Overview

Bed Bath & Beyond Inc. and subsidiaries (the "Company") is an omnichannel retailer that makes it easy for its customers to feel at home. The Company sells a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond ("BBB"), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively, "CTS"), Harmon, Harmon Face Values, or Face Values (collectively, "Harmon"), buybuy BABY ("Baby") and World Market, Cost Plus World Market, or Cost Plus (collectively, "Cost Plus World Market"). Customers can purchase products either in-store, online, with a mobile device or through a customer contact center. The Company generally has the ability to have customer purchases picked up in-store, curbside or shipped direct to the customer from the Company's distribution facilities, stores or vendors. The Company also operates Decorist, an online interior design platform that provides personalized home design services. In addition, the Company operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates retail stores in Mexico under the name Bed Bath & Beyond.

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

The Company has undertaken significant changes over the past year, including extensive changes to its Board of Directors and executive leadership, as well as development of essential strategies and plans to renew and build its business for long-term success. In recent months, as the world responds to the unparalleled challenge of the COVID-19 pandemic, the Company has taken aggressive and thoughtful steps to safeguard its people and communities while it continues to serve customers. As 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 closure of
       approximately 200 mostly Bed Bath & Beyond stores over the next two years.
       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)
       and Curbside Pickup;


•      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 program and business transformation plan, the Company recorded pre-tax restructuring charges of approximately $27.1 million, which are primarily related to severance and associated costs for the workforce reduction as well as other restructuring activities, during the three months ended August 29, 2020. At this initial stage of the store closure plan, a reasonable estimate of the amount or range of amounts expected to be incurred in connection with the store closure plan, both with respect to each major type of cost associated therewith and with respect to the total cost or estimated range of total cost, or an estimate of the amount or range of amounts that will result in future cash expenditures, cannot be made at this time.

During fiscal 2019, the Company entered into a definitive agreement to sell PersonalizationMall.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 on March 30, 2020, but failed to do so. Accordingly, the Company filed an action to require the buyer to close the transaction. On July 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 on August 3, 2020. During the first quarter of fiscal 2020, the Company also sold One Kings Lane to a third party for an amount that was not material. The net proceeds from these transactions and any



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other potential cash-generating transactions could be used to reinvest in the Company's core business operations to drive growth, fund share repurchases, reduce the Company's outstanding debt, or some combination of these. In other activity, the Company has been further evaluating its product assortment and taking aggressive steps to rationalize the assortment and better manage its inventory.

While the Company cannot make any assurances, with guidance from its outside advisors, it continues to pursue other portfolio adjustments and evaluate the Company's remaining owned real estate in an effort to create a stronger and more focused portfolio and enhance shareholder value.

Given the current business environment resulting from the COVID-19 pandemic, including temporary store closures and further reductions in operating expenses, the Company modified its fiscal 2020 capital investments, focusing on its core business and key projects that support its digital and omni fulfillment capabilities, including the introduction of BOPIS and contactless Curbside Pickup services, omni inventory management, and digital marketing and personalization. The Company is also re-engineering its supply chain and vendor relationships, as well as further strengthening its owned-brand strategy. These are among the accelerated actions being taken to lay the foundation to create a new vision for the Company.

The integration of retail store and digital channels allows the Company to provide its customers with a seamless omni channel shopping experience. Store purchases are primarily fulfilled from that store's inventory or may also be shipped to a customer from one of the Company's distribution facilities, from a vendor, or from another store. 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 through The Beyond Store, the Company's proprietary web-based platform. These capabilities allow the Company to better serve customers across various channels.

Operating in the highly competitive retail industry, the Company'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.

