Bed Bath & Beyond Inc (BBBY) 2006 Q3 法說會逐字稿

Welcome to Bed Bath & Beyond's Third Quarter of Fiscal Year 2006 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 call will be available beginning at Wednesday, December 20, 2006 at 6:30 PM Eastern Time through 6:30 PM Eastern Time on Friday, December 22, 2006. To access the rebroadcast, you may dial 888-203-1112 with a pass code ID of 6869344.

Now at this time, I'd like to turn the conference over to Ron Curwin, Senior Vice President of Investor Relations of Bed Bath & Beyond. Mr. Curwin, please go ahead, sir.

Thank you and good afternoon. Welcome to Bed Bath & Beyond's Fiscal Third Quarter of 2006 conference call. Within the past hour we issued a press release announcing Bed Bath & Beyond's results for the three and nine-month periods ended November 25, 2006, as well as a newly authorized share repurchase program. During this call we will comment on our third quarter and nine month results, and update our guidance for fiscal 2006, a 53-week year ending on March 3, 2007. We will also provide our preliminary guidance for fiscal 2007, a 52-week year, which begins on March 4, 2007 and ends on March 1, 2008.

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 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 25, 2006 and the Forms 10-Q and 8-K filed by the Company since that date. 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, Chief Executive Officer, and a Member of the Board of Directors, will follow Warren. The earnings guidance and some additional financial comments will conclude today's call.

I am now very pleased to introduce Warren Eisenberg.

Warren.

Yes, Good afternoon. The solid results we achieved during the first half of this year were followed by another strong quarter for the period ended November 25, 2006. The press release, issued about an hour ago, showed that our Company earned $0.50 per diluted share in the quarter and $1.36 per diluted share for the nine months.

Our balance sheet is strong, and our cash flows are positive. We are in an excellent position to fund our future growth initiatives, and more. In light of our strong cash generation, I'm very pleased that our Board of Directors has expressed its confidence in our future by authorizing today a share repurchase program in the amount of $1 billion, which we intend to fund from present and expected future excess cash flows. This is our fourth share repurchase announcement since 2004. Steven will have more to say about this Board action.

Since going public in 1992, including the one store we've opened since the end of the third quarter, the count for our Bed Bath & Beyond stores has grown from 34 in nine states to 796 in 47 states, the District of Columbia and Puerto Rico. With approximately 17 additional Bed Bath & Beyond stores expected to open in our fiscal fourth quarter, we expect to be operating approximately 813 Bed Bath & Beyond stores at the end of fiscal '06.

In addition, at quarter-end, Christmas Tree Shops operated 35 stores in eight states, including 4 new stores opened during the fiscal third quarter, and Harmon Stores operated 38 stores in three states, with its 39th store scheduled to open shortly.

Consolidated store space as of November 25, 2006 was approximately 27.3 million square feet, which we anticipate growing to approximately 27,800,000 square feet by fiscal year-end.

We continue to open Harmon Health and Beauty care departments within Bed Bath & Beyond stores, open new Fine China departments and launch new merchandising initiatives. In addition, we continue to explore ways to enhance the productivity of existing stores, and are planning to expand and/or remodel a number of existing stores.

Although we are obviously aware of the results being reported by other operators, and of the current macro-economic environment, we feel strongly that home goods is an attractive retailing sector. We continue to strive to make Bed Bath & Beyond the first choice for enhancing the beauty and convenience of our customers' homes and while we enjoy a strong position in the sector, our share of the home goods market is relatively small and we continue to be successful in our efforts to improve our absolute and our relative positions in the marketplace.

Our steady growth should continue for years in the future and we believe that we can successfully operate in excess of 1300 Bed Bath & Beyond stores in the United States, and significantly grow our Christmas Tree stores and Harmon merchandise presence in the years to come.

