Notes to Consolidated Financial Statements
Fiscal years ended
September 24, 2017
,
September 25, 2016
and
September 27, 2015
(1) Description of Business
Whole Foods Market is the leading natural and organic foods supermarket and is a mission-driven company that aims to set the standards of excellence in food retailing. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance over the last
39
years. As of
September 24, 2017
, we operated
470
stores:
448
stores in
42
United States (“U.S.”) states and the District of Columbia;
13
stores in Canada; and
9
stores in the United Kingdom (“U.K.”). The Company has
one
operating segment and a single reportable segment, natural and organic foods supermarkets. Whole Foods Market became an indirect wholly owned subsidiary of Amazon.com, Inc. (the “Parent”) (Nasdaq: AMZN) on August 28, 2017.
The following is a summary of annual percentage sales and net long-lived assets by geographic area for the fiscal years indicated:
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2017
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|
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2016
|
|
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2015
|
|
|
Sales:
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|
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|
United States
|
97.0
|
%
|
|
97.1
|
%
|
|
96.9
|
%
|
|
Canada and United Kingdom
|
3.0
|
|
|
2.9
|
|
|
3.1
|
|
|
Total sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Long-lived assets, net:
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|
|
|
|
|
|
United States
|
97.3
|
%
|
|
97.5
|
%
|
|
97.4
|
%
|
|
Canada and United Kingdom
|
2.7
|
|
|
2.5
|
|
|
2.6
|
|
|
Total long-lived assets, net
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The following is a summary of annual percentage sales by product category for the fiscal years indicated:
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2017
|
|
|
2016
|
|
|
2015
|
|
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Perishables:
|
|
|
|
|
|
|
Prepared foods and bakery
|
18.8
|
%
|
|
18.9
|
%
|
|
19.0
|
%
|
|
Other perishables
|
48.4
|
|
|
47.6
|
|
|
47.5
|
|
|
Total perishables
|
67.2
|
|
|
66.5
|
|
|
66.5
|
|
|
Non-perishables
|
32.8
|
|
|
33.5
|
|
|
33.5
|
|
|
Total sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
(2) Summary of Significant Accounting Policies
Definition of Fiscal Year
The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years
2017
,
2016
and
2015
were 52-week years.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. All significant majority-owned subsidiaries are consolidated on a line-by-line basis, and all significant intercompany accounts and transactions with majority-owned subsidiaries are eliminated upon consolidation.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
Investments
Available-for-sale investments are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale investments are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. A decline in the fair value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction of the carrying amount to fair value. The impairment is charged to earnings and a new cost basis of the security is established. The Company considers several factors when determining whether an impairment is other than temporary, including the extent and duration of the decline in fair value and whether it is more likely than not that we will be required to sell the security before recovery of its basis. Cost basis is established and maintained utilizing the specific identification method.
The Company also holds certain equity interests accounted for using the cost method of accounting. Equity investments without readily determinable fair values for which we do not have the ability to exercise significant influence are accounted for using the cost method of accounting and classified as “Other assets” on the Consolidated Balance Sheet. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions, and additional investments. Additionally, the Company holds certain equity interests accounted for using the equity method of accounting.
Restricted Cash
Restricted cash primarily relates to cash held as collateral to support a portion of our projected workers’ compensation obligations. Additionally,
the Company holds restricted cash as a rent guarantee on certain operating leases through fiscal year 2020
.
Accounts Receivable
Accounts receivable are shown net of related allowances and consist primarily of credit card receivables, vendor receivables, customer purchases, and occupancy-related receivables. Vendor receivable balances are generally presented on a gross basis separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method and was not material in fiscal year
2017
or
2016
.
Inventories
The Company values inventories at the lower of cost or market. Cost was determined using the dollar value retail last-in, first-out (“LIFO”) method for approximately
92.9%
and
91.8%
of inventories in fiscal years
2017
and
2016
, respectively. Under the LIFO method, the cost assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO carrying value, or LIFO reserve, was approximately
$47 million
and
$42 million
at
September 24, 2017
and
September 25, 2016
, respectively. Costs for remaining inventories are determined by the first-in, first-out method. Cost before the LIFO adjustment is principally determined using the item cost method, which is calculated by counting each item in inventory, assigning costs to each of these items based on the actual purchase cost (net of vendor allowances) of each item and recording the actual cost of items sold.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. The Company provides depreciation of equipment over the estimated useful lives (generally
3
to
15
years) using the straight-line method, and provides amortization of leasehold improvements and real estate assets under capital leases on a straight-line basis over the shorter of the estimated useful lives of the improvements or the expected terms of the related leases. The Company provides depreciation of buildings over the estimated useful lives (generally
20
to
50
years) using the straight-line method. Costs related to a projected site determined to be unsatisfactory and general site selection costs that cannot be identified with a specific store location are charged to operations currently. The Company recognizes a liability for the fair value of a conditional asset retirement obligation when the obligation is incurred. Repair and maintenance costs are expensed as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in earnings.
Leases
The Company generally leases stores, non-retail facilities and administrative offices under operating leases. Store lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of specified levels. We recognize rent on a straight-line basis over the expected term of the lease, which includes rent holiday periods and scheduled rent increases. The expected lease term begins with the date the Company has the right to possess the leased space for construction and other purposes. The expected lease term may also include the exercise of renewal options if the exercise of the option is determined to be reasonably assured. The expected lease term is also used in the determination of whether a store lease is a capital or operating lease. Amortization of land and building under capital lease is included with occupancy costs, while the amortization of equipment under capital lease is included with depreciation expense. Additionally, we review leases for which we are involved in construction to determine whether build-to-suit and sale-leaseback criteria are met. For those leases that trigger specific build-to-suit accounting, developer assets are recorded during the construction period with an offsetting liability. Developer assets recorded as of
September 24, 2017
totaling approximately
$19 million
, with the offsetting liability included in the “Other current liabilities” line item on the Consolidated Balance Sheets. As of
September 25, 2016
, developer assets were not material. Sale-leaseback transactions are recorded as financing lease obligations. We record tenant improvement allowances and rent holidays as deferred rent liabilities, and amortize the deferred rent over the expected lease term to rent. We record rent liabilities for contingent percentage of sales lease provisions when we determine that it is probable that the specified levels as defined by the lease will be reached.
Goodwill and Intangible Assets
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. Goodwill is reviewed for impairment annually at the Company’s fiscal year end, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill impairment testing. A qualitative assessment, based on macroeconomic factors, industry and market conditions and company-specific performance, is performed to determine whether it is more likely than not that the fair value of the reporting unit is impaired. If it is more likely than not, we compare our fair value, which is determined utilizing both a market value method and discounted projected future cash flows, to our carrying value for the purpose of identifying impairment.
Intangible assets include acquired leasehold rights, favorable lease assets, trade names, brand names, patents, liquor licenses, license agreements, and non-competition agreements. The Company amortizes definite-lived intangible assets on a straight-line basis over the period the intangible asset is expected to generate cash flows, generally the life of the related agreement. Currently, the Company’s intangible assets are comprised solely of contract-based intangible assets. The weighted average life is approximately
16
years. Indefinite-lived intangible assets are reviewed for impairment quarterly, or whenever events or changes in circumstances indicate the carrying amount of an intangible asset may not be recoverable.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow, short lease life, or a plan to close is established, indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. The fair value, based on hierarchy input Level 3, is determined using management’s best estimate based on a discounted cash flow model based on future store operating results using internal projections of future net sales and comparable store sales, or based on a review of the future benefit the Company anticipates receiving from the related assets. Additionally for closing locations, the Company estimates net future cash flows based on its experience and knowledge of the area in which the closed property is located and, when necessary, utilizes local real estate brokers. Estimates of future net sales and comparable store sales may vary based upon current and anticipated business trends, including increased competition and the opening of new stores that cannibalize store sales in existing areas. Changes in these forecasts could significantly change the amount of impairment recorded, if any. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. When the Company impairs assets related to an operating location, a charge to write down the related assets is included in the “Selling, general and administrative expenses” line item on the Consolidated Statements of Operations. When the Company commits to relocate, close, or dispose of a location, a charge to write down the related assets to their estimated recoverable value is included in the “Relocation, store closure and lease termination costs” line item on the Consolidated Statements of Operations.
Fair Value of Financial Instruments
The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in generally accepted accounting principles. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
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•
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Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
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•
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Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
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•
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Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
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The Company holds money market fund investments that are classified as cash equivalents that are measured at fair value on a recurring basis based on quoted prices in active markets for identical assets. The Company also holds available-for-sale securities generally consisting of state and local municipal obligations and corporate bonds and commercial paper which hold high credit ratings. These instruments are valued using a series of multi-dimensional relational models and series of matrices with standard inputs obtained from readily available pricing sources and other observable market data, such as benchmark yields and base spread. Investments are stated at fair value with unrealized gains and losses, net of related tax effect, included as a component of shareholders’ equity until realized. Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against net earnings.
The carrying amounts of accrued payroll, bonuses and other benefits due team members, and other accrued expenses approximate fair value because of their short maturities. Store closure reserves and estimated workers’ compensation claims are recorded at net present value to approximate fair value.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability, and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The Company had insurance liabilities totaling approximately
$198 million
and
$180 million
at
September 24, 2017
and
September 25, 2016
, respectively, included in the “Other current liabilities” line item on the Consolidated Balance Sheets.
