UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 3, 2007
Commission File Number 0-20214
BED BATH & BEYOND INC.
(Exact name of registrant as specified in its charter)
New York |
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11-2250488 |
(State of incorporation) |
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(IRS Employer Identification No.) |
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650 Liberty Avenue, Union, New Jersey 07083 |
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(Address of principal executive offices) (Zip Code) |
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Registrants telephone number, including area code: 908/688-0888 |
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Securities registered pursuant to Section 12(b) of the Act: |
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Name of each exchange on |
Title of each class |
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which registered |
None |
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None |
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Securities registered pursuant to Section 12(g) of the Act: |
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Common Stock (par value $ 0.01 per share) |
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(Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants 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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 26, 2006, the aggregate market value of the common stock held by non-affiliates (which was computed by reference to the closing price on such date of such stock on the NASDAQ National Market) was $8,785,134,704.*
The number of shares outstanding of the issuers common stock (par value $0.01 per share) at March 31, 2007: 277,125,199.
Documents Incorporated by Reference
Portions of the Registrants definitive proxy statement for the 2007 Annual Meeting of Shareholders pursuant to Regulation 14A are incorporated by reference in Part III hereof.
* For purposes of this calculation, all outstanding shares of common stock have been considered held by non-affiliates other than the 16,541,779 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.
Form 10-K |
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2
Unless otherwise indicated, the term Company refers collectively to Bed Bath & Beyond Inc. and subsidiaries as of March 3, 2007. The Companys fiscal year is comprised of the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2006 represented 53 weeks and ended on March 3, 2007. Fiscal 2005 and 2004 represented 52 weeks and ended on February 25, 2006 and February 26, 2005, respectively. Unless otherwise indicated, all references herein to periods of time (e.g., quarters and years) are to fiscal periods.
Introduction
Bed Bath & Beyond Inc. and subsidiaries (the Company) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and buybuy BABY. The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. The Company believes that it is the nations largest operator of stores selling predominantly domestics merchandise and home furnishings while offering a breadth and depth of selection in most of its product categories that exceeds what is generally available in department stores or other specialty retail stores.
History
The Company was founded in 1971 by Leonard Feinstein and Warren Eisenberg, the Co-Chairmen of the Company. Each has more than 46 years of experience in the retail industry.
The Company commenced operations in 1971 with the opening of two stores, which primarily sold bed linens and bath accessories. In 1985, the Company introduced its first store carrying a full line of domestics merchandise and home furnishings. The Company began using the name Bed Bath & Beyond in 1987 in order to reflect the expanded product line offered by its stores and to distinguish its stores from conventional specialty retail stores offering only domestics merchandise or home furnishings. In March 2002, the Company acquired Harmon, a health and beauty care retailer, which operated 27 stores at the time located in Connecticut, New Jersey and New York. In June 2003, the Company acquired CTS, a retailer of giftware and household items, which operated 23 stores at the time located in Connecticut, Maine, Massachusetts, New Hampshire, New York and Rhode Island.
In March 2007, subsequent to the end of fiscal 2006, the Company acquired buybuy BABY, a privately held retailer of infant and toddler merchandise, which operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. See Acquisition of buybuy BABY below for more information.
Operations
It is the Companys goal to offer quality merchandise at everyday low prices; to maintain a wide assortment of merchandise; to present merchandise in a distinctive manner designed to maximize customer convenience and reinforce customer perception of wide selection; and to emphasize dedication to customer service and satisfaction.
Pricing. The Company believes in maintaining everyday low prices. The Company regularly monitors price levels at its competitors in order to ensure that its prices are in accordance with its pricing philosophy. The Company believes that the application of its everyday low price philosophy is an important factor in establishing its reputation among customers.
Merchandise Assortment. The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings includes categories such as kitchen and tabletop items, fine tabletop, basic
3
housewares and general home furnishings. The Company encourages local store personnel to tailor the merchandise mix as appropriate to respond to changing trends and conditions. The factors taken into account in selecting the merchandise mix for a particular store include store size and configuration and local market conditions such as climate and demographics. The Company, on an ongoing basis, tests new merchandise categories and adjusts the categories of merchandise carried in its stores and may add new departments or adjust the size of existing departments as required. Additionally, the Company continues to integrate the merchandise assortments within its concepts. The Company believes that the process of adding new departments, integrating the Companys merchandise within concepts, and expanding or reducing the size of various departments in response to changing conditions is an important part of its merchandising strategy.
Merchandise Presentation. BBB has developed a distinctive style of merchandise presentation. Primarily all of the BBB stores have groups of related product lines presented together in separate areas of each store, creating the appearance that the store is comprised of several individual specialty stores for different product lines. BBB believes that its format of merchandise presentation makes it easy for customers to locate products, reinforces customer perception of wide selection and communicates to customers that its stores offer a level of customer service generally associated with smaller specialty stores.
BBB believes that its extensive merchandise selection, rather than fixturing, should be the focus of customer attention and, accordingly, typically 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 stores merchandise mix and presentation. BBB believes that its merchandise displays create an exciting and attractive shopping environment that encourages impulse purchases of additional items.
Advertising. In general, the Company relies on word of mouth advertising and its reputation for offering a wide assortment of quality merchandise at everyday low prices, supplemented by the use of paid advertising. The Company distributes full-color circulars and other advertising pieces as its primary vehicles of paid advertising. Also, to support the opening of new stores, the Company primarily uses grand opening circulars and newspaper advertising.
Customer Service. The Company places a strong focus on customer service and seeks to make shopping at its stores as pleasant and convenient as possible. Most stores are open seven days (and six evenings) a week in order to enable customers to shop at times that are convenient for them. In addition, the Companys websites, www.bedbathandbeyond.com, www.christmastreeshops.com, www.harmondiscount.com and www.buybuybaby.com are available for customers to access 24 hours a day, seven days a week.
Suppliers
In fiscal 2006, the Company purchased its merchandise from approximately 4,600 suppliers. In fiscal 2006, the Companys largest supplier accounted for approximately 4% of the Companys merchandise purchases and the Companys 10 largest suppliers accounted for approximately 19% of such purchases. The Company purchases substantially all of its merchandise in the United States, the majority from domestic sources and the balance from importers. The Company purchases a small amount of its merchandise directly from overseas sources. The Company has no long-term contracts for the purchase of merchandise. The Company believes that most merchandise, other than brand name goods, is available from a variety of sources and that most brand name goods can be replaced with comparable merchandise.
Warehousing
The Companys merchandise displays allow a substantial amount of merchandise to be displayed on the sales floor at all times. Merchandise not displayed on the sales floor is typically stored in warehouse space within the store. In addition, the Company maintains 13 supplemental storage locations as well as two central distribution centers. Merchandise is shipped directly to stores from vendors through a network of third party carriers, service providers and the central distribution centers.
4
In addition, the Company maintains two E-Service fulfillment centers.
Employees
As of March 3, 2007, the Company employed over 35,000 persons in full-time and part-time positions. The Company believes that its relations with its employees are very good and that the labor turnover rate among its management employees is lower than that generally experienced within the industry.
Seasonality
The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December, and generally lower in February and April.
Expansion Program
The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets, the expansion or relocation of existing stores and the continuous review of strategic acquisitions. In the fifteen year period from the beginning of fiscal 1992 to the end of fiscal 2006, the Company has grown from 34 stores to 888 stores. The Companys 888 stores operate in 48 states, the District of Columbia and Puerto Rico, including: 815 BBB stores operating in 48 states, the District of Columbia and Puerto Rico; 34 CTS stores operating in 8 states; and 39 Harmon stores operating in 3 states. Total square footage grew from approximately 917,000 square feet at the beginning of fiscal 1992 to approximately 27.8 million square feet at the end of fiscal 2006. During fiscal 2006, the Company opened 74 BBB stores, 6 CTS stores and 1 Harmon store, and closed 1 BBB store and 1 CTS store, which resulted in the aggregate addition of approximately 2.3 million square feet of store space.
The Company intends to continue its expansion program and believes that the continued growth of the Company is dependent, in large part, on the success of this program. As part of its expansion program, the Company expects to open new stores and expand existing stores as opportunities arise. The Company also continues to actively explore international expansion (including Canada).
In determining where to open new stores, the Company evaluates a number of factors, including the availability of real estate, demographic information (such as data relating to income and education levels, age and occupation) and distribution. The Company has built its management structure with a view toward its expansion and believes that, as a result, it has the management depth necessary to support its anticipated expansion program.
Competition
The Company believes it is the preeminent retailer in its segment of the home goods industry, which is fragmented and highly competitive. In addition, the BBB stores compete with many different types of retail stores that sell many or most of the same products. Such competitors include: (i) department stores, which often carry many of the same product lines as the Companys 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 Companys stores, (iii) discount and mass merchandise stores and (iv) national chains. In addition, the Companys stores compete, to a more limited extent, with factory outlet stores that typically offer limited quantities or limited lines of quality merchandise at discount prices.
The visibility of the Company has encouraged competitors to imitate its stores format and methods. Other retail chains continue to introduce new store concepts that include many of the product lines carried by the Companys stores. There can be no assurance that the operation of store competitors will not have a material effect on the Company.
5
Tradenames and Service Marks
The Company uses the nationally recognized Bed Bath & Beyond name and logo and the Beyond any store of its kind tag line as service marks in connection with retail services. The Company has registered these marks and others, including names and logos of CTS, Harmon and buybuy BABY, with the United States Patent and Trademark Office. The Company also has registered or has applications pending with the trademark registries of several foreign countries. Management believes that its name recognition and service marks are important elements of the Companys merchandising strategy.
Acquisition of buybuy BABY
On March 22, 2007, subsequent to the end of fiscal 2006, the Company completed and announced the acquisition of buybuy BABY, a privately held retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. Based in Garden City, New York, buybuy BABY operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products.
buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Companys Co-Chairmen. The acquisition was approved by a special committee of independent members of the Board of Directors of the Company. The special committee retained Merrill Lynch & Co. to serve as its independent financial advisor and render a fairness opinion in connection with the transaction, as well as Chadbourne & Parke LLP to serve as independent legal counsel to oversee the acquisition negotiations. The aforementioned repayment of approximately $19 million of debt results in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Companys Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
The acquisition of buybuy BABY had no effect on the Companys fiscal 2006 results since the transaction occurred during fiscal 2007. The Company believes the benefit of this acquisition will not have a material effect on the overall results or financial condition of the Company for fiscal 2007.
