Overview
The Company has accounted for its operations as two operating segments: North
American Retail and Institutional Sales, which did not meet the quantitative
thresholds under GAAP and, therefore, was not a reportable segment. The
Institutional Sales operating segment was comprised of
The Company has undertaken significant changes over the past year, including extensive changes to its Board of Directors and executive leadership, as well as development of essential strategies and plans to focus on and grow its core Home, Baby, Beauty and Wellness businesses for long-term success. In recent months, as the world responds to the unparalleled challenge of the COVID-19 pandemic, the Company has taken aggressive and thoughtful steps to safeguard its people and communities while it continues to serve customers. As it did with many other businesses, the COVID-19 pandemic served as a catalyst to accelerate the pace of change and innovation across the Company, advancing ongoing efforts to reset the Company's cost structure and build a modern, durable model for long-term profitable growth.
As part of its business transformation plan, the Company is pursuing a comprehensive cost restructuring program, to drive profit improvement over the next two-to-three years. The Company expects to reinvest a portion of the expected cost savings into future growth initiatives. Key components of the expected profit improvement include: •Approximately$100 million in annual savings from its previously disclosed store network optimization project which includes the planned closure of approximately 200 mostlyBed Bath & Beyond stores over the next two years. During the third quarter of fiscal 2020, the Company initiated store closing activities for more than 70Bed Bath & Beyond stores and expects to close approximately 120Bed Bath & Beyond stores by the end of fiscal 2020. The Company continues to believe that its physical store channel is an asset for its transformation into a digital-first company, especially with new omni-fulfillment capabilities in Buy-Online-Pick-Up-In-Store (BOPIS), Curbside Pickup and Same Day Delivery; •Approximately$200 million in annual savings from product sourcing, through renegotiations with existing vendors; and •Approximately$100 to$150 million in annual selling, general and administrative expense savings from continued optimization of its corporate overhead cost structure and reductions in other discretionary expense. During the second quarter of fiscal 2020, the Company implemented a workforce reduction of approximately 2,800 roles from across its corporate headquarters and retail stores, designed to further reduce layers at the corporate level, significantly reposition field operations to better serve customers in a digital-first environment, and realign technology, supply chain and merchandising teams to support the Company's strategic growth initiatives. In connection with the above restructuring and transformation initiatives, the Company recorded$30.7 million and$61.6 million , respectively, within cost of sales and restructuring and transformation initiative expenses in its consolidated statements of operations for the three and nine months endedNovember 28, 2020 for costs associated with its planned store closures as part of the network optimization plan for which the store closure process has commenced, workforce reduction and other transformation initiatives. At this point, the Company is unable to estimate the amount or range of amounts expected to be incurred in connection with future store closures and will provide such estimates as they become available. -24-
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OnOctober 28, 2020 , the Company held its first Investor Day to unveil the details of a comprehensive strategy designed to unlock growth and drive significant shareholder value as it rebuilds authority in the Home, Baby and Beauty & Wellness markets. This strategy includes resetting its assortment, and providing a more curated, inspirational and differentiated product collection across categories; offering a clear and compelling price-value proposition designed to increase relevance with customers while at the same time driving productivity and cost savings; leveraging its stores as a strategic asset that deliver fast and convenient shopping for its digital-first customers; and modernizing operational proficiencies in an effort to deliver a technology-powered foundation to support sustainable growth, improved margins and greater cash generation. OnDecember 14, 2020 , the Company announced that it entered into a definitive agreement to sell Cost Plus World Market toKingswood Capital Management , aLos Angeles -based private equity firm, for$110 million , subject to certain working capital and other adjustments. The transaction is expected to close during the fourth quarter of fiscal 2020, subject to customary closing conditions. AtNovember 28, 2020 , certain assets and liabilities related toCost Plus World Market were classified as held for sale on the Company's consolidated balance sheet. OnOctober 11, 2020 , the Company entered into a definitive agreements to sellChristmas Tree Shops ("CTS") toHandil Holdings LLC and to sell one of the CTS distribution facilities to an institutional buyer, with a leaseback term of nine months, to provide business continuity to the Company for some of its operations currently using the facility. These transactions were completed during the third quarter of fiscal 2020, generating approximately$233.8 million in proceeds, subject to certain working capital and other adjustments. OnOctober 11, 2020 , the Company entered into a definitive agreement to sellLinen Holdings toThe Linen Group, LLC , an affiliate ofLion Equity Partners . OnOctober 24, 2020 , the Company completed the sale ofLinen Holdings for approximately$11.9 million , subject to certain working capital and other adjustments. OnFebruary 14, 2020 , the Company entered into a definitive agreement to sellPersonalizationMall.com ("PMall") to 1-800-FLOWERS.COM for$252 million , subject to certain working capital and other adjustments. The buyer was required to close the PMall transaction onMarch 30, 2020 , but failed to do so. Accordingly, the Company filed an action to require the buyer to close the transaction. OnJuly 20, 2020 , the Company entered into a settlement agreement with respect to the litigation. Under this agreement, 1-800-FLOWERS.COM agreed to move forward with its purchase of PMall for$245 million , subject to certain working capital and other adjustments. The transaction closed onAugust 3, 2020 . During the first quarter of fiscal 2020, the Company also soldOne Kings Lane