10-K 1 a13-8110_110k.htm 10-K

Table of Contents

 

 

 

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 2, 2013

 

Commission File Number 0-20214

 

BED BATH & BEYOND INC.

(Exact name of registrant as specified in its charter)

 

New York

 

11-2250488

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

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:

 

Title of each class

 

Name of each exchange on which registered

Common stock, $.01 par value

 

The NASDAQ Stock Market LLC

 

 

(NASDAQ Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

 

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 25, 2012, 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 $14,555,560,334.*

 

The number of shares outstanding of the registrant’s common stock (par value $0.01 per share) at March 30, 2013: 220,044,578.

 

Documents Incorporated by Reference

 

Portions of the Registrant’s definitive proxy statement for the 2013 Annual Meeting of Shareholders to be filed 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 9,986,661 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.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Form 10-K

 

 

Item No.

 

Name of Item

 

 

 

 

 

PART I

Item 1.

 

Business

Item 1A.

 

Risk Factors

Item 1B.

 

Unresolved Staff Comments

Item 2.

 

Properties

Item 3.

 

Legal Proceedings

Item 4.

 

Mine Safety Disclosures

 

 

 

 

 

PART II

Item 5.

 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Item 6.

 

Selected Financial Data

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

 

Financial Statements and Supplementary Data

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A.

 

Controls and Procedures

Item 9B.

 

Other Information

 

 

 

 

 

PART III

Item 10.

 

Directors, Executive Officers and Corporate Governance

Item 11.

 

Executive Compensation

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

Item 14.

 

Principal Accounting Fees and Services

 

 

 

 

 

PART IV

Item 15.

 

Exhibits, Financial Statement Schedules

 

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PART I

 

Unless otherwise indicated, the term “Company” refers collectively to Bed Bath & Beyond Inc. and subsidiaries as of March 2, 2013. The Company’s fiscal year is comprised of the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2012 represented 53 weeks and ended on March 2, 2013. Fiscal 2011 and 2010 represented 52 weeks and ended on February 25, 2012 and February 26, 2011, 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”) operates a chain of 1,471 retail stores under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops or andThat! (collectively, “CTS”), Harmon or Harmon Face Values (collectively, “Harmon”), buybuy BABY and World Market or Cost Plus World Market (collectively, “World Market”). The Company includes Linen Holdings, a distributor of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, food service, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates three retail stores in Mexico under the name Bed Bath & Beyond.

 

The Company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products. The Company offers 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 50 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 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 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 2007, the Company acquired buybuy BABY, a retailer of infant and toddler merchandise, which operated 8 stores at the time located in Maryland, New Jersey, New York and Virginia. In 2007, the Company opened its first international BBB store in Ontario, Canada. In 2008, the Company became a partner in a joint venture which operated two stores in the Mexico City market under the name “Home & More,” which were rebranded as Bed Bath & Beyond in fiscal 2012. In June 2012, the Company acquired Linen Holdings, LLC (“Linen Holdings”), a distributor of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, food service, healthcare and other industries, and Cost Plus, Inc. (“World Market”), a retailer selling a wide range of home decorating items, furniture, gifts, holiday and other seasonal items, and specialty food and beverages, which operated 258 stores in 30 states at the time of acquisition under the names of World Market or Cost Plus World Market.

 

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

 

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Total net sales of the Company were $10.915 billion, $9.500 billion and $8.759 billion for fiscal 2012, 2011 and 2010, respectively. Net sales outside of the U.S. were not material for fiscal 2012, 2011 and 2010.  Refer to Part II, Item 7 and Item 8 of this Form 10-K for additional financial information.

 

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 domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products. The Company strives 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, 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 among 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. The Company has developed a style of merchandise presentation where all of its stores have groups of related product lines presented together in separate areas of each store. The Company believes that this 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.

 

The Company believes that its extensive merchandise selection, rather than fixturing, should be the focus of customer attention and, accordingly, primarily 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. The Company 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,” its reputation for offering a wide assortment of quality merchandise at everyday low prices and the use of paid advertising. Primary vehicles of paid advertising used by the Company include full-color circulars and other advertising pieces distributed via direct mail or inserts, as well as digital media including email, mobile, social and search advertising. Also, to support the opening of new stores, the Company primarily uses “grand opening” newspaper advertising and email.

 

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, www.buybuybaby.com, www.bedbathandbeyond.ca and www.worldmarket.com as well as the Company’s Facebook pages are available for customers to access 24 hours a day, seven days a week.

 

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Suppliers

 

In fiscal 2012, the Company purchased its merchandise from approximately 7,800 suppliers with the Company’s largest supplier accounting for approximately 5% of the Company’s merchandise purchases and the Company’s 10 largest suppliers accounting for approximately 18% 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.

 

Distribution of Merchandise

 

A substantial portion of the Company’s merchandise is shipped to stores or customers through its supply chain network, which includes distribution facilities which are either owned or leased by the Company or managed by third parties, with the remaining merchandise shipped to stores or customers directly from a vendor. The Company utilizes 15 distribution facilities totaling approximately 6.0 million square feet.  In addition, the Company maintains a number of supplemental storage locations to either enhance the warehouse facilities in the Company’s stores in proximity to these locations or to fulfill orders for customers.

 

Employees

 

As of March 2, 2013, the Company employed approximately 57,000 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’s sales exhibit seasonality with sales levels generally higher in the calendar months of August, November and December, and generally lower in February.

 

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 21 year period from the beginning of fiscal 1992 to the end of fiscal 2012, the Company has grown from 34 stores to 1,471 stores, including the 258 World Market stores acquired on June 29, 2012. The Company’s 1,471 stores operate in all 50 states, the District of Columbia, Puerto Rico and Canada, including: 1,004 BBB stores operating in all 50 states, the District of Columbia, Puerto Rico and Canada; 74 CTS stores operating in 22 states; 47 Harmon stores operating in four states; 82 buybuy BABY stores operating in 29 states; and 264 World Market stores operating in 31 states and the District of Columbia. Total square footage grew from approximately 0.9 million square feet at the beginning of fiscal 1992 to approximately 42.0 million square feet at the end of fiscal 2012, including the 264 World Market stores. During fiscal 2012, the Company opened a total of 41 new stores, including 12 BBB stores throughout the United States and Canada and three CTS stores, two Harmon stores, 18 buybuy BABY stores and six World Market stores throughout the United States and closed one BBB store, all of which resulted in the aggregate addition of approximately 5.9 million square feet of store space, including approximately 4.8 million square feet of store space for the 258 World Market stores acquired on June 29, 2012. Additionally, the Company is a partner in a joint venture which opened one store during fiscal 2012 and as of March 2, 2013, operated a total of three retail stores in Mexico under the name Bed Bath & Beyond.

 

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 believes throughout the United States and Canada, there is an opportunity to operate in excess of 1,300 BBB stores as well as grow World Market, CTS and buybuy BABY from coast to coast.

 

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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.

 

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

 

Competition

 

The Company operates in the fragmented and highly competitive retail industry. The Company competes with many different types of retail stores that sell many or most of the same products. Such competitors include but are not limited to: (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, (iv) national chains and (v) online and multi-channel retailers. 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. Other entities continue to introduce new concepts that include many of the product lines carried by the Company’s stores. There can be no assurance that the operation of competitors will not have a material adverse effect on the Company.

 

Tradenames and Service Marks

 

The Company uses the service marks “Bed Bath & Beyond,” “buybuy BABY,” “Christmas Tree Shops,” “andThat!,” “Harmon,” “Face Values,” “Cost Plus,” “World Market” and “Cost Plus World Market” in connection with its retail services. The Company has registered trademarks and service marks or is seeking registrations for these and other trademarks and service marks 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, including having registered the “Bed Bath & Beyond” name and logo in Canada and Mexico. The Company also files patent applications and seeks copyright registrations where it deems such to be advantageous to the business. Management believes that its name recognition and service marks are important elements of the Company’s merchandising strategy.

 

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.

