Bed Bath & Beyond Inc (BBBY) 2014 Q3 法說會逐字稿

Welcome to the Bed Bath & Beyond third quarter of fiscal 2014 results conference call.

All participants are in a listen only mode for the duration of the call.

This conference is being recorded.

A rebroadcast of this conference will be available beginning on Thursday, January 8, 2015 at 6:30 p.m.

through 6:30 p.m.

Eastern Time on Saturday, January 10, 2015.

To access the rebroadcast, you may dial 888-843-7419 with a passcode ID of 38655099.

At this time it is my pleasure to turn the conference over to Janet Barth, Vice President, Investor Relations.

Please go ahead.

Good afternoon and thank you for joining us today for our earnings call to review our third quarter of fiscal 2014 results.

I am joined by Steven Temares, Bed Bath & Beyond's Chief Executive Officer; and Sue Lattmann, Chief Financial Officer and Treasurer.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements, including statements about, or references to, our internal models and our long-term objectives.

All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today.

Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties.

The Company undertakes no obligation to update or revise any forward-looking statements, as events or circumstances may change after this call.

Our earnings press release, dated January 8, 2015, can be found in the investor relations section of our website, www.bedbathandbeyond.com.

For those of you who might not have had a chance to read the press release, here are some highlights:

Our third quarter of fiscal 2014 net earnings per diluted share were $1.23, which includes approximately $0.04 per diluted share of net benefits for certain non-recurring items, including credit card fee litigation.

Third-quarter net sales were $2.9 billion, an increase of approximately 2.7% over the prior-year period.

Comparable sales increased by approximately 1.7% in the third quarter.

For the fourth quarter of 2014, our model continues to show net earnings per diluted share in the range of approximately $1.78 to $1.83.

We are now modeling full-year net earnings per diluted share of approximately $5.05 to $5.09, which reflects our third quarter actual results and our current fourth quarter model.

Later in the call, Sue will discuss our third quarter financial results in more detail as well as provide an update on our modeling assumptions for the fourth quarter of fiscal 2014 and provide some preliminary thoughts regarding fiscal 2015.

But first, let turn the call over to Steve.

Thank you, Janet, and again, welcome to Bed Bath & Beyond.

We are thrilled that you have joined us.

And to our listeners, good afternoon, and I would like to wish everyone a healthy and happy new year.

The retail environment is ever changing, and Bed Bath & Beyond has more than 43 years of experience navigating the challenges of this competitive and dynamic industry.

This past holiday season reflects this continuing evolution in retailing, as we saw more customers interact with us online and through their mobile devices than ever before.

True to our history, and as our successful track record shows, while never satisfied, overall we were able to meet the needs of our customers, and we are confident in our ability to prosper in this evolving retail environment.

We continue to maintain our philosophy of providing great service and great selection, at the right value.

And now we can do this in more ways than ever.

Our ability to interact with our customers wherever, whenever, and however they express their lifestyles and habits, and move through their various life stages, creates a powerful customer value proposition, and a loyal customer base.

By combining our services and merchandise offerings, together with the ability to utilize the significant data available to us about our customers' preferences, we are excited to have the opportunity to become more dynamic, and more relevant to our customers.

As Janet mentioned, and as Sue will discuss in more detail, Bed Bath & Beyond reported net earnings per diluted share of $1.23, which includes approximately $0.04 per diluted share of net benefits for certain non-recurring items, including credit card fee litigation on net sales of $2.9 billion and a comp sales increase of approximately 1.7%.

And we continue to model net earnings per diluted share in the range of $1.78 to $1.83 for the fourth quarter.

As a reminder, with respect to our comparable sales metric, it includes the sales transactions consummated through all of our retail channels, including in-store, online and through a mobile device.

Today more than ever, customers are taking advantage of our omni-channel environment by using more than one platform to make their purchases.

For example, a customer may go to our store and be assisted by an associate to create a wedding or baby registry.

This registry gift could then be purchased from one of our websites.

Or a shopper may research a particular item on our websites, and read various customer reviews, before visiting a store to make a purchase.

This same customer may choose to execute the sale via a mobile device and choose either in-store pickup, or home delivery, which could then be fulfilled from a distribution facility, from a store, or directly from a vendor.

