Bed Bath & Beyond Inc (BBBY) 2005 Q3 法說會逐字稿

Please stand by we are about to begin.

Thank you for standing by, and welcome to Bed Bath & Beyond's fiscal third quarter of 2005 results conference call. (OPERATOR INSTRUCTIONS).

This call is being recorded.

A rebroadcast of this conference will be available beginning at 6:30 PM Eastern time on Wednesday, December 21, 2005 through 6:30 PM Eastern time on Friday, December 23, 2005.

To access the rebroadcast, you may dial 1-888-203-1112 with a passcode ID of 3287943.

Repeating 3287943.

Now at this time I’d like to turn the conference over to Ron Curwin, Chief Financial Officer and Treasurer of Bed Bath & Beyond.

Mr. Curwin please go ahead.

Thank you and good afternoon.

Welcome to Bed Bath & Beyond's fiscal third quarter of 2005 conference call.

Within the past hour we issued a press release covering our results for the three and nine month periods ended November 26, 2005.

During this call we will discuss our third quarter highlights, financial position and cash flows, and update guidance with respect to the balance of fiscal 2005.

As we do every year with the release of our fiscal third quarter results, we will also provide our initial guidance for the succeeding year, in this case, fiscal 2006, which will be a 53-week year, beginning on February 26, 2006 and ending on March 3, 2007.

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, 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's SEC filings, including its Form 10-K, for the year ended February 26, 2005.

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, President and Chief Executive Officer, and a Member of the Board of Directors, will follow Warren.

The earnings guidance and some additional financial commentary will conclude today's call.

I'm now very pleased to introduce Warren Eisenberg: Warren…

Thanks Ron.

The solid results we achieved during the first half of this year were followed by another strong quarter.

As many of you know from the press release which was issued about an hour ago, our Company in the quarter earned a record $0.45 per share.

For the first nine months of fiscal 2005, earnings were up about 15.7% from a year ago.

Our earnings growth, cash flow generation and financial strength, over time, continue to set a high standard.

As Steve will discuss in a few minutes, we were pleased to be able to produce these results in a quarter fraught with unusual challenges.

Over the past 13 years, including the five stores we’ve opened since the end of the third quarter, Bed Bath & Beyond store count has grown from 34 stores in nine states to 731 stores in 46 states and Puerto Rico.

We opened 40 new Bed Bath & Beyond’s stores during the fiscal third quarter, as well as two Christmas Tree Shops and two Harmon Stores.

About half of the new Bed Bath & Beyond stores opened in the quarter were opened in fiscal November, the last month of our quarter, limiting their ability to significantly contribute to the quarter's results.

Consolidated store space as of November 26, 2005 was approximately 25 million square feet.

With approximately 12 new Bed Bath & Beyond stores expected to open before year end, the total Bed Bath & Beyond stores for all of 2005 is expected to be about 83.

Total square footage additions in fiscal 2005 in the Bed Bath & Beyond stores is projected to be about 2.4 million square feet.

At quarter end, Christmas Tree Shops operated 29 stores in eight states and Harmon Stores operated 38 stores in three states.

Including a Harmon Store opened last week, new store openings for Christmas Tree Shops and Harmon Stores, for all of fiscal 2005 will be three and four, respectively.

We continue to open Harmon Health & Beauty Care departments within Bed Bath & Beyond stores, as well as new Fine China departments.

In addition, we are expanding and/or remodeling a number of existing stores.

We’re also very pleased that in late October, our Board of Directors authorized a $400 million share repurchase program.

About a year ago we completed our first-ever buyback, that one amounting to $350 million.

These authorizations enhance shareholder value and reflect our Board's confidence in the future of our Company.

As we've said previously, we believe home goods continues to be one of the most attractive sectors in retailing.

While we are pleased that we enjoy a dominant position in our sector, our share of the approximately $100 billion home goods market remains relatively small and we continue to look forward to increasing our share of the market.