to a third party for an amount that was not material. The net proceeds from these transactions and any other potential cash-generating transactions could be used to reinvest in the Company's core business operations to drive growth, fund share repurchases, reduce the Company's outstanding debt, or some combination of these. The integration of retail store and digital channels allows the Company to provide its customers with a seamless omni channel shopping experience. Store purchases are primarily fulfilled from that store's inventory or may also be shipped to a customer from one of the Company's distribution facilities, from a vendor, or from another store. Other purchases, including web and mobile, can be shipped to a customer from the Company's distribution facilities, directly from vendors, or from a store. Customers can also choose to pick up orders using the Company's newly introduced BOPIS and contactless Curbside Pickup services, as well as return online purchases to a store. Customers can also make purchases through one of the Company's customer contact centers and in-store throughThe Beyond Store , the Company's proprietary web-based platform. These capabilities allow the Company to better serve customers across various channels. Operating in the highly competitive retail industry, the Company's performance, along with other retail companies, is influenced by a number of factors including, but not limited to: general economic conditions including the housing market, unemployment levels and commodity prices; the overall macroeconomic environment and related changes in the retailing environment; consumer preferences, spending habits and adoption of new technologies; unusual weather patterns and natural disasters, including pandemics; competition from existing and potential competitors across all channels; potential supply chain disruption; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company's plans for new stores; and the ability to assess and implement technologies in support of the Company's development of its omnichannel capabilities. The Company cannot predict whether, when or the manner in which these factors could affect the Company's operating results. -25-
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In
The Company has and will continue to seek opportunities to mitigate the impact
of the COVID-19 pandemic, including, among others, renegotiating payment terms
for goods, services and rent, managing inventory levels, and reducing
discretionary spending such as business travel and advertising and expense
associated with the maintenance of stores that were temporarily closed. The
COVID-19 pandemic materially adversely impacted the Company's results of
operations and cash flows in fiscal 2020 to date, and could continue to
materially impact results of operations and cash flows as well as the Company's
financial condition. Given the uncertainties regarding the spread of the virus,
the timing of the economic recovery and the resurgence of the virus, the related
financial impact cannot be reasonably predicted or estimated at this time.
On
The following represents an overview of the Company's financial performance for the periods indicated:
•Net sales for the three months ended
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?Comparable sales for the three months endedNovember 28, 2020 increased by approximately 2.4%, compared to a decrease of approximately 8.3% for the three months endedNovember 30, 2019 . As a result of the extended closure of the majority of the Company's stores due to the COVID-19 pandemic and the Company's policy of excluding extended store closures from its comparable sales calculation, the Company believes that comparable sales were not a meaningful metric for the first quarter of fiscal 2020 and, therefore, are not a meaningful metric for the nine months endedNovember 28, 2020 . For the nine months endedNovember 30, 2019 , comparable sales decreased by approximately 7.2%. Comparable sales include sales consummated through all retail channels which have been operating for twelve full months following the opening period (typically four to six weeks). The Company is an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store, online, with a mobile device or through a customer contact center, and have it fulfilled, in most cases, either through in-store customer pickup or by direct shipment to the customer from one of the Company's distribution facilities, stores or vendors. Sales consummated on a mobile device while physically in a store location and BOPIS orders are recorded as customer facing digital channel sales. Customer orders taken in-store by an associate throughThe Beyond Store , the Company's proprietary, web-based platform, are recorded as in-store sales. Prior to the Company implementing BOPIS and contactless Curbside Pickup services, customer orders reserved online and picked up in a store were recorded as in-store sales. Sales originally consummated from customer facing digital channels and subsequently returned in-store are recorded as a reduction of in-store sales. Stores relocated or expanded are excluded from comparable sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store's sales are not considered comparable once the store closing process has commenced. Stores impacted by unusual and unexpected events outside the Company's control, including the COVID-19 pandemic, severe weather, fire or floods, are excluded from comparable sales for the period of time that such event would cause a meaningful disparity in sales over the prior period.One Kings Lane and PMall are excluded from the comparable sales calculation beginning in the second quarter of fiscal 2020 due to their divestiture andChristmas Tree Shops is excluded from the comparable sales calculation beginning in fiscal November of 2020 due to its divestiture.Linen Holdings has always been excluded from the comparable sales calculation, as it represents non-retail activity. •Gross profit for the three months endedNovember 28, 2020 was$956.6 million , or 36.5% of net sales, compared with$913.8 million , or 33.1% of net sales, for the three months endedNovember 30, 2019 . Gross profit for the nine months endedNovember 28, 2020 was$2.293 billion , or 34.7% of net sales, compared with$2.528 billion , or 31.4% of net sales, for the nine months endedNovember 30, 2019 . The Company's gross profit margin in the three and nine months endedNovember 28, 2020 includes a net benefit of approximately$30.4 million and$53.4 million , respectively, from the reduction of incremental markdown reserves taken in the prior year, partially offset by an increase for restructuring and transformation