Bed Bath & Beyond Earned 51 Cents a Share

Now it’s official: For the August quarter, Bed Bath & Beyond (BBBY) earned 51 cents a share (see earnings call transcript). That’s not too much of a surprise since it’s what the company said to expect.
Well…they were right!
Sales were up 12.3% to $1.607 billion. Interestingly, net income was nearly the exact same as last year. The difference is that there are now 17 million fewer shares.
Although Bed Bath & Beyond doesn’t pay a dividend, last year the company bought back $600 million worth of stock. That’s a frickin ginormous amount for a company this size (5.7% of current market value).
As I’m sure you know by now, I’m a big fan of Bed Bath & Beyond. Let’s geek out at some of stats:

Quarter	Sales	Gross Profit	Operating Profit	Net Profit	EPS
May-99	$356,633	$146,214	$28,015	$17,883	$0.06
Aug-99	$451,715	$185,570	$53,580	$33,247	$0.12
Nov-99	$480,145	$196,784	$50,607	$31,707	$0.11
Feb-00	$569,012	$238,233	$77,138	$48,392	$0.17
May-00	$459,163	$187,293	$36,339	$23,364	$0.08
Aug-00	$589,381	$241,284	$70,009	$43,578	$0.15
Nov-00	$602,004	$246,080	$64,592	$40,665	$0.14
Feb-01	$746,107	$311,802	$101,898	$64,315	$0.22
May-01	$575,833	$234,959	$45,602	$30,007	$0.10
Aug-01	$713,636	$291,342	$84,672	$53,954	$0.18
Nov-01	$759,438	$311,030	$83,749	$52,964	$0.18
Feb-02	$879,055	$370,235	$132,077	$82,674	$0.28
May-02	$776,798	$318,362	$72,701	$46,299	$0.15
Aug-02	$903,044	$370,335	$119,687	$75,459	$0.25
Nov-02	$936,030	$386,224	$119,228	$75,112	$0.25
Feb-03	$1,049,292	$443,626	$168,441	$105,309	$0.35
May-03	$893,868	$367,180	$90,450	$57,508	$0.19
Aug-03	$1,111,445	$459,145	$155,867	$97,208	$0.32
Nov-03	$1,174,740	$486,987	$161,459	$100,506	$0.33
Feb-04	$1,297,928	$563,352	$231,567	$144,248	$0.47
May-04	$1,100,917	$456,774	$128,707	$82,049	$0.27
Aug-04	$1,273,960	$530,829	$189,108	$120,008	$0.39
Nov-04	$1,305,155	$548,152	$190,978	$121,927	$0.40
Feb-05	$1,467,646	$650,546	$283,621	$180,980	$0.59
May-05	$1,244,421	$520,781	$150,884	$98,903	$0.33
Aug-05	$1,431,182	$601,784	$217,877	$141,402	$0.47
Nov-05	$1,448,680	$615,363	$205,493	$134,620	$0.45
Feb-06	$1,685,279	$747,820	$304,917	$197,922	$0.67
May-06	$1,395,963	$590,098	$148,750	$100,431	$0.35
Aug-06	$1,607,239	$678,249	$219,622	$145,535	$0.51

The first thing you’ll notice is a big spike in business during the February quarter due to the holiday shopping season. Retailers live or die by the holidays.
Let’s break down the numbers. The first thing I like to look at is a company’s margins. First we’ll start with gross margins:

Ah, tres bien! This shows Bed Bath & Beyond’s gross margins for the trailing four quarters. As you can see, gross margins have climbed very nicely. In short, they can charge $7 for something that costs them $4 to make. We like that. We like that a lot.
This is also referred to as a company’s variable costs. Let’s say you run a lemonade stand. Your variable cost is simply how much it costs to make your lemonade. For each unit you sell, your variables costs should rise by the same percent. Variable costs are always a function of sales. That’s why gross profit margins don’t change much, and it speaks well of the company that gross margins have climbed in recent years.
Now let’s look at operating margin and net profit margin:

Again, these graphs are very good. The red line is operating margin, and the black is net margin. Don’t worry about the recent downturn in operating margin. For the last four quarters, Bed Bath & Beyond has implement Statement of Financial Accounting Standards 123(R) which accounts for stock-based compensation. That’s shaved…oh, a couple million dollars each quarter.
The charges work out to three cents a share in this quarter and in last quarter. Excluding those charges, the company’s operating margins are still over 15%, so these numbers are still looking good.
Now let me explain what operating margin is. Operating margin is gross margin minus “selling, general and administrative” expense. These are your fixed cost. For you lemonade stand, it would be things like salaries, maintenance and marketing (what can I say…it’s a fancy lemonade stand). These costs are hard to control because they’ll rise simply because you’re still in business. Hey, you gotta pay the phone bill.
Net margin is operating margin minus interest expense and your tax bill. This is my favorite line, the bottom line. In Bed Bath & Beyond’s case, it makes a small amount of money from interest income.
Now let’s look at the growth in sales-per-share:

Again, this is what I like to see–a nice smooth trend.
For the quarter we’re currently in (the company’s third), Bed Bath & Beyond forecasts earnings of 52 cents a share. And for the fourth quarter (ending in February), the company sees earnings of 79 cents a share.
Here’s a chart of earnings-per-share for the past few years, along with the company’s estimate for the next two quarters, plus my estimate for the four quarters after that:

Also in the press release was this:

The Company also announced an independent committee of its Board of Directors is carrying out a review of the Company’s stock option grants and procedures. The independent committee’s review was initiated voluntarily by the Company and is being conducted with the assistance of independent legal counsel and outside accounting experts selected by the committee. The independent committee’s review is not complete. The Company expects to report further with respect to the review in its Form 10-Q for the quarter ended August 26, 2006, which the Company expects to file on a timely basis on or before October 5, 2006.

The shares dropped sharply in the after-hours market but this struck me as a perfectly ordinary review. I don’t see how we can read any more into it.

Posted by Eddy Elfenbein on September 20th, 2006 at 10:25 pm

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