Reserves for Closed Properties
The Company maintains reserves for retail stores and other properties that are no longer being utilized in current operations. The Company provides for closed property operating lease liabilities using the present value of the remaining noncancelable lease payments and lease termination fees after the closing date, net of estimated subtenant income. The closed property lease liabilities are expected to be paid over the remaining lease terms, which generally range from
four months
to
nineteen years
. The Company estimates subtenant income and future cash flows based on the Company’s experience and knowledge of the area in which the closed property is located, the Company’s previous efforts to dispose of similar assets and existing economic conditions. Reserves for closed properties are included in the “Other current liabilities” and “Other long-term liabilities” line items on the Consolidated Balance Sheets.
The reserves for closed properties include management’s estimates for lease subsidies, lease terminations and future payments on exited real estate. Adjustments to closed property reserves primarily relate to changes in existing economic conditions, subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.
Revenue Recognition
We recognize revenue for sales of our products at the point of sale. Discounts provided to customers at the point of sale are recognized as a reduction in sales as the products are sold. Sales taxes are not included in revenue.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold includes cost of inventory sold during the period (net of discounts and allowances), distribution and food preparation costs, and shipping and handling costs. The Company receives various rebates from third-party vendors in the form of purchase or sales volume discounts and payments under cooperative advertising agreements. Purchase volume discounts are calculated based on actual purchase volumes. Volume discounts and cooperative advertising discounts in excess of identifiable advertising costs are recognized as a reduction of cost of goods sold when the related merchandise is sold. The Company utilizes forward purchases to limit its exposures to changes in commodity prices. All forward purchase commitments are established at current prices and recorded through cost of goods sold at settlement. Occupancy costs include store rental costs, property taxes, utility costs, repair and maintenance costs, and property insurance. Our largest supplier, United Natural Foods, Inc., accounted for approximately
33.2%
,
32.5%
and
32.0%
of our total purchases in fiscal years
2017
,
2016
and
2015
, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of retail operational expenses, marketing, and corporate and regional administrative support costs. Advertising expense for fiscal years
2017
,
2016
and
2015
was approximately
$113 million
,
$96 million
and
$89 million
, respectively. Advertising costs are charged to expense when incurred, except for certain production costs that are charged to expense when the advertising first takes place.
Pre-opening Expenses
Pre-opening expenses include rent expense incurred during construction of new facilities and costs related to new location openings, including costs associated with hiring and training personnel, smallwares, supplies and other miscellaneous costs. Rent expense is generally incurred approximately
nine months
prior to a store’s opening date. Other pre-opening expenses are incurred primarily in the
60 days
prior to a new store opening. Pre-opening costs are expensed as incurred.
Relocation, Store Closure and Lease Termination Costs
Relocation costs consist of moving costs, estimated remaining net lease payments, accelerated depreciation costs, related asset impairment, and other costs associated with replaced facilities. Store closure costs consist of estimated remaining lease payments, accelerated depreciation costs, related asset impairment, and other costs associated with closed facilities. Lease termination costs consist of estimated remaining net lease payments for terminated leases and idle properties, and associated asset impairments.
Share-Based Payments
In connection with the Company’s acquisition by Amazon.com, Inc. on August 28, 2017, all outstanding options were canceled and those for which the merger consideration per share exceeded the exercise price per share were converted into cash for the excess amount. Expense associated with the acceleration of the vesting period for stock options is included in “merger-related expenses” on the Statement of Operations. Stock options with an exercise price per share greater than or equal to the merger consideration per share were canceled for no consideration or payment. The Company maintained several share-based incentive plans. We granted both options to purchase common stock and restricted common stock under our Whole Foods Market 2009 Stock Incentive Plan. All options outstanding were governed by the original terms and conditions of the grants, unless modified by a subsequent agreement. Options were granted at an option price equal to the market value of the stock at the grant date and generally vested ratably over a
four
- or
nine
-year period beginning
one
year from grant date and had a
five
,
seven
, or
ten
year term. The grant date was established once the Company’s Board of Directors approved the grant and all key terms were determined. The exercise prices of our stock option grants were the closing price on the grant date. Stock option grant terms and conditions were communicated to team members within a relatively short period of time. The Company generally approved one primary stock option grant annually, occurring during a trading window. Restricted common stock was granted at the market price of the stock on the day of grant and generally vested over a
four
- or
six
-year period.
The Company used the Black-Scholes multiple option pricing model which required extensive use of accounting judgment and financial estimates, including estimates of the expected term team members retained their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that were forfeited prior to the completion of their vesting requirements. The related share-based payment expense was recognized on a straight-line basis over the vesting period. The tax savings resulting from tax deductions in excess of expense reflected in the Company’s financial statements was reflected as a financing cash flow.
All full-time team members with a minimum of
400 hours
of service could purchase our common stock through payroll deductions under the Company’s Team Member Stock Purchase Plan (“TMSPP”). The TMSPP provided for a
5%
discount on the shares’ purchase date market value, which meets the share-based payment “Safe Harbor” provisions, and therefore was non-compensatory. As a result, no compensation expense was recognized for our team member stock purchase plan.
Income Taxes
The Company recognizes deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. The Company may recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained by the taxing authorities based on technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. The Company believes that its tax positions are consistent with applicable tax law, but certain positions may be challenged by taxing authorities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.
Treasury Stock
Under the Company’s stock repurchase program, the Company could repurchase shares of the Company’s common stock on the open market that were held in treasury at cost. Shares held in treasury could be reissued to satisfy exercises of stock options and issuances of restricted stock awards. The Company’s common stock has no par value. The Company retired its treasury shares on August 28, 2017 in connection with the Amazon merger, which was recorded as an offsetting reduction of retained earnings totaling
$1.95 billion
.
Comprehensive Income
Comprehensive income consists of: net income; foreign currency translation adjustments; and unrealized gains and losses on available-for-sale securities, net of income tax, and is reflected in the Consolidated Statements of Comprehensive Income.
Foreign Currency Translation
The Company’s operations in Canada and the U.K. use their local currency as their functional currency. Foreign currency transaction gains and losses related to Canadian intercompany operations are charged to net income in the period incurred. Foreign currency gains and losses were not material in fiscal year
2017
,
2016
or
2015
. Intercompany transaction gains and losses associated with our U.K. operations are excluded from the determination of net income since these transactions are considered long-term investments in nature. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average exchange rates during the fiscal year. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual amounts could differ from those estimates.
Reclassifications
Where appropriate, we have reclassified prior years’ financial statements to conform to current year presentation.
Recent Accounting Pronouncements
The following table provides a brief description of recently issued accounting pronouncements:
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Standard
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Description
|
Effective Date
|
Effect on financial statements and other significant matters
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ASU No. 2017-04
Simplifying the Test for Goodwill Impairment (Topic 350)
|
The amendments eliminate Step 2 from the goodwill impairment test. Instead, an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss should also be considered, if applicable. The amendments should be applied on a prospective basis.
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First quarter of fiscal year ending September 27, 2020
|
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
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ASU No. 2016-13
Measurement of Credit Losses on Financial Instruments(Topic 326)
|
The amendments guide on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses on available-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic.
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First quarter of fiscal year ending September 29, 2021
|
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
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ASU No. 2016-09
Improvements to Employee Share-Based Payment Accounting (Topic 718)
|
The amendments aim to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, and certain classifications on the statement of cash flows. The amendments should be applied on either a prospective, retrospective, or modified-retrospective basis depending on the subtopic.
|
First quarter of fiscal year ending September 30, 2018
|
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
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Standard
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Description
|
Effective Date
|
Effect on financial statements and other significant matters
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ASU No. 2016-08
Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (Topic 606)
|
The amendments, which do not change the core principle of the guidance in Topic 606, clarify the implementation guidance on principal versus agent considerations, including how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments may be applied on either a full or modified retrospective basis.
|
First quarter of fiscal year ending September 29, 2019
|
We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
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ASU No. 2016-07
Simplifying the Transition to the Equity Method of Accounting (Topic 323)
|
The amendments eliminate the requirement to retroactively apply the equity method of accounting when an investment qualifies for the use of the equity method due to an increase in the level of ownership interest or degree of influence. The amendments should be applied on a prospective basis.
|
First quarter of fiscal year ending September 30, 2018
|
We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
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ASU No. 2016-04
Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force) (Subtopic 405-20)
|
The amendments require entities to recognize liabilities related to the sale of prepaid stored-value products redeemable for goods, services or cash as financial liabilities in the scope of ASC 405. Additionally, the new guidance amends ASC 405-20 to include a narrow scope exception requiring entities to recognize breakage for these liabilities in a way that is consistent with how gift card breakage will be recognized under the new revenue recognition standard. The amendments may be applied on either a full or modified retrospective basis.
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First quarter of fiscal year ending September 29, 2019
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We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
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ASU No. 2016-02
Leases (Topic 842)
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The amendments require lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The amendments should be applied on a modified retrospective basis.
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First quarter of fiscal year ending September 27, 2020
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The adoption of this ASU will result in a significant increase to the Company’s Consolidated Balance Sheets for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its Consolidated Financial Statements.
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ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
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The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet in year of adoption. Early adoption is permitted for only certain amendments of the update.
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First quarter of fiscal year ending September 29, 2019
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We are currently evaluating the impact that the adoption of these provisions will have on the Company’s consolidated financial statements.
