March 31, 2004
Conference Call Notes and Observations
Bed Bath and Beyond, Inc.
12 Months ended February 28, 2004
please see Disclaimer at bottom of report
This report was last amended on April 8, 2004. This is now a work in process as new data is being accumulated. We hope to, but do not guarantee to update this report or site with this new data.
Recent Report Date: April 4, 2004
Shares Outstanding: 306,394,000
Market Capitalization: $12,133,202,400
Dividend Yield: 0.00%
Fiscal Year Ends: February
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
Leonard Feinstein – Co-Chairman
1. Earnings up 32.2% for the year and 37% for the fiscal 4th quarter.
2. 47 straight quarters of meeting or exceeding there operating plan, since the IPO in 1992.
3. Added 85 new stores in fiscal 2003. Total stores now stands at 575.
4. Total store space at fiscal year end is now 19.4M square feet.
5. Added 2.1M square feet during F2003, or about 12.2% increase.
6. Christmas Tree Stores (CTS) added one store. Total is now 24 stores.
7. Harmon Stores added one store. Total is now 40 stores.
8. Stores expected to be slightly larger in F2004 than in F2003.
9. Since going public in 1992, net sales have grown at an annual rate of approximately 32%, whereas net earnings have grown approximately 34% annually.
10. Cash and investments ended the year at over $1B for the first time.
11. Called the home goods market an $85B market. Claims that BBBY has a relatively small market share of that market.
12. Expects store enlargements in the coming years. Also expects growth of Harmon and CTS.
13. Calls home goods market one of the most attractive sectors in retail.
14. Expects 2004 to be their best year ever. Mentioned that 2004 will have its own challenges.
Steven H. Temares – President and Chief Executive Officer
1. Mentioned solid quarter and “better than planned results for F2003.
2. Remains committed to “generation of strong earnings, combined with a solid balance sheet and positive cash flow.”
3. Mentioned that company has approximately 29,000 associates.
4. Goal is to keep progressing towards becoming “the store of overwhelming choice for customers doing their life-style shopping.”
5. Performance stems from culture and decentralization.
6. Sales for 4Q03 were $1,298M or 23.7% over 4Q02.
7. 4th quarter comps increased by 8.1% from 4Q03 which were up 4.1% a year ago.
8. Revenues (including CTS) increased year-over-year (YOY) by 22.2%.
9. Comps for all of F2003 grew by 6.3%. In Fiscal 2002 same store sales were up 7.9%.
10. Gross margin increased for the third consecutive year. Gross margin was 43.4%, compared with 42.3% in F2002. Gross margin increased 1% in the 4th quarter alone. The increase in gross margin for the year was attributable to improvements in mark-up and mark-downs.
11. Selling, General and Administrative (SG&A) were $331.8M in 4Q03, compared to $275.2M a year ago. SG&A decreased percentage wise from a year ago. This decrease is because of lower occupancy costs, other store expenses and costs associated with new store openings. These costs were partially offset by an increase in litigation and advertising.
12. SG&A ratio has improved in each of the last 7 years. Additional investments in the infrastructure and other opportunities may mitigate the SG&A leverage.
13. Operating margin increased from 13.1% to 14.3% YOY in F2004.
14. CTS revenues for 4Q03 were $87.5M, compared to $86.9M in 4Q02. This resulted in a “slightly negative comp”.
15. CTS had revenue disruption because of the acquisition and missed merchandising time overseas, due to SARS. Claims that sales figures were “within their range of expectations.”
16. Previous guidance on new store, first year sales target was $160 to $185 per square foot. Most of their new stores are producing revenues at the high end of that target.
17. Discouraged the reliance on new store productivity models in trying to evaluate the performance of new stores. Data is too incomplete to construct such models, as they don’t consider factors such as timing, size and promotional calendar.
18. Although there is a planned acceleration of infrastructure development and spending, Feinstein did mention that consensus earnings estimates are reasonable for F2004. We will quantify the guidance for F2004, later in this later in this report.
Ronald Curwin – Chief Financial Officer
1. Mentions that F2004 guidance of $1.53 to $1.56 per share is reasonable. Estimates 1Q04 to be $0.25, which is $0.01 above current consensus.
