Bed Bath & Beyond Inc.
Q1 2008 Earnings Call Transcript

Published: 26 Jun 2008

[Operator:]

Welcome to the Bed Bath & Beyond first quarter of fiscal 2008 results conference call. (Operator Instructions) Now, at this time it is my pleasure to turn the conference over to Ron Curwin, Senior Vice President of Investor Relations of Bed Bath & Beyond.

[Ronald Curwin:]

Welcome to Bed Bath & Beyond’s first quarter fiscal 2008 conference call. Within the past hour we issued a press release covering Bed Bath & Beyond’s results for the three month period ended May 31, 2008. During this call we will comment on some of the quarter’s highlights and update guidance for the fiscal second quarter and for all of fiscal 2008, a 52 week year ending on February 28, 2009. Before proceeding I will read the following statement and I quote, “Bed Bath and Beyond fiscal’s first quarter press release and comments made during this call make contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Many of these forward-looking statements can be identified by the use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan and similar words and phrases. The company’s actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of the company’s control. Please refer to Bed Bath & Beyond’s SEC filings including its Form 10K for the year ended March 1, 2008. The company does not undertake any obligation to update forward-looking statements. Warren Eisenberg, Co-Chairman of Bed Bath & Beyond leads off today’s call. Steven Temares, Chief Executive Officer and a member of the Board of Directors will follow Warren. An update of our earnings guidance for the fiscal second quarter ending on August 30, 2008 and for all of fiscal 2008 and some additional financial commentary will conclude today’s call. I’m now very pleased to introduce Warren Eisenberg.

[Warren Eisenberg:]

Our press release issued within the past hour showed that our company earned $0.30 per share in the fiscal quarter ended May 31, 2008 compared with earnings of $0.38 per share in the comparable period a year ago. These results which were at the upper end of our April 9th guidance range continue to reflect the challenging macroeconomic environment to which as we previously pointed out, we’re not immune. The retail sector for home related products continues to be affected by the macroeconomic environment including the slowdown in housing, particularly in certain parts of the country such as Arizona, California, Florida and Nevada, tight credit markets, high energy costs and ongoing consolidation. In these challenging times we will maintain focus on our customers and in so doing seek to further distance ourselves from our competitors. As always, we base our actions on what is prudent under the circumstances and what is in the best interest of our company, our customers and our shareholders. As we said before, despite the challenges we will take advantage of the opportunity to further expand our market share by capitalizing on the unique strengths of our decentralized culture by investing in our infrastructure to achieve our long term goals and most importantly by providing a superior shopping experience for our customers. We opened nine new Bed Bath & Beyond stores during the fiscal first quarter ending the period with 890 stores in 49 states, the District of Columbia, Puerto Rico and Canada. Also as of May 31, 2008 we operated 41 Christmas Tree Shops, 10 buybuy Baby stores, one of which was opened during the fiscal first quarter and 40 stores under the names Harmon and Harmon Face Values. Consolidated store space at May 31, 2008 was approximately 30.4 million square feet. As previously reported in the fourth quarter of last year we also commenced operations of a new state of the art Christmas Tree Shops distribution center as well as a new in service fulfillment center which will facilitate the growth in our online sales. In addition, we purchased a building adjacent to our corporate offices in Union, New Jersey to support our continuing growth. In fiscal 2008 we expect to open approximately 50 to 55 new Bed Bath & Beyond stores throughout the United States and Canada. We’ve signed or are in final documentation for approximately a dozen additional sites in Canada and are actively negotiating another dozen or so as we look to expand aggressively in our effort to become the first choice for the home in Canada. In the United States we continue to target in excess of 1,300 Bed Bath & Beyond stores. Underscoring our long-standing interest in exploring other international opportunities we are excited to have recently entered in to a joint venture in Mexico which currently operates two stores in the Mexico City market and is well positioned for future growth. We also plan to accelerate the growth of our Christmas Tree Shops and buybuy Baby store concepts and to continue to open new Harmon Face Value stores. Approximately 12 Christmas Tree Shop stores and several buybuy Baby stores are planned to open prior to the end of fiscal 08. As part of an ongoing program to increase the productivity of our stores, we will also add fine china departments in many Bed Bath & Beyond stores, Harmon Face Values departments within a number of Bed Bath & Beyond and Christmas Tree stores and expand, renovate or remodel many other stores. Through the efforts of our approximate 39,000 associates who breath live in to Bed Bath & Beyond, Christmas Tree Shops, buybuy Baby, Harmon and Harmon Face Value stores every day, we fully expect to improve our relative position in the marketplace and expand our market share not only in fiscal 2008 but for years in the future. Now, I’ll turn the call over to Steven Temares.

[Steven H. Temares:]

