Bed Bath & Beyond Inc.
Q2 2007 Earnings Call Transcript

Published: 27 Sep 2007

[Operator:]

Welcome to Bed Bath & Beyond's second quarter fiscal 2007 results conference call. (Operator Instructions). Now at this time, I would like to turn the conference over to Ron Curwin, Senior Vice President of Investor Relations of Bed Bath & Beyond. Mr. Curwin, please go ahead.

[Ron Curwin:]

Thank you and good afternoon. Welcome to Bed Bath & Beyond's second quarter fiscal 2007 conference call. Within the past hour, we issued a press release covering Bed Bath & Beyond's results for the three- and six-month periods ended September 1, 2007. During this call, we will comment on some of the quarter’s highlights and update guidance for fiscal 2007, a 52-week year ending on March 1, 2008. Before proceeding, I will read the following statement, and I quote

[Warren Eisenberg:]

Good afternoon. I am pleased to say that our second quarter once again produced solid results and that I am confident that fiscal 2007, despite its challenges, will be yet another successful year for our company. In the retail market for home related products, our company’s market share continues to expand as we distance ourselves from our competitors by most measures, including and most importantly, profitability. We remain highly confident in the ever-growing success of our business. Our unique, decentralized corporate culture continues to produce strong operating results. Our entire organization is dedicated to providing our customers with the best possible shopping experience. During the fiscal second quarter, we opened 10 new Bed Bath & Beyond stores and one new Christmas Tree Shops stores. As of September 1, 2007, we operated 831 Bed Bath & Beyond stores in 48 states, the District of Columbia, and Puerto Rico; 36 Christmas Tree Shops stores in 10 states; 39 Harmon stores in three states; and eight buybuy BABY stores in four states. Consolidated store space as of September 1, 2007, was approximately 28.6 million square feet, which we anticipate growing to approximately 30.3 million square feet by fiscal year-end. Since the beginning of our fiscal third quarter, we’ve opened an additional eight Bed Bath & Beyond stores, including our first store in the State of Wyoming, and as of today, we are operating 839 Bed Bath & Beyond stores in 49 states, the District of Columbia, and Puerto Rico. For all of fiscal 2007, we continue to expect to open approximately 70 new Bed Bath & Beyond stores, including our first store in Canada. However, it’s possible a few of these openings may occur subsequent to year-end in March, 2008. If this were to occur, it would not affect this year’s earnings guidance or our long-term profitability. In addition, we plan to open two buybuy BABY stores and a freestanding Harmon store, as well as a new e-service fulfillment center to accommodate the growth in our online business. We also plan to add four more Christmas Tree Shops stores prior to our fiscal year-end, bringing to six the total number of fiscal 2007 Christmas Tree Shops new store openings. We remain on target to operate in excess of 1,300 domestic Bed Bath & Beyond stores. In addition, we have multiple opportunities to expand, renovate, or remodel a significant number of existing stores, thereby increasing their productivity. We are also working on additional sites in Canada, a new market with significant growth potential, and continue to review other international opportunities. For future years, we plan to accelerate the growth of our Christmas Tree Shops and buybuy BABY store concepts, as well as continue to roll out Harmon departments within the Bed Bath & Beyond stores. With regard to Christmas Tree Shops, the completion of our new 700,000 square foot distribution facility in early 2008 will help support many of the new Christmas Tree Shops stores expected to open over the next several years, including the approximately 12 new stores we expect to open in fiscal 2008. Our strong operating cash flow over the years has enabled us to increase our investments in the infrastructure necessary to support each of these growth initiatives. At a time when the ability of other sector participants to finance new store growth and/or to maintain or upgrade existing programs and facilities has proven challenging for them, our financial strength provides us with still another competitive advantage. The $1 billion share repurchase program approved by our Board of Directors last December authorized our company to purchase shares of our common stock with funds from present and expected future free cash flows. During the second fiscal quarter, our company repurchased approximately $239 million of our common shares. Since December, we have repurchased approximately $826 million under the $1 billion authorization. We anticipate completing the existing program by the end of fiscal 2007. In addition, we are pleased to announce that our Board of Directors has authorized a new $1 billion share repurchase program, which will commence after the completion of the current repurchase program. It is currently anticipated that this new $1 billion share repurchase program will be funded from present and expected future free cash flows. That said, our company’s Board of Directors continues to review our capital structure. This new program, the fourth since 2004, reflects the Board’s confidence in our future. We expect to continue to outperform the other participants in the home goods sector, which has been for us an attractive and profitable area of retailing. We continue to be in an excellent position to exploit the attractive opportunities offered through the sale of merchandise for the home and to continue to gain market share. As a result of the dedicated efforts of our approximately 37,000 associates in our decentralized environment, our strong financial condition and steadily improving position in the marketplace, we have no doubt that 2007 will be another year of solid accomplishment for our company. Now I’ll turn the call over to Steven Temares. Steve.