 

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

 

82

 

Co-Chairman and Director

 

 

 

 

 

Leonard Feinstein

 

76

 

Co-Chairman and Director

 

 

 

 

 

Steven H. Temares

 

54

 

Chief Executive Officer and Director

 

 

 

 

 

Arthur Stark

 

58

 

President and Chief Merchandising Officer

 

 

 

 

 

Matthew Fiorilli

 

56

 

Senior Vice President — Stores

 

 

 

 

 

Eugene A. Castagna

 

47

 

Chief Financial Officer and Treasurer

 

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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 Co-Chief Executive Officer from 1971 to 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 2003.

 

Steven H. Temares has been Chief Executive Officer since 2003 and has served as a Director since 1999. Mr. Temares was President and Chief Executive Officer from 2003 to 2006, President and Chief Operating Officer from 1999 to 2003 and Executive Vice President and Chief Operating Officer from 1997 to 1999. Mr. Temares joined the Company in 1992.

 

Arthur Stark has been President and Chief Merchandising Officer since 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 Senior Vice President - Stores since 1999. Mr. Fiorilli joined the Company in 1973.

 

Eugene A. Castagna has been Chief Financial Officer and Treasurer since 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.

 

ITEM 1A — RISK FACTORS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains forward-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-looking statements as a result of many factors. Such factors include the following:

 

General economic factors beyond the Company’s control and changes in the economic climate could adversely affect the Company’s performance.

 

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, civil disturbances 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.

 

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The Company operates in the highly competitive retail business where the use of emerging technologies as well as unanticipated changes in the pricing and other practices of competitors may adversely affect the Company’s performance.

 

The retail business is highly competitive. The Company competes for customers, employees, locations, merchandise, technology, 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 as well as online and multi-channel retailers. Specifically, rapidly evolving technologies are altering the manner in which the Company and its competitors communicate and transact with customers, and the Company’s own omni channel strategy to adapt to these changes in relation to its competitors’ actions in doing so presents a specific risk. Further, unanticipated changes in the pricing and other practices of the Company’s competitors, including promotional activity, may adversely affect the Company’s performance.

 

The Company’s failure to anticipate and respond in a timely fashion to changes in consumer preferences and demographic factors could have a material adverse affect on the Company’s financial condition and results of operations.

 

The Company’s success depends on its 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.

 

Unusual weather patterns could adversely affect the Company’s performance.

 

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.

 

A major disruption of the Company’s information technology systems could negatively impact operating results.

 

The Company’s operating results could be negatively impacted by a major disruption of the Company’s information technology systems. The Company relies heavily on these systems to process transactions, manage inventory replenishment, summarize results and control distribution of products. Despite numerous safeguards and careful contingency planning, these systems are still subject to power outages, computer viruses, telecommunication failures, security breaches and other catastrophic events. A major disruption of the systems and their backup mechanisms may cause the Company to incur significant costs to repair the systems, experience a critical loss of data and result in business interruptions.

 

A privacy breach of the Company’s data security systems or those of its third party service providers could have a negative impact on the Company’s operating results and financial performance due to possible loss of consumer confidence, as well as potential government penalties and private litigation.

 

The Company stores certain information about its customers and employees in the ordinary course of business. The Company invests considerable resources in protecting this sensitive information but is still subject to a possible security event. A breach of its security systems or those of its third party service providers resulting in unauthorized access to stored personal information could negatively impact the Company’s operating results and financial performance. Certain aspects of the business, particularly the Company website, heavily depend on consumers entrusting personal financial information to be transmitted securely over public networks. A loss of consumer confidence could result in lost future sales and have a material adverse effect on the Company’s reputation. In addition, a privacy breach could cause the Company to incur significant costs to restore the integrity of its systems, and could result in significant costs in government penalties and private litigation.

 

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A failure of the Company’s suppliers to adhere to appropriate laws or standards could negatively impact its reputation.

 

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 failure of one of the Company’s domestic or foreign suppliers to adhere to labor, environmental, health and safety laws and standards could negatively impact the Company’s reputation and have an adverse effect on the Company’s results of operations.

 

Changes in statutory, regulatory, and other legal requirements at a local, state and national level could potentially impact the Company’s operating and financial results.

 

The Company is subject to numerous statutory, regulatory and legal requirements at a local, state and national level. The Company’s operating results could be negatively impacted by developments in these areas due to the costs of compliance in addition to possible government penalties and litigation in the event of deemed noncompliance. Changes in the regulatory environment in the area of product safety, environmental protection, privacy and information security, wage and hour laws, among others, could potentially impact the Company’s operations and financial results.

 

New, or developments in existing, litigation, claims or assessments could potentially impact the Company’s operating and financial results.

 

The Company is involved in litigation, claims and assessments incidental to the Company’s business, the disposition of which is not expected to have a material effect on the Company’s financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions related to these matters. While outcomes of such actions vary, any such claim or assessment against the Company could potentially impact the Company’s operations and financial results.

 

Changes to accounting rules, regulations and tax laws, or new interpretations of existing accounting standards or tax laws could negatively impact the Company’s operating results and financial position.

 

The Company’s operating results and financial position could be negatively impacted by changes to accounting rules and regulations or new interpretations of existing accounting standards. These changes may include, without limitation, changes to lease accounting standards. The Company’s effective income tax rate could be impacted by changes in accounting standards as well as changes in tax laws or the interpretations of these tax laws by courts and taxing authorities which could negatively impact the Company’s financial results.

 

The success of the Company is dependent, in part, on managing costs of labor, merchandise and other expenses that are subject to factors beyond the Company’s control.

 

The Company’s success depends, in part, on its 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, labor organizing activities 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.

 

The Company depends upon its employees in all areas of the organization to execute its business plan and, ultimately, to satisfy its customers.

 

The Company’s ability to attract and retain qualified employees in all areas of the organization may be affected by a number of factors, including geographic relocation of employees, operations or facilities and the highly competitive markets in which the Company operates, including the markets for the types of skilled individuals needed to support the Company’s continued growth domestically, interactively and, over the longer term, internationally.

 

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The Company’s growth depends, in part, on its ability to open new stores, execute its interactive strategies and operate profitably.

 

The Company’s growth depends, in part, on its ability to open new stores, execute its interactive strategies and operate profitably. The Company’s ability to open additional stores successfully will depend on a number of factors, including its identification and availability of suitable store locations; its success in negotiating leases on acceptable terms; its hiring and training of skilled store operating personnel, especially management; and its 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. This increases the cost of doing business and the risk that the Company’s business practices could result in liabilities that may adversely affect its performance, despite the exercise of reasonable care.

 

The continued uncertainty in the financial markets could have an adverse effect on the Company’s ability to access its cash and cash equivalents.

 

The Company may have amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. While the Company closely manages its cash and cash equivalents balances to minimize risk, with the current financial environment and instability of financial institutions, the Company can not be assured that it will not experience losses on its deposits.

 

The Company has acquired several businesses and continues to evaluate potential business initiatives, including acquisitions, any of which could adversely impact the Company’s performance.

 

The Company believes it carefully evaluates and plans for the integration of newly acquired businesses, as well as carefully prepares for and executes on other business combinations and strategic initiatives that are part of the growth of its business. However, such activities involve certain inherent risks, including the failure to retain key personnel from an acquired business; undisclosed or subsequently arising liabilities; challenges in the successful integration of operations, aligning standards, policies and systems; and the potential diversion of management resources from existing operations to respond to unforeseen issues arising in the context of the integration of a new business or initiative.

 

ITEM 1B — UNRESOLVED STAFF COMMENTS

 

None.

 

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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 1,471 stores are located in all 50 states, the District of Columbia, Puerto Rico and Canada and range in size from approximately 5,000 to 100,000 square feet, but are predominantly between 18,000 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.

