The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as the financial and other information included in the fiscal 2021 Form 10-K. This section, as well as other parts of this Form 10-Q, contain forward-looking statements, such as the Company's plans, estimates and expectations, that involve risks and uncertainties. The Company's actual results or other events could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below in "Risk Factors" and in "Forward-Looking Statements" and elsewhere in this report and also in "Risk Factors" under Part I, Item 1A of our 2021 Form 10-K.
Overview
Bed Bath & Beyond Inc. and subsidiaries (the "Company", "we", "our", "us", or "ourselves") is an omni-channel retailer that makes it easy for our customers to feel at home. We sell a wide assortment of merchandise in the Home, Baby, Beauty & Wellness markets and operate under the namesBed Bath & Beyond , buybuy BABY ("BABY"), and Harmon, Harmon Face Values, or Face Values (collectively, "Harmon"). In addition, we are a partner in a joint venture, which operates retail stores inMexico under the nameBed Bath & Beyond . We account for our operations as one North American Retail reporting segment. We are driving a digital-first, omni-always growth strategy and optimizing our digital and physical store channels to provide our customers with a seamless omni-channel shopping experience. Digital purchases, including web and mobile, can be shipped to a customer from our distribution facilities, directly from vendors, or from a store. Store purchases are primarily fulfilled from that store's inventory or may also be shipped to a customer from one of our distribution facilities, from a vendor, or from another store. Customers can also choose to pick up orders using ourBuy Online Pickup In Store ("BOPIS") and contactless Curbside Pickup services, as well as return online purchases to a store. Customers can also make purchases through one of our customer contact centers and in-store throughThe Beyond Store , our proprietary web-based platform. These capabilities allow us to better serve our customers across various channels. Across our banners, we carry a wide variety of domestics and home furnishings merchandise. 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. Business Update Beginning in the third quarter of fiscal 2022, the Company began to execute significant strategic and management changes to transform our business and adapt to the dynamic retail environment and the evolving needs of our customers in order to position ourselves for long-term success. Beginning in the third quarter of fiscal 2022, the Company began to execute a comprehensive strategic plan led by our new President and Chief Executive Officer,Sue Gove , who was appointed inOctober 2022 after serving as Interim Chief Executive Officer. This plan is focused on strengthening the Company's financial position through additional liquidity and a reduction of its cost structure, better serving its customers through merchandising, inventory and customer engagement, and regaining our authority in the Home and Baby markets. To accelerate these strategic initiatives, the Company realigned its organizational structure, which included the creation of Brand President roles forBed Bath & Beyond and BABY to lead merchandising, planning, brand marketing, site merchandising and stores for each banner. In conjunction with the Company's new strategic focus areas, the Company executed plans to rebalance its merchandise assortment to align with customer preference by leading with National Brands inventory and introducing new, emerging direct-to-consumer brands. Consequently, we announced the exiting of a third of our Owned Brands, including the discontinuation of three of our nine labels (Haven™, Wild Sage™ and Studio 3B™). We also expect to reduce the breadth and depth of inventory across our six remaining Owned Brands (Simply Essential™, Nestwell™, Our Table™, Squared Away™, H for Happy™ and Everhome™). Although we moved quickly and effectively to change the assortment and other merchandising and marketing strategies, inventory and in-stock levels were lower than anticipated due to supplier constraints and vendor credit line decreases. This resulted in lower levels of in-stock presentation within the assortments than our customers expect. Consequently, net sales for the three months endedNovember 26, 2022 were$1.259 billion , a decrease of$618.8 million , or approximately 33.0%, compared with net sales of$1.878 billion for the three months endedNovember 27, 2021 . Net sales for the nine months endedNovember 26, 2022 were$4.160 billion , a decrease of approximately 28.5% as compared with the nine months endedNovember 27, 2021 . -27- -------------------------------------------------------------------------------- Table of Contents To right-size our cost structure and store fleet based on lower volumes, we have implemented significant SG&A reductions. Key components of these reductions include: •Reduction in SG&A by focusing on immediate priorities of merchandising, inventory, and traffic to align with changes in our store footprint, lower Owned Brands development and support, and deferral of longer-term strategic initiatives. Also, we have had a reduction in force, including an approximately 20% reduction across corporate and supply chain associates.
•The planned closure of approximately 150 lower-producing
See further discussion of restructuring and transformation initiative expenses in the "Results of Operations" section herein.
Executive Summary
The following represents a summary of key financial results and related business developments for the periods indicated:
•Net sales for the three months endedNovember 26, 2022 were$1.259 billion , a decrease of approximately 33.0% as compared with the three months endedNovember 27, 2021 . Net sales for the nine months endedNovember 26, 2022 were$4.160 billion , a decrease of approximately 28.5% as compared with the nine months endedNovember 27, 2021 . •Comparable Sales* for the three months endedNovember 26, 2022 decreased by approximately 32.0% compared to a decrease of approximately 7.0% for three months endedNovember 27, 2021 . For the nine months endedNovember 26, 2022 , Comparable Sales decreased by approximately 27.0%. Comparable Sales was not a meaningful metric for the nine months endedNovember 27, 2021 as a result of the impact of the extended closure of the majority of our stores due to the COVID-19 pandemic during a portion of the comparable period in fiscal 2020.