initiatives. The Company's gross profit margin in the prior year reflected an incremental reserve for future markdowns of approximately$169.8 million related to the Company's transformation initiatives, which was an incremental charge to the actual markdowns recorded in the second and third quarters of fiscal 2019. •Selling, general and administrative expenses ("SG&A") for the three months endedNovember 28, 2020 were$890.7 million , or 34.0% of net sales, compared with$931.8 million , or 33.8% of net sales, for the three months endedNovember 30, 2019 . SG&A for the nine months endedNovember 28, 2020 were$2.461 billion , or 37.2% of net sales, compared with$2.705 billion , or 33.6% of net sales, for the nine months endedNovember 30, 2019 . •Impairments, including on assets held for sale, for the three and nine months endedNovember 28, 2020 were$58.0 million or 2.2% of net sales, and$172.4 million or 2.6% of net sales, respectively, which included a loss on business held for sale of$54.0 million to remeasure Cost Plus to the lower of its carrying value or fair value less costs to sell. Impairment charges for the three and nine months endedNovember 30, 2019 were$11.8 million , or 0.4% of net sales and$441.4 million or 5.5% of net sales, respectively. •Restructuring and transformation expenses during the three and nine months endedNovember 28, 2020 were$16.8 million and$47.6 million , respectively, primarily related to severance costs recorded in connection with the workforce reduction and store network optimization programs described above, as well as other restructuring activities. •Loss (gain) on sale of business included a$113.9 million loss for the three months endedNovember 28, 2020 and a$75.6 million gain for the nine months endedNovember 28, 2020 , which included losses on the sales ofLinen Holdings and CTS during the third quarter of fiscal 2020 and a gain on the sale of PMall during the second quarter of 2020. -27-
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•Interest expense, net for the three and nine months endedNovember 28, 2020 was$17.8 million and$58.3 million , respectively, compared with$17.2 million and$49.4 million , respectively, for the three and nine months endedNovember 30, 2019 . •Gain on extinguishment of debt for the nine months endedNovember 28, 2020 of$77.0 million related to partial repayment of senior unsecured notes inAugust 2020 . •The effective tax rate for the three and nine months endedNovember 28, 2020 was 46.4% and 45.7%, respectively, as compared with 17.9% for both the three and nine months endedNovember 30, 2019 . For the three and nine months endedNovember 28, 2020 , the effective tax rate includes the impact of the benefits relating to the salesCTS and Linen Holdings and relating to the loss on Cost Plus that is classified as held-for sale, partially offset by the impact of impairment charges for tradename and certain store-level assets, and other discrete tax items. The effective tax rate for the nine months endedNovember 28, 2020 also includes a$43.7 million benefit related to fiscal 2019 net operating loss carry-back under the CARES Act, as described above, and the gain on sale of PMall. For the three and nine months endedNovember 30, 2019 , the effective tax rate reflects the impact of charges for goodwill and other impairments and severance costs, portions of which are non-deductible for tax purposes, and other discrete tax items resulting in net after tax costs of approximately$3.5 million and$10.5 million , respectively. •For the three months endedNovember 28, 2020 , net loss per diluted share was$(0.61) ($(75.4) million ), as compared with net loss per diluted share of$(0.31) ($(38.6) million ) for three months endedNovember 30, 2019 . The unfavorable change in net loss per diluted share for the three months endedNovember 28, 2020 was due to higher net loss due to the items described above and the impact of the Company's repurchases of common stock. Net loss per diluted share for the three months endedNovember 28, 2020 was unfavorably impacted by$0.69 per share, attributable to the net loss on sale of businesses, charges recorded in connection with the restructuring and transformation initiatives, and non-cash impairment charges related to a business held for sale, tradename and certain store-level assets, partially offset by a benefit from the reduction of non-recurring inventory reserves. Net loss per diluted share for the three months endedNovember 30, 2019 included a net benefit of approximately$0.07 per diluted share from the favorable impact from an adjustment to the incremental inventory reserve for future markdowns related to the Company's transformation initiatives, partially offset by a non-cash charge for the impairment of certain store-level assets incurred during the fiscal third quarter of 2019. For the nine months endedNovember 28, 2020 , net loss per diluted share was$(1.29) ($(159.8) million ), as compared with net loss per diluted share of$(4.40) ($(548.4) million ) for the nine months endedNovember 30, 2019 . The favorable change in net loss per diluted share for the nine months endedNovember 28, 2020 reflected the improvement in earnings due to the items described above and the impact of the Company's repurchases of common stock. Net loss per diluted share for the nine months endedNovember 28, 2020 includes the net favorable impact of$0.09 per share related to the net gain on sale of businesses, gain on partial extinguishment of debt and a benefit from the reduction of non-recurring inventory reserves, partially offset by non-cash impairment charges related to a business held for sale, tradename and certain store-level assets and charges recorded in connection with the restructuring and transformation initiatives. Net loss per diluted share for the nine months endedNovember 30, 2019 included the unfavorable impact of$4.48 per diluted share during the nine months endedNovember 30, 2019 related to goodwill and other impairment charges, including non-cash store impairment charges, an incremental reserve for future markdowns related to the Company's transformation initiatives, severance costs and shareholder activity costs. Capital expenditures for the nine months endedNovember 28, 2020 andNovember 30, 2019 were$117.3 million and$188.4 million , respectively. In the first nine months of fiscal 2020, approximately 65% of the capital expenditures related to pre-planned technology projects, including inventory and warehouse management capabilities such as advanced allocation logic and replenishment strategies to meet changing customer needs. The remaining capital expenditures were primarily related to investments in existing stores.
