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ITEM 3 —- LEGAL PROCEEDINGS
TwoDuring fiscal 2006, two purported derivative actions were filed in New Jersey Superior Court naming several officers and the directors of the Company as defendants and making allegations concerning alleged historical options backdating practices at the Company. Those two actions were consolidated, and a consolidated complaint was filed in late November.November 2006 (the “Consolidated State Derivative Case”). Subsequently, five additional purported derivative actions were filed, all concerning the same subject matter. Wandel v. Eisenberg, et al., was filed on October 19, 2006 in the Supreme Court of the State of New York, County
of New York; Jamieson v. Eisenberg, et al. was filed on January 5, 2007 in the New Jersey Superior Court; and three cases were filed in the United States District Court for the District of New Jersey, Snowball Capital Appreciation Fund v. Eisenberg, et al.; Crowley v. Temares, et al.; and Cummings v. Temares, et al. on October 17, 2006, October 24, 2006 and October 25, 2006, respectively. The Snowball Capital Appreciation Fund v. Eisenberg, et al. and Jamieson v. Eisenberg, et al. cases have been voluntarily dismissed. The Crowley v. Temares, et al. and Cummings v. Temares, et al. cases have purportedly been consolidated. consolidated (the “Consolidated Federal Derivative Case”). During the fiscal first quarter of 2007, the Wandel v. Eisenberg, et al. case was dismissed by the Supreme Court of the State of New York, but the plaintiff in the case has filed a notice of appeal. During the fiscal third quarter of 2007, the Consolidated Federal Derivative Case was dismissed by the United States District Court for the District of New Jersey. During the fiscal fourth quarter of 2007, the Consolidated State Derivative Case was dismissed by the New Jersey Superior Court. No appeals were filed in either the Consolidated Federal or the Consolidated State Derivative Cases.
In eachthe sole remaining derivative case,Wandel v. Eisenberg, et al., the Company is a nominal defendant against which no recovery is sought. The Company has commenced a separate action in the Supreme Court of New York against the shareholders who had brought the Consolidated State Derivative Case, in response to a request to inspect certain materials, which request is deemed by the Company to be improper.
The Company is, in addition, party to various other legal proceedings arising in the ordinary course of business, which the Company does not believe to be material to the Company’s business or financial condition.
ITEM 4 —- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended March 3, 2007.1, 2008.
Executive Officers of the Registrant
The following table sets forth the name, age and business experience of the Executive Officers of the Registrant:
Name | | Age | | Positions |
|
|
|
|
|
Warren Eisenberg | | 7677
| | Co-Chairman and Director |
|
|
|
|
|
Leonard Feinstein | | 7071
| | Co-Chairman and Director |
|
|
|
|
|
Steven H. Temares | | 4849
| | Chief Executive Officer and Director |
|
|
|
|
|
Arthur Stark | | 5253
| | President and Chief Merchandising Officer |
|
|
|
|
|
Matthew Fiorilli | | 5051
| | Senior Vice President —– Stores |
|
|
|
|
|
Eugene A. Castagna | | 4142
| | Chief Financial Officer and Treasurer |
Warren Eisenberg is a Co-Founder of the Company and has served as Co-Chairman since 1999. He has served as a Director since 1971. Mr. Eisenberg served as Chairman from 1992 to 1999, and served as Chief Executive Officer or Co-Chief
10
Executive Officer from 1971 to April 2003.
Leonard Feinstein is a Co-Founder of the Company and has served as Co-Chairman since 1999. He has served as a Director since 1971. Mr. Feinstein served as President from 1992 to 1999, and served as Co-Chief Executive Officer from 1971 to April 2003.
Steven H. Temares has been our Chief Executive Officer since April 2003 and has served as a Director since January 1999. Mr. Temares was President and Chief Executive Officer from April 2003 to January 2006, President and Chief Operating Officer from 1999 to April 2003 and Executive Vice President and Chief Operating Officer from 1997 to 1999. Mr. Temares joined the Company in 1992.
Arthur Stark has been our President and Chief Merchandising Officer since January 2006. Mr. Stark has served as Chief Merchandising Officer since 1999 and was a Senior Vice President from 1999 to 2006. Mr. Stark joined the Company in 1977.
Matthew Fiorilli has been our Senior Vice President —– Stores since January 1999. Mr. Fiorilli joined the Company in 1973.
Eugene A. Castagna has been our Chief Financial Officer and Treasurer since January 2006. Mr. Castagna served as Assistant Treasurer from 2002 to 2006 and as Vice President - Finance from 2000 to 2006. Mr. Castagna is a certified public accountant and joined the Company in 1994.
The Company’s executive officers are elected by the Board of Directors for one-year terms and serve at the discretion of the Board of Directors. No family relationships exist between any of the executive officers or directors of the Company.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the high and low reported closing prices of the Company’s common stock on the NASDAQ National Market System for the periods indicated.
| | High | | Low | |
Fiscal 2006: | | | | | |
1st Quarter | | $ | 40.82 | | $ | 35.22 | |
2nd Quarter | | 36.92 | | 31.42 | |
3rd Quarter | | 41.24 | | 33.29 | |
4th Quarter | | 43.02 | | 38.04 | |
| | | | | |
| | High | | Low | |
Fiscal 2005: | | | | | |
1st Quarter | | $ | 40.80 | | $ | 35.57 | |
2nd Quarter | | 46.84 | | 40.65 | |
3rd Quarter | | 43.18 | | 37.01 | |
4th Quarter | | 43.33 | | 35.50 | |
| | High | | Low | |
Fiscal 2007: | | | | | |
1st Quarter | | $ | 41.82 | | $ | 38.83 | |
2nd Quarter | | 40.47 | | 32.83 | |
3rd Quarter | | 36.06 | | 29.29 | |
4th Quarter | | 32.73 | | 25.81 | |
| | | | | | | |
| | High | | Low | |
Fiscal 2006: | | | | | |
1st Quarter | | $ | 40.82 | | $ | 35.22 | |
2nd Quarter | | 36.92 | | 31.42 | |
3rd Quarter | | 41.24 | | 33.29 | |
4th Quarter | | 43.02 | | 38.04 | |
| | | | | | | |
The common stock is quoted through the NASDAQ National Market System under the symbol BBBY. On March 31, 2007,29, 2008, there were approximately 4,0005,000 shareholders of record of the common stock (without including individual participants in nominee security position listings). On March 31, 2007,29, 2008, the last reported sale price of the
11
common stock was $40.17.$29.11.
The Company has not paid cash dividends on its common stock since its 1992 initial public offering and does not currently plan to pay dividends on its common stock. The payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including the Company’s earnings, financial condition and requirements, business conditions and other factors. See Item 8 - Financial Statements and Supplementary Data.
The Company’s purchases of its common stock during the fourth quarter of fiscal 20062007 were as follows:
| | | | | | | | Approximate Dollar | |
| | | | | | Total Number of | | Value of Shares | |
| | | | | | Shares Purchased as | | that May Yet Be | |
| | | | | | Part of Publicly | | Purchased Under | |
| | Total Number of | | Average Price | | Announced Plans | | the Plans or | |
Period | | Shares Purchased (1) | | Paid per Share | | or Programs (1) | | Programs (1) (2) | |
November 26, 2006 - December 23, 2006 | | 1,000 | | $ | 41.14 | | 1,000 | | 1,000,969,141 | |
December 24, 2006 - January 20, 2007 | | 3,964,000 | | $ | 38.45 | | 3,964,000 | | 848,555,818 | |
January 21, 2007 - March 3, 2007 | | 3,519,000 | | $ | 41.91 | | 3,519,000 | | 701,113,324 | |
Total | | 7,484,000 | | $ | 40.07 | | 7,484,000 | | 701,113,324 | |
| | | | | | | | Approximate Dollar | |
| | | | | | Total Number of | | Value of Shares | |
| | | | | | Shares Purchased as | | that May Yet Be | |
| | | | | | Part of Publicly | | Purchased Under | |
| | Total Number of | | Average Price | | Announced Plans | | the Plans or | |
Period | | Shares Purchased (1) | | Paid per Share | | or Programs (1) | | Programs (1) (2) | |
December 2, 2007 - December 29, 2007 | | 1,000 | | $ | 29.56 | | 1,000 | | 1,069,575,497 | |
December 30, 2007 - January 26, 2008 | | 1,878,000 | | $ | 26.65 | | 1,878,000 | | 1,019,531,016 | |
January 27, 2008 - March 1, 2008 | | 1,716,000 | | $ | 30.51 | | 1,716,000 | | 967,174,067 | |
Total | | 3,595,000 | | $ | 28.49 | | 3,595,000 | | 967,174,067 | |
(1) In December 2006, the Company announced that the Board of Directors approved a $1 billion share repurchase program, authorizing the repurchase of its common stock. The Company’s Board of Directors previouslyhas authorized repurchases of shares of its common stock in the amount of $1 billion, $1 billion, $200 million, $400 million and $350 million in September 2007, December 2006, January 2006, October 2005 and December 2004, respectively. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. Shares purchased indicated in this table also include the withholding of a portion of restricted shares to cover taxes on vested restricted shares.
(2) Excludes brokerage commissions paid by the Company.
Stock Price Performance Graph
The graph shown below compares the performance of the Company’s common stock with that of the S&P 500 Index, the S&P Specialty Retail Index and the S&P Retail Composite Index over the same period (assuming the investment of $100 in the Company’s common stock and each of the three Indexes on March 2, 2002,1, 2003, and the reinvestment of all dividends).
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ITEM 6 —- SELECTED FINANCIAL DATA
Consolidated Selected Financial Data | | Fiscal Year Ended (1) | |
(in thousands, except per share | | March 3, | | February 25, | | February 26, | | February 28, | | March 1, | |
and selected operating data) | | 2007 | | 2006 | | 2005 | | 2004 (2) | | 2003 | |
| | | | | | | | | | | |
Statement of Earnings Data: | | | | | | | | | | | |
| | | | | | | | | | | |
Net sales | | $ | 6,617,429 | | $ | 5,809,562 | | $ | 5,147,678 | | $ | 4,477,981 | | $ | 3,665,164 | |
| | | | | | | | | | | |
Gross profit | | 2,835,402 | | 2,485,748 | | 2,186,301 | | 1,876,664 | | 1,518,547 | |
| | | | | | | | | | | |
Operating profit | | 889,401 | | 879,171 | | 792,414 | | 639,343 | | 480,057 | |
| | | | | | | | | | | |
Net earnings | | 594,244 | | 572,847 | | 504,964 | | 399,470 | | 302,179 | |
| | | | | | | | | | | |
Net earnings per share - Diluted (3) | | $ | 2.09 | | $ | 1.92 | | $ | 1.65 | | $ | 1.31 | | $ | 1.00 | |
| | | | | | | | | | | |
Selected Operating Data: | | | | | | | | | | | |
| | | | | | | | | | | |
Number of stores open (at period end) | | 888 | | 809 | | 721 | | 629 | | 519 | |
| | | | | | | | | | | |
Total square feet of store space (at period end) | | 27,794,000 | | 25,502,000 | | 22,945,000 | | 20,472,000 | | 17,452,000 | |
| | | | | | | | | | | |
Percentage increase in comparable store sales | | 4.9 | % | 4.6 | % | 4.5 | % | 6.3 | % | 7.9 | % |
| | | | | | | | | | | |
Balance Sheet Data (at period end): | | | | | | | | | | | |
| | | | | | | | | | | |
Working capital | | $ | 1,553,541 | | $ | 1,082,399 | | $ | 1,223,409 | | $ | 1,199,752 | | $ | 914,220 | |
| | | | | | | | | | | |
Total assets | | 3,959,304 | | 3,382,140 | | 3,199,979 | | 2,865,023 | | 2,188,842 | |
| | | | | | | | | | | |
Long-term debt | | — | | — | | — | | — | | — | |
| | | | | | | | | | | |
Shareholders’ equity (4) | | $ | 2,649,151 | (5) | $ | 2,262,450 | | $ | 2,203,762 | | $ | 1,990,820 | | $ | 1,451,921 | |
Consolidated Selected Financial Data
| | Fiscal Year Ended (1) | |
(in thousands, except per share | | March 1, | | March 3, | | February 25, | | February 26, | | February 28, | |
and selected operating data) | | 2008 (2) | | 2007 | | 2006 | | 2005 | | 2004 (3) | |
| | | | | | | | | | | |
Statement of Earnings Data: | | | | | | | | | | | |
| | | | | | | | | | | |
Net sales | | $ | 7,048,942 | | $ | 6,617,429 | | $ | 5,809,562 | | $ | 5,147,678 | | $ | 4,477,981 | |
| | | | | | | | | | | |
Gross profit | | 2,925,231 | | 2,835,402 | | 2,485,748 | | 2,186,301 | | 1,876,664 | |
| | | | | | | | | | | |
Operating profit | | 838,022 | | 889,401 | | 879,171 | | 792,414 | | 639,343 | |
| | | | | | | | | | | |
Net earnings | | 562,808 | | 594,244 | | 572,847 | | 504,964 | | 399,470 | |
| | | | | | | | | | | |
Net earnings per share - Diluted (4) | | $ | 2.10 | | $ | 2.09 | | $ | 1.92 | | $ | 1.65 | | $ | 1.31 | |
| | | | | | | | | | | |
Selected Operating Data: | | | | | | | | | | | |
| | | | | | | | | | | |
Number of stores open (at period end) | | 971 | | 888 | | 809 | | 721 | | 629 | |
| | | | | | | | | | | |
Total square feet of store space (at period end) | | 30,181,000 | | 27,794,000 | | 25,502,000 | | 22,945,000 | | 20,472,000 | |
| | | | | | | | | | | |
Percentage increase in comparable store sales | | 1.0 | % | 4.9 | % | 4.6 | % | 4.5 | % | 6.3 | % |
| | | | | | | | | | | |
Comparable store net sales (in 000’s) | | $ | 6,457,268 | | $ | 6,068,694 | | $ | 5,281,675 | | $ | 4,468,095 | | $ | 3,902,308 | |
| | | | | | | | | | | |
Number of comparable stores | | 792 | | 683 | | 605 | | 535 | | 416 | |
| | | | | | | | | | | |
Balance Sheet Data (at period end): | | | | | | | | | | | |
| | | | | | | | | | | |
Working capital | | $ | 1,065,599 | | $ | 1,553,541 | | $ | 1,082,399 | | $ | 1,223,409 | | $ | 1,199,752 | |
| | | | | | | | | | | |
Total assets | | 3,844,093 | | 3,959,304 | | 3,382,140 | | 3,199,979 | | 2,865,023 | |
| | | | | | | | | | | |
Long-term debt | | — | | — | | — | | — | | — | |
| | | | | | | | | | | |
Shareholders’ equity (5) | | $ | 2,561,828 | | $ | 2,649,151 | (6) | $ | 2,262,450 | | $ | 2,203,762 | | $ | 1,990,820 | |
(1) Each fiscal year represents 52 weeks, except for fiscal 2006 (ended March 3, 2007) which represents 53 weeks.
(2) On March 22, 2007, the Company acquired buybuy BABY, Inc.
(3) On June 19, 2003, the Company acquired Christmas Tree Shops, Inc.
(3)(4) The Company has not declared any cash dividends in any of the fiscal years noted above.
(4)(5) In fiscal 2007, 2006, 2005 and 2004, the Company repurchased approximately $734 million, $301 million, $598 million and $350$350 million of its common stock, respectively.
(5) The(6) In fiscal 2006, the Company adopted Staff Accounting Bulletin 108, “Considering"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements”Statements" resulting in a one-time net reduction to Shareholders’Shareholders' equity. See Note 23 in the Consolidated Financial Statements.
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ITEM 7 —- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Bed Bath & Beyond Inc. and subsidiaries (the “Company”) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops (“CTS”), Harmon and Harmon.Harmon Face Values (“Harmon”) and buybuy BABY. The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, and health and beauty care items.items and infant and toddler merchandise. The Company’s objective is to be a customer’s first choice for products and services in the categories offered, in the markets in which the Company operates.
The Company’s strategy is to achieve this objective through excellent customer service, an extensive breadth and depth of assortment, everyday low prices, introduction of new merchandising offerings and development of its infrastructure.
Operating in the highly competitive retail industry, the Company, along with other retail companies, is influenced by a number of factors including, but not limited to, general economic conditions including the housing market and fuel costs, unusual weather patterns, consumer preferences and spending habits, general economic conditions, unusual weather patterns, competition from existing and potential competitors, and the ability to find suitable locations at acceptable occupancy costs to support the Company’s expansion program.
Net earnings
The Company’s fiscal 2007 results reflect the challenges presented by certain macroeconomic conditions, including the economic slowdown, in general; specific issues related to the housing and mortgage industries; and a heightened promotional environment. The following represents an overview of the Company’s financial performance for the periods indicated:
·Net sales in fiscal year2007 (fifty-two weeks) increased approximately 6.5% to $7.049 billion; net sales in fiscal 2006 (fifty-three weeks) ended March 3, 2007 were $2.09 per diluted share, including a non-recurring charge relatingincreased approximately 13.9% to the Company’s remediation program intended to protect its employees from certain potential adverse tax consequences arising pursuant to Internal Revenue Code Section 409A$6.617 billion over net sales of approximately $.07 per diluted share, exceeding$5.810 billion in fiscal 2005 (fifty-two weeks) net earnings of $1.92 per diluted share by approximately 8.9%. Net sales for fiscal 2006 (fifty-three weeks) were approximately $6.617 billion, an increase of approximately 13.9% from the prior fiscal year (fifty-two weeks). Contributing to this increase was the expansion of store space by 9.0%, from 25.5 million square feet at fiscal year end 2005 to 27.8 million square feet at fiscal year end 2006 and the benefit of an additional week in fiscal 2006. The 2.3 million square feet increase was primarily the result of opening 74 BBB stores, 6 CTS stores and 1 Harmon store.
·Comparable store sales for fiscal 20062007 increased by approximately 4.9%1.0% as compared with an increase of approximately 4.6%4.9% and 4.5%4.6% in fiscal 20052006 and 2004,2005, respectively. Comparable store sales percentage increasespercentages are calculated based on an equivalent number of weeks for each annual period. As of the beginning of the fiscal third quarter of 2004, CTS was included in the calculation of comparable store sales. The fiscal 2006 increase in comparable store sales reflected a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings and a strong focus on customer service with an emphasis on responding to customer feedback.
A store is considered a comparable store when it has been open for twelve full months following its grand opening period (typically four to six weeks). Stores relocated or expanded are excluded from comparable store sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store’s sales are not considered comparable once the store closing process has commenced. buybuy BABY is excluded from the comparable store sales percentage for fiscal 2007, but will be included in the Company’s comparable store sales calculation starting in the first quarter of fiscal 2008.
·Gross profit for fiscal 2007 was $2.925 billion or 41.5% of net sales compared with $2.835 billion or 42.8% of net sales for fiscal 2006 and $2.486 billion or 42.8% of net sales for fiscal 2005.
·Selling, general and administrative expenses for fiscal 2007 were $2.087 billion or 29.6% of net sales compared with $1.946 billion or 29.4% of net sales for fiscal 2006 and $1.607 billion or 27.7% of net sales for fiscal 2005. Fiscal 2006 includes a non-recurring pre-tax charge of $30 million related to the Company’s remediation program intended to protect its employees from certain adverse tax consequences arising pursuant to Internal Revenue Code Section 409A.
·The effective tax rate was 35.0%, 36.3% and 37.4% for fiscal years 2007, 2006 and 2005, respectively.
14
·Net earnings for the fiscal year (fifty-two weeks) ended March 1, 2008 were $2.10 per diluted share ($562.8 million), compared to fiscal 2006 (fifty-three weeks) net earnings of $2.09 per diluted share ($594.2 million), which included a non-recurring charge of approximately $.07 per diluted share, and fiscal 2005 (fifty-two weeks) net earnings of $1.92 per diluted share ($572.8 million). The increase in net earnings per diluted share for fiscal 2007 includes the impact of the Company’s repurchases of its common stock.