* See "Results of Operations -
•Net loss for the three months endedNovember 26, 2022 was$393.0 million , or 4.33 per diluted share, compared with net loss of$276.4 million , or$2.78 per diluted share, for the three months endedNovember 27, 2021 . Net loss for the three months endedNovember 26, 2022 included a net unfavorable impact of$0.68 per diluted share associated with restructuring and other transformation initiatives, and non-cash impairment charges, partially offset by gain on extinguishment of debt of$1.04 per diluted share. Net loss for the three months endedNovember 27, 2021 included a net unfavorable impact of$2.53 per diluted share associated with non-cash impairment charges, charges associated with restructuring program and transformation initiatives, loss on sale of business, and the impact of recording a valuation allowance against the Company'sU.S. federal and state deferred tax assets. •Net loss for the nine months endedNovember 26, 2022 was$1.117 billion , or$13.40 per diluted share, compared with net loss of$400.5 million , or$3.90 per diluted share, for the nine months endedNovember 27, 2021 . Net loss for the nine months endedNovember 26, 2022 included a net unfavorable impact of$3.65 per diluted share associated with inventory markdown reserves, restructuring and other transformation initiatives, and non-cash impairment charges, partially offset by gain on extinguishment of debt. Net loss for the nine months endedNovember 27, 2021 included a net unfavorable impact of$3.74 per diluted share associated with non-cash impairment charges, charges associated with restructuring program and transformation initiatives, loss on sale of business, and loss on extinguishment of debt, and the impact of recording a valuation allowance against the Company'sU.S. federal and state deferred tax assets. •In connection with our restructuring and transformation initiatives, during the three and nine months endedNovember 26, 2022 , we recorded total expenses of$54.1 million and$131.4 million , respectively, including$8.6 million and$7.4 million in cost of sales for the three and nine months endedNovember 26, 2022 . In addition, approximately$45.5 million and$123.8 million , respectively, is recorded in restructuring and transformation initiative expenses in the consolidated statement of operations, as well as$100.7 million and$182.9 million , respectively, of impairments. •During the nine months endedNovember 26, 2022 , we launched Welcome Rewards™. The Company plans to leverage its recently introduced, cross-banner loyalty program, Welcome Rewards™ to drive traffic, sales, and customer retention. Welcome Rewards™ brings valuable savings, more benefits, and special perks to customers who shop online and in stores nationwide atBed Bath & Beyond , buybuy BABY, and Harmon. Customers earn and redeem points across the retail banners with every purchase. -28- -------------------------------------------------------------------------------- Table of Contents •During fiscal 2021, we announced plans to complete our$1 billion three-year repurchase plan by the end of fiscal 2021, which was two years ahead of schedule and resulted in the repurchase of$950.0 million of shares under this plan as ofFebruary 26, 2022 . During the first quarter of fiscal 2022, we completed this program, repurchasing approximately 2.3 million shares of our common stock under the share repurchase plan approved by our Board of Directors, at a total cost of approximately$40.4 million . Results of Operations Net Sales Three Months Ended Nine Months Ended November 26, November 27, November 26, November 27, (in millions) 2022 2021 Change 2022 2021 Change Net sales$ 1,259.1 $ 1,877.9 $ (618.8) (33.0) %$ 4,159.5 $ 5,816.4 $ (1,656.9) (28.5) % Net sales for the three months endedNovember 26, 2022 were$1.259 billion , a decrease of$618.8 million , or approximately 33.0%, compared with net sales of$1.878 billion for the three months endedNovember 27, 2021 . Net sales for the nine months endedNovember 26, 2022 were$4.160 billion , a decrease of$1.657 billion , or approximately 28.5%, compared with net sales of$5.816 billion for the nine months endedNovember 27, 2021 . The decrease in net sales for the three and nine months endedNovember 26, 2022 was predominantly due to the decrease in Comparable Sales driven by lower customer traffic and conversion, in part due to consumer spending patterns and demand, a lack of inventory availability and assortment in key product areas, specifically within the Company's Owned Brands and National Brands product mix. 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 , our proprietary, web-based platform, are recorded as in-store sales. Prior to implementation of 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. Net sales consummated through digital channels represented approximately 33.0% and 37.0% of our sales for the three and nine months endedNovember 26, 2022 , respectively, compared with approximately 35.1% and 35.8% of our sales for the three and nine months endedNovember 27, 2021 , respectively. Comparable Sales* for the three and nine months endedNovember 26, 2022 decreased by approximately 32.0% and 27.0%, respectively. Management attributes a portion of this decline to the impact of lower traffic due to macro-economic factors, such as steep inflation, and fluctuations in purchasing patterns of the consumer. Also contributing to the comparable sales decline was the lack of inventory availability and assortment in key product areas, due to vendor constraints and credit line decreases. Comparable Sales the three months endedNovember 27, 2021 decreased by approximately 7.0%. For the nine months endedNovember 27, 2021 , Comparable