As Warren said, our fiscal first quarter results were accomplished in a challenging macroeconomic environment for retailers in general and home related retailers specifically. Our results reflect the considerable strength of our decentralized organization and demonstrate what can be accomplished through the talents and dedicate of our associates despite the difficult business conditions. We remain focused on our company’s long-term goals and fully expect over time to benefit from the opportunities provided by the current environment to widen the gap between us and our competitors. We continue to test new merchandise initiatives throughout our stores and consistently strive to increase productivity of existing stores. Our bridal and gift registry business as well as our online sales activity afford us an important opportunity to attract new shoppers to the Bed Bath & Beyond experience. We are continuing to add associates in key areas throughout our organization and implement new systems at Christmas Tree Shops and buybuy Baby. Also, as Warren said, we recently opened a new state of the art distribution center and a new eService fulfillment center. We continue to expand our business prudently while simultaneously focusing on controlling costs throughout our organization. Through a combination of broad merchandise assortments at everyday low prices, superior customer service, merchandising innovation, information technology enhancements and ongoing human resource development, we remain focused on continuing to increase our leadership position in home good retailing; an industry that we believe will continue to experience consolidation. We continue to take the long term approach to building the Bed Bath & Beyond, Christmas Tree Shops, buybuy Baby and Harmon Face Value concepts by making the necessary investments in our infrastructure and we remain enthusiastic about our long term prospects. We believe that 2008 will afford us the opportunity to take advantage of these times to gain a superior and stronger position with an enhanced ability to serve our customer’s needs and to compete more effectively than ever when the environment improves. We are confident that we will be able to look back at this period as one affording exceptional opportunity to gain market share and improve our competitive position. Warren commented earlier about our fiscal first quarter store openings and our fiscal 2008 store opening program. As he said, we expect to open approximately 50 to 55 new Bed Bath & Beyond stores in the United States and Canada in fiscal 2008. We also expect to expand in new and existing markets by opening approximately 12 Christmas Tree Shops and grow our buybuy Baby and Harmon Face Value operations. While the number of new store openings in these concepts will be growing we are planning the number of Bed Bath & Beyond store openings to decrease versus prior years affording us the flexibility to take advantage of real estate opportunities for additional stores that might arrive from further retail consolidation if we so choose. Our new state of the art distribution facility and new eService fulfillment center are now both operational and we are in an improved position to support the growth of our business. We strongly believe in and are passionate about the strong growth potential provided by the merchandise offering across all our retail concepts and the ability it provides for us to do more with our customers in the years ahead. Also, as Warren touched on, we believe that the Canadian market has outstanding growth potential for us. The aggressive expansion program that we have initiated in Canada is intended to position Bed Bath & Beyond as the country’s premier retailer of goods for the home. Turning now to the financial highlights of our fiscal first quarter, our company earned $0.30 per share compared with $0.38 per share earned in the first quarter a year ago. While we believe our recent operating results indicate that we continue to outperform others in the home furnishing industries, we are not satisfied and we continue to work hard to achieve improved results over time and we remain focused on building an even more successful business over the long term. Net sales for the fiscal first quarter were approximately $1.6 billion, that’s 6.1% higher than the corresponding fiscal 2007 period. First quarter comps were up .8%. At last year’s first quarter comps were up 1.6%. Net sales and comp sales were negatively affected by the economic slowdown in general and by issues specific to the housing and mortgage industries in particular. In those areas of the country that have been reported as being the most significantly affected by these issues, notable Arizona, California, Florida and Nevada, comp sales were noticeably weaker than in less affected areas. The gross profit margin decreased by approximately 180 basis points for the quarter primarily due to an increase in coupon redemption associated with a heightened promotional environment, an increase in inventory acquisition costs and the shift in the mix of merchandise sold as we continue to experience a higher percentage of sales of hard lines. Selling, general and administrative expenses for the fiscal first quarter were about $537 million, 32.6% of net sales compared with approximately $492 million or 31.7% of net sales in the corresponding quarter a year ago. SG&A as a percent of sales increased by approximately 90 basis points for the quarter primarily due to increases in advertising expenses as a result of our increased distribution of advertising pieces and response to the heightened promotional environment and relative increases in occupancy costs including rent, real estate taxes and depreciation. As you are aware, historically, first quarter net sales are the lowest of any quarter so relatively tend to deleverage SG&A more than in any of the three succeeding quarters when net sales have historically been higher. Reflecting the movement in the gross profit margin and SG&A expenses, the operating profit margin for the first quarter was lower by approximately 270 basis points. Interest income in this year’s difficult first quarter of $4.5 million versus $9.9 million a year ago is a result of lower cash balances reflecting share repurchases and lower interest rates from a year ago. We continue to plan capital spending for all of fiscal 2008 to be approximately $265 million. We’d like to reemphasize that in today’s challenging economic environment while others in our industry might unable to invest in their infrastructure and are in fact curtailing operations while limiting growth, we have the resources, and are committed to investing in our company’s future and in providing our customers a better shopping experience through years to come. The widening gap between us and our competitors creates a significant opportunity for our company to continue to increase our share of the home furnishing and other markets that we serve. Again, by taking a long term approach to building the Bed Bath & Beyond, Christmas Tree Shops, buybuy Baby and Harmon Face Value concepts, 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. Since becoming a public company through reinvesting in our business, we have gone from 34 stores in nine states during approximately $168 million in net sales to ending fiscal 2007 with over 970 stores in 49 states, the District of Columbia, Puerto Rico and Canada doing approximately $7 billion dollars in net sales. In addition, we recently announced the formation of a joint venture with Home & More, a privately held home products retailer operating two stores in Mexico. We’re excited to be entering Mexico with the strong management team of Home & More as our partners. So, to recap, Bed Bath & Beyond’s fiscal first quarter produced earnings of approximately $0.30 per share on an approximately 6.1% increase in net sales and a .8% gain in same store sales. With our annual meeting of shareholders scheduled to take place on Thursday, July 3, 2008 we would like to thank our shareholders in advance for supporting the recommendations of our board of directors with respect to the proxy proposals. We encourage shareholders who have not yet voted to take advantage of electronic voting either via the Internet or by telephone. Please feel free to call Ron or Ken [Frankel] with any questions you may have. Our company has never been stronger or better positioned to compete and despite the business climate we are confident that we will achieve our 2008 objectives. I’ll now turn the call back to Ron.

[Ronald Curwin:]

As you heard from Warren and Steve, our fiscal first quarter results were at the upper end of our April 9th guidance range. In reflecting upon the balance of our fiscal year we believe that it’s prudent to assume that the challenging economic environment will persist. We will continue to assess our prospects as the year develops and may reflect any changes in our outlook in future quarterly guidance. As of today, these are our major planning assumptions for fiscal 2008