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Bed Bath & Beyond (NASDAQ:BBBY)

Q4 2011 Earnings Call

April 06, 2011 5:00 pm ET

Executives

Steven Temares - Chief Executive Officer and Director

Eugene Castagna - Chief Financial Officer, Principal Accounting Officer, Treasurer and President of Buy Buy Baby Inc

Warren Eisenberg - Co-Founder, Co-Chairman and Secretary

Operator

Welcome to Bed Bath & Beyond's Fourth Quarter of Fiscal 2010 Results Conference Call. [Operator Instructions] A rebroadcast of the conference call will be available beginning on Wednesday, April 6, 2011, at 6:30 p.m. Eastern Time through 6:30 p.m. Eastern Time on Friday, April 8, 2011. To access the rebroadcast, you made dial 1 (888) 203-1112, with the passcode ID of 3298306. Now at this time, it's my pleasure to turn the conference over to Mr. Gene Castagna, Chief Financial Officer and Treasurer of Bed Bath & Beyond. Please go ahead, sir.

Eugene Castagna

Thank you, and good afternoon. Welcome to Bed Bath & Beyond's Fourth Quarter of Fiscal 2010 Conference Call. Within the past hour, we issued a press release announcing Bed Bath & Beyond's results for the three- and 12-month periods ended February 26, 2011. During this call, we will comment on some of the fourth quarter and full year highlights and provide our fiscal 2011 planning assumptions.

Before proceeding, I will read the following statement, and I quote, “Bed Bath & Beyond's fiscal fourth 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, 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 that may be outside the company’s control. Please refer to Bed, Bath & Beyond’s SEC filings, including its Form 10-K for the year ended February 27, 2010. The company does not undertake any obligation to update its forward-looking statements.”

Joining me today -- joining me on today's call are Warren Eisenberg, 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 Warren Eisenberg. Warren?

Warren Eisenberg

Good afternoon. I'm pleased to report that our company's net earnings per diluted share increased approximately 30% in the fiscal fourth quarter to $1.12 and approximately 33% in the fiscal year to $3.07. We are pleased that in terms of earnings growth, cash flow generation and overall financial strength, our performance continues to be a strong one.

During the fourth quarter, we opened six Bed Bath & Beyond stores, five buybuy BABY stores and one Harmon Face Values store, as well as relocating one Bed Bath & Beyond store. Consolidated store space at February 26, 2011 was approximately 35.1 million square feet, an increase of approximately 4% over last year's fourth quarter.

Since the beginning of the fiscal first quarter of 2011, we've opened two and relocated two additional Bed Bath & Beyond stores. Including these stores, we currently operate 1,141 stores, including 984 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada, as well as 66 Christmas Tree Shops, 45 buybuy BABY stores and 46 stores under the names Harmon or Harmon Face Values. In addition, we are a partner in a joint venture which operates two stores in the Mexico City market under the name Home & More.

During fiscal 2011, including the two stores we've opened to date, we anticipate that the total number of new store openings will be approximately 45 stores across all of our concepts. Currently, we believe that fiscal 2011's mix of store openings will be relatively comparable to fiscal 2010. As always, as the year progresses, the total number of stores that we will open will be revised as we gain greater visibility.

We continue to apply our stringent standards to growth as we evaluate new store sites, as well as to continue to review our existing locations and lease terms for opportunities to relocate and/or rightsize our stores in response to changing market conditions.

As we have previously said, we believe that throughout the United States and Canada, there is an opportunity to create in excess of 1,300 Bed Bath & Beyond stores as well as grow our Christmas Tree Shops and buybuy BABY concepts from coast to coast. Additionally, we will continue to open Harmon Face Values stores and selectively place health and beauty care offerings in all our concepts. We remain committed to and are excited about the continued growth of all our merchandise offerings.

We continue to increase the productivity of our existing stores by evolving the merchandise offerings, as well as by expanding, renovating and/or relocating stores to enhance our customer shopping experience. Our ability to leverage the breadth and depth of our merchandise offerings, grow our bridal, baby and gift registries and continue the development of our interactive platforms has afforded us additional opportunities to attract new customers to Bed Bath & Beyond.

The continued success of our company is due to the tremendous efforts of our associates and to our unique decentralized culture. 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're 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. Steve?