During fiscal 2007, 2006 and 2005 the Company’s capital expenditures were $358.2 million, $317.5 million and $220.4 million. Included in fiscal 2007’s capital expenditures were costs associated with a new distribution center and a new E-service fulfillment center to support the Company’s growth.
On March 22, 2007, subsequent to the end of fiscal 2006, the Company completed and announced the acquisition ofacquired buybuy BABY, a privately held retailer of infant and toddler merchandise for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million.Based in Garden City, New York, buybuy BABY operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products.
buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Company’s Co-Chairmen. The acquisition was
approved by a special committee of independent members of the Board of Directors of the Company. The special committee retained Merrill Lynch & Co. to serve as its independent financial advisor and render a fairness opinion in connection with the transaction, as well as Chadbourne & Parke LLP to serve as independent legal counsel to oversee the acquisition negotiations. The aforementioned repayment of approximately $19 million of debt results in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Company’s Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
The acquisition of buybuy BABY had no effect on the Company’s fiscal 2006 results since the transaction occurred during fiscal 2007. The Company believes the benefit of this acquisition willdid not have a material effect on the overallits consolidated results orof operations and financial condition of the Companyfor fiscal 2007.
Also, in December 2007, the Company opened its first international store in Canada and is actively pursuing its expansion opportunities in Canada.
The Company plans to continue to expand its operations and invest in its infrastructure to reach its long-term objectives. The Company’s fiscal 2007 store opening program is expectedCompany currently expects to focus primarily onopen approximately 50 to 55 new BBB stores.stores throughout the United States and Canada in fiscal 2008. The Company also plansexpects to improveopen approximately 12 new CTS stores and grow its CTS, Harmon andseveral buybuy BABY concepts.stores as well as continue to open new Harmon stores.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) selected statement of earnings data of the Company expressed as a percentage of net sales and (ii) the percentage change in dollar amounts from the prior year in selected statement of earnings data:
| | Fiscal Year Ended | |
| | Percentage | | Percentage Change | |
| | of Net Sales | | from Prior Year | |
| | March 3, | | February 25, | | February 26, | | March 3, | | February 25, | |
| | 2007 | | 2006 | | 2005 | | 2007 | | 2006 | |
| | | | | | | | | | | |
Net sales | | 100.0 | % | 100.0 | % | 100.0 | % | 13.9 | % | 12.9 | % |
| | | | | | | | | | | |
Cost of sales | | 57.2 | | 57.2 | | 57.5 | | 13.8 | | 12.2 | |
| | | | | | | | | | | |
Gross profit | | 42.8 | | 42.8 | | 42.5 | | 14.1 | | 13.7 | |
| | | | | | | | | | | |
Selling, general and administrative expenses | | 29.4 | | 27.7 | | 27.1 | | 21.1 | | 15.3 | |
| | | | | | | | | | | |
Operating profit | | 13.4 | | 15.1 | | 15.4 | | 1.2 | | 10.9 | |
| | | | | | | | | | | |
Earnings before provision for income taxes | | 14.1 | | 15.8 | | 15.8 | | 1.9 | | 12.8 | |
| | | | | | | | | | | |
Net earnings | | 9.0 | | 9.9 | | 9.8 | | 3.7 | | 13.4 | |
| | Fiscal Year Ended | |
| | Percentage | | Percentage Change | |
| | of Net Sales | | from Prior Year | |
| | March 1, | | March 3, | | February 25, | | March 1, | | March 3, | |
| | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | |
| | | | | | | | | | | |
Net sales | | 100.0 | % | 100.0 | % | 100.0 | % | 6.5 | % | 13.9 | % |
| | | | | | | | | | | |
Cost of sales | | 58.5 | | 57.2 | | 57.2 | | 9.0 | | 13.8 | |
| | | | | | | | | | | |
Gross profit | | 41.5 | | 42.8 | | 42.8 | | 3.2 | | 14.1 | |
| | | | | | | | | | | |
Selling, general and administrative expenses | | 29.6 | | 29.4 | | 27.7 | | 7.3 | | 21.1 | |
| | | | | | | | | | | |
Operating profit | | 11.9 | | 13.4 | | 15.1 | | (5.8 | ) | 1.2 | |
| | | | | | | | | | | |
Earnings before provision for income taxes | | 12.3 | | 14.1 | | 15.8 | | (7.3 | ) | 1.9 | |
| | | | | | | | | | | |
Net earnings | | 8.0 | | 9.0 | | 9.9 | | (5.3 | ) | 3.7 | |
Net Sales
Net sales in fiscal 2007 (fifty-two weeks) increased $431.5 million to $7.049 billion, representing an increase of 6.5% over the $6.617 billion of net sales in fiscal 2006 (fifty-three weeks), which increased $807.9 million to $6.617 billion, representing an increase of or
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13.9% over thenet sales of $5.810 billion of net sales in fiscal 2005 (fifty-two weeks), which increased $661.9 million or 12.9% over. For fiscal 2007, approximately 82% of the increase in net sales was attributable to an increase in the Company’s new store sales, 26% of $5.148 billionthe increase was attributable to the acquisition of buybuy BABY, 15% of the increase was attributable to the increase in comparable store sales, all partially offset by 23% as a result of the additional week of sales in fiscal 2004. Approximately2006. For fiscal 2006, approximately 52% of the increase in fiscal 2006net sales was attributable to an increase in the Company’s new store sales, and the balance of the increase was primarily attributable to the increase in comparable store sales and the benefit of an additional week in fiscal 2006. The additional week of sales in fiscal 2006 represented approximately 1.6% of net sales.
For fiscal 2007, comparable store sales for 792 stores represented $6.457 billion of net sales; for fiscal 2006, comparable store sales for 683 stores represented $6.069 billion of net sales; and for fiscal 2005, comparable store sales for 605 stores represented $5.282 billion of net sales. For fiscal 2007, the increase in comparable store sales was approximately 1.0%. The increase in comparable store sales forreflects the continued consumer acceptance of the Company’s merchandise offerings and advertising programs, but was negatively affected by the economic slowdown, in general, and by issues specific to the housing and mortgage industries in particular. In those areas of the Country that have been reported as being the most significantly affected by these issues, notably Arizona, California, Florida and Nevada, sales were noticeably weaker than in less affected areas. For fiscal 2006, the increase in comparable store sales of 4.9% was due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings and a strong focus on customer service with an emphasis on responding to customer feedback. Comparable store sales percentage increasespercentages are calculated based on an equivalent number of weeks for each annual period. Forbuybuy BABY is excluded from the comparable store sales percentage for fiscal 2005, approximately 64% of the increase in net sales was attributable to an increase2007, but will be included in the Company’s newcomparable store sales andcalculation starting in the balancefirst quarter of the increase was primarily attributable to the increase in comparable store sales.fiscal 2008.
Sales of domestics merchandise accounted for approximately 46%44%, 47%46% and 48%47% of net sales in fiscal 2007, 2006 2005 and 2004,2005, respectively, of which the Company estimates that bed linens accounted for approximately 15%14%, 16%15% and 17%16% of net sales in fiscal 2007, 2006 2005 and 2004,2005, respectively. The remaining net sales in fiscal 2007, 2006 and 2005 of 56%, 54% and 2004 of 54%, 53% and 52%, respectively, represented sales of home furnishings and other items. No other individual product category accounted for 10% or more of net sales during fiscal 2007, 2006 2005 or 2004.2005.
Gross Profit
Gross profit in fiscal 2007, 2006 and 2005 and 2004 was $2.925 billion or 41.5% of net sales, $2.835 billion or 42.8% of net sales and $2.486 billion or 42.8% of net sales, and $2.186 billion or 42.5% of net sales, respectively. The increasedecrease in gross profit between fiscal 20052007 and 20042006 as a percentage of net sales was primarily attributabledue to loweran increase in coupon redemptions associated with a heightened promotional environment, an increase in inventory acquisition costs and the shift in the mix of merchandise sold, as the Company’s current merchandise offerings.Company continues to experience a higher percentage of sales of home furnishings.
Selling, General and Administrative expenses
Selling, general and administrative expenses (“SG&A”) were $2.087 billion or 29.6% of net sales in fiscal 2007 compared to $1.946 billion or 29.4% of net sales in fiscal 2006. The increase in SG&A as a percentage of net sales is primarily due to a relative increase in advertising expense as a result of increased distributions of advertising pieces in response to the heightened promotional environment and a relative increase in occupancy costs and other expenses, partially offset by a relative decrease in payroll and payroll related items (including a non-recurring pre-tax charge of $30 million in fiscal 2006 related to the Company’s remediation program intended to protect its employees from certain adverse tax consequences arising pursuant to Internal Revenue Code Section 409A).
SG&A was $1.946 billion or 29.4% of net sales in fiscal 2006 compared to $1.607 billion or 27.7% of net sales in fiscal 2005. The increase in SG&A as a percentage of net sales iswas primarily due to athe non-recurring charge relatingreferred to the Company’s remediation program intended to protect its employees from certain potential adverse tax consequences arising pursuant to Internal Revenue Code Section 409A,above, the expensing of stock options for twelve months in fiscal 2006 versus six months in fiscal 2005, additional stock-based compensation charges primarily related to the revised measurement dates, increased legal and accounting charges associated with the stock option review (see “Review of Equity Grants and Procedures and
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Related Matters”Matters in Fiscal 2006”) and an increase in advertising, which includesincluded higher paper costs and postal rates. Lastly, there were one-time benefits experienced in fiscal 2005, such as settlement of credit card litigation and certain insurance recoveries, which the Company did not have in fiscal 2006.
SG&A
Operating Profit
Operating profit for fiscal 2007 was $838.0 million or 11.9% of net sales compared to $889.4 million or 13.4% of net sales in fiscal 2006. The decrease in operating profit as a percentage of net sales increased to 27.7%was a result of the deleverage in the gross margin and SG&A, as discussed above.
Operating profit was $889.4 million or 13.4% of net sales in fiscal 2005 from 27.1%2006 compared to $879.2 million or 15.1% of net sales in fiscal 2004, primarily due to2005. The decrease in operating profit as a percentage of net sales was the expensingresult of stock options and related changesthe deleverage in the compensation program reflecting the early adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SG&A, in fiscal 2005 was $1.607 billion as compared to $1.394 billion in fiscal 2004.discussed above.
Interest Income
Interest income in fiscal 2007, 2006 and 2005 and 2004 was $27.2 million, $43.5 million $35.9 million and $18.8$35.9 million, respectively. Interest income decreased in fiscal 2007 compared to fiscal 2006 primarily as a result of lower cash balances principally due to share repurchase activity in fiscal 2007. Interest income increased in fiscal 2006 compared to fiscal 2005 primarily due to increases in the Company’s average investment interest rates as a result of the upward trend in short term interest rates.
Income Taxes
The effective tax rate was 36.30%35.0% for fiscal 2007, 36.3% for fiscal 2006 37.40%and 37.4% for fiscal 2005 and 37.75%2005. The tax rate for fiscal 2004.2007 included an approximate $21.6 million benefit primarily due to the effective settlement of certain discrete tax items from ongoing examinations, the recognition of favorable discrete state tax items and from changing the blended state tax rate of deferred income taxes. The decreases aredecrease from fiscal 2005 to fiscal 2006 is primarily due to a reduction in the weighted average effective tax rate resulting from a change in the mix of the business within the taxable jurisdictions in which the Company operates. For fiscal 2007,
The Company expects that Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”) may, over time, create more volatility in the effective tax rate from year to year because the Company is estimated at approximately 36.30%.required each year to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.
EXPANSION PROGRAM
The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets, the expansion or relocation of existing stores and the continuous review of strategic acquisitions. The Company also continues to actively explore international expansion (including Canada). In the fifteensixteen year period from the beginning of fiscal 1992 to the end of fiscal 2006,2007, the chain has grown from 34 to 888971 stores. Total square footage grew from 917,000 square feet at the beginning of fiscal 1992 to 27.830.2 million square feet at the end of fiscal 2006.2007. The Company opened its first international BBB store in Ontario, Canada in December 2007 and is actively pursuing its expansion opportunities in Canada. In addition, the Company continues to explore other international opportunities.
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The Company intends to continue its expansion program and currently plansexpects to open primarilyapproximately 50 to 55 new BBB stores throughout the United States and Canada in fiscal 2007.2008. The Company also plansexpects to open approximately 12 new CTS stores and several buybuy BABY stores as well as continue to improve and grow its CTS,open new Harmon and buybuy BABY concepts in fiscal 2007stores (see details under “Liquidity and Capital Resources” below). The continued growth of the Company is dependent, in large part, upon the Company’s ability to execute its expansion program successfully.
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LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2007 compared to Fiscal 2006
The Company has been able to finance its operations, including its expansion program, through internally generated funds. Net cash provided by operating activities in fiscal 2007 was $614.5 million, compared with $613.6 million in fiscal 2006. Year over year, the Company experienced an increase in cash provided by net earnings, as adjusted for non-cash expenses (primarily deferred taxes and depreciation), which was offset by a decrease in the net components of working capital (primarily decreases in accounts payable and income taxes offset by an increase in merchandise inventories).
Inventory per square foot was $53.58 and $54.18 as of March 1, 2008 and March 3, 2007, respectively. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales growth.
Net cash provided by investing activities in fiscal 2007 was $101.7 million, compared with net cash used in investing activities of $397.7 million in fiscal 2006. The increase in net cash provided by investing activities was attributable to an increase in the redemptions of investment securities, net of purchases, that was partially offset by the payment of $85.9 million for the acquisition of buybuy BABY and an increase in capital expenditures to $358.2 million in fiscal 2007 from $317.5 million in fiscal 2006.
Net cash used in financing activities in fiscal 2007 was $705.5 million, compared with $250.3 million in fiscal 2006. The increase in net cash used in financing activities was primarily attributable to common stock repurchased of $734.2 million in fiscal 2007 compared to $301.0 million in fiscal 2006 under the Company’s stock repurchase program.
Fiscal 2006 compared to Fiscal 2005
Net cash provided by operating activities in fiscal 2006 was $613.6 million, compared with $660.4 million in fiscal 2005. The decrease in net cash provided by operating activities was principally driven by working capital changes due to the increase in merchandise inventories (primarily as a result of new store space) and an increase in other current assets (due to the timing of prepayments), partially offset by an increase in net earnings and an increase in accrued expenses and other current liabilities (primarily due to the timing of payments).
Inventory per square foot was $54.18 and $51.04 as of March 3, 2007 and $51.04 as of February 25, 2006. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales growth.2006, respectively.
Net cash used in investing activities in fiscal 2006 was $397.7 million, compared with $67.6 million in fiscal 2005. The increase in net cash used in investing activities was attributable to a decrease in redemptions of investment securities and an increase in capital expenditures partially offset by a decrease in purchases of investment securities.
Net cash used in financing activities in fiscal 2006 was $250.3 million, compared with $567.3 million in fiscal 2005. The decrease in net cash used in financing activities was primarily attributable to common stock repurchased of $301$301.0 million in the current yearfiscal 2006 compared to $598$598.2 million in the prior yearfiscal 2005 under the Company’s stock repurchase program.
Auction Rate Securities
As of March 1, 2008, the Company had approximately $326.7 million par value of auction rate securities, less a temporary valuation adjustment of approximately $7.2 million to reflect the current lack of liquidity of these investments. The Company recorded this temporary valuation adjustment in other comprehensive income, net of the related tax benefit of $2.7 million, which did not affect fiscal 2007 earnings, and reclassified these investments to long term investment securities to reflect the lack of liquidity of these investments. Due to current market conditions, these investments have experienced failed auctions beginning in mid-February 2008. These failed auctions result in a lack of liquidity in the securities, but do not affect the underlying collateral of the
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securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies and the Company believes that given their high credit quality, it will ultimately recover at par all amounts invested in these securities. The Company does not anticipate that any potential lack of liquidity in these auction rate securities, even for an extended period of time, will affect its ability to finance its operations, including its expansion program and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments, including the recent announcements by certain asset managers to redeem a portion of their outstanding auction rate securities. These investments are classified as non-current assets until the Company has better visibility as to when their liquidity will be restored. The classification and valuation of these securities will be reviewed quarterly.
Other Fiscal 2007 Information
At March 3, 2007,1, 2008, the Company maintained two uncommitted lines of credit of $100 million and $75 million,each, with expiration dates of September 3, 20072008 and February 28, 2008,27, 2009, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. In addition, under these uncommitted lines of credit, the Company can obtain unsecured standby letters of credit. During fiscal 2006,2007, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 3, 2007,1, 2008, there was approximately $6.9$8.1 million of outstanding letters of credit and approximately $40.0$49.8 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates. The Company believes that during fiscal 2007,2008, internally generated funds will be sufficient to fund its operations, including its expansion program.program and planned capital expenditures.
The Company’s Board of Directors has authorized repurchases of shares of its common stock for $1 billion in September 2007, for $1 billion in December 2006, for $200 million in January 2006, for $400 million in October 2005 and for $350 million in December 2004. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. The Company has approximately $967 million remaining of authorized share repurchases as of March 1, 2008. The execution of the Company’s current share repurchase program will consider current economic and market conditions, including but not limited to, the liquidity of its auction rate security investments.
The Company has contractual obligations consisting mainly of operating leases for stores, offices, warehouse facilities and equipment, and purchase obligations and other long-term liabilities which the Company is obligated to pay as of March 3, 20071, 2008 as follows:
| | | | Less than 1 | | | | | | After 5 | |
(in thousands) | | Total | | year | | 1-3 years | | 4-5 years | | years | |
Operating Lease Obligations | | $3,195,864 | | $ | 372,168 | | $ | 743,317 | | $ | 644,898 | | $ | 1,435,481 | |
Purchase Obligations | | 415,727 | | 415,727 | | — | | — | | — | |
Total Contractual Obligations | | $3,611,591 | | $ | 787,895 | | $ | 743,317 | | $ | 644,898 | | $ | 1,435,481 | |
| | | | Less than 1 | | | | | | After 5 | |
(in thousands) | | Total | | year | | 1-3 years | | 4-5 years | | years | |
| | | | | | | | | | | |
Operating Lease Obligations (1) | | $ | 3,195,366 | | $ | 404,197 | | $ | 776,185 | | $ | 642,058 | | $ | 1,372,926 | |
Purchase Obligations (2) | | 433,630 | | 433,630 | | — | | — | | — | |
Other long-term liabilities (3) | | 268,153 | | — | | — | | — | | — | |
| | | | | | | | | | | |
Total Contractual Obligations | | $ | 3,897,149 | | $ | 837,827 | | $ | 776,185 | | $ | 642,058 | | $ | 1,372,926 | |
(1) The amounts presented represent the future minimum lease payments under non-cancelable operating leases. In addition to minimum rent, certain of the Company’s leases require the payment of additional costs for insurance, maintenance and other costs. These additional amounts are not included in the table of contractual commitments as the timing and/or amounts of such payments are not known. As of March 3, 2007,1, 2008, the Company has leased sites for 5856 new stores planned for opening in fiscal 20072008 or 2008,2009, for which aggregate minimum rental payments over the term of the leases are approximately $325.0$261.7 million and are
included in the table above.
(2) Purchase obligations primarily consist of purchase orders for merchandise and capital expenditures.
Other significant commitments
(3) The Company’s deferred rent and contingencies includeother liabilities as well as income taxes payable in the following:
·Consolidated Balance The Company utilizes a combinationSheet as of insurance and self insurance for a numberMarch 1, 2008 are primarily comprised of risks includingdeferred rent, income taxes, workers’ compensation andgeneral liability reserves and automobile liability.other various accruals. As the timing and/or amounts of any cash payment isuncertain, the related amounts have been reflected only in the Total column in the table above.
·Some of the Company’s operating lease agreements have scheduled rent increases. The Company accounts for these scheduled rent increases on a straight-line basis over the expected lease term, beginning when the Company obtains possession of the premises, thus creating deferred rent.