We believe that we can successfully operate well over 1,100 Bed Bath & Beyond stores in the United States as well as significantly grow our Christmas Tree Shops and Harmon Stores in the years to come.

Through a combination of superior customer service, new merchandising initiatives, information technology enhancements and human resources development, we expect to continue our profitable growth, both domestically and interactively.

Other possible opportunities including international expansion, acquisitions and additional share repurchases, continue to be regularly and systematically explored.

For over three decades our unique, decentralized culture has been the foundation for our long-term record of outstanding financial performance.

We continue to be better positioned than most for a continuation of our controlled growth.

Our entire organization is dedicated more than ever to the attainment of our long-term objectives.

With a Holiday season coming to a close, and with our fiscal year-end approaching in February, we’re confident that fiscal 2005 will be our best year ever.

Now I’ll turn the call over to Steve Temares: Steve...

Thank you Warren.

Good afternoon everyone and thank you for participating in this conference call.

A short while ago we announced that consolidated net earnings for the fiscal third quarter were at a record $134.6 million, equivalent to $0.45 per share compared with net earnings of $121.9 million, or $0.40 per share earned in last year's comparable period.

For the nine months, net earnings were approximately $374.9 million, equivalent to $1.25 per share, compared with $324 million, or $1.06 per share, earned a year ago.

Since our IPO in June of 1992, we’ve achieved over 13 consecutive years of uninterrupted earnings growth.

As I cannot emphasize enough, this is a tribute to the talents and outstanding efforts of our over 33,000 associates, who daily take the core principle of customer service and seize the opportunity and empowerment of our decentralized structure, to make Bed Bath & Beyond a better Company.

As Warren mentioned, despite these strong results, the quarter was in many ways, uniquely challenging.

These challenges included the most severe hurricane season ever recorded, which affected several important markets.

Hurricanes Katrina, Rita and Wilma, which occurred over the course of about eight weeks, and all within our fiscal third quarter, and their aftermaths, resulted in the closing, for varying lengths of time, of approximately 75 stores in the Southeast and Gulf regions.

Also in response to immediate needs in the aftermath of the hurricanes, our Company responded to requests for significant merchandise donations and cash contributions.

The donations made went to various organizations directly helping the affected communities, as well as to our associates.

However, the needs of the impacted communities and the need to assist our associates persists, and we will continue to respond.

In addition to the financial impact of the hurricanes during the quarter, we believe high energy costs and other factors in the economy impacted consumer spending, as well as increasing certain operating expenses throughout the quarter.

During the quarter, and through this entire holiday season, we have experienced and continue to experience a period of extraordinary promotional activity, where, it seems that the generation of sales, at almost any price, took precedent, for some, over margins, profitability, and investment returns.

During the third quarter, we chose to stay on message with our customers, and maintain a consistent level of promotional activity.

We primarily responded by continuing to offer our customers a constantly evolving and improving shopping experience featuring a wide-range of attractive,desirable merchandise, at everyday low prices, accompanied by attentive and helpful service.

And, we continued to focus on maintaining our margins, profitability, and return on invested capital.

At the same time, we want to note that the fiscal third-quarter results did benefit from the settlement of credit card litigation and from insurance recoveries from prior year events.

This in turn, partially offset some of the previously mentioned negative impacts during the quarter.

Consolidated net sales for the quarter, were approximately $1.449 billion, about 11% higher than those in the corresponding quarter a year ago.

For the first nine months, consolidated net sales advanced to $4.124 billion, approximately 12.1% higher than in the similar three quarters last year.

Consolidated comp store sales grew by approximately 3.1% and approximately 4% in the fiscal third quarter and nine months, respectively.

Gross profit for the fiscal third quarter was approximately $615 million, or 42.5% of net sales, compared with $548 million, or 42% of net sales, during the fiscal third quarter of 2004.

