Bed Bath & Beyond Inc.
Q4 2014 Earnings Call Transcript

Published: 9 Apr 2015

[Operator:]

Welcome to Bed Bath & Beyond's fourth quarter of fiscal 2014 earnings conference call. [Operator instructions.] At this time, it is my pleasure to turn the conference over to Janet Barth, Vice President, Investor Relations. Please go ahead.

[Janet Barth:]

Thank you, operator, and good afternoon, everyone. With me on the call to review our fourth quarter and year end fiscal 2014 results are Steven Temares, Bed Bath & Beyond’s Chief Executive Officer, and Susan Lattmann, Chief Financial Officer and Treasurer. Before we begin, I’d like to remind you that this conference call may contain forward-looking statements including statements about, or references to, our internal models and our long-term objectives. All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements as events or circumstances may change after this call. Our earnings press release dated April 8, 2015, can be found in the investor relations section of our website at www.bedbathandbeyond.com. Here are some highlights. Fourth quarter net earnings per diluted share were $1.80, an increase of approximately 12.5% over the prior year period. Net sales for the quarter were $3.3 billion, an increase of approximately 4.2%. Quarterly comparable sales increased by approximately 3.7% or 3.9% on a constant currency basis. Fiscal 2014 net earnings per diluted share were $5.07. Full year net sales increased approximately 3.3% to $11.9 billion, and comparable sales for the full year increased approximately 2.4%. Sue will discuss our quarterly financial results in more detail later in the call. As we reflected on this past fiscal year, we delivered solid financial results and also continued to deliver on our objective to do more for and with our customers, wherever, whenever, and however they want to interact with us. Across our concepts, we believe that we produced meaningful enhancements to our omnichannel retail shopping experience this year by increasing and improving our use of emerging technologies to better understand and engage with our customers as they express their life interests and travel through various life stages, as well as by significantly expanding and differentiating our merchandise assortments, both in store and online. Our customer-centric mission is what drives us to improve, innovate, and ultimately prosper in this ever-evolving retail industry. Let me now turn the call over to Steven.

[Steven Temares:]

Thank you, Janet, and good afternoon to everyone. I’d like to start by reviewing our sales and earnings for the fiscal fourth quarter. Then I’d like to take a few minutes to review our operations and the key strategies driving our mission to continue to do more for and with our customers. As Janet mentioned, for fiscal 2014, we were able to deliver solid financial results, including growth in both net sales and net earnings per diluted share. We continued to enhance shareholder value by returning more than $2.2 billion to our shareholders through share repurchase, while also making strategic investments to improve our omnichannel capabilities. We ended fiscal 2014 with our operations and finances in good shape, and we believe we are extremely well-positioned for long term success in an ever-evolving retail environment. As Janet also mentioned, and as Sue will discuss in more detail, net earnings per diluted share in the fiscal 2014 fourth quarter were $1.80, a 12.5% increase over the fourth quarter of last year. Our net sales grew approximately 4.2% in the fiscal fourth quarter and comparable sales, which include sales transactions consummated through all of our retail channels, including in store, online, and through a mobile device, increased approximately 3.7% in the fourth quarter. This includes an unfavorable impact of about 20 basis points on comp sales due to the atypical fluctuations in the foreign exchange rate related to our Canadian operations. We would like to note that when we spoke to you back on January 8, we were pleased with our holiday sales performance, and our actual results for the fourth quarter remained well within the range of our model for sales and comparable sales until the latter part of February, when the adverse weather conditions worsened in many parts of the United States. Similar to other retailers, we were also impacted by the prolonged West Coast port slowdown. However, the negative effect on our fiscal fourth quarter sales was minimized as we were able to divert shipments to other ports, albeit at some additional cost. Regardless of the unpredictability of the weather and the West Coast port slowdown, the quarter was a good one. Before we turn to an update on some of our strategic initiatives, I’d like to take a few minutes to talk about our operations. Our ability to interact with and satisfy our customers wherever, whenever, and however they express their life interests and travel through their various life stages is our strategic imperative. We remain focused on enhancing our customer’s shopping experience and further integrating that experience across all of our retail channels. Our philosophy has always been to provide great service and a great selection of products at the right value. In keeping with this, we believe all of our merchandise and service offerings across and integrated among our concepts broaden our customer base and enable us to meet our customers’ needs and wants based upon their life interests and life stages, as well as allow us to engage with our customers wherever, whenever, and however they prefer

