Bed Bath & Beyond Inc.
Q4 2012 Earnings Call Transcript

Published: 10 Apr 2013

[Operator:]

Welcome to Bed Bath & Beyond's Fiscal 2012 Results Conference Call. [Operator Instructions] A rebroadcast of the conference will be available beginning on Wednesday, April 10, 2013, at 6

[Eugene A. Castagna:]

Thank you, and good afternoon. Welcome to Bed Bath & Beyond's Fourth Quarter and Fiscal 2012 Conference Call. A short time ago, we issued a press release announcing Bed Bath & Beyond's results for the 3- and 12-month periods ended March 2, 2013. During this call, we will comment on some of the fourth quarter and full year highlights and provide our fiscal 2013 planning assumptions. Before proceeding, I will read the following statement, and I quote, "Bed Bath & Beyond's fiscal fourth quarter press release and comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities and 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, approximate, estimate, assume, continue, model, 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. Please refer to Bed Bath & Beyond's SEC filings, including its Form 10-K for the year ended February 25, 2012. The company does not undertake any obligation to update its forward-looking statements." Joining me on today's call are Warren Eisenberg, Co-Chairman of Bed Bath & Beyond; and Steven Temares, Chief Executive Officer and member of the Board of Directors. I'm now very pleased to introduce Warren Eisenberg. Warren?

[Warren Eisenberg:]

