Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 1Q13 Earnings Release
Prev. Ed.: May 21, 2013, 4Q12 & FY12 Earnings Update
Flash Update [Earnings update in progress; to follow]
On Jun 26, 2013, Bed Bath & Beyond reported earnings of $0.93 per share for first-quarter fiscal 2013, up 4.5% from the year-ago quarter’s earnings of $0.89 and in line with the Zacks Consensus Estimate. Earnings for the quarter and the prior-year quarter included a distinct net tax benefit of $0.01 and $0.06, respectively.
Quarter in Detail
The company’s top line jumped 17.8% to $2,612.1 million in the first quarter from $2,218.3 million in the year-ago quarter. The year-over-year rise in sales was primarily driven by the inclusion of World Market and Linen Holdings, an increase in comparable-store sales (comps) and new store openings. Moreover, Bed Bath & Beyond’s top line surpassed the Zacks Consensus Estimate of $2,600.0 million.
Comps rose 3.4%, primarily driven by an increase in the transaction count and the average transaction amount.
Gross profit came in at $1,033.0 million, up 16.4% from the comparable year-ago level. However, gross profit margin for the quarter declined 50 basis points (bps) to 39.5% from 40.0% in first-quarter fiscal 2012. Margins suffered a downside mainly due to increased coupons driven by increases in their redemptions as well as the average coupon amount, and shift in the mix of merchandise sold to lower margin categories.
Selling, general and administrative (SG&A) expenses surged 23.7% year over year to $709.9 million and as a percentage of sales it expanded 130 bps to 27.2%. During the quarter, Bed Bath & Beyond’s higher payroll and payroll-related expenses as well as higher advertising expenses led to an increase in SG&A expenses as a percentage of net sales.
Consequently, operating margin contracted about 170 bps to 12.4% from the prior-year quarter. However, in dollar terms, operating profit increased 3.1% to $323.1 million.
Financial Position
Bed Bath & Beyond ended the first quarter with cash and cash equivalents of $439.9 million compared with $1,075.2 million at the end of the prior-year quarter. Moreover, shareholders’ equity as of Jun 1, 2013, stood at $4,005.1 million versus $3,874.6 million as of May 26, 2012.
During the quarter, the company repurchased nearly 5.0 million of its outstanding shares, valued at about $324.0 million. Therefore, as of first-quarter end, the company had nearly $2.1 billion remaining under its share repurchase program of $2.5 billion, authorized in Dec 2012.
Stores Update
In the first quarter, Bed Bath & Beyond inaugurated 4 Bed Bath & Beyond store, 2 World Market stores, 1 buybuy BABY store and 1 Harmon Face Values store and closed 1 Christmas Tree Shops store. As of Jun 1, 2013, the company operated 1,008 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 266 World Market, Cost Plus World Market, and World Market Stores; 73 Christmas Tree Shop or andThat! stores; 83 buybuy BABY stores and 48 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,478.
Bed Bath & Beyond is also a partner in a joint venture, which operates 3 stores in the Mexico City market under the name "Home & More."
Stepping into the second quarter of fiscal 2013, Bed Bath has so far opened 1 buybuy BABY store.
Taking into account the 9 stores opened so far in fiscal 2013, the company anticipates its total store openings for the year to be in the mid-30s. Additionally, the company expects its joint venture in the Mexico City market to open 2 more stores in fiscal 2013.
Management Guidance
Management expects net sales to increase by 7% to 9% in the second quarter and by 5% to 7% for fiscal 2013. Further, the company projects a comparable store sales increase of 2% to 4% for both the second quarter and fiscal 2013.
On the cost side, the company expects depreciation in fiscal 2013 to be nearly $220.0 million. Additionally, driven by the above average sales projections and the consolidation of World Market and Linen Holdings, the company expects operating profit margin to deleverage for the second quarter and fiscal 2013.
Net interest expense for the second quarter and the full year is expected to include about $2.2 million and $8.7 million, respectively, in World Market net interest expense, mainly due to the addition of sale-leaseback obligations related to its distribution facilities. Further, tax provision for the second quarter is projected in the 35% – 36% range, while the full-year tax provision is estimated to be 36.5% to 37%.
Bed Bath & Beyond expects to deliver second-quarter fiscal 2013 earnings per share between $1.11 and $1.16. Moreover, the company projects fiscal 2013 earnings per share in the range of $4.84 – $5.01, consistent with the previous projection of mid-single-digit to low-double-digit percentage growth.
