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September 24, 2003
Q2’03
Conference Call Notes and Observations
Bed Bath and Beyond, Inc.
BBBY
6 Months ended August 31, 2003
please see Disclaimer at bottom of report
This report was last amended on October 1, 2003.
Founded in 1971, Bed Bath & Beyond Inc. is a nationwide chain of superstores selling predominantly better quality domestics merchandise and home furnishings. The Company’s over 500 stores principally range in size from 30,000 to 50,000 square feet, with some stores exceeding 80,000 square feet. Bed Bath & Beyond combines superior service and a huge selection of items at everyday low prices within a constantly evolving shopping environment that has proven to be both fun and exciting for customers. Bed Bath & Beyond’s stock is traded on the NASDAQ National Market under the symbol BBBY and is included in the Standard and Poor’s 500 Index and the NASDAQ 100 Index.
Notes From Conference Call
Warren Eisenberg – Co-Chairman
1. Continues to perform at impressive levels in overall financial strength. Entire quarter was strong.
2. Economy is challenging, nevertheless , company has met or exceeded operating plan in 45 straight quarters since they became a public company in 1992.
3. Christmas Tree Shops, Inc. ( CTS ) have 24 stores in 6 states (as of today). Stores range in size from 11 to 50K square feet. Most stores are being opened in the 50,000 square foot range.
4. Company opened total of 16 stores during quarter, many of them late in the period. Opened a total of 9 stores since end of quarter. There are now 523 total stores in 44 states and Puerto Rico. There were 514 stores at quarter end, compared to 443 a year ago. New smaller stores are exceeding all expectations.
5. The Harmon Stores, store count is 29 as of today.
6. Market share remains small. Claims that the home goods market is $85 billion annually, and believes that “at least” 950 stores could be operated in USA.
7. Expects F2003 to be “best year ever”.
8. Claims that analysts estimates for F2003 is Revenues of $4.5b and Earnings Per Share (eps) of $373M.
9. Emphasized debt free status and strong liquid balance sheet.
10. As previously mentioned , they plan on opening a total of 80 to 90 new stores in F2003. This should not include CTS or Harmon, but this was not specifically mentioned. I write this only because the beginning of the call disseminated between the 3 stores.
Steven H. Temares – President and Chief Executive Officer
1. Second quarter was especially significant as CTS was introduced on June 19, 2003. Looks forward to significant contributions of CTS in the future.
2. Very focused on the strength of the balance sheet.
3. Decentralization is allowing the company achieve consistent long term performance.
4. Credit given to over 25,000 core associates. Financial results are continuing testimony to these associates.
5. 6 months of net earnings increased 27.1% from F2002 6 month results.
6. For first half net sales were 19.4% higher than same time last year. Comparable sales stores for quarter increased 5.90% vs. 8% increase for same quarter last year. Attributes this to successful back to school season. For 6 months comparable sales increased 5.2 % compared to 10.4% from first 6 months of F2002. Previous guidance range of comp sales for quarter was an increase of 3 to 5% . Again, quarter comp increase was 5.90%. Strong sales contributed to better than expected earnings.
7. Gross profit for 2nd quarter was 41.3 % of net sales, compared to 41.0% same quarterly period last fiscal year . The 30 basis point increase was consistent with plan. Company expects incremental growth of gross profit margin over the balance of the year.
8. S,G&A were 303.3M , as a percentage of net sales they were 27.3 % versus 27.8% last year.
9. Operating profit margin increased 77 basis points for this quarter, and 83 basis points for first 6 months.
10. Financial strength looks to continually improve over time.
11. Remain comfortable and conservative for F2003 targets. Will be raising F2003 eps estimate.
12. F2004 outlook will be given on December 17, 2003 (next conference call)
Ronald Curwin – Chief Financial Officer
1. 24 of the planned 80 to 90 new stores were opened in the first half of F2003( approximately 553,000 square feet.)
2. Expansion continued to be generated from internally generated funds.
3. Revenues are expected to grow in low 20% range for all of F2003. Comp sales expected to continue to grow in 3 to 5 % range.
