Welcome to Bed Bath & Beyond's Third Quarter of Fiscal 2012 Results Conference Call. [Operator Instructions] Today's conference is being recorded. A rebroadcast of the conference call will be available beginning on Wednesday, December 19, 2012, at 6:30 p.m. Eastern Time through 6:30 p.m. Eastern Time on Friday, December 21, 2012. To access the rebroadcast, you may dial 1 (888) 203-1112 with the passcode ID of 4058928.
And at this time, it's my pleasure to turn the conference over to Gene Castagna, Chief Financial Officer and Treasurer of Bed Bath & Beyond. Please go ahead.
Eugene A. Castagna
Thank you, and good afternoon. Welcome to Bed Bath & Beyond's Third Quarter of Fiscal 2012 Conference Call. A short time ago, we issued a press release announcing Bed Bath & Beyond's results for the 3- and 9-month periods ended November 24, 2012. During this call, we will comment on some of the third quarter highlights, update our fiscal fourth quarter and full year model and provide some preliminary fiscal 2013 planning assumptions.
Before proceeding, I will read the following statement, and I quote, "Bed Bath & Beyond's fiscal third 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 Leonard Feinstein, 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 Leonard Feinstein. Len?
Leonard Joseph Feinstein
Thanks, Gene, and good afternoon. Before we begin, on behalf of all the associates of Bed Bath & Beyond, we wish there were words that could bring comfort and make sense of the tragedy that occurred in Connecticut last week. We are deeply troubled trying to find any. Our thoughts and prayers are with the victims, their families and friends.
Because we must, we now turn to our company's call and our fiscal third quarter, which includes the effects of Hurricane Sandy on our customers along the East Coast.
Today, we reported net earnings per diluted share of $1.03 for the fiscal third quarter, an increase of approximately 8.4% over the fiscal third quarter of 2011. The third quarter continues our consistent performance in terms of earnings per share growth, cash flow generation and our overall financial strength. With regard to Hurricane Sandy, we continue to work with local organizations and through our stores to provide assistance to those impacted in the affected areas. We understand the restoration process will take time and will be difficult.
During this quarter, we also continued the integration of World Market and Linen Holdings and made progress on our initiatives to enhance our website, ramp up our Pendergrass, Georgia E-Commerce Fulfillment operation, pursue 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.
In addition, during the third quarter, we opened 4 Bed Bath & Beyond stores and closed 1; opened 7 buybuy BABY stores, 6 World Market Stores and 1 Christmas Tree Shops store operating under the name andThat! andThat!represents an evolution of the name for the Christmas Tree Shops concept, with stores opening outside existing Christmas Tree Shops markets.
At November 24, 2012, consolidated store space, including the 264 World Market stores, was approximately 41.9 million square feet, an increase of approximately 16% over the end of last year's third quarter. Since the beginning of the fiscal fourth quarter of 2012, we have opened 1 additional Bed Bath & Beyond store and 2 additional buybuy BABY stores. Including these still-work openings, we currently operate 1,469 stores, consisting of 1,004 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 264 World Market Stores; 80 buybuy BABY stores; 74 stores under the names Christmas Tree Shops or andThat!; and 47 stores under the names Harmon or Harmon Face Values.
For the remainder of fiscal 2012, we now anticipate opening 2 additional buybuy BABY stores, bringing our total openings for the year to 41 stores across all our concepts, which, as a reminder, includes World Market.
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 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, most recently in Schaumburg, Illinois and Tysons Corner, Virginia. We remain committed to and are excited about the continued growth of all merchandise categories.
At this time, in conjunction with our ongoing review of our capital structure, I am pleased to announce that our Board of Directors has authorized a new $2.5 billion share repurchase program. We are currently planning that the new share repurchase program will commence after the completion of the existing program. Although the Board's authorization does not set a time limitation for the share repurchase, for planning purposes, the company anticipates completing the program over the next 3 years or so after it begins. It is currently anticipated that this new $2.5 billion share repurchase program will be funded from current cash and future cash flows. This new program reflects the Board's continued confidence in our future and commitment to returning value to our shareholders. Since 2004 through the third quarter of our fiscal 2012, our company has returned approximately $4.7 billion to our shareholders through share repurchases.
The tremendous efforts of our associates and our unique decentralized culture have been and remain the keys 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, Len. As you said, we struggle to find the words to express our sorrow about what happened in Connecticut last week, but please know our thoughts and prayers are with the victims, their families and friends.
