(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bed Bath & Beyond Inc. and subsidiaries (the "Company") is an omnichannel retailer that makes it easy for its customers to feel at home. The Company sells a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond ("BBB"), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively, "CTS"), Harmon, Harmon Face Values, or Face Values (collectively, "Harmon"), buybuy BABY ("Baby") and World Market, Cost Plus World Market, or Cost Plus (collectively, "Cost Plus World Market"). Customers can purchase products either in-store, online, with a mobile device or through a customer contact center. The Company generally has the ability to have customer purchases picked up in-store, curbside or shipped direct to the customer from the Company's distribution facilities, stores or vendors. The Company also operates Decorist, an online interior design platform that provides personalized home design services. In addition, the Company operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates retail stores in Mexico under the name Bed Bath & Beyond. The Company also operates PersonalizationMall.com ("PMall"), an industry-leading online retailer of personalized products.
The Company accounts for its operations as two operating segments: North American Retail and Institutional Sales. The Institutional Sales operating segment, which is comprised of Linen Holdings, does not meet the quantitative thresholds under U.S. generally accepted accounting principles and therefore is not a reportable segment.
The Company has undertaken significant changes over the past year, including extensive changes to its Board of Directors and executive leadership, as well as development of essential strategies and plans to renew and build its business for long-term success. In recent months, as the world responds to the unparalleled challenge of the COVID-19 pandemic, the Company has taken aggressive and thoughtful steps to safeguard its people and communities while it continues to serve customers. As with many businesses, the COVID-19 pandemic served as a catalyst to accelerate the pace of change and innovation across the Company, advancing ongoing efforts to reset the Company's cost structure and build a modern, durable model for long-term profitable growth.
During fiscal 2019, the Company entered into a definitive agreement to sell PMall to 1-800-FLOWERS.COM for $252 million, subject to certain working capital and other adjustments. The buyer was required to close the PMall transaction on March 30, 2020, but failed to do so. Accordingly, the Company filed an action to require the buyer to close the transaction. During the three months ended May 3, 2020, the Company sold One Kings Lane to a third party for an amount which was not material. While the Company cannot make any assurances, the Company, together with its outside advisors, continues to pursue other portfolio adjustments and evaluate the Company's remaining owned real estate in an effort to create a stronger and more focused portfolio and enhance shareholder value. The net proceeds from these transactions and any other potential cash-generating transactions could be used to reinvest in the Company's core business operations to drive growth, fund share repurchases, reduce the Company's outstanding debt, or some combination of these. In other activity, the Company has been further evaluating its product assortment and taking aggressive steps to rationalize the assortment and better manage its inventory.
Given the current business environment resulting from the COVID-19 pandemic, including temporary store closures and further reductions in operating expenses, the Company has modified its fiscal 2020 capital investments, focusing on its core business and key projects that support its digital and omni fulfillment capabilities, including the introduction of Buy-Online-Pickup-In-Store ("BOPIS") and contactless Curbside Pickup services, omni inventory management, as well as digital marketing and personalization. The Company is also re-engineering its supply chain and vendor relationships, as well as further strengthening its owned-brand strategy. These are among the accelerated actions being taken to lay the foundation to create a new vision for the Company.
The integration of retail store and digital channels allows the Company to provide its customers with a seamless omni channel shopping experience. Store purchases are primarily fulfilled from that store's inventory or may also be shipped to a customer from one of the Company's distribution facilities, from a vendor, or from another store. Purchases, including web and mobile, can be shipped to a customer from the Company's distribution facilities, directly from vendors, or from a store. Customers can also choose to pick up orders using the Company's newly introduced BOPIS and contactless Curbside Pickup services, as well as return online purchases to a store. Customers can also make purchases through one of the Company's customer contact centers and in-store through The Beyond Store, the Company's proprietary web-based platform. These capabilities allow the Company to better serve customers across various channels.