Thanks, Gene, and good afternoon. I'm pleased to report that our company's net earnings per diluted share increased approximately 14% for the fourth quarter to $1.68, and approximately 12% for the full year to $4.56. As a reminder, fiscal 2012 was a 53-week year, and as such, the fourth quarter of fiscal 2012 consisted of 14 weeks versus 13 weeks in fiscal 2011. These results continue our consistent performance in terms of earnings per share growth, cash flow generation and overall financial strength. During this quarter, we continued the integration of World Market and Linen Holdings and made substantial progress on our initiatives to enhance our website, ramp up our Pendergrass, Georgia E-Commerce Fulfillment operation, complete the remaining construction and other follow-up items related to the relocation of our Farmingdale and Garden City, New York offices to our corporate headquarters in Union, New Jersey and advance the development of a new IT data center, which is located in Claremont, North Carolina. Also during the fourth quarter, we opened one Bed Bath & Beyond store and 4 buybuy BABY stores and completed the relocation and renovation of selected stores across our concepts. At March 2, 2013, consolidated store space, including the 264 World Market Stores, was approximately 42 million square feet, an increase of approximately 16% over the end of last year's fourth quarter. Since the beginning of the fiscal quarter of 2013, we've opened 2 additional Bed Bath & Beyond stores and 1 additional buybuy BABY store. Including those store openings, we currently operate 1,474 stores, consisting of 1,006 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 264 World Market stores; 83 buybuy BABY stores; 74 stores under the names Christmas Tree Shops or andThat!; and 47 stores under the names Harmon or Harmon Face Values. During fiscal 2013, including the 3 stores opened to date, we anticipate opening approximately 45 stores across all of our concepts, with a possibility of some of those pushing into the first fiscal quarter of 2014. We also remain flexible to take advantage of real estate opportunities that may arise. Additionally, we will continue our program of renovating or relocating stores where deemed appropriate. As the year progresses, the total number of stores that we will open will be updated as we gain greater visibility. As always, we apply our stringent standards to growth as we evaluate new store sites, as well as continue to review our existing locations and lease terms for opportunities to relocate and/or rightsize our stores in response to changing market conditions. We believe that throughout the United States and Canada, there is an opportunity to operate in excess of 1,300 Bed Bath & Beyond stores, as well as grow our World Market, Christmas Tree Shops or andThat! and buybuy BABY concepts from coast to coast. Additionally, we will continue to open Harmon Face Values stores and place health and beauty care offerings in selected stores, as well as specialty food and beverage departments in selected Bed Bath & Beyond stores. We remain committed to and are excited about the continued growth of all our merchandise categories. In addition, our joint venture in Mexico opened its third store during our fiscal fourth quarter, the first under the name Bed Bath & Beyond and rebranded its 2 existing stores in the Mexico City market as Bed Bath & Beyond. We took this action in order to leverage the Bed Bath & Beyond name as we continue to expand our footprint. During fiscal 2013, the joint venture plans to open 2 additional stores in Mexico. As we've said consistently, the tremendous efforts of our associates and our unique decentralized culture has been and remain the key to our company's long-term success. This culture, which takes advantage of the knowledge, the independence and the customer focus of our associates, has always been the foundation of our long-term performance and allows us to respond more quickly to market demands and to changing economic conditions on a market-by-market basis. We believe we have the people, the resources and the capability to achieve our near and long-term goals. And 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. As Warren said, we are pleased that we've been able to continue our consistent performance in terms of earnings per share growth, cash flow generation and overall financial strength. For this, we thank our dedicated and talented associates and their focus on improving our customers' overall shopping experience, which are the keys to producing these results. On an ongoing basis, we continue to increase and differentiate our merchandise assortments to better serve our customers' needs and shopping preferences. We also continue to invest in all aspects of our company to enhance the experience in store, online and through mobile devices and social media, and we remain committed to being our customers' first choice for the merchandise categories we offer domestically, interactively and, over the longer term, internationally. By offering a broad, deep and differentiated assortment of merchandise at everyday low prices with superior customer service, we are confident that our company is well positioned to grow profitably and increase market share and shareholder value over time. Looking back on 2012, we are pleased with the progress we have made in many areas. To mention a few, we completed the relocation of our buying offices from New York to our headquarters in Union, New Jersey. Although we are still working on some remaining construction items, we believe the benefits of the enhanced communication, coordination and execution across all our concepts will even exceed our expectations. We completed 2 acquisitions, which were both accretive during fiscal 2012 and are expected to enhance shareholder value over time. The integrations of both World Market and Linen Holdings are going well, in no small part due to the terrific management teams both companies possess, and we are very happy with the progress to date. We have also made significant progress toward creating an enhanced omni-channel experience for our customers, have taken substantial steps in replacing both back-end and customer-facing systems, which will culminate in launching new websites for both buybuy BABY and Bed Bath & Beyond by the end of our fiscal second quarter. We opened a new Internet fulfillment center in Georgia to support our growing online business. We have increased our investment in people and systems to upgrade our data and analytics capabilities. Lastly, we commenced the initial phase of a new IT Data Center to enhance our disaster recover capabilities and support our overall IT systems. Due to the nature and timing of these initiatives, we will continue to incur additional expenses related to these areas in 2013. For 2013, in addition to the investments required in launching our new websites and building, equipping and staffing our new data center in North Carolina, we will be advancing other initiatives, which will also require incremental capital investment and SG&A expense during the year. Some of these are

[Eugene A. Castagna:]

