Big box bucks retail trend with sky-high performance

Don Hogsett, December 22, 2003

Looking increasingly like a poster child for 'getting it done right' in American retailing, and raising the bar higher with each succeeding quarter, superstore retailer Bed Bath & Beyond drove third-quarter earnings up by 33.8 percent, to $100.5 million from $75.1 million last year.

Opening new stores and extending its rocket-hot franchise further, the home furnishings specialist pushed sales higher by 25.5 percent, to $1.2 billion from $936.0 million last year.

And in an increasingly vexing retail environment, with consumers holding on tight to their wallets, the retailer pushed same-store sales up by 6.4 percent, at a time when other full-price retailers are delighted just to run flat. Even the nation's biggest and most successful mass merchants would be hard pressed to match that set of comps.

Wall Street cheered the strong performance, driving the retailer's stock up by 5.5 percent in value, or $2.21 as share, to $42.17 on Dec. 18, the first day of trading after the news came out. Almost 10 million shares changed hands, three times the normal daily trading volume.

Dressing up the bottom line, in addition to stronger sales, was a powerful combination of stronger margins and lower costs. Average gross margin improved by 20 basis points, or two-tenths of a percentage point, to 41.5 percent from 41.3 percent a year ago. Gross margin dollars improved by 26.1 percent, to $487.0 million from $386.2 million.

Wringing every possible nickel out of overhead, the retailer lowered its operating costs by 80 basis points, or eight-tenths of a percentage point, to 27.7 percent of sales from 28.5 percent last year.

Fueled by the stronger sales, wider margins and lower costs, operating profits shot up by 35.4 percent, to $161.5 million from $119.2 million. The retailer's operating margin — operating profit measured as a percentage of sales — came in at a jaw-dropping 13.7 percent, up from 12.7 percent a year ago.

About the only minus sign to show up in the income statement was a decline in investment income, the interest earned on the money the company put in the bank, not a surprise in today's low interest-rate environment. Interest income fell by 32.4 percent, to $2.0 million from $2.9 million last year. With interest rates running in the low single-digits, that would suggest the company has comfortably more than $100 million sitting with a bank earning interest. Cash on hand at the close of the quarter total $620 million, more than twice the $293.0 million total a year ago.

Inventories remained tightly controlled, rising far slower than sales. The value of stockpiles increased by 18.1 percent, to $1.2 billion, well behind the 21.6 percent rate of sales growth.

Bed Bath & Beyond

Qtr. 11/29 (x000) 2003 2002 % chg
a-Third-quarter results include $2.0 million in interest income, down 32.4 percent from $2.9 million last year. For the nine-month period, interest income totaled $7.2 million, down 15.0 percent from $8.5 million the preceding year.
Sales $1,174,740 $936,030 25.5
Oper. income (EBIT) 161,459 119,228 35.4
Net income 100,506a 75,112a 33.8
Per share (diluted) 0.33 0.25 32.0
Average gross margin 41.5% 41.3%
SG&A expenses 27.7% 28.5%
Nine months 2002 2002 % chg
Sales 3,180,053 2,615,872 21.6
Oper. income (EBIT) 407,776 311,616 30.9
Net income 255,222a 196,870a 29.6
Per share (diluted) 0.84 0.65 29.2
Average gross margin 41.3% 41.1
SG&A expenses 28.5% 29.2%

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