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 Companys 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.
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 Companys actual results and future financial condition may differ materially from those expressed in any such forward looking statements as a result of many factors that may be outside the Companys control. Such factors include the following:
Consumer Preferences and Demographic Factors
The Companys success depends on our ability to anticipate and respond in a timely manner to changing
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merchandise trends, customer demands and demographics. The Companys 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 Companys financial condition and results of operations.
General Economic Conditions
General economic factors that are beyond the Companys control impact the Companys forecasts and actual performance. These factors include interest rates, recession, inflation, deflation, consumer credit availability, consumer debt levels, fuel and energy costs, tax rates and policy, unemployment trends, the impact of natural disasters and terrorist activities, and other matters that influence consumer spending. Changes in the economic climate could adversely affect the Companys performance.
Unusual Weather Patterns
The Companys 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 Companys performance.
Competition and Pricing Pressures
The retail business is highly competitive. The Company competes for customers, associates, locations, merchandise, services and other important aspects of the business with many other local, regional and national retailers. Those competitors range from specialty retail stores to department stores and discounters. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Companys performance.
Cost of Labor, Merchandise and Other Expenses
The Companys success depends, in part, on our ability to manage operating costs and to look for opportunities to reduce costs. The Companys ability to meet its labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. The Companys 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 Companys control.
Expansion Program
The Companys growth depends, in part, on our ability to open new stores and operate profitably. Our ability to open additional stores successfully will depend on a number of factors, including our identification and availability of suitable store locations; our success in negotiating leases on acceptable terms; our hiring and training of skilled store operating personnel, especially management; and our timely development of new stores, including the availability of construction materials and labor and the absence of significant construction and other delays in store openings based on weather or other events. In addition, as our business continues to grow, we are subject to more complex state and federal regulations and may be the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could result in liabilities that may adversely affect the Companys performance, despite the exercise of reasonable care.
Review of Equity Grants and Procedures and Related Matters
In June 2006, the Companys Board of Directors appointed a special committee of independent directors with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of the deficiencies, the Company revised the
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measurement dates for various option grants. Counsel to the special committee notified the SEC of the review. Following such self-reporting, the SEC Staff commenced an informal inquiry and the United States Attorneys office for the District of New Jersey commenced an inquiry regarding these matters. The Company is cooperating with these inquiries.
The Companys past stock option granting process has exposed the Company to risk factors that could have a material adverse affect on the Companys business and financial condition, including the outcome or any other matters arising out of the inquiries commenced by the SEC or the United States Attorneys office for the District of New Jersey; the possibility that the SEC or the United States Attorneys office for the District of New Jersey may not agree with all of the special committees findings and recommendations as set forth in the Companys Form 8-K filed October 10, 2006, and may require additional or different remediation or may bring proceedings in respect of such matters; any other proceedings which may be brought against the Company by other governmental agencies; any tax implications relating to the Companys stock option grants; the outcome of the shareholder derivative actions filed against certain of the Companys officers and its directors; the possibility of other private litigation relating to such stock option grants and related matters; and other matters arising out of or related to the Companys stock option grants and procedures and related matters.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
Most of the Companys 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 Companys 888 stores are located in 48 states, the District of Columbia and Puerto Rico and range in size from approximately 5,000 to 100,000 square feet, but are predominantly between 20,000 square feet and 50,000 square feet. Approximately 85% to 90% of store space is used for selling areas and the balance for warehouse, receiving and office space.
The table below sets forth the number of stores located in each state, district or territory as of March 3, 2007:
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BED BATH & BEYOND STORES |
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CHRISTMAS TREE SHOPS STORES |
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Alabama |
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10 |
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Nebraska |
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5 |
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Connecticut |
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3 |
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Alaska |
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1 |
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Nevada |
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7 |
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Maine |
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2 |
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Arizona |
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18 |
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New Hampshire |
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6 |
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Massachusetts |
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15 |
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Arkansas |
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4 |
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New Jersey |
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34 |
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New Hampshire |
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2 |
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California |
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95 |
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New Mexico |
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4 |
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New Jersey |
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3 |
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Colorado |
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23 |
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New York |
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51 |
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New York |
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6 |
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Connecticut |
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13 |
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North Carolina |
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24 |
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Rhode Island |
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2 |
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Delaware |
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1 |
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North Dakota |
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2 |
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Vermont |
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1 |
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Florida |
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60 |
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Ohio |
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34 |
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Total |
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34 |
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Georgia |
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23 |
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Oklahoma |
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5 |
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Idaho |
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6 |
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Oregon |
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9 |
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HARMON STORES |
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Illinois |
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34 |
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Pennsylvania |
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27 |
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Indiana |
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17 |
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Rhode Island |
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3 |
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Connecticut |
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2 |
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Iowa |
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6 |
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South Carolina |
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13 |
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New Jersey |
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28 |
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Kansas |
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7 |
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South Dakota |
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1 |
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New York |
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9 |
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Kentucky |
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7 |
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Tennessee |
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16 |
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Total |
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39 |
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Louisiana |
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10 |
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Texas |
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67 |
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Maine |
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5 |
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Utah |
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11 |
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Maryland |
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16 |
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Vermont |
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2 |
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Massachusetts |
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22 |
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Virginia |
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23 |
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Michigan |
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30 |
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Washington |
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20 |
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Minnesota |
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9 |
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West Virginia |
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1 |
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Mississippi |
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4 |
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Wisconsin |
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10 |
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Missouri |
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12 |
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District of Columbia |
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1 |
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Montana |
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3 |
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Puerto Rico |
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3 |
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Total |
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815 |
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The Company leases primarily all of its existing stores. The leases provide for original lease terms that generally range from five to twenty years and certain leases provide for renewal options, often at increased rents. Certain leases provide for scheduled rent increases (which, in the case of fixed increases, the Company accounts for on a straight-line basis over the expected lease term, beginning when the Company obtains possession of the premises) and/or for contingent rent (based upon store sales exceeding stipulated amounts).
In addition, the Company leases storage space in 16 locations, totaling approximately 775,000 square feet, that provide supplemental merchandise storage space and fulfillment of BBBs E-Service activities. This space is used to supplement the warehouse facilities in the Companys stores in proximity to these locations. In addition, the Company also owns a distribution center of approximately 770,000 square feet.
As of March 3, 2007, the Company leased a combined total of approximately 150,000 square feet in two locations (Farmingdale, New York and South Yarmouth, Massachusetts) for its procurement and office functions. The Company purchased the Union, New Jersey corporate office location in fiscal 2006 which occupies approximately 140,000 square feet of office space at that location.
Two purported derivative actions were filed in New Jersey Superior Court naming several officers and the directors of the Company as defendants and making allegations concerning alleged historical options backdating practices at the Company. Those two actions were consolidated, and a consolidated complaint was filed in late November. Subsequently, five additional purported derivative actions were filed, all concerning the same subject matter. Wandel v. Eisenberg, et al., was filed on October 19, 2006 in the Supreme Court of the State of New York, County
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of New York; Jamieson v. Eisenberg, et al. was filed on January 5, 2007 in the New Jersey Superior Court; and three cases were filed in the United States District Court for the District of New Jersey, Snowball Capital Appreciation Fund v. Eisenberg, et al.; Crowley v. Temares, et al.; and Cummings v. Temares, et al. on October 17, 2006, October 24, 2006 and October 25, 2006, respectively. The Snowball Capital Appreciation Fund v. Eisenberg, et al. and Jamieson v. Eisenberg, et al. cases have been voluntarily dismissed. The Crowley v. Temares, et al. and Cummings v. Temares, et al. cases have purportedly been consolidated. In each case the Company is a nominal defendant against which no recovery is sought.
The Company is, in addition, party to various other legal proceedings arising in the ordinary course of business, which the Company does not believe to be material to the Companys business or financial condition.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended March 3, 2007.
Executive Officers of the Registrant
The following table sets forth the name, age and business experience of the Executive Officers of the Registrant:
Name |
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Age |
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Positions |
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Warren Eisenberg |
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76 |
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Co-Chairman and Director |
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Leonard Feinstein |
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70 |
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Co-Chairman and Director |
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Steven H. Temares |
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48 |
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Chief Executive Officer and Director |
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Arthur Stark |
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52 |
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President and Chief Merchandising Officer |
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Matthew Fiorilli |
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50 |
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Senior Vice President Stores |
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Eugene A. Castagna |
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41 |
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Chief Financial Officer and Treasurer |
Warren Eisenberg is a Co-Founder of the Company and has served as Co-Chairman since 1999. He has served as a Director since 1971. Mr. Eisenberg served as Chairman from 1992 to 1999, and served as Chief Executive Officer or Co-Chief Executive Officer from 1971 to April 2003.
Leonard Feinstein is a Co-Founder of the Company and has served as Co-Chairman since 1999. He has served as a Director since 1971. Mr. Feinstein served as President from 1992 to 1999, and served as Co-Chief Executive Officer from 1971 to April 2003.
Steven H. Temares has been our Chief Executive Officer since April 2003 and has served as a Director since January 1999. Mr. Temares was President and Chief Executive Officer from April 2003 to January 2006, President and Chief Operating Officer from 1999 to April 2003 and Executive Vice President and Chief Operating Officer from 1997 to 1999. Mr. Temares joined the Company in 1992.
Arthur Stark has been our President and Chief Merchandising Officer since January 2006. Mr. Stark has served as Chief Merchandising Officer since 1999 and was a Senior Vice President from 1999 to 2006. Mr. Stark joined the Company in 1977.
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Matthew Fiorilli has been our Senior Vice President Stores since January 1999. Mr. Fiorilli joined the Company in 1973.
Eugene A. Castagna has been our Chief Financial Officer and Treasurer since January 2006. Mr. Castagna served as Assistant Treasurer from 2002 to 2006 and as Vice President - Finance from 2000 to 2006. Mr. Castagna is a certified public accountant and joined the Company in 1994.
The Companys 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 5 - MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low reported closing prices of the Companys common stock on the NASDAQ National Market System for the periods indicated.