Thanks, Steve. I would like to begin by bringing to your attention several items which affect the comparability of our just-completed fiscal 2012 and our upcoming fiscal 2013. First of all, fiscal 2013 is a 52-week year. Since fiscal 2012 was a 53-week year, the approximate $0.05 that we earned in the 53rd week will not be repeated in fiscal 2013. Second, during fiscal 2012, we recorded a tax benefit of approximately $26.7 million or approximately $0.12 per diluted share in favorable discrete tax adjustments, particularly in the fiscal first quarter of 2012 when we reported an approximate $14.6 million favorable tax adjustment or approximately $0.06 per diluted share. Since these benefits were onetime in nature and fiscal 2013 adjustments are uncertain, we are anticipating the tax rate to be 400 to 500 basis points higher in the first quarter of 2013 as compared to the first quarter of 2012. For the full year, we expect the fiscal 2013 tax rate to be incrementally higher than the tax rate for last year's full year. Third, the inclusion of the results of World Market and Linen Holdings will not be comparable until after we anniversary the acquisitions during the fiscal second quarter of 2013. Finally, we have 2 calendar changes which will affect the comparability of our sales results. First is the shift in our fiscal calendar caused by the 53rd week; second is the timing of Thanksgiving relative to Christmas in fiscal 2013. These effects on comparability will be most evident in the third and fourth quarters of fiscal 2013. That said, I would now like to provide our remaining major planning assumptions for fiscal 2013. One, including the 3 stores opened to date, we currently anticipate opening approximately 45 stores across all our concepts, with the possibility of some of those pushing into the first quarter of fiscal 2014. As always, we remain flexible to take advantage of real estate opportunities that may arise. Two, we expect to continue our program of relocating, remodeling, renovating and expanding a number of our stores during fiscal 2013. Three, capital expenditures for fiscal 2013 are planned to be in the range of approximately $350 million, which of course remains subject to the timing and composition of projects. Projected capital expenditures, which include World Market and Linen Holdings for the full year, are primarily for new stores, existing store refurbishments and information technology enhancements such as launching our new websites by the end of the fiscal second quarter, upgrading our mobile sites and apps, enhancing network communications in our stores, implemented point-of-sale improvements and building, equipping and staffing our new IT Data Center to support our ongoing technology initiatives. Four, we are modeling an increase of 2% to 4% in comparable store sales for the first quarter and for the full year. Five, taking into account that the prior year was a 53-week year, and including our newly acquired companies, we are modeling consolidated net sales to increase by 17% to 19% for the first quarter and approximately 5% to 7% for the full year. Six, depreciation for fiscal 2013 is expected to be approximately $220 million. Seven, assuming these sales levels, modeling a continuation of the shift in the mix of merchandise sold to lower margin categories, an increase in coupon redemptions, the incremental operating costs associated with our initiatives and the consolidation of World Market and Linen Holdings, we are modeling operating profit as a percentage of net sales to deleverage for the first quarter. We also anticipate operating profit margin as a percentage of net sales to deleverage for the full year. Eight, our annual interest line will include approximately $8.7 million in World Market interest expense, substantially resulting from the inclusion of sale-leaseback obligations related to its distribution centers. Nine, we expect to generate positive operating cash flow and to continue to fund operations entirely from internally generated sources. Ten, we plan to continue to repurchase shares under our $2.5 billion repurchase program, which we estimate to be completed by the end of fiscal 2015. However, this repurchase program may be influenced by several factors, including business and market conditions. Based on these and other planning assumptions, including a tax rate that is approximately 400 to 500 basis points higher than in the fiscal first quarter of fiscal 2012, we are modeling net earnings per diluted share to be approximately $0.88 to $0.94 for the fiscal first quarter of 2013. For the 52 weeks of fiscal 2013, including the incrementally higher tax rate assumption, we are modeling net earnings per diluted share to increase by a mid-single digit to a low-double-digit percentage range over the 53 weeks of fiscal 2012. Before concluding this afternoon's call, a few additional comments relative to our recently concluded fiscal fourth quarter. Our balance sheet and cash flows remain strong. We ended the fiscal year with cash and cash equivalents and investment securities of approximately $1.1 billion. This includes approximately $51 million of investments related to auction rate securities. These securities have an estimated temporary valuation adjustment of approximately $2 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed temporary, it did not affect the company's earnings. We will continue to monitor the market for these securities and will expense any permanent changes to the value of our remaining securities, if any, as they occur. As of March 2, 2013, retail inventories at cost, including World Market, were approximately $2.4 billion or $58.12 per square foot, an increase of approximately 1.3% on a per square foot basis over the end of last year's fourth quarter. Retail inventories continue to be tailored by store to meet the anticipated demands of our customers and are in good condition. Consolidated shareholders' equity at March 2, 2013, was approximately $4.1 billion, which is net of share repurchases, including the approximately $305 million, representing approximately 5.3 million shares repurchased during the fiscal fourth quarter of 2012. As of March 2, 2013, the remaining balance of the current share repurchase program authorized in December 2012 was approximately $2.4 billion. As a reminder, our next conference call to review operating results for the first quarter ending on June 1, 2013, will be on Wednesday, June 26, 2013. If you have any questions, Ken Frankel and I will be in our offices this evening, April 10, to take your calls. As always, we appreciate your interest in Bed Bath & Beyond.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for listening. You may now disconnect.