Bed Bath & Beyond 3Q Profits Top 20 Percent

Heath E. Combs, Don Hogsett, December 20, 2004

Union, N.J. — Supported by strong internal discipline, which is offsetting a slowing rate of sales growth, third quarter profits at Bed Bath & Beyond continued to climb sharply, rising 21.2 percent, to $121.9 million from $100.5 million last year.

Sales at the big-box home furnishings specialist advanced 11.1 percent, to $1.3 billion from $1.2 billion, while the crucial measure of same-store sales advanced 3.1 percent.

While that growth is more than respectable, especially in a soft economy and a spotty retail environment, the numbers the retailer is able to put up today lag far behind its performance of just two years ago. During the third quarter of 2002, sales and earnings both grew twice as fast — earnings soaring 41.8 percent, sales shooting up 23.3 percent, and comps growing a heady 8 percent.

While Bed Bath & Beyond remains among the strongest retailers in America, the big engine of earnings growth is undergoing a profound transformation as the retailer's format matures and it saturates the map, shifting from growth driven by rapid expansion to improved operational metrics, notably stronger margins, lower costs and stringent inventory controls.

Indeed, during the recent third quarter, much of the earnings growth stemmed from a tight focus on improved operational discipline, as margins strengthened, costs were tightly controlled, and stockpiles grew at a far slower pace than sales.

Since Bed Bath & Beyond almost never sells at less than full price, occasionally using a percent-off coupon to bring traffic through its doors, margins remain strong, increasing 50 basis points, or one-half of a percentage point, to 42 percent from 41.5 percent a year ago. Gross margin dollars, helped by the combination of rising sales and margins, grew 41.5 percent, to $548.2 million from $487 million.

And hacking steadily away at its overhead, the retailer drove costs down 30 basis points, or three-tenths of a percentage point, to 27.4 percent of sales from 27.7 percent a year ago.

Driven by the rising sales, widening margins and lower costs, operating profits improved 18.3 percent, to $191 million from $161.5 million.

Saving even more money, the retailer put a cap on stockpiles, which rose at a far slower pace than sales, increasing just 3.9 percent, versus the 11.1 percent sales gain, to $1.2 billion.

Putting the money it saves to good use, Bed Bath earned $5 million in interest income, more than twice the $2 million it banked during the same quarter a year ago. For eight years, the company has been entirely debt free, and earning interest rather than paying it.

With its share price stuck in neutral over the past 18 months as the company matures and shifts its status from growth stock to blue chip, Bed Bath said it is launching a $350 million share repurchase program in a move to improve per-share earnings and increase investor interest in its stock. Shortly after earnings were reported, its stock was trading on Dec. 15 at $39.90 a share, about 10.2 percent beneath its 12-month high of $44.43. The program became effective Dec. 15, and is expected to be completed in about 12 months, the company said.

Steven Temares, CEO, commented, “Our board took this action based upon our company's strong financial condition, and it reflects the board's confidence in Bed Bath & Beyond's growth potential, financial outlook and excess cash flow generation.”

And the retailer could be hoarding its cash to make future acquisitions, Temares indicated, saying, “In addition to providing value to our shareholders through the $350 million share repurchase program, our strong operations should allow us to continue to invest in our infrastructure and maintain our flexibility to take advantage of opportunities as they may arise.”

Bed Bath & Beyond Inc.

Qtr. 11/27 (x000) 2004 2003 % change
a - Third quarter results include interest income of $4.9 million, up 148.8 percent from $2 million last year.
b - Nine month results include interest income of $11.7 million, up 61.6 percent from $7.2 million during the same period a year ago.
Sales $1,305,155 $1,174,740 11.1
Oper. income (EBIT) 190,978 161,459 18.3
Net income 121,927a 100,506a 21.3
Per share (diluted) 0.40 0.33 21.2
Average gross margin 42.0 41.5
SG&A expenses 27.4% 27.7%
Nine months
Sales 3,680.032 3,180,053 15.7
Oper. Income (EBIT) 508,793 407,776 24.8
Net income 323,984b 255,222b 26.9
Per share (diluted) 1.06 0.84 26.2
Average gross margin 41.7% 41.3%
SG&A expenses 27.9% 2.5%

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