As we have consistently said, we believe an integrated shopping experience must exist among all channels to provide a seamless and efficient customer experience.

Today our customers have many convenient options to interact with us to find what they need, when and how they want it.

Another example of our seamless shopping experience is that we accept returns in-store without regard to the channel in which the purchase was consummated.

It is worth noting that in the case of an item being purchased online and returned to a store, the sales return actually results in a reduction in store sales even though the sale was consummated in a different channel.

Our highly integrated retail operation makes it difficult for us to reasonably track the channel in which a sale was initiated.

However, as we did last quarter, we can provide directional information on how the sale was completed.

With all this in mind, during the third quarter of fiscal 2014, comparable sales consummated through customer facing online websites and mobile applications grew in excess of 40%, while comparable sales consummated in our stores were relatively flat.

As a reminder, we re-platformed both the buybuy BABY and Bed Bath & Beyond websites during the second quarter of fiscal 2013.

Our commitment to take care of our customer is directly related to many of our capital investments, including our investments in technology.

We believe new features and improved technology have created a better customer experience, and are contributing to our online sales growth.

We recognize that the capital investments we are making and incremental expenses related to them are increasing our technology costs and depreciation, as well as other expenses, as a percentage of net sales in the short term.

However, we are confident we are making the appropriate investments to position our Company for long-term profitable growth, and to further enhance shareholder value in an evolving retail environment.

At this time I'd like to provide an update on some of the progress we're making.

We continue to add new functionality and assortment to our selling websites, mobile sites, and apps.

Today we have more than 200,000 unique SKUs available online across our website, representing an increase of more than 40% since last January.

Many of these new SKUs can be shipped to our customers directly from our vendors.

We have introduced new categories online as well as expanded our assortments in others.

Our online offerings now include such things as a selection of jewelry and watches, and we have greatly expanded our online merchandise offerings for many categories, such as audio and electronics, furniture, lighting, rugs, pet care, as well as lawn and garden.

Also, on our Bed Bath & Beyond website, you can now purchase a variety of greenhouses and herb gardens as well as some interesting finds, such as motorized scooters, electric snow throwers, doghouses, aviaries, and chicken coops.

Further, to support our merchandise expansion in home furnishings in areas as such as living room, dining room, and bedroom sets, we have enhanced our vendor relationships and delivery capabilities to allow for the shipment of larger items directly to our customer's home.

Our enhanced delivery capabilities give our customers the choice of several delivery options ranging from curbside to white glove, which could include assembly and removal of product packaging.

We have also expanded our online registry services for Bed Bath & Beyond to enable customers to schedule an appointment for an in-store wedding consultation.

In addition, we now have the capability to accept PayPal transactions online and we are continuing to expand the acceptance of international credit cards.

And, for international orders, we have partnered with a third party company to better enable the shipment of merchandise overseas.

We are also continuing our deployment of systems, equipment and increased bandwidth in our stores.

These in-store system enhancements enable our associates to optimize our shipping costs for home deliveries, as well as, to improve inventory ordering and workforce management.

They will also enable us, over time, to develop a digital shopping experience that will provide real-time, personalized offers and recommendations that can be sent directly to a customer's mobile device.

Wi-Fi access to customers and store associates will enable a more dynamic shopping experience.

Further, we also plan to launch a new robust point-of-sale system that will, in conjunction with other system enhancements, over time, allow customers to use their mobile device in our stores to shop and make purchases, to receive and redeem personalized coupons, as well as receive a selection of multiple item price deals to enhance their shopping experience.

These new system enhancements will also enable customers to make payments in foreign currencies, and receipts to be issued in foreign languages.

In addition, we are also creating more flexible fulfillment options to allow us to deliver orders more quickly and cost effectively.

For example, to support our growing direct-to-consumer shipments, and the growth of our health and beauty care offerings, we plan to open an additional distribution facility in Las Vegas in early 2015.

As a reminder, product can ship directly from one of our distribution facilities, from one of our stores, or directly from our vendors.