The approximate 50 basis point improvement in gross profit margin was driven primarily by the reduction of inventory acquisition costs.

Selling, general and administrative expenses for the fiscal third quarter were about $410 million compared with approximately $357 million in the corresponding quarter a year ago.

As a percentage of net sales, SG&A expenses were 28.3% compared to 27.4% a year ago.

The third-quarter increase primarily resulted from the deleveraging of payroll and payroll-related items, mostly from the expensing of stock options in connection with our early adoption of the revised stock option accounting rules, and a relative increase in preopening and occupancy expenses, which I said earlier, was partially offset by the settlement of credit card litigation and certain insurance recoveries from prior year events.

Although we continue to invest in, and strengthen, our infrastructure, we nonetheless strive to systematically reduce and eliminate costs throughout our operations.

This balanced strategy of reinvesting for the Company's future while achieving planned current operating results, remains a high priority.

As a result of the deleverage in SG&A expense which, was partially offset by the gross profit margin improvement, the operating profit margin in the fiscal third quarter deleveraged by approximately 40 basis points.

As most of you know, since our founding in 1971, we have grown our Company as a decentralized organization.

This is consistent with our belief in the dedication and talents of our associates.

Our success is all about our people.

Our decentralized model leads to better decision making and better execution and provides us with a unique competitive advantage in the marketplace.

The efforts of our associates in focusing on how to best service our customers, has enabled us to achieve a consistent, long-term performance, of which, we all can be proud.

As I mentioned, this Holiday season has produced an extreme promotional retail environment which became exceedingly aggressive over the Thanksgiving weekend, and has persisted since.

Consistent with our philosophy of taking a long-term approach to our business and the optimization of our profitability over time, we have chosen to remain relatively restrained with our promotional activity, believing it is in the long-term interests of our business and its shareholders to maintain a consistent message of selection, value and superior service.

Having said that, we will continue to closely monitor conditions in our marketplace, and make those changes which we deem prudent and necessary to gain market share.

We remain extremely well-positioned to take advantage of any opportunities that arise, and to respond to any challenges that might lie ahead.

Although pleased with our year-to-date operations, we continue to strive to improve our performance.

Our balance sheet at November 26 was solid and our operating cash flow was strong.

Our financial strength has always been, and will continue to be, a key management focus.

So to recap, net earnings for our fiscal third quarter rose approximately 10.4% to $134.6 million, or $0.45 per share, compared with $121.9 million, or $0.40 per share, in the fiscal third quarter of 2004, on an approximately 11% increase in net sales and a 3.1% gain in same store sales.

We are dedicated to giving our Bed Bath & Beyond, Christmas Tree and Harmon customers the very best shopping experience possible and, through these efforts, to continuing to produce exceptional financial results.

As you will hear from Ron, we remain comfortable with our ability to meet our performance and growth targets for fiscal 2005, which ends on February 25th, and we are expecting another productive year in fiscal 2006.

We will review our fiscal fourth quarter and full-year results with you in our next conference call, now scheduled for Wednesday, April 5, 2006.

At the conclusion of this conference call, both Ron and Ken Frankel, our Director of Financial Planning, will be in their offices to take your questions.

On behalf of all of us at Bed Bath & Beyond, Christmas Tree Shops and Harmon Stores, we wish you the very best for the Holiday season, and a Healthy, Happy and Prosperous New Year.

Ron…

Thanks Steve.

As Warren and Steve said, we are pleased with our fiscal third quarter and year-to-date results, and are comfortable that our financial goals for all of fiscal 2005, which ends on February 25, 2006, will be achieved.

After updating guidance for our fiscal fourth quarter, and the underlying planning assumptions for that period, we will, for the first time, comment on our outlook for fiscal 2006.

Therefore, any fiscal 2006 earnings estimates, or models, that presently exist have not had the benefit of any prior guidance or input, from Bed Bath & Beyond.