2. Guidance Assumptions :
A. Open 80 to 90 new BBBY stores, comprising of 2.2M square feet of total store space.
B. Expects to double from a year ago, first quarter store openings. Many of these stores, expected to be opened at end of the quarter.
C. Expects 16 stores to be opened in 2Q04.
D. Most of the rest of the stores (perhaps slight exceptions) are expected to be opened in 3Q04.
E. New store sales expected between $160 to $185 per square foot in the first 12 months of operation.
F. Expects low “20’s%” increase in sales in 1Q04 and mid teens for all of F2004.
G. Comp sales are expected at 3% to 5% increase for F2004.
H. Continued improvement in Net Operating Profit Margin.
I. Interest income is expected to increase “modestly” due to anticipated higher cash balances.
J. Tax rate will be lowered to 37.75% in F2004. We will discuss this later in our report.
K. F2004 capital expenditures estimated at $190M.
L. F2004 depreciation and amortization estimated at $95M.
3. Claims inventory of $1 Billion is on plan.
4. Shareholder’s equity was $1,991M, which is 37% higher than year ago of $1,452M.
5. Capital expenditures for F2003 was $113M.
6. Depreciation and Amortization was $85M.
Some “ back of the envelope” financial observations
1. Revenues were $1,297,928 for 4Q03. Value Line (02/13/04) was projecting $1,260M.
Total Quarterly Revenues
% Change in Quarterly Revenues From Year Ago Quarter
Total Annual Revenues
% Change in Total Annual Revenues
2. 4th quarter comps increased by 8.1% from 4Q03 which were up 4.1% a year ago. Many analysts feel that BBBY is facing easy comps in the coming quarters. Yet, expectations given at guidance, are not showing such. The argument would be the claims that management is being “conservative” guidance.
Quarterly Same Store Revenue Comps % change
|2004||3.0e – 5.0e||3.0e – 5.0e||3.0e – 5.0e||3.0e – 5.0e|
Annual Same Store Revenue Comps % change
|2004||3.0e – 5.0e|
3. Total Store Space was 19,353,000 square feet at 4Q03 compared to 17,255,000 at 4Q02. This is an increase from end of fiscal 2002 of 2,098,000 square feet. This represents an increase of 12.16% over the same period last year.
Total Store Space in Millions of Square Feet
% Change in Total Store Space From Prior Quarter
% Change in Total Store Space From Year Ago Quarter
% Change in Total Store Space Year Over Year
Total Number of Stores Bed and Bath Only
(a) – Harmon Stores purchased
(b) – Christmas Tree Shops purchased
4. Net earnings were $144,248M or $0.47 per share. Value Line (02/13/04) was projecting $0.44 per share. Consensus estimates were $0.44 per share.
Total Quarterly Earnings Per Share
% Change In Same Prior Period
Total Annual Earnings Per Share
% Change in Total Earnings Per Share
5. Current Ratio is “Current Assets / Current Liabilities.” The prior Current Ratios were as follows :
6. Flow Ratio is 1.43. The Flow Ratio is desired to be less than 1.25. Here is the formula : Current Assets = $1,969,286, Cash and Equivalents = $866,595, Current Liabilities = $769,534 and Short Term Debt = $ 0.
7. Book Value is $ 6.50 per share . The prior Book Values were as follows :
Book Value Per Share
During the conference call, CFO Curwin stated that Shareholder’s equity was $1,991M, which is 37% higher than year ago of $1,452M. It is interesting to remove the goodwill intangible asset and see that Shareholder’s tangible equity rose to $1,844M. which was not 37% higher, but was 28% higher than year ago of $1,436M.
Tangible Book Value Per Share
8. Gross Margin levels were as follows :
Quarterly Gross Margin in Dollars
Quarterly Gross Margin %
Annual Gross Margin in Dollars
Annual Gross Margin %
9. Operating Margin levels were as follows :
Quarterly Operating Margin
Annual Operating Margin
10. Net Profit Margin levels were as follows :
Quarterly Net Profit Margin
Annual Net Profit Margin
11. SG&A levels were as follows :
Quarterly SG&A Margins
Annual SG&A Margins
12. Weighted Average Shares Outstanding levels were as follows :
Weighted Average Shares Outstanding
% Change in Weighted Average Shares Outstanding From Year Ago Quarter
It is important to watch dilution. We have discussed this at length elsewhere on our site. Bed and Bath is creating a great deal of dilution. This dilution has primarily been caused by the issuance of stock options to executives. Most casual investors do not understand dilution. One way to think about dilution is the sharing of one pizza pie. Assume you were going to share a pizza pie with 3 other people, and each of you were to have 2 slices. When you begin to eat your pizza, 4 other friends enter the room and want a slice as well. You cut the pizza in 16 pieces, rather than the standard 8. You now will eat 2 pieces. Are you as satisfied after the meal? That in essence is dilution.