 

The table below sets forth the locations of the Company’s stores as of March 2, 2013:

 

Alabama

 

21

 

Alaska

 

2

 

Arizona

 

43

 

Arkansas

 

7

 

California

 

187

 

Colorado

 

33

 

Connecticut

 

23

 

Delaware

 

4

 

Florida

 

97

 

Georgia

 

37

 

Hawaii

 

1

 

Idaho

 

9

 

Illinois

 

58

 

Indiana

 

24

 

Iowa

 

10

 

Kansas

 

11

 

Kentucky

 

10

 

Louisiana

 

19

 

Maine

 

8

 

Maryland

 

21

 

Massachusetts

 

43

 

Michigan

 

43

 

Minnesota

 

14

 

Mississippi

 

7

 

Missouri

 

22

 

Montana

 

8

 

Nebraska

 

5

 

Nevada

 

13

 

New Hampshire

 

14

 

New Jersey

 

84

 

New Mexico

 

8

 

New York

 

92

 

North Carolina

 

43

 

North Dakota

 

2

 

Ohio

 

50

 

Oklahoma

 

8

 

Oregon

 

17

 

Pennsylvania

 

42

 

Rhode Island

 

5

 

South Carolina

 

24

 

South Dakota

 

3

 

Tennessee

 

27

 

Texas

 

114

 

Utah

 

15

 

Vermont

 

3

 

Virginia

 

44

 

Washington

 

36

 

West Virginia

 

3

 

Wisconsin

 

15

 

Wyoming

 

2

 

District of Columbia

 

3

 

Puerto Rico

 

3

 

Alberta, Canada

 

8

 

British Columbia, Canada

 

7

 

New Brunswick, Canada

 

2

 

Newfoundland, Canada

 

1

 

Novia Scotia, Canada

 

1

 

Ontario, Canada

 

14

 

Prince Edward Island, Canada

 

1

 

Total

 

1,471

 

 

The Company leases primarily all of its existing stores. The leases provide for original lease terms that generally range from 10 to 15 years and most leases provide for renewal options, often at increased rents. The Company evaluates leases on an ongoing basis which may lead to renegotiated lease terms, including rents during renewal options, or the possible relocation of stores. 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).

 

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Table of Contents

 

The Company has distribution facilities totaling approximately 5.8 million square feet consisting of three owned facilities and eight leased facilities.

 

As of March 2, 2013, the Company occupied approximately 450,000 square feet of office space at five locations for procurement and corporate office functions. The corporate headquarters within two owned facilities in Union, New Jersey includes approximately 305,000 square feet with the remaining approximately 145,000 square feet within owned and leased facilities in Massachusetts, California, New Jersey and Florida. During 2012, the Company completed the relocation of the Company’s Farmingdale and Garden City, New York offices to its corporate headquarters in Union, New Jersey. In addition, the Company has seven locations, totaling approximately 14,000 square feet, which are utilized primarily for institutional sales related functions.

 

ITEM 3 LEGAL PROCEEDINGS

 

The Company is party to various 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 — MINE SAFETY DISCLOSURES

 

Not Applicable.

 

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Table of Contents

 

PART II

 

ITEM 5 — MARKET FOR 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 2012:

 

 

 

 

 

1st Quarter

 

$

72.47

 

$

59.74

 

2nd Quarter

 

74.72

 

59.34

 

3rd Quarter

 

71.60

 

56.40

 

4th Quarter

 

60.39

 

54.91

 

 

 

 

High

 

Low

 

Fiscal 2011:

 

 

 

 

 

1st Quarter

 

$

57.30

 

$

45.07

 

2nd Quarter

 

60.31

 

49.73

 

3rd Quarter

 

63.44

 

55.26

 

4th Quarter

 

63.22

 

57.46

 

 

The common stock is quoted through the NASDAQ National Market System under the symbol BBBY. On March 30, 2013, there were approximately 5,300 shareholders of record of the common stock (without including individual participants in nominee security position listings). On March 30, 2013, the last reported sale price of the common stock was $64.42.

 

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.

 

Since 2004 through the end of fiscal 2012, the Company has repurchased approximately $5.0 billion of its common stock through share repurchase programs. The Company’s purchases of its common stock during the fourth quarter of fiscal 2012 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 (2)

 

or Programs (1)

 

Programs (1) (2)

 

November 25, 2012 — December 22, 2012

 

1,326,400

 

$

58.38

 

1,326,400

 

$

2,645,688,672

 

December 23, 2012 - January 19, 2013

 

1,655,900

 

$

56.14

 

1,655,900

 

$

2,552,729,759

 

January 20, 2013 - March 2, 2013

 

2,316,700

 

$

58.10

 

2,316,700

 

$

2,418,133,888

 

Total

 

5,299,000

 

$

57.56

 

5,299,000

 

$

2,418,133,888

 

 


(1) Between December 2004 and December 2012, the Company’s Board of Directors authorized, through share repurchase programs, the repurchase of $7.450 billion of its shares of common stock. The Company has authorization 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.

 

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Table of Contents

 

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 1, 2008, and the reinvestment of dividends, if any).

 

 

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Table of Contents

 

ITEM 6 — SELECTED FINANCIAL DATA

 

Consolidated Selected Financial Data

 

Fiscal Year Ended (1)

 

(in thousands, except per share

 

March 2,

 

February 25,

 

February 26,

 

February 27,

 

February 28,

 

and selected operating data)

 

2013 (2)

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

10,914,585

 

$

9,499,890

 

$

8,758,503

 

$

7,828,793

 

$

7,208,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

4,388,755

 

3,930,933

 

3,622,929

 

3,208,119

 

2,873,236

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

1,638,218

 

1,568,369

 

1,288,458

 

980,687

 

673,896

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

1,037,788

 

989,537

 

791,333

 

600,033

 

425,123

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share - Diluted

 

$

4.56

 

$

4.06

 

$

3.07

 

$

2.30

 

$

1.64

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of stores open (at period end)

 

1,471

 

1,173

 

1,139

 

1,100

 

1,037

 

 

 

 

 

 

 

 

 

 

 

 

 

Total square feet of store space (at period end)

 

42,030,000

 

36,125,000

 

35,055,000

 

33,740,000

 

32,050,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage increase (decrease) in comparable store sales

 

2.7

%

5.9

%

7.8

%

4.4

%

(2.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

Comparable store net sales (in 000’s)

 

$

9,819,904

 

$

9,157,183

 

$

8,339,112

 

$

7,409,203

 

$

6,746,472

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of comparable stores

 

1,122

 

1,076

 

1,013

 

942

 

874

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

2,232,275

 

$

2,803,809

 

$

2,751,398

 

$

2,413,791

 

$

1,609,831

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

6,279,952

 

5,724,546

 

5,646,193

 

5,152,130

 

4,268,843

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term sale/leaseback and capital lease obligations

 

108,364

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity (3) (4)

 

$

4,079,730

 

$

3,922,528

 

$

3,931,659

 

$

3,652,904

 

$

3,000,454

 

 


(1) Each fiscal year represents 52 weeks, except for fiscal 2012 (ended March 2, 2013) which represents 53 weeks.

(2) The Company acquired Linen Holdings, LLC. on June 1, 2012 and Cost Plus, Inc. on June 29, 2012.

(3) The Company has not declared any cash dividends in any of the fiscal years noted above.

(4) In fiscal 2012, 2011, 2010, 2009 and 2008, the Company repurchased approximately $1.001 billion, $1.218 billion, $688 million, $95 million and $48 million of its common stock, respectively.

(5) As a result of the Cost Plus, Inc. acquisition, the Company assumed two sale/leaseback and various capital lease obligations.

 

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Table of Contents

 

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Bed Bath & Beyond Inc. and subsidiaries (the “Company”) operates a chain of 1,471 retail stores under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops or andThat! (collectively, “CTS”), Harmon or Harmon Face Values (collectively, “Harmon”), buybuy BABY and World Market or Cost Plus World Market (collectively, “World Market”).  The Company includes Linen Holdings, a distributor of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, food service, healthcare and other industries. (See “Acquisitions,” Note 2 in the consolidated financial statements for the acquisitions of World Market and Linen Holdings). Additionally, the Company is a partner in a joint venture which operates three retail stores in Mexico under the name Bed Bath & Beyond.  The Company accounts for its operations as two operating segments: North American Retail and Institutional Sales.  The Institutional Sales operating segment, which is comprised of Linen Holdings, does not meet the quantitative thresholds under U.S. generally accepted accounting principles and therefore is not a reportable segment.