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High |
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Low |
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Fiscal 2006: |
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1st Quarter |
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$ |
40.82 |
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$ |
35.22 |
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2nd Quarter |
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36.92 |
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31.42 |
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3rd Quarter |
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41.24 |
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33.29 |
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4th Quarter |
|
43.02 |
|
38.04 |
|
||
|
|
|
|
|
|
||
|
|
High |
|
Low |
|
||
Fiscal 2005: |
|
|
|
|
|
||
1st Quarter |
|
$ |
40.80 |
|
$ |
35.57 |
|
2nd Quarter |
|
46.84 |
|
40.65 |
|
||
3rd Quarter |
|
43.18 |
|
37.01 |
|
||
4th Quarter |
|
43.33 |
|
35.50 |
|
The common stock is quoted through the NASDAQ National Market System under the symbol BBBY. On March 31, 2007, there were approximately 4,000 shareholders of record of the common stock (without including individual participants in nominee security position listings). On March 31, 2007, the last reported sale price of the common stock was $40.17.
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 Companys earnings, financial condition and requirements, business conditions and other factors. See Item 8 - Financial Statements and Supplementary Data.
11
The Companys purchases of its common stock during the fourth quarter of fiscal 2006 were as follows:
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
Total Number of |
|
Value of Shares |
|
|
|
|
|
|
|
|
Shares Purchased as |
|
that May Yet Be |
|
|
|
|
|
|
|
|
Part of Publicly |
|
Purchased Under |
|
|
|
|
Total Number of |
|
Average Price |
|
Announced Plans |
|
the Plans or |
|
|
Period |
|
Shares Purchased (1) |
|
Paid per Share |
|
or Programs (1) |
|
Programs (1) (2) |
|
|
November 26, 2006 - December 23, 2006 |
|
1,000 |
|
$ |
41.14 |
|
1,000 |
|
1,000,969,141 |
|
December 24, 2006 - January 20, 2007 |
|
3,964,000 |
|
$ |
38.45 |
|
3,964,000 |
|
848,555,818 |
|
January 21, 2007 - March 3, 2007 |
|
3,519,000 |
|
$ |
41.91 |
|
3,519,000 |
|
701,113,324 |
|
Total |
|
7,484,000 |
|
$ |
40.07 |
|
7,484,000 |
|
701,113,324 |
|
(1) In December 2006, the Company announced that the Board of Directors approved a $1 billion share repurchase program, authorizing the repurchase of its common stock. The Companys Board of Directors previously authorized repurchases of shares of its common stock in the amount of $200 million, $400 million and $350 million in January 2006, October 2005 and December 2004, respectively. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. Shares purchased indicated in this table also include the withholding of a portion of restricted shares to cover taxes on vested restricted shares.
(2) Excludes brokerage commissions paid by the Company.
Stock Price Performance Graph
The graph shown below compares the performance of the Companys 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 Companys common stock and each of the three Indexes on March 2, 2002, and the reinvestment of all dividends).
12
ITEM 6 SELECTED FINANCIAL DATA
Consolidated Selected Financial Data |
|
Fiscal Year Ended (1) |
|
|||||||||||||
(in thousands, except per share |
|
March 3, |
|
February 25, |
|
February 26, |
|
February 28, |
|
March 1, |
|
|||||
and selected operating data) |
|
2007 |
|
2006 |
|
2005 |
|
2004 (2) |
|
2003 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Statement of Earnings Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
6,617,429 |
|
$ |
5,809,562 |
|
$ |
5,147,678 |
|
$ |
4,477,981 |
|
$ |
3,665,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Gross profit |
|
2,835,402 |
|
2,485,748 |
|
2,186,301 |
|
1,876,664 |
|
1,518,547 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating profit |
|
889,401 |
|
879,171 |
|
792,414 |
|
639,343 |
|
480,057 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net earnings |
|
594,244 |
|
572,847 |
|
504,964 |
|
399,470 |
|
302,179 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net earnings per share - Diluted (3) |
|
$ |
2.09 |
|
$ |
1.92 |
|
$ |
1.65 |
|
$ |
1.31 |
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Selected Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Number of stores open (at period end) |
|
888 |
|
809 |
|
721 |
|
629 |
|
519 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total square feet of store space (at period end) |
|
27,794,000 |
|
25,502,000 |
|
22,945,000 |
|
20,472,000 |
|
17,452,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Percentage increase in comparable store sales |
|
4.9 |
% |
4.6 |
% |
4.5 |
% |
6.3 |
% |
7.9 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Working capital |
|
$ |
1,553,541 |
|
$ |
1,082,399 |
|
$ |
1,223,409 |
|
$ |
1,199,752 |
|
$ |
914,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total assets |
|
3,959,304 |
|
3,382,140 |
|
3,199,979 |
|
2,865,023 |
|
2,188,842 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Shareholders equity (4) |
|
$ |
2,649,151 |
(5) |
$ |
2,262,450 |
|
$ |
2,203,762 |
|
$ |
1,990,820 |
|
$ |
1,451,921 |
|
(1) Each fiscal year represents 52 weeks, except for fiscal 2006 (ended March 3, 2007) which represents 53 weeks.
(2) On June 19, 2003, the Company acquired Christmas Tree Shops, Inc.
(3) The Company has not declared any cash dividends in any of the fiscal years noted above.
(4) In fiscal 2006, 2005 and 2004, the Company repurchased approximately $301 million, $598 million and $350 million of its common stock, respectively.
(5) The Company adopted Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements resulting in a one-time net reduction to Shareholders equity. See Note 2 in the Consolidated Financial Statements.
13
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Bed Bath & Beyond Inc. and subsidiaries (the Company) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS) and Harmon. The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware and health and beauty care items. The Companys objective is to be a customers first choice for products and services in the categories offered, in the markets in which the Company operates.
The Companys strategy is to achieve this objective through excellent customer service, an extensive breadth and depth of assortment, everyday low prices, introduction of new merchandising offerings and development of its infrastructure.
Operating in the highly competitive retail industry, the Company, along with other retail companies, is influenced by a number of factors including, but not limited to, consumer preferences and spending habits, general economic conditions, unusual weather patterns, competition from existing and potential competitors, and the ability to find suitable locations at acceptable occupancy costs to support the Companys expansion program.
Net earnings for the fiscal year (fifty-three weeks) ended March 3, 2007 were $2.09 per diluted share, including a non-recurring charge relating to the Companys remediation program intended to protect its employees from certain potential adverse tax consequences arising pursuant to Internal Revenue Code Section 409A of approximately $.07 per diluted share, exceeding fiscal 2005 (fifty-two weeks) net earnings of $1.92 per diluted share by approximately 8.9%. Net sales for fiscal 2006 (fifty-three weeks) were approximately $6.617 billion, an increase of approximately 13.9% from the prior fiscal year (fifty-two weeks). Contributing to this increase was the expansion of store space by 9.0%, from 25.5 million square feet at fiscal year end 2005 to 27.8 million square feet at fiscal year end 2006 and the benefit of an additional week in fiscal 2006. The 2.3 million square feet increase was primarily the result of opening 74 BBB stores, 6 CTS stores and 1 Harmon store.
Comparable store sales for fiscal 2006 increased by approximately 4.9% as compared with an increase of approximately 4.6% and 4.5% in fiscal 2005 and 2004, respectively. Comparable store sales percentage increases are calculated based on an equivalent number of weeks for each annual period. As of the beginning of the fiscal third quarter of 2004, CTS was included in the calculation of comparable store sales. The fiscal 2006 increase in comparable store sales reflected a number of factors, including but not limited to, the continued consumer acceptance of the Companys merchandise offerings and a strong focus on customer service with an emphasis on responding to customer feedback.
A store is considered a comparable store when it has been open for twelve full months following its grand opening period (typically four to six weeks). Stores relocated or expanded are excluded from comparable store sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such stores sales are not considered comparable once the store closing process has commenced.
On March 22, 2007, subsequent to the end of fiscal 2006, the Company completed and announced the acquisition of buybuy BABY, a privately held retailer of infant and toddler merchandise, for approximately $67 million (net of cash acquired) and repayment of debt of approximately $19 million. Based in Garden City, New York, buybuy BABY operates a total of 8 stores in Maryland, New Jersey, New York and Virginia. The stores range in size from approximately 28,000 to 60,000 square feet and offer a broad assortment of premier infant and toddler merchandise in categories including furniture, car seats, strollers, feeding, bedding, bath, health and safety essentials, toys, learning and development products, clothing and a unique selection of seasonal and holiday products.
buybuy BABY was founded in 1996 by Richard and Jeffrey Feinstein, both of whom were previously employed by the Company, and are the sons of Leonard Feinstein, one of the Companys Co-Chairmen. The acquisition was
14
approved by a special committee of independent members of the Board of Directors of the Company. The special committee retained Merrill Lynch & Co. to serve as its independent financial advisor and render a fairness opinion in connection with the transaction, as well as Chadbourne & Parke LLP to serve as independent legal counsel to oversee the acquisition negotiations. The aforementioned repayment of approximately $19 million of debt results in the retirement of all indebtedness of buybuy BABY, which debt was held by Richard and Jeffrey Feinstein (approximately $16 million) and Leonard Feinstein (approximately $3 million). The Companys Co-Chairmen, Leonard Feinstein and Warren Eisenberg, recused themselves from deliberations relating to the transaction.
The acquisition of buybuy BABY had no effect on the Companys fiscal 2006 results since the transaction occurred during fiscal 2007. The Company believes the benefit of this acquisition will not have a material effect on the overall results or financial condition of the Company for fiscal 2007.