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The pandemic has materially disrupted the operations of the Company to date. The consequences of the pandemic and impact to the economy continue to evolve and the full extent of the impact is still uncertain. As a result of 'social distancing' measures put into effect in March 2020, the Company began to temporarily close certain store locations that did not have a health and personal care department and, as of March 23, 2020, all retail banner stores across the U.S .and Canada were temporarily closed except for most stand-alone Baby and Harmon stores, subject to state and local regulations. In May 2020, the Company announced a phased approach to re-open its stores, subject to state and local regulations. As of the end of July 2020, nearly all of the Company's stores had re-opened, in accordance with state and local regulations. The Company cannot predict, however, whether reopened stores will remain open, particularly if the pandemic's effects increase as the winter season approaches. In addition, the Company has expanded its recently rolled out BOPIS and contactless Curbside Pickup services to cover the vast majority of stores. In conjunction with the temporary store closures, the Company implemented additional cost reductions, including a furlough of the majority of store associates and a portion of corporate associates. The Company provided impacted store associates with applicable pay and benefits through April 3, 2020, and impacted corporate associates with pay and benefits through April 18, 2020. In addition, the Company had continued to pay 100% of the cost of healthcare premiums for all associates who participated in the Company's health plan. The majority of the associates who were subject to furlough have returned as of August 29, 2020. The Company also implemented a temporary reduction in salaries of the Company's executive team by 30% through May 16, 2020, and a temporary reduction in the quarterly cash compensation of the independent directors of the Board of Directors by 30% for the fiscal 2020 first quarter. The Company has and will continue to seek opportunities to mitigate the impact of the COVID-19 pandemic, including, among others, renegotiating payment terms for goods, services and rent, managing inventory levels, and reducing discretionary spending such as business travel 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 the first half of fiscal 2020, and could continue to materially impact results of operations and cash flows as well as the Company's financial condition.



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Given the uncertainties regarding the spread of the virus, the timing of the economic recovery and the possibility of a resurgence or a second wave of the virus, the related financial impact cannot be reasonably predicted or estimated at this time. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in the United States. The CARES Act is an emergency economic aid package to help mitigate the impact of the COVID-19 pandemic. Among other things, the CARES Act provides certain changes to tax laws, which may impact the Company's results of operations, financial position and cash flows. The Company is currently implementing certain provisions of the CARES Act, such as deferring employer payroll taxes and utilizing the ability to carry back and deduct losses to offset prior income in previously filed tax returns. As of August 29, 2020, the Company has deferred $19.8 million of employer payroll taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. During the six months ended August 29, 2020, the Company recorded an additional $43.0 million benefit as a result of the fiscal 2019 net operating losses that can now be carried back to prior years during which the federal tax rate was 35% under the CARES Act. In addition, the Company recorded a credit of $27.3 million as an offset to selling, general and administrative expenses as a result of the employee retention credits made available under the CARES Act for U.S. employees and under the Canada Emergency Wage Subsidy for Canadian employees during the six months ended August 29, 2020.

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



•      Net sales for the three months ended August 29, 2020 were $2.688 billion,
       a decrease of approximately 1.2% as compared with the three months ended
       August 31, 2019. Net sales for the six months ended August 29, 2020 were
       $3.995 billion, a decrease of approximately 24.5% as compared with the six
       months ended August 31, 2019. As noted above, the majority of the
       Company's stores were closed beginning March 23, 2020, except for most
       stand-alone Baby and Harmon stores, which remained open during such
       period, subject to state and local regulations, through July 2020. Nearly
       all stores reopened as of July 2020.


?      For the three and six months ended August 29, 2020, net sales consummated
       through digital channels increased approximately 88% and 85%,
       respectively, and net sales consummated in-store declined approximately
       18.0% and 46.0%, respectively. Net sales consummated through digital
       channels represented approximately one third and approximately two fifths
       of the Company's net sales for the three and six months ended August 29,
       2020, respectively.


?      Comparable sales for the three months ended August 29, 2020 increased by
       approximately 5.5%, compared to a decrease of approximately 6.7% for the
       three months ended August 31, 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 six months ended August 29, 2020.
       Comparable sales for the six months ended August 31, 2019 decreased by
       approximately 6.6%.