Sales was not a meaningful metric as a result of the impact of the extended closure of the majority of our stores during a portion of the comparable period in fiscal 2020 due to the COVID-19 pandemic. * Comparable Sales normally includes sales consummated through all retail channels that have been operating for twelve full months following the opening period (typically six to eight weeks), excluding the impact of store fleet optimization program. We are an omni-channel 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 our distribution facilities, stores or vendors. Sales of domestics merchandise and home furnishings accounted for approximately 36.0% and 64.0% of net sales, respectively, for the three months endedNovember 26, 2022 , and approximately 37.6% and 62.4% of net sales, respectively, for the three months endedNovember 27, 2021 . Sales of domestics merchandise and home furnishings accounted for approximately 36.4% and 63.6% of net sales, respectively, for the nine months endedNovember 26, 2022 , and approximately 38.4% and 61.6% of net sales, respectively, for the nine months endedNovember 27, 2021 . -29-
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Table of Contents Gross Profit Three Months Ended Nine Months Ended November 26, November 27, November 26, November 27, (in millions) 2022 2021 Change 2022 2021 Change Gross profit$ 278.8 $ 668.9 $ (390.1) (58.3) %$ 1,026.4 $ 1,903.7 $ (877.3) (46.1) % Gross margin 22.1 % 35.6 % (13.5) % (37.9) % 24.7 % 32.7 % (8.0) % (24.5) % Gross profit for the three months endedNovember 26, 2022 was$278.8 million , or 22.1% of net sales, compared with$668.9 million , or 35.6% of net sales, for the three months endedNovember 27, 2021 . Gross profit for the nine months endedNovember 26, 2022 was$1.026 billion , or 24.7% of net sales, compared with$1.904 billion , or 32.7% of net sales, for the nine months endedNovember 27, 2021 . Gross profit margin as a percentage of net sales for the three months endedNovember 26, 2022 includes the unfavorable impact of the acceleration of inventory clearance activity resulting from actions taken to rebalance Owned Brands inventory levels in response to consumer preference as well as higher promotional activity. Gross profit margin as a percentage of net sales for the nine months endedNovember 26, 2022 includes$91.6 million associated with the unfavorable impact of the acceleration of inventory clearance activity resulting from actions taken to rebalance Owned Brands inventory levels in response to consumer preference as well as higher promotional activity.
Gross profit for the three and nine months ended
Selling, General and Administrative Expenses
Three Months Ended Nine Months Ended November 26, November 27, November 26, November 27, (in millions) 2022 2021 Change 2022 2021 Change Selling, general and administrative expenses ("SG&A")$ 583.6 $ 698.0 $ (114.4) (16.4) %$ 1,856.0 $ 2,009.7 $ (153.7) (7.6) % SG&A as a percentage of net sales 46.4 % 37.2 % 9.2 % 24.7 % 44.6 % 34.6 % 10.0 % 28.9 % SG&A for the three months endedNovember 26, 2022 was$583.6 million , or 46.4% of net sales, compared with$698.0 million , or 37.2% of net sales, for the three months endedNovember 27, 2021 . SG&A for the nine months endedNovember 26, 2022 was$1.856 billion , or 44.6% of net sales, compared with$2.010 billion , or 34.6% of net sales, for the nine months endedNovember 27, 2021 . The decrease in SG&A for the three months endedNovember 26, 2022 compared with the three months endedNovember 27, 2021 was primarily attributable to the Company's cost reduction initiatives, primarily a decrease in payroll and payroll-related expenses of approximately$66.7 million (primarily salaries), a decline of approximately$19.9 million in rent and occupancy expenses driven by a lower store base as a result of the Company's real estate and store fleet optimization initiatives as well as cost reductions in marketing spend of approximately$15.7 million . The decrease in SG&A for the nine months endedNovember 26, 2022 compared with the nine months endedNovember 27, 2021 was primarily attributable to the Company's cost reduction initiatives, primarily a decrease in payroll and payroll-related expenses of approximately$132.0 million (primarily salaries) and a decline of approximately$18.3 million in rent and occupancy expenses driven by a lower store base as a result of the Company's real estate and store fleet optimization initiatives. The increase in SG&A as a percentage of net sales for the three and nine months endedNovember 26, 2022 was primarily due to the impact of de-leveraging of SG&A due to the declines in net sales noted above. -30- -------------------------------------------------------------------------------- Table of Contents Impairments Impairments for the three and nine months endedNovember 26, 2022 were$100.7 million and$182.9 million , respectively, compared with$1.8 million and$18.5 million , respectively, during the comparable periods last year. Impairment charges for the three months endedNovember 26, 2022 andNovember 27, 2021 included$100.7 million and$1.6 million , respectively, relating to certain store-level assets (including leasehold improvements and operating lease assets) and tradename impairments of$0.2 million for three months endedNovember 27, 2021 . There were no tradename impairment charges for three months endedNovember 26, 2022 . Impairment charges for the nine months endedNovember 26, 2022 andNovember 27, 2021 included$180.0 million and$15.6 million , respectively, relating to certain store-level assets (including leasehold improvements and operating lease assets) and tradename impairments of$2.9 million and$2.9 million , respectively.