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ASU No. 2015-17
Balance Sheet Classification of Deferred Taxes (Topic 740)
|
The amendments simplify the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The amendments may be applied on either a prospective or retrospective basis.
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First quarter of fiscal year ending September 30, 2018
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We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
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Standard
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Description
|
Effective Date
|
Effect on financial statements and other significant matters
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ASU No. 2015-11
Simplifying the Measurement of Inventory (Topic 330)
|
The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments should be applied on a prospective basis.
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First quarter of fiscal year ending September 30, 2018
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We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
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ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606)
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The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The amendments may be applied on either a full or modified retrospective basis.
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First quarter of fiscal year ending September 29, 2019
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We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.
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(3) Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
The Company held the following financial assets measured at fair value on a recurring basis based on the hierarchy levels indicated (in millions):
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September 24, 2017
|
Level 1 Inputs
|
|
Level 2 Inputs
|
|
Level 3 Inputs
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market fund
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Commercial paper
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
Municipal bonds
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
Marketable securities - available-for-sale:
|
|
|
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
Corporate bonds
|
—
|
|
|
98
|
|
|
—
|
|
|
98
|
|
|
Municipal bonds
|
—
|
|
|
135
|
|
|
—
|
|
|
135
|
|
|
Variable-rate demand notes
|
—
|
|
|
357
|
|
|
—
|
|
|
357
|
|
|
Total
|
$
|
45
|
|
|
$
|
625
|
|
|
$
|
—
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2016
|
Level 1 Inputs
|
|
Level 2 Inputs
|
|
Level 3 Inputs
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market fund
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
Commercial paper
|
—
|
|
|
30
|
|
|
—
|
|
|
30
|
|
|
Municipal bonds
|
—
|
|
|
46
|
|
|
—
|
|
|
46
|
|
|
Marketable securities - available-for-sale:
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
—
|
|
|
30
|
|
|
—
|
|
|
30
|
|
|
Municipal bonds
|
—
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
Variable rate demand notes
|
—
|
|
|
323
|
|
|
—
|
|
|
323
|
|
|
Total
|
$
|
62
|
|
|
$
|
455
|
|
|
$
|
—
|
|
|
$
|
517
|
|
Assets Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on a nonrecurring basis include items such as property and equipment, intangible assets, and other assets. These assets are measured at fair value if determined to be impaired. During fiscal years 2017 and 2015, the Company recorded fair value adjustments, based on hierarchy input Level 3, totaling approximately
$26 million
and
$46 million
, respectively, related to certain locations for which asset value exceeded expected future cash flows, which were primarily included in the “Selling, general and administrative expenses” line item on the Consolidated Statements of Operations. These asset impairment charges reduced the carrying value of related long-term assets to fair value of zero. Fair value adjustments, based on hierarchy input Level 3, were not material during fiscal year 2016.
(4) Investments
The Company holds investments primarily in marketable securities that are classified as either short- or long-term available-for-sale securities. The Company held the following investments at fair value as of the dates indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24,
2017
|
|
September 25,
2016
|
|
Short-term marketable securities - available-for-sale:
|
|
|
|
|
Commercial paper
|
$
|
35
|
|
|
$
|
30
|
|
|
Corporate bonds
|
5
|
|
|
—
|
|
|
Municipal bonds
|
107
|
|
|
26
|
|
|
Variable rate demand notes
|
357
|
|
|
323
|
|
|
Total short-term marketable securities
|
$
|
504
|
|
|
$
|
379
|
|
|
Long-term marketable securities - available-for-sale:
|
|
|
|
|
Corporate bonds
|
$
|
93
|
|
|
$
|
—
|
|
|
Municipal bonds
|
28
|
|
|
—
|
|
|
Total long-term marketable securities
|
$
|
121
|
|
|
$
|
—
|
|
Gross unrealized holding gains and losses were not material at
September 24, 2017
or
September 25, 2016
. Available-for-sale securities totaling approximately
$156 million
and
$33 million
were in unrealized loss positions at
September 24, 2017
and
September 25, 2016
, respectively. The aggregate value of available-for-sale securities in a continuous unrealized loss position for greater than 12 months was not material at
September 24, 2017
or
September 25, 2016
. The Company did not recognize any other-than-temporary impairments during the last three fiscal years. At
September 24, 2017
, the average effective maturity of the Company’s short- and long-term available-for-sale securities was approximately
one
month and
20
months, respectively. The average effective maturity of the Company’s short-term available-for-sale securities was less than
one
month, at
September 25, 2016
.
The Company held approximately
$25 million
and
$19 million
in equity interests that are accounted for using the cost method of accounting at
September 24, 2017
and
September 25, 2016
, respectively. Equity interests accounted for using the equity method were not material at
September 24, 2017
or
September 25, 2016
.
(5) Property and Equipment
Balances of major classes of property and equipment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24,
2017
|
|
September 25,
2016
|
|
Land
|
$
|
156
|
|
|
$
|
161
|
|
|
Buildings and leasehold improvements
|
3,641
|
|
|
3,390
|
|
|
Capitalized real estate leases
|
120
|
|
|
80
|
|
|
Fixtures and equipment
|
2,615
|
|
|
2,499
|
|
|
Construction in progress and equipment not yet in service
|
265
|
|
|
284
|
|
|
Property and equipment, gross
|
6,797
|
|
|
6,414
|
|
|
Less accumulated depreciation and amortization
|
(3,283
|
)
|
|
(2,972
|
)
|
|
Property and equipment, net of accumulated depreciation and amortization
|
$
|
3,514
|
|
|
$
|
3,442
|
|
Depreciation and amortization expense related to property and equipment totaled approximately
$554 million
,
$478 million
and
$422 million
for fiscal years
2017
,
2016
and
2015
, respectively. During fiscal year
2017
and
2015
, asset impairment charges related to property and equipment totaled approximately
$78 million
and
$48 million
, respectively, related to locations as discussed in Note 3, Fair Value Measurements. Asset impairment charges related to property and equipment were not material in fiscal year
2016
. These charges were incurred because future estimated cash flows were less than the carrying value of assets. The Company reduced the future estimated cash flows based on current comparable store sales trends and reductions in estimated future net sales projections based on future and anticipated business trends, including increased competition. Development costs of new locations totaled approximately
$348 million
,
$395 million
and
$516 million
in fiscal years
2017
,
2016
and
2015
, respectively. Construction accruals related to development sites, remodels, and expansions were included in the “Other current liabilities” line item on the Consolidated Balance Sheets and totaled approximately
$56 million
and
$94 million
at
September 24, 2017
and
September 25, 2016
, respectively.
(6) Goodwill and Other Intangible Assets
There were no additions or adjustments to goodwill during fiscal year
2017
and
2016
. There were no impairments of goodwill during fiscal years
2017
,
2016
or
2015
. Additions of other intangible assets were not material during fiscal years 2017 and 2016. The components of intangible assets as of the dates indicated were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Definite-lived contract-based
|
$
|
117
|
|
|
$
|
(58
|
)
|
|
$
|
120
|
|
|
$
|
(55
|
)
|
|
Indefinite-lived contract-based
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
Total
|
$
|
126
|
|
|
$
|
(58
|
)
|
|
$
|
129
|
|
|
$
|
(55
|
)
|
Amortization expense associated with intangible assets was not material during fiscal year
2017
,
2016
or
2015
. Future amortization expense associated with the net carrying amount of definite-lived intangible assets is estimated to be as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal year 2018
|
$
|
5
|
|
|
Fiscal year 2019
|
5
|
|
|
Fiscal year 2020
|
5
|
|
|
Fiscal year 2021
|
4
|
|
|
Fiscal year 2022
|
4
|
|
|
Future fiscal years
|
36
|
|
|
Total
|
$
|
59
|
|
(7) Reserves for Closed Properties
The following table provides a summary of activity in reserves for closed properties during the fiscal years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Beginning balance
|
$
|
26
|
|
|
$
|
28
|
|
|
Additions
|
30
|
|
|
6
|
|
|
Usage
|
(16
|
)
|
|
(10
|
)
|
|
Adjustments
|
4
|
|
|
2
|
|
|
Ending balance
|
$
|
44
|
|
|
$
|
26
|
|
In
2017
,
$25 million
of additions to store closure reserves related to
eighteen
location and
three
commissary kitchen closures. Additions related to
six
location closures during fiscal year
2016
, were not material. The remainder of additions to store closure reserves primarily relate to the accretion of interest on existing reserves. Usage primarily related to ongoing cash rental payments totaled approximately
$16 million
and
$10 million
for fiscal years
2017
and
2016
, respectively.
(8) Long-Term Debt
Credit Agreement
On
November 2, 2015
, the Company entered into a credit facility (the “Credit Agreement”) that provided for an unsecured revolving credit facility in the aggregate principal amount of
$500 million
, with an ability to increase by up to
$250 million
in the aggregate pursuant to an expansion feature set forth in the Credit Agreement. The Credit Agreement also provided for a letter of credit subfacility of up to
$250 million
and a swingline subfacility of up to
$50 million
. The Credit Agreement was terminated effective August 28, 2017.
Commitment fees paid on undrawn amounts were not material during the
fifty-two
weeks ended
September 24, 2017
.
