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Bed Bath & Beyond reports second-quarter slowdown

Union, N.J. -- In a second straight quarterly slowdown, settling down to earth after a long run as one of American retailing's highest fliers, second-quarter profits at Bed Bath & Beyond inched up a skimpy 2.9%, to $145.5 million from $141.5 million, a far cry from the gains of 25% or more the retailer at one time routinely recorded.

Even more telling, all of the earnings gain came not out of selling goods, but directly as a result of the money it earned on what it put in the bank. Interest income totaled $9.9 million, more than twice the $4.1 million increase in net income.

In a piece of good earnings news, the number that Wall Street fixates on, earnings per share, improved by 8.5%, to $0.51 a share from $0.47, a direct result of the retailer's aggressive stock buyback. With fewer of its shares out in the marketplace, that key earnings number rose substantially.

Sales climbed higher by 12.3%, to $1.6 billion from $1.4 billion, largely due to continued expansion. Same-store sales remained strong, rising by 4.8%, slightly behind the 4.9% gain put up during the prior quarter.

Average gross margin improved somewhat, widening by 20 basis points, or two-tenths of a percentage point, to 42.2% from 42.0% a year ago. But acting as a drag and offsetting any margin expansion, costs climbed substantially higher. When measured as a percentage of sales, costs jumped by 170 basis points, or 1.7 percentage points, to 28.5% from 26.8% a year ago. Adding substantially to expenses was the retailer's early adoption of new accounting rules governing stock-based compensation.

Hit hard by the rising costs, operating profits rose a skimpy 0.8%, to $219.6 million from $217.9 million during the same quarter a year ago.

Putting further pressure on the bottom line, inventories climbed at a faster pace than sales, rising by 14.8%, to $1.4 billion, compared with the 12.3% increase in sales.

The retailer's cash position thinned out by 43.3%, to $168.0 million from $296.5 million last year, and the value of its short-term investment securities fell by 7.7%, to $649.3 million from $703.4 million a year ago.

With a number of American companies recently in the spotlight for the way they doled out stock options to executives, the company said it is voluntarily conducting a review of its own stock-option procedures. An independent committee of the board of directors is carrying out the review and is being conducted with the assistance of outside legal and accounting experts. The review is not yet complete, and the company said it expects to report its findings by early October.

Bed Bath & Beyond Inc.
Qtr. 8/26 (x000)          2006        2005        % change
Sales                  $1,607,239  $1,431,182         12.3
Oper. income (EBIT)       219,622     217,877          0.8
Net income                145,535     141,402          2.9
Per share (diluted)          0.51        0.47          8.5
Average gross margin         42.2%       42.0%          --
SG&A expenses                28.5%       26.8%          --
Six Months
Sales                   3,003,202   2,675,603         12.2
Oper. income (EBIT)       368,372     368,761         -0.1
Net income                245,966     240,305          2.4
Per share (diluted)          0.86        0.80          7.5
Average gross margin         42.2%       42.0%          --
SG&A expenses                30.0%       28.2%          --

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