[Susan Lattmann:]

Thank you, Steven. Beginning with some fourth quarter financial highlights, net sales for the fiscal fourth quarter were approximately $3.3 billion, approximately 4.2% higher than net sales in the prior year period. Of this increase, approximately 86% was attributable to the increase in comp sales and the remainder was primarily from new stores. To reiterate what Steven said earlier, even after considering the impact from Canadian currency fluctuations, disruptive weather, and the West Coast port slowdown, it was a good quarter, with a comparable sales increase of approximately 3.7%. If not for these factors, we would have been comfortably within our model comp sales range of 4% to 5%. Our 3.7% increase in comp for the quarter was attributable to increases in both the average transaction amount and the number of transactions. Gross profit for the fiscal fourth quarter was approximately 39.7% of net sales, compared to approximately 40.5% of net sales in the corresponding period a year ago. The primary factor contributing to this decrease was an increase in coupon expense due to an increase in redemptions, partially offset by a slight decrease in the average coupon amount. Also contributing to this decrease are increases in net direct to customer shipping expense, markdowns, and shrink. As a reminder, the one-year anniversary of bedbathandbeyond.com’s $49 free shipping threshold was in February 2015. Selling, general, and administrative expenses for the fourth quarter were approximately 23.8% of net sales, as compared to 24% of net sales in the prior year period. This decrease in SG&A as a percentage of net sales was primarily attributable to a relative decrease in occupancy expenses. Reflecting the movements in gross profit margin and SG&A expenses, the fourth quarter operating profit margins of 15.9% was approximately 50 basis points lower when compared with the same period last year. Net interest expense of $19.3 million in the fourth quarter relates primarily to interest associated with our $1.5 billion of senior unsecured notes issued in July 2014. Our tax rate for the fiscal fourth quarter was approximately 37.4% compared to approximately 36.7% in the fourth quarter of fiscal 2013. The fourth quarter provisions included net after tax benefits of approximately $700,000 this year and $2.8 million last year, due to distinct tax events occurring during the quarters. Considering all of this activity, net earnings per diluted share were $1.80 for the fourth quarter of fiscal 2014, an increase of 12.5%, which includes approximately $0.01 per diluted share due to the unfavorable foreign currency exchange rate fluctuations during the quarter. Turning to the balance sheet, as of February 28, 2015, our cash and cash equivalents and investment securities were approximately $1.1 billion. Retail inventories at cost were approximately $2.7 billion or $62.58 per square foot, an increase of approximately 4.9% on a per square foot basis over the end of last year’s fourth quarter. Retail inventories, which include inventory in our distribution facilities for direct-to-consumer shipments, continue to be tailored to meet the anticipated demands of our customers and are in good condition. Capital expenditures for fiscal 2014 were approximately $331 million. Slightly more than half of these expenditures were for technology enhancements, with the remaining balance being used primarily for new stores, existing store improvements, and other projects important to our future. Consolidated shareholder’s equity at the end of the fiscal year was approximately $2.7 billion, which is net of approximately $947 million, representing about 11.8 million shares of fourth quarter share repurchases. Of this total, approximately $782 million representing approximately 10.3 million shares were from open market repurchases, and the remaining $165 million and 1.5 million shares represented the net settlement at the completion of our $1.1 billion accelerated share repurchase program in December 2014. The company’s current $2 billion share repurchase authorization had a remaining balance of approximately $884 million at the end of the fiscal year and is expected to be completed by early 2016. Since our first share repurchase authorization back in December 2004, and through February 28, 2015, the company has returned more than $8.5 billion of cash to shareholders through repurchases, representing over 162 million shares. Bed Bath & Beyond continues to generate significant operating cash flow and maintains a solid balance sheet. Regarding our store counts, we currently operate 1,513 stores, consisting of 1,019 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico, and Canada; 270 stores under the names World Market, Cost Plus World Market, or Cost Plus; 96 buybuy BABY stores; 78 stores under the names Christmas Tree Shops, Christmas Tree Shops & That, or And That; and 50 stores