Additionally, Bed Bath & Beyond projects a total capital spending, including that of World Market and Linen Holdings, of about $350 million in fiscal 2013, mainly slated for new stores and existing store refurbishments, information technology enhancements and other important future projects.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON BBBY.
Portfolio Manager Executive Summary[Note: only highlighted material has been changed]
Bed Bath & BeyondInc. is a specialty retailer of domestic goods and home furnishings in the United States and Canada. The company expanded its operations through acquisitions of Christmas Tree Shops, a value retailer selling giftware and household items, and Harmon, a health and beauty care retailer.
Of the 21firms in the Zacks Digest Group providing ratings on the stock, 14provided positive ratings,6assigned neutral ratingswhile 1rendered a negative rating on the stock.
The outlook of the firms on Bed Bath is dealt with in the following paragraphs:
Positive or equivalent (66.7%; 14/21 firms): These firms regard Bed Bath as a world-class retailer with an impressive economic model. In addition to benefiting from the rationalization of industry competitors, the company’s best-in-class merchandising continues to attract customers.Going forward, the firms expectBed Bath to benefit from its ongoing investments, including the purchase of Cost Plus World Market and Linen Holdings, initiatives to better position its core coupon offerings to lead comps growth and improve its lagging e-Commerce assortments.
Moreover, the firms see excellent growth opportunities via e-Commerce and international expansion in the longterm. According to them, management’s effort of uniformity in execution is witnessed through a strong balance sheet and its emphasis on return on invested capital.
The bullish firms believe that the company’s aggressive share repurchase strategy, as evident from the new $2.5 billion share repurchase program authorized in Dec 2012, reflects its superior cash generation abilities and demonstrates the management’s confidence that Bed Bath is well-positioned to meet its long-term strategic goals.
Further, the company, a market leader remains well-positioned to capture market share in the large and fragmented home goods industry. The firms with a bullish outlook view any pullback in the stock as an opportunity for entry, given Bed Bath’s industry dominance, visible square footage growth potential, future growth potential for newer concepts, superior competitive positioning, solid financial condition and attractive valuation,especially inthe light of Bed Bath’s impressive returns on capital and its leading market position.
Further, the firms believe that the company will benefit from the Cost Plus acquisition, which has the potential to drive comps upside going forward.
Neutral or equivalent (28.6%; 6/21firms):According to thesefirms, although Bed Bath is a successful home furnishingretailer, the fearof competition in the e-Commerce business force them to remain cautious. However, some of the firms are impressed by the company’s initiatives in cost control and seem to have confidence in its ability to achieve long-term growth. The firms, therefore, look upon Bed Bath as a financially sound and highly profitable retailer with a proven management team.
According to the firms, the primary concerns facing the stock going forward are difficult multi-year comparisons, higher input costs and a further slowdown in consumer spending on discretionary products. Given the slower business trends,the neutrally biased firms believe that the stock will remain slightly range‐bound in the near term. However, these firms remain confident of Bed Bath’s valuation, which yields a favorable risk/reward, given the company’s solid execution and growth prospects.
Negative or equivalent (4.7%; 1/21 firms):This firm remains concernedas the company is plagued with issues of weaker sales trends, market share losses andgross margin erosiondue to couponing. Though impressed by the company’s share buyback program, the firm notes that the ongoing operating challenges demand a more balanced approach to reward shareholders.
May 21, 2013
Overview[Note: only highlighted material has been changed]
The firms identified the following factors for evaluating the investment merits of Bed Bath:
Key Positive Arguments / Key Negative Arguments- Strong cash flow generation is expected to assist management in returning value to shareholders through additional share repurchases.
- Favorable regional positioning of Bed Bath stores gives it a distinct competitive edge.
- Expansion of Christmas Tree Shops is expected to be a significant growth driver going forward.
- Comps are expected to increase based on the company’s merchandising strategy and customer service.
- Maturity of the core Bed Bath & Beyond concept hampers growth opportunities for the company.
- Uncertain economic and consumer spending environment and rising interest rates are near-term concerns.
- Increased competitive pressure is expected from departmental stores and other off-price retailers.
- Weakness in the housing market could dampen prospects for the home furnishings business.