The Company continues to review and prioritize its capital needs and remains committed to making the required investments in its infrastructure to help position the Company for continued growth and success. Key areas of investment include: continuing to improve the presentation and content as well as the functionality, general search and navigation across its customer facing digital channels; improving customer data integration and customer relations management capabilities; continuing to enhance service offerings to its customers; continuing to strengthen and deepen its information technology, analytics, marketing and e-commerce groups; and creating more flexible fulfillment options designed to improve the Company's delivery capabilities and lower the Company's shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling customer experience across the Company's omnichannel retail platform. As a result of the COVID-19 pandemic, the Company is prioritizing essential capital expenditures for fiscal 2020 to drive strategic growth plans, including investments in digital, BOPIS and Curbside Pickup service offerings, and has postponed certain previously planned capital expenditures, including some store remodels.
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During the nine months endedNovember 28, 2020 , the Company opened a total of five new stores and closed 30 stores. The Company plans to continue to actively manage its real estate portfolio in order to permit store sizes, layouts, locations and offerings to evolve over time to optimize market profitability and will renovate or reposition stores within markets when appropriate. Over the past several years, the Company's pace of its store openings has slowed, and the Company has increased the number of store closings. The Company has approximately 150 store leases that are up for renewal in the remainder of 2020, which provide opportunity to evaluate additional store closures and relocations. Some portion of these stores will be included in the Company's store network optimization program discussed above. During fiscal 2016, the Company's Board of Directors authorized a quarterly dividend program. During the nine months endedNovember 28, 2020 andNovember 30, 2019 , total cash dividends of$23.1 million and$64.3 million were paid, respectively. InMarch 2020 , the Company suspended its future quarterly declarations of cash dividends as a result of the COVID-19 pandemic. Any future quarterly cash dividend payments on its common stock will be subject to the determination by the Board of Directors, based on an evaluation of the Company's earnings, financial condition and requirements, business conditions and other factors, including the restrictions on the payment of dividends under the secured asset-based revolving credit facility (see "Long Term Debt," Note 11). OnOctober 28, 2020 , the Company entered into an accelerated share repurchase agreement ("ASR Agreement") withJPMorgan Chase Bank, National Association ("JP Morgan") to repurchase$225.0 million of the Company's common stock. Pursuant to the ASR Agreement, the Company paid$225.0 million to JP Morgan and received an initial delivery of 4.5 million shares of common stock, which was accounted for as a treasury stock transaction and resulted in a$92.4 million increase in treasury stock and reduced the number of weighted average shares outstanding. The final number of shares to be repurchased under the ASR Agreement will be based on the average of the daily volume-weighted average price of common stock during the term of the ASR Agreement, less a discount. The Company also recorded a$132.6 million decrease in additional paid in capital upon the inception of the ASR Agreement. At final settlement, which is expected to occur during the Company's fiscal 2020 fourth quarter ending onFebruary 27, 2021 , JP Morgan may be required to deliver additional shares of common stock to the Company or, under certain circumstances, the Company may elect to either deliver shares or make a cash payment to JP Morgan. Subsequent to the end of the fiscal third quarter of 2020, onDecember 11, 2020 , the Company's Board of Directors approved a new accelerated share repurchase program to repurchase an aggregate of$150 million of the Company's common stock, subject to market conditions, which is in addition to the$225.0 million accelerated share repurchase program announced in the third quarter of fiscal 2020, both of which are expected to be completed by the end of fiscal 2020. The Company also expanded its existing share repurchase authorization by an additional$150 million , which increased the total share repurchase authorization to$12.775 billion . In addition, during the three and nine months endedNovember 28, 2020 , the Company repurchased approximately 0.1 million shares and 0.6 million shares, respectively, of its common stock to cover employee related taxes withheld on vested restricted stock, restricted stock units and performance stock unit awards, at a total cost of approximately$1.7 million and$4.7 million , respectively, bringing the aggregate total of common stock repurchased to approximately 222.3 million shares for a total cost of approximately$10.8 billion since the initial authorization inDecember 2004 . During the three and nine months endedNovember 30, 2019 , the Company repurchased approximately 0.1 million and 6.8 million shares, respectively, of its common stock at a total cost of approximately$1.2 million and$99.1 million , respectively. Decisions regarding share repurchases are within the discretion of the Board of Directors, and will be influenced by a number of factors, including the price of the Company's common stock, general business and economic conditions, the Company's financial condition and operating results, the emergence of alternative investment or acquisition opportunities, changes in business strategy and other factors. The Company's share repurchase program could change, and would be influenced by several factors, including business and market conditions, such as the impact of the COVID-19 pandemic on the Company's stock price. The Company reviews its alternatives with respect to its capital structure on an ongoing basis. Any future share repurchases will be subject to the determination of the Board of Directors, based on an evaluation of the Company's earnings, financial condition and requirements, business conditions and other factors, including the restrictions on share repurchases under the secured asset-based revolving credit facility (see "Long Term Debt," Note 11 to the accompanying consolidated financial statements). -29-