under the names Harmon or Harmon Face Values. As of February 28, 2015, consolidated store space, net of openings and closings for all of our concepts, was approximately 43 million square feet, an increase of approximately 1% over the prior year. Now I would like to turn to our fiscal 2015 planning assumptions. To start, I would like to bring to your attention some items which affect the comparability of our completed fiscal 2014 results to our fiscal 2015 model. We had some one-time benefits in 2014, which we are not modeling to the same extent, or at all, in 2015, and we are modeling some incremental expenses in 2015 that we didn’t have in 2014. The benefits in 2014 that we are not modeling to the same extent, or at all, in 2015 are first, as we disclosed throughout 2014, we had several favorable distinct tax events totaling approximately $20 million for the full year. In 2015, we are only modeling approximately $7 million in distinct tax events, for a year over year difference of $15 million in income tax expense. Second, as we disclosed in the third quarter, we had a nonrecurring favorable credit card fee litigation settlement, which is not modeled to reoccur in 2015. The effect of these two items on our 2015 model represents approximately $0.08 and $0.05 per diluted share respectively, based on our lowered model share count in 2015. This represents a total unfavorable impact of $0.13. In addition to these items, we are modeling incremental expenses in 2015, which are not comparable to 2014. First, we are modeling an unfavorable foreign currency exchange rate impact of approximately $0.05 per diluted share, based on a model 2015 Canadian currency exchange rate of approximately CAN1.25 to each U.S. dollar. Second, we are modeling an increase in our investments in compensation and benefits beyond what we have always historically planned for to continue to assure that we preserve our ability to attract and retain the best associates. This results in an incremental expense of approximately $0.06 per diluted share. The impact of these four noncomparable items on the differential between our 2014 actuals and our 2015 model is approximately $0.24 per diluted share based upon our estimated 2015 full year diluted weighted average shares outstanding. That said, I would now like to provide our remaining major planning assumptions for 2015. We are modeling a 2% to 3% increase for comparable sales for both the first quarter and full year 2015 and that net sales will exceed the comp sales percentage increase by approximately 70 basis points in the first quarter and by approximately 90 basis points for the year. This model comp sales range of 2% to 3% includes an unfavorable impact for both the first quarter and full year of about 20 to 30 basis points due to model fluctuations in the foreign currency exchange rate related to our Canada operations. Assuming these sales levels, gross profit is modeled to deleverage for both the first quarter and full year. Contributing to the model’s gross profit deleverage are our increases in both coupon expense and net direct to customer shipping expense. Please note, we are modeling the deleverage in gross profit as a percentage of net sales to be less than it was in 2014 due in part to the one year anniversary of the $49 free shipping threshold on bedbathandbeyond.com, which occurred in February 2015. SG&A is also modeled to deleverage for both the first quarter and full year. As a result of our ongoing strategic initiatives, included in this model deleverage for both the first quarter and full year are increases in technology related expenses. Also contributing to the full year deleverage, are modeled increases in our investments in compensation and benefits and the nonrecurring benefit relating to the credit card litigation settlement in the prior year. Depreciation expense is modeled to be in the range of approximately $255 million to $265 million for the full year. Annual interest expense is anticipated to be approximately $82 million, primarily resulting from the interest related to the $1.5 billion of senior unsecured notes and the interest from our sale leaseback obligations related to certain distribution centers. The first quarter and full year tax rates are estimated to be in the mid to high 30s percent range, with an expected variability as distinct tax events occur. As I said earlier, this year’s model assumes approximately $13 million less in favorable distinct tax benefits when compared to 2014. Based on our model, we expect to generate positive operating cash flow. In connection with leveraging our merchandise assortments and optimizing our operations, we continue to expand across selected stores the number of specialty departments such as health and beauty care, baby, specialty food, and beverage. At Bed Bath & Beyond stores alone, we have nearly 200 locations that have one or more of these departments. For 2015, we