Senior Notes
On
December 3, 2015
, the Company completed the offering of
$1.0 billion
of
5.2%
senior notes due 2025 (the “Notes”). The Notes were offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States pursuant to Regulation S under the Securities Act. In fiscal year 2017, the Company commenced a registered exchange offer to exchange the Notes for new notes that are identical in all material respects to the Notes, except that the new notes have been registered under the Securities Act. The exchange offer expired on October 28, 2016, and approximately
99.1%
of the Notes were exchanged. The Notes that were not exchanged have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements or a transaction not subject to the registration requirements of the Securities Act or any state securities laws.
The Notes bear interest at a fixed rate equal to
5.2%
per year, payable
semiannually
, and mature on
December 3, 2025
. The interest rate payable on the Notes is subject to adjustment upon the occurrence of certain credit rating events described in the indenture.
The Notes are subject to customary covenants including certain restrictions with respect to, among other things, the Company’s and its subsidiaries’ ability to incur debt secured by liens or to enter into sale and leaseback transactions and restricting the Company’s ability to merge or consolidate with another entity or sell substantially all of its assets to another person without obtaining a waiver prior to the event. Prior to September 3, 2025, the Company may redeem the Notes at the Company’s option at any time either in whole or in part for a redemption price equal to 100% of the aggregate principal amount of the Notes to be redeemed plus the applicable make-whole premium described in the indenture, plus accrued and unpaid interest thereon. On or after September 3, 2025, the Company may redeem the Notes at the Company’s option at any time either in whole or in part for a redemption price equal to 100% of the aggregate principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereon.
The components of long-term debt as of the dates indicated were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24,
2017
|
|
September 25,
2016
|
|
5.2% senior notes due 2025
|
$
|
999
|
|
|
$
|
1,000
|
|
|
Less: unamortized discount and debt issuance costs related to senior notes
|
(6
|
)
|
|
(7
|
)
|
|
Carrying value of senior notes
|
993
|
|
|
993
|
|
|
Capital lease obligations
|
90
|
|
|
58
|
|
|
Total long-term debt and capital lease obligations
|
1,083
|
|
|
1,051
|
|
|
Less: current installments
|
(2
|
)
|
|
(3
|
)
|
|
Total long-term debt and capital lease obligations, less current installments
|
$
|
1,081
|
|
|
$
|
1,048
|
|
The Notes are recorded at cost net of discount and issuance costs. The effective interest rate of the Notes, which includes interest on the Notes and amortization of discount and issuance costs, is approximately
5.28%
. The estimated fair value of the Notes at
September 24, 2017
, based on observable market prices (Level 1), exceeded the carrying value by approximately
$160.4 million
.
(9) Leases
The Company is committed under certain capital leases for rental of certain buildings, land and equipment, and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates from
2017
to
2054
. The Company had capital lease obligations totaling approximately
$90 million
and
$58 million
at
September 24, 2017
and
September 25, 2016
, respectively.
Rental expense charged to operations under operating leases for fiscal years
2017
,
2016
and
2015
totaled approximately
$508 million
,
$477 million
and
$441 million
, respectively, which included contingent rentals totaling approximately
$11 million
,
$12 million
and
$14 million
during those same periods. Sublease rental income was not material during fiscal year
2017
,
2016
or
2015
. Prepaid rent is included in the “Other current assets” line item on the Consolidated Balance Sheets and totaled approximately
$48 million
and
$44 million
at
September 24, 2017
and
September 25, 2016
, respectively.
Minimum rental commitments and sublease rental income required by all noncancelable leases are approximately as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
Sublease
|
|
Fiscal year 2018
|
$
|
7
|
|
|
$
|
469
|
|
|
$
|
8
|
|
|
Fiscal year 2019
|
7
|
|
|
556
|
|
|
7
|
|
|
Fiscal year 2020
|
6
|
|
|
580
|
|
|
5
|
|
|
Fiscal year 2021
|
7
|
|
|
582
|
|
|
3
|
|
|
Fiscal year 2022
|
7
|
|
|
582
|
|
|
2
|
|
|
Future fiscal years
|
122
|
|
|
6,304
|
|
|
3
|
|
|
|
156
|
|
|
$
|
9,073
|
|
|
$
|
28
|
|
|
Less amounts representing interest
|
66
|
|
|
|
|
|
|
Net present value of capital lease obligations
|
$
|
90
|
|
|
|
|
|
The present values of future minimum obligations for capital leases shown above are calculated based on interest rates determined at the inception of the lease, or upon acquisition of the original lease. The future minimum obligations for operating leases shown above include locations in development.
(10) Income Taxes
Components of income tax expense for the fiscal years indicated were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Current federal income tax
|
$
|
168
|
|
|
$
|
223
|
|
|
$
|
310
|
|
|
Current state income tax
|
58
|
|
|
52
|
|
|
76
|
|
|
Current foreign income tax
|
1
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Total current tax
|
227
|
|
|
274
|
|
|
385
|
|
|
Deferred federal income tax
|
(56
|
)
|
|
41
|
|
|
(40
|
)
|
|
Deferred state income tax
|
2
|
|
|
8
|
|
|
(2
|
)
|
|
Deferred foreign income tax
|
(1
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
Total deferred tax
|
(55
|
)
|
|
46
|
|
|
(43
|
)
|
|
Total income tax expense
|
$
|
172
|
|
|
$
|
320
|
|
|
$
|
342
|
|
Actual income tax expense for the fiscal years indicated differed from the amount computed by applying statutory corporate income tax rates to income before income taxes as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Federal income tax based on statutory rates
|
$
|
146
|
|
|
$
|
289
|
|
|
$
|
307
|
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
Tax-exempt interest
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Excess charitable contributions
|
(11
|
)
|
|
(10
|
)
|
|
(9
|
)
|
|
Merger transaction costs
|
12
|
|
|
—
|
|
|
—
|
|
|
Federal income tax credits
|
(3
|
)
|
|
(4
|
)
|
|
(3
|
)
|
|
Other, net
|
(2
|
)
|
|
10
|
|
|
2
|
|
|
Total federal income taxes
|
141
|
|
|
285
|
|
|
296
|
|
|
State income taxes, net of federal income tax benefit
|
30
|
|
|
39
|
|
|
48
|
|
|
Tax impact of foreign operations
|
1
|
|
|
(4
|
)
|
|
(2
|
)
|
|
Total income tax expense
|
$
|
172
|
|
|
$
|
320
|
|
|
$
|
342
|
|
Current income taxes receivable were not material at
September 24, 2017
or
September 25, 2016
.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24,
2017
|
|
September 25,
2016
|
|
Deferred tax assets:
|
|
|
|
|
Compensation-related costs
|
$
|
131
|
|
|
$
|
215
|
|
|
Insurance-related costs
|
70
|
|
|
60
|
|
|
Inventories
|
8
|
|
|
5
|
|
|
Lease and other termination accruals
|
18
|
|
|
10
|
|
|
Lease negotiation legal fees
|
7
|
|
|
7
|
|
|
Rent differential
|
207
|
|
|
189
|
|
|
Tax basis of fixed assets in excess of financial basis
|
7
|
|
|
8
|
|
|
Net domestic and international operating loss carryforwards
|
13
|
|
|
14
|
|
|
Accrued liabilities
|
5
|
|
|
—
|
|
|
Charitable contribution carryforward
|
20
|
|
|
—
|
|
|
Deferred revenue
|
14
|
|
|
13
|
|
|
Other
|
9
|
|
|
—
|
|
|
Gross deferred tax assets
|
509
|
|
|
521
|
|
|
Valuation allowance
|
(24
|
)
|
|
(23
|
)
|
|
Deferred tax assets
|
485
|
|
|
498
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Financial basis of fixed assets in excess of tax basis
|
(192
|
)
|
|
(197
|
)
|
|
Capitalized costs expensed for tax purposes
|
(4
|
)
|
|
(4
|
)
|
|
Deferred tax liabilities
|
(196
|
)
|
|
(201
|
)
|
|
Net deferred tax asset
|
$
|
289
|
|
|
$
|
297
|
|
Deferred taxes have been classified on the Consolidated Balance Sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24,
2017
|
|
September 25,
2016
|
|
Current assets
|
$
|
215
|
|
|
$
|
197
|
|
|
Noncurrent assets
|
74
|
|
|
100
|
|
|
Net deferred tax asset
|
$
|
289
|
|
|
$
|
297
|
|
At
September 24, 2017
, the Company had international operating loss carryforwards totaling approximately
$70 million
, all of which have an indefinite life. The Company provided a valuation allowance totaling approximately
$24 million
for deferred tax assets associated with international operating loss carryforwards, federal credit carryforwards, and certain equity investments, for which management has determined it is more likely than not that the deferred tax asset will not be realized. Management believes that it is more likely than not that we will fully realize the remaining domestic deferred tax assets in the form of future tax deductions based on the nature of these deductible temporary differences and a history of profitable operations.
The Company intends to utilize earnings in foreign operations for an indefinite period of time, or to repatriate such earnings only when tax-efficient to do so. If these amounts were distributed to the United States, in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Company’s foreign affiliates file income tax returns in Canada and the United Kingdom. The IRS of the United States completed its examination of the Company’s federal tax returns for fiscal year
2015
during the first quarter of fiscal year
2017
. With limited exceptions, the Company is no longer subject to federal income tax examinations for fiscal years before 2015 and is no longer subject to state and local income tax examinations for fiscal years before 2011. Additionally, the Company entered into a Compliance Agreement Program (“CAP”) with the IRS under which the Company’s federal income tax return is reviewed and accepted by the Internal Revenue Service in conjunction with the filing of its tax return.