 

The Company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products. The Company’s objective is to be a customer’s first choice for products and services in the categories offered, in the markets in which the Company operates.

 

The Company’s strategy is to achieve this objective through excellent customer service, an extensive breadth, depth and differentiated assortment, everyday low prices and introduction of new merchandising offerings, supported by the continuous development and improvement of its infrastructure.

 

Operating in the highly competitive retail industry, the Company, along with other retail companies, is influenced by a number of factors including, but not limited to, general economic conditions including the housing market, relatively high unemployment and historically high commodity prices; the overall macroeconomic environment and related changes in the retailing environment; consumer preferences and spending habits; unusual weather patterns and natural disasters; competition from existing and potential competitors; evolving technology; and the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company’s expansion program. The Company cannot predict whether, when or the manner in which these factors could affect the Company’s operating results.

 

The results of operations for the fiscal year ended March 2, 2013 include Linen Holdings since the date of acquisition on June 1, 2012 and World Market since the date of acquisition on June 29, 2012.

 

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

 

·                  Net sales in fiscal 2012 (fifty-three weeks) increased approximately 14.9% to $10.915 billion; net sales in fiscal 2011 (fifty-two weeks) increased approximately 8.5% to $9.500 billion over net sales of $8.759 billion in fiscal 2010 (fifty-two weeks).

 

·                  Comparable store sales for fiscal 2012 increased by approximately 2.7% as compared with an increase of approximately 5.9% in fiscal 2011 and an increase of approximately 7.8% in fiscal 2010.  Comparable store sales percentages are calculated based on an equivalent number of weeks in each annual period.

 

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. Linen Holdings is excluded from the comparable store sales calculations and will continue to be excluded on an ongoing basis as long as it does not meet the above definition of comparable store sales. World Market is excluded from the comparable store sales calculations for fiscal 2012, and will continue to be excluded from the comparable store sales calculations until after the anniversary of the acquisition.

 

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Table of Contents

 

·                  Gross profit for fiscal 2012 was $4.389 billion or 40.2% of net sales compared with $3.931 billion or 41.4% of net sales for fiscal 2011 and $3.623 billion or 41.4% of net sales for fiscal 2010.

 

·                  Selling, general and administrative expenses (“SG&A”) for fiscal 2012 were $2.751 billion or 25.2% of net sales compared with $2.363 billion or 24.9% of net sales for fiscal 2011 and $2.334 billion or 26.7% of net sales for fiscal 2010.

 

·                  The effective tax rate was 36.5%, 37.0% and 38.8% for fiscal years 2012, 2011 and 2010, respectively. The tax rate included discrete tax items of an approximate $26.7 million net benefit, $20.7 million net benefit and $0.9 million net expense, respectively, for fiscal 2012, 2011 and 2010.

 

·                  For the fiscal year ended March 2, 2013 (fifty-three weeks), net earnings per diluted share were $4.56 ($1.038 billion), an increase of approximately 12%, as compared with net earnings per diluted share of $4.06 ($989.5 million) for fiscal 2011 (fifty-two weeks), which was an increase of approximately 32% from net earnings per diluted share of $3.07 ($791.3 million) for fiscal 2010 (fifty-two weeks). For the fiscal year ended March 2, 2013, the increase in net earnings per diluted share is the result of the items described above, which includes an estimated $0.05 benefit related to the fifty-third week in fiscal year 2012 and the impact of the Company’s repurchases of its common stock. For the fiscal year ended February 25, 2012, the increase in net earnings per diluted share is the result of the items described above and the impact of the Company’s repurchases of its common stock.

 

During fiscal 2012, the Company made progress in many areas, such as: the completion of the relocation of the Company’s Farmingdale and Garden City, New York offices to its corporate headquarters in Union, New Jersey; the ongoing integration of the two fiscal 2012 acquisitions; enhancing the omni channel experience for its customers by replacing both back end and customer facing systems; the opening of a new distribution facility in Georgia; increasing the investment in people and systems to upgrade the Company’s data and analytics capabilities; and the commencement of the initial phase of a new information technology data center to enhance the Company’s disaster recovery capabilities and support its overall information technology systems.

 

Capital expenditures for fiscal 2012, 2011 and 2010 were $314.7 million, $243.4 million and $183.5 million, respectively. The Company remains committed to making the required investments in its infrastructure to help position the Company for continued growth and success. The Company continues to review and prioritize its capital needs while continuing to make investments, principally for new stores, existing store improvements, information technology enhancements, including omni channel capabilities, and other projects whose impact is considered important to its future.

 

During fiscal 2012, 2011 and 2010, the Company repurchased 16.1 million, 21.5 million and 15.9 million shares, respectively, of its common stock at a total cost of approximately $1.001 billion, $1.218 billion and $687.6 million, respectively.

 

The Company plans to continue to expand its operations and invest in its infrastructure to further its long term objectives. In fiscal 2013, the Company expects to open approximately 45 new stores with the possibility of some of these stores pushing into fiscal 2014. During fiscal 2012, the Company opened a total of 41 new stores and closed one store. Additionally, the Company acquired 258 World Market stores as of June 29, 2012.

 

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Table of Contents

 

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 2,

 

February 25,

 

February 26,

 

March 2,

 

February 25,

 

 

 

2013

 

2012

 

2011

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

14.9

%

8.5

%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

59.8

 

58.6

 

58.6

 

17.2

 

8.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

40.2

 

41.4

 

41.4

 

11.6

 

8.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

25.2

 

24.9

 

26.7

 

16.4

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

15.0

 

16.5

 

14.7

 

4.5

 

21.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before provision for income taxes

 

15.0

 

16.5

 

14.8

 

4.1

 

21.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

9.5

 

10.4

 

9.0

 

4.9

 

25.0

 

 

Net Sales

 

Net sales in fiscal 2012 (fifty-three weeks) increased $1.415 billion to $10.915 billion, representing an increase of 14.9% over $9.500 billion of net sales in fiscal 2011 (fifty-two weeks), which increased $741.4 million or 8.5% over the $8.759 billion of net sales in fiscal 2010 (fifty-two weeks). For fiscal 2012, approximately 58% of the increase in net sales was attributable to the inclusion of World Market and Linen Holdings since the date of each respective acquisition through the end of the fiscal fifty-second week, approximately 13% of the increase was attributable to the fifty-third week including World Market and Linen Holdings, approximately 18% was attributable to an increase in the Company’s comparable store sales and the remaining 11% of the increase was primarily attributable to an increase in the Company’s new store sales. For fiscal 2011, approximately 68.6% of the increase in net sales was attributable to an increase in the Company’s comparable store sales and the balance of the increase was primarily attributable to an increase in the Company’s new store sales.

 

For fiscal 2012, comparable store sales for 1,122 stores represented $9.820 billion of net sales; for fiscal 2011, comparable store sales for 1,076 stores represented $9.157 billion of net sales; and for fiscal 2010, comparable store sales for 1,013 stores represented $8.339 billion of net sales. The number of stores includes only those which constituted a comparable store for the entire respective fiscal period. The increase in comparable store sales, which excludes World Market and Linen Holdings, was approximately 2.7% for fiscal 2012, as compared with an increase of approximately 5.9% for fiscal 2011. The increase in comparable store sales for fiscal 2012 was due to an increase in the average transaction amount partially offset by a decrease in the number of transactions. The increase in comparable store sales for fiscal 2011 was due to increases in both the number of transactions and the average transaction amount. Comparable store sales percentages are calculated based on an equivalent number of weeks for each annual period.

 

Sales of domestics merchandise accounted for approximately 39%, 40% and 41% of net sales in fiscal 2012, 2011 and 2010, respectively, of which the Company estimates that bed linens accounted for approximately 12% of net sales in fiscal 2012, 2011 and 2010, respectively. The remaining net sales in fiscal 2012, 2011 and 2010 of 61%, 60% and 59%, respectively, represented sales of home furnishings. No other individual product category accounted for 10% or more of net sales during fiscal 2012, 2011 or 2010.