Steven Temares

Thank you, Warren. Good afternoon, everyone, and thank you for participating in this conference call. We are pleased that our fourth quarter results exceeded our internal planning assumptions. We believe the dedication and talent of our associates and their constant focus on improving the overall customer shopping experience, while at the same time creating a more productive and efficient company, are the keys to producing the continued strong results we have experienced. As Warren said, we also are pleased that in terms of earnings growth, cash flow generation and overall financial strength, our performance continues to be a strong one. While a number of economic challenges persist, including higher commodity prices, relatively high unemployment, a sluggish housing market and fragile consumer confidence, our fundamental business strategy remains unchanged to offer a broad assortment of merchandise at everyday low prices with superior customer service.

As always, we will continue to work to enhance our customers' overall shopping experience 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, compete for and increase our market share and over the long term, continue to grow shareholder value. As always, we remain focused on building a business that stands the test of time. And taking this long-term approach to building our Bed Bath & Beyond, Christmas Tree Shops, buybuy BABY and Harmon Face Values concepts, and through the ongoing effort to cross merchandise and leverage our best practices across all our concepts, we expect, over time, to do more for and with our customers.

Turning to our fiscal 2010 performance. As reported earlier today, our net earnings per diluted share for the fiscal fourth quarter were $1.12, an increase of approximately 30% when compared to the $0.86 per share that we earned in last year's fourth quarter. For all of fiscal 2010, net earnings per diluted share were $3.07 compared with $2.30 last year, an increase of approximately 33%. Net sales for the fiscal fourth quarter were approximately $2.5 billion, approximately 11.6% higher than in the prior year. Fourth quarter comp store sales increased by approximately 8.5%, compared with an increase of 11.5% last year.

For the full year of fiscal 2010, net sales were approximately $8.8 billion, about 11.9% higher than last year. Comp store sales for the fiscal full year increased by approximately 7.8%, compared with an increase of approximately 4.4% last year. Gross profit for the fiscal fourth quarter was approximately 43% of net sales, compared to approximately 42.6% of net sales for the fourth quarter of 2009. This increase in the gross profit margin resulted primarily from a decrease in coupon expense and a reduction in markdowns as a percentage of net sales, partially offset by a shift in the mix of merchandise sold to lower margin categories. Gross profit for the full year was approximately 41.4% of net sales, compared to approximately 41% of net sales for fiscal 2009. This increase in the gross profit margin for the year was primarily due to a decrease in coupon expense as a percentage of net sales, partially offset by a shift in the mix of merchandise sold to lower margin categories.

Selling, general and administrative expenses for the fiscal fourth quarter were approximately 24.6% of net sales as compared to approximately 26.1% of net sales in last year's fourth quarter, a decrease of approximately 150 basis points. This decrease can be primarily be attributed to lower payroll and occupancy expenses as a percentage of net sales, which benefited from the approximately 8.5% increase in comp store sales. Selling, general and administrative expenses for the full year were approximately 26.7% of net sales as compared to approximately 28.5% of net sales in fiscal 2009, a decrease of approximately 180 basis points. This decrease can be primarily attributed to lower payroll and occupancy expenses as a percentage of net sales, as well as a relative decrease in advertising expenses, resulting from a reduction in the distribution of advertising pieces. Payroll and occupancy expenses benefited from the approximate 7.8% increase in annual comp store sales.

Reflecting the movement in gross profit margin and SG&A expenses, the operating profit margin for the fiscal fourth quarter was higher than in the same period a year ago by approximately 190 basis points. For all of fiscal 2010, the operating profit margin increased by approximately 220 basis points. Our provision for income taxes continues to fluctuate as taxable events occur and exposures are reevaluated. For the fiscal fourth quarter, our provision for income taxes was approximately 38.7%, compared to approximately 39.1% for the comparable quarter last year. For the full year, our provision for income taxes was approximately 38.8%, compared to approximately 39.1% for fiscal 2009.

Our capital spending for all of fiscal 2010 was approximately $183 million, principally for new stores, existing store improvements, information technology enhancements and other projects important to our future. 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.

In addition, we anticipate completing our current share repurchase program in early fiscal 2011. And thereafter, beginning our $2 billion share repurchase program that was authorized in December 2010, and which we plan to complete approximately two years after it commences.