The Company plans to continue to expand its operations and invest in its infrastructure to reach its long-term objectives. The Companys fiscal 2007 store opening program is expected to focus primarily on new BBB stores. The Company also plans to improve and grow its CTS, Harmon and buybuy BABY concepts.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) selected statement of earnings data of the Company expressed as a percentage of net sales and (ii) the percentage change in dollar amounts from the prior year in selected statement of earnings data:
|
|
Fiscal Year Ended |
|
||||||||
|
|
Percentage |
|
Percentage Change |
|
||||||
|
|
of Net Sales |
|
from Prior Year |
|
||||||
|
|
March 3, |
|
February 25, |
|
February 26, |
|
March 3, |
|
February 25, |
|
|
|
2007 |
|
2006 |
|
2005 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
13.9 |
% |
12.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
57.2 |
|
57.2 |
|
57.5 |
|
13.8 |
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
42.8 |
|
42.8 |
|
42.5 |
|
14.1 |
|
13.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
29.4 |
|
27.7 |
|
27.1 |
|
21.1 |
|
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
13.4 |
|
15.1 |
|
15.4 |
|
1.2 |
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before provision for income taxes |
|
14.1 |
|
15.8 |
|
15.8 |
|
1.9 |
|
12.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
9.0 |
|
9.9 |
|
9.8 |
|
3.7 |
|
13.4 |
|
Net Sales
Net sales in fiscal 2006 (fifty-three weeks) increased $807.9 million to $6.617 billion, representing an increase of 13.9% over the $5.810 billion of net sales in fiscal 2005 (fifty-two weeks), which increased $661.9 million or 12.9% over net sales of $5.148 billion in fiscal 2004. Approximately 52% of the increase in fiscal 2006 was attributable to an increase in the Companys new store sales, and the balance of the increase was primarily attributable to the increase in comparable store sales and the benefit of an additional week in fiscal 2006. The additional week of sales in fiscal 2006 represented approximately 1.6% of net sales. The increase in comparable store sales for fiscal 2006 of 4.9% was due to a number of factors, including but not limited to, the continued consumer acceptance of the Companys merchandise offerings and a strong focus on customer service with an emphasis on responding to customer feedback. Comparable store sales percentage increases are calculated based on an equivalent number of weeks for each annual period. For fiscal 2005, approximately 64% of the increase in net sales was attributable to an increase in the Companys new store sales, and the balance of the increase was primarily attributable to the increase in comparable store sales.
15
Sales of domestics merchandise accounted for approximately 46%, 47% and 48% of net sales in fiscal 2006, 2005 and 2004, respectively, of which the Company estimates that bed linens accounted for approximately 15%, 16% and 17% of net sales in fiscal 2006, 2005 and 2004, respectively. The remaining net sales in fiscal 2006, 2005 and 2004 of 54%, 53% and 52%, respectively, represented sales of home furnishings and other items. No other individual product category accounted for 10% or more of net sales during fiscal 2006, 2005 or 2004.
Gross Profit
Gross profit in fiscal 2006, 2005 and 2004 was $2.835 billion or 42.8% of net sales, $2.486 billion or 42.8% of net sales and $2.186 billion or 42.5% of net sales, respectively. The increase in gross profit between fiscal 2005 and 2004 as a percentage of net sales was primarily attributable to lower inventory acquisition costs of the Companys current merchandise offerings.
Selling, General and Administrative expenses
Selling, general and administrative expenses (SG&A) were $1.946 billion or 29.4% of net sales in fiscal 2006 compared to $1.607 billion or 27.7% of net sales in fiscal 2005. The increase in SG&A as a percentage of net sales is primarily due to a non-recurring charge relating to the Companys remediation program intended to protect its employees from certain potential adverse tax consequences arising pursuant to Internal Revenue Code Section 409A, the expensing of stock options for twelve months in fiscal 2006 versus six months in fiscal 2005, additional stock-based compensation charges primarily related to the revised measurement dates, increased legal and accounting charges associated with the stock option review (see Review of Equity Grants and Procedures and Related Matters) and an increase in advertising, which includes higher paper costs and postal rates. Lastly, there were one-time benefits experienced in fiscal 2005, such as settlement of credit card litigation and certain insurance recoveries, which the Company did not have in fiscal 2006.
SG&A as a percentage of net sales increased to 27.7% in fiscal 2005 from 27.1% in fiscal 2004, primarily due to the expensing of stock options and related changes in the compensation program reflecting the early adoption of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). SG&A in fiscal 2005 was $1.607 billion as compared to $1.394 billion in fiscal 2004.
Interest Income
Interest income in fiscal 2006, 2005 and 2004 was $43.5 million, $35.9 million and $18.8 million, respectively. Interest income increased primarily due to increases in the Companys average investment interest rates as a result of the upward trend in short term interest rates.
Income Taxes
The effective tax rate was 36.30% for fiscal 2006, 37.40% for fiscal 2005 and 37.75% for fiscal 2004. The decreases are primarily due to a reduction in the weighted average effective tax rate resulting from a change in the mix of the business within the taxable jurisdictions in which the Company operates. For fiscal 2007, the effective tax rate is estimated at approximately 36.30%.
EXPANSION PROGRAM
The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets, the expansion or relocation of existing stores and the continuous review of strategic acquisitions. The Company also continues to actively explore international expansion (including Canada). In the fifteen year period from the beginning of fiscal 1992 to the end of fiscal 2006, the chain has grown from 34 to 888 stores. Total square footage grew from 917,000 square feet at the beginning of fiscal 1992 to 27.8 million square feet at the end of fiscal 2006.
16
The Company intends to continue its expansion program and currently plans to open primarily new BBB stores in fiscal 2007. The Company also plans to continue to improve and grow its CTS, Harmon and buybuy BABY concepts in fiscal 2007 (see details under Liquidity and Capital Resources below). The continued growth of the Company is dependent, in large part, upon the Companys ability to execute its expansion program successfully.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been able to finance its operations, including its expansion program, through internally generated funds. Net cash provided by operating activities in fiscal 2006 was $613.6 million, compared with $660.4 million in fiscal 2005. The decrease in net cash provided by operating activities was principally driven by working capital changes due to the increase in merchandise inventories (primarily as a result of new store space) and an increase in other current assets (due to the timing of prepayments), partially offset by an increase in net earnings and an increase in accrued expenses and other current liabilities (primarily due to the timing of payments).
Inventory per square foot was $54.18 as of March 3, 2007 and $51.04 as of February 25, 2006. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales growth.
Net cash used in investing activities in fiscal 2006 was $397.7 million, compared with $67.6 million in fiscal 2005. The increase in net cash used in investing activities was attributable to a decrease in redemptions of investment securities and an increase in capital expenditures partially offset by a decrease in purchases of investment securities.
Net cash used in financing activities in fiscal 2006 was $250.3 million, compared with $567.3 million in fiscal 2005. The decrease in net cash used in financing activities was primarily attributable to common stock repurchased of $301 million in the current year compared to $598 million in the prior year under the Companys stock repurchase program.
At March 3, 2007, the Company maintained two uncommitted lines of credit of $100 million and $75 million, with expiration dates of September 3, 2007 and February 28, 2008, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. In addition, under these uncommitted lines of credit, the Company can obtain unsecured standby letters of credit. During fiscal 2006, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 3, 2007, there was approximately $6.9 million of outstanding letters of credit and approximately $40.0 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates. The Company believes that during fiscal 2007, internally generated funds will be sufficient to fund its operations, including its expansion program.
The Company has contractual obligations consisting mainly of operating leases for stores, offices, warehouse facilities and equipment, and purchase obligations which the Company is obligated to pay as of March 3, 2007 as follows:
|
|
|
|
Less than 1 |
|
|
|
|
|
After 5 |
|
||||
(in thousands) |
|
Total |
|
year |
|
1-3 years |
|
4-5 years |
|
years |
|
||||
Operating Lease Obligations |
|
$3,195,864 |
|
$ |
372,168 |
|
$ |
743,317 |
|
$ |
644,898 |
|
$ |
1,435,481 |
|
Purchase Obligations |
|
415,727 |
|
415,727 |
|
|
|
|
|
|
|
||||
Total Contractual Obligations |
|
$3,611,591 |
|
$ |
787,895 |
|
$ |
743,317 |
|
$ |
644,898 |
|
$ |
1,435,481 |
|
As of March 3, 2007, the Company has leased sites for 58 new stores planned for opening in fiscal 2007 or 2008, for which aggregate minimum rental payments over the term of the leases are approximately $325.0 million and are
17
included in the table above.
Purchase obligations primarily consist of purchase orders for merchandise and capital expenditures.
Other significant commitments and contingencies include the following:
· The Company utilizes a combination of insurance and self insurance for a number of risks including workers compensation, general liability and automobile liability.
· Some of the Companys operating lease agreements have scheduled rent increases. The Company accounts for these scheduled rent increases on a straight-line basis over the expected lease term, beginning when the Company obtains possession of the premises, thus creating deferred rent.
SEASONALITY
The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December, and generally lower in February and April.
INFLATION
The Company does not believe that its operating results have been materially affected by inflation during the past year. There can be no assurance, however, that the Companys operating results will not be affected by inflation in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
Staff Accounting Bulletin No. 108
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The transition provisions of SAB 108 permit the Company to adjust for the cumulative effect on retained earnings of immaterial errors relating to prior years. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended. The Company adopted SAB 108 at the end of fiscal 2006. In accordance with SAB 108, the Company has adjusted beginning retained earnings for fiscal 2006 in the accompanying consolidated financial statements for the items described under Review of Equity Grants and Procedures and Related Matters and Rent and Lease Accounting below. The Company considers these adjustments to be immaterial to prior periods.
Review of Equity Grants and Procedures and Related Matters
In June 2006, the Companys Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Companys Board of Directors.
The review of stock option grants and procedures identified various deficiencies in the process of granting and documenting stock options and restricted shares described below. As a result of the deficiencies, the special committee recommended, among other things, that the Company revise the measurement dates under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for 16 annual option grant dates, 26 monthly grant dates and 2 special grant dates (revisions of 2 annual, 4 monthly and 1 special grant dates have
18
no accounting impact because prices on the revised dates were lower than on the measurement dates previously recorded by the Company). As a result of these revised measurement dates and the correction of various other errors relating to the accounting for equity-based compensation, the Company has determined that from fiscal year 1993 through fiscal 2005, it had certain unrecorded non-cash equity-based compensation charges associated with its equity-based compensation plans. The Company filed a Form 8-K dated October 10, 2006, which provides further details regarding the special committees review.
As a result, the Company has recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, including related tax items. In accordance with the provisions of SAB 108, the Company decreased beginning retained earnings for fiscal year 2006 by $61.8 million within the accompanying Consolidated Financial Statements.
