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Executives

Eugene A. Castagna – Chief Financial Officer & Treasurer

Leonard Feinstein – Co-Chairman of the Board

Steven H. Temares – Chief Executive Officer & Director

Bed Bath and Beyond, Inc. (BBBY) F2Q10 Earnings Call January 6, 2010 5:00 PM ET

Operator

Welcome to Bed Bath and Beyond’s third quarter of fiscal 2009 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 the conference will be available beginning on Wednesday, January 6, 2010 at 6:30 pm Eastern time through 6:30 pm Eastern time on Friday, January 8, 2010. To access the rebroadcast you may dial 1-888-203-1112 with a pass code ID of 9421445.

Now, at this time it’s my pleasure to turn the conference over to Gene Castagna, Chief Financial Officer and Treasurer of Bed Bath and Beyond.

Eugene A. Castagna

Welcome to Bed Bath and Beyond’s third quarter fiscal 2009 conference call. Within the past hour we issued a press release announcing Bed Bath and Beyond’s results for the three and nine month periods ended November 28, 2009. During this call we will comment on some of the third quarter highlights, update our fourth quarter and full year planning assumptions and provide some preliminary fiscal 2010 planning assumptions.

Before proceeding I will read the following statement, “Bed Bath and 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 & 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, project, plan and similar words and phrases.

The company’s actual results or 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 of the company’s control. Please refer to Bed, Bath & Beyond’s SEC filings including its Form 10K for the year ended February 28, 2009. 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 and Beyond and Steven Temares, Chief Executive Officer and Member of the Board of Directors. I’m now very pleased to introduce Leonard Feinstein.

Leonard Feinstein

I am very pleased to report that our company produced earnings of $0.58 per diluted share in the fiscal third quarter ended November 28, 2009 compared with $0.34 per diluted share last year, an increase of approximately 71%. You will recall that last year’s fiscal third quarter was negatively impacted by challenging economic conditions as well as the liquidation sales of a then major competitor.

While the consumer continues to face economic challenges and the pressures of the macroeconomic environment still remain, we are cautiously optimistic as we look to the balance of fiscal 2009. During the fiscal third quarter we opened 16 new Bed Bath and Beyond stores, four Christmas Tree Shops, one Harmon Face Value store and seven buybuy BABY stores bringing the number of openings in the first nine months of fiscal 2009 to 49 versus 50 for the same period last year. Additionally, we closed one Bed Bath and Beyond store during the quarter.

We continued to add fine china departments in additional Bed Bath and Beyond stores as well as Harmon Face Value health and beauty care departments and additional Bed Bath and Beyond Christmas Tree Shops and buybuy BABY stores. Consolidated store space at November 28, 2009 was approximately 33.4 million square feet, an increase of approximately 5.7% over last year.

Since the beginning of the fiscal fourth quarter, we have opened three new Bed Bath and Beyond stores and one Harmon Face Value store and closed one Bed Bath and Beyond store. We currently operate 1,086 stores including 960 Bed Bath and Beyond stores in 49 states, the District of Columbia, Puerto Rico and Canada as well as 57 Christmas Tree Shops, 26 buybuy BABY stores and 43 stores under the names Harmon or Harmon Face Value. In addition, through a joint venture we operate two stores in the Mexico City market under the name Home & More.

In fiscal 2009 including stores already opened to date we anticipate opening approximately 64 new stores across our concepts including 38 Bed Bath and Beyond stores in the United States and Canada, eight Christmas Tree Shops, 13 buybuy BABY stores and five Harmon Face Value stores, ending the year with approximately 33.7 million square feet, an increase of approximately 5% over last year. We also continue to apply our stringent standards to growth as we evaluate new store sites and proactively review lease terms as well as look to relocate and/or right size our stores in response to changing market conditions on a case-by-case basis.

We believe that throughout the United States and Canada there is an opportunity to open in excess of 400 additional Bed Bath and Beyond stores and we also strive overtime to become the leading home furnishings retailer in the countries in which we do business. We keep working to increase the productivity of our stores by introducing new merchandising initiatives as well as by expanding, renovating, remodeling and/or relocating stores to enhance our customer’s shopping experience.

Our ability to leverage the breadth and depth of our merchandise offering, grow our bridal and baby gift registries and continue the development of our online sales capabilities afford us additional opportunities to attract new customers to Bed Bath and Beyond. As we have repeatedly said, we will capitalize on the unique strengths of our decentralized culture which has enabled us to build the strong, exciting business we have today. This culture which takes advantage of the knowledge, independence and customer focus of our associates has always been the foundation of our long term performance and allows us to respond more quickly as economic conditions change on a market-by-market basis.