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SEASONALITY
The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December, and generally lower in February and April.
INFLATION
The Company does not believe that its operating results have been materially affected by inflation during the past year. There can be no assurance, however, that the Company’s operating results will not be affected by inflation in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
Staff Accounting Bulletin No. 108
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The transition provisions of SAB 108 permit the Company to adjust for the cumulative effect on retained earnings of immaterial errors relating to prior years. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended. The Company adopted SAB 108 at the end of fiscal 2006. In accordance with SAB 108, the Company has adjusted beginning retained earnings for fiscal 2006 in the accompanying consolidated financial statements for the items described under “Review of Equity Grants and Procedures and Related Matters” and “Rent and Lease Accounting” below. The Company considers these adjustments to be immaterial to prior periods.
Review of Equity Grants and Procedures and Related Matters
In June 2006, the Company’s BoardFASB issued FIN 48. FIN 48 addresses the determination of Directors appointedwhether tax benefits claimed or expected to be claimed on a special committee of two independent memberstax return should be recorded in the financial statements. Under FIN 48, a company may recognize the tax benefit from uncertain tax positions 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 Boardposition. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent counsel who engaged outside accounting advisors to assistbeing realized upon settlement with the review. This review was completedtaxing authorities. FIN 48 also provided guidance on derecognition, classification, interest and penalties on October 9, 2006,income taxes, accounting in interim periods and requires increased disclosures.
On March 4, 2007, the special committee presentedCompany adopted FIN 48 and recognized a $13.1 million increase to Retained earnings to reflect the change to its report to the Company’s Boardliability for unrecognized tax benefits as required. The Company also recorded additional unrecognized tax benefits, and corresponding higher deferred tax assets, of Directors.
The review of stock option grants and procedures identified various deficiencies in the process of granting and documenting stock options and restricted shares described below. As$35.6 million as a result of the deficiencies,adoption.
In September 2006, the special committee recommended, amongFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other things,accounting pronouncements that the Company revise the measurement dates under Accounting Principles Board Opinionrequire or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 25, “Accounting for Stock Issued to Employees,” for 16 annual option grant dates, 26 monthly grant dates and 2 special grant dates (revisions of 2 annual, 4 monthly and 1 special grant dates have
no accounting impact because prices on the revised dates were lower than on the measurement dates previously recorded by the Company). As a result of these revised measurement dates and the correction of various other errors relating to the accounting for equity-based compensation, the Company has determined that from fiscal year 1993 through fiscal 2005, it had certain unrecorded non-cash equity-based compensation charges associated with its equity-based compensation plans. The Company filed a Form 8-K dated October 10, 2006, which provides further details regarding the special committee’s review.
As a result, the Company has recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, including related tax items. In accordance with the provisions of SAB 108, the Company decreased beginning retained earnings157 is effective for fiscal year 2006 by $61.8 million withinyears beginning after November 15, 2007. The FASB has issued a one-year deferral of SFAS No. 157’s fair value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. Although SFAS No. 157 will require additional disclosures about fair value measurements, the accompanying Consolidated Financial Statements.
The Company does not believe that the net effect of this adjustment was material, either quantitatively or qualitatively, in any of the years covered by the review. In reaching that determination, the following quantitative measures were considered:
(in thousands) | | | | | | Net Adjustment, After | |
| | Net Adjustment, | | Net Income | | Tax as a % of Net | |
Fiscal Year | | After Tax | | As Reported | | Income As Reported | |
2005 | | $ | 11,488 | | $ | 572,847 | | 2.01 | % |
2004 | | 12,493 | | 504,964 | | 2.47 | % |
2003 | | 13,607 | | 399,470 | | 3.41 | % |
2002 | | 8,600 | | 302,179 | | 2.85 | % |
2001 | | 7,391 | | 219,599 | | 3.37 | % |
2000 | | 5,272 | | 171,922 | | 3.07 | % |
1999 | | 1,340 | | 131,229 | | 1.02 | % |
1998 | | 923 | | 97,346 | | 0.95 | % |
1997 | | 405 | | 73,142 | | 0.55 | % |
1996 | | 163 | | 55,015 | | 0.30 | % |
1995 | | 56 | | 39,459 | | 0.14 | % |
1994 | | 22 | | 30,013 | | 0.07 | % |
1993 | | 2 | | 21,887 | | 0.01 | % |
Total | | $ | 61,762 | | | | | |
| | | | | | | | | |
Rent and Lease Accounting
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease. In fiscal 2004, due to clarification by the Office of the Chief Accountant of the SEC, the Company changed its method of accounting to define the beginning of the lease term as the date the Company obtained possession of the leased premises. Prior to fiscal 2004, the Company’s method of accounting defined the beginning of the lease term as the date the Company commenced lease payments. The Company has recorded an adjustment to retained earnings and deferred rent and other liabilities to reflect these accounts as if the Company had always defined the beginning of the lease term as the date the Company obtained possession of the leased premises and to correspondingly increase deferred tax assets. The Company does not believe that the net effect of this adjustment which includes fiscal years 1993 through 2003 was material.
Impact of Adjustments
The impact of each of the items noted above, net of tax, on fiscal 2006 beginning balances are presented below:
| | Review of Stock | | | | | |
| | Option Grant | | Rent & | | | |
| | Practices, Including | | Lease | | | |
(in thousands) | | Related Tax Items | | Accounting | | Total | |
Other Assets | | $ | 11,273 | | $ | 4,738 | | $ | 16,011 | |
Income Taxes Payable | | (34,747 | ) | — | | (34,747 | ) |
Deferred Rent and Other Liabilities | | — | | (15,588 | ) | (15,588 | ) |
Additional Paid-in Capital | | (38,288 | ) | — | | (38,288 | ) |
Retained Earnings | | 61,762 | | 10,850 | | 72,612 | |
Total | | $ | — | | $ | — | | $ | — | |
Other Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition,expect the adoption of SFAS No. 123R requires additional accounting and disclosure related157 to income tax and cash flow effects resulting from stock-based compensation. The Company adopted SFAS No. 123Rhave a material impact on August 28, 2005 (the “date of adoption”), the beginning of its third quarter of fiscal 2005, the year ended February 25, 2006. While SFAS No. 123R was not required to be effective until the first annual reporting period that began after June 15, 2005, early adoption was encouraged and the Company elected to adopt before the required effective date.consolidated financial statements.
The Company adopted SFAS No.123R under the modified prospective application. Under this application, prior period amounts are not restated to include the effects of stock-based compensation, and the Company records stock-based compensation expense for all awards granted on or after the date of adoption and for the portion of previously granted awards that remained unvested at the date of adoption. Currently, the Company’s stock-based compensation relates to restricted stock awards and stock options. The Company’s restricted stock awards are considered nonvested share awards as defined under SFAS No. 123R.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—IncludingLiabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the “fair value option”). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. As required by SFAS No. 158, the Company adopted the balance sheet recognition provisions at the end of fiscal 2006 on a prospective basis and will adopt the year end measurement date in fiscal 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. (See “Employee Benefit Plans,” Note 9).
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157159 will have a material impact on its consolidated financial statements.
In June 2006,December 2007, the FASB issued FASB InterpretationSFAS No. (“FIN”) 48, “Accounting141 (revised 2007), “Business Combinations.” SFAS No. 141R establishes principles and requirements for Uncertaintyhow the acquirer in Income Taxes — An Interpretation of FASB Statementa business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. SFAS No. 109.” FIN No. 48 prescribes a recognition threshold and measurement attribute for141R determines what information to disclose to enable users
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of the financial statement recognitionstatements to evaluate the nature and measurementfinancial effects of a tax position takenthe business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or expected to be taken in a tax return. FIN No. 48 is effective for fiscal yearsafter the beginning of the first annual reporting period beginning on or after December 15, 2006. The Company does2008. Early adoption is not believe the adoption of FIN No. 48 will have a material impact on its consolidated financial statements.permitted.
In June 2006, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording these taxes in the Company’s consolidated financial statements as the Company historically has presented sales excluding these taxes.
In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 was effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1 did not have a material impact on the Company’s consolidated financial statements.
REVIEW OF EQUITY GRANTS AND PROCEDURES AND RELATED MATTERS IN FISCAL 2006
As a result of revised measurement dates for certain stock option grants, and the correction of various other errors, the Company has determined that it had certain unrecorded non-cash equity-based compensation charges of $61.8 million, including related tax items related to fiscal years prior to 2006. (See “Recent Accounting Pronouncements-StaffIn accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 108”). For108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company decreased beginning Retained earnings for fiscal 2006 by $61.8 million within the Company recorded $8.2 million of expense related to the revised measurement dates.accompanying Consolidated Financial Statements.
The Company’s Board of Directors also approved a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical deficiencies associated with certain of the Company’s stock option grants that were disclosed through the Company’s stock option review. As a result of this program, the Company made cash payments totaling approximately $30.0 million to over 1,600 employees in the fourth quarter of fiscal 2006, which resulted in a non-recurring, pre-tax stock-based compensation charge. The cash outlay primarily representsrepresented payments to employees in connection with increasing the exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences. No executive officer received such payments. The Company believes it is likely the Company will recoup a substantial portion of the anticipated cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery would not flow through the income statement.
The Company also filed a Form 8-K dated December 28, 2006 which provides further details regarding the remediation program.
The Company continues to cooperate with the informal inquiry of the SEC regarding the Company’s stock option grant practices. In addition, the Company is also cooperating with the
The United States Attorney’s officeOffice for the District of New Jersey in connection withconcluded its inquiry into such matters.with respect to matters arising out of and related to the Company’s historical stock option grants and procedures and related matters and has indicated it will take no further action related to this matter.
CRITICAL ACCOUNTING POLICIES
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 the inventory valuation, impairment of long-lived assets, goodwill and other indefinitely lived intangible assets, accruals for self insurance, litigation, store opening, expansion, relocation and closing costs, stock-based
compensation and income taxes. Actual results could differ from these estimates.
Inventory Valuation: Merchandise inventories are stated at the lower of cost or market. Inventory costs for BBB and Harmon are calculated using the weighted average retail inventory method and inventory costcosts for CTS isand buybuy BABY are calculated using the first-in, first-outfirst in first out cost method.
Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated
21
by applying a cost-to-retailcost to retail ratio to the retail valuevalues 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.
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 and anticipated demand. 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.shrinkage and any current trends, if applicable. Actual shrinkage is recorded at year-endyear end based upon the results of the Company’s physical inventory count. 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.
Impairment of Long-Lived Assets: The Company reviews long-lived assets for impairment annually or 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. 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.
Goodwill and Other Indefinitely Lived Intangible Assets: The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually 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. The Company has not historically recorded an impairment to its goodwill and other indefinitely lived intangible assets. 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.
Self Insurance: The Company utilizes a combination of insurance and self insurance for a number of risks including workers’ compensation, general 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.
Litigation: The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which 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 its pending litigation and revises its estimates, as appropriate. The ultimate resolution of these ongoing matters as a result of future developments could have a material impact on the Company’s earnings. The Company 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.
Store Opening, Expansion, Relocation and Closing Costs: Store opening, expansion, relocation and closing costs,
including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
22
Stock-Based Compensation:Under SFAS No. 123R,123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), the Company uses a Black-Scholes option-pricing model to determine the fair value of its stock options. The Black-Scholes model includes various assumptions, including the expected life of stock options, the expected volatilityrisk free interest rate and the expected risk free interest rate.volatility. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. As a result, if other assumptions had been used, total stock-based compensation cost, as determined in accordance with SFAS No. 123R, could have been materially impacted. Furthermore, if the Company uses different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods.
The Company determines its assumptions for the Black-Scholes option-pricing model in accordance with SFAS No. 123R and/or SAB No. 107, “Share-Based Payment”.
· The expected life of stock options is estimated based on historical experience.
· The expected risk free interest rate is based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
· The expected volatility is based solely on the implied volatility of the Company’s call options. The Company’s call options used to determine implied volatility 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. The Company believes the resulting implied volatility used to determine the fair value of its stock options represents what marketplace participants would likely use in determining an exchange price for an option.
The Company is required to record stock-based compensation expense net of estimated forfeitures. The Company’s forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates.
Income Taxes: 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 carryforwards. 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.
The Company intends to reinvest the unremitted earnings of its Canadian subsidiary. Accordingly, no provision has been made for U.S. or additional non-U.S. taxes with respect to these earnings. In the event of repatriation to the U.S., such earnings would be subject to U.S. income taxes in most cases.
During the first quarter of 2007, the Company adopted FIN 48. Under FIN 48, 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.
The Company expects that FIN 48 may, over time, create more volatility in the effective tax rate from quarter to quarter because the Company is required each quarter to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.
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.
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FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
This Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward lookingforward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company’s actual results and future financial condition may differ materially from those expressed in any such forward lookingforward-looking statements as a result of many factors that may be outside the Company’s control. Such factors include, without limitation: general economic conditions including the housing market and fuel costs; changes in the retailing environment and consumer preferences and spending habits; demographics and other macro-economicmacroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; general economic conditions; unusual weather patterns; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the cost of labor, merchandise and other costs and expenses; the ability to find suitable locations at acceptable occupancy costs to support the Company’s expansion program; the impact of failed auctions for auction rate securities held by the Company; and matters arising out of or related to the Company’s stock option grants and procedures and related matters, including the outcome or any other matters arising out of the informal inquiry commenced by the SEC, or the inquiry commenced by the United States Attorney’s office for the District of New Jersey, the possibility that the SEC or the United States Attorney’s office for the District of New Jersey may not agree with all of the special committee’s findings and recommendations and may require additional or different remediation, or may bring proceedings in respect of such matters, any other proceedings which may be brought against the Company by the SEC or other governmental agencies, any tax implications relating to the Company’s stock option grants, the outcome of thea shareholder derivative actionsaction filed against certain of the Company’s officers and its directors and related matters, and the possibility of other private litigation relating to such stock option grants and related matters.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company’s exposure to market risk for changes in interest rates relates primarily to
As of March 1, 2008, the Company’s investment securities. The Company is adverse to loss of principal and seeks to preserve its invested funds by limiting market risk.The Company’s investment securities consist of fixed rate instruments. The Company’s investments include cash and cash equivalents of $213.4 million, short term investment securities of $774.9$224.1 million and long term investment securities of $102.7$326.0 million at weighted average interest rates of 2.2% and 4.4%, respectively. The Company had no short term investment securities as of March 3,1, 2008.
Included in its long term investment securities, the Company has approximately $326.7 million par value of auction rate securities, less a temporary valuation adjustment of approximately $7.2 million to reflect the current lack of liquidity of these investments. The Company recorded this temporary valuation adjustment in other comprehensive income, net of the related tax benefit of $2.7 million, which did not affect fiscal 2007 earnings, and reclassified these investments to long term investment securities to reflect the current lack of 5.3%, 3.8%liquidity of these investments. Due to current market conditions, these investments have experienced failed auctions beginning in mid-February 2008. These failed auctions result in a lack of liquidity in the securities, but do not affect the underlying collateral of the securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies and 4.5%, respectively.the Company believes that given their high credit quality, it will ultimately recover at par all amounts invested in these securities. The Company does not anticipate that any potential lack of liquidity in these auction rate securities, even for an extended period of time, will affect its ability to finance its operations, including its expansion program and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments, including the recent announcements by certain asset managers to redeem a portion of their outstanding auction rate securities. However, if the interest rate environment changes, the Company may incur further unrealized losses. If uncertainties in the credit and capital markets continue and these markets deteriorate further, the Company may conclude that the decline in value is other than temporary and incur realized losses, including up to the full amount of the investments in auction rate securities, which could negatively affect the Company’s financial condition, cash flow and results of operations.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are included herein:
1)
| 1) | Consolidated Balance Sheets as of March 1, 2008 and March 3, 2007 |
| | |
| 2) | Consolidated Statements of Earnings for the fiscal years ended March 1, 2008, March 3, 2007 and February 25, 2006 |
| | |
| 3) | Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 1, 2008, March 3, 2007 and February 25, 2006 |
| | |
| 4) | Consolidated Statements of Cash Flows for the fiscal years ended March 1, 2008, March 3, 2007 and February 25, 2006 |
| | |
| 5) | Notes to Consolidated Financial Statements |
| | |
| 6) | Reports of Independent Registered Public Accounting Firm |
2)Consolidated Statements of Earnings for the fiscal years ended March 3, 2007, February 25 2006 and February 26, 2005
3)Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 3, 2007, February 25, 2006 and February 26, 2005
4)Consolidated Statements of Cash Flows for the fiscal years ended March 3, 2007, February 25, 2006 and February 26, 2005
5)Notes to Consolidated Financial Statements
6)Reports of Independent Registered Public Accounting Firm
24
BED BATH & BEYOND INC. AND SUBSIDIARIES
Consolidated Balance Sheets
sheets
(in thousands, except per share data)
| | March 3, | | February 25, | |
| | 2007 | | 2006 | |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 213,381 | | $ | 247,697 | |
Short term investment securities | | 774,881 | | 404,113 | |
Merchandise inventories | | 1,505,800 | | 1,301,720 | |
Other current assets | | 204,552 | | 118,415 | |
| | | | | |
Total current assets | | 2,698,614 | | 2,071,945 | |
| | | | | |
Long term investment securities | | 102,692 | | 393,862 | |
Property and equipment, net | | 929,507 | | 738,742 | |
Other assets | | 228,491 | | 177,591 | |
| | | | | |
Total assets | | $ | 3,959,304 | | $ | 3,382,140 | |
| | | | | |
Liabilities and Shareholders’ Equity | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 615,156 | | $ | 534,910 | |
Accrued expenses and other current liabilities | | 245,267 | | 249,092 | |
Merchandise credit and gift card liabilities | | 143,737 | | 113,514 | |
Income taxes payable | | 140,913 | | 92,030 | |
| | | | | |
Total current liabilities | | 1,145,073 | | 989,546 | |
| | | | | |
Deferred rent and other liabilities | | 165,080 | | 130,144 | |
| | | | | |
Total liabilities | | 1,310,153 | | 1,119,690 | |
| | | | | |
Commitments and contingencies (notes 4, 8 and 10) | | | | | |
| | | | | |
Shareholders’ equity: | | | | | |
Preferred stock—$0.01 par value; authorized—1,000
shares; no shares issued or outstanding | | — | | — | |
| | | | | |
Common stock—$0.01 par value; authorized—900,000 shares; issued 309,750
and 306,156 shares, respectively; outstanding 277,074 and 280,990 shares, respectively | | 3,098 | | 3,062 | |
Additional paid-in capital | | 737,209 | | 575,559 | |
Retained earnings | | 3,153,856 | | 2,632,224 | |
Treasury stock, at cost | | (1,249,397 | ) | (948,395 | ) |
Accumulated other comprehensive income | | 4,385 | | — | |
| | | | | |
Total shareholders’ equity | | 2,649,151 | | 2,262,450 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 3,959,304 | | $ | 3,382,140 | |
| | March 1, | | March 3, | |
| | 2008 | | 2007 | |
| | | | | |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 224,084 | | $ | 213,381 | |
Short term investment securities | | — | | 774,881 | |
Merchandise inventories | | 1,616,981 | | 1,505,800 | |
Other current assets | | 238,646 | | 204,552 | |
| | | | | |
Total current assets | | 2,079,711 | | 2,698,614 | |
| | | | | |
Long term investment securities | | 326,004 | | 102,692 | |
Property and equipment, net | | 1,121,906 | | 929,507 | |
Other assets | | 316,472 | | 228,491 | |
| | | | | |
Total assets | | $ | 3,844,093 | | $ | 3,959,304 | |
| | | | | |
Liabilities and Shareholders’ Equity | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 570,605 | | $ | 615,156 | |
Accrued expenses and other current liabilities | | 258,989 | | 245,267 | |
Merchandise credit and gift card liabilities | | 171,252 | | 143,737 | |
Current income taxes payable | | 13,266 | | 140,913 | |
| | | | | |
Total current liabilities | | 1,014,112 | | 1,145,073 | |
| | | | | |
Deferred rent and other liabilities | | 192,778 | | 165,080 | |
Income taxes payable | | 75,375 | | — | |
| | | | | |
Total liabilities | | 1,282,265 | | 1,310,153 | |
| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
Shareholders’ equity: | | | | | |
Preferred stock - $0.01 par value; authorized - 1,000 shares; no shares issued or outstanding | | — | | — | |
Common stock - $0.01 par value; authorized - 900,000 shares; issued 312,229 and 309,750 shares, respectively; outstanding 258,920 and 277,074 shares, respectively | | 3,122 | | 3,098 | |
Additional paid-in capital | | 813,568 | | 737,209 | |
Retained earnings | | 3,729,766 | | 3,153,856 | |
Treasury stock, at cost | | (1,983,590 | ) | (1,249,397 | ) |
Accumulated other comprehensive (loss) income | | (1,038 | ) | 4,385 | |
| | | | | |
Total shareholders’ equity | | 2,561,828 | | 2,649,151 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 3,844,093 | | $ | 3,959,304 | |
See accompanying Notes to Consolidated Financial Statements.