(11) Shareholders’ Equity
Dividends per Common Share
The following table provides a summary of dividends declared per common share during fiscal years
2017
and
2016
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of declaration
|
Dividend per
common share
|
|
Date of record
|
|
Date of payment
|
|
Total amount
|
|
Fiscal year 2017:
|
|
|
|
|
|
|
|
|
November 2, 2016
|
$
|
0.140
|
|
|
January 13, 2017
|
|
January 24, 2017
|
|
$
|
45
|
|
|
February 17, 2017
|
0.140
|
|
|
April 7, 2017
|
|
April 18, 2017
|
|
45
|
|
|
June 7, 2017
|
0.180
|
|
|
June 30, 2017
|
|
July 11, 2017
|
|
58
|
|
|
Fiscal year 2016:
|
|
|
|
|
|
|
|
|
November 4, 2015
|
$
|
0.135
|
|
|
January 15, 2016
|
|
January 26, 2016
|
|
$
|
44
|
|
|
March 9, 2016
|
0.135
|
|
|
April 8, 2016
|
|
April 19, 2016
|
|
44
|
|
|
June 7, 2016
|
0.135
|
|
|
July 1, 2016
|
|
July 12, 2016
|
|
43
|
|
|
September 22, 2016
|
0.135
|
|
|
October 3, 2016
|
|
October 14, 2016
|
|
43
|
|
Treasury Stock
The Company’s share repurchase program was canceled in connection with the Amazon merger and no share repurchase program remained in effect at
September 24, 2017
. The Company repurchased and retired approximately
56.7 million
shares totaling approximately
$1.95 billion
related to the Amazon merger.
Share repurchase activity for fiscal year
2017
was immaterial. Share repurchase activity for fiscal year
2016
was as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
2016
|
|
|
Number of common shares acquired
|
31.7
|
|
|
Average price per common share acquired
|
$
|
29.82
|
|
|
Total cost of common shares acquired
|
$
|
944
|
|
The Company reissued approximately
2.2 million
treasury shares at cost of approximately
$76 million
and approximately
1.1 million
treasury shares at cost of approximately
$42 million
to satisfy the issuance of common stock pursuant to team member stock plans during fiscal years
2017
and
2016
, respectively. At
September 24, 2017
, the Company held
no
treasury shares. As of
September 25, 2016
, the Company held in treasury
58.7 million
shares totaling approximately
$2.0 billion
.
(12) Share-Based Payments
Share-based payment expense, primarily included in the “Selling, general and administrative expenses” line item on the Consolidated Statements of Operations, totaled approximately
$114 million
,
$49 million
and
$64 million
, respectively, during fiscal years
2017
,
2016
and
2015
. The
2017
share-based payment expense included accelerated expense of approximately
$78 million
due to the Amazon merger included in the “Merger-related expenses” line item. At
September 25, 2016
and
September 27, 2015
approximately
29.8 million
shares and
32.9 million
shares of the Company’s common stock, respectively, were available for future stock incentive grants. As of
September 24, 2017
, the Company’s stock option plan was canceled and
no
shares were available for grant as a result of the merger with Amazon.
Stock Options
The following table summarizes stock option activity (in millions, except per share amounts and contractual lives in years):
|
|
|
|
|
|
|
|
|
|
|
|
Number
of options
outstanding
|
|
Weighted
average
exercise price
|
|
Outstanding options at September 28, 2014
|
22.3
|
|
|
$
|
38.37
|
|
|
Options granted
|
5.3
|
|
|
44.30
|
|
|
Options exercised
|
(2.2
|
)
|
|
27.81
|
|
|
Options expired
|
(0.3
|
)
|
|
42.88
|
|
|
Options forfeited
|
(0.8
|
)
|
|
42.66
|
|
|
Outstanding options at September 27, 2015
|
24.3
|
|
|
$
|
40.45
|
|
|
Options granted
|
5.0
|
|
|
30.31
|
|
|
Options exercised
|
(0.9
|
)
|
|
15.23
|
|
|
Options expired
|
(0.9
|
)
|
|
41.73
|
|
|
Options forfeited
|
(1.2
|
)
|
|
41.72
|
|
|
Outstanding options at September 25, 2016
|
26.3
|
|
|
$
|
39.35
|
|
|
Options granted
|
5.1
|
|
|
35.89
|
|
|
Options exercised
|
(2.4
|
)
|
|
27.41
|
|
|
Options expired
|
(1.3
|
)
|
|
39.84
|
|
|
Options cancelled due to Amazon merger
|
(26.6
|
)
|
|
39.84
|
|
|
Options forfeited
|
(1.1
|
)
|
|
37.21
|
|
|
Outstanding options at September 24, 2017
|
—
|
|
|
$
|
—
|
|
|
Vested/expected to vest at September 24, 2017
|
—
|
|
|
$
|
—
|
|
|
Exercisable options at September 24, 2017
|
—
|
|
|
$
|
—
|
|
The weighted average grant date fair value of options granted during fiscal years
2017
,
2016
and
2015
was
$7.23
,
$6.71
and
$10.19
, respectively. The aggregate intrinsic value of stock options at exercise, represented in the table above, was approximately
$24 million
,
$16 million
and
$46 million
during fiscal years
2017
,
2016
and
2015
, respectively. The Company realized a tax benefit from stock options exercised during fiscal years
2017
,
2016
and
2015
totaling approximately
$44 million
,
$15 million
and
$46 million
, respectively. The total fair value of shares vested during fiscal years
2017
,
2016
and
2015
was approximately
$145 million
,
$141 million
and
$209 million
, respectively, including the value of vested options exercised during those same periods. As of the end of fiscal year
2016
, there was approximately
$73 million
of unrecognized share-based payment expense, related to unvested stock options, net of estimated forfeitures, related to approximately
10.5 million
shares. There was
no
unrecognized share-based payment expense at the end of fiscal year
2017
.
Share-based payment expense related to vesting stock options recognized during fiscal years
2017
,
2016
and
2015
totaled approximately
$114 million
,
$45 million
and
$60 million
, respectively. Upon a change in control, the vesting is accelerated for any unvested options in accordance with the Company’s stock option plan. The total share-based payment expense related to acceleration due to the Amazon merger was approximately
$78 million
in fiscal year
2017
. In connection with the Company’s acquisition by Amazon on August 28, 2017, all outstanding options were canceled and those in which the merger consideration exceeded the exercise price per share were converted into cash for the excess amount. The Company recorded an intercompany receivable from Amazon totaling approximately
$124 million
for the cash payout of all outstanding options, RSUs, and SARs. Stock options with an exercise price per share greater than or equal to the merger consideration per share were canceled for no consideration or payment.
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Expected dividend yield
|
2.20
|
%
|
|
1.73
|
%
|
|
1.00
|
%
|
|
Risk-free interest rate
|
1.63
|
%
|
|
1.08
|
%
|
|
1.20
|
%
|
|
Expected volatility
|
28.70
|
%
|
|
31.30
|
%
|
|
29.73
|
%
|
|
Expected life, in years
|
4.12
|
|
|
4.05
|
|
|
4.04
|
|
Risk-free interest rate was based on the U.S. Treasury yield curve on the date of the grant for the time period equal to the expected term of the grant. Expected volatility was calculated using a ratio of implied volatility based on the Newton-Raphson method of bisection, and
four
or
six
year historical volatilities based on the expected life of each tranche of options. The Company determined the use of blended volatility versus historical or implied volatility represents a more accurate calculation of option fair value. Expected life is calculated in
two
tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last
five
or
seven
years. Unvested options were included in the term calculation which used the “mid-point scenario” which assumed that unvested options will be exercised halfway between vest and expiration date. The assumptions used to calculate the fair value of options granted were evaluated and revised, as necessary, to reflect market conditions and experience. In addition to the above valuation assumptions, the Company estimated an annual forfeiture rate for unvested options and adjusted fair value expense accordingly. The Company monitored actual forfeiture experience and adjusted the rate from time to time as necessary.
(13) Quarterly Results (unaudited)
The Company’s first fiscal quarter consists of 16 weeks, the second and third fiscal quarters each are 12 weeks, and the fourth fiscal quarter is 12 or 13 weeks. Fiscal years
2017
and
2016
were 52-week years with twelve weeks in the fourth quarter. Because the first fiscal quarter is longer than the remaining quarters, it typically represents a larger share of the Company’s annual sales from existing stores. Quarter-to-quarter comparisons of results of operations have been and may be materially impacted by the timing of new store openings. The first and second fiscal quarters included store closure costs related to the
nine
store and
three
commissary kitchen closures announced in the first fiscal quarter. The fourth fiscal quarter included approximately
$153 million
in merger expenses related to the Amazon merger. The Company believes that the following information reflects all adjustments, consisting of normal recurring accruals, necessary for a fair presentation. The operating results for any quarter are not necessarily indicative of results for any future period.
