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Bed Bath & Beyond (NASDAQ:BBBY)

Q3 2011 Earnings Call

December 21, 2011 5:00 pm ET

Executives

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

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

Steven H. Temares - Chief Executive Officer and Director

Operator

Welcome to Bed Bath & Beyond's Third Quarter of Fiscal 2011 Results Conference Call. [Operator Instructions] This conference is being recorded. A rebroadcast of the conference will be available beginning on Wednesday, December 21, 2011 at 6:30 p.m. Eastern time through 6:30 p.m. Eastern time on Friday, December 23, 2011. To access the rebroadcast, you may dial (888) 203-1112 with the passcode ID of 6140235.

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.

Eugene A. Castagna

Thank you, and good afternoon. Welcome to Bed Bath & Beyond's Third Quarter of Fiscal 2011 Conference Call. Within the past hour, we issued a press release announcing Bed Bath & Beyond's results for the 3- and 9-month periods ended November 26, 2011. During this call, we will comment on some of the third quarter highlights, update our fiscal fourth quarter and full year planning assumptions and provide some preliminary fiscal 2012 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 & 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 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 the company's control. Please refer to Bed Bath & Beyond's SEC filings, including its Form 10-K for the year ended February 26, 2011. The company does not undertake any obligation to update its forward-looking statements."

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

Thanks, Gene. Good afternoon. I'm pleased to report that our company's net earnings per diluted share increased approximately 28% in the fiscal third quarter to $0.95. We're pleased that we've been able to continue our strong performance in terms of earnings growth, cash flow generation and overall financial strength as we continue to challenge ourselves to improve in every aspect of our operation.

Our unique decentralized corporate culture continues to produce positive results, and we remain confident that our business will continue to grow successfully in the years ahead. Our entire organization is dedicated to providing our customers with the best possible shopping experience.

During the third quarter, we opened 7 Bed Bath & Beyond stores, 7 buybuy BABY stores, one Christmas Tree Shop store and one Harmon Face Values store. Additionally, we continue to relocate and renovate Bed Bath & Beyond stores. Consolidated store space at November 26, 2011 was approximately 36 million square feet, an increase of approximately 4% over last year's third quarter.

Since the beginning of the fiscal fourth quarter of 2011, we have opened an additional buybuy BABY store and closed 1 Harmon store. Including this activity, we currently operate 1,171 stores, consisting of: 993 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 71 Christmas Tree Shops stores; 62 buybuy BABY stores; and 45 stores under the names Harmon or Harmon Face Values. In addition, we are a partner in a joint venture which operates 2 stores in the Mexico City market under the name Home & More.

During fiscal 2011, including the 36 stores we've opened to date, we anticipate that the total number of new store openings will be 39 stores across all our concepts. As always, we apply our stringent standards to growth as we evaluate new store sites, as well as continue to review our existing locations and lease terms for opportunities to relocate and/or rightsize our stores in response to changing market conditions.

We continue to 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 Christmas Tree Shops and buybuy BABY concepts from coast to coast. Additionally, we will continue to open Face Value stores and place health and beauty care offerings in stores across all our concepts.

We remain committed to and are excited about the continued growth of all our merchandise offerings. We remain focused on increasing the productivity of our existing stores by evolving the merchandise offerings as well as by expanding, renovating and/or relocating stores to enhance our customers' 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.

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 continue to believe 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 H. Temares

Thank you, Warren. Good afternoon, everyone, and thank you for participating in this conference call. As Warren said, we are pleased that have been able to continue our strong performance in terms of earnings growth, cash flow generation and overall financial strength. We believe the dedication and talents 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.

While consumer confidence and spending is impacted by the continuing economic challenges, 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 invest in all aspects of our company and work to enhance our customer's overall experience in-store, online and through social media and mobile devices.

We remain committed to being our customer's 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.

In taking this long-term approach to the growth and development of our business and through the ongoing efforts to cross-merchandise and leverage our best practices throughout our organization, we expect, over time, to do more for and with our customers.

As we announced in our last conference call in September, we will be relocating our offices in Farmingdale and Garden City, New York to our corporate headquarters here in Union, New Jersey. This transition is being made to further improve the communication, coordination and execution across all our concepts, activities and platforms and to better leverage the internal and external resources to support the continuing growth of our company. We expect this transition to be substantially completed during the second half of fiscal 2012.

Turning to our fiscal third quarter of 2011 performance. As reported earlier today, our net earnings per diluted share were $0.95, an increase of approximately 28% when compared to the $0.74 per diluted share that we earned in last year's third quarter. For the fiscal 9 months, net earnings per diluted share were $2.60 compared with $1.95 earned last year, an increase of approximately 33%.

Net sales for the fiscal third quarter were approximately $2.3 billion, approximately 6.8% higher than in the prior year. For the fiscal 9 months, net sales were approximately $6.8 billion, 8.2% higher than last year. Third quarter comp store sales increased by approximately 4.1% compared with an increase of 7% last year. For the fiscal 9 months, comp store sales increased by approximately 5.5% compared with an increase of 7.6% last year. Increases in comp store sales for the fiscal third quarter and 9 months of 2011 were attributed to increases in both the number of transactions and the average transaction amount.

Gross profit for the fiscal third quarter was approximately 40.9% of net sales, the same as the comparable period a year ago. The gross profit margin included a reduction in markdowns as a percentage of net sales, offset by the increase in inventory acquisition costs and a shift in the mix of merchandise sold to lower margin categories.