 

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Table of Contents

 

Gross Profit

 

Gross profit in fiscal 2012, 2011 and 2010 was $4.389 billion or 40.2% of net sales, $3.931 billion or 41.4% of net sales and $3.623 billion or 41.4% of net sales, respectively. The decrease in the gross profit margin as a percentage of net sales between fiscal 2012 and 2011 was primarily attributed to an increase in coupons, due to increases in both the redemption and the average coupon amount, and a shift in the mix of merchandise sold to lower margin categories. The gross profit margin as a percentage of net sales for fiscal 2011 included a reduction in markdowns, offset by an increase in inventory acquisition costs and a shift in the mix of merchandise sold to lower margin categories.

 

Selling, General and Administrative Expenses

 

SG&A was $2.751 billion or 25.2% of net sales in fiscal 2012, $2.363 billion or 24.9% of net sales in fiscal 2011 and $2.334 billion or 26.7% of net sales in fiscal 2010. The increase in SG&A between fiscal 2012 and 2011 as a percentage of net sales was primarily due to a relative increase in advertising expenses. As a percentage of net sales, the relative increase in advertising expenses was higher due to the inclusion of the financial results of the acquisitions completed in fiscal 2012. In addition, the fifty-third week has relatively higher SG&A than the year to date fifty-two weeks and increased SG&A by approximately 10 basis points. The decrease in SG&A between fiscal 2011 and 2010 as a percentage of net sales was primarily due to relative decreases in payroll and payroll-related items (including salaries and medical insurance), occupancy (including rent and depreciation), advertising and store expenses, all of which benefited from the increase in comparable store sales. In addition, advertising expenses as a percentage of net sales benefited from a reduction in the mailing of advertising pieces.

 

Operating Profit

 

Operating profit for fiscal 2012 was $1.638 billion or 15.0% of net sales, $1.568 billion or 16.5% of net sales in fiscal 2011 and $1.288 billion or 14.7% of net sales in fiscal 2010. The change in operating profit as a percentage of net sales between fiscal 2012 and 2011 was the result of the changes in gross profit margin and SG&A as a percentage of net sales as described above. The change in operating profit as a percentage of net sales between fiscal 2011 and 2010 was the result of the change in SG&A as a percentage of net sales as described above.

 

Interest (Expense) Income

 

Interest expense was $4.2 million in fiscal 2012 and interest income was $1.1 million and $4.5 million in fiscal 2011 and 2010, respectively. Interest expense for fiscal 2012 increased primarily due to the inclusion of interest expense related to the sale/leaseback obligations on the distribution facilities acquired as part of the fiscal 2012 acquisitions.

 

Income Taxes

 

The effective tax rate was 36.5% for fiscal 2012, 37.0% for fiscal 2011 and 38.8% for fiscal 2010. For fiscal 2012, the tax rate included an approximate $26.7 million net benefit primarily due to the recognition of favorable discrete state tax items. For fiscal 2011, the tax rate included an approximate $20.7 million net benefit primarily due to the settlement of certain discrete tax items from on-going examinations, the recognition of favorable discrete state tax items and from changing the blended state tax rate of deferred income taxes. For fiscal 2010, the tax rate included an approximate $0.9 million net expense primarily due to the recognition of certain discrete tax items, partially offset by the changing of the blended state tax rate of deferred income taxes.

 

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

 

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Table of Contents

 

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 21-year period from the beginning of fiscal 1992 to the end of fiscal 2012, the chain has grown from 34 to 1,471 stores, including the 264 World Market stores (258 stores were acquired on June 29, 2012). Total square footage grew from approximately 0.9 million square feet at the beginning of fiscal 1992 to approximately 42.0 million square feet at the end of fiscal 2012, including the 264 World Market stores. During fiscal 2012, the Company opened a total of 41 new stores and closed one store, all of which resulted in the aggregate addition of approximately 5.9 million square feet of store space, including approximately 4.8 million square feet of store space for the 258 World Market stores acquired on June 29, 2012. Additionally, the Company is a partner in a joint venture which opened one store during fiscal 2012 and as of March 2, 2013, operated a total of three retail stores in Mexico under the name Bed Bath & Beyond.

 

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

 

The Company plans to continue to expand its operations and invest in its infrastructure to reach its long term objectives. In fiscal 2013, the Company expects to open approximately 45 new stores with the possibility of some of these stores pushing into fiscal 2014. The continued growth of the Company is dependent, in part, upon the Company’s ability to execute its expansion program successfully. During fiscal 2012, the Company completed the relocation of its Farmingdale and Garden City, New York offices to its corporate headquarters in Union, New Jersey, which the Company believes improves the communication, collaboration, coordination and execution across all concepts, activities and platforms.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has been able to finance its operations, including its expansion program, entirely through internally generated funds. For fiscal 2013, the Company believes that it can continue to finance its operations, including its expansion program, share repurchase program and planned capital expenditures, entirely through existing and internally generated funds. The Company periodically reviews its alternatives with respect to optimizing its capital structure. Capital expenditures for fiscal 2013, principally for new stores, existing store improvements, information technology enhancements, including omni channel capabilities, and other projects are planned to be approximately $350.0 million, subject to the timing and composition of the projects. Some of the initiatives included in capital expenditures for fiscal 2013 are: enhancing the omni channel experience for its customers through replacing both back end and customer facing systems, upgrading the Company’s mobile sites and applications, enhancing network communications in the stores and implementing point of sale improvements; building, equipping and staffing a new information technology data center to enhance disaster recovery capabilities and to support the Company’s ongoing technology initiatives; and retrofitting energy saving equipment in the stores.

 

Fiscal 2012 compared to Fiscal 2011

 

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

 

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

 

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

 

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

 

Fiscal 2011 compared to Fiscal 2010

 

Net cash provided by operating activities in fiscal 2011 was $1.225 billion, compared with $987.4 million in fiscal 2010. Year-over-year, the Company experienced an increase in net earnings, partially offset by an increase in cash used for the net components of working capital (primarily accounts payable and income taxes payable, partially offset by merchandise inventories).

 

Inventory per square foot was $57.35 as of February 25, 2012, as compared to $56.17 as of February 26, 2011.

 

Net cash used in investing activities in fiscal 2011 was $364.0 million, compared with $341.0 million in fiscal 2010. In fiscal 2011, net cash used in investing activities was due to $243.4 million of capital expenditures and $120.6 million of purchases of investment securities, net of redemptions. In fiscal 2010, net cash used in investing activities was due to $157.5 million of purchases of investment securities, net of redemptions, and $183.5 million of capital expenditures.

 

Net cash used in financing activities for fiscal 2011 was $1.042 billion, compared with $559.0 million in fiscal 2010. The increase in net cash used was primarily due to a $530.4 million increase in common stock repurchases partially offset by a $45.4 million increase in cash proceeds from the exercise of stock options.

 

Auction Rate Securities

 

As of March 2, 2013, the Company held approximately $49.0 million of net investments in auction rate securities. Beginning in mid-February 2008, the auction process for the Company’s auction rate securities failed and continues to fail. These failed auctions result in a lack of liquidity in the securities but do not affect the underlying collateral of the securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies. As of March 2, 2013, these securities had a temporary valuation adjustment of approximately $2.0 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed to be temporary, it was recorded in accumulated other comprehensive loss, net of a related tax benefit, and did not affect the Company’s net earnings for fiscal 2012.

 

During fiscal 2012, approximately $8.5 million of auction rate securities were redeemed at par and approximately $24.3 million were tendered at a price of approximately 95% of par value, for which the Company incurred a realized loss of approximately $1.1 million included within interest (expense) income, net in the consolidated statement of earnings for fiscal 2012. Prior to these tenders, all redemptions of these securities had been at par. The Company will continue to monitor the market for these securities and will expense any permanent changes to the value of the remaining securities, if any, as they occur.

 

The Company does not anticipate that any continuing lack of liquidity in its auction rate securities will affect its ability to finance its operations, including its expansion program, share repurchase program, and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. These investments will remain primarily classified as non-current assets until the Company has better visibility as to when their liquidity will be restored. The classification and valuation of these securities will continue to be reviewed quarterly.