Following the discussion of our fiscal 2006 outlook, we will have some additional comments relative to our fiscal third quarter.

As many of you will recall, we explained in several prior conference calls that fiscal 2005 results would reflect changes in our compensation plan, revised stock option accounting and lease accounting, with most of the impact being in the second half of the fiscal year.

We further explained that, while the exact impact of each of these variables was dependent on events still to occur, and as such could not be finally determined at that time, estimates from these changes were reflected in our earnings targets for fiscal 2005.

In our September conference call, taking into consideration our first half results, a new store opening program heavily weighted toward the back half of the year, the above-referred to accounting changes, the then updated major planning assumptions and the impact of Hurricane Katrina (Hurricanes Rita and Wilma had not yet occurred.) we raised our full year earnings per share target to approximately $1.89 per share.

Despite all the factors previously mentioned, we remain comfortable, at this time, with that full year target, and with the $0.64 per share Q4 target, which we should point out, is the same as our prior Q4 guidance in September.

Had we opted to postpone the expensing of stock options until the beginning of fiscal 2006, as is now permitted by the revised accounting rules and consequently to delay the implementation of changes in our overall compensation plan, we estimate that our earnings per share for all of fiscal 2005 would have been approximately $0.06 per share higher.

Also as previously explained, the changes to our compensation plan, which were implemented at the beginning of fiscal 2005, in which we shifted from primarily granting stock options to restricted shares, have caused an increase in payroll and payroll related items, and will continue to do so in the near-term.

However, over the long-term, these changes, are expected to have a favorable financial impact, and will permit us to continue to reward our associates, while providing greater predictability and control in our business planning process.

Additional fiscal fourth quarter planning assumptions are as follows:

One.

We expect to be operating approximately 743 Bed Bath & Beyond stores, 29 Christmas Tree Shops and 38 Harmon Stores, occupying approximately 25.5 million square feet of store space at the end of fiscal 2005.

This would include approximately 83 new Bed Bath & Beyond stores, representing approximately 2.4 million square feet of store space, added during the year.

About half of the approximately 17 fiscal fourth quarter new store openings will occur in February, the last month of our fiscal year.

Two.

Our expansion will continue to be entirely funded from internally-generated sources.

Three.

Based on current assumptions, including anticipated new store opening dates, and other factors, consolidated net sales in the fiscal fourth quarter are expected to grow in the 11 to 13% range.

Consolidated comp sales are projected to grow in the 3 to 5% range.

We continue to project Bed Bath & Beyond new store net sales of between $160 and $185 per square foot in the first 12 months of operation.

Four.

Changes in accounting for stock options and in our overall compensation plan are expected to cause deleveraging in SG&A expenses resulting in a reduction in the operating profit margin for the fiscal fourth quarter.

Five.

An increase in interest income is anticipated principally due to higher interest rates.

Six.

The rate used to calculate the provision for income taxes will be unchanged at approximately 37.4%.

Seven.

Capital expenditures for all of fiscal 2005 are now estimated at approximately $285 million, principally for new Bed Bath & Beyond stores, Christmas Tree Shops, and Harmon Stores, Information Technology enhancements and other infrastructure investments.

We estimate depreciation for fiscal 2005 to be approximately $110 million.

Turning now to next year, fiscal 2006.

After the conclusion of the ongoing 2005 Holiday Shopping Season, we will finalize our fiscal 2006 operating plan.

At this time, based on a yet-to-be finalized 2006 plan, we believe that consolidated net sales will grow by approximately 11 to 12% in fiscal 2006.

As explained previously, the Company has made significant changes to our overall compensation plan in conjunction with rules requiring the expenses of equity compensation including stock options.

The early adoption of these rules in the third quarter of fiscal 2005 and the changes to our overall compensation plan will result in four consecutive quarters of incremental compensation expense which began in the third quarter of 2005 reported today, and will continue through the second quarter of 2006.