Comparable sales include sales consummated through all retail channels which have been operating for twelve full months following the opening period (typically four to six weeks). The Company is an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store, online, with a mobile device or through a customer contact center, and have it fulfilled, in most cases, either through in-store customer pickup or by direct shipment to the customer from one of the Company's distribution facilities, stores or vendors.

Sales consummated on a mobile device while physically in a store location and BOPIS orders are recorded as customer facing digital channel sales. Customer orders taken in-store by an associate through The Beyond Store, the Company's proprietary, web-based platform, are recorded as in-store sales. Prior to the Company implementing BOPIS and contactless Curbside Pickup services, customer orders reserved online and picked up in a store were recorded as in-store sales. Sales originally consummated from customer facing digital channels and subsequently returned in-store are recorded as a reduction of in-store sales.

Stores relocated or expanded are excluded from comparable sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store's sales are not considered comparable once the store closing process has commenced. Stores impacted by unusual and unexpected events outside the Company's control, including the COVID-19 pandemic, severe weather, fire or floods, are excluded from comparable sales for the period of time that such event would cause a meaningful disparity in sales over the prior period. One Kings Lane and PMall are excluded from the comparable sales calculation beginning in the second quarter of fiscal 2020 due to the sale of these businesses. Linen Holdings is excluded from the comparable sales calculation and will continue to be excluded on an ongoing basis as it represents non-retail activity.




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•      Gross profit for the three months ended August 29, 2020 was $987.5
       million, or 36.7% of net sales, compared with $727.0 million, or 26.7% of
       net sales, for the three months ended August 31, 2019. Gross profit for
       the six months ended August 29, 2020 was $1.336 billion, or 33.4% of net
       sales, compared with $1.614 billion, or 30.5% of net sales, for the six
       months ended August 31, 2019. The Company's gross profit margin in the
       second quarter of fiscal 2020 includes a favorable adjustment to the
       incremental inventory reserve for future markdowns of approximately $23.0
       million. The Company's gross profit margin in the prior year reflected an
       incremental reserve for future markdowns of approximately $194.0 million
       taken in the second quarter of fiscal 2019 related to the Company's
       transformation initiatives, which was an incremental charge to the actual
       markdowns recorded in the second quarter of fiscal 2019.



•      Selling, general and administrative expenses ("SG&A") for the three months
       ended August 29, 2020 were $850.2 million, or 31.6% of net sales, compared
       with $880.9 million, or 32.4% of net sales, for the three months ended
       August 31, 2019. SG&A for the six months ended August 29, 2020 were $1.574
       billion, or 39.4% of net sales, compared with $1.774 billion, or 33.5% of
       net sales, for the six months ended August 31, 2019.



•      Goodwill and other impairments for the three and six months ended August
       29, 2020 were $29.2 million or 1.1% of net sales, and $114.4 million or
       2.9% of net sales, respectively, compared with $28.4 million, or 1.0% of
       net sales and $429.6 or 8.1% of net sales, respectively, for the three and
       six months ended August 31, 2019.


•      Restructuring and transformation initiative costs during the three and six
       months ended August 29, 2020 were $27.1 million, primarily related to
       severance costs recorded in connection with the workforce reduction
       program described above, as well as other restructuring activities.


•      Gain on sale of business for the three and six months ended August 29,
       2020 was $189.5 million, which related to the Company's sale of its PMall
       business on August 3, 2020.


•      Interest expense, net for the three and six months ended August 29, 2020
       was $23.4 million and $40.5 million, respectively, compared with $16.3
       million and $32.2 million, respectively, for the three and six months
       ended August 31, 2019.


•      Gain on extinguishment of debt for the three and six months ended August
       29, 2020 of $77.0 million related to partial repayment of senior unsecured
       notes in August 2020.


•      The effective tax rate for the three and six months ended August 29, 2020
       was 32.8% and 45.2%, respectively, as compared with 30.1% and 17.9%,
       respectively, for the three and six months ended August 31, 2019. For the
       three and six months ended August 29, 2020, the effective tax rate
       includes the impact of the gain on sale of PMall, 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. The
       effective tax rate for the six months ended August 29, 2020 also includes
       a $43.0 million benefit related to fiscal 2019 net operating loss
       carry-back under the CARES Act, as described above. For the three months
       and six months ended August 31, 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
       items resulting in net after tax costs.