[Steven H. Temares:]

Thank you, Warren. Good afternoon, everyone and thank you for participating in this conference call. We have been and continue to be focused on building a business that stands the test of time. By becoming our customer’s first choice for the products we offer domestically, interactively, and over the longer term, internationally, we work to continue to distance ourselves from our competitors. We believe the current retailing environment provides companies such as ours, with the capacity to reinvest in their infrastructure, the ability to expand their market share. In a sector of retailing where many have been struggling, we continue to generate solid operating results and we believe our company has never been stronger or better positioned to compete. For over 35 years, we have grown our company as a decentralized organization. This is consistent with our belief in the dedication and talents of our associates. We have often repeated our belief that our decentralization has led to better decision-making and better execution. In our view, these benefits become more apparent during challenging times. Our associates, their knowledge, independence and focus on servicing our customers and providing them with the very best possible shopping experience have been largely responsible for our consistent long-term performance. The previously announced acquisition during our fiscal first quarter of buybuy BABY, an eight-store chain offering a broad assortment of merchandise for expectant parents and later on, their infants and toddlers, represents another opportunity for us to satisfy our customers in new ways by servicing another portion of their lifecycle. We are excited about the opportunity this provides to enhance our offerings to our customers in stores and through our e-service sites. We are also pleased to provide additional value to our shareholders through our share repurchase program. As reported, we have made substantial progress in repurchasing shares under the $1 billion program authorized last December. As Warren said, our Board of Directors has authorized a new $1 billion share repurchase program, and our board continues to review our capital structure on an ongoing basis. We also continue to invest in our infrastructure while maintaining financial flexibility to take advantage of opportunities as they may arise. Turning to the financial highlights of our fiscal second quarter, net earnings per diluted share were approximately $0.55, or approximately $147 million compared with net earnings of approximately $0.51, or approximately $146 million a year ago. Net earnings in the second quarter benefited from a tax rate that was lower than last year’s second quarter. This rate was also lower than we originally planned and had discussed in June, and includes a $5.8 million benefit due to discrete tax items recorded in the quarter. For the six months, net earnings per diluted share were approximately $0.92, or approximately $252 million, compared with approximately $0.86, or approximately $246 million, reported for last year’s first half. Net sales for the fiscal second quarter were approximately $1.8 billion, about 10% higher than in the corresponding quarter a year ago, while comp store sales were up 2.2%. For the first half, net sales advanced to approximately $3.3 billion, which was about 10.6% higher than in the similar six-month period last year. Comp store sales for the six months increased by approximately 1.9%. We were pleased that our business improved in our second quarter, throughout which we maintained our everyday low price philosophy that’s proven so popular with our customers and so successful for us. Gross profit for the fiscal second quarter was approximately $732 million, or 41.4% of net sales, compared with approximately $678 million, or 42.2% of net sales during the second quarter of 2006. The approximately 80 basis point decrease in the gross profit margin resulted from a number of factors, including an increase in inventory acquisition costs, a heightened promotional environment, and a change in the mix of merchandise sold as we experienced a higher percentage of sales of hard line goods. Selling, general and administrative expenses for the fiscal second quarter were about $511 million, compared with approximately $459 million in the corresponding quarter a year ago. SG&A deleveraged by approximately 40 basis points during the quarter, due primarily to a relative increase in advertising expense. Although the number of advertising events remained relatively constant, increased distribution resulted in higher postage and paper costs. As always, we continue to look for ways to reduce and eliminate costs throughout our operations. Reflecting the movements in the gross profit margin and SG&A expenses, the operating profit margin for the fiscal second quarter was lower by approximately 120 basis points. For the fiscal six months, the operating profit margin decreased by approximately 100 basis points compared with last year’s first half. Over the past 15 years, including the eight stores opened since the beginning of our fiscal third quarter, our company store count has grown from 34 stores in nine states, doing about $168 million in net sales, to expecting to end this year with over 970 stores in 49 states, the District of Columbia, Puerto Rico, and Canada, with sales exceeding $7 billion. In the last five years, we have acquired buybuy BABY, Christmas Tree Shops, and Harmon stores, and vastly improved our infrastructure, putting us in a better position than ever to support our future growth. As I said earlier, our organization has never been stronger. As always, we continue to test new merchandise initiatives throughout our stores. We also have continued to open new fine china and Harmon health and beauty care departments within Bed Bath & Beyond stores, and increased our capabilities to service our bridal and gift registry customers. In addition, we continue our efforts to increase the productivity of existing stores by expanding, remodeling, and/or relocating them. As Warren said, at this time, we anticipate opening approximately 70 new Bed Bath & Beyond stores, including our first store in Canada, for fiscal 2007. Two additional buybuy BABY stores and a Harmon store are expected to open before year-end, as well as a new e-service fulfillment center to accommodate growth in our online business. We also plan to add four more Christmas Tree Shops stores and complete its new state-of-the-art distribution facility, which will help support the approximately 12 new Christmas Tree Shops stores opening in 2008, as well as additional new Christmas Tree Shops stores opening beyond next year. Our capital spending plan for all of fiscal 2007 is approximately $375 million. We remain committed to investing in projects essential to our future growth. The widening gap between us and our competitors creates a significant opportunity for our company to continue to increase our share of the home furnishings and other markets that we serve, and investing in our infrastructure is essential to that accomplishment. Again, by taking a long-term approach to building the Bed Bath & Beyond, Christmas Tree Shops, buybuy BABY, and Harmon store concepts, and by making the investments in our infrastructure, we expect that all aspects of our business will continue to contribute to the achievement of our goals in the years ahead. We are extremely well-positioned to take advantage of any opportunities that arise and to respond to any challenges that may lie ahead. Our entire organization is dedicated to providing the best possible service to our customers and through these efforts, to producing exceptional financial results for our shareholders. To briefly recap, Bed Bath & Beyond's fiscal second quarter produced net earnings of approximately $0.55 per share on an approximately 10% increase in net sales and a 2.2% gain in same-store sales. We look forward to our next call on January 3, 2008, when we will review our fiscal third quarter and first nine months of fiscal 2007 results. We will also at that time provide our initial thoughts with respect to our fiscal 2008 outlook. With so many new stores scheduled to open before year-end, and with the fall selling season well underway, the balance of this year promises to be an exciting, productive time for Bed Bath & Beyond. At the conclusion of this call, Ron, Ken Frankel, and Lisa [Capluitz], will be in their offices should you have any questions. I will now turn the call back to Ron.