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26
Consolidated Statements of Earnings
Bed Bath & Beyond Inc. and Subsidiaries
| | Fiscal Year Ended | |
| | March 3, | | February 25, | | February 26, | |
(in thousands, except per share data) | | | | 2007 | | 2006 | | 2005 | |
Net sales | | $ | 6,617,429 | | $ | 5,809,562 | | $ | 5,147,678 | |
Cost of sales | | 3,782,027 | | 3,323,814 | | 2,961,377 | |
Gross profit | | 2,835,402 | | 2,485,748 | | 2,186,301 | |
Selling, general and administrative expenses | | 1,946,001 | | 1,606,577 | | 1,393,887 | |
Operating profit | | 889,401 | | 879,171 | | 792,414 | |
Interest income | | 43,478 | | 35,920 | | 18,773 | |
Earnings before provision for income taxes | | 932,879 | | 915,091 | | 811,187 | |
Provision for income taxes | | 338,635 | | 342,244 | | 306,223 | |
Net earnings | | $ | 594,244 | | $ | 572,847 | | $ | 504,964 | |
| | | | | | | |
Net earnings per share - Basic | | $ | 2.12 | | $ | 1.95 | | $ | 1.68 | |
Net earnings per share - Diluted | | $ | 2.09 | | $ | 1.92 | | $ | 1.65 | |
| | | | | | | |
Weighted average shares outstanding - Basic | | 280,199 | | 293,899 | | 300,743 | |
Weighted average shares outstanding - Diluted | | 284,956 | | 298,973 | | 306,642 | |
| | | | | | | | | | | | |
| | FISCAL YEAR ENDED | |
| | March 1, | | March 3, | | February 25, | |
(in thousands, except per share data) | | 2008 | | 2007 | | 2006 | |
| | | | | | | |
Net sales | | $ | 7,048,942 | | $ | 6,617,429 | | $ | 5,809,562 | |
Cost of sales | | 4,123,711 | | 3,782,027 | | 3,323,814 | |
Gross profit | | 2,925,231 | | 2,835,402 | | 2,485,748 | |
Selling, general and administrative expenses | | 2,087,209 | | 1,946,001 | | 1,606,577 | |
Operating profit | | 838,022 | | 889,401 | | 879,171 | |
Interest income | | 27,210 | | 43,478 | | 35,920 | |
Earnings before provision for income taxes | | 865,232 | | 932,879 | | 915,091 | |
Provision for income taxes | | 302,424 | | 338,635 | | 342,244 | |
Net earnings | | $ | 562,808 | | $ | 594,244 | | $ | 572,847 | |
| | | | | | | | | | |
Net earnings per share - Basic | | $ | 2.13 | | $ | 2.12 | | $ | 1.95 | |
Net earnings per share - Diluted | | $ | 2.10 | | $ | 2.09 | | $ | 1.92 | |
| | | | | | | |
Weighted average shares outstanding - Basic | | 264,824 | | 280,199 | | 293,899 | |
Weighted average shares outstanding - Diluted | | 268,409 | | 284,956 | | 298,973 | |
See accompanying Notes to Consolidated Financial Statements.
27
Consolidated Statements of Shareholders’ Equity
Bed Bath & Beyond Inc. and Subsidiaries
| | | | | | | | | | | | | | Accumulated | | | |
| | | | | | Additional | | | | | | | | Other | | | |
| | Common Stock | | Paid-in | | Retained | | Treasury Stock | | Comprehensive | | | |
(in thousands) | | | | Shares | | Amount | | Capital | | Earnings | | Shares | | Amount | | Income | | Total | |
Balance at February 28, 2004 | | 300,278 | | $ | 3,003 | | $ | 433,404 | | $ | 1,554,413 | | — | | $ | — | | $ | — | | $ | 1,990,820 | |
Net earnings | | | | | | | | 504,964 | | | | | | | | 504,964 | |
Shares sold under employee stock option plans, including tax benefit | | 2,547 | | 25 | | 58,104 | | | | | | | | | | 58,129 | |
Repurchase of common stock, including fees | | | | | | | | | | (8,762 | ) | (350,151 | ) | | | (350,151 | ) |
Balance at February 26, 2005 | | 302,825 | | 3,028 | | 491,508 | | 2,059,377 | | (8,762 | ) | (350,151 | ) | — | | 2,203,762 | |
Net earnings | | | | | | | | 572,847 | | | | | | | | 572,847 | |
Shares sold under employee stock option plans, including tax benefit | | 2,300 | | 24 | | 57,622 | | | | | | | | | | 57,646 | |
Issuance of restricted shares, net | | 1,031 | | 10 | | (10 | ) | | | | | | | | | — | |
Stock-based compensation expense | | | | | | 26,439 | | | | | | | | | | 26,439 | |
Repurchase of common stock, including fees | | | | | | | | | | (16,404 | ) | (598,244 | ) | | | (598,244 | ) |
Balance at February 25, 2006 | | 306,156 | | 3,062 | | 575,559 | | 2,632,224 | | (25,166 | ) | (948,395 | ) | — | | 2,262,450 | |
Net earnings | | | | | | | | 594,244 | | | | | | | | 594,244 | |
Shares sold under employee stock option plans, including tax benefit | | 2,603 | | 26 | | 61,628 | | | | | | | | | | 61,654 | |
Issuance of restricted shares, net | | 991 | | 10 | | (10 | ) | | | | | | | | | — | |
Stock-based compensation expense, net | | | | | | 61,744 | | | | | | | | | | 61,744 | |
Repurchase of common stock, including fees | | | | | | | | | | (7,510 | ) | (301,002 | ) | | | (301,002 | ) |
Adoption of SAB 108 (Note 2) | | | | | | 38,288 | | (72,612 | ) | | | | | | | (34,324 | ) |
Adoption of SFAS No. 158 (Note 9) | | | | | | | | | | | | | | 4,385 | | 4,385 | |
Balance at March 3, 2007 | | 309,750 | | $ | 3,098 | | $ | 737,209 | | $ | 3,153,856 | | (32,676 | ) | $ | (1,249,397 | ) | $ | 4,385 | | $ | 2,649,151 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | ADDITIONAL | | | | | | | | ACCUMULATED OTHER | | | |
| | COMMON STOCK | | PAID-IN | | RETAINED | | TREASURY STOCK | | COMPREHENSIVE | | | |
(in thousands) | | SHARES | | AMOUNT | | CAPITAL | | EARNINGS | | SHARES | | AMOUNT | | INCOME (LOSS) | | TOTAL | |
Balance at February 26, 2005 | | 302,825 | | $3,028 | | $491,508 | | $2,059,377 | | (8,762 | ) | $(350,151 | ) | $— | | $2,203,762 | |
Net earnings | | | | | | | | 572,847 | | | | | | | | 572,847 | |
Shares sold under employee stock option plans, including tax benefit | | 2,300 | | 24 | | 57,622 | | | | | | | | | | 57,646 | |
Issuance of restricted shares, net | | 1,031 | | 10 | | (10 | ) | | | | | | | | | — | |
Stock-based compensation expense | | | | | | 26,439 | | | | | | | | | | 26,439 | |
Repurchase of common stock, including fees | | | | | | | | | | (16,404 | ) | (598,244 | ) | | | (598,244 | ) |
Balance at February 25, 2006 | | 306,156 | | 3,062 | | 575,559 | | 2,632,224 | | (25,166 | ) | (948,395 | ) | — | | 2,262,450 | |
Net earnings | | | | | | | | 594,244 | | | | | | | | 594,244 | |
Shares sold under employee stock option plans, including tax benefit | | 2,603 | | 26 | | 61,628 | | | | | | | | | | 61,654 | |
Issuance of restricted shares, net | | 991 | | 10 | | (10 | ) | | | | | | | | | — | |
Stock-based compensation expense, net | | | | | | 61,744 | | | | | | | | | | 61,744 | |
Repurchase of common stock, including fees | | | | | | | | | | (7,510 | ) | (301,002 | ) | | | (301,002 | ) |
Adoption of SAB 108 | | | | | | 38,288 | | (72,612 | ) | | | | | | | (34,324 | ) |
Adoption of SFAS No. 158 | | | | | | | | | | | | | | 4,385 | | 4,385 | |
Balance at March 3, 2007 | | 309,750 | | 3,098 | | 737,209 | | 3,153,856 | | (32,676 | ) | (1,249,397 | ) | 4,385 | | 2,649,151 | |
Adoption of FIN 48 | | | | | | | | 13,102 | | | | | | | | 13,102 | |
Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | |
Net earnings | | | | | | | | 562,808 | | | | | | | | 562,808 | |
Temporary impairment of auction rate securities, net of taxes | | | | | | | | | | | | | | (4,516 | ) | (4,516 | ) |
Pension adjustment, net of taxes | | | | | | | | | | | | | | (736 | ) | (736 | ) |
Currency translation adjustment | | | | | | | | | | | | | | (171 | ) | (171 | ) |
Comprehensive Income | | | | | | | | | | | | | | | | 557,385 | |
Shares sold under employee stock option plans, including tax benefit | | 1,463 | | 14 | | 31,367 | | | | | | | | | | 31,381 | |
Issuance of restricted shares, net | | 1,016 | | 10 | | (10 | ) | | | | | | | | | — | |
Stock-based compensation expense, net | | | | | | 45,002 | | | | | | | | | | 45,002 | |
Repurchase of common stock, including fees | | | | | | | | | | (20,633 | ) | (734,193 | ) | | | (734,193 | ) |
Balance at March 1, 2008 | | 312,229 | | $3,122 | | $813,568 | | $3,729,766 | | (53,309 | ) | $(1,983,590 | ) | $(1,038 | ) | $2,561,828 | |
See accompanying Notes to Consolidated Financial Statements.
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Consolidated Statements of Cash Flows
Bed Bath & Beyond Inc. and Subsidiaries
| | FISCAL YEAR ENDED | |
| | March 3, | | February 25, | | February 26, | |
(in thousands) | | 2007 | | 2006 | | 2005 | |
Cash Flows from Operating Activities: | | | | | | | |
Net earnings | | $ | 594,244 | | $ | 572,847 | | $ | 504,964 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | |
Depreciation | | 132,955 | | 111,111 | | 97,491 | |
Amortization of bond premium | | 3,532 | | 3,172 | | 1,657 | |
Stock-based compensation | | 52,596 | | 26,439 | | — | |
Excess tax benefit from stock-based compensation | | 6,691 | | 20,011 | | 27,049 | |
Deferred income taxes | | (87,225 | ) | (25,874 | ) | 4,056 | |
Increase in assets: | | | | | | | |
Merchandise inventories | | (204,080 | ) | (149,692 | ) | (139,694 | ) |
Trading investment securities | | (2,958 | ) | (423 | ) | — | |
Other current assets | | (38,241 | ) | (23,543 | ) | (7,350 | ) |
Other assets | | (695 | ) | (307 | ) | (145 | ) |
Increase (decrease) in liabilities: | | | | | | | |
Accounts payable | | 75,883 | | 64,892 | | 42,517 | |
Accrued expenses and other current liabilities | | 9,784 | | (5,742 | ) | (12,733 | ) |
Merchandise credit and gift card liabilities | | 30,223 | | 26,453 | | 23,873 | |
Income taxes payable | | 21,575 | | 10,666 | | 47,519 | |
Deferred rent and other liabilities | | 19,348 | | 30,425 | | 17,827 | |
Net cash provided by operating activities | | 613,632 | | 660,435 | | 607,031 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Purchase of held-to-maturity investment securities | | (124,125 | ) | (442,356 | ) | (484,793 | ) |
Redemption of held-to-maturity investment securities | | 309,818 | | 331,565 | | 122,349 | |
Purchase of available-for-sale investment securities | | (1,443,115 | ) | (1,524,835 | ) | (2,414,778 | ) |
Redemption of available-for-sale investment securities | | 1,177,250 | | 1,788,450 | | 2,604,900 | |
Capital expenditures | | (317,501 | ) | (220,394 | ) | (181,363 | ) |
Net cash used in investing activities | | (397,673 | ) | (67,570 | ) | (353,685 | ) |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Proceeds from exercise of stock options | | 43,393 | | 34,953 | | 31,080 | |
Excess tax benefit from stock-based compensation | | 14,001 | | 2,682 | | — | |
Repurchase of common stock, including fees | | (301,002 | ) | (598,244 | ) | (350,151 | ) |
Payment of deferred purchase price for acquisition | | (6,667 | ) | (6,667 | ) | (6,667 | ) |
Net cash used in financing activities | | (250,275 | ) | (567,276 | ) | (325,738 | ) |
| | | | | | | |
Net (decrease) increase in cash and cash equivalents | | (34,316 | ) | 25,589 | | (72,392 | ) |
| | | | | | | |
Cash and cash equivalents: | | | | | | | |
Beginning of period | | 247,697 | | 222,108 | | 294,500 | |
End of period | | $ | 213,381 | | $ | 247,697 | | $ | 222,108 | |
| | FISCAL YEAR ENDED | |
| | March 1, | | March 3, | | February 25, | |
(in thousands) | | 2008 | | 2007 | | 2006 | |
Cash Flows from Operating Activities: | | | | | | | |
Net earnings | | $ | 562,808 | | $ | 594,244 | | $ | 572,847 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | |
Depreciation | | 157,770 | | 132,955 | | 111,111 | |
Amortization of bond premium | | 1,538 | | 3,532 | | 3,172 | |
Stock-based compensation | | 43,755 | | 52,596 | | 26,439 | |
Tax benefit from stock-based compensation | | 2,719 | | 6,691 | | 20,011 | |
Deferred income taxes | | 2,315 | | (87,225 | ) | (25,874 | ) |
(Increase) decrease in assets, net of effect of acquisition: | | | | | | | |
Merchandise inventories | | (96,673 | ) | (204,080 | ) | (149,692 | ) |
Trading investment securities | | (3,020 | ) | (2,958 | ) | (423 | ) |
Other current assets | | (16,217 | ) | (38,241 | ) | (23,543 | ) |
Other assets | | 529 | | (695 | ) | (307 | ) |
(Decrease) increase in liabilities, net of effect of acquisition: | | | | | | | |
Accounts payable | | (31,764 | ) | 75,883 | | 64,892 | |
Accrued expenses and other current liabilities | | 15,774 | | 9,784 | | (5,742 | ) |
Merchandise credit and gift card liabilities | | 24,430 | | 30,223 | | 26,453 | |
Income taxes payable | | (74,530 | ) | 21,575 | | 10,666 | |
Deferred rent and other liabilities | | 25,102 | | 19,348 | | 30,425 | |
Net cash provided by operating activities | | 614,536 | | 613,632 | | 660,435 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Purchase of held-to-maturity investment securities | | — | | (124,125 | ) | (442,356 | ) |
Redemption of held-to-maturity investment securities | | 494,526 | | 309,818 | | 331,565 | |
Purchase of available-for-sale investment securities | | (1,495,155 | ) | (1,443,115 | ) | (1,524,835 | ) |
Redemption of available-for-sale investment securities | | 1,546,430 | | 1,177,250 | | 1,788,450 | |
Capital expenditures | | (358,210 | ) | (317,501 | ) | (220,394 | ) |
Payment for acquisition, net of cash acquired | | (85,893 | ) | — | | — | |
Net cash provided by (used in) investing activities | | 101,698 | | (397,673 | ) | (67,570 | ) |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Proceeds from exercise of stock options | | 22,672 | | 43,393 | | 34,953 | |
Excess tax benefit from stock-based compensation | | 5,990 | | 14,001 | | 2,682 | |
Repurchase of common stock, including fees | | (734,193 | ) | (301,002 | ) | (598,244 | ) |
Payment of deferred purchase price for acquisition | | — | | (6,667 | ) | (6,667 | ) |
Net cash used in financing activities | | (705,531 | ) | (250,275 | ) | (567,276 | ) |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 10,703 | | (34,316 | ) | 25,589 | |
| | | | | | | |
Cash and cash equivalents: | | | | | | | |
Beginning of period | | 213,381 | | 247,697 | | 222,108 | |
End of period | | $ | 224,084 | | $ | 213,381 | | $ | 247,697 | |
See accompanying Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
Bed Bath & Beyond Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
A. Nature of Operations
Bed Bath & Beyond Inc. and subsidiaries (the “Company”) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops (“CTS”), Harmon and Harmon.Harmon Face Values (“Harmon”) and buybuy BABY, which was acquired on March 22, 2007. (See “Acquisition,” Note 2). The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, and health and beauty care items.items and infant and toddler merchandise. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.
B.Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned.
All significant intercompany balances and transactions have been eliminated in consolidation.
C.B. Fiscal Year
The Company’s fiscal year is comprised of the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2007 and fiscal 2005 represented 52 weeks and ended on March 1, 2008 and February 25, 2006, respectively; fiscal 2006 represented 53 weeks and ended on March 3, 2007; fiscal 20052007.
C.Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and fiscal 2004 represented 52 weeksits subsidiaries, all of which are wholly owned.
All significant intercompany balances and ended on February 25, 2006 and February 26, 2005, respectively.transactions have been eliminated in consolidation.
D.Segments
The Company accounts for its operations as one operating segment.
E. Use of Estimates
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 impairment of auction rate securities, inventory valuation, impairment of long-lived assets, goodwill and other indefinitely 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 taxes. Actual results could differ from these estimates.
E.Cash and Cash Equivalents
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 5 business days, of $49.3 million and $44.3 million as of March 1, 2008 and March 3, 2007, respectively.
F. RecentInvestment Securities
Investment securities primarily consist of auction rate securities, U.S. Government Agency debt securities and municipal debt securities. Auction rate securities are securities with interest rates that reset periodically through an auction process. Auction rate securities are classified as available-for-sale and are stated at fair value, which had
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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, due to current market conditions, the auction process for the Company’s auction rate securities has recently failed beginning in mid-February 2008. These failed auctions result in a lack of liquidity in the securities, and affect their estimated fair values at March 1, 2008, but do not affect the underlying collateral of the securities. (See “Investment Securities,” Note 6). 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.
G.Inventory Valuation
Merchandise inventories are stated at the lower of cost or market. Inventory costs for BBB and Harmon are calculated using the weighted average retail inventory method and inventory costs for CTS and buybuy BABY are calculated using the first in first out cost 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.
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 and anticipated demand. 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 count. 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.
H.Property and Equipment
Property and equipment are stated at cost. Depreciation is computed 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 seven 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 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 $72.9 million, $67.0 million and $54.2 million for fiscal 2007, 2006 and 2005, respectively.
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I.Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment annually or 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. 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.
