Bed Bath & Beyond Inc. (BBBY) reported solid second-quarter 2012 results. This includes the performances of the newly acquired World Market (Cost Plus Inc.) and Linen Holdings from their respective dates of acquisition.
Earnings in the second quarter rose approximately 5.4% to 98 cents per share from the year-ago earnings of 93 cents, within the company’s guidance range of 97 cents and $1.03 per share. However, Bed Bath & Beyond’s earnings missed the Zacks Consensus Estimate of $1.02 per share.
Sales
Bed Bath & Beyond's top line augmented almost 12.1% to $2,593.0 million in the second quarter from $2,314.1 million in the year-ago quarter. The company's top line also outpaced the Zacks Consensus Estimate of $2,566 million. The rise in sales was primarily driven by the recently completed acquisitions as well as the increase in comparable-store sales and new store openings.
The company has been witnessing incremental trends in comparable-store sales for the past several quarters, with the last notable downside in comps dating back to the second quarter of fiscal 2009. In the reported quarter, comparable-store sales rose 3.5% compared with a 5.6% rise in the prior-year quarter. Comps for the quarter exclude the results from the World Market and Linen Holdings acquisitions. This upside in comp-store sales for the period mainly came from an increase in both the number of transactions as well as average transaction amount.
Quarterly Synopsis
Gross profit margin for the quarter declined 130 basis points to 39.8% from 41.1% in second-quarter 2011. Margins suffered a downside mainly due to increased coupons and their redemption and shift in the mix of merchandise sold to lower margin categories as well as the inclusion of the World Market’s financial results.
During the quarter, Bed Bath’s higher payroll and occupancy expenses as well as higher advertising expenses led to an increase in selling, general and administrative expenses as a percentage of net sales, which eventually resulted in operating margin contraction of about 200 basis points to 14.1% from the prior-year quarter.
Financial Position
Bed Bath & Beyond ended the quarter with cash and cash equivalents of $744.5 million compared with $1,018.0 million in the year-ago quarter. Moreover, shareholders' equity at year-end stood at $3,920.1million versus $3,911.0 million in the prior-year quarter.
During the quarter, the company repurchased nearly 3.1 million of its outstanding shares, valued at about $199 million. Therefore, as of second-quarter end, the company had nearly $414 million remaining under its share repurchase program of $2.0 billion, authorized in December 2010.
Stores Update
In the second quarter of 2012, the company inaugurated 5 Bed Bath & Beyond stores, 3 buybuy BABY stores, 1 Christmas Tree Shops store and 2 Harmon Face Values stores. The company as of August 25, 2012 operated 1,000 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 258 stores under the names of World Market, Cost Plus World Market, and World Market Stores; 73 Christmas Tree Shop stores; 71 buybuy BABY stores and 47 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,449.
Bed Bath & Beyond is also a partner in a joint venture, which operates two stores in the Mexico City market under the name "Home & More."
Stepping into third-quarter 2012, Bed Bath has so far opened 1 buybuyBABY store and 3 World Market stores.
Management Guidance
Accounting for the additional 53rd week in fiscal 2012 and including the newly acquired businesses, management expects net sales to increase by 15% to 18% in the third quarter and by 24% to 26% in the fourth quarter. Further, the company projects a comparable store sales increase of 2% to 4% for both the third and fourth quarter.
On the cost side, the company expects depreciation in fiscal 2012 to be in the $195 – $205 million range. This coupled with assumptions of advertising expense similar to fiscal 2011 and continued mix shift toward low-margin categories is expected to deleverage operating profit margin for both the third and fourth quarter as well as for fiscal 2012.
Bed Bath & Beyond expects to deliver third-quarter 2012 earnings per share between 99 cents and $1.04. Moreover, the company continues to expect fiscal 2012 earnings per share to increase by a high-single to a low-double-digit percentage, including one additional week this fiscal year.
In addition to 22 stores opened so far in 2012, the company expects to open a total of 45 stores across all concepts in fiscal 2012. The company expects the 2012 mix of store openings by concept, excluding World Market, to remain similar to that of fiscal 2011.
Moreover, Bed Bath projects a total capital spending, including World Market and Linen Holdings, of about $300 million in fiscal 2012, mainly slated for new stores and existing store refurbishments, information technology enhancements and other important future projects.
Our Take
A strong countrywide network of stores coupled with the strategic effort to align merchandise according to regional climate and demographics offer a strong competitive advantage to Bed Bath & Beyond, while simultaneously strengthening its well-established position in the market.
Bed Bath & Beyond operates in a highly fragmented industry and faces competition from larger retailers, such as Target Corporation (TGT) and Wal-Mart Stores Inc. (WMT), as well as from departmental and specialty stores.
Currently, Bed Bath & Beyond holds a Zacks #2 Rank, implying a short-term Buy rating on the stock. The company retains a long-term Neutral recommendation on the stock.
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