BB&B surpasses 3Q forecasts

Don Hogsett, December 23, 2002

Completely ignoring a slowdown in consumer spending and blithely turning its back on a sluggish retail environment that has most of its peers stuck in the muck, Bed Bath & Beyond blew past Wall Street expectations, driving third-quarter profits up by 41.8 percent, to $75.1 million from $53.0 million a year ago.

Sales at the home furnishings big-box climbed by 23.3 percent, to $936.0 million from $759.4 million last year. And breezing past virtually every other American retailer, the superstore retailer drove same-store sales up a remarkable 8.0 percent, improving upon the year-ago period's 5.8 percent increase.

The news came as an early stocking stuffer on Wall Street, which badly needed the shot of good news, and analysts and investors applauded the stock, pushing it up by 4.0 percent in value, or $1.30 a share, to $33.63 in heavy mid-day trading last Thursday. Earnings per share of $0.25 breezed past a consensus Wall Street forecast of $0.23 a share.

Breaking the retail mold and going its own way, the superstore retailer parlayed a trifecta of stronger sales, wider margins and lower costs into an operating profit that swelled by 42.4 percent, to $119.2 million from $83.7 million a year ago.

The retailer's operating margin — operating profits measured as a percentage of sales — soared up to 12.7 percent, rising from 11.0 percent the preceding year.

While other retailers have been busy marking down early, Bed Bath & Beyond improved its average gross margin by 30 basis points, to 41.3 percent from 41.0 percent the prior year. Gross margin dollars increased by almost a third, rising by 29.9 percent, to $386.2 million from $311.0 million.

At the same time, the retailer substantially whittled down its operating costs, by 140 basis points, or 1.4 percentage points, to 28.5 percent from 29.9 percent.

In another big, and profitable, point of differentiation from other U.S. retailers, Bed Bath & Beyond doesn't owe any money. Rather, it puts some money in the bank and earns interest income — $2.9 million during the third quarter, up from $2.4 million last year.

Keeping a watchful eye on its stockpiles, and holding on to more of its cash, the specialty retailer built its inventories at a slower pace than its sales, by 16.5 percent, compared with the 23.3 percent sales gain.

As if all that weren't enough good news, senior executives spread even more cheer around during a conference call with investors. Bullish about its prospects going forward and the all-important Christmas quarter, the company said it now expects full-year earnings to come in at $0.98 a share, $0.03 above an earlier projection of $0.95 a share.

And looking ahead to 2003, the retailer said it's comfortable with a forecast of $1.18 in per-share profits.

During the third quarter, the retailer opened 55 new units and relocated two existing stores. Total store space at the end of the quarter totaled about 17.2 million square feet, up by 17.1 percent from last year. Through the first nine months of the year, the company opened 92 new units.

During the fourth quarter, Bed Bath & Beyond plans to open three new stores, bringing to 95 the total number of doors opened in 2002. By the end of this year, the chain will encompass 491 units.

Bed Bath & Beyond

Qtr. 11/30 (x000) 2002 2001 % change
Sales $936,030 $759,438 23.3
Oper. income (EBIT) 119,228 83,749 42.4
Net income 75,112 52,964 41.8
Per share (diluted) 0.25 0.18 38.9
Average gross margin 41.3% 41.0%
SG&A expenses 28.5% 29.9%
Nine months
Sales 2,615,872 2,048,907 27.7
Oper. income (EBIT) 311,616 214,023 45.5
Net income 196,870 136,925 43.8
Per share (diluted) 0.65 0.46 41.3
Average gross margin 41.1% 40.9%
SG&A expenses 29.2% 30.4%

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