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, unemployment levels and commodity prices; the overall macroeconomic environment and related changes in the retailing environment; consumer preferences, spending habits and adoption of new technologies; unusual weather patterns and natural disasters, including pandemics; competition from existing and potential competitors across all channels; potential supply chain disruption; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company's plans for new stores; and the ability to assess and implement technologies in support of the Company's development of its omnichannel capabilities. The Company cannot predict whether, when or the manner in which these factors could affect the Company's operating results. In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. To date, the pandemic has materially disrupted the operations of the Company. The consequences of the pandemic and impact to the economy continue to evolve and the full extent of the impact is uncertain as of the date of this filing. As a result of 'social distancing' measures put into effect in March 2020, the Company began to temporarily close certain store locations that did not have a health and personal care department and, as of March 23, 2020, all retail banner stores across the US and Canada were temporarily closed except for most stand-alone Baby and Harmon store locations, subject to state and local regulations. On May 8, 2020, the Company announced a phased approach to fully re-open a number of stores, subject to state and local regulations, and on May 22, 2020 the Company announced its plan to re-open additional stores as part of the phased approach to re-opening stores across North America, subject to state and local regulations. As of May 30, 2020, the majority of the Company's stores remained temporarily closed. The Company expects nearly all stores to re-open during July 2020, subject to state and local regulations. In addition, the Company expects to expand its recently rolled out BOPIS and contactless Curbside Pickup services to cover the vast majority of stores. In conjunction with the temporary store closures, the Company implemented additional cost reductions, including a furlough of the majority of store associates and a portion of corporate associates. The Company provided impacted store associates with applicable pay and benefits through April 3, 2020, and impacted corporate associates with pay and benefits through April 18, 2020. Until further notice, the Company will continue to pay 100% of the cost of healthcare premiums for all associates who currently participate in the Company's health plan. The Company also implemented a temporary reduction in salaries of the Company's executive team by 30% through May 16, 2020, and a temporary reduction in the quarterly cash compensation of the independent directors of the Board of Directors by 30% for the fiscal 2020 first quarter. The Company has and will continue to seek opportunities to mitigate the impact of the COVID-19 pandemic, including, among others, renegotiating payment terms for goods, services and rent, managing inventory levels, and reducing discretionary spending such as business travel, advertising and expense associated with the maintenance of stores that are temporarily closed. The COVID-19 pandemic materially impacted the Company's results of operations and cash flows in the first quarter of fiscal 2020, and could continue to materially impact results of operations and cash flows as well as the Company's financial condition. Given the uncertainty regarding the spread of the virus and the timing of the economic recovery and the possibility of a resurgence or a second wave of the virus, the related financial impact cannot be reasonably predicted or estimated at this time.
Net sales for the three months ended May 30, 2020 were $1.307 billion, a decrease of approximately 49% as compared with the three months ended June 1, 2019. For the first quarter of fiscal 2020, as compared to the corresponding quarter last year, net sales consummated through digital channels increased approximately 82% and net sales consummated in-store declined approximately 77%. As noted above, the majority of the Company's stores were closed beginning March 23, 2020 and remained closed as of May 30, 2020, except for most stand-alone Baby and Harmon store locations, which remained open during such period, subject to state and local regulations. Net sales consummated through digital channels represented approximately two-thirds of the Company's fiscal 2020 first quarter net sales. For the first quarter of fiscal 2020, net sales from Baby contributed approximately 20% of the Company's net sales.
As a result of the extended closures of the majority of the Company's stores due to the COVID-19 pandemic and the Company's policy of excluding extended store closures from its comparable sales calculation, the Company believes that comparable sales is not a meaningful metric for the three months ended May 30, 2020. The Company will continue to reevaluate its comparable sales during future reporting periods as stores reopen.
The Company's historical definition of comparable sales is that comparable sales include sales consummated through all retail channels which have been operating for twelve full months following the opening period (typically four to six weeks). The Company is an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store, online, with a mobile device or through a customer contact center, and have it fulfilled, in most cases, either through in-store customer pickup or by direct shipment to the customer from one of the Company's distribution facilities, stores or vendors.
Sales consummated on a mobile device while physically in a store location and BOPIS orders are recorded as customer facing digital channel sales. Customer orders taken in-store by an associate through The Beyond Store, the Company's proprietary, web-based platform, are recorded as in-store sales. Prior to the Company implementing BOPIS and contactless Curbside Pickup services, customer orders reserved online and picked up in a store were recorded as in-store sales. Sales originally consummated from customer facing digital channels and subsequently returned in-store are recorded as a reduction of in-store sales.
Stores relocated or expanded are excluded from comparable sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store's sales are not considered comparable once the store closing process has commenced. Stores impacted by unusual and unexpected events outside the Company's control, including the COVID-19 pandemic, severe weather, fire or floods, are excluded from comparable sales for the period of time that such event would cause a meaningful disparity in sales over the prior period.
Gross profit for the three months ended May 30, 2020 was $348.5 million, or 26.7% of net sales, compared with $887.2 million, or 34.5% of net sales, for the three months ended June 1, 2019.
SG&A for the three months ended May 30, 2020 were $724.2 million, or 55.4% of net sales, compared with $892.8 million, or 34.7% of net sales, for the three months ended June 1, 2019.