Restructuring and Transformation Initiative Expenses
The Company recorded$54.1 million and$131.4 million in its consolidated statements of operations for the three and nine months endedNovember 26, 2022 , respectively, for costs associated with restructuring and other transformation initiatives, of which approximately$8.6 million and$7.4 million is included in cost of sales for the three and nine months endedNovember 26, 2022 , respectively. In addition, for the three and nine months endedNovember 26, 2022 , approximately$45.5 million and$123.8 million , respectively, was recorded in restructuring and transformation initiative expenses in the consolidated statements of operations, which included approximately$7.9 million and$42.9 million , respectively, of severance costs related to workforce reduction, store closures and leadership changes. The Company also recorded approximately$11.5 million and$18.3 million , respectively, for lease related and other costs, including in connection with store closures, and approximately$26.1 million and$62.6 million , respectively, of costs for other transformation initiatives for the three and nine months endedNovember 26, 2022 . As part of the Company's ongoing business transformation, onAugust 31, 2022 , the Company announced the planned closure of approximately 150 lower-producingBed Bath & Beyond banner stores as part of its real estate and store fleet optimization. During the three months endedNovember 26, 2022 , the Company closed 6Bed Bath & Beyond stores and recorded$3.9 million of severance costs and$1.4 million of lease-related and other costs associated with planned store closures for which the store closing process has commenced, in restructuring and transformation initiative expenses in the consolidated statements of operations and included above. The Company also recorded$8.6 million within cost of sales, as discussed above, related to the store closures. At this point, the Company is unable to reasonably estimate the amount or range of amounts expected to be incurred for future store closures in connection with these restructuring activities, both with respect to each major type of cost associated therewith and with respect to the total cost or estimated range of total cost.
Loss on Sale of Businesses
During the three and nine months endedNovember 27, 2021 , we recognized a loss of approximately$14.1 million and$18.2 million , respectively, primarily related to a$13.5 million charge associated with the fiscal 2021 settlement of theChristmas Tree Shops ("CTS") pension plan, as well as certain working capital and other adjustments related to the divestiture of certain banners in fiscal 2020. Operating Loss Three Months Ended Nine Months Ended November 26, November 27, November 27, (in millions) 2022 2021 Change November 26, 2022 2021 Change Operating Loss$ (450.9) $ (86.1) $ (364.8) 423.7 %$ (1,136.3) $ (242.1) $ (894.2) 369.4 % As a percentage of net sales (35.8) % (4.6) % (31.2) % 678.3 % (27.3) % (4.2) % (23.1) % 550.0 % For the three months endedNovember 26, 2022 , operating loss was$450.9 million , or 35.8% of net sales, compared with an operating loss of$86.1 million , or 4.6% of net sales, for the three months endedNovember 27, 2021 . Operating loss for the three months endedNovember 26, 2022 included the unfavorable impact of the acceleration of inventory clearance activity resulting from actions taken to rebalance Owned Brands inventory levels in response to consumer preference as well as higher promotional activity,$45.5 million associated with restructuring and other transformation initiatives, and$100.7 million for non-cash impairment charges (each as discussed above or below). The change in operating loss as a percentage of net sales for three months endedNovember 26, 2022 was primarily due to the decline in gross margin, as discussed above, as well as higher impairment charges compared to the three months endedNovember 27, 2021 . -31-
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For the nine months endedNovember 26, 2022 , operating loss was$1.136 billion , or 27.3% of net sales, compared with an operating loss of$242.1 million , or 4.2% of net sales, for the nine months endedNovember 27, 2021 . Operating loss for the nine months endedNovember 26, 2022 included$91.6 million associated with the unfavorable impact of the acceleration of inventory clearance activity resulting from actions taken to rebalance Owned Brands inventory levels in response to consumer preference as well as higher promotional activity,$123.8 million associated with restructuring and other transformation initiatives, and$182.9 million for non-cash impairment charges (each as discussed above). The change in operating loss as a percentage of net sales for nine months endedNovember 26, 2022 was primarily due to the decline in gross margin, as discussed above, as well as higher restructuring and transformation initiative expenses and higher impairment charges compared to the nine months endedNovember 27, 2021 . Interest Expense, net Interest expense, net for the three and nine months endedNovember 26, 2022 was$33.5 million and$68.6 million , respectively, compared with$15.8 million and$47.9 million , respectively, for the three and nine months endedNovember 27, 2021 . For the three and nine months endedNovember 26, 2022 , the increase in interest expense, net was primarily driven by an increase in borrowings and higher interest rates against our ABL and FILO facilities and finance lease liabilities.