J.Goodwill and Other Indefinitely Lived Intangible Assets
The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually 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. The Company has not historically recorded an impairment to its goodwill and other indefinitely lived intangible assets. 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 March 1, 2008 and March 3, 2007 is $198.4 million and $147.6 million, respectively, for goodwill, and $30.9 million and $19.9 million, respectively, for tradenames, which are not subject to amortization. The increase in goodwill was attributable to a $61.3 million increase as a result of the acquisition of buybuy BABY, partially offset by a $10.5 million decrease due to the favorable resolution of a tax contingency related to a prior acquisition. Tradenames increased as a result of the acquisition of buybuy BABY.
K.Self Insurance
The Company utilizes a combination of insurance and self insurance for a number of risks including workers’ compensation, general 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.
L.Deferred Rent
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease beginning as of the date the Company obtained possession of the leased premises. Deferred rent amounted to $77.8 million and $74.9 million as of March 1, 2008 and March 3, 2007, respectively.
Cash or lease incentives (“tenant allowances”) received pursuant to certain store leases are recognized on a straight-line basis as a reduction to rent over the lease term. The unamortized portion of tenant allowances is included in deferred rent and other liabilities. Tenant allowances amounted to $51.0 million and $34.5 million as of March 1, 2008 and March 3, 2007, respectively.
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M.Treasury Stock
The Company’s Board of Directors has authorized repurchases of shares of its common stock for $1 billion in September 2007, for $1 billion in December 2006, for $200 million in January 2006, for $400 million in October 2005 and for $350 million in December 2004. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. During fiscal 2007, the Company repurchased approximately 20.6 million shares of its common stock at a total cost of approximately $734.2 million. During fiscal 2006, the Company repurchased approximately 7.5 million shares of its common stock at a total cost of approximately $301.0 million. During fiscal 2005, the Company repurchased approximately 16.4 million shares of its common stock at a total cost of approximately $598.2 million.
N.Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, investment securities, accounts payable and certain other liabilities. The Company’s investment securities consist primarily of available-for-sale debt securities which are stated at their approximate fair value. The book value of all financial instruments is representative of their fair values with the exception of certain investment securities (See “Investment Securities,” Note 6).
O.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, but are subject to state escheat regulations; as such, the Company does not record income associated with unredeemed gift cards.
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 to the sales return accrual is required due to material changes in the returns activity, the reserve will be adjusted accordingly.
P.Cost of Sales
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.
Q.Vendor Allowances
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
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cooperative allowances of $11.1 million, $10.6 million and $9.4 million for fiscal 2007, 2006 and 2005, respectively.
R.Store Opening, Expansion, Relocation and Closing Costs
Store opening, expansion, relocation and closing costs, including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
S.Advertising Costs
Expenses associated with direct response advertising are expensed over the period during which the sales are expected to occur, generally four to six weeks, and all other expenses associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to $239.6 million, $198.4 million and $158.2 million for fiscal 2007, 2006 and 2005, respectively.
T.Stock-Based Compensation
The Company records stock-based compensation under the provisions of Statement of Financial Accounting PronouncementsStandards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. The Company adopted SFAS No. 123R on August 28, 2005 (the “date of adoption”) under the modified prospective application. Under this application, the Company records stock-based compensation expense for all awards granted on or after the date of adoption and for the portion of previously granted awards that remained unvested at the date of adoption. Currently, the Company’s stock-based compensation relates to restricted stock awards and stock options. The Company’s restricted stock awards are considered nonvested share awards as defined under SFAS No. 123R.
Prior to the third quarter of fiscal 2005, the Company applied the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (“SFAS No. 148”) and complied with the disclosure requirements of SFAS 123. During the first half of fiscal 2005, which ended on August 27, 2005, the Company recognized compensation expense for restricted stock awards over the service period, but did not recognize compensation expense for stock options, since the Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters in Fiscal 2006,” Note 13 for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants).
U.Income Taxes
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 carryforwards. 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.
The Company intends to reinvest the unremitted earnings of its Canadian subsidiary. Accordingly, no provision has been made for U.S. or additional non-U.S. taxes with respect to these earnings. In Februarythe event of repatriation to the
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U.S., such earnings would be subject to U.S. income taxes in most cases.
During the first quarter of 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN 48, 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.
V.Litigation
The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which 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 its pending litigation and revises its estimates, as appropriate. The ultimate resolution of these ongoing matters as a result of future developments could have a material impact on the Company’s earnings. The Company 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.
W.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 10.9 million, 8.6 million and 4.9 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for fiscal 2007, 2006 and 2005, respectively.
X.Segments
The Company accounts for its operations as one operating segment.
Y.Recent Accounting Pronouncements
In September 2006, the FASB issued StatementSFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The FASB has issued a one-year deferral of Financial Accounting Standards (“SFAS”)SFAS No. 157’s fair value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. Although SFAS No. 157 will require additional disclosures about fair value measurements, the Company does not expect the adoption of SFAS No. 157 to have a material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including
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Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the “fair value option”). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact ofdoes not believe SFAS No. 159 on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of effects of the prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the first annual period ending after November 15, 2006 with early
application encouraged. The Company adopted SAB 108 in its fiscal fourth quarter. (See “Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” Note 2).
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. As required by SFAS No. 158, the Company adopted the balance sheet recognition provisions at the end of fiscal 2006 on a prospective basis and will adopt the year end measurement date provisions in fiscal 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. (See “Employee Benefit Plans,” Note 9).
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of FIN No. 48 will have a material impact on its consolidated financial statements.
In June 2006,December 2007, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording these taxes in the Company’s consolidated financial statements as the Company historically has presented sales excluding these taxes.
In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 was effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1 did not have a material impact on the Company’s consolidated financial statements.
G.Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, investment securities, accounts payable and certain other liabilities. The Company’s investment securities consist primarily of held-to-maturity debt securities which are stated at amortized cost and available-for-sale debt securities which are stated at their approximate fair value. The book value of all financial instruments is representative of their fair values with the exception of investment securities (See “Investment Securities,” Note 5).
H.Cash and Cash Equivalents
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 5 business days, of $44.3 million and $34.9 million as of March 3, 2007 and February 25, 2006, respectively.
I.Investment Securities
Investment securities primarily consist of auction rate securities, U.S. Government Agency debt securities and municipal debt securities. Auction rate securities are securities with interest rates that reset periodically through an auction process. Auction rate securities are classified as available-for-sale and are stated at cost or par value which approximates fair value due to interest rates which reset periodically, typically within 35 days. As a result, there are no cumulative gross unrealized holding gains or losses relating to these auction rate securities. All income from these investments is recorded as interest income.
Primarily all other investment securities are classified as held-to-maturity because the Company has the ability and intent to hold these investments until maturity and are stated at amortized cost.
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.
J.Inventory Valuation
Merchandise inventories are stated at the lower of cost or market. Inventory costs for BBB and Harmon are calculated using the retail inventory method and inventory cost for CTS is calculated using the first-in, first-out cost 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 value of inventories.
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 and anticipated demand. 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. Actual shrinkage is recorded at year-end based upon the results of the Company’s physical inventory count. Historically, the Company’s shrinkage has not been volatile.
K.Property and Equipment
Property and equipment are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets (forty years for buildings; five to fifteen years for furniture, fixtures and equipment; and three to five 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 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 $67.0 million, $54.2 million and $51.4 million for fiscal 2006, 2005 and 2004, respectively.
L.Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment annually or 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. 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.
M.Goodwill and Other Indefinitely Lived Intangible Assets
The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually 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. The Company has not historically recorded an impairment to its goodwill and other indefinitely lived intangible assets. 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 March 3, 2007 and February 25, 2006 is $147.6 million for goodwill and $19.9 million for the tradename of CTS, which are not subject to amortization.
N.Self Insurance
The Company utilizes a combination of insurance and self insurance for a number of risks including workers’ compensation, general 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.
O.Litigation
The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which 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 its pending litigation and revises its estimates, as appropriate. The ultimate resolution of these ongoing matters as a result of future developments could have a material impact on the Company’s earnings. The Company 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.
P.Deferred Rent
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease beginning as of the date the Company obtained possession of the leased premises. Deferred rent amounted to $74.9 million and $53.4 million as of March 3, 2007 and February 25, 2006, respectively.
Cash or lease incentives (“tenant allowances”) received pursuant to certain store leases are recognized on a straight-line basis as a reduction to rent over the lease term. The unamortized portion of tenant allowances is included in deferred rent and other liabilities. Tenant allowances amounted to $34.5 million and $21.1 million as of March 3, 2007 and February 25, 2006, respectively.
Q.Treasury Stock
The Company’s Board of Directors has authorized repurchases of shares of its common stock for $1 billion in December 2006, for $200 million in January 2006, for $400 million in October 2005 and for $350 million in December 2004. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. During fiscal 2006, the Company repurchased approximately 7.5 million shares of its common stock at a total cost of approximately $301 million excluding brokerage fees. During fiscal 2005, the Company repurchased approximately 16.4 million shares of its common stock at a total cost of approximately $598 million excluding brokerage fees. During fiscal 2004, the Company repurchased approximately 8.8 million shares of its common stock at a total cost of $350 million excluding brokerage fees.
R.Revenue Recognition
Sales are recognized upon purchase by customers at the Company’s retail stores or when shipped 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. Revenues from gift cards, gift certificates and merchandise credits are recognized when redeemed.
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 to the sales returns accrual is required due to material changes in the returns activity, the reserve will be adjusted accordingly.
S.Cost of Sales
Cost of sales includes the cost of merchandise, buying costs and costs of our distribution network including inbound freight charges, distribution facility costs, receiving costs and internal transfer costs.
T.Vendor Allowances
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 $10.6 million, $9.4 million and $8.7 million for fiscal 2006, 2005 and 2004, respectively.
U.Store Opening, Expansion, Relocation and Closing Costs
Store opening, expansion, relocation and closing costs, including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
V.Advertising Costs
Expenses associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to $198.4 million, $158.2 million and $134.5 million for fiscal 2006, 2005 and 2004, respectively.
W.Stock-Based Compensation
The FASB issued SFAS No. 123141 (revised 2004)2007), “Share-Based Payment” (““Business Combinations.” SFAS No. 123R”) which requires companies to measure all employee stock-based compensation awards using141R establishes principles and requirements for how the acquirer in a fair value methodbusiness combination recognizes and record such expensemeasures in its consolidated financial statements. In addition,statements the adoption ofidentifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. SFAS No. 123R requires additional accounting141R determines what information to disclose to enable users of the financial statements to evaluate the nature and disclosure related to income tax and cash flowfinancial effects resulting from stock-based compensation. The Company adoptedof the business combination. SFAS No. 123R141R applies prospectively to business combinations for which the acquisition date is on August 28, 2005 (the “date of adoption”),or after the beginning of its third quarter of fiscal 2005, the year ended February 25, 2006. While SFAS No. 123R was not required to be effective until the first annual reporting period that beganbeginning on or after JuneDecember 15, 2005, early2008. Early adoption was encouraged and the Company elected to adopt before the required effective date.is not permitted.
Under SFAS No. 123R, the Company uses a Black-Scholes option-pricing model to determine the fair value of its stock options. The Black-Scholes model includes various assumptions, including the expected life of stock options, the expected volatility and the expected risk free interest rate. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. As a result, if other assumptions had been used, total stock-based compensation cost, as determined in accordance with SFAS No. 123R could have been materially impacted. Furthermore, if the Company uses different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods.
Also, under SFAS No. 123R, the Company is required to record stock-based compensation expense net of estimated forfeitures. The Company’s forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates.
Prior to the third quarter of fiscal 2005, the Company applied the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” and complied with the disclosure requirements of SFAS 123. During the first half of fiscal 2005, which ended on August 27, 2005, the Company recognized compensation expense for restricted stock awards over the service period, but did not recognize compensation expense for stock options, since the Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters,” Note 12 for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). No compensation expense for stock-based awards was recognized in fiscal 2004.
X. Income Taxes
The Company files a consolidated Federal income tax return. Income tax returns are filed with each state and territory 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 carryforwards. 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.
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.
Y. 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 8.6 million, 4.9 million and 2.8 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for fiscal 2006, 2005 and 2004, respectively.
2. ACQUISITION
On March 22, 2007, the Company completed and announced the acquisition of buybuy BABY, a retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. Based in Garden City, New York, buybuy BABY operated a total of 8 stores at the time of acquisition, in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products. (See “Transactions and Balances with Related Parties,” Note 8).
The results of buybuy BABY’s operations, which are not material, have been included in the consolidated financial statements since the date of acquisition.
3. STAFF ACCOUNTING BULLETIN NO. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS
As discussed under Recent Accounting Pronouncements in Note 1, in
In September 2006, the SECSecurities and Exchange Commission (“SEC”) issued SAB 108.Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” The transition provisions of SAB 108 permit the Company to adjust for the cumulative effect on retained earnings of immaterial errors relating to prior years. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended. The Company adopted SAB 108 at the end of fiscal 2006. In accordance with SAB 108, the Company has adjusted beginning retained earnings for fiscal 2006 in the accompanying consolidated financial statements for the items described below. The Company considers these adjustments to be immaterial to prior periods.
Review of Equity Grants and Procedures and Related Matters in Fiscal 2006
In June 2006, the Company’s Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Company’s Board of Directors.
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The review of stock option grants and procedures identified various deficiencies in the process of granting and documenting stock options and restricted shares described below. As a result of the deficiencies, the special committee recommended, among other things, that the Company revise the measurement dates under Accounting Principles Board OpinionAPB No. 25, “Accounting for Stock Issued to Employees,” for 16 annual option grant dates, 26 monthly grant dates and 2 special grant dates (revisions of 2 annual, 4 monthly and 1 special grant dates have no accounting impact because prices on the revised dates were lower than on the measurement dates previously recorded by the Company). As a result of these revised measurement dates and the correction of various other errors relating to the accounting for equity-based compensation, the Company has determined that from fiscal year 1993 through fiscal 2005, it had certain unrecorded non-cash equity-based compensation charges associated with its equity-based compensation plans.
As a result, the Company has recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, including related tax items. In accordance with the provisions of SAB 108, the Company decreased beginning retained earnings for fiscal year 2006 by $61.8 million within the accompanying Consolidated Financial Statements.
The Company does not believe that the net effect of this adjustment was material, either quantitatively or qualitatively, in any of the years covered by the review. In reaching that determination, the following quantitative measures were considered:
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(in thousands) | | | | | | | |
| | | | | | Net Adjustment, After | |
| | Net Adjustment, | | Net Income | | Tax as a % of Net | |
Fiscal Year | | After Tax | | As Reported | | Income As Reported | |
| | | | | | | |
2005 | | $ | 11,488 | | $ | 572,847 | | 2.01 | % |
2004 | | 12,493 | | 504,964 | | 2.47 | % |
2003 | | 13,607 | | 399,470 | | 3.41 | % |
2002 | | 8,600 | | 302,179 | | 2.85 | % |
2001 | | 7,391 | | 219,599 | | 3.37 | % |
2000 | | 5,272 | | 171,922 | | 3.07 | % |
1999 | | 1,340 | | 131,229 | | 1.02 | % |
1998 | | 923 | | 97,346 | | 0.95 | % |
1997 | | 405 | | 73,142 | | 0.55 | % |
1996 | | 163 | | 55,015 | | 0.30 | % |
1995 | | 56 | | 39,459 | | 0.14 | % |
1994 | | 22 | | 30,013 | | 0.07 | % |
1993 | | 2 | | 21,887 | | 0.01 | % |
| | | | | | | |
Total | | $ | 61,762 | | | | | |
| | | | | | | | | |
(in thousands) | | | | | | Net Adjustment, After | |
Fiscal Year | | Net Adjustment,
After Tax | | Net Income
As Reported | | Tax as a % of Net
Income As Reported | |
2005 | | $ | 11,488 | | $ | 572,847 | | 2.01 | % |
2004 | | 12,493 | | 504,964 | | 2.47 | % |
2003 | | 13,607 | | 399,470 | | 3.41 | % |
2002 | | 8,600 | | 302,179 | | 2.85 | % |
2001 | | 7,391 | | 219,599 | | 3.37 | % |
2000 | | 5,272 | | 171,922 | | 3.07 | % |
1999 | | 1,340 | | 131,229 | | 1.02 | % |
1998 | | 923 | | 97,346 | | 0.95 | % |
1997 | | 405 | | 73,142 | | 0.55 | % |
1996 | | 163 | | 55,015 | | 0.30 | % |
1995 | | 56 | | 39,459 | | 0.14 | % |
1994 | | 22 | | 30,013 | | 0.07 | % |
1993 | | 2 | | 21,887 | | 0.01 | % |
Total | | $ | 61,762 | | | | | |
| | | | | | | | | |
Rent and Lease Accounting
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease. In fiscal 2004, due to clarification by the Office of the Chief Accountant of the SEC, the Company changed its method of accounting to define the beginning of the lease term as the date the Company obtained possession of the leased premises. Prior to fiscal 2004, the Company’s method of accounting defined the beginning of the lease term as the date the Company commenced lease payments. The Company has recorded an adjustment to retained earnings and deferred rent and other liabilities to reflect these accounts as if the Company had always defined the beginning of the lease term as the date the Company obtained possession of the leased premises and to correspondingly increase deferred tax assets. The Company does not believe that the net effect of this adjustment which includes fiscal years 1993 through 2003 was material.
37
Impact of Adjustments
The impact of each of the items noted above, net of tax, on fiscal 2006 beginning balances are presented below:
(in thousands) | | | Review of Stock
Option Grant
Practices,
Including
Related Tax Items | | Rent & Lease
Accounting | | Total | |
Other Assets | | $ | 11,273 | | $ | 4,738 | | $ | 16,011 | |
Income Taxes Payable | | (34,747 | ) | — | | (34,747 | ) |
Deferred Rent and Other Liabilities | | — | | (15,588 | ) | (15,588 | ) |
Additional Paid-in Capital | | (38,288 | ) | — | | (38,288 | ) |
Retained Earnings | | 61,762 | | 10,850 | | 72,612 | |
Total | | $ | — | | $ | — | | $ | — | |
| | | | Review of Stock | | | | | |
| | | | Option Grant | | Rent & | | | |
| | | | Practices, Including | | Lease | | | |
(in thousands) | | Related Tax Items | | Accounting | | Total | |
| | | | | | | |
Other Assets | | $ | 11,273 | | $ | 4,738 | | $ | 16,011 | |
Income Taxes Payable | | (34,747 | ) | — | | (34,747 | ) |
Deferred Rent and Other Liabilities | | — | | (15,588 | ) | (15,588 | ) |
Additional Paid-in Capital | | (38,288 | ) | — | | (38,288 | ) |
Retained Earnings | | 61,762 | | 10,850 | | 72,612 | |
| | | | | | | |
Total | | $ | — | | $ | — | | $ | — | |
3.4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(in thousands) | | | March 3,
2007 | | February 25,
2006 | |
| | | | | |
Land and buildings | | $ | 112,527 | | $ | 49,900 | |
Furniture, fixtures and equipment | | 598,892 | | 517,469 | |
Leasehold improvements | | 651,737 | | 528,109 | |
Computer equipment and software | | 286,943 | | 231,047 | |
| | 1,650,099 | | 1,326,525 | |
| | | | | |
Less: Accumulated depreciation and amortization | | (720,592 | ) | (587,783 | ) |
| | $ | 929,507 | | $ | 738,742 | |
| | March 1, | | March 3, | |
(in thousands) | | 2008 | | 2007 | |
| | | | | |
Land and buildings | | $ | 195,536 | | $ | 112,527 | |
Furniture, fixtures and equipment | | 714,974 | | 598,892 | |
Leasehold improvements | | 760,335 | | 651,737 | |
Computer equipment and software | | 329,340 | | 286,943 | |
| | 2,000,185 | | 1,650,099 | |
Less: Accumulated depreciation and amortization | | (878,279 | ) | (720,592 | ) |
| | $ | 1,121,906 | | $ | 929,507 | |
4.5. LINES OF CREDIT
At March 3, 2007,1, 2008, the Company maintained two uncommitted lines of credit of $100 million and $75 million,each, with expiration dates of September 3, 20072008 and February 28, 2008,27, 2009, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. In addition, under these uncommitted lines of credit, the Company can obtain unsecured standby letters of credit. During fiscal 2007, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 1, 2008, there was approximately $8.1 million of outstanding letters of credit and approximately $49.8 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.