Goodwill and other impairments for the three months ended May 30, 2020 were $85.3 million or 6.5% of net sales, compared with $401.3 million, or 15.6% of net sales, for the three months ended June 1, 2019.
Interest expense, net for the three months ended May 30, 2020 was $17.2 million, compared with $15.9 million for the three months ended June 1, 2019.
The effective tax rate for the three months ended May 30, 2020 was 36.8%, compared with 12.2% for the three months ended June 1, 2019. For the three months ended May 30, 2020, the effective tax rate includes the impact of impairment charges for leasehold improvements and lease assets, a $43.0 million benefit related to fiscal 2019 net operating loss carry-back under the CARES Act, as described above, and other discrete items resulting in net after tax costs. For the three months ended June 1, 2019, the effective tax rate reflected the impact of charges for goodwill and other impairments and severance costs, portions of which are non-deductible for tax purposes, and other discrete tax items resulting in net after tax costs of approximately $12.5 million.
For the three months ended May 30, 2020, net loss per diluted share was $(2.44) ($(302.3) million), as compared with net loss per diluted share of $(2.91) ($(371.1) million) for the three months ended June 1, 2019. Net loss per diluted share for the three months ended May 30, 2020 included the unfavorable impact of certain store-level assets and tradename impairment charges and severance costs of approximately $0.48, compared to the unfavorable impact of $3.03 related to the goodwill and other impairments charge, severance costs and shareholder activity costs for three months ended June 1, 2019.
Capital expenditures for the three months ended May 30, 2020 and June 1, 2019 were $42.4 million and $68.4 million, respectively. In the first three months of fiscal 2020, approximately 55% of the capital expenditures related to pre-planned technology projects, including inventory and warehouse management capabilities such as advanced allocation logic and replenishment strategies to meet changing customer needs. The remaining capital expenditures were primarily related to investments in existing stores.
The Company continues to review and prioritize its capital needs and remains committed to making the required investments in its infrastructure to help position the Company for continued growth and success. Key areas of investment include: continuing to improve the presentation and content as well as the functionality, general search and navigation across its customer facing digital channels; improving customer data integration and customer relations management capabilities; continuing to enhance service offerings to its customers; continuing to strengthen and deepen its information technology, analytics, marketing and e-commerce groups; and creating more flexible fulfillment options designed to improve the Company's delivery capabilities and lower the Company's shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling customer experience across the Company's omnichannel retail platform. As a result of the COVID-19 pandemic, the Company is prioritizing approximately $250 million in essential capital expenditures for fiscal 2020 to drive strategic growth plans, including investments in digital, BOPIS and Curbside Pickup service offerings, and has postponed approximately $150 million in planned capital expenditures, including some store remodels. During the three months ended May 30, 2020, the Company opened a total of two new stores and closed 21 stores. The Company plans to continue to actively manage its real estate portfolio in order to permit store sizes, layouts, locations and offerings to evolve over time to optimize market profitability and will renovate or reposition stores within markets when appropriate. Over the past several years, the Company's pace of its store openings has slowed, and the Company has increased the number of store closings. The Company has approximately 200 store leases that are up for renewal in the remainder of 2020, which provide opportunity to evaluate additional store closures and relocations. As part of the Company's ongoing business transformation, on July 6, 2020, the Board of Directors of the Company approved the planned closure of approximately 200 mostly Bed Bath & Beyond stores over the next two years as part of the Company's real estate optimization program. Some portion of these stores may include stores for which leases are up for renewal in the remainder of 2020. During fiscal 2016, the Company's Board of Directors authorized a quarterly dividend program. During the three months ended May 30, 2020 and June 1, 2019, total cash dividends of $21.2 million and $21.9 million were paid, respectively. In March 2020, the Company suspended its future quarterly declarations of cash dividends as a result of the COVID-19 pandemic. Any future quarterly cash dividend payments on its common stock will be subject to the determination by the Board of Directors, based on an evaluation of the Company's earnings, financial condition and requirements, business conditions and other factors, including the restrictions on the payment of dividends under the secured asset-based revolving credit facility (see "Subsequent Events," Note 19). During the three months ended May 30, 2020, the Company repurchased approximately 0.5 million shares of its common stock to cover employee related taxes withheld on vested restricted stock, restricted stock units and performance stock unit awards, at a total cost of approximately $2.5 million. During the three months ended June 1, 2019, the Company repurchased approximately 5.3 million shares of its common stock at a total cost of approximately $81.5 million. Decisions regarding share repurchases are within the discretion of the Board of Directors, and will be influenced by a number of factors, including the price of the Company's common stock, general business and economic conditions, the Company's financial condition and operating results, the emergence of alternative investment or acquisition opportunities, changes in business strategy and other factors. The Company's share repurchase program could change, and would be influenced by several factors, including business and market conditions, such as the impact of the COVID-19 pandemic on the Company's stock price. The Company reviews its alternatives with respect to its capital structure on an ongoing basis. The Company postponed its plans for share repurchases as a result of the COVID-19 pandemic. Any future share repurchases will be subject to the determination of the Board of Directors, based on an evaluation of the Company's earnings, financial condition and requirements, business conditions and other factors, including the restrictions on share repurchases under the secured asset-based revolving credit facility (See "Subsequent Events," Note 19).