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.

We again 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, continuing to improve our competitive position in the merchandise categories that we offer.

I'll now turn the call back to Gene. Gene?

Eugene Castagna

Thanks, Steve. As you heard from Warren and Steve, our results exceeded our planning assumptions and we earned $1.12 per diluted share in our fiscal fourth quarter and $3.07 per diluted share for all of fiscal 2010. We were encouraged by our positive fiscal fourth quarter results and continue to be cautiously optimistic about the coming year. The following are our major planning assumptions for fiscal 2011.

One. Including the two stores opened so far this year, we anticipate that the total number of new store openings will be approximately 45 stores across all of our concepts. Currently, we believe that fiscal 2011's mix of store openings will be relatively comparable to fiscal 2010. As the year progresses, the total number of stores that we will open will be revised as we gain greater visibility.

We will continue to place Harmon Face Values' health and beauty care offerings in selected stores across all of our concepts. As always, we remain flexible to take advantage of real estate opportunities that may arise.

Two. We expect to continue our program of expanding, renovating and/or relocating a number of our stores in fiscal 2011.

Three. We are modeling a two- to four-percentage increase in comparable store sales for the first quarter and full fiscal year.

Four. Based on these comparable store sales assumptions, we are modeling consolidated net sales to increase by a mid-single-digit percentage in the first quarter and full year of fiscal 2011.

Five. Assuming these sales levels and modeling advertising events that are generally consistent with fiscal 2010, in addition to planning the continuation of the shift in the mix of merchandise sold to lower margin categories, we are modeling a relatively consistent operating profit margin for both the fiscal first quarter and the full year.

Six. Interest income is expected to be relatively flat versus fiscal 2010.

Seven. The first quarter and full year tax provisions are estimated in the mid to high 30s percentage range with expected variability as taxable events occur.

Eight. Capital expenditures for fiscal 2011, principally for new stores, existing store refurbishment, information technology enhancements, including increased spending on our interactive platforms and other projects, are now planned to be approximately $250 million, which of course, remain subject to the timing of projects.

Nine. Depreciation for fiscal 2011 is estimated to be approximately $190 million.

10. We expect to generate positive operating cash flow in fiscal 2011 and continue to fund operations entirely from internally generated sources.

11. We anticipate completing our current share repurchase program in early fiscal 2011, which has approximately $136.9 million remaining, and thereafter, beginning our $2 billion share repurchase program that was authorized in December 2010 and which we plan to complete approximately two years after it commences. Our share repurchase program may be influenced by several factors, including business and market conditions.

Based on these and other planning assumptions, we are modeling net earnings per diluted share to be in the range of approximately $0.58 to $0.61 for the fiscal first quarter of 2011. For all of fiscal 2011, we are modeling net earnings per diluted share to increase by approximately 10% to 15%. Before concluding this afternoon's call, a few additional comments relative to our recently concluded fiscal fourth quarter. Our balance sheet remains strong and debt free. We ended fiscal 2010 with cash and cash equivalents and investment securities of approximately $1.9 billion. This includes approximately $112.9 million of investments related to auction rate securities. These securities have an estimated temporary valuation adjustment of approximately $3.2 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 fourth quarter, we had approximately $8.4 million of redemptions of auction rate securities at par. Subsequent to the fourth quarter, we had approximately $5.8 million of auction rate securities redemptions at par, leaving a balance of approximately $107.1 million of these securities. 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 condition. As of February 26, 2011, inventories at cost were approximately $2 billion or $56.17 per square foot. Inventory per square foot was higher than in the prior year, primarily due to increased inventory levels required to support recent increases in comp store sales and timing of receipts.

Consolidated shareholders equity at February 26, 2011, was approximately $3.9 billion, which is net of all share repurchases, including the approximately $199 million representing approximately 4.1 million shares repurchased during fiscal fourth quarter of 2010.

As a reminder, our next conference call to review operating results for the first quarter ending on May 28, 2011 will be on Wednesday, June 22, 2011. If you have any questions, Ken Frankel and I will be in our offices this evening, April 6, to take your calls. As always, we appreciate your interest in Bed Bath & Beyond.

Operator

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

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