The Company does not believe that the net effect of this adjustment was material, either quantitatively or qualitatively, in any of the years covered by the review. In reaching that determination, the following quantitative measures were considered:
(in thousands) |
|
|
|
|
|
Net Adjustment, After |
|
||
|
|
Net Adjustment, |
|
Net Income |
|
Tax as a % of Net |
|
||
Fiscal Year |
|
After Tax |
|
As Reported |
|
Income As Reported |
|
||
2005 |
|
$ |
11,488 |
|
$ |
572,847 |
|
2.01 |
% |
2004 |
|
12,493 |
|
504,964 |
|
2.47 |
% |
||
2003 |
|
13,607 |
|
399,470 |
|
3.41 |
% |
||
2002 |
|
8,600 |
|
302,179 |
|
2.85 |
% |
||
2001 |
|
7,391 |
|
219,599 |
|
3.37 |
% |
||
2000 |
|
5,272 |
|
171,922 |
|
3.07 |
% |
||
1999 |
|
1,340 |
|
131,229 |
|
1.02 |
% |
||
1998 |
|
923 |
|
97,346 |
|
0.95 |
% |
||
1997 |
|
405 |
|
73,142 |
|
0.55 |
% |
||
1996 |
|
163 |
|
55,015 |
|
0.30 |
% |
||
1995 |
|
56 |
|
39,459 |
|
0.14 |
% |
||
1994 |
|
22 |
|
30,013 |
|
0.07 |
% |
||
1993 |
|
2 |
|
21,887 |
|
0.01 |
% |
||
Total |
|
$ |
61,762 |
|
|
|
|
|
|
Rent and Lease Accounting
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease. In fiscal 2004, due to clarification by the Office of the Chief Accountant of the SEC, the Company changed its method of accounting to define the beginning of the lease term as the date the Company obtained possession of the leased premises. Prior to fiscal 2004, the Companys method of accounting defined the beginning of the lease term as the date the Company commenced lease payments. The Company has recorded an adjustment to retained earnings and deferred rent and other liabilities to reflect these accounts as if the Company had always defined the beginning of the lease term as the date the Company obtained possession of the leased premises and to correspondingly increase deferred tax assets. The Company does not believe that the net effect of this adjustment which includes fiscal years 1993 through 2003 was material.
Impact of Adjustments
The impact of each of the items noted above, net of tax, on fiscal 2006 beginning balances are presented below:
19
|
|
Review of Stock |
|
|
|
|
|
|||
|
|
Option Grant |
|
Rent & |
|
|
|
|||
|
|
Practices, Including |
|
Lease |
|
|
|
|||
(in thousands) |
|
Related Tax Items |
|
Accounting |
|
Total |
|
|||
Other Assets |
|
$ |
11,273 |
|
$ |
4,738 |
|
$ |
16,011 |
|
Income Taxes Payable |
|
(34,747 |
) |
|
|
(34,747 |
) |
|||
Deferred Rent and Other Liabilities |
|
|
|
(15,588 |
) |
(15,588 |
) |
|||
Additional Paid-in Capital |
|
(38,288 |
) |
|
|
(38,288 |
) |
|||
Retained Earnings |
|
61,762 |
|
10,850 |
|
72,612 |
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
Other Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 123R which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption of SFAS No. 123R requires additional accounting and disclosure related to income tax and cash flow effects resulting from stock-based compensation. The Company adopted SFAS No. 123R on August 28, 2005 (the date of adoption), the beginning of its third quarter of fiscal 2005, the year ended February 25, 2006. While SFAS No. 123R was not required to be effective until the first annual reporting period that began after June 15, 2005, early adoption was encouraged and the Company elected to adopt before the required effective date.
The Company adopted SFAS No.123R under the modified prospective application. Under this application, prior period amounts are not restated to include the effects of stock-based compensation, and the Company records stock-based compensation expense for all awards granted on or after the date of adoption and for the portion of previously granted awards that remained unvested at the date of adoption. Currently, the Companys stock-based compensation relates to restricted stock awards and stock options. The Companys restricted stock awards are considered nonvested share awards as defined under SFAS No. 123R.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the fair value option). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. As required by SFAS No. 158, the Company adopted the balance sheet recognition provisions at the end of fiscal 2006 on a prospective basis and will adopt the year end measurement date in fiscal 2008. The adoption of this guidance did not have a material impact on the Companys consolidated financial statements. (See Employee Benefit Plans, Note 9).
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of FIN No. 48 will have a material impact on its consolidated financial statements.
20
In June 2006, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording these taxes in the Companys consolidated financial statements as the Company historically has presented sales excluding these taxes.
In October 2005, the FASB issued FASB Staff Position (FSP) 13-1, Accounting for Rental Costs Incurred during a Construction Period. FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 was effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1 did not have a material impact on the Companys consolidated financial statements.
REVIEW OF EQUITY GRANTS AND PROCEDURES AND RELATED MATTERS
As a result of revised measurement dates for certain stock option grants, and the correction of various other errors, the Company has determined that it had certain unrecorded non-cash equity-based compensation charges related to fiscal years prior to 2006. (See Recent Accounting Pronouncements-Staff Accounting Bulletin No. 108). For fiscal 2006, the Company recorded $8.2 million of expense related to the revised measurement dates.
The Companys Board of Directors also approved a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical deficiencies associated with certain of the Companys stock option grants that were disclosed through the Companys stock option review. As a result of this program, the Company made cash payments totaling approximately $30.0 million to over 1,600 employees in the fourth quarter of fiscal 2006, which resulted in a non-recurring, pre-tax stock-based compensation charge. The cash outlay primarily represents payments to employees in connection with increasing the exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences. No executive officer received such payments. The Company believes it is likely the Company will recoup a substantial portion of the anticipated cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery would not flow through the income statement.
The Company also filed a Form 8-K dated December 28, 2006 which provides further details regarding the remediation program.
The Company continues to cooperate with the informal inquiry of the SEC regarding the Companys stock option grant practices. In addition, the Company is also cooperating with the United States Attorneys office for the District of New Jersey in connection with its inquiry into such matters.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In particular, judgment is used in areas such as the inventory valuation, impairment of long-lived assets, goodwill and other indefinitely lived intangible assets, accruals for self insurance, litigation, store opening, expansion, relocation and closing costs, stock-based
21
compensation and income taxes. Actual results could differ from these estimates.
Inventory Valuation: Merchandise inventories are stated at the lower of cost or market. Inventory costs for BBB and Harmon are calculated using the retail inventory method and inventory cost for CTS is calculated using the first-in, first-out cost method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories.
At any one time, inventories include items that have been written down to the Companys best estimate of their realizable value. Judgment is required in estimating realizable value and factors considered are the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions.
The Company estimates its reserve for shrinkage throughout the year, based on historical shrinkage. Actual shrinkage is recorded at year-end based upon the results of the Companys physical inventory count. Historically, the Companys shrinkage has not been volatile.
Impairment of Long-Lived Assets: The Company reviews long-lived assets for impairment annually or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Goodwill and Other Indefinitely Lived Intangible Assets: The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. The Company has not historically recorded an impairment to its goodwill and other indefinitely lived intangible assets. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.
Self Insurance: The Company utilizes a combination of insurance and self insurance for a number of risks including workers compensation, general liability, automobile liability and employee related health care benefits (a portion of which is paid by its employees). Liabilities associated with the risks that the Company retains are estimated by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Although the Companys claims experience has not displayed substantial volatility in the past, actual experience could materially vary from its historical experience in the future. Factors that affect these estimates include but are not limited to: inflation, the number and severity of claims and regulatory changes. In the future, if the Company concludes an adjustment to self insurance accruals is required, the liability will be adjusted accordingly.
Litigation: The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company reassesses the potential liability related to its pending litigation and revises its estimates, as appropriate. The ultimate resolution of these ongoing matters as a result of future developments could have a material impact on the Companys earnings. The Company cannot predict the nature and validity of claims which could be asserted in the future, and future claims could have a material impact on its earnings.
Store Opening, Expansion, Relocation and Closing Costs: Store opening, expansion, relocation and closing costs,
22
including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
Stock-Based Compensation: Under SFAS No. 123R, the Company uses a Black-Scholes option-pricing model to determine the fair value of its stock options. The Black-Scholes model includes various assumptions, including the expected life of stock options, the expected volatility and the expected risk free interest rate. These assumptions reflect the Companys best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. As a result, if other assumptions had been used, total stock-based compensation cost, as determined in accordance with SFAS No. 123R could have been materially impacted. Furthermore, if the Company uses different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods.
The Company is required to record stock-based compensation expense net of estimated forfeitures. The Companys forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates.
Income Taxes: The Company accounts for its income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Companys 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 Managements 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 Companys actual results and future financial condition may differ materially from those expressed in any such forward looking statements as a result of many factors that may be outside the Companys control. Such factors include, without limitation: changes in the retailing environment and consumer preferences and spending habits; demographics and other macro-economic factors that may impact the level of spending for the types of merchandise sold by the Company; general economic conditions; unusual weather patterns; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the cost of labor, merchandise and other costs and expenses; the ability to find suitable locations at acceptable occupancy costs to support the Companys expansion program; and matters arising out of or related to the Companys stock option grants and procedures and related matters, including the outcome or any other matters arising out of the informal inquiry commenced by the SEC or the inquiry commenced by the United States Attorneys office for the District of New Jersey, the possibility that the SEC or the United States Attorneys office for the District of New Jersey may not agree with all of the special committees findings and recommendations and may require additional or different remediation or may bring proceedings in respect of such matters, any other proceedings which may be brought against the Company by other governmental agencies, any tax implications relating to the Companys stock option grants, the outcome of the shareholder derivative actions filed against certain of the Companys officers and its directors and the possibility of other private litigation relating to such stock option grants and related matters.
23
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Companys exposure to market risk for changes in interest rates relates primarily to the Companys investment securities. The Company is adverse to loss of principal and seeks to preserve its invested funds by limiting market risk. The Companys investment securities consist of fixed rate instruments. The Companys investments include cash and cash equivalents of $213.4 million, short term investment securities of $774.9 million and long term investment securities of $102.7 million at weighted average interest rates as of March 3, 2007 of 5.3%, 3.8% and 4.5%, respectively.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are included herein:
1) Consolidated Balance Sheets as of March 3, 2007 and February 25, 2006
2) Consolidated Statements of Earnings for the fiscal years ended March 3, 2007, February 25, 2006 and February 26, 2005
3) Consolidated Statements of Shareholders Equity for the fiscal years ended March 3, 2007, February 25, 2006 and February 26, 2005
4) Consolidated Statements of Cash Flows for the fiscal years ended March 3, 2007, February 25, 2006 and February 26, 2005
5) Notes to Consolidated Financial Statements
6) Reports of Independent Registered Public Accounting Firm
24
BED BATH &
BEYOND INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements.