We look forward to Bed Bath & Beyond's future with a great deal of confidence. With another exciting holiday season nearing a close and our February year-end rapidly approaching, we look forward to a successful conclusion to fiscal '06 and are anticipating an even better 2007.

And now, I will turn the call over to Steven Temares.

Steve.

Thank you Warren. Good afternoon everyone and thank you for participating in this conference call. Before reviewing our performance for the fiscal third quarter, I'd like to discuss a program our Board of Directors is reviewing to protect our employees against certain potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical issues associated with some of our stock options grants that were disclosed through our stock option review. Although no final determination has been reached by our Board, we anticipate we will incur a non-recurring charge in the fourth quarter of fiscal 2006 related to this program. 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 pretax 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 exercise prices on certain stock option grants, so as to protect them from certain potential adverse tax consequences. We currently believe 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 belief 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, have informed the Board that we declined to be considered for payments.

Now, with respect to our fiscal third quarter and first nine months results that we just reported, the Company earned approximately $142 million, equivalent to $0.50 per diluted share. This includes a year-to-date non-cash selling, general and administrative charge of about $7.2 million, related to the review of stock option grants and procedures. You will recall that in our 8-K filed on October 10th, we had estimated this charge to be approximately $8 million. This charge, in addition to the associated legal and accounting expenses, was equivalent to approximately $0.02 per diluted share. The approximately $142 million of net earnings compares with approximately $135 million or $0.45 per diluted share, earned in last year's comparable period. Excluding the impact of the non-comparable charge, earnings per diluted share for the quarter would have increased approximately 15% from a year ago.

For the nine months, net earnings were approximately $388 million, equivalent to $1.36 per diluted share. This compares with about $375 million, or $1.25 per diluted share, earned a year ago. Recall that the Company incurred approximately $0.06 per diluted share of non-comparable expense in the first half of fiscal 2006 primarily related to the adoption of FAS 123R. For the nine months, excluding the impact of both non-comparable charges-- that being the approximately $0.02 relating to the stock option review and approximately $0.06 relating to FAS 123R-- earnings per diluted share would have increased about 15% from a year ago.

As Warren mentioned, we also announced that our Board of Directors has authorized our largest share repurchase program to date, in the amount of $1 billion. Over the last two years, we previously completed share repurchases totaling approximately $950 million.

Our Board took this action based upon its continued confidence in our Company's long-term growth potential, financial outlook and excess cash flow generation. In addition to providing value to our shareholders through the $1 billion share repurchase program, 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. Although the Board's authorization does not set a time limitation for the share repurchase, for planning purposes, the Company anticipates completing the program over the next two years. Our Company, which has been debt-free for over 10 years, had approximately $1.1 billion in cash, cash equivalents and investment securities as of November 25, 2006, a point in time just prior to what has been, historically, our most positive cash flow period of the year.

Since our IPO in June of 1992, we've achieved over 14 consecutive years of uninterrupted earnings growth. This is primarily due to the talent and dedication of our now over 34,000 associates, who daily provide superior customer service and seize the opportunity and empowerment embedded in our decentralized structure, to make Bed Bath & Beyond a better company.

Consolidated net sales for the fiscal third quarter were approximately $1.6 billion about 11.8% higher than those in the corresponding quarter a year ago. For the first nine months, net sales advanced to approximately $4.6 billion dollars, about 12.1% higher than that of the similar three quarters last year.

Comp store sales grew by approximately 4.6% and 4.8% in the third quarter and nine months, respectively.

Gross profit for the fiscal third quarter was approximately $704 million, or 43.5% of net sales, compared with $615 million, or 42.5% of net sales during the fiscal third quarter of 2005. The approximate 100-basis point improvement in the gross profit margin was primarily due to the reduction of inventory acquisition costs, which included an increase in purchase volume incentives.

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. This was 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 costs 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%.

So to recap, net earnings for our fiscal third quarter rose to about $142 million or $0.50 per diluted share, compared with about $135 million, or $0.45 per diluted share, in the fiscal third quarter of 2005, on an approximately 11.8% increase in net sales and a 4.6% gain in same store sales.

