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Getting beautiful: Bed Bath makes first acquisition with Harmon

Union, NJ — With an ample amount of cash available, zero debt and aggressive growth in its future, Bed Bath & Beyond completed its first-ever acquisition last week with the purchase of Harmon Stores, a deep discount health and beauty aid retailer based in Cedar Grove, NJ.

While Bed Bath was not disclosing most of the details, it did say that the acquisition was made in cash and believes the benefit of the acquisition will not have a material effect on the overall results or financial condition of the company for 2002.

Harmon Stores currently operates 27 stores — one in Connecticut, two in New York and the rest in New Jersey, with a square footage total of 178,000.

The decision to buy was timely, said Joan Bogucki, analyst, Wedbush Morgan Securities, Los Angeles. Ending 2001 with almost 400 store locations, Bed Bath has said in the past that it wants to expand to 750 to 800 stores, she said, and this would be one way to do it — "to get their hands on a new business." Though no specifics were given on Bed Bath's plans for Harmon, she speculated that since both companies are headquartered in New Jersey, they are likely very familiar with each other, and Bed Bath has probably studied the company for a while.

Harmon differentiates itself from other H&BA retailers with its assortment and discount pricing, Bogucki said, and also has its own private label brand, which "bodes well for BBB," which may want to extend its brands as well.

Though Harmon's sales numbers were not released, based on estimates of similar H&BA retailers, she projected annual sales to be between $35 million and $50 million. Excluding pharmacy sales and floor space, CVS has sales per square feet of $241 and Walgreens $271, Bogucki estimated, and she believes Harmon is in line with those stores.

"Bed Bath is very, very methodical" and bottom- and top-line oriented, noted Alan Rifkin, analyst, Lehman Brothers, here. It has been looking at scores of possible purchases over the years, seeking a company that met certain criteria, like delivering EBIT margins, he added.

Harmon is a "complementary, long-term growth vehicle" for Bed Bath, he said, estimating Harmon's sales between $40 million to $50 million. The purchase is a proactive strategy to grow the company, though it will take a few years before Harmon contributes to earnings. He also believes, knowing Bed Bath's management, Harmon could expand to 75 stores by 2005.

Rifkin also thought that Bed Bath feels that Harmon represents a vital business, one that will become just as attractive over the next few years as Bed Bath's core business is now. There is also the possibility of cross-merchandising, as Bed Bath may try putting some consumables in its own locations "to boost traffic flow."

As for the possibility of other acquisitions, Bed Bath will want to experiment with this one first, Rifkin said. But "you have to believe that they're not stopping."

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