 

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Other Fiscal 2012 Information

 

At March 2, 2013, the Company maintained two uncommitted lines of credit of $100 million each, with expiration dates of September 1, 2013 and February 28, 2014, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. During fiscal 2012, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 2, 2013, there was approximately $11.6 million of outstanding letters of credit. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates. In addition, as of March 2, 2013, the Company maintained unsecured standby letters of credit of $76.2 million, primarily for certain insurance programs.

 

Between December 2004 and December 2012, the Company’s Board of Directors authorized, through share repurchase programs, the repurchase of $7.450 billion of the Company’s common stock.

 

Since 2004 through the end of fiscal 2012, the Company has repurchased approximately $5.0 billion of its common stock through share repurchase programs. The Company has approximately $2.4 billion remaining of authorized share repurchases as of March 2, 2013. The execution of the Company’s share repurchase program will consider current business and market conditions.

 

The Company has authorization 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 contractual obligations consisting mainly of operating leases for stores, offices, distribution facilities and equipment, purchase obligations, long-term sale/leaseback and capital lease obligations and other long-term liabilities which the Company is obligated to pay as of March 2, 2013 as follows:

 

(in thousands)

 

Total

 

Less than 1
year

 

1-3 years

 

4-5 years

 

After 5
years

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Obligations (1)

 

$

3,353,145

 

$

561,104

 

$

971,468

 

$

727,632

 

$

1,092,941

 

Purchase Obligations (2)

 

969,151

 

969,151

 

 

 

 

Long-term sale/leaseback and capital lease obligations(3)

 

352,262

 

9,877

 

19,689

 

19,921

 

302,775

 

Other long-term liabilities (4)

 

456,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contractual Obligations

 

$

5,131,206

 

$

1,540,132

 

$

991,157

 

$

747,553

 

$

1,395,716

 

 


(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 2, 2013, the Company has leased sites for 31 locations planned for opening in fiscal 2013 or 2014, for which aggregate minimum rental payments over the term of the leases are approximately $140.1 million and are included in the table above.

 

(2)  Purchase obligations primarily consist of purchase orders for merchandise.

 

(3)  Long-term sale/leaseback and capital lease obligations represent future minimum lease payments under the sale/leaseback agreements and capital lease agreements, acquired through the World Market acquisition.

 

(4)  Other long-term liabilities are primarily comprised of income taxes payable, deferred rent, workers’ compensation and general liability reserves and various other accruals and are recorded as Deferred Rent and Other Liabilities and Income Taxes Payable in the Consolidated Balance Sheet as of March 2, 2013.  The amounts associated with these other long-term liabilities have been reflected only in the Total Column in the table above as the timing and/or amount of any cash payment is uncertain.

 

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SEASONALITY

 

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

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance related to testing goodwill for impairment. This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. During the fourth quarter of fiscal 2012, the Company adopted this guidance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In July 2012, the FASB issued updated accounting guidance related to testing indefinite lived intangible assets for impairment. This guidance permits an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the annual impairment analysis. This guidance is effective for annual and interim indefinite lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. During the fourth quarter of fiscal 2012, the Company adopted this guidance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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.

 

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 inventory valuation, impairment of long-lived assets, goodwill and other indefinite lived intangible assets, accruals for self insurance, litigation, store opening, expansion, relocation and closing costs, stock-based compensation and income and certain other taxes. Actual results could differ from these estimates.

 

Inventory Valuation: Merchandise inventories are stated at the lower of cost or market. Inventory costs are primarily calculated using the weighted average retail inventory method.

 

Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail values of inventories. The cost associated with determining the cost-to-retail ratio includes: merchandise purchases, net of returns to vendors, discounts and volume and incentive rebates; inbound freight expenses; duty, insurance and commissions.

 

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.

 

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The Company estimates its reserve for shrinkage throughout the year based on historical shrinkage and any current trends, if applicable. Actual shrinkage is recorded at year end based upon the results of the Company’s physical inventory counts for locations at which counts were conducted. For locations where physical inventory counts were not conducted in the fiscal year, an estimated shrink reserve is recorded based on historical shrinkage and any current trends, if applicable. Historically, the Company’s shrinkage has not been volatile.

 

The Company accrues for merchandise in transit once it takes legal ownership and title to the merchandise; as such, an estimate for merchandise in transit is included in the Company’s merchandise inventories.

 

Impairment of Long-Lived Assets: The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the 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. The Company has not historically recorded any material impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.

 

Goodwill and Other Indefinite 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 indefinite lived intangible assets. As of March 2, 2013, for goodwill related to the Institutional Sales operating segment and certain other indefinite lived intangible assets, the Company assessed qualitative factors in order to determine whether any events and circumstances existed which indicated that it was more likely than not that the fair value of these indefinite lived intangible assets did not exceed its carrying value and concluded no such events or circumstances existed which would require an impairment test being performed. Additionally, the Company completed its annual impairment testing related to goodwill for the North American Retail operating segment, which is the reporting unit, and certain other indefinite lived intangible assets, not considered in the qualitative analysis, and determined that, as of March 2, 2013, no impairment existed because the fair value of these assets substantially exceeded their carrying values. 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 its various claims and legal actions arising in the ordinary course of business when and to the extent that it concludes a liability is probable and the amount of the loss can be reasonably estimated. Such estimated loss is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company reassesses the potential liability related to claims and legal actions and revises its estimated liabilities, as appropriate. The Company expects the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. The Company also cannot predict the nature and validity of claims which could be asserted in the future, and future claims could have a material impact on its earnings.

 

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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.

 

Stock-Based Compensation: 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 risk free interest rate and the expected 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 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 the accounting guidance related to stock compensation.

 

·                  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.

·                  Expected volatility is based on the average of historical and implied volatility. The historical volatility is determined by observing actual prices of the Company’s stock over a period commensurate with the expected life of the awards. The implied volatility represents the implied volatility of the Company’s call options, which are actively traded on multiple exchanges, had remaining maturities in excess of twelve months, had market prices close to the exercise prices of the employee stock options and were measured on the stock option grant date.

 

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.

 

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 carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

 

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., in most cases such earnings would be subject to U.S. income taxes.

 

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

 

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Table of Contents

 

The Company also accrues for certain other taxes as required by their operations.

 

Judgment is required in determining the provision for income and other 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 various 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.

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-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-looking statements as a result of many factors. Such factors include, without limitation: general economic conditions including the housing market, a challenging overall macroeconomic environment and related changes in the retailing environment, consumer preferences and spending habits; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; civil disturbances and terrorist attacks; unusual weather patterns and natural disasters; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the ability to attract and retain qualified employees in all areas of the organization; the cost of labor, merchandise and other costs and expenses; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company’s expansion program; uncertainty in financial markets; disruptions to the Company’s information technology systems including but not limited to security breaches of the Company’s systems protecting consumer and employee information; reputational risk arising from the acts of third parties; changes to statutory, regulatory and legal requirements; new, or developments in existing, litigation, claims or assessments; changes to, or new, tax laws or interpretation of existing tax laws; changes to, or new, accounting standards including, without limitation, changes to lease accounting standards; and the integration of acquired businesses. The Company does not undertake any obligation to update its forward-looking statements.

 

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 2, 2013, the Company’s investments include cash and cash equivalents of approximately $565.0 million, short term investment securities of approximately $449.9 million and long term investment securities of approximately $77.3 million at weighted average interest rates of 0.01%, 0.09% and 0.18%, respectively.

 

As of March 2, 2013, the Company held approximately $49.0 million of net investments in auction rate securities. Beginning in mid-February 2008, the auction process for the Company’s auction rate securities failed and continues to fail. These failed auctions result in a lack of liquidity in the securities but do not affect the underlying collateral of the securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies. As of March 2, 2013, these securities had a temporary valuation adjustment of approximately $2.0 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed to be temporary, it was recorded in accumulated other comprehensive loss, net of a related tax benefit, and did not affect the Company’s net earnings for fiscal 2012.

