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Bed Bath & Beyond Inc. (BBBY)

F2Q06 Earnings Conference Call

September 20, 2006 5:00 pm ET

Executives

Ronald Curwin - Senior Vice President, Investor Relations

Warren Eisenberg - Co-Chairman

Steven Temares - Chief Executive Officer

Operator

Thank you for standing by and welcome to Bed Bath & Beyond’s second quarter fiscal year 2006 results conference call. All participants are in a listen-only mode for the duration of the call. This call is being recorded. A rebroadcast of this conference call is available beginning on Wednesday, September 20, 2006, at 6:30 p.m. Eastern time, through 6:30 p.m. Eastern time on Friday, September 22, 2006. To access the rebroadcast, you may dial 1-888-203-1112, with a passcode ID of 4369195.

Now, at this time, I would like to turn the conference over to Ron Curwin, Senior Vice President of Investor Relations of Bed Bath & Beyond. Mr. Curwin, please go ahead.

Ronald Curwin

Thank you, and good afternoon. Welcome to Bed Bath & Beyond’s second quarter of fiscal 2006 conference call. Within the past hour, we issued a press release covering Bed Bath & Beyond’s results for the three and six month periods ended August 26, 2006.

Also in this press release, we announced that a committee of independent directors has been appointed to carry out a review of the company’s stock option grants and procedures. We expect to report further on the independent stock option review in our Form 10-Q, which the company expects to file on a timely basis by October 5, 2006.

During this call, we will comment on the results of our second quarter and six-month periods, and update our fiscal 2006 guidance, a 53-week year ending on March 3, 2007.

Before proceeding, I will read the following statement, and I quote:

Bed Bath & Beyond’s fiscal second quarter press release and comments made during this call may contain forward-looking statements within the meaning of section 21-E 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”, “estimate”, “assume”, “continue”, “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 that may be outside the company’s control.

Please refer to Bed Bath & Beyond SEC filings, including its Form 10-K for the year ended February 25, 2006. The company does not undertake any obligation to update its forward-looking statements.

Warren Eisenberg, Co-Chairman of Bed Bath & Beyond, leads off today’s call. Steven Temares, Chief Executive Officer and a member of the Board of Directors, will follow Warren. Some additional financial commentary will conclude today’s call.

I am now very pleased to introduce Warren Eisenberg. Warren.

Warren Eisenberg

Good afternoon. I am very pleased to say that our fiscal second quarter produced solid results and that I am confident that fiscal 2006 will be our best year ever. Our company continues to perform at impressive levels in terms of consistent earnings growth, cash flow generation, and overall financial strength.

We are proud of our performance in each and every quarter since becoming a public company in 1992.

We opened 11 new Bed Bath & Beyond stores during the fiscal second quarter, ending the period with 762 stores, compared with 686 stores a year ago. We have opened an additional 7 stores since the beginning of our fiscal third quarter, and as of today, we are operating 769 Bed Bath & Beyond stores in 46 states, the District of Columbia, and Puerto Rico.

We expect to open approximately 75 Bed Bath & Beyonds for the year. However, it is possible a few of these openings may occur subsequent to year-end in March, 2007. If this were to occur, it would not affect this year’s earnings guidance or our long-term profitability.

In addition, there are now 31 Christmas Tree Shops operating in 8 states, with an additional 4 stores planned to open prior to year-end, bringing the total number of Christmas Tree Shops store openings to 6 for the year.

Also, as of August 26th, Harmon stores are operating 38 stores in three states.

Consolidated store space, as of October 26, 2006, was approximately 26.2 million square feet, which we anticipate growing to approximately 27.8 million square feet by fiscal year-end.

Our steady growth should continue for years into the future. We believe we can operate in excess of 1,300 Bed Bath & Beyond stores in the United States. The expansion and development of Christmas Tree Shops, Harmon stores, and a number of new merchandising initiatives, are ongoing. We continue to create the infrastructure required to support our long-term growth.

Other productive uses of our growing financial resources including acquisitions, international activities, and additional share repurchases, continue to be actively explored.

A successful first half is now in the books, and we are firmly on course to achieve our fiscal 2006 goals.

I will now turn the call over to Steven Temares. Steve.

Steven Temares

Thank you, Warren. Good afternoon, everyone, and thank you for participating in this conference call. Before reviewing our performance for the second quarter, I would like to say, regarding the stock option review, that the review is not complete and, as Ron said, we expect to report further on the review in our Form 10-Q filing for the second quarter, which we expect to file on or before October 5th.

With respect to our second quarter and first half results just reported, these combined with our second half operating plan, support our confidence that fiscal 2006, as Warren said, will be our best year ever.