Looking ahead, we will:

Continue to enhance and improve upon our online search and navigation capabilities, which is one way to better understand our customer's preferences and deliver a more personalized shopping experience;

Continue to enhance the shopping experience on our mobile websites by optimizing the mobile display capabilities;

Continue to strengthen and deepen our IT, analytics, marketing and e-commerce groups;

Enable our customers to manage their coupons in one place on our mobile apps;

Expand our buy online pick up in-store feature into Canada; and

Expand our online registry services for buybuy BABY, including Canada, to enable customers to schedule an appointment for in-store baby registry consultation.

We are pleased by the progress and adoption of our omni-channel initiatives.

We're also very pleased by our customers' acceptance of our ever-increasing and differentiated merchandise assortments.

We continue to leverage our product offerings, services and promotional activities, across all channels, concepts and countries in which we do business, so that we can do more for, and with, our customers.

On the real estate side, our third quarter activities included opening four new Bed Bath & Beyond stores, one buybuy BABY store, and one Cost Plus World Market store, and the closing of two Bed Bath & Beyond stores.

Including stores opened to date, we are still on track to open approximately 22 new stores company-wide during our 2014 fiscal year.

During this current fourth quarter, we opened our first buybuy BABY store in Canada.

On December 5th, we opened our doors in Edmonton.

We are excited about the opportunity to grow our baby offerings throughout Canada.

It is our intent to continue to optimize our store operations and market coverage by expanding, downsizing, renovating, opening, closing and relocating stores.

We continue to actively manage our real estate portfolio in a manner that permits store sizes, layouts, locations and offerings to evolve over time to optimize market profitability.

Throughout the United States and Canada, we believe we have the opportunity to open stores in new and existing markets across all our concepts.

Our goal is to provide more products, services and solutions to our customers, and our stores continue to play a vital role in that strategy.

Additionally, in connection with leveraging our merchandise assortments and optimizing our operations, we continue to expand across selected stores the number of specialty departments such as, health and beauty care, baby, specialty food and beverage.

Although the number of these placements continues to evolve in Bed Bath & Beyond stores alone, we have nearly 200 locations that have at least one specialty department already, and we believe there is an opportunity to add at least one more additional specialty departments to more than one-third of these stores.

Also, we believe there's an opportunity to launch specialty departments in roughly 240 Bed Bath & Beyond stores that currently do not have one.

We are also a partner in a Mexican joint venture which opened one Bed Bath & Beyond store earlier this year and currently operates five Bed Bath & Beyond stores in Mexico City market.

We continue to be excited about Mexico and, with our partners, plan to open additional stores in the future.

And, as you are probably aware, in addition to our retail operations, we are also growing our complementary institutional business, with the potential to utilize our existing vendor base to provide products and services to hospitality, travel and other institutional customers.

I'll now turn the call over to Sue to review our quarterly financial results and our planning assumptions.

Sue...

Thank you, Steve.

Net sales for the fiscal third quarter were approximately $2.9 billion, approximately 2.7% higher than net sales in the prior year period.

Of this increase, approximately 60% was attributable to the increase in comp sales, and the remainder is primarily from new stores.

Comparable sales for the fiscal third quarter increased approximately by 1.7% this year compared with an increase of 1.3% last year.

The comparable sales increase this year was attributed to increases in both the average transaction amount and the number of transactions.

Gross profit for the fiscal third quarter was approximately 38.4% of net sales, compared to approximately 39.2% of net sales in the corresponding period a year ago.

The decrease in the gross profit margin as a percentage of net sales, in order of magnitude, was primarily attributed to first, an increase in coupon expense, resulting from an increase in redemptions, partially offset by a slight decrease in the average coupon amount; and second, an increase in net direct-to-customer shipping expense, which continues to be impacted by a reduction in bedbathandbeyond.com's free shipping threshold to $49, which is due to anniversary next month.

Selling, general and administrative expenses for the third quarter were approximately 26.4% of net sales, as compared to 26.1% of net sales in the prior year period.

This 30 basis point increase in SG&A as a percentage of net sales was primarily attributable to increased technology expenses and related depreciation, and increased advertising expenses, partially offset by the year over year net benefits of certain non-recurring items, primarily relating to credit card fee litigation.

The increase in technology expenses and related depreciation, as a percentage of net sales represented approximately 40 basis points for the quarter.