•      For the three months ended August 29, 2020, net earnings per diluted share
       was $1.75 ($217.9 million), as compared with net loss per diluted share of
       $(1.12) ($(138.8) million) for three months ended August 31, 2019. Net
       earnings per diluted share for the three months ended August 29, 2020
       includes the net favorable impact of $1.25 per share related to the gain
       on sale of PMall, gain on extinguishment of debt and decrease in the
       incremental inventory reserve for future markdowns recorded in the prior
       year, partially offset by non-cash impairment charges for tradename and
       certain store-level assets and charges recorded in connection with the
       restructuring program and transformation initiatives. Net earnings per
       diluted share for the three months ended August 31, 2019 includes an
       unfavorable impact of $1.46 per diluted share for the three months ended
       August 31, 2019 from charges related to the first wave of the Company's
       transformation initiatives, including severance costs associated with the
       corporate workforce reduction and the decision to outsource certain
       functions, an incremental reserve for future markdowns, and non-cash store
       impairment charges.

For the six months ended August 29, 2020, net loss per diluted share was $(0.68) ($(84.4) million), as compared with net loss per diluted share of $(4.06) ($(509.9) million) for the six months ended August 31, 2019. Net loss per diluted share for the six months ended August 29, 2020 includes the net favorable impact of $0.78 per share related to gain on sale of PMall, gain on partial extinguishment of debt and decrease in the incremental inventory reserve for future markdowns recorded in the prior year, partially offset by non-cash impairment charges for tradename and certain store-level assets and charges recorded in connection with the restructuring program and transformation initiatives. Net earnings per diluted share for the six months ended August 31, 2019 include the unfavorable impact of $4.52 per diluted share during the six months ended August 31, 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.



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Capital expenditures for the six months ended August 29, 2020 and August 31, 2019 were $79.3 million and $125.2 million, respectively. In the first six months of fiscal 2020, approximately 57% of the capital expenditures related to pre-planned technology projects, including inventory and warehouse management capabilities such as advanced allocation logic and replenishment strategies to meet changing customer needs. The remaining capital expenditures were primarily related to investments in existing stores.

The Company continues to review and prioritize its capital needs and remains committed to making the required investments in its infrastructure to help position the Company for continued growth and success. Key areas of investment include: continuing to improve the presentation and content as well as the functionality, general search and navigation across its customer facing digital channels; improving customer data integration and customer relations management capabilities; continuing to enhance service offerings to its customers; continuing to strengthen and deepen its information technology, analytics, marketing and e-commerce groups; and creating more flexible fulfillment options designed to improve the Company's delivery capabilities and lower the Company's shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling customer experience across the Company's omnichannel retail platform. As a result of the COVID-19 pandemic, the Company is prioritizing approximately $250 million in essential capital expenditures for fiscal 2020 to drive strategic growth plans, including investments in digital, BOPIS and Curbside Pickup service offerings, and has postponed approximately $150 million in planned capital expenditures, including some store remodels.

During the six months ended August 29, 2020, the Company opened a total of four new stores and closed 25 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 170 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 six months ended August 29, 2020 and August 31, 2019, total cash dividends of $23.0 million and $43.4 million were paid, respectively. In March 2020, the Company suspended its future quarterly declarations of cash dividends as a result of the COVID-19 pandemic. Any future quarterly cash dividend payments on its common stock will be subject to the determination by the Board of Directors, based on an evaluation of the Company's earnings, financial condition and requirements, business conditions and other factors, including the restrictions on the payment of dividends under the secured asset-based revolving credit facility (see "Long Term Debt," Note 11).