Turning as we must to what we need to cover in today's call, despite the effects of Hurricane Sandy, we were able to continue our consistent performance in terms of earnings per share growth, cash flow generation and our overall financial strength. For this, we thank our dedicated and talented associates and their focus on improving our customers' overall shopping experience.
On an ongoing basis, we continue to invest in all aspects of our company to enhance our customers' 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. We are confident that our company is well positioned to grow profitably and increase market share and shareholder value over time by offering a broad and deep assortment of merchandise at everyday low prices with superior customer service. We are focused on increasing the productivity of our existing stores and enhancing our customer experience by expanding our product offerings, relocating, renovating and/or expanding stores, continuing the development of our interactive platforms and growing our bridal, baby and gift registries.
As Len also touched upon, we are pleased with the ongoing integration of World Market and Linen Holdings and our progress on the initiatives associated with our website enhancement, our new Pendergrass, Georgia E-Commerce Fulfillment Center, the remaining construction and other follow-up items related to our corporate headquarters and our new IT data center.
Turning to our fiscal third quarter of 2012 performance, we reported earlier today our fiscal third quarter net earnings per diluted share of $1.03, an increase of approximately 8.4% when compared to the $0.95 per diluted share that we earned in last year's third quarter. For the fiscal 9 months, net earnings per diluted share were $2.89, an increase of approximately 11.2% compared to the $2.60 earned last year.
Net sales for the fiscal third quarter were approximately $2.7 billion, approximately 15.3% higher than in the prior year. Of this increase, approximately 79% was the result of the inclusion of World Market and Linen Holdings, approximately 11% was attributable to the increase in comp store sales and the remaining 10% resulted primarily from new stores.
Net sales for the fiscal 9 months of the year were approximately $7.5 billion, approximately 11% higher than in the fiscal 9 months of 2011. Of this increase, approximately 59% was the result of the inclusion of World Market and Linen Holdings, approximately 25% was attributable to the increase in comp store sales and the remaining 16% resulted primarily from new stores.
Third quarter comp store sales, which excludes World Market and Linen Holdings, increased by approximately 1.7% compared with an increase of approximately 4.1% last year. From our company's perspective, Hurricane Sandy occurred during our fiscal third quarter, and its impact resulted in many of our stores being closed and many of our customers either not having the ability to shop or having much greater concerns than shopping, including property damage, electrical outages and gasoline shortages, which include rationing in a number of our markets. We estimate the impact of this disruption reduced our comparable store sales by approximately 90 basis points in the fiscal third quarter.
For the fiscal 9 months, comp store sales increased by approximately 2.7% compared with an increase of approximately 5.5% last year. These increases in comp store sales each of the fiscal third quarter and the fiscal 9 months of 2012 were attributed to an increase in the average transaction amount, partially offset by a decrease in the number of transactions, in part due to store closings and other post-Hurricane Sandy impacts.
As a reminder, unlike last year when we had in excess of 200 stores opened, we also chose not to open on Thanksgiving this year with the exception of 29 stores, which, but for a few exceptions, were all located in enclosed malls where the entire center was open.
Gross profit for both the fiscal third quarter and the fiscal 9 months was approximately 39.8% of net sales compared to approximately 40.9% of net sales for the comparable periods of 2011. These decreases in the gross profit margin as a percentage of net sales were primarily attributed to an increase in coupons due to increases in both redemptions and the average coupon amount, as well as the shift in the mix of the merchandise sold to lower margin categories.
The inclusion of World Market and Linen Holdings did not have a material effect on our gross profit percentages. Please note, though, World Market's pre-acquisition accounting policies included occupancy costs and gross profit. These costs are now included in selling, general and administrative expenses, consistent with our historical practices.
Turning to selling, general and administrative expenses, for the fiscal third quarter, SG&A was approximately 26.4% of net sales as compared to approximately 25.7% of net sales in last year's fiscal third quarter, an increase of approximately 70 basis points. This increase in SG&A can primarily be attributed to higher expenses for payroll and payroll-related costs, advertising expenses and occupancy costs as a percentage of net sales. Each of these expense items was impacted by the inclusion of World Market's financial results and the higher percentages for these categories. The inclusion of World Market and Linen Holdings increased total company selling, general and administrative expenses by approximately 120 basis points in the third quarter. In addition, the costs associated with the major initiatives that Len and I previously mentioned increased SG&A by approximately 30 basis points during the third quarter.