The following tables set forth selected unaudited quarterly Consolidated Statements of Operations information for the fiscal years ended
September 24, 2017
and
September 25, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal Year 2017
(1)
|
|
|
|
|
|
|
|
|
Sales
|
$
|
4,918
|
|
|
$
|
3,737
|
|
|
$
|
3,725
|
|
|
$
|
3,650
|
|
|
Cost of goods sold and occupancy costs
|
3,268
|
|
|
2,463
|
|
|
2,457
|
|
|
2,445
|
|
|
Gross profit
|
1,650
|
|
|
1,274
|
|
|
1,268
|
|
|
1,205
|
|
|
Selling, general and administrative expenses
|
1,417
|
|
|
1,057
|
|
|
1,069
|
|
|
1,084
|
|
|
Merger-related expenses
|
—
|
|
|
—
|
|
|
3
|
|
|
153
|
|
|
Pre-opening expenses
|
21
|
|
|
12
|
|
|
13
|
|
|
14
|
|
|
Relocation, store closure and lease termination costs
|
41
|
|
|
34
|
|
|
3
|
|
|
17
|
|
|
Operating income
|
171
|
|
|
171
|
|
|
180
|
|
|
(63
|
)
|
|
Interest expense
|
(15
|
)
|
|
(11
|
)
|
|
(11
|
)
|
|
(12
|
)
|
|
Investment and other income (expense)
|
—
|
|
|
2
|
|
|
4
|
|
|
1
|
|
|
Income before income taxes
|
156
|
|
|
162
|
|
|
173
|
|
|
(74
|
)
|
|
Provision for income taxes
|
61
|
|
|
63
|
|
|
67
|
|
|
(19
|
)
|
|
Net income
|
$
|
95
|
|
|
$
|
99
|
|
|
$
|
106
|
|
|
$
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal Year 2016
(1)
|
|
|
|
|
|
|
|
|
Sales
|
$
|
4,829
|
|
|
$
|
3,696
|
|
|
$
|
3,703
|
|
|
$
|
3,497
|
|
|
Cost of goods sold and occupancy costs
|
3,188
|
|
|
2,406
|
|
|
2,417
|
|
|
2,303
|
|
|
Gross profit
|
1,641
|
|
|
1,290
|
|
|
1,286
|
|
|
1,194
|
|
|
Selling, general and administrative expenses
|
1,373
|
|
|
1,028
|
|
|
1,057
|
|
|
1,019
|
|
|
Pre-opening expenses
|
13
|
|
|
18
|
|
|
18
|
|
|
15
|
|
|
Relocation, store closure and lease termination costs
|
3
|
|
|
3
|
|
|
2
|
|
|
5
|
|
|
Operating income
|
252
|
|
|
241
|
|
|
209
|
|
|
155
|
|
|
Interest expense
|
(7
|
)
|
|
(11
|
)
|
|
(12
|
)
|
|
(11
|
)
|
|
Investment and other income
|
4
|
|
|
5
|
|
|
(1
|
)
|
|
3
|
|
|
Income before income taxes
|
249
|
|
|
235
|
|
|
196
|
|
|
147
|
|
|
Provision for income taxes
|
92
|
|
|
93
|
|
|
76
|
|
|
59
|
|
|
Net income
|
$
|
157
|
|
|
$
|
142
|
|
|
$
|
120
|
|
|
$
|
88
|
|
(1)
Sum of quarterly amounts may not equal fiscal year totals due to the effect of rounding.
(14) Commitments and Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that we believe best serves the interests of our stakeholders. From time to time we are a party to legal proceedings including matters involving shareholder claims, personnel and employment issues, personal injury, product liability, protecting our intellectual property, acquisitions and other proceedings arising in the ordinary course of business. These matters have not resulted in any material losses to date. Certain litigation cases have been certified as class or collective actions and may seek substantial damages.
Our primary contingencies are associated with insurance and self-insurance obligations and litigation matters. Additionally, the Company has retention agreements with certain members of Company management which provide for payments under certain circumstances including change of control. Estimation of our insurance and self-insurance liabilities requires significant judgments, and actual claim settlements and associated expenses may differ from our current provisions for loss. We have exposures to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties.
The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated, and is not currently a party to any legal proceeding that management believes could have a material adverse effect on our results of operations. Insurance and legal settlement liabilities are included in the “Other current liabilities” line item on the Consolidated Balance Sheets. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.
The Company is committed under certain capital leases for rental of certain buildings, land and equipment, and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2054. The following table shows payments due by period on contractual obligations as of
September 24, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1
year
|
|
1-3
years
|
|
3-5
years
|
|
More than 5
years
|
|
Senior notes
|
$
|
993
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
993
|
|
|
Estimated interest on senior notes
|
442
|
|
|
52
|
|
|
104
|
|
|
104
|
|
|
182
|
|
|
Capital lease obligations (including interest)
|
156
|
|
|
7
|
|
|
13
|
|
|
14
|
|
|
122
|
|
|
Operating lease obligations
(1)
|
9,073
|
|
|
469
|
|
|
1,136
|
|
|
1,164
|
|
|
6,304
|
|
|
Unconditional purchase obligations
(2)
|
23,041
|
|
|
2,880
|
|
|
5,760
|
|
|
5,760
|
|
|
8,641
|
|
|
Total
|
$
|
33,705
|
|
|
$
|
3,408
|
|
|
$
|
7,013
|
|
|
$
|
7,042
|
|
|
$
|
16,242
|
|
(1)
Amounts exclude taxes, insurance and other related expense
(2)
Includes unconditional purchase obligations related to certain products offered in our stores that are not reflected on the consolidated balance sheets arising from the change in control that occurred in the fourth fiscal quarter.
(15) Guarantor Financial Statement Information
Prior to the closing of the Company’s merger with Amazon.com, Inc., the Notes issued on December 3, 2015 were fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by certain 100% owned domestic subsidiaries of the Company (the “Guarantors”). At the time of the closing, the Company’s Credit Agreement was terminated and the related guarantees by the Guarantors were released. Pursuant to the terms of the indenture governing the Notes, upon release of the guarantees under the Credit Agreement, the guarantees of the Notes by the Guarantors were automatically terminated. The Notes are now the sole obligation of the Company. Supplemental condensed consolidating financial information of the Company, including such information for the Guarantors, is presented below. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-Guarantor subsidiaries operated as independent entities. Investments in subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.
Consolidated Balance Sheets
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
Assets
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
205
|
|
$
|
117
|
|
$
|
—
|
|
$
|
322
|
|
|
Short-term investments - available-for-sale securities
|
—
|
|
504
|
|
—
|
|
—
|
|
504
|
|
|
Restricted cash
|
—
|
|
118
|
|
6
|
|
—
|
|
124
|
|
|
Accounts receivable
|
—
|
|
215
|
|
27
|
|
—
|
|
242
|
|
|
Intercompany receivable
|
—
|
|
853
|
|
—
|
|
(853
|
)
|
—
|
|
|
Merchandise inventories
|
—
|
|
400
|
|
71
|
|
—
|
|
471
|
|
|
Prepaid expenses and other current assets
|
—
|
|
129
|
|
14
|
|
—
|
|
143
|
|
|
Receivable from Parent
|
124
|
|
—
|
|
—
|
|
—
|
|
124
|
|
|
Deferred income taxes
|
—
|
|
215
|
|
—
|
|
—
|
|
215
|
|
|
Total current assets
|
124
|
|
2,639
|
|
235
|
|
(853
|
)
|
2,145
|
|
|
Property and equipment, net of accumulated depreciation and amortization
|
—
|
|
3,099
|
|
415
|
|
—
|
|
3,514
|
|
|
Long-term investments - available-for-sale securities
|
—
|
|
121
|
|
—
|
|
—
|
|
121
|
|
|
Investments in consolidated subsidiaries
|
4,867
|
|
110
|
|
480
|
|
(5,457
|
)
|
—
|
|
|
Goodwill
|
—
|
|
702
|
|
8
|
|
—
|
|
710
|
|
|
Intangible assets, net of accumulated amortization
|
—
|
|
59
|
|
9
|
|
—
|
|
68
|
|
|
Deferred income taxes
|
—
|
|
65
|
|
9
|
|
—
|
|
74
|
|
|
Other assets
|
—
|
|
10
|
|
34
|
|
—
|
|
44
|
|
|
Total assets
|
$
|
4,991
|
|
$
|
6,805
|
|
$
|
1,190
|
|
$
|
(6,310
|
)
|
$
|
6,676
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Current installments of long-term debt and capital lease obligations
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2
|
|
|
Accounts payable
|