At March 3, 2007, the Company maintained two uncommitted lines of credit of $100 million and $75 million. These uncommitted lines of credit were utilized for letters of credit in the ordinary course of business. During fiscal 2006, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 3, 2007, there was approximately $6.9 million of outstanding letters of credit and approximately $40.0 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.
At February 25, 2006, the Company maintained two uncommitted lines of credit of $100 million and $75 million. These uncommitted lines of credit were utilized for letters of credit in the ordinary course of business. During fiscal 2005, the Company did not have any direct borrowings under the uncommitted lines of credits. As of February 25, 2006, there was approximately $11.5 million of outstanding letters of credit and approximately $33.7 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs.
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5.6. INVESTMENT SECURITIES
The Company’s investment securities consistas of held-to-maturity U.S. Government AgencyMarch 1, 2008 and March 3, 2007 are as follows:
| | March 1, | | March 3, | |
(in millions) | | 2008 | | 2007 | |
Available-for-sale securities: | | | | | |
Short term | | — | | 378.0 | |
Long term | | 319.5 | | — | |
| | 319.5 | | 378.0 | |
Trading Securities: | | | | | |
Short term | | — | | 3.4 | |
Long term | | 6.4 | | — | |
| | 6.4 | | 3.4 | |
Held-to-maturity securities: | | | | | |
Short term | | $ | — | | $ | 393.5 | |
Long term | | 0.1 | | 102.7 | |
| | 0.1 | | 496.2 | |
| | | | | |
Total investment securities | | $ | 326.0 | | $ | 877.6 | |
Available-for-sale securities
As of March 1, 2008, the Company had approximately $326.7 million par value of auction rate securities, less a temporary valuation adjustment of approximately $7.2 million to reflect the current lack of liquidity of these investments. Since this valuation adjustment is deemed to be temporary, it was recorded in other comprehensive income, net of the related tax benefit of $2.7 million, and did not affect the Company’s earnings for fiscal 2007. The Company reclassified these investments to long term investment securities at March 1, 2008 to reflect the current lack of liquidity of these investments. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies. Approximately $283.5 million of these securities at par are invested in preferred shares of closed end municipal bond funds, which are required, pursuant to the Investment Company Act of 1940, to maintain minimum asset coverage ratios of 200%. The remaining approximate $43.2 million at par are invested in securities collateralized by student loans which are currently more than 100% collateralized and with approximately 90% of such collateral in the aggregate being guaranteed by the United States government. None of the auction rate securities held by the Company are mortgage-backed debt obligations.
The Company’s auction rate securities carry interest rates that reset periodically, every 7, 28 or 35 days, through an auction process. Due to current market conditions, these investments have experienced failed auctions beginning in mid-February 2008. These failed auctions result in a lack of liquidity in the securities, but do not affect the underlying collateral of the securities. Upon the auction failures of the securities held by the Company, the interest rates reset based on a predetermined maximum contractual rate, which is nominally higher than the interest rates earned prior to the auction failures. The Company continues to earn and municipal debtreceive interest on these securities. The Company’s auction rate securities will continue to be presented for auction every 7, 28 or 35 days until the auction succeeds, the issuer calls the security, or they mature, as in the case of securities collateralized by student loans.
Trading securities
The Company’s trading securities, which are stated at amortized cost; available-for-sale auction rate securities, which are stated at cost or par value which approximates fair value; and trading securities, whichprovided as investment options to the participants of the nonqualified deferred compensation plan, are stated at fair market value. The(See “Employee Benefit Plans,” Note 10).
Held-to-maturity securities as
As of March 3, 2007, and February 25, 2006 are as follows:
(in millions) | | | March 3,
2007 | | February 25,
2006 | |
Held-to-maturity securities: | | | | | |
Short term | | $ | 393.5 | | $ | 291.6 | |
Long term | | 102.7 | | 393.9 | |
| | 496.2 | | 685.5 | |
Available-for-sale securities: | | | | | |
Short term | | 378.0 | | 112.1 | |
Long term | | — | | — | |
| | 378.0 | | 112.1 | |
Trading Securities: | | | | | |
Short term | | 3.4 | | 0.4 | |
Total investment securities | | $ | 877.6 | | $ | 798.0 | |
Those investment securities with contractual maturity dates or interest reset dates within one year are classified as short term investment securities. All other investment securities are classified as long term investment securities. The contractual maturity dates ofthe Company’s held-to-maturity investment securities extend to January 2018consisted of U.S. Government Agency
39
debt securities and the available-for-sale investment securities do not have stated contractual maturities due to the nature of the investment vehicle.municipal debt securities. Actual maturities could differ from contractual maturities because borrowers have the right to call certain obligations.
As of March 3, 2007, the fair value of short term and long term held-to-maturity securities werewas $393.0 million and $102.5 million, respectively. As of February 25, 2006, the fair value of short term and long term held-to-maturity securities were $289.8 million and $390.0 million, respectively.
As of March 3, 2007, and February 25, 2006, the Company had gross unrecognized holding losses of approximately $1.3 million, and $5.6 million, respectively, relating to held-to-maturity investment securities with fair values totaling $405.8 million and $678.8 million, respectively. As of March 3, 2007, $361.0 million of these investment securities have been in a continuous unrecognized loss position for more than 12 months. Unrecognized holding losses typically will not result in a recognized expense if the underlying securities are held to maturity as intended. Gross unrecognized holding gains relating to held-to-maturity investment securities were approximately $0.6 million as of March 3, 2007 and were not material as of February 25, 2006. As of March 3, 2007 and February 25, 2006, the Company had no cumulative unrecognized holding gains or losses relating to its available-for-sale investment securities.million.
6.7. PROVISION FOR INCOME TAXES
The components of the provision for income taxes are as follows:
| | | FISCAL YEAR ENDED | |
| | | FISCAL YEAR ENDED | | | March 1, | | March 3, | | February 25, | |
(in thousands) | | | March 3,
2007 | | February 25,
2006 | | February 26,
2005 | | | 2008 | | 2007 | | 2006 | |
Current: | Current: | | | | | | | | | | | | | | |
Federal | Federal | | $ | 375,800 | | $ | 331,930 | | $ | 271,061 | | | $ | 276,986 | | $ | 375,800 | | $ | 331,930 | |
State and local | State and local | | 50,060 | | 36,188 | | 31,106 | | | 23,123 | | 50,060 | | 36,188 | |
| | | 425,860 | | 368,118 | | 302,167 | | | 300,109 | | 425,860 | | 368,118 | |
| | | | | | | | |
Deferred: | Deferred: | | | | | | | | | | | | | | |
Federal | Federal | | (81,067 | ) | (24,681 | ) | 2,715 | | | 5,483 | | (81,067 | ) | (24,681 | ) |
State and local | State and local | | (6,158 | ) | (1,193 | ) | 1,341 | | | (3,168 | ) | (6,158 | ) | (1,193 | ) |
| | | (87,225 | ) | (25,874 | ) | 4,056 | | | 2,315 | | (87,225 | ) | (25,874 | ) |
| | | $ | 338,635 | | $ | 342,244 | | $ | 306,223 | | | $ | 302,424 | | $ | 338,635 | | $ | 342,244 | |
|
At March 1, 2008 and March 3, 2007, and February 25, 2006, included in other current assets and in other assets is a net current deferred income tax asset of $119.4$137.2 million and $71.5$119.4 million, respectively, and a net noncurrent deferred income tax asset of $58.5$81.4 million and $8.2$58.5 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) | | | March 3,
2007 | | February 25,
2006 | |
| | | | | |
Deferred Tax Assets: | | | | | |
Inventories | | $ | 28,751 | | $ | 29,859 | |
Deferred rent and other rent credits | | 42,643 | | 29,130 | |
Insurance | | 36,398 | | 26,404 | |
Stock-based compensation | | 46,696 | | 9,547 | |
Merchandise credits and gift card liabilities | | 42,731 | | 9,103 | |
Other | | 30,600 | | 25,656 | |
Deferred Tax Liabilities: | | | | | |
Depreciation | | (33,360 | ) | (37,986 | ) |
Other | | (16,566 | ) | (12,004 | ) |
| | $ | 177,893 | | $ | 79,709 | |
| | March 1, | | March 3, | |
(in thousands) | | 2008 | | 2007 | |
Deferred Tax Assets: | | | | | |
Inventories | | $ | 30,074 | | $ | 28,751 | |
Deferred rent and other rent credits | | 51,507 | | 42,643 | |
Insurance | | 37,899 | | 36,398 | |
Stock-based compensation | | 55,511 | | 46,696 | |
Merchandise credits and gift card liabilities | | 26,350 | | 42,731 | |
Accrued expenses | | 49,508 | | 17,824 | |
Other | | 17,211 | | 12,776 | |
| | | | | |
Deferred Tax Liabilities: | | | | | |
Depreciation | | (22,066 | ) | (33,360 | ) |
Other | | (27,361 | ) | (16,566 | ) |
| | $ | 218,633 | | $ | 177,893 | |
The Company has not established a valuation allowance for the net deferred tax asset as it is considered more likely
40
than not that it is realizable through a combination of future taxable income, the deductibility of future net deferred tax liabilities and tax planning strategies.
The Company adopted FIN 48 on March 4, 2007 (“FIN 48 Adoption Date”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from uncertain tax positions 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 should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. FIN 48 also provided guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Upon adoption of FIN 48, the Company recognized a $13.1 million increase to retained earnings to reflect the change to its liability for gross unrecognized tax benefits as required. The Company also recorded additional gross unrecognized tax benefits, and corresponding higher deferred tax assets, of $35.6 million as a result of the adoption. At March 4, 2007 the total amount of gross unrecognized tax benefits was $163.3 million, of which $119.9 million would impact the Company’s effective tax rate. The Company recognizes accrued interest and penalties related to gross unrecognized tax benefits in the provision for income taxes. As of March 4, 2007, the liability for gross unrecognized tax benefits included approximately $27.5 million of accrued interest.
Set forth below is the tabular roll-forward of the gross unrecognized tax benefits from uncertain tax positions for the fiscal year ended March 1, 2008:
(in thousands) | | | |
| | | |
Balance as of March 4, 2007 (FIN 48 Adoption Date) | | $ | 163,297 | |
| | | |
Increase related to current year positions | | 16,920 | |
Increase related to prior year positions | | 36,584 | |
Decrease related to prior year positions | | (81,330 | ) |
Settlements | | (44,175 | ) |
Lapse of statute of limitations | | (2,617 | ) |
Other | | (5,540 | ) |
| | | |
Balance as of March 1, 2008 | | $ | 83,139 | |
At March 1, 2008, the Company has recorded approximately $7.7 million and $75.4 million of gross unrecognized tax benefits in current and non-current taxes payable, respectively, on the consolidated balance sheet of which approximately $76.0 million would impact the Company’s effective tax rate. As of March 1, 2008, the liability for gross unrecognized tax benefits included approximately $14.3 million of accrued interest. For the year ended March 1, 2008, the Company recorded a reduction of interest for gross unrecognized tax benefits of approximately $1.9 million 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 settlement of audits and the expiration of statutes of limitations, will not exceed $1.0 million in the next twelve months. However, actual results could differ from those currently anticipated.
As of March 1, 2008, the Company operated in 49 states, the District of Columbia, Puerto Rico and Canada 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 tax years 2001 through 2005. The Company is also open to examination for state and local jurisdictions with varying statutes of limitations, generally ranging from three to five years.
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For fiscal 2007, the effective tax rate is comprised of the Federal statutory income tax rate of 35.00%, the State income tax rate, net of Federal benefit, of 2.57% and other income tax benefits of 2.62%. Included in other income tax benefits are the settlement of certain discrete tax items from ongoing examinations, the recognition of favorable discrete state tax items and from changing the blended state tax rate of deferred income taxes. For fiscal 2006, the effective tax rate is comprised of the Federal statutory income tax rate of 35.00%, the State income tax rate, net of Federal benefit, of 3.06% and other income tax benefits of 1.76%. For fiscal 2005, the effective tax rate is comprised of the Federal statutory income tax rate of 35.00%, the State income tax rate, net of Federal benefit, of 2.49% and other income tax benefits of 0.09%. For fiscal 2004, the effective tax rate is comprised of the Federal statutory income tax rate of 35.00% and the State income tax rate, net of Federal benefit, of 2.60% and other income tax effects of 0.15%.
7.8. TRANSACTIONS AND BALANCES WITH RELATED PARTIES
A. In fiscal 2002, the Company had an interest in certain life insurance policies on the lives of its Co-Chairmen and their spouses. The beneficiaries of these policies were related to the aforementioned individuals. The Company’s interest in these policies was equivalent to the net premiums paid by the Company. Since the Company is no longer permitted to pay policy premiums due to restrictions in the Sarbanes-Oxley Act of 2002, theThe agreements relating to the Company’s interest in the life insurance policies on the lives of its Co-Chairmen and their spouses were terminated in fiscal 2003. Upon termination in fiscal 2003, the Co-Chairmen 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-Chairmen in substitution for the aforementioned terminated agreements, the Company has agreed to pay to the Co-Chairmen, at a future date, an aggregate amount of $4.2 million, which is included in accrued expenses and other current liabilities as of March 1, 2008 and March 3, 2007 and February 25, 2006.2007.
B. In fiscal 2007, 2006 2005 and 2004,2005, the Company leased office and retail space from entities controlled by
management of CTS. Through November 15, 2004,In fiscal 2007, the Company leased warehouse and officeretail space from an entityentities controlled by management of Harmon.buybuy BABY. The Company paid such entities occupancy costs of approximately $7.1 million, $6.3 million $6.5 million and $6.9$6.5 million in fiscal 2007, 2006 2005 and 2004,2005, respectively.
C.C. Subsequent to fiscal year end,On March 22, 2007, the Company acquired buybuy BABY, froma retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Company’s Co-Chairmen. (See “Subsequent Event,” Note 13)The aforementioned repayment of approximately $19 million of debt resulted in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Company’s Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
8.9. LEASESLEASES
The Company leases retail stores, as well as warehouses, office facilities and equipment, under agreements expiring at various dates through 2042.2041. Certain leases provide for contingent rents (which are based upon store sales exceeding stipulated amounts and are immaterial in fiscal 2007, 2006 2005 and 2004)2005), 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.
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As of March 3, 2007,1, 2008, future minimum lease payments under noncancelablenon-cancelable operating leases are as follows:
Fiscal Year | | Amount | |
| | (in thousands) | |
2007 | | $ | 372,168 | |
2008 | | 379,091 | |
2009 | | 364,226 | |
2010 | | 338,374 | |
2011 | | 306,524 | |
Thereafter | | 1,435,481 | |
Total future minimum lease payments | | $ | 3,195,864 | |
Fiscal Year | | Amount | |
| | (in thousands) | |
2008 | | $ | 404,197 | |
2009 | | 401,271 | |
2010 | | 374,914 | |
2011 | | 340,924 | |
2012 | | 301,134 | |
Thereafter | | 1,372,926 | |
Total future minimum lease payments | | $ | 3,195,366 | |
Expenses for all operating leases were $380.5 million, $355.7 million $322.0 million and $288.9$322.0 million for fiscal 2007, 2006 2005 and 2004,2005, respectively.
9.10. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company has two defined contribution savings plans covering all eligible employees of the Company (“the Plans”). During fiscal 2006, a 401(k) savings plan, which was frozen effective December 31, 2003, was merged into one of the Plans. Participants of the Plans may defer annual pre-tax compensation subject to statutory and Plan limitations. Effective January 1, 2006, a certain percentage of an employee’s contributions, will be matched by the Company, subject to certain statutory and Plan limitations. This match will vest over a specified period of time. The Company contributedCompany’s match was approximately $5.9 million, $4.8 million and $0.5 million for fiscal 2007, 2006 and 2005, respectively. For fiscal 2004, the Company did not make a material contribution to the Plans,respectively, which was expensed as the match was not yet effective.incurred.
Nonqualified Deferred Compensation Plan
Effective January 1, 2006, the Company adopted a nonqualified deferred compensation plan for the benefit of employees defined by the Internal Revenue Service as highly compensated. A certain percentage of an employee’s contributions may be matched by the Company, subject to certain Plan limitations. This match will vest over a specified period of time. The Company did not make any contributions to the plan duringCompany’s match was approximately $0.7 million, $0.4 million and $0.1 million for fiscal 2007, 2006 and 2005.2005, respectively, which was expensed as incurred.
Defined Benefit Plan
The Company has a non-contributory defined benefit pension plan for the CTS employees, hired on or before July
39
31, 2003, who meet specified age and length-of-service requirements. The benefits are based on years of service and the employee’s compensation near retirement. The Company utilizes a December 31 measurement date for this plan. In fiscal 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and 132(R),” on a prospective basis. SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. For the years ended March 1, 2008 and March 3, 2007, and February 25, 2006, the net periodic pension cost was not material to the Company’s results of operations. The Company has a $1.1$0.7 million and $7.1$1.1 million liability, which is included in deferred rent and other liabilities as of March 1, 2008 and March 3, 2007, and February 25, 2006, respectively. In addition, as of March 1, 2008 and March 3, 2007, the Company recognized $3.6 million, net of the related tax benefit of $2.2 million, and $4.4 million, net of the related tax benefit of $2.6 million, respectively, within accumulated other comprehensive (loss) income.
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10.11 COMMITMENTS AND CONTINGENCIES
The Company maintains employment agreements with its Co-Chairmen, which extend through June 2007.2010. The agreements provide for a base salary (which may be increased by the Board of Directors), termination payments, post-retirement benefits and other terms and conditions of employment. In addition, the Company maintains employment agreements with other executives which provide for severance pay and, in some instances, certain other supplemental retirement benefits.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, 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.
11.12. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of $359.9 million, $388.4 million $338.7 million and $229.0$338.7 million in fiscal 2007, 2006 and 2005, and 2004, respectively.
The Company recorded an accrual for capital expenditures of $36.6 million, $53.9 million $49.6 million and $30.1$49.6 million as of March 1, 2008, March 3, 2007 and February 25, 2006, and February 26, 2005, respectively.
12.13. STOCK-BASED COMPENSATION
The FASB issuedCompany records stock-based compensation under the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”)123R which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption of SFAS No. 123R requires additional accounting and disclosure related to income tax and cash flow effects resulting from stock-based compensation. The Company adopted SFAS No. 123R on August 28, 2005 (the “date of adoption”), the beginning of its third quarter of fiscal 2005, the year ended February 25, 2006. While SFAS No. 123R was not required to be effective until the first annual reporting period that began after June 15, 2005, early adoption was encouraged and the Company elected to adopt before the required effective date.
The Company adopted SFAS No. 123R under the modified prospective application. Accordingly, prior period amounts have not been restated. Under this application, the Company records stock-based compensation expense for all awards granted on or after the date of adoption and for the portion of previously granted awards that remained unvested at the date of adoption. Currently, the Company’s stock-based compensation relates to restricted stock awards and stock options. The Company’s restricted stock awards are considered nonvested share awards as defined under SFAS No. 123R.
Prior to the third quarter of fiscal 2005, the Company applied the provisions of APB No. 25 “Accounting for Stock Issued to Employees,” as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.”148. During the first half of fiscal 2005, which ended on August 27, 2005, the Company recognized compensation expense for restricted stock awards over the service
period, but did not recognize compensation expense for stock options, since the Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters”Matters in Fiscal 2006” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants).