During the three and six months ended August 29, 2020, the Company repurchased approximately 57,000 shares and 0.5 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 $0.5 million and $3.0 million, respectively. During the three and six months ended August 31, 2019, the Company repurchased approximately 1.4 million and 6.7 million shares, respectively, of its common stock at a total cost of approximately $16.5 million and $98.0 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. The Company postponed its plans for share repurchases as a result of the COVID-19 pandemic. Any future share repurchases will be subject to the determination of the Board of Directors, based on an evaluation of the Company's earnings, financial condition and requirements, business conditions and other factors, including the restrictions on share repurchases under the secured asset-based revolving credit facility (see "Long Term Debt," Note 11).




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Results of Operations
Net Sales
Net sales for the three months ended August 29, 2020 were $2.688 billion, a
decrease of $31.5 million or approximately 1.2%, compared to $2.719 billion of
net sales for the corresponding quarter last year. Net sales for the six months
ended August 29, 2020 were $3.995 billion, a decrease of $1.3 billion, or
approximately 24.5%, compared to net sales of $5.292 billion for the
corresponding six months last year. The decrease in net sales for the three
months ended August 29, 2020 was partially due the the divestiture of One Kings
Lane. The decrease in net sales for the six months ended August 29, 2020 was
primarily due to the temporary nationwide closure of the majority of the
Company's stores beginning March 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 of July 2020. For the three and six months ended August
29, 2020, net sales consummated through digital channels increased approximately
88% and 85%, respectively, and net sales consummated in-store declined
approximately 18.0% and 46.0%, respectively. Net sales consummated through
digital channels represented approximately one third and approximately two
fifths of the Company's net sales for the three and six months ended August 29,
2020, respectively.
Comparable sales for the three months ended August 29, 2020 increased by
approximately 5.5%, compared to a decrease of approximately 6.7% for the three
months ended August 31, 2019. The increase in comparable sales for the three
months ended August 29, 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 six months ended August
29, 2020. Comparable sales for the six months ended August 31, 2019 decreased by
approximately 6.6%.
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 37.5% and 62.5% of net sales, respectively, for the three
months ended August 29, 2020, and approximately 38.7% and 61.3% of net sales,
respectively, for the three months ended August 31, 2019. Sales of domestics
merchandise and home furnishings accounted for approximately 35.2% and 64.8% of
net sales, respectively, for the six months ended August 29, 2020 and
approximately 37.2% and 62.8% of net sales, respectively, for the six months
ended August 31, 2019.
Gross Profit
Gross profit for the three months ended August 29, 2020 was $987.5 million, or
36.7% of net sales, compared with $727.0 million, or 26.7% of net sales, for the
three months ended August 31, 2019. Gross profit for the six months ended August
29, 2020 was $1.336 billion, or 33.4% of net sales, compared with $1.614
billion, or 30.5% of net sales, for the six months ended August 31, 2019. The
Company's gross profit margin in the second quarter of fiscal 2020 includes a
favorable adjustment to the incremental inventory reserve for future markdowns
taken in the prior year of approximately $23.0 million. The Company's gross
profit margin in the prior year reflected an incremental reserve for future
markdowns of approximately $194.0 million taken in the second quarter of fiscal
2019 related to the Company's transformation initiatives, which was an
incremental charge to the actual markdowns recorded in the second quarter of
fiscal 2019. Also, the increase in gross profit margin as a percentage of net
sales for the three months ended August 29, 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. For the six
months ended August 29, 2020, gross profit margin as a percentage of net sales
was also impacted by the impact of channel mix, including higher net-direct-to
customer shipping expense, offset by the leverage of distribution and
fulfillment costs.