25
Consolidated Statements of Earnings
Bed Bath & Beyond Inc. and Subsidiaries
|
|
Fiscal Year Ended |
|
|||||||||
|
|
March 3, |
|
February 25, |
|
February 26, |
|
|||||
(in thousands, except per share data) |
|
|
|
2007 |
|
2006 |
|
2005 |
|
|||
Net sales |
|
$ |
6,617,429 |
|
$ |
5,809,562 |
|
$ |
5,147,678 |
|
||
Cost of sales |
|
3,782,027 |
|
3,323,814 |
|
2,961,377 |
|
|||||
Gross profit |
|
2,835,402 |
|
2,485,748 |
|
2,186,301 |
|
|||||
Selling, general and administrative expenses |
|
1,946,001 |
|
1,606,577 |
|
1,393,887 |
|
|||||
Operating profit |
|
889,401 |
|
879,171 |
|
792,414 |
|
|||||
Interest income |
|
43,478 |
|
35,920 |
|
18,773 |
|
|||||
Earnings before provision for income taxes |
|
932,879 |
|
915,091 |
|
811,187 |
|
|||||
Provision for income taxes |
|
338,635 |
|
342,244 |
|
306,223 |
|
|||||
Net earnings |
|
$ |
594,244 |
|
$ |
572,847 |
|
$ |
504,964 |
|
||
|
|
|
|
|
|
|
|
|||||
Net earnings per share - Basic |
|
$ |
2.12 |
|
$ |
1.95 |
|
$ |
1.68 |
|
||
Net earnings per share - Diluted |
|
$ |
2.09 |
|
$ |
1.92 |
|
$ |
1.65 |
|
||
|
|
|
|
|
|
|
|
|||||
Weighted average shares outstanding - Basic |
|
280,199 |
|
293,899 |
|
300,743 |
|
|||||
Weighted average shares outstanding - Diluted |
|
284,956 |
|
298,973 |
|
306,642 |
|
|||||
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders Equity
Bed Bath & Beyond Inc.
and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
||||||||
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
Other |
|
|
|
||||||||
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
Treasury Stock |
|
Comprehensive |
|
|
|
||||||||||||
(in thousands) |
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Shares |
|
Amount |
|
Income |
|
Total |
|
||||||
Balance at February 28, 2004 |
|
300,278 |
|
$ |
3,003 |
|
$ |
433,404 |
|
$ |
1,554,413 |
|
|
|
$ |
|
|
$ |
|
|
$ |
1,990,820 |
|
||
Net earnings |
|
|
|
|
|
|
|
504,964 |
|
|
|
|
|
|
|
504,964 |
|
||||||||
Shares sold under employee stock option plans, including tax benefit |
|
2,547 |
|
25 |
|
58,104 |
|
|
|
|
|
|
|
|
|
58,129 |
|
||||||||
Repurchase of common stock, including fees |
|
|
|
|
|
|
|
|
|
(8,762 |
) |
(350,151 |
) |
|
|
(350,151 |
) |
||||||||
Balance at February 26, 2005 |
|
302,825 |
|
3,028 |
|
491,508 |
|
2,059,377 |
|
(8,762 |
) |
(350,151 |
) |
|
|
2,203,762 |
|
||||||||
Net earnings |
|
|
|
|
|
|
|
572,847 |
|
|
|
|
|
|
|
572,847 |
|
||||||||
Shares sold under employee stock option plans, including tax benefit |
|
2,300 |
|
24 |
|
57,622 |
|
|
|
|
|
|
|
|
|
57,646 |
|
||||||||
Issuance of restricted shares, net |
|
1,031 |
|
10 |
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
||||||||
Stock-based compensation expense |
|
|
|
|
|
26,439 |
|
|
|
|
|
|
|
|
|
26,439 |
|
||||||||
Repurchase of common stock, including fees |
|
|
|
|
|
|
|
|
|
(16,404 |
) |
(598,244 |
) |
|
|
(598,244 |
) |
||||||||
Balance at February 25, 2006 |
|
306,156 |
|
3,062 |
|
575,559 |
|
2,632,224 |
|
(25,166 |
) |
(948,395 |
) |
|
|
2,262,450 |
|
||||||||
Net earnings |
|
|
|
|
|
|
|
594,244 |
|
|
|
|
|
|
|
594,244 |
|
||||||||
Shares sold under employee stock option plans, including tax benefit |
|
2,603 |
|
26 |
|
61,628 |
|
|
|
|
|
|
|
|
|
61,654 |
|
||||||||
Issuance of restricted shares, net |
|
991 |
|
10 |
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
||||||||
Stock-based compensation expense, net |
|
|
|
|
|
61,744 |
|
|
|
|
|
|
|
|
|
61,744 |
|
||||||||
Repurchase of common stock, including fees |
|
|
|
|
|
|
|
|
|
(7,510 |
) |
(301,002 |
) |
|
|
(301,002 |
) |
||||||||
Adoption of SAB 108 (Note 2) |
|
|
|
|
|
38,288 |
|
(72,612 |
) |
|
|
|
|
|
|
(34,324 |
) |
||||||||
Adoption of SFAS No. 158 (Note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,385 |
|
4,385 |
|
||||||||
Balance at March 3, 2007 |
|
309,750 |
|
$ |
3,098 |
|
$ |
737,209 |
|
$ |
3,153,856 |
|
(32,676 |
) |
$ |
(1,249,397 |
) |
$ |
4,385 |
|
$ |
2,649,151 |
|
||
See accompanying Notes to Consolidated Financial Statements.
26
Consolidated Statements of Cash Flows
Bed Bath & Beyond Inc. and Subsidiaries
|
|
FISCAL YEAR ENDED |
|
|||||||
|
|
March 3, |
|
February 25, |
|
February 26, |
|
|||
(in thousands) |
|
2007 |
|
2006 |
|
2005 |
|
|||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|||
Net earnings |
|
$ |
594,244 |
|
$ |
572,847 |
|
$ |
504,964 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation |
|
132,955 |
|
111,111 |
|
97,491 |
|
|||
Amortization of bond premium |
|
3,532 |
|
3,172 |
|
1,657 |
|
|||
Stock-based compensation |
|
52,596 |
|
26,439 |
|
|
|
|||
Excess tax benefit from stock-based compensation |
|
6,691 |
|
20,011 |
|
27,049 |
|
|||
Deferred income taxes |
|
(87,225 |
) |
(25,874 |
) |
4,056 |
|
|||
Increase in assets: |
|
|
|
|
|
|
|
|||
Merchandise inventories |
|
(204,080 |
) |
(149,692 |
) |
(139,694 |
) |
|||
Trading investment securities |
|
(2,958 |
) |
(423 |
) |
|
|
|||
Other current assets |
|
(38,241 |
) |
(23,543 |
) |
(7,350 |
) |
|||
Other assets |
|
(695 |
) |
(307 |
) |
(145 |
) |
|||
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|||
Accounts payable |
|
75,883 |
|
64,892 |
|
42,517 |
|
|||
Accrued expenses and other current liabilities |
|
9,784 |
|
(5,742 |
) |
(12,733 |
) |
|||
Merchandise credit and gift card liabilities |
|
30,223 |
|
26,453 |
|
23,873 |
|
|||
Income taxes payable |
|
21,575 |
|
10,666 |
|
47,519 |
|
|||
Deferred rent and other liabilities |
|
19,348 |
|
30,425 |
|
17,827 |
|
|||
Net cash provided by operating activities |
|
613,632 |
|
660,435 |
|
607,031 |
|
|||
|
|
|
|
|
|
|
|
|||
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|||
Purchase of held-to-maturity investment securities |
|
(124,125 |
) |
(442,356 |
) |
(484,793 |
) |
|||
Redemption of held-to-maturity investment securities |
|
309,818 |
|
331,565 |
|
122,349 |
|
|||
Purchase of available-for-sale investment securities |
|
(1,443,115 |
) |
(1,524,835 |
) |
(2,414,778 |
) |
|||
Redemption of available-for-sale investment securities |
|
1,177,250 |
|
1,788,450 |
|
2,604,900 |
|
|||
Capital expenditures |
|
(317,501 |
) |
(220,394 |
) |
(181,363 |
) |
|||
Net cash used in investing activities |
|
(397,673 |
) |
(67,570 |
) |
(353,685 |
) |
|||
|
|
|
|
|
|
|
|
|||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|||
Proceeds from exercise of stock options |
|
43,393 |
|
34,953 |
|
31,080 |
|
|||
Excess tax benefit from stock-based compensation |
|
14,001 |
|
2,682 |
|
|
|
|||
Repurchase of common stock, including fees |
|
(301,002 |
) |
(598,244 |
) |
(350,151 |
) |
|||
Payment of deferred purchase price for acquisition |
|
(6,667 |
) |
(6,667 |
) |
(6,667 |
) |
|||
Net cash used in financing activities |
|
(250,275 |
) |
(567,276 |
) |
(325,738 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net (decrease) increase in cash and cash equivalents |
|
(34,316 |
) |
25,589 |
|
(72,392 |
) |
|||
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|||
Beginning of period |
|
247,697 |
|
222,108 |
|
294,500 |
|
|||
End of period |
|
$ |
213,381 |
|
$ |
247,697 |
|
$ |
222,108 |
|
See accompanying Notes to Consolidated Financial Statements.
27
Notes to Consolidated Financial Statements
Bed Bath
& Beyond Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
A. Nature of Operations
Bed Bath & Beyond Inc. and subsidiaries (the Company) is a nationwide chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS) and Harmon. The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware and health and beauty care items. As the Company operates in the retail industry, its results of operations are affected by general economic conditions and consumer spending habits.
B. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned.
All significant intercompany balances and transactions have been eliminated in consolidation.
C. Fiscal Year
The Companys fiscal year is comprised of the 52 or 53 week period ending on the Saturday nearest February 28. Accordingly, fiscal 2006 represented 53 weeks and ended on March 3, 2007; fiscal 2005 and fiscal 2004 represented 52 weeks and ended on February 25, 2006 and February 26, 2005, respectively.