- The new concept, Christmas Tree Shops (CTS), could be a less consistent operation compared to the core Bed Bath stores.
Based in Union, N.J., Bed Bath & Beyond operates specialty retail stores in the United States and Canada, including Bed Bath & Beyond stores (BBB), Harmon stores, and Christmas Tree Shops stores (CTS). Bed Bath's domestic merchandise line includes bed linens, bath accessories, and kitchen textiles, and the company’s home furnishings line includes cookware, dinnerware, glassware, and basic houseware. Harmon is a health and beauty care retailer. CTS is a retailer of giftwares and household items, selling an assortment of domestic merchandise and home furnishings at low prices in many categories, including home décor, houseware, food, paper goods, and seasonal products. As of Mar 2, 2013, the company operated 1,004 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 264 World Market, Cost Plus World Market, and World Market Stores; 74 Christmas Tree Shop or andThat! stores; 82 buybuy BABY stores and 47 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,471. Bed Bath & Beyond is also a partner in a joint venture, which operates 2 stores in the Mexico City market under the name "Home & More". Additional information is available on the company’s website Bath’s fiscal year ends on Feb 28.
May 21, 2013
Long-Term Growth[Note: only highlighted material has been changed]
Bed Bathis a leading operator of retail stores in the U.S. and Canada,especiallyin the home furnishings industry. The company’s acquisitions are providing expanded distribution capabilities, which will likely offer meaningful long-term growth opportunities. Bed Bathcontinues to outperform its competitors due to its consistent fundamental execution and its strong balance sheet.
The company has the opportunity to boost sales over the long term by opening new Bed Bath stores; adding and improving Christmas Tree Shops and the Harmon business, growing the new buybuy BABY business, and exploring international expansion; offering new and innovative merchandise, and adding Harmon departments to existing Bed Bath, Christmas Tree, and Baby stores.
Moreover, the firms have identified 3 distinct sales and margin drivers: new customers to drive sales and comps, less gross margin pressure from coupon redemptions, and lower advertising expense from reduced coupon distribution. The company’s concepts, Harmon, CTS and BBB, have strong cross merchandising opportunities, which will drive store productivity and have organic growth potential for the longer term.
Bed Bath & Beyond is a specialist in the home goods business and expects to gain market share. Despite being negatively impacted by the difficult times prevalent in the industry, it has the potential to emerge stronger, with expansion opportunities boosting its prospects for long-term growth.
Over the long term, some firms see immense potential in Bed Bath. These firms believe the company’s future will be characterized by several distinct performance drivers, including a well-differentiated assortment at the core Bed Bath & Beyond and cross-concept merchandising evolving (HBA, food) to drive existing store comps, and marketing and coupons that will continue to drive traffic. Though the firms see numerous concerns on competitive grounds for the company, they remain optimistic about its ability to successfully evolve its merchandise strategy and remain useful to consumers.
The firms remain encouraged by Bed Bath’s efforts to improvenot only the shopping experience at stores but also online. They note that the company’s e-Commerce sales are growing at a rapidpace. Going forward, the company’s major growth initiatives include the development of an enhanced website to improve customer experience; the opening of a new 800,000 square-feet e-Commerce fulfillment center in Pendergrass, Ga.; the relocation of the Farmingdale and Garden City, New York offices to the corporate headquarters in Union, N.J.; and the initial phase of a new IT data center to support the ongoing technology initiatives.
May 21, 2013
Target Price/Valuation[Note: only highlighted material has been changed]
Rating DistributionPositive / 66.7%
Neutral / 28.6%
Negative / 4.7%
Avg. Target Price / $72.88↑
Highest Target Price / $85.00
Lowest Target Price / $59.00↑
No. of Analysts with Target Price/Total / 17/21
Risks to the price target include but are not limited to the following: macroeconomic variables that could influence financial performance; seasonality; competitive forces; market saturation; higher interest rates; gas prices, a slowdown in the housing market; and volatile job growth.