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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 150 basis points and 200 basis
points, respectively, during the three and six months ended August 29, 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 ended August 29, 2020 was $850.2 million, or 31.6% of
net sales, compared with $880.9 million, or 32.4% of net sales, for the three
months ended August 31, 2019. The decrease in SG&A, as a percentage of net sales
was primarily attributable to, in order of magnitude: a decrease in payroll and
payroll-related expenses (primarily for salaried employees) and advertising
costs, partially offset by the unfavorable impact due to the reevaluation of
costs included in cost of sales described above, and an increase in professional
fees, which was in part related to consulting costs associated with the
Company's strategic initiatives.
SG&A for the six months ended August 29, 2020 was $1.574 billion, or 39.4% of
net sales, compared with $1.774 billion, or 33.5% of net sales, for the six
months ended August 31, 2019. The increase in SG&A, as a percentage of net sales
was primarily attributable to, in order of magnitude: increases in occupancy
costs (primarily rent), the unfavorable impact due to the reevaluation of costs
included in cost of sales described above, and increased professional fees, in
part related to consulting costs related to the Company's strategic initiatives.
Fixed costs, such as occupancy, as a percentage of net sales, were also impacted
by the significant reduction in net sales due to the temporary nationwide
closure of the majority of the Company's stores during the fiscal first quarter
of 2020 due to the COVID-19 pandemic.
Goodwill and other impairments
Goodwill and other impairments for the three and six months ended August 29,
2020 were $29.2 million, or 1.1% of net sales, and $114.4 million, or 2.9% of
net sales, respectively, compared with $28.4 million, or 1.0% of net sales
and $429.6 million, or 8.1% of net sales, respectively, during the comparable
periods last year. For the three months and six months ended August 29, 2020,
the Company recorded impairment charges of $2.0 million and $82.4 million
relating to certain store-level assets, including leasehold improvements and
operating lease assets, and tradename impairments of $27.2 million and $32.7
million, respectively. Goodwill and other impairments for the six months ended
August 31, 2019 included goodwill impairments of $391.1 million, tradename
impairments of $10.2 million and certain store-level and operating lease asset
impairments of $28.4 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 Costs
During the three and six months ended August 29, 2020, the Company recorded
charges of $27.1 million in connection with its restructuring program and
transformation initiatives, primarily related to severance costs recorded in
connection with the workforce reduction program described above as well as other
restructuring activities. (see "Restructuring Activities," Note 16).
Gain on Sale of Business
During the three and six months ended August 29, 2020, the Company recorded a
$189.5 million gain in connection with the sale of its PMall business on August
3, 2020 (see "Divestitures and Assets Held-for-Sale," Note 17)
Operating Profit (Loss)
Operating profit for the three months ended August 29, 2020 was $270.5 million,
or 10.1% of net sales, compared with an operating loss of $182.3 million, or
6.7% of net sales, during the comparable period last year. For the six months
ended August 29, 2020, operating loss was $190.4 million, or 4.8% of net sales,
compared with an operating loss of $589.1 million, or 11.1% of net sales for the
six months ended August 31, 2019. The favorable changes in operating profit
(loss) as a percentage of net sales in both periods were primarily due to
increases in the gross margin and a gain recorded on the sale of PMall during
the second quarter of fiscal 2020. Operating margin for the six months ended
August 29, 2020 also benefited from lower goodwill and other impairments
compared to the prior year period, but was partially offset by increased SG&A
expenses as percentage of sales. 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 of July
2020.