For the year, we also anticipate positive operating cash flows and further strengthening of our balance sheet.

For almost 35 years, we have grown our company as a decentralized organization. This is consistent with our belief in the dedication and talents of our associates. We have also repeated our belief that our decentralization has led to better decision-making and better execution. Through the efforts of our associates and their focus on servicing our customers and providing them with the very best possible shopping experience, we have been able to achieve our consistent long-term performance.

We believe our operating philosophy continues to provide us with a unique competitive advantage in the market place. Our financial results are a continuing testimony to the talent and efforts of our over 34,000 associates, and to our core principals of superior customer service and corporate decentralization.

Turning to the financial highlights of our fiscal second quarter, net earnings, which include expenses associated with the implementation of statement of financial accounting standards 123R, and related compensation plan changes, were approximately $146 million, equivalent to $0.51 per diluted share, compared with net earnings of $141 million, or $0.47 a year ago, which was prior to the adoption of FAS-123R. Excluding the impact of FAS-123R and the related compensation plan changes, earnings per share for the quarter would have been approximately $0.54 per diluted share, up about 15% from a year ago.

For the six months, net earnings, again reflecting FAS-123R, were approximately $246 million, equivalent to $0.86 per diluted share, compared with $240 million, or $0.80 reported a year ago, again on a pre-FAS-123R basis. Excluding the impact of FAS-123R and the related compensation plan changes, earnings per share for the fiscal first half would have been approximately $0.92 per diluted share, up about 15% from a year ago.

Net sales for the fiscal second quarter were approximately $1.6 billion, about 12.3% higher than in the corresponding quarter a year ago. For the first half, net sales advanced to approximately $3 billion, which was about 12.2% higher than in a similar period last year.

Comp store sales for both the quarter and for the six months increased by approximately 4.8%.

Our fiscal 2006 business plan continues to model comp sales increases in the range of 3% to 5%.

Gross profit for the fiscal second quarter was approximately $678 million, or 42.2% of net sales, compared with approximately $602 million, or 42% of net sales, during the second quarter of 2005. The approximately 20 basis point improvement in the gross profit margin resulted from a number of items, including a reduction in inventory acquisition costs.

Selling, general and administrative expenses for the fiscal second quarter were about $459 million, compared with approximately $384 million in the corresponding quarter a year ago. SG&A deleveraged by approximately 170 basis points during the quarter, which was an improvement of approximately 20 basis points over the prior quarter. This SG&A deleverage for the second quarter was due to the expensing of stock options and the related changes in our employee compensation program, as well as increased occupancy costs, including utilities and depreciation.

As we previously disclosed, we had a non-comparable benefit of reduced litigation expenses in last year’s second quarter, which was not anniversaried in this year’s second quarter. As always, we will continue to look for ways to reduce and eliminate costs throughout our operations.

In accordance with prior guidance, and as planned, we experienced a decrease in operating profit of approximately 150 basis points for the fiscal second quarter.

We are extremely well-positioned to take advantage of any opportunities that arise, and to respond to any challenges that may lie ahead. Our entire organization is dedicated to providing the best possible service to our customers, and through these efforts, to producing exceptional financial results for our shareholders.

We also continue to study alternative uses of our growing cash resources and how they may be best used to optimize the strength of our company over the long term.

So to recap, Bed Bath & Beyond’s fiscal second quarter, including the impact of FAS-123R, produced earnings of about $146 million, or $0.51 per diluted share, on an approximately 12.3% increase in net sales, and a 4.8% gain in same store sales.

Over the past 14 years, including the 7 stores open since the beginning of our fiscal third quarter, Bed Bath & Beyond’s store count has grown from 34 stores in 9 states to 769 stores in 46 states, the District of Columbia, and Puerto Rico.

We acquired Christmas Tree Shops and Harmon stores, and vastly improved our infrastructure, putting us in a better position than ever to support our future growth. Our organization has never been stronger.

Again, we remain committed to giving our customers the very best shopping experience possible, and through these efforts, improving our financial performance over the long term.

We look forward to our next call on Wednesday, December 20, 2006, when we will review our fiscal third quarter and first nine months of fiscal 2006 results. We will also at that time introduce our initial guidance for fiscal 2007.

With so many new stores scheduled to open, and with the fall selling season well underway, the balance of this year promises to be an exciting productive time for Bed Bath & Beyond. We believe we are well on our way toward achieving our fiscal 2006 financial goals, and expect that we will end the year in the strongest financial position in our history, and perhaps, given the current business environment, an enhanced competitive situation.