We believe that the challenging macroeconomic environment affords us an exceptional opportunity to solidify and enhance our position in the merchandising categories we offer our customers. We are confident that we have the people, the resources and the capability to achieve our near and long term goals.

Now, I’ll turn the call over to Steven Temares.

Steven H. Temares

Our third quarter results exceeded our internal planning assumptions. They were accomplished through the dedication and talents of our associates and our constant focus on improving the overall customer shopping experience while at the same time creating a more productive and efficient company. Although economic and consumer spending challenges persist, our fundamental business strategy has remained unchanged, to offer a broad assortment of merchandise at everyday low prices with superior customer service.

We continue to systematically challenge the cost associated with running our company and although we have anniversaried many of the expense reduction initiatives that we instituted during last year’s fiscal third quarter, we continue to strive to find opportunities to lower our operating costs. Our balance sheet and overall financial health are extremely strong and we remain focused on building a business that stands the test of time.

We always look for ways to enhance our customers overall shopping experience and remain committed to being our customer’s first choice for the merchandise categories we offer, domestically, interactively and over the longer term internationally. We still believe strongly that the current retailing environment though difficult provides an excellent opportunity for us to continue to strengthen our long term prospects. We are confident that our company is well positioned to grow profitably and deliver superior shareholder value and that we are effectively managing our business to compete and increase our market share over time.

Our capital spending in the first nine months of fiscal 2009 was approximately $109 million. 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 long term success principally for new stores, existing store improvements, information technology enhancements and other projects who’s impact is viewed as important to our future.

In taking a long term approach to building our Bed Bath and Beyond, Christmas Tree Shops, buybuy BABY and Harmon Face Value concepts and through the ongoing efforts to cross merchandise and leverage our best practices across each of our concepts we expect over time to do more for and with our customers.

Turning to our third quarter performance, as reported earlier today net earnings per diluted share for the quarter were $0.58, an increase of approximately 71% versus the $0.34 a share earned in last year’s third quarter which was negatively impacted by challenging economic conditions as well as liquidation sales of a number of retailers including a then major competitor. For the fiscal nine months, net earnings per diluted share were $1.44 compared with $1.10 last year.

Net sales for the fiscal third quarter were approximately $2 billion , approximately 10.8% higher than the corresponding fiscal 2008 period. Third quarter comp store sales increased approximately 7.3% versus a decrease of 5.6% last year. For the first nine months, net sales were approximately $5.6 billion, about 5.7% higher than last year. Comp store sales for the fiscal nine months increased approximately 1.7% versus a decrease of 1.7% for the same period last year.

Gross profit for the fiscal third quarter was approximately 41.1% of net sales compared with approximately 38.9% of net sales for the fiscal third quarter of 2008 which ramped to an approximate 238 basis point increase in the gross profit margin. This increase resulted from relative decreases in inventory acquisition costs and coupon redemption as a percentage of sales partially offset by a shift in the mix of merchandise sold to lower margin categories.

Selling, general and administrative expenses for the fiscal third quarter were approximately 28.7% of net sales as compared to approximately 31.2% in last year’s third quarter. The decrease of 250 basis points in the SG&A was primarily due to a relative decrease in advertising expense resulting from a decrease in the distribution of advertising pieces as well as a relative decrease in payroll expense. Also contributing to this decrease was the 7.3% increase in comparable store sales resulting in relative decreases in fixed costs such as occupancy.

Reflecting the movement in gross profit margin at SG&A expenses, the operating profit margin for the fiscal third quarter was higher than in the period a year ago by approximately 480 basis points. For the fiscal nine months the operating profit margin increased by approximately 250 basis points. Our tax rate continues to fluctuate as taxable events occur and exposures are reevaluated. For the fiscal third quarter our tax rate was approximately 38.6% compared to approximately 36.3% for the comparable quarter last year.

We again want to thank our associates for their ongoing efforts which produced Bed Bath and Beyond’s long term success. Through their efforts we look forward to meeting the challenges that lay ahead and seizing the opportunities to satisfy our customers and by doing so continuing to improve our competitive position in the merchandise categories that we offer. I’ll now turn the call back to Gene.

Eugene A. Castagna

As you heard from Len and Steve, we earned $0.58 per diluted share in our fiscal third quarter and $1.44 per diluted share for the first nine months of fiscal 2009. We are encouraged by our positive fiscal third quarter results and with the holiday shopping season now behind us, we are cautiously optimistic about the balance of fiscal 2009 as compared to last year when a then major competitor was completing its liquidation.