For the fiscal 9 months, selling, general and administrative expenses were approximately 26% of net sales, an increase of approximately 10 basis points when compared to approximately 25.9% of net sales in the fiscal 9 months of 2011. The inclusion of World Market and Linen Holdings' selling, general and administrative expenses for that period increased total company selling, general and administrative expenses by approximately 70 basis points. In addition, the inclusion of the major initiatives mentioned earlier increased SG&A for the 9 months by approximately 30 basis points.
With all that said, the operating profit margin for the fiscal third quarter was lower than in the same period a year ago by approximately 180 basis points. And for the fiscal 9 months, the operating profit margin decreased by approximately 120 basis points.
The provision for income taxes continues to fluctuate, as taxable events occur and exposures are reevaluated. For the fiscal third quarter, the provision for income taxes was approximately 35.1% compared to approximately 35.9% for the comparable quarter last year, a decrease of approximately 80 basis points, which was primarily the result of an increase in other income tax benefits. The provisions for the fiscal quarter included net after-tax benefits of approximately $9.1 million in both the current year and comparable period last year due to distinct tax events occurring during the quarters.
For the fiscal 9 months, the provision for income taxes was approximately 35.9% compared to approximately 37.1% for the comparable period last year, a decrease of approximately 120 basis points. The provisions for the fiscal 9 months included net after-tax benefits of approximately $24.3 million this year and $14.1 million last year due to distinct tax events occurring during these periods.
Capital expenditures for the fiscal 9 months of 2012 were approximately $238 million, principally for new stores, existing store improvements, information technology enhancements and other projects that are important to our future, including the initiatives that Len and I mentioned earlier. While we continue to review and prioritize our capital needs, we remain committed to making the required investments in our company to help position us for our long-term success.
As Len said, our Board of Directors has authorized a new $2.5 billion share repurchase program. Our Board took this action based upon its continued confidence in our company's long-term growth potential, financial outlook and cash flow generation. It's currently anticipated that this new $2.5 billion share repurchase program will be funded from current cash and future cash flows. That said, our company's Board of Directors continues to review our capital structure on an ongoing basis.
In addition to providing value to our shareholders through share repurchase programs, our strong operations should allow us to continue to invest in our infrastructure and maintain our flexibility to take advantage of opportunities as they may arise.
As always, we want to thank our associates for their ongoing efforts, which produced Bed Bath & Beyond's long-term success. Through their efforts, we look forward to meeting the challenges that lie ahead and to seizing the opportunities to satisfy our customers, and by doing so, improving our competitive position in the merchandise categories that we offer.
I'll now turn the call back to Gene. Gene?
Eugene A. Castagna
Thanks, Steve. As Len and Steve said, today, we reported net earnings of $1.03 per diluted share for the fiscal third quarter and $2.89 per diluted share for the 9 months of fiscal 2012. We are encouraged by our positive fiscal third quarter results and continue to be cautiously optimistic about the remainder of fiscal 2012.
The following are the planning assumptions for the remainder of fiscal 2012, which consists of 53 weeks and includes World Market and Linen Holdings from the date of each acquisition to the end of the fiscal year: One, as Len said, for the remainder of fiscal 2012, we now anticipate opening 2 additional buybuy BABY stores, bringing our total store openings for the year to 41 stores across all of our concepts, which, as a reminder, includes World Market. As always, we remain flexible to take advantage of real estate opportunities that may arise.
Two, we expect to continue our program of relocating stores during the fiscal fourth quarter.
Three, capital expenditures for fiscal 2012, including World Market and Linen Holdings, are planned to be in the range of $325 million to $350 million, which, of course, remains subject to the timing and composition of projects, including new stores and existing store refurbishments, information technology enhancements and other projects important to our future, including the following major initiatives: the development of an enhanced website experience for our customers; the opening of a new 800,000 square foot E-Commerce Fulfillment Center in Pendergrass, Georgia; the cost of relocating our Farmingdale and Garden City, New York offices to our corporate headquarters in Union, New Jersey, which will continue into next year; and the initial phase of a new IT data center to support our ongoing technology initiatives. Currently, we estimate the fiscal fourth quarter of 2012 incremental operating costs associated with these major initiatives to be approximately $0.03 per diluted share.
Four, we are modeling an increase of 2% to 4% in comparable store sales for the fourth quarter and for the full year.
Five, taking into account the 53rd week in fiscal 2012, including our newly acquired companies, we are modeling consolidated net sales to increase by 24% to 26% for the fourth quarter and by approximately 15% for the full year.
Six, depreciation for fiscal 2012 is expected to be approximately $195 million.