 

During fiscal 2012, approximately $8.5 million of auction rate securities were redeemed at par and approximately $24.3 million were tendered at a price of approximately 95% of par value, for which the Company incurred a realized loss of approximately $1.1 million included within interest (expense) income, net in the consolidated statement of earnings for fiscal 2012. Prior to these tenders, all redemptions of these securities had been at par. The Company will continue to monitor the market for these securities and will expense any permanent changes to the value of the remaining securities, if any, as they occur.

 

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Table of Contents

 

The Company does not anticipate that any continuing lack of liquidity in its auction rate securities will affect its ability to finance its operations, including its expansion program, share repurchase program, and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. These investments will remain primarily classified as non-current assets until the Company has better visibility as to when their liquidity will be restored. The classification and valuation of these securities will continue to be reviewed quarterly.

 

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Table of Contents

 

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

The following are included herein:

 

 

1)

Consolidated Balance Sheets as of March 2, 2013 and February 25, 2012

 

 

 

 

2)

Consolidated Statements of Earnings for the fiscal years ended March 2, 2013, February 25, 2012 and February 26, 2011

 

 

 

 

3)

Consolidated Statements of Comprehensive Income for the fiscal years ended March 2, 2013, February 25, 2012 and February 26, 2011

 

 

 

 

4)

Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 2, 2013, February 25, 2012 and February 26, 2011

 

 

 

 

5)

Consolidated Statements of Cash Flows for the fiscal years ended March 2, 2013, February 25, 2012 and February 26, 2011

 

 

 

 

6)

Notes to Consolidated Financial Statements

 

 

 

 

7)

Reports of Independent Registered Public Accounting Firm

 

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BED BATH & BEYOND INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

March 2,

 

February 25,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

564,971

 

$

1,003,166

 

Short term investment securities

 

449,933

 

756,389

 

Merchandise inventories

 

2,466,214

 

2,071,890

 

Other current assets

 

386,367

 

311,494

 

 

 

 

 

 

 

Total current assets

 

3,867,485

 

4,142,939

 

 

 

 

 

 

 

Long term investment securities

 

77,325

 

95,785

 

Property and equipment, net

 

1,466,667

 

1,198,255

 

Goodwill

 

483,518

 

198,749

 

Other assets

 

384,957

 

88,818

 

 

 

 

 

 

 

Total assets

 

$

6,279,952

 

$

5,724,546

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

913,365

 

$

752,064

 

Accrued expenses and other current liabilities

 

393,094

 

329,174

 

Merchandise credit and gift card liabilities

 

251,481

 

209,646

 

Current income taxes payable

 

77,270

 

48,246

 

 

 

 

 

 

 

Total current liabilities

 

1,635,210

 

1,339,130

 

 

 

 

 

 

 

Deferred rent and other liabilities

 

484,868

 

339,266

 

Income taxes payable

 

80,144

 

123,622

 

 

 

 

 

 

 

Total liabilities

 

2,200,222

 

1,802,018

 

 

 

 

 

 

 

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 332,696 and 330,576 shares, respectively; outstanding 221,489 and 235,515 shares, respectively

 

3,327

 

3,306

 

Additional paid-in capital

 

1,540,451

 

1,417,337

 

Retained earnings

 

7,573,612

 

6,535,824

 

Treasury stock, at cost

 

(5,033,340

)

(4,032,060

)

Accumulated other comprehensive loss

 

(4,320

)

(1,879

)

 

 

 

 

 

 

Total shareholders’ equity

 

4,079,730

 

3,922,528

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

6,279,952

 

$

5,724,546

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Consolidated Statements of Earnings

Bed Bath & Beyond Inc. and Subsidiaries

 

 

 

FISCAL YEAR ENDED

 

 

 

March 2,

 

February 25,

 

February 26,

 

(in thousands, except per share data)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net sales

 

$

10,914,585

 

$

9,499,890

 

$

8,758,503

 

 

 

 

 

 

 

 

 

Cost of sales

 

6,525,830

 

5,568,957

 

5,135,574

 

 

 

 

 

 

 

 

 

Gross profit

 

4,388,755

 

3,930,933

 

3,622,929

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

2,750,537

 

2,362,564

 

2,334,471

 

 

 

 

 

 

 

 

 

Operating profit

 

1,638,218

 

1,568,369

 

1,288,458

 

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

(4,159

)

1,119

 

4,520

 

 

 

 

 

 

 

 

 

Earnings before provision for income taxes

 

1,634,059

 

1,569,488

 

1,292,978

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

596,271

 

579,951

 

501,645

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,037,788

 

$

989,537

 

$

791,333

 

 

 

 

 

 

 

 

 

Net earnings per share - Basic

 

$

4.62

 

$

4.12

 

$

3.11

 

Net earnings per share - Diluted

 

$

4.56

 

$

4.06

 

$

3.07

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - Basic

 

224,623

 

240,016

 

254,297

 

Weighted average shares outstanding - Diluted

 

227,723

 

243,890

 

258,079

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Comprehensive Income

Bed Bath & Beyond Inc. and Subsidiaries

 

 

 

FISCAL YEAR ENDED

 

 

 

March 2,

 

February 25,

 

February 26,

 

(in thousands)

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,037,788

 

$

989,537

 

$

791,333

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in temporary impairment of auction rate securities, net of taxes

 

1,017

 

(297

)

(663

)

Pension adjustment, net of taxes

 

146

 

(4,596

)

343

 

Currency translation adjustment

 

(3,604

)

(2,086

)

4,692

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

(2,441

)

(6,979

)

4,372

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

1,035,347

 

$

982,558

 

$

795,705

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Consolidated Statements of Shareholders’ Equity

Bed Bath & Beyond Inc. and Subsidiaries

 

 

 

Common Stock

 

Additional Paid-

 

Retained

 

Treasury Stock

 

Accumulated Other
Comprehensive

 

 

 

(in thousands) 

 

Shares

 

Amount

 

in Capital

 

Earnings

 

Shares

 

Amount

 

Income (Loss)

 

Total

 

Balance at February 27, 2010

 

320,553

 

$

3,206

 

$

1,020,515

 

$

4,754,954

 

(57,655

)

$

(2,126,499

)

$

728

 

$

3,652,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

791,333

 

 

 

 

 

 

 

791,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

4,372

 

4,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold under employee stock option plans, net of taxes

 

3,804

 

38

 

125,058

 

 

 

 

 

 

 

 

 

125,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted shares, net

 

863

 

9

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense, net

 

 

 

 

 

45,465

 

 

 

 

 

 

 

 

 

45,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director fees paid in stock

 

2

 

 

 

94

 

 

 

 

 

 

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock, including fees

 

 

 

 

 

 

 

 

 

(15,901

)

(687,605

)

 

 

(687,605

)

Balance at February 26, 2011

 

325,222

 

3,253

 

1,191,123

 

5,546,287

 

(73,556

)

(2,814,104

)

5,100

 

3,931,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

989,537

 

 

 

 

 

 

 

989,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,979

)

(6,979

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold under employee stock option plans, net of taxes

 

4,645

 

46

 

179,546

 

 

 

 

 

 

 

 

 

179,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted shares, net

 

706

 

7

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense, net

 

 

 

 

 

46,501

 

 

 

 

 

 

 

 

 

46,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director fees paid in stock

 

3

 

 

 

174

 

 

 

 

 

 

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock, including fees

 

 

 

 

 

 

 

 

 

(21,505

)

(1,217,956

)

 

 

(1,217,956

)

Balance at February 25, 2012

 

330,576

 

3,306

 

1,417,337

 

6,535,824

 

(95,061

)

(4,032,060

)

(1,879

)

3,922,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

1,037,788

 

 

 

 

 

 

 

1,037,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,441

)

(2,441

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold under employee stock option plans, net of taxes

 

1,489

 

15

 

74,323

 

 

 

 

 

 

 

 

 

74,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted shares, net

 

626

 

6

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense, net

 

 

 

 

 

48,520

 

 

 

 

 

 

 

 

 

48,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director fees paid in stock

 

5

 

 

 

277

 

 

 

 

 

 

 

 

 

277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock, including fees

 

 

 

 

 

 

 

 

 

(16,146

)

(1,001,280

)

 

 