(Gain) Loss on Extinguishment of Debt
Gain on extinguishment of debt for the three and nine months endedNovember 26, 2022 of$94.4 million related to the gain of approximately$102.8 million recorded for the privately negotiated exchange offers completed inNovember 2022 , partially offset by third-party costs of approximately$8.0 million incurred with the Exchange Offers and$0.4 million of unamortized debt financing costs written-off related to the extinguished notes. Loss on extinguishment of debt for the nine months endedNovember 27, 2021 of$0.4 million related to partial repayment of senior unsecured notes. We did not record a gain or loss on extinguishment during the three months endedNovember 27, 2021 .
Income Taxes
The effective tax rate for the three and nine months endedNovember 26, 2022 was (0.7)% and (0.6)%, respectively, compared with (171.3)% and (37.9)%, respectively, for the three and nine months endedNovember 27, 2021 . For the three and nine months endedNovember 26, 2022 , the effective tax rate reflects the impact of continuing to record a valuation allowance against the Company'sU.S. federal and state deferred tax assets (discussed below). For the three and nine months endedNovember 27, 2021 , the effective tax rate reflects the impact of a charge to record a valuation allowance in the fiscal third quarter of$181.5 million , charges for restructuring and transformation initiatives, as well as a benefit under the provisions of the CARES Act. In assessing the recoverability of our deferred tax assets, we evaluated the available objective positive and negative evidence to estimate whether it is more likely than not that sufficient future taxable income will be generated to permit the use of existing deferred tax assets in each taxpaying jurisdiction. For any deferred tax asset in excess of the amount for which it is more likely than not that we will realize a benefit, we established a valuation allowance. A valuation allowance is a non-cash charge, and does not limit our ability to utilize our deferred tax assets, including our ability to utilize tax loss and credit carryforward amounts, against future taxable income. In the third quarter of fiscal 2021, we concluded that, based on our evaluation of available objective positive and negative evidence, it was no longer more likely than not that our netU.S. federal and state deferred tax assets were recoverable. In assessing the realizability of deferred tax assets, the key assumptions used to determine positive and negative evidence included our cumulative taxable loss before income taxes for the past three years, current trends related to actual taxable earnings or losses, and expected future reversals of existing taxable temporary differences, as well as timing and the cost of our transformation initiatives and their expected associated benefits. Accordingly, in the third quarter of fiscal 2021, we recorded a valuation allowance against substantially all of our netU.S. federal and state deferred tax assets. During the three and nine months endedNovember 26, 2022 , we concluded that it continues to not be more likely than not that our netU.S. federal and state deferred tax assets are recoverable, and the Company's assertion for the need of a full valuation allowance remains as ofNovember 26, 2022 . The amount of the deferred tax assets considered realizable, and the associated valuation allowance, could be adjusted in a future period if estimates of future taxable income change or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth. -32- -------------------------------------------------------------------------------- Table of Contents Potential volatility in the effective tax rate from year to year may occur as we are required each year to determine whether new information changes our 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 26, 2022 was$393.0 million , or$4.33 per diluted share, compared with net loss of$276.4 million , or$2.78 per diluted share, for the three months endedNovember 27, 2021 . Net loss for the three months endedNovember 26, 2022 included a net unfavorable impact of$0.68 per diluted share associated with charges for restructuring and other transformation initiatives, and non-cash impairment charges, partially offset by gain on extinguishment of debt (each as discussed above), as well as the associated tax effects. Net loss for the three months endedNovember 27, 2021 included a net unfavorable impact of$2.53 per diluted share associated with non-cash impairment charges, charges associated with restructuring program and transformation initiatives, loss on sale of business, and the impact of recording a valuation allowance against ourU.S. federal and state deferred tax assets. As a result of the factors described above, net loss for the nine months endedNovember 26, 2022 was$1.117 billion , or$13.40 per diluted share, compared with net loss of$400.5 million , or$3.90 per diluted share, for the nine months endedNovember 27, 2021 . Net loss for the nine months endedNovember 26, 2022 included a net unfavorable impact of$3.65 per diluted share associated with inventory markdown reserves, restructuring and other transformation initiatives, and non-cash impairment charges, partially offset by gain on extinguishment of debt, as well as the associated tax effects. Net loss for the nine months endedNovember 27, 2021 included a net unfavorable impact of$3.74 per diluted share associated with non-cash impairment charges, charges associated with restructuring program and transformation initiatives, loss on sale of business, and loss on extinguishment of debt, partially offset by a gain on the sale of property, and the impact of recording a valuation allowance against ourU.S. federal and state deferred tax assets (each as discussed above).