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Results of OperationsNet Sales Net sales for the three months endedNovember 28, 2020 were$2.618 billion , a decrease of$140.9 million or approximately 5.1%, compared to$2.759 billion of net sales for the corresponding quarter last year. Net sales for the nine months endedNovember 28, 2020 were$6.614 billion , a decrease of$1.4 billion , or approximately 17.9%, compared to net sales of$8.052 billion for the corresponding nine months last year. The decrease in net sales for the nine months endedNovember 28, 2020 was primarily due to the temporary nationwide closure of the majority of the Company's stores beginningMarch 23, 2020 due to the COVID-19 pandemic, except for most stand-alone Baby and Harmon stores, which remained open during such period, subject to state and local regulations. Nearly all of the Company's stores have reopened as ofJuly 2020 . The declines in net sales during the third quarter and year-to-date period also reflected the impacts of business divestitures described above. Net sales consummated through digital channels increased approximately 75% and 82%, respectively, and net sales consummated in-store declined approximately 17% and 37%, respectively, during the three and nine months endedNovember 28, 2020 . Net sales consummated through digital channels represented approximately one third of the Company's net sales for the three and nine months endedNovember 28, 2020 . Comparable sales for the three months endedNovember 28, 2020 increased by approximately 2.4%, compared to a decrease of approximately 8.3% for the three months endedNovember 30, 2019 . The increase in comparable sales for the three months endedNovember 28, 2020 was due to an increase in the average transaction amount, partially offset by a decrease in the number of transactions. As a result of the extended closure of the majority of the Company's stores due to the COVID-19 pandemic and the Company's policy of excluding extended store closures from its comparable sales calculation, the Company believes that comparable sales were not a meaningful metric for the first quarter of fiscal 2020 and, therefore, are not a meaningful metric for the nine months endedNovember 28, 2020 . For the nine months endedNovember 30, 2019 , comparable sales decreased by approximately 7.2%. The Company's comparable sales metric considers sales consummated through all retail channels - in-store, online, with a mobile device or through a customer contact center. The Company's omnichannel environment allows its customers to use more than one channel when making a purchase. The Company believes in an integrated and seamless customer experience. A few examples are: a customer may be assisted by an in-store associate to create a wedding or baby registry, while the guests may ultimately purchase a gift from the Company's websites; or a customer may research a particular item, and read other customer reviews on the Company's websites before visiting a store to consummate the actual purchase; or a customer may buy an item online for in-store or curbside pickup; or while in a store, a customer may make the purchase on a mobile device for in home delivery from either a distribution facility, a store or directly from a vendor. In addition, the Company accepts returns in-store without regard to the channel in which the purchase was consummated, therefore resulting in reducing store sales by sales originally consummated through customer facing digital channels. As the Company's retail operations are integrated and it cannot reasonably track the channel in which the ultimate sale is initiated, the Company can however, provide directional information on where the sale was consummated. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings (including furniture and wall décor), consumables and certain juvenile products. Sales of domestics merchandise and home furnishings accounted for approximately 35.7% and 64.3% of net sales, respectively, for the three months endedNovember 28, 2020 , and approximately 35.0% and 65.0% of net sales, respectively, for the three months endedNovember 30, 2019 . Sales of domestics merchandise and home furnishings accounted for approximately 35.4% and 64.6% of net sales, respectively, for the nine months endedNovember 28, 2020 and approximately 36.4% and 63.6% of net sales, respectively, for the nine months endedNovember 30, 2019 . Gross Profit Gross profit for the three months endedNovember 28, 2020 was$956.6 million , or 36.5% of net sales, compared with$913.8 million , or 33.1% of net sales, for the three months endedNovember 30, 2019 . Gross profit for the nine months endedNovember 28, 2020 was$2.293 billion , or 34.7% of net sales, compared with$2.528 billion , or 31.4% of net sales, for the nine months endedNovember 30, 2019 . The increase in gross profit margin as a percentage of net sales for the three and nine months endedNovember 28, 2020 was primarily attributable to an increase in product mix, including lower coupon expense and the leverage of distribution and fulfillment costs, partially offset by the impact of channel mix, including higher net-direct-to-customer shipping expense. In addition, the Company's gross profit margin for the three and nine months endedNovember 28, 2020 includes a net benefit of approximately$30.4 million and$53.4 million , respectively, from the reduction of incremental markdown reserves taken in the prior year, partially offset by an increase for restructuring and transformation initiatives. The Company's gross profit margin in the prior year reflected an incremental reserve for future markdowns of -30-