(1,001,280

)

Balance at March 2, 2013

 

332,696

 

$

3,327

 

$

1,540,451

 

$

7,573,612

 

(111,207

)

$

(5,033,340

)

$

(4,320

)

$

4,079,730

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Consolidated Statements of Cash Flows

Bed Bath & Beyond Inc. and Subsidiaries

 

 

 

FISCAL YEAR ENDED

 

(in thousands)

 

March 2,
2013

 

February 25,
2012

 

February 26,
2011

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net earnings

 

$

1,037,788

 

$

989,537

 

$

791,333

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

194,728

 

183,873

 

183,820

 

Stock-based compensation

 

47,163

 

45,223

 

44,276

 

Tax benefit from stock-based compensation

 

13,217

 

63

 

(3,453

)

Deferred income taxes

 

17,600

 

30,238

 

(15,988

)

Other

 

702

 

(1,622

)

(1,757

)

(Increase) decrease in assets, net of effect of acquisitions:

 

 

 

 

 

 

 

Merchandise inventories

 

(198,407

)

(102,983

)

(209,204

)

Trading investment securities

 

(6,206

)

(4,538

)

(5,469

)

Other current assets

 

(43,585

)

24,948

 

(17,736

)

Other assets

 

(9,685

)

900

 

(2,899

)

Increase (decrease) in liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

Accounts payable

 

105,251

 

31,582

 

102,307

 

Accrued expenses and other current liabilities

 

(26,412

)

19,822

 

29,809

 

Merchandise credit and gift card liabilities

 

36,888

 

16,585

 

20,257

 

Income taxes payable

 

6,598

 

(37,392

)

25,456

 

Deferred rent and other liabilities

 

17,350

 

29,048

 

46,655

 

Net cash provided by operating activities

 

1,192,990

 

1,225,284

 

987,407

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchase of held-to-maturity investment securities

 

(730,976

)

(1,605,851

)

(1,511,555

)

Redemption of held-to-maturity investment securities

 

1,031,249

 

1,456,250

 

1,286,270

 

Redemption of available-for-sale investment securities

 

31,715

 

28,975

 

24,975

 

Redemption of trading investment securities

 

 

 

42,825

 

Capital expenditures

 

(314,682

)

(243,374

)

(183,474

)

Payment for acquisitions, net of cash acquired

 

(643,098

)

 

 

Payment for acquisition of trademarks

 

(40,000

)

 

 

Net cash used in investing activities

 

(665,792

)

(364,000

)

(340,959

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

56,377

 

171,088

 

125,700

 

Excess tax benefit from stock-based compensation

 

5,021

 

5,163

 

2,944

 

Payment for credit facility assumed in acquisition

 

(25,511

)

 

 

Repurchase of common stock, including fees

 

(1,001,280

)

(1,217,956

)

(687,605

)

Net cash used in financing activities

 

(965,393

)

(1,041,705

)

(558,961

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(438,195

)

(180,421

)

87,487

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

1,003,166

 

1,183,587

 

1,096,100

 

End of period

 

$

564,971

 

$

1,003,166

 

$

1,183,587

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

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”) operates a chain of retail stores under the names Bed Bath & Beyond (“BBB”), Christmas Tree Shops or andThat! (collectively, “CTS”), Harmon or Harmon Face Values (collectively, “Harmon”), buybuy BABY and World Market or Cost Plus World Market (collectively, “World Market”). The Company includes Linen Holdings, a distributor of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, food service, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates three retail stores in Mexico under the name Bed Bath & Beyond. The Company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.

 

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

 

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 2012 represented 53 weeks and ended on March 2, 2013; fiscal 2011 and fiscal 2010 represented 52 weeks and ended on February 25, 2012 and February 26, 2011, respectively.

 

C.             Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company accounts for its investment in the joint venture under the equity method.

 

All significant intercompany balances and transactions have been eliminated in consolidation.

 

D.            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 inventory valuation, impairment of long-lived assets, impairment of auction rate securities, goodwill and other indefinite lived intangible assets, accruals for self insurance, litigation, store opening, expansion, relocation and closing costs, the provision for sales returns, vendor allowances, stock-based compensation and income and certain other taxes. Actual results could differ from these estimates.

 

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 $87.8 million and $67.1 million as of March 2, 2013 and February 25, 2012, respectively.

 

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Table of Contents

 

F.              Investment Securities

 

Investment securities consist primarily of U.S. Treasury Bills with remaining maturities of less than one year and auction rate securities, which are securities with interest rates that reset periodically through an auction process. The U.S. Treasury Bills are classified as short term held-to-maturity securities and are stated at their amortized cost which approximates fair value. Auction rate securities are classified as available-for-sale and are stated at fair value, which had historically been consistent with cost or par value due to interest rates which reset periodically, typically every 7, 28 or 35 days. As a result, there generally were no cumulative gross unrealized holding gains or losses relating to these auction rate securities. However, beginning in mid-February 2008 due to market conditions, the auction process for the Company’s auction rate securities failed and continues to fail. These failed auctions result in a lack of liquidity in the securities, and affect their estimated fair values at March 2, 2013 and February 25, 2012, but do not affect the underlying collateral of the securities. (See “Fair Value Measurements,” Note 5 and “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 are primarily calculated using the weighted average retail inventory method.

 

Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail values of inventories. The cost associated with determining the cost-to-retail ratio includes: merchandise purchases, net of returns to vendors, discounts and volume and incentive rebates; inbound freight expenses; duty, insurance and commissions.

 

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 counts for locations at which counts were conducted. For locations where physical inventory counts were not conducted in the fiscal year, an estimated shrink reserve is recorded based on historical shrinkage and any current trends, if applicable. Historically, the Company’s shrinkage has not been volatile.

 

The Company accrues for merchandise in transit once it takes legal ownership and title to the merchandise; as such, an estimate for merchandise in transit is included in the Company’s merchandise inventories.

 

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 primarily included within selling, general and administrative expenses.

 

35



Table of Contents

 

The cost of maintenance and repairs is charged to earnings as incurred; significant renewals and betterments are capitalized. Maintenance and repairs amounted to $106.1 million, $85.8 million and $90.2 million for fiscal 2012, 2011 and 2010, respectively.

 

I.                 Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the 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. The Company has not historically recorded any material impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.

 

J.                Goodwill and Other Indefinite 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 indefinite lived intangible assets. As of March 2, 2013, for goodwill related to the Institutional Sales operating segment and certain other indefinite lived intangible assets, the Company assessed qualitative factors in order to determine whether any events and circumstances existed which indicated that it was more likely than not that the fair value of these indefinite lived intangible assets did not exceed its carrying value and concluded no such events or circumstances existed which would require an impairment test being performed. Additionally, the Company completed its annual impairment testing of goodwill for the North American Retail operating segment, which is the reporting unit, and other indefinite lived intangible assets, not considered in the qualitative analysis, and determined that, as of March 2, 2013, no impairment existed because the fair value of these assets substantially exceeded their carrying values. 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 2, 2013 and February 25, 2012 are $291.4 million and $30.9 million, respectively, for indefinite lived tradenames and trademarks.

 

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.

 

36



Table of Contents

 

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 $80.2 million and $77.9 million as of March 2, 2013 and February 25, 2012, 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. The unamortized portion of tenant allowances amounted to $126.1 million and $120.1 million as of March 2, 2013 and February 25, 2012, respectively.

 

M.        Treasury Stock

 

Between December 2004 and December 2012, the Company’s Board of Directors authorized, through share repurchase programs, the repurchase of $7.450 billion of the Company’s common stock.

 

During fiscal 2012, the Company repurchased approximately 16.1 million shares of its common stock at a total cost of approximately $1.001 billion. During fiscal 2011, the Company repurchased approximately 21.5 million shares of its common stock at a total cost of approximately $1.218 billion. During fiscal 2010, the Company repurchased approximately 15.9 million shares of its common stock at a total cost of approximately $687.6 million. The Company has approximately $2.4 billion remaining of authorized share repurchases as of March 2, 2013.

 

The Company has authorization 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.

 

N.            Fair Value of Financial Instruments