Seven, we estimate the addition of the 53rd -- of a 53rd week to the fourth quarter this year will add an incremental $0.04 to $0.05 in net earnings per diluted share. This additional week will have higher SG&A expenses as a percentage of net sales than the rest of the fourth quarter since it is a lower sales week than the average weekly sales during the rest of the fourth quarter.
Eight, assuming these sales levels, we are modeling operating profit margin as a percentage of net sales to deleverage for the fourth quarter. Slightly more than 1/2 of this deleverage is attributable to the consolidation of World Market and Linen Holdings' financial results, the previously discussed major initiatives and the inclusion of the 53rd week. Also contributing to the model deleverage is an increase in coupons and a shift in the mix of merchandise sold to lower margin categories.
Nine, interest income will include approximately $2 million in interest expense due to the inclusion of World Market capital leases; similar expense was included in the fiscal third quarter.
10, the fourth quarter and full year tax provisions are estimated to be in the mid to high 30s percent range with expected variability as distinct tax events occur.
11, we expect to generate positive operating cash flow and continue to fund operations entirely from internally-generated sources.
12, we plan to continue to repurchase shares under our current authorizations. Our share repurchase program may be influenced by several factors, including business and market conditions. Based on these and other planning assumptions, we are now modeling net earnings per diluted share to be approximately $1.60 to $1.67 for the fiscal fourth quarter of 2012.
For all of fiscal 2012, based on these and other planning assumptions, which again include the benefit of the 53rd week, the incremental operating costs from the previously discussed major initiatives, the transaction and integration costs related to the recently completed acquisitions and the results of the newly acquired companies, consistent with prior estimates provided and accounting for the weighted average shares outstanding for the full fiscal year, we model net earnings per diluted share to be approximately $4.48 to $4.54 or 10% to 12% over fiscal 2011.
For fiscal 2013, we are in the process of preparing our budget. Our preliminary planning assumptions for next year include the following: One, we anticipate opening approximately 50 stores across all of our concepts, including approximately 10 World Market stores. We anticipate the mix of store openings under the Bed Bath & Beyond, buybuy BABY, Christmas Tree Shops and Harmon Face Values concepts to be relatively consistent with fiscal 2012. 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 in fiscal 2013.
Three, our operations will continue to be entirely funded from internally generated sources.
Four, as previously discussed, we anticipate completing the current share repurchase programs in the fourth quarter of fiscal 2012 and beginning our new $2.5 billion share repurchase program thereafter, which we are planning to take 3 years or so to complete after it begins.
Five, we expect continuing variability in our quarterly tax rates.
Six, the deleverage resulting from the consolidation of World Market and Linen Holdings will continue until we anniversary the acquisitions in the third quarter of fiscal 2013. We plan to provide further information related to fiscal -- to the fiscal first quarter and full year 2013 on our next quarterly conference call on April 10, 2013.
Before concluding this afternoon's call, a few additional comments relative to our recently concluded fiscal third quarter: Our balance sheet and cash flows remain strong. We ended the fiscal third quarter with cash and cash equivalents and investments securities of approximately $859.4 million. 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 the current lack of liquidity.
During the fiscal quarter, the company tendered approximately $24.3 million of its auction rate securities at a price of approximately 95% of par value. As a result, the company incurred a realized loss of approximately $1.1 million, which is reflected in its fiscal third quarter results. 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 going forward.
As of November 24, 2012, retail inventories at cost, including World Market, were approximately $2.7 billion or $65.52 per square foot, relatively flat on a per square foot basis over the end of last year's third quarter. Retail inventories continue to be tailored by store to meet the anticipated demands of our customer and are in good condition.
Consolidated shareholders' equity at November 24, 2012 was approximately $4 billion, which is net of share repurchases, including the approximately $191 million, representing approximately 3.1 million shares repurchased during the fiscal third quarter of 2012. As of November 24, 2012, the remaining balance of the current share repurchase program authorized in December 2010 was approximately $223 million.
As a reminder, our next conference call will be on Wednesday, April 10, 2013. During this call, we will review operating results for the fourth quarter and full year ending on March 2, 2013, and we'll further discuss fiscal 2013 planning assumptions.
If you have any questions, Ken Frankel and I will be in our offices this evening, December 19, to take your calls. As always, we appreciate your interest in Bed Bath & Beyond, and we wish you a happy holiday season and a happy New Year.
Ladies and gentlemen, this concludes today's conference call. Thank you for listening. You may now disconnect.
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