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approximately$169.8 million related to the Company's transformation initiatives, which was an incremental charge to the actual markdowns recorded in the second and third quarters of fiscal 2019. In addition, the Company's cost of sales includes cost of merchandise, buying costs and costs of the Company's distribution network, including inbound freight charges, distribution facility costs, receiving costs, internal transfer costs and shipping and handling costs. During the first quarter of fiscal 2020, the Company reevaluated the costs included in cost of sales as it continues its focus on its digital and omni fulfillment capabilities, including the introduction of BOPIS and contactless Curbside Pickup services. The reevaluation of the costs included in cost of sales favorably impacted the change in gross profit margin as a percentage of net sales by approximately 150 basis points and 200 basis points, respectively, during the three and nine months endedNovember 28, 2020 . This favorable impact was fully offset by a corresponding unfavorable impact in the change in SG&A as a percentage of net sales and resulted in no net impact to the consolidated statement of operations. Selling, General and Administrative Expenses SG&A for the three months endedNovember 28, 2020 was$890.7 million , or 34.0% of net sales, compared with$931.8 million , or 33.8% of net sales, for the three months endedNovember 30, 2019 . The slight increase in SG&A as a percentage of net sales was primarily due to increased occupancy costs (primarily rent), largely offset by lower advertising expenses and payroll and related expenses. SG&A for the nine months endedNovember 28, 2020 was$2.461 billion , or 37.2% of net sales, compared with$2.705 billion , or 33.6% of net sales, for the nine months endedNovember 30, 2019 . The increase in SG&A as a percentage of net sales was primarily attributable to increases in fixed costs such as rent and occupancy and depreciation, and increased consulting costs related to the Company's strategic initiatives. Impairments, Including On Assets Held for Sale Impairments, including on assets held for sale for the three and nine months endedNovember 28, 2020 , were$58.0 million , or 2.2% of net sales, and$172.4 million , or 2.6% of net sales, respectively, compared with$11.8 million , or 0.4% of net sales and$441.4 million , or 5.5% of net sales, respectively, during the comparable periods last year. During the third quarter of fiscal 2020, the Company recorded a loss on business held for sale of$54.0 million to remeasure Cost Plus to the lower of its carrying value or fair value less costs to sell. Impairment charges for the three months and nine months endedNovember 28, 2020 also included$1.6 million and$84.0 million , respectively, relating to certain store-level assets (including leasehold improvements and operating lease assets) and tradename impairments of$2.4 million and$35.1 million , respectively. Impairment charges for the nine months endedNovember 30, 2019 included goodwill impairments of$391.1 million , tradename impairments of$10.2 million and certain store-level and operating lease asset impairments of$40.1 million . The non-cash pre-tax goodwill impairment charges recorded during the first half of fiscal 2019 were primarily the result of a sustained decline in the Company's market capitalization. Restructuring and Transformation Initiative Expenses During the three and nine months endedNovember 28, 2020 , the Company recorded charges of$16.8 million and$47.6 million . respectively, in connection with its restructuring and transformation initiatives, primarily related to severance costs recorded in connection with the workforce reduction and store network optimization programs described above as well as other restructuring activities. (see "Restructuring Activities," Note 16 to the accompanying financial statements). Loss (gain) on Sale of Business During the three and nine months endedNovember 28, 2020 , the Company recorded a$113.9 million net loss and a$75.6 million gain on sale of businesses, respectively, which reflected the$189.5 million gain in connection with the sale of PMall in the second quarter of fiscal 2020, as well as losses on divestitures ofLinen Holdings and CTS of$62.8 million and$51.1 million , respectively, recorded during the third quarter of fiscal 2020 (see "Assets Held for Sale and Divestitures," Note 17 to the accompanying financial statements). Operating Loss Operating loss for the three months endedNovember 28, 2020 was$122.8 million , or 4.7% of net sales, compared with an operating loss of$29.8 million , or 1.1% of net sales, during the comparable period last year. The unfavorable change in operating loss as a percentage of net sales for the three months endedNovember 28, 2020 was primarily attributable to third quarter losses on the divestitures ofLinen Holdings and CTS, the charge related to classification of Cost Plus as held for sale, and restructuring and transformation initiative expenses, partially offset by an increase in gross profit margin. -31-
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For the nine months endedNovember 28, 2020 , operating loss was$313.2 million , or 4.7% of net sales, compared with an operating loss of$618.9 million , or 7.7% of net sales for the nine months endedNovember 30, 2019 . The favorable change in operating loss as a percentage of net sales for the nine months endedNovember 28, 2020 was primarily due to an increase in the gross margin, lower goodwill and other impairments compared to the prior year period, and the net gain on sales of businesses in the current year, partially offset by increased SG&A expenses and restructuring and transformation initiative expenses. The current year reductions of net sales reflected the impact of the temporary nationwide closure of the majority of the Company's stores due to COVID-19, nearly all of which have reopened as ofJuly 2020 , as well as the impact of the divestitures. Interest Expense, net Interest expense, net for the