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Interest Expense, net
Interest expense, net for the three and six months ended August 29, 2020 was
$23.4 million and $40.5 million, respectively, as compared to $16.3 million and
$32.2 million, respectively, for the three and six months ended August 31, 2019.
For the three and six months ended August 29, 2020 the increase in interest
expense, net was primarily driven by increased interest costs relating the
Company's revolving credit facilities, primarily relating to the new ABL
Facility, partially offset by lower interest income on investments.
Gain on Extinguishment of Debt
During the three and six months ended August 29, 2020, the Company recorded a
$77.0 million gain on the repurchase of $75 million principal amount of 4.915%
senior unsecured notes due August 1, 2034 and $225 million principal of 5.165%
senior unsecured notes due August 1, 2044 (see "Long Term Debt," Note 11).
Income Taxes
The effective tax rate for the three months ended August 29, 2020 was 32.8%,
compared with 30.1% for the three months ended August 31, 2019. The effective
tax rate for the three months ended August 29, 2020 includes the impact of the
gain on sale of PMall, 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 ended August 31,
2019 included net after tax benefits of approximately $5.4 million,
respectively, due to discrete federal and state tax items occurring during these
quarters.
The effective tax rate for the six months ended August 29, 2020 was 45.2%,
compared with 17.9% for the six months ended August 31, 2019. For the six months
ended August 29, 2020, the effective tax rate includes the impact of the gain on
sale of PMall, partially offset by the impact of impairment charges for
tradename and certain store-level assets, a $43.0 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 costs. For the six months ended
June 1, 2019, the effective tax rate reflected the impact of charges for
goodwill and other impairments and severance costs, portions of which are
non-deductible for tax purposes, and after tax costs of approximately $7.0
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 Earnings (Loss)
As a result of the factors described above, net earnings for the three months
ended August 29, 2020 were $217.9 million, compared with net loss of $138.8
million for the three months ended August 31, 2019. Net loss for the six months
ended August 29, 2020 was $84.4 million, compared with net loss of $509.9
million for the six months ended August 31, 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 CEO Mark Tritton, who joined the Company on November 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.
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 the first six months of fiscal 2020,
the Company announced the hiring of a new leadership team, consisting of the
following:
•      On March 4, 2020, Joe Hartsig joined the Company as Executive Vice
       President, Chief Merchandising Officer of the Company and President of
       Harmon Stores Inc.;


•      On May 4, 2020, Gustavo Arnal joined the Company as Executive Vice
       President, Chief Financial Officer and Treasurer of the Company;


•      On May 11, 2020, Rafeh Masood joined the Company as Executive Vice
       President, Chief Digital Officer;


•      On May 11, 2020, Gregg Melnick assumed the role of Executive Vice
       President, Chief Stores Officer. Previously, Mr. Melnick served as the
       Company's interim Chief Digital Officer;



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•      On May 18, 2020, John Hartmann joined the Company as Chief Operating
       Officer of the Company and President, buybuy BABY;


•      On May 18, 2020, Arlene Hong joined the Company as Executive Vice
       President, Chief Legal Officer and Corporate Secretary;


•      On May 26, 2020, Cindy Davis joined the Company as Executive Vice
       President, Chief Brand Officer of the Company and President, Decorist; and


•      On July 28, 2020, the Company announced that Lynda Markoe will join the
       Company as Executive Vice President, Chief People and Culture Officer, in
       September 2020.

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 March 2020 and the majority of the Company's stores were temporarily closed during the first quarter 2020. Subsequently, the Company began a measured approach to re-opening its stores, subject to state and local regulations, and nearly all of the Company's stores have re-opened as of July 2020. During the first quarter of fiscal 2020, the Company elected to draw down the remaining $236.4 million of available funds under its $250 million revolving credit facility (the "Revolver"), which was refinanced with the Company's $850 million secured asset-based revolving credit facility entered into on June 19, 2020 (the "ABL Facility"). These borrowings were subsequently repaid during the second quarter of fiscal 2020. The new ABL Facility matures on June 19, 2023 and provides the Company with additional liquidity. The Company's ability to borrow under the ABL Facility is based upon a specified borrowing base consisting of a percentage of the Company's eligible inventory and credit card receivables as defined in the ABL Facility, net of applicable reserves (See "Long Term Debt," Note 11).

During the second quarter of fiscal 2020, the Company paid approximately $220.9 million to repurchase $300 million aggregate principal amount of its outstanding 4.915% Senior Notes due 2034 and 5.165% Senior Notes due 2044. In addition, on August 3, 2020, the Company sold its PMall business, for net proceeds of $244.8 million, subject to certain working capital and other adjustments.