As they did in the fiscal quarter ended November 26, 2005, the effects of these substantially non-cash charges will create significant deleveraging of SG&A expenses in the fiscal fourth quarter of 2005, and in the fiscal first and second quarters of 2006.

Similar to the third and fourth quarters of 2005, we expect earnings, due to these charges, to be reduced by approximately $0.03 per share in each of the first and second quarters of 2006, or $0.06 per share for the fiscal first half of 2006.

Reflecting this and other major planning assumptions, we presently estimate net earnings for the first and second quarter of 2006 at approximately $0.34 and $0.51 per share, respectively.

Since our fiscal first quarter typically accounts for the smallest portion of our annual earnings, the impact of these new charges, on a percentage basis, is relatively more pronounced in our fiscal first quarter than in any of the other three fiscal quarters.

In the second half of fiscal 2006, when we anniversary the changes and a 53rd week will be added, we presently estimate that earnings will grow by approximately 13 to 14%.

Considering all of these factors, net earnings for all of fiscal 2006 are presently expected to grow in a range of from 10 to 11%.

Additional fiscal 2006 assumptions are as follows: One.

We expect the number of new Bed Bath & Beyond stores for fiscal 2006 to be in the low 80s, and several additional Christmas Tree Shops and Harmon Stores will be opened.

Approximately one-third of the Bed Bath & Beyond stores are expected to open in the first half of the year and the balance in the fiscal second half.

Two.

New Bed Bath & Beyond stores are expected to generate net sales of between $160 and $185 per square foot in their first 12 months of operations.

Consolidated comp sales are expected to increase from 3 to 5%.

Three.

We expect to complete our recently announced $400 million stock repurchase program during fiscal 2006.

Four.

Our current guidance for the effective tax rate currently remains at approximately 37.4% of pre-tax earnings.

However, it is possible that our finalized 2006 operating plan, will incorporate a small reduction in the effective tax rate.

Five.

As previously mentioned, fiscal 2006 will be a 53-week year with the additional week included in the fiscal fourth quarter.

Changes, if any, in our fiscal 2006 operating plan will be covered in future quarterly earnings guidance.

Before concluding this afternoon's call, a few additional comments relative to our fiscal third quarter.

One.

Our debt free balance sheet as of November 26, 2005 remains strong and flexible.

Cash and investment securities approximated $1.35 billion, about $46 million higher than last year.

This is even after our share repurchase of $350 million in last year's final quarter.

Two.

Merchandise inventories levels for the ongoing Holiday season were planned to fully support our sales goals for the period.

Merchandise inventories at November 26, 2005 were on plan at approximately $1.425 billion compared with approximately $1.214 billion a year ago.

On a per square foot basis, inventories at the end of the fiscal third quarter were about $56.98 per square foot compared with $54.29 per square foot a year ago, a planned increase of just under 5%.

Inventories continue to be tailored by store to meet the anticipated demands of the customers of each store.

Three.

Shareholders’ equity at November 26, 2005 after taking into consideration the $350 million share repurchase in fiscal 2004, was approximately $2.65 billion, compared with about $2.37 billion a year ago.

Four.

Capital expenditures through November 26, 2005, primarily for new store openings and Information Technology enhancements, were approximately $167.2 million compared with $112.2 million for the first three fiscal quarters a year ago.

As previously stated, we now expect that capex for all of fiscal 2005 will be about $285 million.

Depreciation for the nine months came to approximately $80 million, up from approximately $70 million last year and should be approximately $110 million for all of fiscal 2005.

Five.

Company-wide total store space as of November 26, 2005 was approximately 25 million square feet.

If you have any questions, Ken and I will be in our offices this evening, December 21, to take your calls.

As always, we very much appreciate your interest in Bed Bath & Beyond.

Have a pleasant evening.

Ladies and gentlemen, this concludes today's conference call.

Thank you all for listening.

You may now disconnect.