D. Segments
The Company accounts for its operations as one operating segment.
E. Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In particular, judgment is used in areas such as inventory valuation, impairment of long-lived assets, goodwill and other indefinitely lived intangible assets, accruals for self insurance, litigation, store opening, expansion, relocation and closing costs, the provision for sales returns, vendor allowances, stock-based compensation and income taxes. Actual results could differ from these estimates.
F. Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the fair value option). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on the consideration of effects of the prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the first annual period ending after November 15, 2006 with early
28
application encouraged. The Company adopted SAB 108 in its fiscal fourth quarter. (See Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, Note 2).
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. As required by SFAS No. 158, the Company adopted the balance sheet recognition provisions at the end of fiscal 2006 on a prospective basis and will adopt the year end measurement date provisions in fiscal 2008. The adoption of this guidance did not have a material impact on the Companys consolidated financial statements. (See Employee Benefit Plans, Note 9).
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of FIN No. 48 will have a material impact on its consolidated financial statements.
In June 2006, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording these taxes in the Companys consolidated financial statements as the Company historically has presented sales excluding these taxes.
In October 2005, the FASB issued FASB Staff Position (FSP) 13-1, Accounting for Rental Costs Incurred during a Construction Period. FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 was effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1 did not have a material impact on the Companys consolidated financial statements.
G. Fair Value of Financial Instruments
The Companys financial instruments include cash and cash equivalents, investment securities, accounts payable and certain other liabilities. The Companys investment securities consist primarily of held-to-maturity debt securities which are stated at amortized cost and available-for-sale debt securities which are stated at their approximate fair value. The book value of all financial instruments is representative of their fair values with the exception of investment securities (See Investment Securities, Note 5).
H. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original maturities of three months or less to
29
be cash equivalents. Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within 5 business days, of $44.3 million and $34.9 million as of March 3, 2007 and February 25, 2006, respectively.
I. Investment Securities
Investment securities primarily consist of auction rate securities, U.S. Government Agency debt securities and municipal debt securities. Auction rate securities are securities with interest rates that reset periodically through an auction process. Auction rate securities are classified as available-for-sale and are stated at cost or par value which approximates fair value due to interest rates which reset periodically, typically within 35 days. As a result, there are no cumulative gross unrealized holding gains or losses relating to these auction rate securities. All income from these investments is recorded as interest income.
Primarily all other investment securities are classified as held-to-maturity because the Company has the ability and intent to hold these investments until maturity and are stated at amortized cost.
Premiums are amortized and discounts are accreted over the life of the security as adjustments to interest income using the effective interest method. Dividend and interest income are recognized when earned.
J. Inventory Valuation
Merchandise inventories are stated at the lower of cost or market. Inventory costs for BBB and Harmon are calculated using the retail inventory method and inventory cost for CTS is calculated using the first-in, first-out cost method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories.
At any one time, inventories include items that have been written down to the Companys best estimate of their realizable value. Judgment is required in estimating realizable value and factors considered are the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions.
The Company estimates its reserve for shrinkage throughout the year, based on historical shrinkage. Actual shrinkage is recorded at year-end based upon the results of the Companys physical inventory count. Historically, the Companys shrinkage has not been volatile.
K. Property and Equipment
Property and equipment are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets (forty years for buildings; five to fifteen years for furniture, fixtures and equipment; and three to five years for computer equipment and software). Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful life or the life of the lease. Depreciation expense is included within Selling, General and Administrative expenses.
The cost of maintenance and repairs is charged to earnings as incurred; significant renewals and betterments are capitalized. Maintenance and repairs amounted to $67.0 million, $54.2 million and $51.4 million for fiscal 2006, 2005 and 2004, respectively.
L. Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment annually or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash
30
flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
M. Goodwill and Other Indefinitely Lived Intangible Assets
The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. The Company has not historically recorded an impairment to its goodwill and other indefinitely lived intangible assets. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs.
Included within other assets in the accompanying consolidated balance sheets as of March 3, 2007 and February 25, 2006 is $147.6 million for goodwill and $19.9 million for the tradename of CTS, which are not subject to amortization.
N. Self Insurance
The Company utilizes a combination of insurance and self insurance for a number of risks including workers compensation, general liability, automobile liability and employee related health care benefits (a portion of which is paid by its employees). Liabilities associated with the risks that the Company retains are estimated by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Although the Companys claims experience has not displayed substantial volatility in the past, actual experience could materially vary from its historical experience in the future. Factors that affect these estimates include but are not limited to: inflation, the number and severity of claims and regulatory changes. In the future, if the Company concludes an adjustment to self insurance accruals is required, the liability will be adjusted accordingly.
O. Litigation
The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company reassesses the potential liability related to its pending litigation and revises its estimates, as appropriate. The ultimate resolution of these ongoing matters as a result of future developments could have a material impact on the Companys earnings. The Company cannot predict the nature and validity of claims which could be asserted in the future, and future claims could have a material impact on its earnings.
P. Deferred Rent
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease beginning as of the date the Company obtained possession of the leased premises. Deferred rent amounted to $74.9 million and $53.4 million as of March 3, 2007 and February 25, 2006, respectively.
Cash or lease incentives (tenant allowances) received pursuant to certain store leases are recognized on a straight-line basis as a reduction to rent over the lease term. The unamortized portion of tenant allowances is included in deferred rent and other liabilities. Tenant allowances amounted to $34.5 million and $21.1 million as of March 3, 2007 and February 25, 2006, respectively.
31
Q. Treasury Stock
The Companys Board of Directors has authorized repurchases of shares of its common stock for $1 billion in December 2006, for $200 million in January 2006, for $400 million in October 2005 and for $350 million in December 2004. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. During fiscal 2006, the Company repurchased approximately 7.5 million shares of its common stock at a total cost of approximately $301 million excluding brokerage fees. During fiscal 2005, the Company repurchased approximately 16.4 million shares of its common stock at a total cost of approximately $598 million excluding brokerage fees. During fiscal 2004, the Company repurchased approximately 8.8 million shares of its common stock at a total cost of $350 million excluding brokerage fees.
R. Revenue Recognition
Sales are recognized upon purchase by customers at the Companys retail stores or when shipped for products purchased from its websites. The value of point of sale coupons and point of sale rebates that result in a reduction of the price paid by the customer are recorded as a reduction of sales. Shipping and handling fees that are billed to a customer in a sale transaction are recorded in sales. Revenues from gift cards, gift certificates and merchandise credits are recognized when redeemed.
Sales returns are provided for in the period that the related sales are recorded based on historical experience. Although the estimate for sales returns has not varied materially from historical provisions, actual experience could vary from historical experience in the future if the level of sales return activity changes materially. In the future, if the Company concludes that an adjustment to the sales returns accrual is required due to material changes in the returns activity, the reserve will be adjusted accordingly.
S. Cost of Sales
Cost of sales includes the cost of merchandise, buying costs and costs of our distribution network including inbound freight charges, distribution facility costs, receiving costs and internal transfer costs.
T. Vendor Allowances
The Company receives allowances from vendors in the normal course of business for various reasons including direct cooperative advertising, purchase volume and reimbursement for other expenses. Annual terms for each allowance include the basis for earning the allowance and payment terms which vary by agreement. All vendor allowances are recorded as a reduction of inventory cost, except for direct cooperative advertising allowances which are specific, incremental and identifiable. The Company recognizes purchase volume allowances as a reduction of the cost of inventory in the quarter in which milestones are achieved. Advertising costs were reduced by direct cooperative allowances of $10.6 million, $9.4 million and $8.7 million for fiscal 2006, 2005 and 2004, respectively.
U. Store Opening, Expansion, Relocation and Closing Costs
Store opening, expansion, relocation and closing costs, including markdowns, asset residual values and projected occupancy costs, are charged to earnings as incurred.
V. Advertising Costs
Expenses associated with store advertising are charged to earnings as incurred. Net advertising costs amounted to $198.4 million, $158.2 million and $134.5 million for fiscal 2006, 2005 and 2004, respectively.
32
W. Stock-Based Compensation
The FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R) which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption of SFAS No. 123R requires additional accounting and disclosure related to income tax and cash flow effects resulting from stock-based compensation. The Company adopted SFAS No. 123R on August 28, 2005 (the date of adoption), the beginning of its third quarter of fiscal 2005, the year ended February 25, 2006. While SFAS No. 123R was not required to be effective until the first annual reporting period that began after June 15, 2005, early adoption was encouraged and the Company elected to adopt before the required effective date.
Under SFAS No. 123R, the Company uses a Black-Scholes option-pricing model to determine the fair value of its stock options. The Black-Scholes model includes various assumptions, including the expected life of stock options, the expected volatility and the expected risk free interest rate. These assumptions reflect the Companys best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. As a result, if other assumptions had been used, total stock-based compensation cost, as determined in accordance with SFAS No. 123R could have been materially impacted. Furthermore, if the Company uses different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods.
Also, under SFAS No. 123R, the Company is required to record stock-based compensation expense net of estimated forfeitures. The Companys forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates.
Prior to the third quarter of fiscal 2005, the Company applied the provisions of APB No. 25, Accounting for Stock Issued to Employees, as permitted under SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123 and complied with the disclosure requirements of SFAS 123. During the first half of fiscal 2005, which ended on August 27, 2005, the Company recognized compensation expense for restricted stock awards over the service period, but did not recognize compensation expense for stock options, since the Company historically has treated its stock options as having been granted at fair market value on the date of grant (however, see Review of Equity Grants and Procedures and Related Matters, Note 12 for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants). No compensation expense for stock-based awards was recognized in fiscal 2004.
X. Income Taxes
The Company files a consolidated Federal income tax return. Income tax returns are filed with each state and territory in which the Company conducts business.
The Company accounts for its income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Companys 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.
33
Y. Earnings per Share
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding including the dilutive effect of stock-based awards as calculated under the treasury stock method.
Stock-based awards of approximately 8.6 million, 4.9 million and 2.8 million shares were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive for fiscal 2006, 2005 and 2004, respectively.