4. Net operating margin for F2003 to be incrementally improved from F2002.
5. Interest income, because of interest rate environment, expected to show little change, despite higher average cash balances.
6. Capital expenditures for F2003 are planned to be $175M, mostly from Bed, Bath and Beyond store openings and technology enhancements. Depreciation and Amortization estimated to be $80M for the fiscal year.
7. Income taxes continue to be estimated at 38.50%
8. Increasing earnings target for F2003 to $1.25 per share (third increase this year). Company claims that earnings have doubled every three year period since they went public in 1992. Company remains comfortable with current consensus estimates for balance of F2003.
9. $802.5M in cash and cash equivalents and investment securities at August 31, 2003
10. Inventories were carried as planned at August 31,2003. On a square foot basis inventories were about $57.72.
11. Capital expenditures for first half amounted to $30M, this compares to $58million in last year at this time.
12. Shareholders Equity was $1.6B
13. 18.9M square feet company wide space. Of which 17.8M were occupied by Bed, Bath and Beyond Stores.
Question and Answers
There were no questions and answers.
Some “ back of the envelope” financial observations
1. Revenues were $1,111,445. Mr. Temares claimed they ” were in line with prior guidance. Value Line (8/15/03) was projecting $1,095M. Consensus estimates were $1,105.
2. Net earnings were $97,208M or $0.32 per share. Consensus estimates were $0.31 per share.
3. Current Ratio is 2.24. Based on data provided by AAII Stock Investor Pro, the prior Current Ratios were as follows :
March 1, 2003 2.3
March 1, 2002 2.4
March 1, 2001 2.5
March 1, 2000 2.3
March 1, 1999 2.3
March 1, 1998 2.2
March 1, 1997 1.1
4. Flow Ratio is 1.35. The Flow Ratio is desired to be less than 1.25. Here is the formula : Current Assets = $1,719,838, Cash and Equivalents = $ 682,650, Current Liabilities = $ 766,368 and Short Term Debt = $ 0.
Flow Ratio = (CA – Cash) / (CL – STD) = 1.35. The ratio was 1.40 on May 31, 2003,
Based on data collected from AAII Stock Investor Pro, the prior Flow Ratios were as follows :
March 1, 2003 1.59
March 1, 2002 1.56
March 1, 2001 1.83
March 1, 2000 1.76
March 1, 1999 1.86
March 1, 1998 1.81
March 1, 1997 1.78
5. Book Value is $ 5.40 per share . Book Value was $5.06 on May 31, 2003, 4.82 on March 1, 2003. Based on data collected from AAII Stock Investor Pro, the prior Book Values were as follows :
March 1, 2003 4.96
March 1, 2002 3.78
March 1, 2001 2.88
March 1, 2000 2.00
March 1, 1999 1.48
March 1, 1998 1.07
March 1, 1997 0.78
6. Gross Margin is 41.31% . The percentage was 41.41% as of May 31, 2003. We had been expecting rising gross margins. We have previously seen projections of 41.7% for F2003. Based on data provided by AAII Stock Investor Pro, the prior Gross Margin levels were as follows :
March 1, 2003 41.4
March 1, 2002 41.2
March 1, 2001 41.2
March 1, 2000 41.3
March 1, 1999 41.7
March 1, 1998 41.3
March 1, 1997 41.4
7. Operating Margin is 14.02% . The percentage was 10.12% as of May 31, 2003. Based on data provided by AAII Stock Investor Pro, the prior Operating Margin levels were as follows :
March 1, 2003 13.1
March 1, 2002 11.8
March 1, 2001 11.4
March 1, 2000 11.3
March 1, 1999 11.4
March 1, 1998 11.1
March 1, 1997 11.0
8. Net Profit Margin is 8.75% . The percentage was 6.43% as of May 31, 2003. Based on data provided by AAII Stock Investor Pro, the prior Net Profit Margin levels were as follows :
March 1, 2003 8.2
March 1, 2002 7.5
March 1, 2001 7.2
March 1, 2000 7.1
March 1, 1999 7.0
March 1, 1998 6.9
March 1, 1997 6.7
8. SG&A is 27.29% . The percentage was 30.96% as of May 31, 2003, 28.33 during FYE March 1, 2003. As of June 1, 2002 it was 31.6%. We have previously seen projections of 28.0% for F2003.