At this time, I would also like to clarify one other point. I think when Warren mentioned consolidated store space, he said that the approximately 26.2 million square feet, which we anticipate growing to approximately 27.8 million square feet by fiscal year end, was the current -- was the amount of square footage that we had through October. The 26.2 million square feet, as we look at it, is actually the number of square feet that we had as of August 26, 2006.

Now, Ron can correct what I have misstated, but at any rate, at the conclusion of this call, Ron and Ken Frankel will be in their offices to take your questions. Ron.

Ronald Curwin

Thank you, Steve. As many of you know, the changes in our compensation plan and revised stock option accounting, which were initiated during fiscal 2005, have continued to affect earnings comparisons through the end of our fiscal second quarter on August 26, 2006.

These substantially non-cash charges were equivalent to approximately $0.03 per diluted share in the fiscal second quarter, and approximately $0.06 per diluted share for the fiscal first half of 2006.

Based upon our updated planning assumptions, we are targeting net earnings of approximately $0.52 per diluted share for the fiscal third quarter ending on November 25, 2006. Recall that it was in the fiscal third quarter of 2005 that we initiated the changes in our accounting for stock-based compensation, so beginning with our fiscal third quarter of 2006, to be reported on December 20th, the accounting for these items will be comparable with those of prior periods.

Consistent with prior guidance, for all of fiscal 2006, we continue to expect to achieve earnings per diluted share of approximately $2.17, compared with fiscal earnings per diluted share of $1.92. Again, this $2.17 target includes non-comparable charges of about $0.06 per share due to the aforementioned changes in our compensation plan and stock option accounting, without which the fiscal year increase in earnings per diluted share would be approximately 16%.

In sum, we expect to achieve our financial objectives for the year and to enter fiscal 2007 in a strong position.

A summary of the major planning assumptions upon which our current earnings targets for fiscal 2006 are based, are as follows:

  1. Including 7 Bed Bath & Beyond stores opened since the beginning of our fiscal third quarter, and subject to the possible February to March shift in store openings mentioned by Warren, we anticipate opening approximately 54 new Bed Bath & Beyond stores in our fiscal second half, as well as four Christmas Tree Shops. About 60% of these approximately 54 stores are expected to open during the third quarter, with a remainder in the fourth quarter. In addition, we expect to complete the renovation of a significant number of existing stores, including the introduction of several expanded fine china and Harmon health and beauty care departments. As a result of all of this expansion activity, consolidated total store space at the end of fiscal 2006 is expected, as we said before, to be approximately 27.8 million square feet;
  2. Net sales for the fiscal third quarter and fiscal fourth quarter, including the 53rd week, are expected to increase in a low-teens percentage and a high-teens percentage respectively, with consolidated comp sales increases in the range of 3% to 5%. New Bed Bath & Beyond stores are planned to produce net sales of between $160 and $185 per square foot in the first 12 months of operation;
  3. Our business plan for the balance of fiscal 2006 anticipates a reduction in operating profit for the fiscal third quarter and for the full year;
  4. Principally due to higher interest rates than a year ago, interest income is expected to increase from fiscal 2005;
  5. The provision for income taxes will continue to be calculated at approximately 36.6%;
  6. Our capital spending plan for fiscal 2006 is presently being estimated at $350 million. Depreciation in fiscal 2006 is expected to be approximately $130 million;
  7. As previously mentioned, fiscal 2006 will be a 53-week year. The additional week will be included in the fiscal fourth quarter, making it a 14-week period.

Before concluding this afternoon’s call, a few additional comments relative to our fiscal second quarter:

  1. Our consolidated balance sheet as of August 26, 2006, remains strong and flexible. Even after completing our $600 million share repurchase program in last year’s final quarter, the combined total of cash, cash equivalents, and investment securities at quarter end was approximately $1.2 billion;
  2. Merchandise inventories at August 26, 2006, were on plan of approximately $1.4 billion. Inventories continue to be tailored by store to meet the anticipated demands of our customers, and are in excellent condition going into the fall selling season;
  3. Cash outlays for cap-ex in the fiscal first half, including the acquisition of the Union, New Jersey headquarters, new stores, and information technology, amounted to approximately $136 million;
  4. Depreciation for the fiscal first half approximated $63 million;
  5. Shareholders equity at August 26, 2006, after taking into consideration the fiscal 2005 share repurchase, was approximately $2.5 billion.

As a reminder, our next conference call to review our fiscal third quarter and fiscal nine month results, and to update our guidance for the remainder of fiscal 2006, will be on Wednesday, December 20, 2006. We will also at that time make our initial comments with respect to our fiscal 2007 outlook.

If you have any questions, Ken and I will be in our offices this evening, September 20th, to take your calls.

As always, we very much appreciate your interest in Bed Bath & Beyond. Have a pleasant evening.

Operator

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

Question-and-Answer Session

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