The following table details the effect on net earnings and earnings per share “as reported” and as if compensation expense had been recorded through the end of the second quarter of fiscal 2005 and in fiscal 2004, based on the fair value method under SFAS No. 123, “Accounting for Stock-Based Compensation” (“pro forma”). The reported and pro forma net earnings and earnings per share for the yearyears ended March 1, 2008 and March 3, 2007 are the same since stock-based compensation expense is calculated under the provisions of SFAS No. 123R for those periods.
| | February 25, | | February 26, | |
(in thousands, except per share data) | | | | 2006 | | 2005 | |
NET EARNINGS: | | | | | |
As reported | | $ | 572,847 | | $ | 504,964 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects | | (31,415 | ) | (34,686 | ) |
Add: Total stock-based employee compensation expense included in net earnings, net of related tax effects | | 16,008 | | — | |
Pro forma | | $ | 557,440 | | $ | 470,278 | |
NET EARNINGS PER SHARE: | | | | | |
Basic: | | | | | |
As reported | | $ | 1.95 | | $ | 1.68 | |
Pro forma | | $ | 1.90 | | $ | 1.56 | |
Diluted: | | | | | |
As reported | | $ | 1.92 | | $ | 1.65 | |
Pro forma | | $ | 1.87 | | $ | 1.55 | |
| | | | | | | | | |
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| | February 25, | |
(in thousands, except per share data) | | 2006 | |
NET EARNINGS: | | | |
As reported | | $ | 572,847 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects | | (31,415 | ) |
Add: Total stock-based employee compensation expense included in net earnings, net of related tax effects | | 16,008 | |
Pro forma | | $ | 557,440 | |
NET EARNINGS PER SHARE: | | | |
Basic: | | | |
As reported | | $ | 1.95 | |
Pro forma | | $ | 1.90 | |
Diluted: | | | |
As reported | | $ | 1.92 | |
Pro forma | | $ | 1.87 | |
Stock-based compensation expense for the fiscal year ended March 1, 2008 and March 3, 2007 was approximately $43.8 million ($28.4 million after tax or $0.11 per diluted share) and February 25, 2006 was approximately $82.6 million ($52.6 million after tax or $0.18 per diluted share) and approximately $25.6 million ($16.0 million after tax or $0.05 per diluted share), respectively. Stock-based compensation expense for the fiscal year ended March 3, 2007, includesincluded expenses related to the cash payment of $30.0 million to remediate potential adverse tax consequences for Internal Revenue Code Section 409A and approximately $8.2 million related to the revised measurement dates (See “Review of Equity Grants and Procedures and Related Matters”Matters in Fiscal 2006” below). In addition, the amount of stock-based compensation cost capitalized for the year ended March 1, 2008 and March 3, 2007 was approximately $1.2 million and $1.7 million, respectively.
Incentive Compensation Plans
The Company currently grants awards under the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2004 Plan is a flexible compensation plan that enables the Company to offer incentive compensation through stock options, restricted stock awards, stock appreciation rights and performance awards, including cash awards. As a result, during fiscal 2007, 2006 and 2005, awards consisting of a combination of stock options and performance-based restricted stock were granted to executive officers and other executives and awards consisting of restricted stock were granted to the Company’s other employees who traditionally have received stock options. Awards of stock options and restricted stock generally vest in five equal annual installments beginning one to three years from the date of grant.
Prior to fiscal 2004, the Company had adopted various stock option plans (the “Prior Plans”), all of which solely provided for the granting of stock options. Upon adoption of the 2004 Plan, the common stock available under the Prior Plans became available for issuance under the 2004 Plan. No further option grants may be made under the Prior Plans, although outstanding awards under the Prior Plans will continue to be in effect.
Under the 2004 Plan and the Prior Plans, an aggregate of 83.4 million shares of common stock were authorized for issuance. The Company generally issues new shares for stock option exercises and restricted stock awards. Under the 2004 Plan, grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted.
As of March 1, 2008, unrecognized compensation expense related to the unvested portion of the Company’s stock
45
options and restricted stock awards, based on the Company’s historical treatment of options and awards as having been granted at fair market value, was $48.4 million and $78.8 million, respectively, which is expected to be recognized over a weighted average period of 2.5 years and 4.8 years, respectively (however, see “Review of Equity Grants and Procedures and Related Matters in Fiscal 2006” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants).
Stock Options
The Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters in Fiscal 2006” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). The option grants generally become exercisable in five equal annual installments beginning one to three years from the date of grant. Option grants for stock options issued prior to May 10, 2004 expire ten years after the date of grant. Option grants for stock options issued since May 10, 2004 expire eight years after the date of grant. All option grants are non-qualified.
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 | |
| | March 1, | | March 3, | | February 25, | |
Black-Scholes Valuation Assumptions (1) | | 2008 | | 2007 | | 2006 | |
| | | | | | | |
Weighted Average Expected Life (in years) (2) | | 6.4 | | 6.3 | | 6.1 | |
Weighted Average Expected Volatility (3) | | 25.00 | % | 25.00 | % | 25.00 | % |
Weighted Average Risk Free Interest Rates (4) | | 4.58 | % | 4.95 | % | 4.02 | % |
Expected Dividend Yield | | — | | — | | — | |
(1) Beginning on the date of adoption, forfeitures are estimated based on historical experience; prior to the date of adoption, forfeitures were recorded as they occurred.
(2) The expected life of stock options is estimated based on historical experience.
(3) The expected volatility is based solely on the implied volatility of the Company’s call options. The Company’s call options used to determine implied volatility 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.
Changes in the Company’s stock options for the fiscal year ended March 1, 2008 were as follows:
| | | | Weighted | |
| | | | Average | |
| | Number of | | Exercise | |
(Shares in thousands) | | Stock Options | | Price | |
Options outstanding, beginning of year | | 19,836 | | $ | 29.99 | |
Granted | | 550 | | 41.12 | |
Exercised | | (1,463 | ) | 15.39 | |
Forfeited or expired | | (541 | ) | 37.02 | |
Options outstanding, end of year | | 18,382 | | $ | 31.29 | |
Options exercisable, end of year | | 12,189 | | $ | 28.30 | |
The weighted average fair value for the stock options granted in fiscal 2007, 2006 and 2005 was $15.07, $14.24
46
and $12.71, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of March 3,1, 2008 was 4.0 years and $60.7 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of March 1, 2008 was 3.5 years and $60.2 million, respectively. The total intrinsic values for stock options exercised during fiscal 2007, 2006 and February 25, 2006 was approximately $1.72005 were $28.2 million, $58.8 million and $0.9$60.7 million, respectively.
Net cash proceeds from the exercise of stock options for fiscal 2007 were $22.7 million and the associated income tax benefits were $8.7 million.
Restricted Stock
The Company historically has treated its restricted stock awards as having been issued and measured at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters in Fiscal 2006” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). The restricted stock awards generally become exercisable in five equal annual installments beginning one to three years from the date of grant.
Vesting of restricted stock awarded to certain of the Company’s executives is dependent on the Company’s achievement of a performance-based test for the fiscal year of grant, and assuming achievement of the performance-based test, time vesting, subject, in general, to the executive remaining in the Company’s employ on specified vesting dates. The Company recognizes compensation expense related to these awards based on the assumption that the performance-based test will be achieved. Vesting of restricted stock awarded to the Company’s other employees is based solely on time vesting.
Changes in the Company’s restricted stock for the fiscal year ended March 1, 2008 were as follows:
| | | | Weighted | |
| | Number of | | Average | |
| | Restricted | | Grant-Date | |
(Shares in thousands) | | Shares | | Fair Value | |
Unvested restricted stock, beginning of year | | 1,931 | | $ | 37.25 | |
Granted | | 1,174 | | 39.32 | |
Vested | | (181 | ) | 37.85 | |
Forfeited | | (158 | ) | 37.93 | |
Unvested restricted stock, end of year | | 2,766 | | $ | 38.05 | |
Review of Equity Grants and Procedures and Related Matters in Fiscal 2006
In June 2006, the Company’s Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent legal counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Company’s Board of Directors.
The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of these deficiencies, the special committee recommended, among other things, revised
measurement dates for certain stock option grants. The exercise price for most of these stock option grants was less than the fair market value of the Company’s common stock on the revised measurement date.
As a result of these revised measurement dates, and the correction of various other errors, the Company has determined that it had certain unrecorded non-cash equity-based compensation charges related to fiscal years prior to 2006. (See “Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When
47
Quantifying Misstatements in Current Year Financial Statements,” Note 2)3).
The Company’s Board of Directors also approved a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical deficiencies associated with certain of the Company’s stock option grants that were disclosed through the Company’s stock option review. As a result of this program, the Company made cash payments totaling approximately $30.0 million to over 1,600 employees in the fourth quarter of fiscal 2006, which resulted in a non-recurring, pre-tax stock-based compensation charge. The cash outlay primarily represents payments to employees in connection with increasing the exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences. No executive officer received such payments. The Company believes it is likely the Company will recoup a substantial portion of the anticipated cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery would not flow through the income statement.
The Company continues to cooperate with the informal inquiry of the SEC regarding the Company’s stock option grant practices. In addition, the Company is also cooperating with the
The United States Attorney’s officeOffice for the District of New Jersey in connection withhas concluded its inquiry into such matters.
Incentive Compensation Plans
During fiscal 2004, in anticipationwith respect to matters arising out of adopting SFAS No. 123R, the Company revised its overall approach to compensation for its employees, including stock-based compensation, and adopted the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2004 Plan is a flexible compensation plan that enables the Company to offer incentive compensation through stock options, stock appreciation rights, restricted stock awards and performance awards, including cash awards. As a result, during fiscal 2006 and fiscal 2005, awards consisting of a combination of stock options and performance-based restricted stock were granted to executive officers and other executives and awards consisting of restricted stock were grantedrelated to the Company’s other employees who traditionally have received stock options. Awards of stock options and restricted stock generally vest in five equal annual installments beginning one to three years from the date of grant.
Prior to fiscal 2004, the Company had adopted varioushistorical stock option plans (the “Prior Plans”), all of which solely provided for the granting of stock options. Upon adoption of the 2004 Plan, the common stock available under the Prior Plans became available for issuance under the 2004 Plan. Nogrants and procedures and related matters and has indicated it will take no further option grants may be made under the Prior Plans, although outstanding awards under the Prior Plans will continue to be in effect.
Under the 2004 Plan and the Prior Plans, an aggregate of 83.4 million shares of common stock were authorized for issuance. The Company generally issues new shares for stock option exercises and restricted stock awards. Under the 2004 Plan, grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted.
As of March 3, 2007, unrecognized compensation expenseaction related to the unvested portion of the Company’s stock options and restricted stock awards, based on the Company’s historical treatment of options and awards as having been granted at fair market value, was $71.9 million and $56.2 million, respectively, which is expected to be recognized over a weighted average period of 3.1 years and 4.9 years, respectively (however, see “Review of Equity Grants and Procedures and Related Matters” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants).this matter.
Stock Options
The Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). The option grants generally become exercisable in five equal annual installments beginning one to three years from the date of grant. Option grants for stock options issued prior to May 10, 2004 expire ten years after the date of grant. Option grants for stock options issued since May 10, 2004 expire eight years after the date of grant. All option grants are non-qualified.
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 | |
| | | | February 25, | | February 26, | |
Black-Scholes Valuation Assumptions(1) | | | | March 3, 2007 | | 2006 | | 2005 | |
Weighted Average Expected Life (in years)(2) | | 6.3 | | 6.1 | | 6.1 | |
Weighted Average Expected Volatility(3) | | 25.00 | % | 25.00 | % | 42.00 | % |
Weighted Average Risk Free Interest Rates(4) | | 4.95 | % | 4.02 | % | 3.89 | % |
Expected Dividend Yield | | — | | — | | — | |
| | | | | | | | | |
(1) Beginning on the date of adoption, forfeitures are estimated based on historical experience; prior to the date of adoption, forfeitures were recorded as they occurred.
(2) The expected life of stock options is estimated based on historical experience.
(3) The expected volatility for fiscal 2006 and 2005 is estimated based on implied volatility. For fiscal 2004, the expected volatility was estimated based on historical and current financial data for the Company.
(4) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
Changes in the Company’s stock options for the fiscal year ended March 3, 2007 were as follows:
| | | | Weighted | |
| | Number of | | Average | |
(Shares in thousands) | | | | Stock Options | | Exercise Price | |
Options outstanding, beginning of year | | 22,589 | | $ | 27.01 | |
Granted | | 550 | | 38.52 | |
Exercised | | (2,603 | ) | 16.63 | |
Forfeited or expired | | (700 | ) | 35.82 | |
Options outstanding, end of year | | 19,836 | | $ | 29.99 | |
Options exercisable, end of year | | 11,016 | | $ | 25.61 | |
| | | | | | | | |
The weighted average fair value for the stock options granted in fiscal 2006, fiscal 2005 and fiscal 2004 was $14.24, $12.71 and $17.16, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of March 3, 2007 was 4.6 years and $192.7 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of March 3, 2007 was 4.1 years and $155.5 million, respectively. The total intrinsic value for stock options exercised during fiscal 2006, fiscal 2005 and fiscal 2004 was $58.8 million, $60.7 million and $71.7 million, respectively.
Net cash proceeds from the exercise of stock options for fiscal 2006 was $43.4 million and the associated income tax benefit was $20.7 million for that same time period.
Restricted Stock
The Company historically has treated its restricted stock awards as having been issued and measured at fair market value on the date of grant (however, see “Review of Equity Grants and Procedures and Related Matters” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). The restricted stock awards generally become exercisable in five equal annual installments beginning one to three years from the date of grant.
Vesting of restricted stock awarded to certain of the Company’s executives is dependent on the Company’s achievement of a performance-based test for the fiscal year of grant, and assuming achievement of the performance-based test, time vesting, subject, in general, to the executive remaining in the Company’s employ on specified vesting dates. The Company recognizes compensation expense related to these awards based on the assumption that the performance-based test will be achieved. Vesting of restricted stock awarded to the Company’s other employees is based solely on time vesting.
Changes in the Company’s restricted stock for the fiscal year ended March 3, 2007 were as follows:
| | Number of | | Weighted Average | |
| | Restricted | | Grant-Date Fair | |
(Shares in thousands) | | | | Shares | | Value | |
Unvested restricted stock, beginning of year | | 1,031 | | $ | 37.00 | |
Granted | | 1,120 | | 37.55 | |
Vested | | (91 | ) | 37.81 | |
Forfeited | | (129 | ) | 37.42 | |
Unvested restricted stock, end of year | | 1,931 | | $ | 37.25 | |
| | | | | | | | |
13. SUBSEQUENT EVENT
On March 22, 2007, subsequent to the end of fiscal 2006, the Company completed and announced the acquisition of buybuy BABY, a privately held retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. Based in Garden City, New York, buybuy BABY operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products.
buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Company’s Co-Chairmen. The acquisition was approved by a special committee of independent members of the Board of Directors of the Company. The special committee retained Merrill Lynch & Co. to serve as its independent financial advisor and render a fairness opinion in connection with the transaction, as well as Chadbourne & Parke LLP to serve as independent legal counsel to oversee the acquisition negotiations. The aforementioned repayment of approximately $19 million of debt results in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Company’s Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
The acquisition of buybuy BABY had no effect on the Company’s fiscal 2006 results since the transaction occurred during fiscal 2007. The Company believes the benefit of this acquisition will not have a material effect on the overall results or financial condition of the Company for fiscal 2007.
14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
| | FISCAL 2006 QUARTER ENDED | | FISCAL 2005 QUARTER ENDED | |
| | May 27, | | August 26, | | November 25, | | March 3, | | May 28, | | August 27, | | November 26, | | February 25, | |
(in thousands, except per share data) | | 2006 | | 2006 | | 2006 | | 2007 | | 2005 | | 2005 | | 2005 | | 2006 | |
Net sales | | $ | 1,395,963 | | $ | 1,607,239 | | $ | 1,619,240 | | $ | 1,994,987 | | $ | 1,244,421 | | $ | 1,431,182 | | $ | 1,448,680 | | $ | 1,685,279 | |
Gross profit | | 590,098 | | 678,249 | | 704,073 | | 862,982 | | 520,781 | | 601,784 | | 615,363 | | 747,820 | |
Operating profit | | 148,750 | | 219,622 | | 211,134 | | 309,895 | | 150,884 | | 217,877 | | 205,493 | | 304,917 | |
Earnings before provision for income taxes | | 158,409 | | 229,550 | | 221,777 | | 323,143 | | 157,992 | | 225,882 | | 215,048 | | 316,169 | |
Provision for income taxes | | 57,978 | | 84,015 | | 79,341 | | 117,301 | | 59,089 | | 84,480 | | 80,428 | | 118,247 | |
Net earnings | | $ | 100,431 | | $ | 145,535 | | $ | 142,436 | | $ | 205,842 | | $ | 98,903 | | $ | 141,402 | | $ | 134,620 | | $ | 197,922 | |
EPS-Basic(1) | | $ | 0.36 | | $ | 0.52 | | $ | 0.51 | | $ | 0.74 | | $ | 0.34 | | $ | 0.48 | | $ | 0.45 | | $ | 0.68 | |
EPS-Diluted(1) | | $ | 0.35 | | $ | 0.51 | | $ | 0.50 | | $ | 0.72 | | $ | 0.33 | | $ | 0.47 | | $ | 0.45 | | $ | 0.67 | |
| | FISCAL 2007 QUARTER ENDED | | FISCAL 2006 QUARTER ENDED | |
(in thousands, except per share data) | | June 2, 2007 | | September 1,
2007 | | December 1,
2007 | | March 1, 2008 | | May 27, 2006 | | August 26,
2006 | | November 25,
2006 | | March 3, 2007 | |
| | | | | | | | | | | | | | | | | |
Net sales | | $ | 1,553,293 | | $ | 1,767,716 | | $ | 1,794,747 | | $ | 1,933,186 | | $ | 1,395,963 | | $ | 1,607,239 | | $ | 1,619,240 | | $ | 1,994,987 | |
Gross profit | | 646,109 | | 732,158 | | 747,866 | | 799,098 | | 590,098 | | 678,249 | | 704,073 | | 862,982 | |
Operating profit | | 154,391 | | 221,037 | | 203,152 | | 259,442 | | 148,750 | | 219,622 | | 211,134 | | 309,895 | |
Earnings before provision for income taxes | | 164,281 | | 227,754 | | 208,120 | | 265,077 | | 158,409 | | 229,550 | | 221,777 | | 323,143 | |
Provision for income taxes | | 59,634 | | 80,746 | | 69,888 | | 92,156 | | 57,978 | | 84,015 | | 79,341 | | 117,301 | |
Net earnings | | $ | 104,647 | | $ | 147,008 | | $ | 138,232 | | $ | 172,921 | | $ | 100,431 | | $ | 145,535 | | $ | 142,436 | | $ | 205,842 | |
EPS-Basic (1) | | $ | 0.38 | | $ | 0.55 | | $ | 0.53 | | $ | 0.67 | | $ | 0.36 | | $ | 0.52 | | $ | 0.51 | | $ | 0.74 | |
EPS-Diluted (1) | | $ | 0.38 | | $ | 0.55 | | $ | 0.52 | | $ | 0.66 | | $ | 0.35 | | $ | 0.51 | | $ | 0.50 | | $ | 0.72 | |
(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.