As Warren said, we feel more strongly than ever in the attractiveness of the home goods sector. Through a combination of superior customer service, merchandising initiatives, information technology enhancements and human resources development, we expect to continue our profitable growth, domestically, interactively and over the longer term, internationally. Our strong cash generation should also permit us, as seen today, to execute additional share repurchases. We also continuously consider growth through acquisitions that are strategic to our business.

We will review our fiscal fourth quarter and full-year results and update fiscal 2007 guidance with you in our next conference call, scheduled for Wednesday, April 11, 2007.

Ron and Ken Frankel will be in their offices this evening, December 20th, to take your questions.

On behalf of all of us at Bed Bath & Beyond, Christmas Tree Shops and Harmon Stores, we wish you all the very best for the holiday season, and a healthy, peaceful and prosperous New Year.

Ron?

Thanks Steve. In our conference call on September 20, 2006, we targeted fiscal third quarter earnings of $0.52 per diluted share. Subsequently, on October 10th, we disclosed that the Company expected to record in the fiscal third quarter a year-to-date non-cash, non-comparable SG&A charge of an estimated $8 million related to the stock option review. The actual charge of approximately $7.2 million, combined with the associated legal and accounting expenses, was equivalent to approximately $0.02 per diluted share, and has been booked in our fiscal third quarter. The Form 8-K filed on October 10th pointed out that this charge was not included in the Company's planning assumptions and earnings guidance on the September 20th conference call.

As Steve said in connection with the Company's stock option review, the Board of Directors along with accounting and human resource advisers, is evaluating program alternatives intended to protect our over 1600 employees, who would otherwise incur certain adverse tax consequences as a result of the stock option review.

Although the program is not yet finalized, the Company anticipates it will incur a non-recurring charge in the fiscal fourth quarter of 2006 resulting from payments to employees of approximately $40 million to protect them from the aforementioned adverse tax consequences. While we're currently reviewing the accounting treatment related to the potential program, we anticipate the pretax income statement impact in the fourth quarter to be slightly higher than the total cash payments, with any difference between the cash payments and the associated pretax expense to be recorded as an adjustment to Additional Paid In Capital in the Shareholders' Equity section of the Company's Balance Sheet.

However, since stock option grant prices to employees will be increased, the Company would expect to recover a substantial portion of the cash outlay through higher proceeds from future stock option exercises, although, as Steve said, this recovery will not flow through the income statement.

The following are some of our major fourth quarter and full year 2006 planning assumptions:

1. As mentioned in our fiscal second-quarter conference call, several of the anticipated fiscal 2006 Bed Bath & Beyond new store openings will probably occur in early fiscal 2007. As of now, 18 new Bed Bath & Beyond stores, including one which has opened, are expected to open during our fiscal fourth quarter, bringing to 72 the number opened for all of fiscal 2006. In addition, six Christmas Tree Shops and one Harmon Store will have opened during the year. We expect to be operating approximately 813 Bed Bath & Beyond stores, 35 Christmas Tree Shops and 39 Harmon Stores, occupying approximately 27.8 million square feet of store space at year-end. Most of the fiscal fourth quarter new store openings will occur in the last month of our fiscal year.

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

3. Net sales for the fiscal fourth quarter including the 53rd week are modeled to increase in a mid-to-high teens percentage range and comp sales are planned to increase within a range of 3% to 5%. New Bed Bath & Beyond stores are planned to produce net sales of between $160 and $185 per square foot in the first 12 months of operation.

4. We anticipate a reduction in operating profit percentage for the fiscal fourth quarter, which includes incremental SG&A expenses of approximately $0.01 per diluted share as a result of the stock option review.