three and nine months endedNovember 28, 2020 was$17.8 million and$58.3 million , respectively, as compared to$17.2 million and$49.4 million , respectively, for the three and nine months endedNovember 30, 2019 . For the three months endedNovember 28, 2020 , the increase in interest expense was primarily due to lower interest income on investments, largely offset by lower interest expense primarily attributable to the repurchase of a portion of the senior unsecured notes inAugust 2020 . For the nine months endedNovember 28, 2020 the increase in interest expense, net was primarily driven by lower interest income on investments and increased interest costs attributable to the Company's revolving credit facilities, primarily relating to the new ABL Facility. Gain on Extinguishment of Debt During the nine months endedNovember 28, 2020 , the Company recorded a$77.0 million gain on the repurchase of$75 million principal amount of 4.915% senior unsecured notes dueAugust 1, 2034 and$225 million principal of 5.165% senior unsecured notes dueAugust 1, 2044 (see "Long Term Debt," Note 11 to the accompanying financial statements). Income Taxes The effective tax rate for the three months endedNovember 28, 2020 was 46.4%, compared with 17.9% for the three months endedNovember 30, 2019 . The effective tax rate for the three months endedNovember 28, 2020 reflects the Company's expectation to carry back the net operating loss to a year in which the tax rate was 35%, and includes the impact of the benefit on the losses from the divestiture ofCTS and Linen Holdings entities and the loss related to the Cost Plus business classified as held for sale, partially offset by the impact of impairment charges for tradename and certain store-level assets, and other discrete tax items resulting in net after tax costs, while the tax rate for the three months endedNovember 30, 2019 included net after tax costs of approximately$3.5 million due to discrete federal and state tax items. The effective tax rate for the nine months endedNovember 28, 2020 was 45.7%, compared with 17.9% for the nine months endedNovember 30, 2019 . For the nine months endedNovember 28, 2020 , the effective tax rate reflects the Company's expectation to carry back the net operating loss to a year in which the tax rate was 35%, and includes the impact of the benefit on the losses from the divestiture ofCTS and Linen Holdings and the loss related to Cost Plus classified as held for sale, partially offset by the impact of impairment charges for tradename and certain store-level assets, the gain on sale of PMall, a$43.7 million benefit related to fiscal 2019 net operating loss carry-back under the CARES Act, and other discrete tax items resulting in net after tax benefits. For the nine months endedNovember 30, 2019 , the effective tax rate reflected the impact of charges for goodwill and other impairments and severance costs, portions of which are non-deductible for tax purposes, and after tax costs of approximately$10.5 million due to discrete and federal and state tax items. Potential volatility in the effective tax rate from year to year may occur as the Company is required each year to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit. Net Loss As a result of the factors described above, net loss for the three months endedNovember 28, 2020 was$75.4 million , compared with net loss of$38.6 million for the three months endedNovember 30, 2019 . Net loss for the nine months endedNovember 28, 2020 was$159.8 million , compared with net loss of$548.4 million for the nine months endedNovember 30, 2019 . Transformation The Company is executing on a comprehensive plan to transform its business and position the Company for long-term success under the leadership of its new President and CEOMark Tritton , who joined the Company onNovember 4, 2019 .Mr. Tritton has been assessing the operations, portfolio, capabilities and culture of the Company and is developing and implementing the initial stages of a strategic plan designed to re-establish the Company's leading position as the preferred omnichannel home destination, grounded in five key pillars: Product, Price, Promise, Place and People. With these five pillars as its framework, and a singular purpose to make it easy for customers to feel at home, the Company is embracing a commitment to build and manage a modern, durable omnichannel model. -32-
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Early actions include the extensive restructure of the Company's leadership team. Interim leaders were appointed in merchandising, digital, marketing, owned brands, legal and human resources. During fiscal 2020, the Company announced the hiring of a new leadership team, consisting of the following: •OnMarch 4, 2020 ,Joe Hartsig joined the Company as Executive Vice President, Chief Merchandising Officer of the Company and President ofHarmon Stores Inc. ; •OnMay 4, 2020 ,Gustavo Arnal joined the Company as Executive Vice President, Chief Financial Officer and Treasurer of the Company; •OnMay 11, 2020 ,Rafeh Masood joined the Company as Executive Vice President,Chief Digital Officer ; •OnMay 11, 2020 ,Gregg Melnick assumed the role of Executive Vice President, Chief Stores Officer. Previously,Mr. Melnick served as the Company's interimChief Digital Officer ; •OnMay 18, 2020 ,John Hartmann joined the Company as Chief Operating Officer of the Company and President, buybuy BABY; •OnMay 18, 2020 ,Arlene Hong joined the Company as Executive Vice President, Chief Legal Officer and Corporate Secretary; •OnMay 26, 2020 ,Cindy Davis joined the Company as Executive Vice President, Chief Brand Officer of the Company and President, Decorist; and •OnSeptember 28, 2020 ,Lynda Markoe joined the Company as Executive Vice President,Chief People and Culture Officer. As discussed in "Overview" above, as part of its business transformation, the Company is also pursuing deliberate actions as part of its restructuring program to drive profit improvement over the next two-to-three years. The Company expects to reinvest a portion of the expected cost savings into future growth initiatives.