The year over year favorable net benefits of certain non-recurring items, as a percentage of net sales, represented approximately 30 basis points for the quarter.

Reflecting the movements in gross profit margin and SG&A expenses, the third quarter operating profit margin of 12% was 110 basis points lower when compared with the same period last year.

Net interest expense of $19.6 million in the third quarter relates primarily to interest associated with our $1.5 billion of senior unsecured notes issued in July 2014.

Our provision for income taxes for the fiscal third quarter was approximately 32.3% compared to approximately 36.9% in the third quarter of fiscal 2013.

The third quarter provisions included net after-tax benefits of approximately $16.7 million this year and $4.9 million last year due to distinct tax events occurring during the quarters.

Year to date net after-tax benefit for 2014 were $19.3 million versus $17.2 million for the comparable period in 2013.

Our quarterly provisions for income taxes continue to fluctuate as taxable events occur and exposures are reevaluated.

Considering all of this activity, net earnings per diluted share were $1.23 for the third quarter of 2014, an increase of 9.8% compared to $1.12 per diluted share in the third quarter of fiscal 2013.

Now let's turn to the balance sheet.

As of November 29th, 2014 our cash and cash equivalents and investment securities were approximately $1.3 billion.

Retail inventories at cost were approximately $3 billion or $70.43 per square foot, an increase of approximately 5.3% on a per square foot basis over the end of last year's third quarter.

Retail inventories continue to be tailored to meet the anticipated demands of our customers, and are in good condition.

Capital expenditures for the first nine months of fiscal 2014 were approximately $231 million.

Slightly more than half of these expenditures were for technology enhancements, with the remaining balance being used primarily for new stores, existing store improvements, and other projects important to our future.

Consolidated shareholders' equity at the end of the quarter was approximately $3.2 billion, net of the initial shares delivered under the $1.1 billion accelerated share repurchase program which commenced in July 2014.

The Company's $2.0 billion share repurchase authorization had a remaining balance of approximately $1.8 billion at the end of the quarter and is expected to be completed during fiscal 2016.

Regarding our store count, we currently operate 1,512 stores, consisting of 1,020 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico, and Canada, 270 stores under the name World Market, Cost Plus World Market, or Cost Plus, 94 buybuy BABY stores - including our newest and first store in Canada, 78 stores under the names Christmas Tree Shops, Christmas Tree Shops andThat!, or andThat!, and 50 stores under the names Harmon or Harmon Face Values.

As of November 29, 2014, consolidated store space, net of openings and closings for all of our concepts, was approximately 43 million square feet, an increase of approximately 1.1% over the prior-year period.

Turning to the remainder of fiscal 2014, the following are some of our planning assumptions:

Based upon sales to date and our assumptions for the rest of the fourth quarter, we continue to model fourth-quarter comp sales to be in the range of 4% to 5%.

This will bring the modeled full-year comp sales to a range of 2.4% to 2.7%.

Consolidated net sales are modeled to increase in the range of approximately 4.4% to 5.4% for the fourth quarter.

This results in a modeled full year consolidated net sales increase of approximately 3.4% to 3.6%.

Assuming these sales levels, we are modeling slight deleverage in gross profit margin for the fourth quarter, and deleverage for the full year.

Contributing to the modeled deleverage are increases in coupon expense and net direct to customer shipping expense.

While any free shipping threshold is subject to change, our current $49 free shipping threshold at bedbathandbeyond.com is due to anniversary next month.

For SG&A, we are modeling slight deleverage, as a percentage of net sales, in both the fourth quarter and full year.

The modeled SG&A includes increases in technology expense and depreciation related to our ongoing investments.

As Steve mentioned, we believe the technology investments we are making will produce long-term benefits and improve our omni-channel capabilities across all of our concepts.

Depreciation for fiscal 2014 is expected to be approximately $240 million.

Our model for interest expense for the fourth quarter is approximately $20.3 million, including the interest related to our $1.5 billion of senior unsecured notes, and the interest resulting from our sale-leaseback obligations related to certain distribution facilities.

The fourth-quarter tax provision is estimated to be in the mid- to-high 30s percentage range, with expected variability as distinct tax events occur.

We expect to continue generating positive operating cash flow.