are modeling approximately 15 Bed Bath & Beyond stores to add at least one specialty department. Capital expenditure in 2015 are planned to be approximately $375 million to $400 million, which remains subject to the timing and composition of projects. Our technology related projects represent nearly half of our planned capital expenditure and includes the deployment of new systems and equipment in our stores, enhancements to our omnichannel capabilities, ongoing investment in data analytics, the continued buildout and utilization of our data center, and the continued development of a new point of sale system. In addition to our technology related projects, capital expenditure also include the opening of approximately 30 new stores company-wide, our Liberty View Brooklyn project, and the new customer service contact center that Steven previously mentioned. We will also continue our program of renovating or repositioning stores within markets where appropriate. In 2015, we are modeling a significant increase in the number of these new stores and repositioned stores that will be self-developed, where Bed Bath & Beyond will be responsible for the construction and other improvement cost. We plan to continue making enhancements to our distribution and ecommerce fulfilment centers to improve capacity and productivity. And we plan on making additional investments in other projects important to our future. We continue to plan to repurchase shares under our current $2 billion share repurchase program, which we estimate to be completed by early fiscal 2016. However, this repurchase program may be influenced by several factors, including business and market conditions. We are modeling full year diluted weighted average shares outstanding for 2015 to be approximately $168 million, subject to the timing of our share repurchase program. Based on these and other planning assumptions, including the items previously discussed relating to the $0.24 of noncomparable items between 2014 and 2015, we are modeling 2015 net earnings per diluted share to be between relatively flat and a mid-single digit percentage increase as compared to 2014. For the first quarter, we are modeling net earnings per diluted share to be between $0.90 and $0.95, as compared to $0.93 in 2014, which included approximately $0.01 due to certain favorable distinct tax events that are not modeled to reoccur in 2015. As a reminder, the first quarter typically accounts for the smallest portion of our annual net sales and net earnings, so any fixed costs such as depreciation as a percentage of net sales are relatively more pronounced in the first quarter than they would be in any of the other three quarters. Please note, we plan to report our 2015 first quarter net sales and net earnings results on Wednesday, June 24. So, in summary, our underlying business is strong. We are pleased that our technology investments are driving meaningful growth in sales from our digital channel. The enhancements to our online and mobile channels are benefitting our customers omnichannel shopping experience. Our expanded merchandise offerings are providing us further opportunities to do more for and with our customers than ever before, and have been well-received. And, we are also pleased with the performance of our institutional business. This is an exciting time in retail, and we continue to manage our business for long term growth and profitability. I would now like to turn the call back to Steven.

[Steven Temares:]

Thank you, Sue. As I told you earlier, and as Sue just said, this is an exciting time in retail, and an exciting time at Bed Bath & Beyond. As an omnichannel retailer, we believe in and are committed to making the necessary investments to keep pace with the rapid advancements in technology that are shaping the retail landscape and driving consumer behavior and expectations. We recognize that the capital investments we are making and the incremental expenses related to them are increasing our technology costs and depreciation as well as other expenses. We are confident that we are making the appropriate investments to position our company for long term profitable growth and to further enhance shareholder value. In closing, I would like to thank our more than 60,000 dedicated associates for a terrific 2014 and for all of their efforts, which drive our company’s success. Throughout Bed Bath & Beyond, we remain focused and disciplined to always take care of our customer. This has been our mission for the past 44 years, and it continues to be the foundation for all of our efforts. Our objective is to continue to do more for and with our customers, wherever, whenever, and however they wish to interact with us. Thank you for listening today, and for your continued interest in Bed Bath & Beyond. Sue, Janet, and Ken Frankel will be here tonight to answer any questions you may have.

[Operator:]

[No Q&A for this event]