Liquidity and Capital Resources
The Company has been able to finance its operations, including its growth and
acquisitions, substantially through internally generated funds. As previously
described, the Company began temporary store closures in
During fiscal 2020, the Company divested of
During the second quarter of fiscal 2020, the Company paid approximately
On
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The Company ended the third quarter of fiscal 2020 in a strong cash position,
which it anticipates maintaining, to provide the Company the flexibility to fund
its ongoing initiatives and act upon other opportunities that may arise. As of
Capital expenditures for fiscal 2020 are projected to be approximately
Fiscal 2020 compared to Fiscal 2019
Net cash provided by operating activities for the nine months ended
Retail inventory, which includes inventory in the Company's distribution
facilities for direct to customer shipments, was approximately
Net cash provided by investing activities for the nine months ended
Net cash used in financing activities for the nine months ended
Seasonality
The Company's business is subject to seasonal influences. Generally, its sales volumes are higher in the calendar months of August, November and December, and lower in February.
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Critical Accounting Policies
See "Critical Accounting Policies" under Item 7 of the Company's Annual Report
on Form 10-K for the fiscal year ended
Forward-Looking Statements
This Form 10-Q contains forward-looking statements, including, but not limited to, the Company's progress and anticipated progress towards its long-term objectives. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, approximate, estimate, assume, continue, model, project, plan, goal, preliminary, and similar words and phrases, although the absence of those words does not necessarily mean that statements are not forward-looking. The Company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors. Such factors include, without limitation: general economic conditions including the housing market, a challenging overall macroeconomic environment and related changes in the retailing environment; risks associated with COVID-19 and the governmental responses to it, including its impacts across the Company's businesses on demand and operations, as well as on the operations of the Company's suppliers and other business partners, and the effectiveness of the Company's actions taken in response to these risks; consumer preferences, spending habits and adoption of new technologies; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; civil disturbances and terrorist acts; unusual weather patterns and natural disasters; competition from existing and potential competitors across all channels; pricing pressures; liquidity; the ability to achieve anticipated cost savings, and to not exceed anticipated costs, associated with organizational changes and investments, including the Company's strategic restructuring program and store network optimization strategies; the ability to attract and retain qualified employees in all areas of the organization; the cost of labor, merchandise and other costs and expenses; potential supply chain disruption due to trade restrictions, and other factors such as natural disasters, pandemics, including the COVID-19 pandemic, political instability, labor disturbances, product recalls, financial or operational instability of suppliers or carriers, and other items; the ability to find suitable locations at acceptable occupancy costs and other terms to support the Company's plans for new stores; the ability to establish and profitably maintain the appropriate mix of digital and physical presence in the markets it serves; the ability to assess and implement technologies in support of the Company's development of its omnichannel capabilities; the ability to effectively and timely adjust the Company's plans in the face of the rapidly changing retail and economic environment, including in response to the COVID-19 pandemic; uncertainty in financial markets; volatility in the price of the Company's common stock and its effect, and the effect of other factors, including the COVID-19 pandemic, on the Company's capital allocation strategy; risks associated with the ability to achieve a successful outcome for its business concepts and to otherwise achieve its business strategies; the impact of intangible asset and other impairments; disruptions to the Company's information technology systems including but not limited to security breaches of systems protecting consumer and employee information or other types of cybercrimes or cybersecurity attacks; reputational risk arising from challenges to the Company's or a third party product or service supplier's compliance with various laws, regulations or standards, including those related to labor, health, safety, privacy or the environment; reputational risk arising from third-party merchandise or service vendor performance in direct home delivery or assembly of product for customers; changes to statutory, regulatory and legal requirements, including without limitation proposed changes affecting international trade; changes to, or new, tax laws or interpretation of existing tax laws; new, or developments in existing, litigation, claims or assessments; changes to, or new, accounting standards; and foreign currency exchange rate fluctuations. Except as required by law, the Company does not undertake any obligation to update its forward-looking statements.
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