45
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Bed Bath & Beyond Inc.:
We have audited the accompanying consolidated balance sheets of Bed Bath & Beyond Inc. and subsidiaries (the Company) as of March 1, 2008 and March 3, 2007, and February 25, 2006, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended March 3, 2007.1, 2008. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bed Bath & Beyond Inc. and subsidiaries as of March 1, 2008 and March 3, 2007, and February 25, 2006, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended March 3, 2007,1, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in the notesNotes to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”, effective March 4, 2007. Further, as discussed in the Notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans —– An Amendment of FASB Statements No. 87, 88, 106, and 132(R),” as well as changed their method for quantifying errors based on SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”Statements” in 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Bed Bath & Beyond Inc. and subsidiaries’the Company’s internal control over financial reporting as of March 3, 2007,1, 2008, based on criteria established in Internal Control—Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 2, 2007April 29, 2008 expressed an unqualified opinion on management’s assessmentthe effectiveness of and the effective operation of,Company’s internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
May 2, 2007
/s/ KPMG LLP | |
Short Hills, New Jersey | |
April 29, 2008 | |
| | |
4649
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
Bed Bath & Beyond Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Bed Bath & Beyond Inc. and subsidiaries maintained effective(the Company) internal control over financial reporting as of March 3, 2007,1, 2008, based on criteria established inInternal Control—Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Bed Bath & Beyond Inc.’sThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.reporting, included in Management’s Report on Internal Control Over Financial Reporting, appearing in Item 9A, Controls and Procedures. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control andbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Bed Bath & Beyond Inc. and subsidiaries maintained effective internal control over financial reporting as of March 3, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Bed Bath & Beyond Inc. and subsidiariesCompany maintained, in all material respects, effective internal control over financial reporting as of March 3, 2007,1, 2008, based on criteria established in Internal Control—Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bed Bath & Beyond Inc. and subsidiaries as of March 1, 2008 and March 3, 2007, and February 25, 2006, and the related consolidated statements of earnings, shareholders’ equity and cash flows and the related financial statement schedule for each of the fiscal years in the three-year period ended March 3, 2007,1, 2008, and our report dated May 2, 2007April 29, 2008 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedule.
/s/ KPMG LLP
Short Hills, New Jersey
May 2, 2007
/s/ KPMG LLP | |
Short Hills, New Jersey | |
April 29, 2008 | |
| | |
4750
ITEM 9 –- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.9A - CONTROLS AND PROCEDURES
(a) Review of Equity Grants and Procedures and Related Matters
On June 19, 2006, the Company’s Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent legal counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Company’s Board of Directors. Among the findings in the report were that the Company’s stock option granting process had control and other deficiencies. The report made recommendations for improvements in the process of granting stock options and restricted share awards.
On October 9, 2006, the Board of Directors adopted the special committee’s recommendations, with such additional improvements in the Company’s stock option and restricted stock processes as the Board and special committee may approve. Company management prepared and presented to the Board an implementation plan with respect to the recommendations, which the Board approved on December 8, 2006. Certain of the recommendations were capable of immediate implementation and have been implemented, including the grant of all equity grants for new hires, promotions or other events on the same fixed date each month (or the following trading day should such date fall on a weekend or holiday). The Company expects to fully implement the recommendations during fiscal 2007. Though not required by the recommendations, this implementation will also include the granting of annual grants on the same fixed date each year (or the following trading day should such date fall on a weekend or holiday).
The Company filed a Form 8-K dated October 10, 2006, which provides further details regarding the special committee’s review including certain deficiencies in controls and procedures regarding the stock option and restricted share process.
(b)(a) Disclosure Controls and Procedures
Based on their evaluation as of March 3, 2007,1, 2008, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by our management in the reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
(c)
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of March 3, 2007.1, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of March 3, 2007,1, 2008, our internal control over financial reporting is effective based on these criteria.
(d)(c) Attestation Report of the Independent Registered Public Accounting Firm
KPMG LLP issued an audit report on our assessmentthe effectiveness of our internal control over financial reporting, which is included herein.
(e)
(d) Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended March 3, 20071, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance of achieving their objectives, and the Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.
ITEM 9B.9B - OTHER INFORMATION
None.
51
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a) Directors of the Company
Information relative to Directors of the Company is set forth under the section captioned “Election of Directors” in the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Shareholders (“the Proxy Statement”) and is incorporated herein by reference.
(b) Executive Officers of the Company
Information with respect to Executive Officers of the Company is set forth immediately following Item 4 of Part I.
(c) Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned “Section 16(a) Beneficial Ownership Compliance” in the Proxy Statement and is incorporated herein by reference.
(d) Information on our audit committee and the audit committee financial expert is contained in the Proxy Statement under the section captioned “Audit Committee” and is incorporated herein by reference.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this item is contained in the Proxy Statement and is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders.reference.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The Equity Plan Compensation Information required by this item is included below; all other information required
by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders.Statement.
The following table provides certain information as of March 3, 20071, 2008 with respect to the Company’s equity compensation plans:
Plan Category | | | | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) | | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c) | |
| | | | | | | |
Equity compensation plans approved by shareholders (1) | | | | | | | |
| | | | | | | |
Stock Options | | 17,958,356 | | $ | 29.40 | | 22,245,315 | |
| | | | | | | |
Equity compensation plans not approved by shareholders (2) | | | | | | | |
| | | | | | | |
Stock Options | | 1,877,489 | | 35.72 | | | |
| | | | | | | |
Total (3) | | 19,835,845 | | $ | 29.99 | | 22,245,315 | |
Plan Category | | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) | | Weighted-average exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c) | |
Equity compensation plans approved by shareholders (1) | | | | | | | |
Stock Options | | 16,737,119 | | 30.87 | | 20,520,039 | |
Equity compensation plans not approved by shareholders (2) | | | | | | | |
Stock Options | | 1,644,809 | | 35.57 | | | |
Total (3) | | 18,381,928 | | 31.29 | | 20,520,039 | |
(1) These plans consist of the Company’s 1992, 1996, 1998 and 2000 Stock Option Plans and the 2004 Incentive Compensation Plan. Upon adoption of the 2004 Incentive Compensation Plan, the common stock available under the Company’s 1992, 1996, 1998 and 2000 Stock Option Plans became available for issuance under the 2004 Incentive Compensation Plan.52
(2) This plan consists of the Company’s 2001 Stock Option Plan. Upon adoption of the 2004 Incentive Compensation Plan, the common stock available for issuance under the 2001 Stock Option Plan became available for issuance under the 2004 Incentive Compensation Plan and therefore has been approved by the shareholders.
(1) | | These plans consist of the Company’s 1992, 1996, 1998 and 2000 Stock Option Plans and the 2004 Incentive Compensation Plan. Upon adoption of the 2004 Incentive Compensation Plan and pursuant to its terms, the common stock available under the Company’s 1992, 1996, 1998 and 2000 Stock Option Plans became available for issuance under the 2004 Incentive Compensation Plan. |
(2) | | This plan consists of the Company’s 2001 Stock Option Plan. Upon adoption of the 2004 Incentive Compensation Plan and pursuant to its terms, the common stock available for issuance under the 2001 Stock Option Plan became available for issuance under the 2004 Incentive Compensation Plan and therefore has been approved by the shareholders. |
(3) | | (3)Any shares of common stock that are subject to awards of options or stock appreciation rights under the 2004 Incentive Compensation Plan shall be counted against the aggregate number of shares of common stock that may be issued as one share for every share issued. Any shares of common stock that are subject to awards other than options or stock appreciation rights, including restricted stock awards, shall be counted against this limit as 1.80 shares for every share granted.
|
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders.Statement.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders.Statement.
53
PART IV
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) | | Consolidated Financial Statements of Bed Bath & Beyond Inc. and subsidiaries are incorporated under Item 8 of this Form 10-K. |
| | |
(a) (2) |
| Financial Statement Schedules |
| | |
| | For the Fiscal Years Ended March 1, 2008, March 3, 2007 and February 25, 2006. |
| | |
| | Schedule II – Valuation and Qualifying Accounts |
| | |
(a) (3) |
| Exhibits |
| | |
| | The exhibits to this Report are listed in the Exhibit Index included elsewhere herein. |
(a) (2) Financial Statement Schedules54
For the Years Ended March 3, 2007, February 25, 2006 and February 26, 2005.
Schedule II – Valuation and Qualifying Accounts
(a) (3) Exhibits
The exhibits to this Report are listed in the Exhibit Index included elsewhere herein.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BED BATH & BEYOND INC. |
| | |
|
|
By: | By:/s/ Steven H. Temares
|
| Steven H. Temares |
| Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Capacity | | Date |
|
| | | | | |
/s/ Warren Eisenberg |
| Co-Chairman and Director | | May 2, 2007
| April 30, 2008 |
Warren Eisenberg |
| | | | |
|
| | | | |
|
| | | | |
/s/ Leonard Feinstein
| | Co-Chairman and Director
| | May 2, 2007
| |
Leonard Feinstein
|
| | | | |
|
| | | | |
|
| | | | |
/s/ Steven H. Temares
| | Chief Executive Officer
| | May 2, 2007
| |
Steven H. Temares
|
| and Director
| | | |
|
| | | | |
|
| | | | |
/s/ Eugene A. Castagna
| | Chief Financial Officer
| | May 2, 2007
| |
Eugene A. Castagna
|
| and Treasurer
| | | |
|
| | | | |
|
| | | | |
/s/ Dean S. Adler
| | Director
| | May 2, 2007
| |
Dean S. Adler
|
| | | | |
|
| | | | |
|
| | | | |
/s/ Stanley Barshay
| | Director
| | May 2, 2007
| |
Stanley Barshay
|
| | | | |
|
| | | | |
|
| | | | |
| | Director
| | May 2, 2007
| |
Klaus Eppler/s/ Leonard Feinstein
|
| Co-Chairman and Director | | April 30, 2008 |
Leonard Feinstein | | | | |
| | | | |
/s/ Steven H. Temares |
| Chief Executive Officer | | April 30, 2008 |
Steven H. Temares | | and Director | | |
| | | | |
/s/ Eugene A. Castagna |
| Chief Financial Officer and Treasurer | | April 30, 2008 |
Eugene A. Castagna | | (Principal Financial and | | |
| | Accounting Officer) | | |
| | | | |
/s/ Dean S. Adler |
| Director | | April 30, 2008 |
Dean S. Adler | | | | |
| | | | |
/s/ Stanley Barshay |
| Director | | April 30, 2008 |
Stanley Barshay | | | | |
/s/ Jordan Heller
| | | | |
/s/ Klaus Eppler |
| Director | | May 2, 2007
| April 30, 2008 |
Jordan HellerKlaus Eppler
|
| | | | |
| | | | |
/s/ Patrick R. Gaston |
| Director | | April 30, 2008 |
Patrick R. Gaston | | | | |
| | | | |
/s/ Jordan Heller |
| Director | | April 30, 2008 |
Jordan Heller | | | | |
| | | | |
/s/ Robert S. Kaplan |
| Director | | May 2, 2007
| April 30, 2008 |
Robert S. Kaplan |
| | | | |
| | | | |
/s/ Victoria A. Morrison |
| Director | | April 30, 2008 |
Victoria A. Morrison | | | | |
|
| | | | |
/s/ Victoria A. MorrisonFran Stoller |
| Director | | May 2, 2007
| |
Victoria A. Morrison
|
| | | | |
|
| | | | |
|
| | | | |
/s/ Fran Stoller
| | Director
| | May 2, 2007
| April 30, 2008 |
Fran Stoller |
| | | | |
5255
Bed Bath & Beyond Inc. and Subsidiaries
Schedule II - - Valuation and Qualifying Accounts
Fiscal Years Ended March 1, 2008, March 3, 2007 and February 25, 2006 and February 26, 2005
(amounts in millions)
Column A | | Column B | | Column C | | Column C | | Column D | | Column E | |
| | | | | | | | | | | |
| | Balance at | | Additions | | Additions | | Adjustments | | Balance at | |
| | Beginning of | | Charged to | | Charged to | | and/or | | End of | |
Description | | Period | | Income | | Other Accounts (a) | | Deductions | | Period | |
Sales Returns and Allowance | | | | | | | | | | | |
| | | | | | | | | | | |
Year Ended: | | | | | | | | | | | |
March 3, 2007 | | $ | 13.3 | | $ | 371.0 | | $ | — | | $ | 369.2 | | $ | 15.1 | |
February 25, 2006 | | 11.9 | | 332.8 | | — | | 331.4 | | 13.3 | |
February 26, 2005 | | 10.7 | | 295.0 | | — | | 293.8 | | 11.9 | |
| | | | | | | | | | | | | | | | |
Column A | | Column B | | Column C | | Column C | | Column D | | Column E | |
| | Balance at | | Additions | | Additions | | Adjustments | | Balance at | |
| | Beginning of | | Charged to | | Charged to | | and/or | | End of | |
Description | | Period | | Income | | Other Accounts | | Deductions | | Period | |
Sales Returns and Allowance | | | | | | | | | | | |
| | | | | | | | | | | |
Year Ended: | | | | | | | | | | | |
March 1, 2008 | | $ | 15.1 | | $ | 382.2 | | $ | — | | $ | 382.8 | | $ | 14.5 | |
March 3, 2007 | | 13.3 | | 371.0 | | — | | 369.2 | | 15.1 | |
February 25, 2006 | | 11.9 | | 332.8 | | — | | 331.4 | | 13.3 | |
| | | | | | | | | | | | | | | | |
53
56
EXHIBIT INDEX
Unless otherwise indicated, exhibits are incorporated by reference to the correspondingly numbered exhibits to the Company’s Registration Statement on Form S-1 (Commission File No. 33-47250)
Exhibit | | |
No. | | Exhibit |
| | |
3.1 | | Restated Certificate of Incorporation |
| | |
3.2 | | Certificate of Amendment to the Company’s Certificate of Incorporation (incorporated by reference to Exhibit 3 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended August 25, 1996) |
| | |
3.3 | | Certificate of Amendment to the Company’s Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
| | |
3.4 | | Certificate of Change of Bed Bath & Beyond Inc. under Section 805-A of the Business Corporation Law (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
| | |
3.5 | | Amended and Restated By-Laws, as amended through June 26, 1997 (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
| | |
3.6 | | Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 3.6 to the Company’s Form 10-K for the year ended February 27, 1999) |
| | |
3.7 | | Amended By-Laws of Bed Bath & Beyond Inc. (As amended through December 17, 1998) (incorporated by reference to Exhibit 3.7 to the Company’s Form 10-K for the year ended February 27, 1999) |
| | |
3.8 | | Amended By-Laws of Bed Bath & Beyond Inc. (As amended through September 22, 1999) (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 28, 1999) |
| | |
3.9 | | Amended By-Laws of the Company as amended through June 28, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 2, 2001) |
| | |
3.10 | | Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 1, 2001) |
| | |
3.11 | | Amended By-Laws of Bed Bath & Beyond Inc. (As amended effective as of April 6, 2006) (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K dated April 11, 2006) |
| | |
10.1* | | Stock Option Agreement between the Company and Warren Eisenberg, dated as of August 26, 1997 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
57
10.2* | | Stock Option Agreement between the Company and Leonard Feinstein, dated as of August 26, 1997 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
| | |
10.3* | | Company’s 1992 Stock Option Plan, as amended through August 26, 1997 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
| | |
10.4* | | Company’s 1996 Stock Option Plan, as amended through August 26, 1997 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 30, 1997) |
| | |
10.5* | | Employment Agreement between the Company and Steven H. Temares (dated as of December 1, 1994) (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-K for the year ended February 28, 1998) |
| | |
10.6* | | Form of Employment Agreement between the Company and the Chief Merchandising Officer and Senior Vice President and Senior Vice President —– Stores (dated as of December 1, 1994) (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K for the year ended February 28, 1998) |
| | |
10.7* | | Company’s 1998 Stock Option Plan (incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 30, 1998) |
| | |
10.8* | | Stock Option Agreement between the Company and Warren Eisenberg, dated as of August 13, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 27, 1999) |
| | |
10.9* | | Stock Option Agreement between the Company and Leonard Feinstein, dated as of August 13, 1999 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 27, 1999) |
| | |
10.10* | | Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 27, 1999) |
| | |
10.11* | | Company’s 2000 Stock Option Plan (incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 27, 2000 which is incorporated by reference to Exhibit A to the Registrant’s Proxy Statement dated May 22, 2000) |
| | |
10.12* | | Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 26, 2000) |
| | |
10.13* | | Company’s 2001 Stock Option Plan (incorporated by reference to Exhibit 10.29 to the Company’s Form 10-K for the year ended March 3, 2001) |
| | |
10.14* | | Amended and Restated Employment Agreement between the Company and Warren Eisenberg, dated as of April 3, 2002 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-K for the year ended March 2, 2002) |
58
10.15* | | Amended and Restated Employment Agreement between the Company and Leonard Feinstein, dated as of April 3, 2002 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-K for the year ended March 2, 2002) |
| | |
10.16* | | Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2002) |
| | |
10.17* | | Form of Standard Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2002) |
| | |
10.18* | | Agreement Terminating Agreements concerning “Split Dollar” Life Insurance Plan, dated May 9, 1994 and June 16, 1995, among the Company, Jay D. Waxenberg, as trustee of the Warren Eisenberg Life Insurance Trust, Warren Eisenberg and Maxine Eisenberg (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended November 29, 2003) |
| | |
10.19* | | Agreement Terminating Agreements concerning “Split Dollar” Life Insurance Plan, dated May 9, 1994 and June 16, 1995, among the Company, Jay D. Waxenberg, as trustee of the Leonard Joseph Feinstein Life Insurance Trust and Leonard Feinstein (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended November 29, 2003) |
| | |
10.20* | | Compensation Agreement concerning Substitute Benefit Payments upon Termination of “Split Dollar” Life Insurance Plan between the Company and Warren Eisenberg, dated as of February 27, 2004 (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-K for the year ended February 28, 2004) |
| | |
10.21* | | Compensation Agreement concerning Substitute Benefit Payments upon Termination of “Split Dollar” Life Insurance Plan between the Company and Leonard Feinstein, dated as of February 27, 2004 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K for the year ended February 28, 2004) |
| | |
10.22* | | Employment Agreement between the Company and Eugene A. Castagna (dated as of March 1, 2000) (incorporated by reference to Exhibit 10.22 to the Company’s Form 10-K for the year ended February 28, 2004) |
| | |
10.23* | | Company’s 2004 Incentive Compensation Plan (incorporated by reference to Exhibit B to the Registrant’s Proxy Statement dated May 28, 2004) |
| | |
10.24* | | Form of Standard Stock Option Agreement dated as of May 10, 2004 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 29, 2004) |
| | |
10.25* | | Form of Stock Option Agreement under 2004 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 28, 2004) |
| | |
10.26* | | Form of Restricted Stock Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 28, 2005) |
| | |
10.27* | | Performance-Based Form of Restricted Stock Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter |
59
| | ended May 28, 2005) |
| | |
10.28* | | Form of Stock Option Agreement under 2004 Stock Option Plan (incorporated by reference to Exhibit 10.1 ofto the Company’s Form 10-Q for the quarter ended August 27, 2005) |
| | |
10.29* | | Company’s Nonqualified Deferred Compensation Plan (effective January 1, 2006) (incorporated by reference to Exhibit 10.1 ofto the Company’s Form 8-K dated January 5, 2006) |
| | |
10.30* | | Supplemental Executive Retirement Benefit Agreement between the Company and Steven H. Temares, dated as of January 11, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated January 13, 2006) |
| | |
10.31** | | Addendum to Stock Option Agreements for Warren Eisenberg, Leonard Feinstein and Steven H. Temares, dated as of December 27, 2006 (incorporated by reference to Exhibit 10.31 to the Company’s Form 10-K for the year ended March 3, 2007) |
| | |
10.32** | | Addendum to Stock Option Agreements for Eugene A. Castagna, Matthew Fiorilli and Arthur Stark dated December 28, 2006 (incorporated by reference to Exhibit 10.32 to the Company’s Form 10-K for the year ended March 3, 2007) |
| | |
10.33* | | Amended and Restated Employment Agreement between the Company and Warren Eisenberg, dated as of April 3, 2002 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 2, 2007) |
| | |
10.34* | | Amended and Restated Employment Agreement between the Company and Leonard Feinstein, dated as of April 3, 2002 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended June 2, 2007) |
| | |
21** | | Subsidiaries of the Company |
| | Commission File No. 33-1 |
| | |
23** | | Consent of Independent Registered Public Accounting Firm |
| | |
31.1** | | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
| | |
31.2** | | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
| | |
32** | | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes —- Oxley Act of 2002 |
* | | *This is a management contract or compensatory plan or arrangement.
|
** | | Filed herewith. |
** Filed herewith.60
57