9. Interest income accounted for eps of $0.01. Keep in mind that is 2.26% of the reported $0.32 as of August 30. 2003. It was 5.3% of the reported eps of $0.19 as of May 31, 2003.
10. Weighted Average Shares Outstanding are 304,172. They were 303,038 as of May 31, 2003, 301,147 on March 1, 2003, 298,667 on March 2, 2002 and 300,674 on June 1, 2002. Shares outstanding are higher than we were projecting. We originally were projecting year end shares outstanding of 302.2M.
11. If we use Projected Total Revenues for F2003 ( not our projection, but near consensus) of $4.5B. The ratio of Inventory/Annual Revenues was 21.31 %, this was 21.56% at May 31, 2003, for F2002 it was 24.98 % and for F2001 it was 25.75 %.
12. Net Cash Provided by Operating Activities in the Statement Of Cash Flows are $139,761. Tax benefit from exercise of stock options was $5,505.
13. Proceeds from exercise of stock options was $5,339 for the 3 months ended August 30, 2003. It was $24,216 on March 1, 2003, 25,753 on March 2, 2002 and 3,664 on June 1, 2002.
14. Inventory Turnover Ratio is Cost Of Sales / Average Inventory. If we use last trailing 12 months Cost of Sales of $2,334,460 and average inventory of $948,000, inventory turnover would be 2.4625.
Based on data provided by AAII Stock Investor Pro, the prior inventory turnover levels were as follows :
March 1, 2003 2.6
March 1, 2002 2.5
March 1, 2001 2.6
March 1, 2000 2.6
March 1, 1999 2.6
March 1, 1998 2.7
March 1, 1997 2.6
Analysis of the 10-Q and observations
1. Based on information supplied by the company, we have started a list of suppliers of Bed, Bath and Beyond.
A. Springs – not a public company
B. Braun – owned by The Gillette Company
C. Pacific Coast
D. Calphalon – Owned by Newell Rubbermaid
E. Krups – Owned by Groupseb
Other suppliers I found directly from the companies web site are
G. Couzon
H. Nambe
J. Skagen
K. Mikasa
L. Lenox ( Owned by Brown Forman)
2. Major head on competitors appear to be the following :
A. Linens and Things 1 – 2% market share
B. Home Goods
C. Cost Plus
Indirect competitors would be variousdepartment stores, Williams Sonoma, Pier 1, etc.
3. According to information supplied by the company, Bed, Bath and Beyond, imports less than 10% of its purchases.
4. According to the company, S&P carries a BBB rating for Bed, Bath and Beyond. Prior to this year it was BBB-. Company claims this rating is not material. As the companies name and financial results are carrying it to preferential lease rentals. Prior to the well known name, the lower rating was used as a vendor negotiating tool.
Disclaimer
If you are a client of ours, and if you have questions regarding Bed, Bath and Beyond, Inc., please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading this report, we urge you to do your own research. We will not be responsible for any person making an investment decision based on this report. This report is a “by-product” of our research. We are not responsible for the accuracy of this report. We are not responsible for errors that may occur in this report. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate our short sale position of Bed, Bath and Beyond, Inc. from our portfolios. This report may have undergone revisions starting on September 25, 2003. We will not notify readers of future revisions. We are not responsible to keep readers of this report updated for changes or material errors or for any reason whatsoever. This report is dated September 25, 2003; it is possible that by September 26, 2003 we could have covered our entire Bed, Bath and Beyond, Inc. short sale position without giving notice to any reader of this report. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have Bed, Bath and Beyond, Inc. in their portfolios. There could be various reasons for this. Again, if you would like to discuss Bed, Bath and Beyond, Inc., please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.