Results of Operations
As result of the extended closures of the majority of the Company's stores due to the COVID-19 pandemic and the Company's policy of excluding extended store closures from its comparable sales calculation, the Company believes that comparable sales are not a meaningful metric for the three months ended May 30, 2020. The Company will continue to reevaluate its comparable sales during future reporting periods as stores reopen.
The Company's comparable sales metric considers sales consummated through all retail channels - in-store, online, with a mobile device or through a customer contact center. The Company's omnichannel environment allows its customers to use more than one channel when making a purchase. The Company believes in an integrated and seamless customer experience. A few examples are: a customer may be assisted by an in-store associate to create a wedding or baby registry, while the guests may ultimately purchase a gift from the Company's websites; or a customer may research a particular item, and read other customer reviews on the Company's websites before visiting a store to consummate the actual purchase; or a customer may reserve an item online for in-store pick up; or while in a store, a customer may make the purchase on a mobile device for in home delivery from either a distribution facility, a store or directly from a vendor. In addition, the Company accepts returns in-store without regard to the channel in which the purchase was consummated, therefore resulting in reducing store sales by sales originally consummated through customer facing digital channels. As the Company's retail operations are integrated and it cannot reasonably track the channel in which the ultimate sale is initiated, the Company can however, provide directional information on where the sale was consummated.
Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings (including furniture and wall decor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings accounted for approximately 30.6% and 69.4% of net sales, respectively, for the three months ended May 30, 2020, and approximately 35.6% and 64.4% of net sales, respectively, for the three months ended June 1, 2019.
Gross profit for the three months ended May 30, 2020 was $348.5 million, or 26.7% of net sales, compared with $887.2 million, or 34.5% of net sales, for the three months ended June 1, 2019. In order of magnitude, the decrease in the gross profit margin as a percentage of net sales for the three months ended May 30, 2020 was primarily attributed to an increase in net direct-to-customer shipping expense and a decrease in merchandise margin.
The Company's cost of sales includes cost of merchandise, buying costs and costs of the Company's distribution network, including inbound freight charges, distribution facility costs, receiving costs, internal transfer costs and shipping and handling costs. For the three months ended May 30, 2020, the Company reevaluated the costs included in cost of sales as it continues its focus on its digital and omni fulfillment capabilities, including the introduction of BOPIS and contactless Curbside Pickup services. The reevaluation of the costs included in cost of sales favorably impacted the change in gross profit margin as a percentage of net sales by 300 basis points, and this impact was also in part driven by the significant reduction in net sales due to the temporary nationwide closure of the majority of the Company's stores during the fiscal first quarter of 2020 due to the COVID-19 pandemic. This favorable impact was fully offset by a corresponding unfavorable impact in the change in SG&A as a percentage of net sales and resulted in no net impact to the consolidated statement of operations.
Selling, General and Administrative Expenses
SG&A for the three months ended May 30, 2020 was $724.2 million, or 55.4% of net sales, compared with $892.8 million, or 34.7% of net sales, for the three months ended June 1, 2019. The increase in SG&A, as a percentage of net sales was primarily attributable to, in order of magnitude: increases in rent and occupancy costs, technology-related expenses including depreciation, and payroll and payroll-related expenses (primarily for salaried employees). Fixed costs, such as occupancy and technology-related expenses, including depreciation, as a percentage of net sales were impacted by the lower sales base in the first quarter of fiscal 2020.
Goodwill and other impairments
Goodwill and other impairments for the three months ended May 30, 2020 was $85.3 million, or 6.5% of net sales, compared with $401.3 million, or 15.6% of net sales, for the three months ended June 1, 2019. For the three months ended May 30, 2020, the Company recorded impairment charges of $80.4 million relating to certain store-level assets, including leasehold improvements and operating lease assets, and tradename impairments of $5.5 million. For the three months ended June 1, 2019, the Company recorded goodwill impairments of $391.1 million, which were primarily resulting from a sustained decline in the Company's market capitalization, and tradename impairments of $10.2 million.
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Jul 08, 2020
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