—
|
|
264
|
|
107
|
|
—
|
|
371
|
|
|
Intercompany payable
|
550
|
|
—
|
|
303
|
|
(853
|
)
|
—
|
|
|
Accrued payroll, bonus and other benefits due team members
|
—
|
|
372
|
|
25
|
|
—
|
|
397
|
|
|
Dividends payable
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Other current liabilities
|
18
|
|
508
|
|
59
|
|
—
|
|
585
|
|
|
Total current liabilities
|
568
|
|
1,146
|
|
494
|
|
(853
|
)
|
1,355
|
|
|
Long-term debt and capital lease obligations, less current installments
|
993
|
|
80
|
|
8
|
|
—
|
|
1,081
|
|
|
Deferred lease liabilities
|
—
|
|
629
|
|
61
|
|
—
|
|
690
|
|
|
Other long-term liabilities
|
—
|
|
118
|
|
2
|
|
—
|
|
120
|
|
|
Total liabilities
|
1,561
|
|
1,973
|
|
565
|
|
(853
|
)
|
3,246
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
3,430
|
|
4,832
|
|
625
|
|
(5,457
|
)
|
3,430
|
|
|
Total liabilities and shareholders’ equity
|
$
|
4,991
|
|
$
|
6,805
|
|
$
|
1,190
|
|
$
|
(6,310
|
)
|
$
|
6,676
|
|
Consolidated Balance Sheets
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2016
|
|
Assets
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
254
|
|
$
|
97
|
|
$
|
—
|
|
$
|
351
|
|
|
Short-term investments - available-for-sale securities
|
—
|
|
379
|
|
—
|
|
—
|
|
379
|
|
|
Restricted cash
|
—
|
|
114
|
|
8
|
|
—
|
|
122
|
|
|
Accounts receivable
|
—
|
|
216
|
|
26
|
|
—
|
|
242
|
|
|
Intercompany receivable
|
—
|
|
649
|
|
—
|
|
(649
|
)
|
—
|
|
|
Merchandise inventories
|
—
|
|
441
|
|
76
|
|
—
|
|
517
|
|
|
Prepaid expenses and other current assets
|
—
|
|
150
|
|
17
|
|
—
|
|
167
|
|
|
Deferred income taxes
|
—
|
|
197
|
|
—
|
|
—
|
|
197
|
|
|
Total current assets
|
—
|
|
2,400
|
|
224
|
|
(649
|
)
|
1,975
|
|
|
Property and equipment, net of accumulated depreciation and amortization
|
—
|
|
3,063
|
|
379
|
|
—
|
|
3,442
|
|
|
Long-term investments - available-for-sale securities
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Investments in consolidated subsidiaries
|
4,593
|
|
103
|
|
472
|
|
(5,168
|
)
|
—
|
|
|
Goodwill
|
—
|
|
702
|
|
8
|
|
—
|
|
710
|
|
|
Intangible assets, net of accumulated amortization
|
1
|
|
63
|
|
10
|
|
—
|
|
74
|
|
|
Deferred income taxes
|
—
|
|
94
|
|
6
|
|
—
|
|
100
|
|
|
Other assets
|
—
|
|
16
|
|
24
|
|
—
|
|
40
|
|
|
Total assets
|
$
|
4,594
|
|
$
|
6,441
|
|
$
|
1,123
|
|
$
|
(5,817
|
)
|
$
|
6,341
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Current installments of long-term debt and capital lease obligations
|
$
|
—
|
|
$
|
3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3
|
|
|
Accounts payable
|
—
|
|
227
|
|
80
|
|
—
|
|
307
|
|
|
Intercompany payable
|
317
|
|
—
|
|
333
|
|
(650
|
)
|
—
|
|
|
Accrued payroll, bonus and other benefits due team members
|
—
|
|
381
|
|
26
|
|
—
|
|
407
|
|
|
Dividends payable
|
43
|
|
—
|
|
—
|
|
—
|
|
43
|
|
|
Other current liabilities
|
17
|
|
536
|
|
28
|
|
—
|
|
581
|
|
|
Total current liabilities
|
377
|
|
1,147
|
|
467
|
|
(650
|
)
|
1,341
|
|
|
Long-term debt and capital lease obligations, less current installments
|
993
|
|
48
|
|
7
|
|
—
|
|
1,048
|
|
|
Deferred lease liabilities
|
—
|
|
592
|
|
48
|
|
—
|
|
640
|
|
|
Other long-term liabilities
|
—
|
|
87
|
|
1
|
|
—
|
|
88
|
|
|
Total liabilities
|
1,370
|
|
1,874
|
|
523
|
|
(650
|
)
|
3,117
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
3,224
|
|
4,567
|
|
600
|
|
(5,167
|
)
|
3,224
|
|
|
Total liabilities and shareholders’ equity
|
$
|
4,594
|
|
$
|
6,441
|
|
$
|
1,123
|
|
$
|
(5,817
|
)
|
$
|
6,341
|
|
Consolidated Statements of Operations
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Sales
|
$
|
—
|
|
$
|
15,093
|
|
$
|
1,135
|
|
$
|
(198
|
)
|
$
|
16,030
|
|
|
Cost of goods sold and occupancy costs
|
—
|
|
10,012
|
|
815
|
|
(194
|
)
|
10,633
|
|
|
Gross profit
|
—
|
|
5,081
|
|
320
|
|
(4
|
)
|
5,397
|
|
|
Selling, general and administrative expenses
|
—
|
|
4,345
|
|
282
|
|
—
|
|
4,627
|
|
|
Merger-related expenses
|
—
|
|
156
|
|
—
|
|
—
|
|
156
|
|
|
Pre-opening expenses
|
—
|
|
55
|
|
5
|
|
—
|
|
60
|
|
|
Relocation, store closure and lease termination costs
|
—
|
|
95
|
|
—
|
|
—
|
|
95
|
|
|
Operating income
|
—
|
|
430
|
|
33
|
|
(4
|
)
|
459
|
|
|
Interest expense
|
(49
|
)
|
—
|
|
—
|
|
—
|
|
(49
|
)
|
|
Investment and other income (expense)
|
—
|
|
5
|
|
(3
|
)
|
5
|
|
7
|
|
|
Equity in net income of subsidiaries
|
274
|
|
6
|
|
8
|
|
(288
|
)
|
—
|
|
|
Income before income taxes
|
225
|
|
441
|
|
38
|
|
(287
|
)
|
417
|
|
|
Provision for income taxes
|
(20
|
)
|
180
|
|
12
|
|
—
|
|
172
|
|
|
Net income
|
$
|
245
|
|
$
|
261
|
|
$
|
26
|
|
$
|
(287
|
)
|
$
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2016
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Sales
|
$
|
—
|
|
$
|
14,928
|
|
$
|
949
|
|
$
|
(153
|
)
|
$
|
15,724
|
|
|
Cost of goods sold and occupancy costs
|
—
|
|
9,798
|
|
664
|
|
(149
|
)
|
10,313
|
|
|
Gross profit
|
—
|
|
5,130
|
|
285
|
|
(4
|
)
|
5,411
|
|
|
Selling, general and administrative expenses
|
—
|
|
4,224
|
|
253
|
|
—
|
|
4,477
|
|
|
Pre-opening expenses
|
—
|
|
58
|
|
6
|
|
—
|
|
64
|
|
|
Relocation, store closure and lease termination costs
|
—
|
|
10
|
|
3
|
|
—
|
|
13
|
|
|
Operating income (loss)
|
—
|
|
838
|
|
23
|
|
(4
|
)
|
857
|
|
|
Interest expense
|
(41
|
)
|
—
|
|
—
|
|
—
|
|
(41
|
)
|
|
Investment and other income (expense)
|
(1
|
)
|
12
|
|
(4
|
)
|
4
|
|
11
|
|
|
Equity in net income of subsidiaries
|
533
|
|
10
|
|
28
|
|
(571
|
)
|
—
|
|
|
Income before income taxes
|
491
|
|
860
|
|
47
|
|
(571
|
)
|
827
|
|
|
Provision for income taxes
|
(16
|
)
|
329
|
|
7
|
|
—
|
|
320
|
|
|
Net income
|
$
|
507
|
|
$
|
531
|
|
$
|
40
|
|
$
|
(571
|
)
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2015
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Sales
|
$
|
—
|
|
$
|
14,565
|
|
$
|
968
|
|
$
|
(144
|
)
|
$
|
15,389
|
|
|
Cost of goods sold and occupancy costs
|
—
|
|
9,433
|
|
679
|
|
(139
|
)
|
9,973
|
|
|
Gross profit
|
—
|
|
5,132
|
|
289
|
|
(5
|
)
|
5,416
|
|
|
Selling, general and administrative expenses
|
—
|
|
4,182
|
|
290
|
|
—
|
|
4,472
|
|
|
Pre-opening expenses
|
—
|
|
65
|
|
2
|
|
—
|
|
67
|
|
|
Relocation, store closure and lease termination costs
|
—
|
|
15
|
|
1
|
|
—
|
|
16
|
|
|
Operating income
|
—
|
|
870
|
|
(4
|
)
|
(5
|
)
|
861
|
|
|
Interest expense
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Investment and other income (expense)
|
—
|
|
16
|
|
(3
|
)
|
4
|
|
17
|
|
|
Equity in net income of subsidiaries
|
536
|
|
9
|
|
38
|
|
(583
|
)
|
—
|
|
|
Income before income taxes
|
536
|
|
895
|
|
31
|
|
(584
|
)
|
878
|
|
|
Provision for income taxes
|
—
|
|
345
|
|
(3
|
)
|
—
|
|
342
|
|
|
Net income
|
$
|
536
|
|
$
|
550
|
|
$
|
34
|
|
$
|
(584
|
)
|
$
|
536
|
|
Consolidated Statements of Comprehensive Income
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Net income
|
$
|
245
|
|
$
|
261
|
|
$
|
26
|
|
$
|
(287
|
)
|
$
|
245
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
|
Other comprehensive loss, net of tax
|
—
|
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
|
Comprehensive income
|
$
|
245
|
|
$
|
255
|
|
$
|
26
|
|
$
|
(287
|
)
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2016
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Net income
|
$
|
507
|
|
$
|
531
|
|
$
|
40
|
|
$
|
(571
|
)
|
$
|
507
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
(12
|
)
|
8
|
|
—
|
|
(4
|
)
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
(12
|
)
|
8
|
|
—
|
|
(4
|
)
|
|
Comprehensive income
|
$
|
507
|
|
$
|
519
|
|
$
|
48
|
|
$
|
(571
|
)
|
$
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2015