2. STAFF ACCOUNTING BULLETIN NO. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS
As discussed under Recent Accounting Pronouncements in Note 1, in September 2006, the SEC issued SAB 108. The transition provisions of SAB 108 permit the Company to adjust for the cumulative effect on retained earnings of immaterial errors relating to prior years. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended. The Company adopted SAB 108 at the end of fiscal 2006. In accordance with SAB 108, the Company has adjusted beginning retained earnings for fiscal 2006 in the accompanying consolidated financial statements for the items described below. The Company considers these adjustments to be immaterial to prior periods.
Review of Equity Grants and Procedures and Related Matters
In June 2006, the Companys Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Companys Board of Directors.
The review of stock option grants and procedures identified various deficiencies in the process of granting and documenting stock options and restricted shares described below. As a result of the deficiencies, the special committee recommended, among other things, that the Company revise the measurement dates under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for 16 annual option grant dates, 26 monthly grant dates and 2 special grant dates (revisions of 2 annual, 4 monthly and 1 special grant dates have no accounting impact because prices on the revised dates were lower than on the measurement dates previously recorded by the Company). As a result of these revised measurement dates and the correction of various other errors relating to the accounting for equity-based compensation, the Company has determined that from fiscal year 1993 through fiscal 2005, it had certain unrecorded non-cash equity-based compensation charges associated with its equity-based compensation plans.
As a result, the Company has recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, including related tax items. In accordance with the provisions of SAB 108, the Company decreased beginning retained earnings for fiscal year 2006 by $61.8 million within the accompanying Consolidated Financial Statements.
The Company does not believe that the net effect of this adjustment was material, either quantitatively or qualitatively, in any of the years covered by the review. In reaching that determination, the following quantitative measures were considered:
34
(in thousands) |
|
|
|
|
|
Net Adjustment, After |
|
||
Fiscal Year |
|
Net Adjustment, |
|
Net Income |
|
Tax as a % of Net |
|
||
2005 |
|
$ |
11,488 |
|
$ |
572,847 |
|
2.01 |
% |
2004 |
|
12,493 |
|
504,964 |
|
2.47 |
% |
||
2003 |
|
13,607 |
|
399,470 |
|
3.41 |
% |
||
2002 |
|
8,600 |
|
302,179 |
|
2.85 |
% |
||
2001 |
|
7,391 |
|
219,599 |
|
3.37 |
% |
||
2000 |
|
5,272 |
|
171,922 |
|
3.07 |
% |
||
1999 |
|
1,340 |
|
131,229 |
|
1.02 |
% |
||
1998 |
|
923 |
|
97,346 |
|
0.95 |
% |
||
1997 |
|
405 |
|
73,142 |
|
0.55 |
% |
||
1996 |
|
163 |
|
55,015 |
|
0.30 |
% |
||
1995 |
|
56 |
|
39,459 |
|
0.14 |
% |
||
1994 |
|
22 |
|
30,013 |
|
0.07 |
% |
||
1993 |
|
2 |
|
21,887 |
|
0.01 |
% |
||
Total |
|
$ |
61,762 |
|
|
|
|
|
|
Rent and Lease Accounting
The Company accounts for scheduled rent increases contained in its leases on a straight-line basis over the term of the lease. In fiscal 2004, due to clarification by the Office of the Chief Accountant of the SEC, the Company changed its method of accounting to define the beginning of the lease term as the date the Company obtained possession of the leased premises. Prior to fiscal 2004, the Companys method of accounting defined the beginning of the lease term as the date the Company commenced lease payments. The Company has recorded an adjustment to retained earnings and deferred rent and other liabilities to reflect these accounts as if the Company had always defined the beginning of the lease term as the date the Company obtained possession of the leased premises and to correspondingly increase deferred tax assets. The Company does not believe that the net effect of this adjustment which includes fiscal years 1993 through 2003 was material.
Impact of Adjustments
The impact of each of the items noted above, net of tax, on fiscal 2006 beginning balances are presented below:
(in thousands) |
|
|
Review of Stock |
|
Rent & Lease |
|
Total |
|
|||
Other Assets |
|
$ |
11,273 |
|
$ |
4,738 |
|
$ |
16,011 |
|
|
Income Taxes Payable |
|
(34,747 |
) |
|
|
(34,747 |
) |
||||
Deferred Rent and Other Liabilities |
|
|
|
(15,588 |
) |
(15,588 |
) |
||||
Additional Paid-in Capital |
|
(38,288 |
) |
|
|
(38,288 |
) |
||||
Retained Earnings |
|
61,762 |
|
10,850 |
|
72,612 |
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
35
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(in thousands) |
|
|
March 3, |
|
February 25, |
|
||
|
|
|
|
|
|
|||
Land and buildings |
|
$ |
112,527 |
|
$ |
49,900 |
|
|
Furniture, fixtures and equipment |
|
598,892 |
|
517,469 |
|
|||
Leasehold improvements |
|
651,737 |
|
528,109 |
|
|||
Computer equipment and software |
|
286,943 |
|
231,047 |
|
|||
|
|
1,650,099 |
|
1,326,525 |
|
|||
|
|
|
|
|
|
|||
Less: Accumulated depreciation and amortization |
|
(720,592 |
) |
(587,783 |
) |
|||
|
|
$ |
929,507 |
|
$ |
738,742 |
|
4. LINES OF CREDIT
At March 3, 2007, the Company maintained two uncommitted lines of credit of $100 million and $75 million, with expiration dates of September 3, 2007 and February 28, 2008, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. In addition, under these uncommitted lines of credit, the Company can obtain unsecured standby letters of credit. During fiscal 2006, the Company did not have any direct borrowings under the uncommitted lines of credit. As of March 3, 2007, there was approximately $6.9 million of outstanding letters of credit and approximately $40.0 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.
At February 25, 2006, the Company maintained two uncommitted lines of credit of $100 million and $75 million. These uncommitted lines of credit were utilized for letters of credit in the ordinary course of business. During fiscal 2005, the Company did not have any direct borrowings under the uncommitted lines of credits. As of February 25, 2006, there was approximately $11.5 million of outstanding letters of credit and approximately $33.7 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs.
5. INVESTMENT SECURITIES
The Companys investment securities consist of held-to-maturity U.S. Government Agency debt securities and municipal debt securities, which are stated at amortized cost; available-for-sale auction rate securities, which are stated at cost or par value which approximates fair value; and trading securities, which are stated at fair market value. The securities as of March 3, 2007 and February 25, 2006 are as follows:
36
(in millions) |
|
|
March 3, |
|
February 25, |
|
||
Held-to-maturity securities: |
|
|
|
|
|
|||
Short term |
|
$ |
393.5 |
|
$ |
291.6 |
|
|
Long term |
|
102.7 |
|
393.9 |
|
|||
|
|
496.2 |
|
685.5 |
|
|||
Available-for-sale securities: |
|
|
|
|
|
|||
Short term |
|
378.0 |
|
112.1 |
|
|||
Long term |
|
|
|
|
|
|||
|
|
378.0 |
|
112.1 |
|
|||
Trading Securities: |
|
|
|
|
|
|||
Short term |
|
3.4 |
|
0.4 |
|
|||
Total investment securities |
|
$ |
877.6 |
|
$ |
798.0 |
|
Those investment securities with contractual maturity dates or interest reset dates within one year are classified as short term investment securities. All other investment securities are classified as long term investment securities. The contractual maturity dates of held-to-maturity investment securities extend to January 2018 and the available-for-sale investment securities do not have stated contractual maturities due to the nature of the investment vehicle. Actual maturities could differ from contractual maturities because borrowers have the right to call certain obligations.
As of March 3, 2007, the fair value of short term and long term held-to-maturity securities were $393.0 million and $102.5 million, respectively. As of February 25, 2006, the fair value of short term and long term held-to-maturity securities were $289.8 million and $390.0 million, respectively.
As of March 3, 2007 and February 25, 2006, the Company had gross unrecognized holding losses of $1.3 million and $5.6 million, respectively, relating to held-to-maturity investment securities with fair values totaling $405.8 million and $678.8 million, respectively. As of March 3, 2007, $361.0 million of these investment securities have been in a continuous unrecognized loss position for more than 12 months. Unrecognized holding losses typically will not result in a recognized expense if the underlying securities are held to maturity as intended. Gross unrecognized holding gains relating to held-to-maturity investment securities were approximately $0.6 million as of March 3, 2007 and were not material as of February 25, 2006. As of March 3, 2007 and February 25, 2006, the Company had no cumulative unrecognized holding gains or losses relating to its available-for-sale investment securities.
6. PROVISION FOR INCOME TAXES
The components of the provision for income taxes are as follows:
|
FISCAL YEAR ENDED |
|
|||||||||
(in thousands) |
|
|
March 3, |
|
February
25, |
|
February 26, |
|
|||
Current: |
|
|
|
|
|
|
|
||||
Federal |
|
$ |
375,800 |
|
$ |
331,930 |
|
$ |
271,061 |
|
|
State and local |
|
50,060 |
|
36,188 |
|
31,106 |
|
||||
|
|
425,860 |
|
368,118 |
|
302,167 |
|
||||
|
|
|
|
|
|
|
|
||||
Deferred: |
|
|
|
|
|
|
|
||||
Federal |
|
(81,067 |
) |
(24,681 |
) |
2,715 |
|
||||
State and local |
|
(6,158 |
) |
(1,193 |
) |
1,341 |
|
||||
|
(87,225 |
) |
(25,874 |
) |
4,056 |
|
|||||
|
|
$ |
338,635 |
|
$ |
342,244 |
|
$ |
306,223 |
|
|
37
At March 3, 2007 and February 25, 2006, included in other current assets and in other assets is a net current deferred income tax asset of $119.4 million and $71.5 million, respectively, and a net noncurrent deferred income tax asset of $58.5 million and $8.2 million, respectively. These amounts represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Companys deferred tax assets and liabilities consist of the following:
(in thousands) |
|
|
March 3, |
|
February 25, |
|
||
|
|
|
|
|
|
|||
Deferred Tax Assets: |
|
|
|
|
|
|||
Inventories |
|
$ |
28,751 |
|
$ |
29,859 |
|
|
Deferred rent and other rent credits |
|
42,643 |
|
29,130 |
|
|||
Insurance |
|
36,398 |
|
26,404 |
|
|||
Stock-based compensation |
|
46,696 |
|
9,547 |
|