The Company ended the second 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 August 29, 2020, the Company had approximately $1.5 billion in cash and investment securities, an increase of approximately $55.4 million compared with February 29, 2020. The Company believes that it can continue to finance its operations through existing and internally generated funds for the next twelve months. In addition, if necessary, the Company could borrow under its ABL Facility, subject to customary conditions, including no default, the accuracy of representations and warranties, and borrowing base availability. The ABL Facility contains an anti-cash hoarding provision which limits the availability of loans under the credit facility to $600 million (plus the amount of any incremental first-in-last-out loans) if, after giving effect to any borrowing and the application of proceeds thereof, the Company has greater than $100 million in unrestricted cash or cash equivalents in the aggregate as of the date of such borrowing. In addition, as a result of the COVID-19 pandemic, for fiscal 2020, the Company has and continues to take measures to preserve its liquidity, including the postponement of its share repurchase program and the suspension of the payment of dividends; postponement of approximately $150 million in capital expenditures and, among other things, renegotiating payment terms for goods, services and rent, managing to lower inventory levels, and reducing discretionary spend such as business travel, advertising and expense associated with the maintenance of stores that were temporarily closed. Similar to other retailers, the Company has withheld portions of and/or delayed payments to certain of its business partners as the Company seeks to renegotiate payment terms, in order to further maintain liquidity given the temporary store closures. In some instances, the renegotiations of lease terms have led to agreements with landlords for rent abatements or rental deferrals. Total payments withheld and/or delayed or deferred as of August 29, 2020 were approximately $50.6 million and are included in current liabilities. Additional negotiations of payment terms are still in process, and there can be no assurance that the Company will be able to successfully renegotiate payment terms with all such business partners, and the ultimate outcome of these activities including the responses of certain business partners are not yet known. The Company is also executing on its business transformation program, which is designed to improve its profitability and includes the closure of 200 mostly Bed Bath & Beyond stores under its store network optimization program and workforce reductions as part of its restructuring program.




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Capital expenditures for fiscal 2020 are projected to be approximately $250 million related to essential capital expenditures to drive strategic growth plans, including investments in digital and BOPIS. In addition, the Company reviews its alternatives with respect to its capital structure on an ongoing basis. The Company's liquidity may continue to be negatively impacted by the uncertainty regarding the spread of the virus and the timing of economic recovery and the possibility of a resurgence of a second wave of the virus.

Fiscal 2020 compared to Fiscal 2019

Net cash provided by operating activities for the six months ended August 29, 2020 was $148.9 million, compared with $255.9 million in the corresponding period in fiscal 2019. Year over year, the Company experienced a decline in net income after non-cash adjustments and a decrease in cash related to changes in components of working capital (primarily merchandise inventories, partially offset by accounts payable, other current assets, and other current liabilities).

Retail inventory, which includes inventory in the Company's distribution facilities for direct to customer shipments, was approximately $2.0 billion at August 29, 2020, a decrease of 2.1% compared to retail inventory at February 29, 2020. The Company continues to focus on its inventory optimization strategies.

Net cash provided by investing activities for the six months ended August 29, 2020 was $552.0 million, compared with net cash provided by investing activities of $362.8 million in the corresponding period of fiscal 2019. For the six months ended August 29, 2020, net cash provided by investing activities included $386.5 million of redemptions of investment securities and $244.8 million in proceeds from the sale of PMall business, partially offset by $79.3 million of capital expenditures. For the six months ended August 31, 2019, net cash provided by investing activities was comprised of $488.0 million of redemptions of investment securities, net of purchases, partially offset by $125.2 million of capital expenditures.

Net cash used in financing activities for the six months ended August 29, 2020 was $255.1 million, compared with net cash used in financing activities of $141.3 million in the corresponding period of fiscal 2019. The increase in net cash provided by financing activities was primarily due to net debt repayments of $221.4 million, primarily associated with the repurchase of a portion of the outstanding senior notes during the second quarter of fiscal 2020, partially offset by a decrease in common stock repurchases of $94.9 million and lower dividend payments of $20.4 million.

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.

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 February 29, 2020 ("2019 Form 10-K"), filed with the Securities and Exchange Commission ("SEC").

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, the future impact of the novel coronavirus (COVID-19), the potential impact and success of its strategic restructuring program, and its current estimates and expectations for financial performance for future periods. 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; 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



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trade restrictions, and other factors such as natural disasters, such as 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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