Recent Events[Note: only highlighted material has been changed]
On Apr 10, 2013, Bed Bathreported robust 4Q12 & FY12 results. Bed Bath’s reported earnings of $1.68 per share for the quarter was 13.5% higher from the year-ago quarter’s earnings of $1.48 and remained in line with the Zacks Consensus Estimate.The company’s top line jumped almost 24.5% to $3,401.4 million in 4Q12 from $2,732.3 million in the year-ago quarter while remaining almost in line with the Zacks Consensus Estimate of $3,402.0 million.For FY12, Bed Bath & Beyond reported earnings of $4.56 per share, up nearly 12% from $4.06 per share earned in FY11, and surpassed the Zacks Consensus Estimate by a penny. Net sales for the fiscal escalated 14.9% to $10,914.6 million but missed the Zacks Consensus Estimate of $10,918.0 million.
Revenue[Note: only highlighted material has been changed]
Provided below is a summary of revenues as compiled by Zacks Research Digest:
Revenue ($ M) / 4Q11A / 3Q12A / 4Q12A / 1Q13E / 2011A / 2012A / 2013E / 2014EDigest High / $2,732.3 / $2,702.0 / $3,401.5 / $2,627.6 / $9,500.0 / $10,915.0 / $11,717.0 / $12,485.7
Digest low / $2,732.0 / $2,701.8 / $3,401.0 / $2,567.0 / $9,499.9 / $10,914.6 / $11,516.1↑ / $11,977.5↑
Digest Average / $2,732.3 / $2,701.8 / $3,401.5 / $2,606.3 / $9,499.9 / $10,914.6 / $11,648.0 / $12,290.2↑
Y-o-Y Growth / 9.1% / 15.3% / 24.5% / 17.5% / 8.5% / 14.9% / 6.7% / 5.5%↑
Sequential Growth / 16.6% / 4.2% / 25.9% / -23.4%
The Zacks Digest average total revenue was $3,401.5 million in 4Q12, reflecting an increase of 24.5% from $2,732.3 million in 4Q11 and up 25.9% from $2,701.8 million in 3Q12.The year-over-year rise in sales was primarily driven by the acquisitions made last year as well as an increase in comparable-store sales (comps) and new store openings.
In 4Q12, comparable-store sales rose 2.5%,primarily driven by an increased average transaction amount partially offset by the decline in number of transactions. Comps for the quarter exclude the results from the acquisitions of World Market and Linen Holdings.
The Zacks Digest average total revenue was $10,914.6 million in FY12, reflecting an increase of 14.9% from $9,499.9 million in FY11.Comparable-store sales, which exclude the results from the acquisitions of World Market and Linen Holdings, increased 2.7% in FY12.
Guidance
Including the newly acquired businesses, management expects net sales to increase by 17%–19% in 1Q13 and by 5%–7% in FY13. Further, the company projects comparable store sales increase of 2%–4% for both the above-mentioned periods.
Please refer to the separately published spreadsheet on Bed Bath for additional details and updated forecasts.
Margins[Note: only highlighted material has been changed]
The Zacks Digest average gross profit for 4Q12 was $1,394.9 million, up 19.9% y/y and 29.9% sequentially. Gross margin for the quarter contracted 160 basis points (bps) y/y to 41.0%. Gross margins suffered a downside mainly due to increased coupons and their redemption, increased markdowns and shift in the mix of merchandise sold to lower margin categories. Gross profit increased 11.6% to $4,388.8 million in FY12 from $3,930.9 million in FY11. However, gross margin for FY12 contracted 120 bps to 40.2% compared with 41.4% in FY11.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 4Q11A / 3Q12A / 4Q12A / 1Q13E / 2011A / 2012A / 2013E / 2014EGross Margin / 42.6% / 39.8% / 41.0% / 39.3% / 41.4% / 40.2% / 39.9% / 39.6%
Operating Margin / 20.2% / 13.4% / 17.6% / 12.8% / 16.5% / 15.0% / 14.9% / 15.0%
Pre-Tax Margin / 20.3% / 13.3% / 17.6% / 12.8% / 16.5% / 15.0% / 14.9% / 15.0%
Net Margin / 12.8% / 8.6% / 11.0% / 7.9% / 10.4% / 9.5% / 9.2% / 9.3%
Selling, general and administrative (SG&A) expense came in at $796.8 million in 4Q12,up 30.0% y/y from $612.9 million in 4Q11.During the quarter, Bed Bath’s higher payroll and occupancy expenses as well as higher advertising expenses led to an increase of 100 bps to 23.4% in SG&A expenses as a percentage of net sales. For FY12, SG&A expenses increased 16.4% to $2,750.6 million while as a percentage of sales it expanded 30 bps to 25.2%.