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Net income
|
$
|
536
|
|
$
|
550
|
|
$
|
34
|
|
$
|
(584
|
)
|
$
|
536
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
(7
|
)
|
(14
|
)
|
—
|
|
(21
|
)
|
|
Other comprehensive loss, net of tax
|
—
|
|
(7
|
)
|
(14
|
)
|
—
|
|
(21
|
)
|
|
Comprehensive income
|
$
|
536
|
|
$
|
543
|
|
$
|
20
|
|
$
|
(584
|
)
|
$
|
515
|
|
Condensed Consolidated Statements of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Net cash provided by (used in) operating activities
|
$
|
(57
|
)
|
$
|
1,149
|
|
$
|
46
|
|
$
|
—
|
|
$
|
1,138
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
—
|
|
(571
|
)
|
(75
|
)
|
—
|
|
(646
|
)
|
|
Purchases of available-for-sale securities
|
—
|
|
(959
|
)
|
—
|
|
—
|
|
(959
|
)
|
|
Sales and maturities of available-for-sale securities
|
—
|
|
712
|
|
—
|
|
—
|
|
712
|
|
|
Purchases of intangible assets
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Intercompany activity
|
322
|
|
—
|
|
—
|
|
(322
|
)
|
—
|
|
|
Other investing activities
|
—
|
|
(6
|
)
|
(7
|
)
|
—
|
|
(13
|
)
|
|
Net cash provided by (used in) investing activities
|
322
|
|
(824
|
)
|
(82
|
)
|
(322
|
)
|
(906
|
)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Purchases of treasury stock
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
|
Common stock dividends paid
|
(190
|
)
|
—
|
|
—
|
|
—
|
|
(190
|
)
|
|
Issuance of common stock
|
51
|
|
—
|
|
—
|
|
—
|
|
51
|
|
|
Excess tax benefit related to exercise of team member stock options
|
3
|
|
—
|
|
—
|
|
—
|
|
3
|
|
|
Proceeds from long-term borrowings
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Proceed for revolving line of credit
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Payments on long-term debt and capital lease obligations
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
(3
|
)
|
|
Payments to option holders on behalf of Parent
|
(124
|
)
|
—
|
|
—
|
|
—
|
|
(124
|
)
|
|
Intercompany activity
|
—
|
|
(370
|
)
|
48
|
|
322
|
|
—
|
|
|
Other financing activities
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
(265
|
)
|
(370
|
)
|
48
|
|
322
|
|
(265
|
)
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
—
|
|
—
|
|
6
|
|
—
|
|
6
|
|
|
Net change in cash, cash equivalents, and restricted cash
|
—
|
|
(45
|
)
|
18
|
|
—
|
|
(27
|
)
|
|
Cash, cash equivalents, and restricted cash at beginning of period
|
—
|
|
368
|
|
105
|
|
—
|
|
473
|
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
—
|
|
$
|
323
|
|
$
|
123
|
|
$
|
—
|
|
$
|
446
|
|
Condensed Consolidated Statements
of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2016
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Net cash provided by operating activities
|
$
|
(27
|
)
|
$
|
1,114
|
|
$
|
29
|
|
$
|
—
|
|
$
|
1,116
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
—
|
|
(643
|
)
|
(73
|
)
|
—
|
|
(716
|
)
|
|
Purchases of available-for-sale securities
|
—
|
|
(593
|
)
|
—
|
|
—
|
|
(593
|
)
|
|
Sales and maturities of available-for-sale securities
|
—
|
|
431
|
|
—
|
|
—
|
|
431
|
|
|
Purchases of intangible assets
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
|
Payment for purchase of acquired entities, net of cash acquired
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
(11
|
)
|
|
Intercompany activity
|
140
|
|
—
|
|
—
|
|
(140
|
)
|
—
|
|
|
Other investing activities
|
—
|
|
(8
|
)
|
—
|
|
—
|
|
(8
|
)
|
|
Net cash provided by (used in) investing activities
|
140
|
|
(815
|
)
|
(84
|
)
|
(140
|
)
|
(899
|
)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Purchases of treasury stock
|
(944
|
)
|
—
|
|
—
|
|
—
|
|
(944
|
)
|
|
Common stock dividends paid
|
(177
|
)
|
—
|
|
—
|
|
—
|
|
(177
|
)
|
|
Issuance of common stock
|
19
|
|
—
|
|
—
|
|
—
|
|
19
|
|
|
Excess tax benefit related to exercise of team member stock options
|
4
|
|
—
|
|
—
|
|
—
|
|
4
|
|
|
Proceeds from long-term borrowings
|
999
|
|
—
|
|
—
|
|
—
|
|
999
|
|
|
Proceeds from revolving line of credit
|
300
|
|
—
|
|
—
|
|
—
|
|
300
|
|
|
Payments on long-term debt and capital lease obligations
|
(306
|
)
|
—
|
|
—
|
|
—
|
|
(306
|
)
|
|
Intercompany activity
|
—
|
|
(196
|
)
|
56
|
|
140
|
|
—
|
|
|
Other financing activities
|
(8
|
)
|
—
|
|
—
|
|
—
|
|
(8
|
)
|
|
Net cash provided by (used in) financing activities
|
(113
|
)
|
(196
|
)
|
56
|
|
140
|
|
(113
|
)
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
—
|
|
3
|
|
2
|
|
—
|
|
5
|
|
|
Net change in cash, cash equivalents, and restricted cash
|
—
|
|
106
|
|
3
|
|
—
|
|
109
|
|
|
Cash, cash equivalents, and restricted cash at beginning of period
|
—
|
|
262
|
|
102
|
|
—
|
|
364
|
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
—
|
|
$
|
368
|
|
$
|
105
|
|
$
|
—
|
|
$
|
473
|
|
Condensed Consolidated Statements
of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2015
|
|
|
Parent/Issuer
|
Guarantor Subsidiaries
|
Non-guarantor Subsidiaries
|
Eliminations
|
Consolidated Total
|
|
Net cash provided by operating activities
|
$
|
—
|
|
$
|
1,095
|
|
$
|
34
|
|
$
|
—
|
|
$
|
1,129
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
—
|
|
(803
|
)
|
(48
|
)
|
—
|
|
(851
|
)
|
|
Purchases of available-for-sale securities
|
—
|
|
(494
|
)
|
—
|
|
—
|
|
(494
|
)
|
|
Sales and maturities of available-for-sale securities
|
—
|
|
928
|
|
—
|
|
—
|
|
928
|
|
|
Purchases of intangible assets
|
—
|
|
(3
|
)
|
—
|
|
—
|
|
(3
|
)
|
|
Payment for purchase of acquired entities, net of cash acquired
|
—
|
|
—
|
|
(4
|
)
|
—
|
|
(4
|
)
|
|
Intercompany activity
|
622
|
|
—
|
|
—
|
|
(622
|
)
|
—
|
|
|
Other investing activities
|
—
|
|
(12
|
)
|
—
|
|
—
|
|
(12
|
)
|
|
Net cash provided by (used in) investing activities
|
622
|
|
(384
|
)
|
(52
|
)
|
(622
|
)
|
(436
|
)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Purchases of treasury stock
|
(513
|
)
|
—
|
|
—
|
|
—
|
|
(513
|
)
|
|
Common stock dividends paid
|
(184
|
)
|
—
|
|
—
|
|
—
|
|
(184
|
)
|
|
Issuance of common stock
|
66
|
|
—
|
|
—
|
|
—
|
|
66
|
|
|
Excess tax benefit related to exercise of team member stock options
|
11
|
|
—
|
|
—
|
|
—
|
|
11
|
|
|
Payments on long-term debt and capital lease obligations
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|
Intercompany activity
|
—
|
|
(641
|
)
|
19
|
|
622
|
|
—
|
|
|
Other financing activities
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|
Net cash provided by (used in) financing activities
|
(622
|
)
|
(641
|
)
|
19
|
|
622
|
|
(622
|
)
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
—
|
|
(3
|
)
|
(3
|
)
|
—
|
|
(6
|
)
|
|
Net change in cash, cash equivalents, and restricted cash
|
—
|
|
67
|
|
(2
|
)
|
—
|
|
65
|
|
|
Cash, cash equivalents, and restricted cash at beginning of period
|
—
|
|
195
|
|
104
|
|
—
|
|
299
|
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
—
|
|
$
|
262
|
|
$
|
102
|
|
$
|
—
|
|
$
|
364
|
|
(16) Merger with Amazon
On August 28, 2017 the Company completed its previously announced Agreement and Plan of Merger (the “Merger Agreement”) by and among Amazon.com, Inc., the Company, and Walnut Merger Sub, Inc., a wholly-owned subsidiary of Amazon.com, Inc. Pursuant to the Merger Agreement, Walnut Merger Sub, Inc. was merged with and into the Company (the “Merger”), with the Company continuing as the surviving company in the Merger.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of common stock, no par value, of the Company issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive
$42.00
per Company share in cash, without interest.
For the
fifty-two
weeks ended
September 24, 2017
, the Company incurred
$156 million
of merger-related expenses in connection with the Merger.