BBB Profits Not Enough For The Street

Don Hogsett, Staff Staff, September 28, 2004

Union, N.J. — Even though profits climbed 23.5 percent at superstore retailer Bed Bath & Beyond, rising to $120 million from $97.2 million last year, Wall Street and stock watchers grew suddenly antsy by a slowing rate of sales growth and drove the high-flying stock down 5 percent in unusually heavy trading on the New York Stock Exchange in the first trading hours after the company put out the news.

By the end of trading on Thursday, Sept. 23, the stock had slumped $1.99 a share, to $37.59. And more than three times as many shares as usual had traded hands on the Big Board, 7.9 million versus 2.6 million on an average trading day.

Raising concerns about whether the retailer can still justify the lofty premiums a growth stock typically commands, Bed Bath & Beyond said sales in the period increased 14.6 percent, to $1.3 billion from $1.1 billion last year — impressive, but still beneath the even more impressive gains of 23.1 percent during the second quarter of last year, or the 26.5 percent increase during the same period of 2002.

More to the point, same-store sales increased 4.8 percent during the second quarter of this year, well beneath the 5.9 percent gain during the same period a year ago, or the 8 percent increase put up during the second quarter of 2002.

While profits remained robust, climbing 23.5 percent, helped by stronger margins and lower costs, the gain was nowhere near the 28.8 percent increase of the same quarter last year, or the phenomenal 39.9 percent run-up during the second quarter of 2002.

Driving the second quarter profit growth, in addition to stronger sales, was the combination of stronger margins and lower costs that the retailer has recently used to provide an extra boost to earnings. Average gross margin widened 40 basis points, or four-tenths of a percentage point.

Always thrifty, the retailer continued to zealously manage costs, pushing operating expenses — when measured as a percentage of sales — down 50 basis points, or five-tenths of a percentage point, to 26.8 percent from 27.3 percent the year before.

In a further big savings, the retailer tightened its belt when it came to stocking its shelves, and inventories grew at a substantially slower pace than sales, rising 9.8 percent, to $1.1 billion from $958.8 million last year, well beneath the 14.6 percent increase at the top line.

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