Liquidity and Capital Resources
The Company's net cash used in operating activities was$307.6 million and$890.0 million for the three and nine months endedNovember 26, 2022 . Cash, cash equivalents and restricted cash were$225.7 million as ofNovember 26, 2022 , a decrease of approximately$245.2 million as compared withFebruary 26, 2022 . On or aroundJanuary 13, 2023 , certain events of default were triggered under the Company's Credit Facilities as a result of the Company's failure to prepay an overadvance and satisfy a financial covenant, among other things. As a result of the continuance of such events of default, onJanuary 25, 2023 , the administrative agent under the Amended Credit Agreement notified the Company that (i) the principal amount of all outstanding loans under the Credit Facilities, together with accrued interest thereon, the FILO Applicable Premium and all fees (including, for the avoidance of doubt, any break funding payments) and other obligations of the Company accrued under the Amended Credit Agreement, are due and payable immediately, (ii) the Company is required, effective immediately, to cash collateralize letter of credit obligations under the Credit Facilities, and (iii) effective as ofJanuary 25, 2023 , all outstanding loans and obligations under the Credit Facilities shall bear interest at an additional default rate of 2% per annum. See "Item 1A. Risk Factors - Certain events of default have occurred under our Amended Credit Agreement, as a result of which loans outstanding thereunder have been accelerated, among other things, and our lenders may exercise remedies against the collateral securing our obligations under the Credit Facilities." As a result of these events of default, the Company classified its outstanding borrowings under its asset-based revolving credit facility (the "ABL Facility) and its FILO Facility as current in the consolidated balance sheet as ofNovember 26, 2022 . The Company's outstanding borrowings under its ABL Facility and FILO Facility were$550.0 million and$375.0 million , respectively, as ofNovember 26, 2022 . In addition, the Company had$186.2 million in letters of credit outstanding under its ABL Facility as ofNovember 26, 2022 . The Company also had$1.030 billion in senior notes (excluding deferred financing costs) outstanding as ofNovember 26, 2022 . For information regarding the Company's borrowings, see Note 12. At this time, the Company does not have sufficient resources to repay the amounts under the Credit Facilities and this will lead the Company to consider all strategic alternatives, including restructuring its debt under theU.S. Bankruptcy Code. The Company is undertaking a number of actions in order to improve its financial position and stabilize its results of operations including but not limited to, cost cutting, lowering capital expenditures, and reducing its store footprint including related distribution centers. In addition, the Company will continue to seek reductions in rental obligations with landlords in its determination of the appropriate footprint, seek additional debt or equity capital, reduce or delay the Company's business activities and strategic initiatives, or sell assets. These measures may not be successful. The Company's key drivers of cash flows are sales, management of inventory levels, vendor payment terms, and capital expenditures. Macro and micro economic challenges increased since the end of the second quarter of fiscal 2022 causing an acceleration of vendor payment terms and credit line constraints. This led to lower inventory receipts than anticipated in the third quarter of fiscal 2022, resulting in lower than required stock levels ahead of the holiday selling season. Additionally, certain service providers and vendors required prepayments. -33- -------------------------------------------------------------------------------- Table of Contents Based on recurring losses from operations and negative cash flows from operations for the nine months endedNovember 26, 2022 as well as current cash and liquidity projections, the Company has concluded that there is substantial doubt about the Company's ability to continue as a going concern for the next 12 months. The consolidated financial statements do not include any adjustments that may result from the outcome of this going concern uncertainty.
ATM Program
OnAugust 31, 2022 , we established an at the market equity distribution program (the "ATM Program") (see "Shareholders' (Deficit) Equity," Note 13 to the accompanying consolidated financial statements), under which we offered and sold 12 million shares of common stock for net proceeds of$72.2 million pursuant to the prospectus supplement datedAugust 31, 2022 . OnOctober 28, 2022 , we filed a prospectus supplement to register additional shares of our common stock to offer and sell under the ATM Program at an aggregate sales price of up to$150.0 million . The net proceeds, after commissions and offering costs, from the ATM Program were used for a number of general corporate purposes, which include immediate strategic priorities such as rebalancing the Company's assortment and inventory. As ofNovember 26, 2022 , we have sold approximately 22.2 million shares for approximately$115.4 million of net proceeds under the Company's ATM Programs. Shares having an aggregate offering price of$105.6 million remained unsold under the ATM program as of the end of fiscalDecember 2022 .
Exchange Offers
During the third fiscal quarter of 2022, the Company commenced exchange offers (the "Exchange Offers") with eligible holders for each series of Existing Notes as follows: (i) 2024 Notes for new 3.693% Senior Second Lien Secured Non-Convertible Notes dueNovember 30, 2027 (the "New Second Lien Non-Convertible Notes") and/or new 8.821% Senior Second Lien Secured Convertible Notes dueNovember 30, 2027 (the "New Second Lien Convertible Notes"); (ii) 2034 Notes for new 12.000% Senior Third Lien Secured Convertible Notes dueNovember 30, 2029 (the "New Third Lien Convertible Notes" and, together with the New Second Lien Non-Convertible Notes and the New Second Lien Convertible Notes, the "New Notes"); and (iii) 2044 Notes for New Third Lien Convertible Notes (see "Long-Term Debt," Note 12 to the accompanying consolidated financial statements). InNovember 2022 , the Company completed privately negotiated exchange offers with existing holders of approximately$69.0 million ,$15.3 million , and$70.2 million aggregate principal amount of 2024 Notes, 2034 Notes, and 2044 Notes, respectively, under which the Company issued an aggregate of approximately 13.6 million shares of common stock to the existing holders in exchange for the exchange notes, including accrued and unpaid interest, and 0.9 million shares in exchange for a cash payment from an existing holder of$3.5 million . The exchange notes were cancelled and no longer outstanding upon completion of the exchange. OnJanuary 5, 2023 , upon the expiration of the Exchange Offers, the Company announced the termination of the offer and consent solicitations with respect to its Existing Notes, as a result of the conditions applicable thereto not being satisfied. As a result of the termination of the Exchange Offers, none of the Existing Notes that had been tendered in the Exchange Offers were accepted for purchase and no consideration will be paid or become payable to holders of the Existing Notes who have tendered their Existing Notes in the Exchange Offers.