[Ron Curwin:]

Thanks, Steve. A short while ago, we reported our fiscal second quarter results, which were favorable to our plan. We also announced the authorization of a new share repurchase program that we intend to fund out of current and expected future excess cash flows. Although no date has been established for the completion of this program, for planning purposes, we anticipate completing it by the end of fiscal 2009. Given the current business environment, there are still lingering questions about the direction of the economy. Consistent with the earnings per share guidance we provided on our June conference call, assuming the continuation of the fiscal first half comp sales trend, an estimated tax rate calculated in accordance with FIN-48, among other factors, we would expect to achieve either flat or a low single digit percentage increase in net earnings per share in the fiscal third quarter, when compared with net earnings of $0.50 per share reported in the corresponding quarter of fiscal 2006. Our guidance with respect to the fourth quarter remains essentially unchanged. Recall that in last year’s fourth quarter, we reported earnings of $0.72 per share, which included a $0.07 per share non-recurring charge, as well as the benefit of an additional week of net sales of approximately $105 million. Excluding this non-recurring charge, earnings per share for the fourth quarter of fiscal 2006 would have been $0.79 per share. Using this $0.79, not the $0.72 per share as reported, if the first half comp sales trend were to continue, and considering one less week of sales than a year ago, we would expect earnings per share in this year’s fiscal fourth quarter to decrease by a low- to mid-single digit percentage from last year’s $0.79 per share. If comps were to be consistent with historical guidance of 3% to 5%, we would expect the year-over-year change in earnings per share, considering last year’s fourth quarter included one additional week, to range from a low single digit percentage decrease to a low single percentage increase when compared to last year’s $0.79 per share. Other key planning assumptions for fiscal 2007 are as follows

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. We thank you all for listening. You may now disconnect.