Gross profit for the fiscal 9 months was approximately 40.9% of net sales compared to approximately 40.7% of net sales in the fiscal 9 months of 2010. The increase in the gross profit margin for the fiscal 9 months was primarily due to a reduction in markdowns and coupons as a percentage of net sales, partially offset by an increase in inventory acquisition costs and a shift in the mix of merchandise sold to lower margin categories.

Selling, general and administrative expenses for the fiscal third quarter were approximately 25.7% of net sales as compared to approximately 27% of net sales in last year's fiscal third quarter, a decrease of approximately 130 basis points. Selling, general and administrative expenses for the fiscal 9 months were approximately 25.9% of net sales as compared to approximately 27.5% of net sales in the fiscal 9 months of 2010, a decrease of approximately 160 basis points. These decreases can be primarily attributed to lower payroll, occupancy and advertising expenses as a percentage of net sales, all of which benefited from the positive comp for both the fiscal third quarter and 9 months.

In addition, advertising as a percentage of net sales for both the fiscal third quarter and 9 months benefited from a reduction in the mailing of advertising pieces. Reflecting the movement in gross profit margin and SG&A expenses, the operating profit margin for the fiscal third quarter was higher than in the same period a year ago by approximately 130 basis points. For the fiscal 9 months, the operating profit margin increased by approximately 180 basis points.

Our provision for income taxes continues to fluctuate as taxable events occur and exposures are reevaluated. For the fiscal third quarter, our provision for income taxes was approximately 35.9% compared to approximately 38.6% for the comparable quarter last year, a decrease of approximately 270 basis points. For the fiscal 9 months, our provision for income taxes was approximately 37.1% compared to approximately 38.8% for the comparable period last year, a decrease of approximately 170 basis points. These provisions for the current fiscal quarter and 9 months of 2011 included a net after-tax benefit of $9.1 million and $14.1 million, respectively, due to distinct tax events occurring during the periods.

Our capital expenditures during the fiscal 9 months of 2011 were approximately $159.2 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.

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 produce 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 A. Castagna

Thanks, Steve. As you heard from Steve, we earned $0.95 per diluted share in our fiscal third quarter and $2.60 per diluted share for the 9 months of fiscal 2011. We were encouraged by our positive fiscal third quarter results and continue to be cautiously optimistic about the remainder of fiscal 2011.

The following are our major planning assumptions for the remainder of fiscal 2011: one, including the 36 stores opened so far this year, we anticipate that the total number of new store openings will be 39 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 2 to 4 percentage increase in comparable store sales for the fourth quarter and approximately 5% for all of fiscal 2011. Four, based on these comparable store sales assumptions, we are modeling consolidated net sales to increase by 4% to 6% in the fourth quarter and between 7% and 8% for the full year. Five, assuming these sales levels, in addition to planning the continuation of the shift in the mix of merchandise sold to lower margin categories, we are modeling our operating profit margin to leverage for the fiscal fourth quarter and full year.

Six, the fourth quarter and full year tax provisions are estimated in the mid- to high-30s percentage range, with expected variability as distinct tax events occur. Seven, capital expenditures for fiscal 2011 are planned at approximately $275 million which, of course, depends on the composition and ultimate timing of projects. Our capital expenditures are principally for new stores, existing store refurbishment, information technology enhancements including increased spending on our interactive platforms and other projects, which include expenditures for an additional 800,000 square foot e-commerce fulfillment center scheduled to become operational in mid-fiscal 2012.

Eight, depreciation for fiscal 2011 is estimated to be approximately $180 million. Nine, we expect to generate positive operating cash flow in fiscal 2011 and continue to fund operations entirely from internally generated sources. Ten, we expect to continue our share repurchase program which 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 $1.28 to $1.33 for the fiscal fourth quarter of 2011 and approximately $3.86 to $3.92 for all of fiscal 2011. This would represent an increase of approximately 26% to 28% over fiscal 2010, up from our previous model of approximately 22% to 25%.

For fiscal 2012, we are in the process of preparing our budget. Our preliminary planning assumptions for next year, which will be 53 weeks, include the following: one, we anticipate opening approximately the same number of stores as the current year. 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 2012. Three, our stores will continue to be entirely -- or our operations will continue to be entirely funded from internally generated sources.

Four, we expect to continue to repurchase shares under our current $2 billion repurchase program, which we anticipate completing by early fiscal 2013. Five, we expect continuing variability in our quarterly tax rates. Six, in the second half of the fiscal year, we expect to substantially complete the relocation of our Farmingdale and Garden City, New York offices to our corporate headquarters in Union, New Jersey.

We plan to provide further information related to the fiscal first quarter and full year 2012 on our next quarterly conference call on April 4, 2012.

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 investment securities of approximately $1.6 billion. This includes approximately $97.3 million of investments related to auction rate securities.

These securities have an estimated temporary valuation adjustment of approximately $1.9 million to reflect our current lack of liquidity. Since this valuation adjustment is deemed temporary, it did not affect the company's earnings. 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 November 26, 2011, inventories at cost were approximately $2.4 billion or $65.43 per square foot. Inventory per square foot was higher than in the prior period, primarily to support increases in comp store sales.

Consolidated shareholders equity at November 26, 2011 was approximately $3.9 billion which is net of share repurchases, including the approximately $328 million, representing approximately 5.6 million shares repurchased during the fiscal third quarter of 2011. As of November 26, 2011, the remaining balance of the current share repurchase program authorized in December 2010 was approximately $1.3 billion.

As a reminder, our next conference call will be on Wednesday, April 4, 2012. During this call, we will review operating results for the fourth quarter and full year ending February 25, 2012, and we'll further discuss fiscal 2012 planning assumptions. If you have any questions, Ken Frankel and I will be in our offices this evening, December 21, 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.

Operator

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

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