Capital Expenditures
Capital expenditures for the nine months endedNovember 26, 2022 were$322.1 million , which includes the entering into use of accrued capital expenditures of$63.4 million which were recorded in fiscal 2021. As the Company executes its new strategic plans and refine capital resources to improve liquidity, capital expenditures are related to maintenance, and investments in technology and digital offerings.
Stock Repurchases
During the three and nine months endedNovember 26, 2022 , we repurchased approximately 0.3 million and 2.9 million shares, respectively, of our common stock, at a total cost of approximately$2.7 million and$45.9 million , respectively. For the nine months endedNovember 26, 2022 , the stock repurchases included approximately 2.3 million shares at a total cost of approximately$40.4 million , repurchased under our share repurchase programs as authorized by our Board of Directors, which was completed in the first quarter of fiscal 2022. During the three and nine months endedNovember 27, 2021 , we repurchased approximately 5.3 million and 14.0 million shares, respectively, of our common stock, at a total cost of approximately$118.9 million and$358.9 million , respectively, which included approximately 5.1 million and 13.4 million shares, respectively, at a total cost of approximately$113.4 million and$344.6 million , respectively, repurchased under our share repurchase programs as authorized by our Board of Directors. -34-
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Additionally, during the three and nine months endedNovember 26, 2022 , we repurchased approximately 0.3 million and 0.6 million shares, respectively, of our common stock, to cover employee related taxes withheld on vested restricted stock, restricted stock unit awards, and performance stock unit awards at a total cost of approximately$2.7 million and$5.5 million , respectively. During the three and nine months endedNovember 27, 2021 , we repurchased approximately 0.2 million and 0.6 million shares, respectively, of our common stock, to cover employee related taxes withheld on vested restricted stock, restricted stock unit awards, and performance stock unit awards at a total cost of approximately$5.5 million and$14.3 million , respectively. During fiscal 2021, we announced that we intended to complete our$1 billion three-year share repurchase plan by the end of fiscal 2021, two years ahead of schedule. During the first quarter of fiscal 2022, we completed this program, repurchasing approximately 2.3 million shares of our common stock. InJanuary 2021 , we entered into an accelerated share repurchase agreement to repurchase an aggregate$150.0 million of our common stock, subject to market conditions. This resulted in the repurchase of 5.0 million shares in the fourth quarter of fiscal 2020, and an additional 0.2 million shares received upon final settlement in the first quarter of fiscal 2021. BetweenDecember 2004 andApril 2021 , our Board of Directors authorized, through several share repurchase programs, the repurchase of up to$12.950 billion of our shares of common stock. We also acquire shares of our common stock to cover employee related taxes withheld on vested restricted stock, restricted stock units and performance stock unit awards. Since the initial authorization inDecember 2004 , the aggregate total of common stock repurchased is approximately 265.0 million shares for a total cost of approximately$11.7 billion . We had approximately$1.2 billion remaining of authorized share repurchases as ofNovember 26, 2022 . Decisions regarding share repurchases are within the discretion of the Board of Directors, and are influenced by a number of factors, including the price of our common stock, general business and economic conditions, our financial condition and operating results, the emergence of alternative investment or acquisition opportunities, changes in business strategy and other factors. Our share repurchase program could change, and could be influenced by several factors, including business and market conditions, such as the impact of the COVID-19 pandemic on our business operations or stock price. We review our 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 our earnings, financial condition and requirements, business conditions and other factors, including the restrictions on share repurchases under the ABL Facility (see "Long-Term Debt," Note 12 to the accompanying consolidated financial statements). We do not currently have plans to engage in stock repurchases as this time.
Debt Repurchases
There were no debt repurchases made during the three and nine months endedNovember 26, 2022 . During the nine months endedNovember 27, 2021 , we purchased approximately$11.0 million aggregate principal amount of our outstanding 3.749% senior unsecured notes dueAugust 1, 2024 . There were no debt repurchases made during the three months endedNovember 27, 2021 .
