Eddy Elfenbein submits: I’ve had some time to review the Bed Bath & Beyond (BBBY) conference call. First, the company had a charge to SG&A last quarter of $7.2 million related to the review of stock option grants and procedures. We already new this was coming. In fact, the company said it was going to be $8 million. After tax, that comes to about two cents a share, so we have our earnings shortfall right there. The company said there might be a little more this quarter.
Next, CEO Steven Temares commented on employee tax charges the company was taking as a result of its stock options grants:
We anticipate the potential cash payments pursuant to the program to be approximately $40 million. While we are still reviewing the accounting treatment related to the potential program, we anticipate the pre-tax income statement impact in the fourth quarter to be slightly higher than the total cash payments. The potential cash outlay primarily represents payments to our employees in connection with increasing the exercised prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.
It's currently believed it is likely the company will recoup a substantial portion of the cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery will not flow through the income statement.
I want to emphasize that any program arrived at by our Board will be consistent with our company’s beliefs that our people are the reason for our success. As such, we would want to protect them against any adverse tax consequences for events that were beyond their control.
While the program has not been finalized, Warren, Len and I as executive officers, who are also members of the Board of Directors, has informed the Board that we decline to be considered for payments.
That only seems fair. Employees shouldn’t be punished for this, and the company did the right thing. The charge will amount to about nine cents a share.
Now let’s turn to SG&A, which I initially found a little troubling:
Selling, general and administrative expenses for the fiscal third quarter were about $493 million, compared with approximately $410 million in the corresponding quarter a year ago. As a percentage of net sales, SG&A expenses were 30.4% compared with 28.3% a year ago, as a result of the previously mentioned $7.2 million increase in stock-based compensation expense along with legal and accounting charges related to the stock option review and a relative increase in advertising, which includes an increase in paper cost and postal rates.
In addition, there were one-time benefits experienced in the prior year for settlement of credit card litigation and certain insurance recoveries which we did not have in this year's third quarter. As a result of the deleverage in SG&A expense partially offset by the improvement in gross profit margin, the operating profit margin in the fiscal third quarter decreased by approximately 115 basis points. The company’s results also benefited from a reduction in its year-to-date effective tax rate from 36.6 to 36.3%, resulting in a third quarter effective tax rate of 35.8%.
The company also said that it’s targeting earnings of 78 cents a share for the February quarter, which is a penny less than what it said on its last conference call.
My view is that the operationally, BBBY look just fine. The company’s sales-per-share increased by 17.4% from last year. That’s darn good. It’s been helped by the company’s aggressive buyback program. Share buybacks don’t impress me much, but with BBBY, it really has an effect on its earnings statement. Today, BBBY said it's going buy back another $1 billion worth of stock.
Unfortunately, the company hasn’t had all the benefits of its growth in gross margins reach the bottom line. Gross profits-per-share were up 20% last quarter. Unfortunately, they dug around looking for one thing (back-dating), and the probe found an even bigger charge (this tax thing)!
On today’s call, the company said that it’s looking for sales- and earnings-per-share growth of 10% next year...(cough)…low-ball..(cough).
Conservatively, I’d say that BBBY’s calendar year-earnings will be about $2.34 a share next year. (Their fiscal year doesn’t follow the calendar year, but I’m estimating for sake of comparison.) That means that the stock is going for just 17 times next year’s earnings, which strikes me as a very good price.