If you multiply the increase in shares from February 2004 to February 2003 of 4.561M , by the current market price of $40. You get additional market capitalization of $182,440,000. Bed and Bath total market capitalization using a price of $40 is $12,255,760,000.
13. Inventory Turnover Ratio is Cost Of Sales / Average Inventory.
Inventory Turnover Ratio Using Trailing 12 Months of Data
Cost of Revenues
14. Return on Equity is Operating earnings/ Shareholders Equity
Return on Equity (Annualized)
Return on Equity (Trailing 12 months)
Annual Return on Equity
10K not yet released – pre-observations
1. According to information supplied by the company, Bed, Bath and Beyond, imports less than 10% of its purchases.
2. 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.
3. Cash flow growth has been strong. Part of the strong cash flow is from compensating employees with stock options. When employees exercise the options, the employee pays the company for the options, hence increasing cash flow. The company also gets a tax deduction for compensating in stock options. The tax benefit from the exercise of stock options was $64,832,000 for the fiscal year ended February 28, 2004. The company also generated cash flows of $74,597,000 from the exercise of employee stock options for the fiscal year ended February 28, 2004. That is a total cash generation of $139M during F2003. As long as the stock price continues to rise, this has been of little concern to employees, and to shareholders for that matter. We are monitoring the dilutive effects, yet to be exact in a calculation of cash flow savings is nearly impossible. The company did not buy back any shares over the last 3 years. This of course caused dilution. Had the company bought back shares to fight the dilution, free cash flow would have been materially reduced. We are not commenting whether the company should or should not buy back shares. We are merely stating that free cash flow, would look substantially different, had the same amount of shares that were issued to employees, had been bought back by the company. We have always believed that management is talented and prudent, and we believe that the company strategically did not repurchase the shares.
4. The effective tax rate is being lowered to 37.75% in F2004. We are curious if that reduction is due to the benefit of stock option expense on the corporate tax return, versus never hitting the Profit and Loss statement on the Financial statements. As is evident in many of our writings, we are quite concerned with the growing dilution.
5. Earnings per share for F2003 was $1.31. Included in that number was Interest Income of $10,202. This equates to $0.03 per share. Hence via a current price earnings ratio of 31.67 (41.50 share price and 1.31 in eps), the company is being generously rewarded a higher than typical price earnings ratio on its non operating Interest Income. This is not an incredible concern, but certainly a piece of the puzzle.
6. Merrill Lynch has recently written, ” …we believe that the industry is maturing, which will challenge Bed Bath to become good at new things.” They also mentioned, “Our proprietary saturation study pegs the overall market at 74% penetrated.”
7. It is interesting to notice the square footage growth. Is the engine slowing? If it is slowing, will it affect the valuation of the company? We choose not to answer these questions on these reports, as each reader should try to interpret their own data. We are merely placing this report here as a source of reference.
8. Items to still work on, and it may be a perpetual work in process, hence it might not happen so soon, if ever :
a. price to sales metrics
b. cash flow ratios and stock option effects. free cash flow
c. other price to “x” ratios
e. ROE (dupont formula)
f. operating leases
g. insider selling and other option activity
h. stock issued to employees, look at the sec filings. determine average strike price, FASB 123, net margins , etc.
i. try to reconstruct anti dilution measures, such as stock repurchase.
j. look at new store productivity, but look lightly as management has warned against such analysis. Exercise doubt and try to determine if NSP really is falling and if management is trying to sway analyst away from such.
k. stress test inventory turns. use Inventory days as well.
l. consider some interest income work. Company certainly should not be rewarded high p/e on interest income.
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 April 8, 2004. 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 April 8, 2004; it is possible that by April 8, 2004 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.