Cash Flow
Fiscal 2022 compared with Fiscal 2021
Net cash used in operating activities for the nine months endedNovember 26, 2022 was$890.0 million , compared with net cash used in operating activities of$264.7 million in the corresponding period in fiscal 2021. The year-over-year change in operating cash flow was primarily due to higher net loss, adjusted for non-cash expense, which included the impact of higher impairments in fiscal 2022, as well as decreases in accounts payable and accrued expenses and other current liabilities, partially offset by decreases in inventory. Retail inventory, which includes inventory in our distribution facilities for direct to customer shipments, was approximately$1.436 billion atNovember 26, 2022 , a decrease of 16.8% compared with retail inventory atFebruary 26, 2022 . We continue to focus on our inventory assortment changes and other merchandising strategies. In the fiscal third quarter of 2022, the Company's in-stock levels were lower than anticipated due to supplier constraints and vendor credit line decreases. -35- -------------------------------------------------------------------------------- Table of Contents Net cash used in investing activities for the nine months endedNovember 26, 2022 was$322.1 million , compared with net cash used in investing activities of$227.5 million in the corresponding period of fiscal 2021. For the nine months endedNovember 26, 2022 , net cash used in investing activities included$322.1 million of capital expenditures, which includes the entering into use of accrued capital expenditures of$63.4 million which were recorded in fiscal 2021. For the nine months endedNovember 27, 2021 , net cash used in investing activities was comprised of$232.5 million of capital expenditures partially offset by$5.0 million in proceeds from the sale of property. Net cash provided by financing activities for the nine months endedNovember 26, 2022 was$968.4 million , compared with net cash used in financing activities of$374.5 million in the corresponding period of fiscal 2021. Net cash provided by financing activities in the nine months endedNovember 26, 2022 was comprised of$1.225 billion of borrowings under the Credit Facilities, partially offset by repayments of$300.0 million , net proceeds from issuances of common stock and ATM Program offerings of$119.0 million , repurchases of common stock of$45.9 million , of which$40.4 million is related to our share repurchase program, payments of deferred financing costs of$19.5 million , payments of Exchange Offer costs of$8.0 million , repayments of finance leases of$1.8 million and dividend payments of$0.3 million . Net cash used in financing activities in the nine months endedNovember 27, 2021 was comprised of repurchases of our common stock of$358.9 million , of which$334.6 million is related to our share repurchase program, repayments of long-term debt of$11.4 million , payments of deferred financing costs of$3.4 million and dividend payments of$0.8 million .
Seasonality
Our business is subject to seasonal influences. Generally, our sales volumes are higher in the calendar months of August, November and December, and lower in September and October.
Critical Accounting Policies
See "Critical Accounting Policies" under Item 7 of our Annual Report on Form 10-K for the fiscal year endedFebruary 26, 2022 ("2021 Form 10-K"), filed with theSecurities and Exchange Commission ("SEC"). -36-
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Table of Contents Forward-Looking Statements This Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934, as amended, including, but not limited to, our progress and anticipated progress towards our long-term objectives and our turnaround plan, as well as more generally the status of our future liquidity and financial condition and our outlook for our 2022 fiscal fourth quarter and 2022 fiscal year. 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. Our 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: our ability to deliver and execute on our turnaround plan; the result of the evaluation of strategic alternatives, including restructuring or refinancing of our debt, seeking additional debt or equity capital, reducing or delaying our business activities and strategic initiatives, or selling assets, other strategic transactions and/or other measures, including obtaining relief under theU.S. Bankruptcy Code, and the terms, value and timing of any transaction resulting from that process; our ability to finalize or fully execute actions and steps that would be probable of mitigating the existence of "substantial doubt" regarding our ability to continue as a going concern; our ability to increase cash flow to support our operating activities and fund our obligations and working capital needs; general economic conditions including supply chain disruptions, labor shortages, wage pressures, rising inflation and the ongoing military conflict betweenRussia andUkraine ; challenges related to our relationships with our suppliers, the failure of our suppliers to supply us with the necessary volume and types of products; the impact of cost-savings measures; our inability to generate sufficient cash to service all of our indebtedness or our ability to access additional capital; changes to our credit rating or the terms on which vendors or others will provide us credit; the impact of strategic changes, including the reaction of customers to such changes; a challenging overall macroeconomic environment and a highly competitive retailing environment; changing consumer preferences, spending habits and demographics; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by us; challenges in executing our omni-channel and transformation strategy, including our ability to establish and profitably maintain the appropriate mix of digital and physical presence in the markets we serve; our ability to successfully execute our store fleet optimization strategies, including our ability to achieve anticipated cost savings and to not exceed anticipated costs; our ability to execute on any strategic transactions and realize the benefits of any, partnerships, investments or divestitures; disruptions to our 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; damage to our reputation in any aspect of our operations; the cost of labor, merchandise, logistical costs and other costs and expenses; potential supply chain disruption due to trade restrictions or otherwise, 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; inflation and the related increases in costs of materials, labor and other costs; inefficient management of relationships and dependencies on third-party service providers; our ability to attract and retain qualified employees in all areas of the organization; unusual weather patterns and natural disasters, including the impact of climate change; uncertainty and disruptions in financial markets; volatility in the price of our common stock and its effect, and the effect of other factors, on our capital allocation strategy; changes to statutory, regulatory and other legal requirements or deemed noncompliance with such requirements; changes to accounting rules, regulations and tax laws, or new interpretations of existing accounting standards or tax laws; new, or developments in existing, litigation, claims or assessments; and a failure of our business partners to adhere to appropriate laws, regulations or standards. Except as required by law, we do not undertake any obligation to update our forward-looking statements.
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