BB&B in Profit Doldrums
January 8, 2007,
With its go-go days of jaw-dropping sales and earnings gains now far behind, and its growth prospects dimming, Bed Bath & Beyond is coming down to earth, pushing third-quarter profits up a respectable 5.8%; same-store sales advanced by 3.8%, both numbers a shadow of the sky-high gains of earlier years, when profits routinely soared by 30% or more, and comps broke through the double-digit barrier.
And when profits for the quarter failed to meet Wall Street expectations, coming in at $0.50 a share vs. an expected $0.52, investors were quick to take notice and head for the exit. Trying to cushion the disappointing earnings, the retailer said it will buy back another $1 billion worth of its own stock, a move designed to drive earnings per share higher by reducing the number of shares on which those profits are calculated. But investors weren't impressed by the attempt at financial engineering and focused on the key merchandising metrics, pushing the retailer's shares down by 3.4%, or $1.37, to $38.56 a share in unusually brisk trading the day after the announcement, with more than 7.2 million shares changing hands by mid-day, almost three times the normal daily trading volume.
Stuck in a relatively narrow trading range for years now, Bed Bath & Beyond stock is trading about 8.3% beneath its 12-month high of $41.98 a share.
Even with the help of stronger sales and wider margins, profits at the big-box pioneer advanced a moderate 5.8%, to $143.4 million from $134.6 million during the same period a year ago. But a hefty percentage of that profit, $10.6 million, stemmed from what it earned on money it put in the bank. When it comes to making money from its core merchandising business, Bed Bath grew its operating profit just 2.7%, to $211.1 million from $205.5 million. And through the first nine months of the year, operating profits hit the wall, edging up just 0.9%, to $579.5 million from $574.3 million a year ago.
In one piece of good news, in addition to the interest income, average gross margin widened by 100 basis points, or 1.0 percentage points, to 43.5% from 42.5% a year ago. But acting as a drag on the bottom line, costs climbed higher and faster, jumping up by 210 basis points, or 2.1 percentage points, to 30.4% of sales from 28.3% the preceding year.
Putting earnings under further pressure, stockpiles grew at a faster pace than sales during the third quarter, by 15.1%, to $1.6 billion from $1.4 billion last year, breezing past the sales growth of 11.8%.
Looking ahead to the end of the Christmas quarter, the retailer hoisted a yellow caution flag, saying problems arising out of its previously announced back-dating of stock options for some employees will continue to dog the bottom line. As the value of those previously granted options is revalued and brought into line with accepted accounting practice, the 1,600 workers who got them will have to settle up with the IRS, paying back taxes. To shield them, the retailer said it's considering a program that would pay them what's due to the tax man, incurring a fourth-quarter charge in the range of $40 million.
Bed Bath & Beyond Inc.
|Qtr. 11/25 (x000)||2006||2005||% change|
|a. Third quarter results include $10.6 million in interest income, up 11.4% from $9.6 million during the same period a year ago.
b. Nine-month results include $30.2 million in interest income, up 22.5% from $24.7 million last year.
|Oper. income (EBIT)||211,134||205,493||2.7|
|Average gross margin||43.5%||42.5%||—|
|Oper. income (EBIT)||579,506||574,254||0.9|
|Average gross margin||42.7%||42.1%||—|