5. We are currently modeling interest income to be flat or slightly higher for the fourth quarter.

6. The effective tax rate is currently estimated to be 36.3%.

7. Capital expenditures for all of fiscal 2006 are now estimated at approximately $300 million, principally for new Bed Bath & Beyond stores, Christmas Tree Shops, and Harmon Stores and departments, information technology enhancements, the purchase of our corporate office building, and other infrastructure investments.

Also included is the land purchase and a portion of the construction costs for a 700,000 square foot New Jersey distribution center for Christmas Tree Shops, expected to be operational in fiscal 2008. The reduction in the capital expenditures forecast from the previous $350 million estimate given in our fiscal second quarter conference call is primarily due to the timing of projects.

8. We estimate depreciation for fiscal 2006 to be approximately $125 million.

As a result of the foregoing planning assumptions, we are now targeting EPS for the fiscal fourth quarter of approximately $0.78 per diluted share. This does not include the anticipating non-recurring charge to earnings associated with the previously mentioned program our Board is reviewing to protect our employees against certain adverse tax consequences as a result of historical issues associated with some of our stock option grants. The Company expects to file a Form 8-K when the program is adopted.

We turn now to next year, fiscal 2007, which will be a 52-week year, compared with the 53 weeks comprising our fiscal 2006. After the conclusion of the 2006 holiday shopping season now in progress, we will finalize our fiscal 2007 operating plan.

At this time, based on the yet-to-be-finalized 2007 plan, we are projecting increases in both consolidated net sales and earnings per diluted share of approximately 10%. The major 2007 planning assumptions are as follows;

1. We expect to open approximately 70 Bed Bath & Beyond stores and relocate approximately 5 Bed Bath & Beyond stores in fiscal 2007 in order to improve their productivity. We also expect to open several Christmas Tree Shops and Harmon Stores. Approximately one-third of the Bed Bath & Beyond stores are expected to open in the fiscal first half of the year and the balance in the fiscal second half.

2. New Bed Bath & Beyond stores are expected to generate net sales of between $160 and $185 that is per square foot in the first 12 months of operations. Consolidated comp sales are modeled to increase from 3% to 5%.

3. We anticipate a reduction in operating profit margin for the full year.

4. We anticipate completing the share repurchase over the next two years.

5. Including the effect of the share repurchase, interest income is expected to remain flat or be slightly lower compared with fiscal 2006.

6. Provision for income taxes is estimated to be approximately 36.3%.

Information with respect to our 2007 capital spending program will be provided in our next call, after our business plan has been finalized.

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

1. Our consolidated Balance Sheet as of November 25, 2006 was strong and flexible. Cash and cash equivalents, and investment securities approximated $1.1 billion. This is even after completing share repurchases totaling approximately $950 million since 2004.

2. At November 25, 2006, merchandise inventories were on plan at approximately $1.6 billion compared with approximately $1.4 billion a year ago. As planned, inventories at the end of the fiscal third quarter were approximately 5% higher than a year ago on a per square foot basis, and inventories continue to be tailored by store to meet the anticipated demands of our customers.

3. Shareholders' equity at November 25, 2006, after taking into account $950 million in aggregate to-date share repurchases since 2004, was approximately $2.7 billion;

4. Capital expenditures through November 25, 2006, including outlays for new stores and existing store renovations, information technology enhancements, the acquisition of our corporate office building, and costs associated with the planned New Jersey distribution center, were approximately $235 million compared with $167 million for the corresponding year-ago period. Depreciation for the nine months came to approximately $96 million, up from approximately $80 million last year.

5. Company-wide total store space as of November 25, 2006 was approximately 27.3 million square feet.

As a reminder, our next conference call, to review our fiscal fourth quarter and full year results will be on Wednesday, April 11, 2007. We will also at that time update our fiscal 2007 and fiscal first quarter guidance.

If you have any questions, Ken and I will be in our offices this evening, December 20, to take your calls. As always, we very much appreciate your interest in Bed Bath & Beyond. Happy holidays and have a pleasant evening.

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