Capital expenditures for fiscal 2014 are now planned to be $330 million, with slightly more than half for technology enhancements.

As a reminder, these expenditures remain subject to the timing and composition of projects.

Our model reflects continued repurchases of shares under our $2.0 billion share repurchase program, with an assumed completion during fiscal 2016, which may be influenced by several factors, including business and market conditions.

The $1.1 billion accelerated share repurchase program which commenced in July 2014, was completed in December 2014 as planned.

In connection with the share repurchase activity, which includes assumptions about future market conditions, including share price and trading volume, we are continuing to model diluted weighted average shares outstanding to be approximately 178 million for the fourth quarter, and 189 million for the full year.

Based on these and other planning assumptions, we are continuing to model net earnings per diluted share to be approximately $1.78 to $1.83 for the fourth quarter, now bringing the full year modeled net earnings per diluted share to a range of $5.05 to $5.09.

I would like to remind you that the timing and amount of our accelerated share repurchase impacts the quarterly and full year diluted weighted average shares outstanding differently.

As you can see from our model of diluted weighted average shares outstanding, and as we explained last quarter, the impact on our individual quarters will be greater than the impact on the full year.

As a result, the sum of the net earnings per diluted share for the four quarters of the year, representing the three fiscal quarters already reported, and the estimated earnings per diluted share for the fiscal fourth quarter, are greater than the estimated full year net earnings per diluted share by approximately $0.06 to $0.07.

Turning to fiscal 2015, while we are in the process of completing our annual budget, our preliminary modeling assumptions include the following:

We expect to make continued investments in technology and in our omni-channel capabilities.

We also anticipate higher technology expenses and related depreciation - in both dollars and as a percentage of net sales - in conjunction with these technology investments.

We anticipate opening approximately 30 stores across all concepts.

We expect to continue our program of renovating or repositioning stores within markets where appropriate.

As we have previously discussed, while any free shipping threshold is subject to change, our current $49 free shipping threshold at bedbathandbeyond.com is due to anniversary next month.

We anticipate interest expense of approximately $82 million, including the interest related to the $1.5 billion of senior unsecured notes and the interest from our sale/leaseback obligations related to certain distribution facilities.

We expect continuing variability in our quarterly tax rate.

Our model reflects continued repurchases of shares under our $2.0 billion share repurchase program, with an assumed completion during fiscal 2016, which may be influenced by several factors, including business and market conditions.

We will provide further information related to the fiscal first quarter and full year of 2015 on our next quarterly conference call on April 8, 2015.

I would now like to turn the call back to Steve.

Thank you, Sue.

I'd like to go back to something that I mentioned earlier.

This past holiday season reflects the continuing evolution in retailing, as we saw more customers interact with us online and through their mobile devices than ever before.

The investments we continue to make in our omni-channel capabilities are to position our Company for long-term success.

Our primary focus has, and always will be, to take care of our customer.

This has been our mission for the past 43 years and it continues to be the foundation for all of our efforts: our objective is to continue to take care of our customers wherever, whenever, and however they wish to interact with us.

We are customer centric.

The ever-evolving services and product offerings we can provide our customers, together with our use of the growing data and analytic tools at our disposal to understand how to best serve our customers, married with personalized marketing efforts, will allow us to be ever more relevant to and do more for, and with, our customers over time.

As we have repeatedly said, the success of our Company is due to the tremendous efforts of our more than 60,000 associates, as well as our unique and decentralized culture that enables us to respond quickly to market and channel demands and changing economic conditions.

Through the commitment of our associates, and the greatly valued contributions of our merchandise and service providers, we look forward to continuing to satisfy our customers and by doing so, improving our competitive position in the merchandise categories we offer, across the channels and within the countries in which we operate.

As we enter a new calendar year, on behalf of Warren, Len and our entire Board of Directors, I would like to express our sincere gratitude to all our associates, customers and business partners.

And to all of our listeners, we wish each of you a healthy and happy 2015.

As always, we look forward to answering your questions, and appreciate the opportunity to speak with you this evening.

Sue, Janet and Ken Frankel will be in their offices and will ensure that all of the calls we receive will be returned tonight.

If you have any questions, we encourage you to call.

Thank you.

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

Thank you for participating.

You may now disconnect.