The continued uncertainty in the macroeconomic environment makes it difficult to forecast future results. However, the following are our major planning assumptions for the remainder f fiscal 2009. One, including the 53 stores opened so far this year, we expect to open approximately 64 new stores across our concepts including 38 Bed Bath and Beyond stores throughout the US and Canada, eight Christmas Tree Shops, 13 buybuy BABY stores and five Harmon Face Value stores. We also plan to continue to add Harmon Face Value’s health and beauty care departments within additional Bed Bath and Beyond, Christmas Tree Shops and buybuy BABY locations as well as continuing to add fine china departments to Bed Bath and Beyond stores.

Two, based on sales to date and our assumptions for the rest of the fourth quarter including our ongoing efforts to optimize our advertising strategy, we are now modeling consolidated comparable store sales to increase about 3% to 5% in the fourth quarter. Three, assuming a 3% to 5% increase in comparable store sales, consolidated net sales are expected to increase by approximately 8% to 11% in the fourth quarter.

Four, we expect some improvement in the operating profit margin for the fourth quarter as compared to the fourth quarter a year ago. However, as Steve mentioned, we expect the improvements we have seen in SG&A to moderate as we continue to anniversary the expense control initiatives we began implementing during the third quarter of last year. Five, interest income is expected to be approximately flat versus last year’s fourth quarter.

Six, the full year tax provision continues to be estimated in the high 30% range with continuing variability as taxable events occur and exposures are reevaluated. Seven, capital expenditures for fiscal 2009 principally for new stores and existing store refurbishments, information technology enhancements and other projects are now planned at approximately $200 million which of course remain subject to the timing of projects.

Eight, depreciation for fiscal 2009 is estimated to be approximately $180 billion. Nine, our share repurchase program will continue to be influenced by several factors including business and market conditions and developments in the auction rate security market. 10, we expect to continue to generate positive cash flow in fiscal 2009 and entirely fund operations from internally generated sources.

Based on an increase in our fourth quarter comparable store sales planning assumption as well as our just released third quarter results exceeding our previous estimates, we now estimate that we will earn approximately $0.67 to $0.71 per diluted share for the fiscal fourth quarter and approximately $2.11 to $2.15 per diluted share for all of fiscal 2009.

Turning to fiscal 2010 while we have not yet completed our budget, our preliminary planning assumptions include the following. One, we expect the overall economic environment to remain challenging. Two, we anticipate opening approximately 65 stores across all of our concepts however, we remain flexible to take advantage of real estate opportunities that may arise. Three, we expect to continue our program of remodeling, renovating and expanding a number of our stores in fiscal 2010.

Four, our operations will continue to be entirely funded from internally generated sources. Five, our share repurchase program will be influenced by several factors including business and market conditions and developments in the auction rate securities market. Six, we expect continuing variability in our quarterly tax rates. We anticipate providing further information related to the fiscal first quarter and full year fiscal 2010 on our next quarterly conference call on April 7, 2010.

Before concluding this afternoon’s call a few additional comments relative to our recently concluded fiscal third quarter. Our balance sheet remains strong and debt free. We ended the fiscal third quarter with cash and cash equivalents and investment securities of approximately $1.2 billion. This includes approximately $186 million of investments related to auction rate securities. These securities have an estimated temporary valuation adjustment of approximately $2 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed temporary, it did not affect the company’s earnings.

During the quarter we had auction rate redemptions of approximately $6 million at par. As we have said in the past and as we have experienced to date, we believe that given the high credit quality of these investments we will ultimately recover at par all amounts invested in these securities. Inventories continue to be tailored by store to meet the anticipated demands of our customers and are in good shape. As of November 28, 2009 inventories were approximately $2 billion or $58.61 per square foot, a reduction of approximately 3.7% on a per square foot basis versus last year.

Consolidated shareholders’ equity at November 28, 2009 was approximately $3.4 billion which is net of share repurchases including approximately $34 million repurchased during the fiscal third quarter. As a reminder, our next conference call to review operating results for the fiscal fourth quarter and full year ending on February 27, 2010 will be on Wednesday, April 7, 2010. If you have any questions, Ken and Lisa will be in their offices this evening, January 6th to take your calls.

As always, we appreciate your interest in Bed Bath and Beyond and we wish you a happy and healthy New Year.

Operator

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

Question-and-Answer Session

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Source: Bed Bath and Beyond, Inc. F2Q10 (Qtr End 11/28/09) Earnings Call Transcript
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