Archive for 2006

• Bed Bath & Beyond Earned 51 Cents a Share
  Eddy Elfenbein, September 20th, 2006 at 10:25 pm

  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.

• Frontier Airlines Jumps
  Eddy Elfenbein, September 20th, 2006 at 2:45 pm

  I had Frontier Airlines (FRNT) on last year’s Buy List. I hate airline stocks, but FRNT looked like a sound investment at a good price. The stock was doing well until it got slammed after Southwest Airlines (LUV) said it was going to enter the Denver market, Frontier’s home turf. Ultimately, I decided againt keeping Frontier on this year’s Buy List, which was a smart move since the stock has fallen for most of the year.
  Shares of Frontier got as low as $6, but have to started to perk up recently. Fuel is a huge cost for the ailines, and crude oil briefly fell below $60 a barrel today. Frontier is up strongly this session and is back over $8 a share.

• The Fed Leaves Rates Unchanged
  Eddy Elfenbein, September 20th, 2006 at 2:18 pm

  Here’s the statement:

  The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
  The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.
  Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
  Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

  Once again, Jeffrey M. Lacker wanted a 0.25% increase. Me too.

• Earnings Preview for Bed Bath & Beyond
  Eddy Elfenbein, September 20th, 2006 at 1:53 pm

  Bed Bath & Beyond (BBBY) reports after the bell. The company has already said it expects 51 cents a share. The AP has a preview:

  OVERVIEW: The company operates 819 stores nationwide under the names Bed Bath & Beyond, Christmas Tree Shops and Harmon selling home furnishings, food, gifts and health and beauty care products.
  Consumers are being squeezed by rising interest rates, the slowing housing market and higher fuel prices. Rising energy costs have also lifted utilities costs, hurting some companies’ bottom line. Furniture sales have been weak in recent weeks, as people cut back on big-ticket items amid the slowing housing market. However, analysts see Bed Bath & Beyond as a savvier merchandiser and better equipped financially to handle economic pressures, compared with Pier 1 Imports Inc. and other rival chains.
  BY THE NUMBERS: Wall Street expects earnings of 51 cents per share, the mean estimate of 24 analysts surveyed by Thomson Financial, on $1.60 billion in sales. The company didn’t provide any financial forecast in its last earnings release in June. (They said 51 cents a share in the conference call.)
  ANALYST TAKE: “Given the company’s historical top-line immunity to furniture sales fluctuations and housing turnover, we remain confident that planned 3 percent to 5 percent (same-store sales increases) are achievable,” Goldman Sachs analyst Adrianne Shapira wrote in a client note. Selling, general and administrative costs could pose some risk, “but our gross margin assumptions should prove conservative.” Shapira forecast quarterly earnings of 52 cents per share, which she said was a penny higher than management’s guidance.

• Market At 5-1/2 Year High
  Eddy Elfenbein, September 20th, 2006 at 11:09 am

  Thanks to Oracle (ORCL) and $61 oil, the S&P 500 has climbed above 1327 for the first time since February 2001. The Dow broke 11600. But will it hold?
  The 10-year yield is now down to 4.72%, it’s lowest point since March. The yield on the 30-year bond got down to 4.835%. Our Buy List is now up over 5% for the year. Expeditors (EXPD) is doing well today. Fiserv (FISV) and Sysco (SYY) also hit new highs earlier today.

• Dept. of the Obvious
  Eddy Elfenbein, September 20th, 2006 at 10:42 am

  Two researchers looked to see if stock spamming works.
  *Drumroll*
  It does!

  Based on a large sample of touted stocks listed on the Pink Sheets quotation system, we find that stocks experience a significantly positive return on days when they are heavily touted via spam, and on the day preceding such touting. Volume of trading also responds positively and significantly to heavy touting. Indeed, on a day when no tout has been detected in our database, the likelihood of a touted stock being the most actively traded stock that day is only 6%. On the other hand, on days when there is touting activity, the probability of a touted stock being the single most actively traded stock is 81%. Returns in the days following touting are significantly negative.

• Biomet’s Earnings
  Eddy Elfenbein, September 20th, 2006 at 8:52 am

  Biomet (BMET) reported earnings of 42 cents a share this morning. That’s a penny below analysts’ consensus so the stock will probably be under pressure today. Sales were up just 5% to $508 million. The company said that sales at its trauma and spine unit (ick) were $12 million below management’s expectations. Over 330 jobs have been cut from that department. Biomet also said that its “comfortable” with second-quarter estimates of 44 cents to 46 cents a share, and sales of $519 million to $540 million.

• Oil Plunges Below $62 A Barrel
  Eddy Elfenbein, September 19th, 2006 at 2:56 pm

  The fall in oil continues. In fact, it’s accelerating. Here’s a chart of October light sweet crude:
  
  From AP:

  “We’ll see sub-$2.25 a gallon retail (prices) by October,” said Tom Kloza, director of the Oil Price Information Service, adding that prices below $2 can already be found in Kansas, Missouri, South Carolina and other states.

  At one point, oil got down to $61.58 a barrel from $63.80 yesterday. Ticker Sense notes the correlation between the price of oil and President Bush’s approval numbers.

• The Flat Yield Curve
  Eddy Elfenbein, September 19th, 2006 at 11:31 am

  
  Actually, the yield isn’t even flat anymore, it’s a bowl. The yield on the five-year note is lower than both the 90-day bill and the 10-year bond.
  The Federal Reserve came close to flattening out the yield curve earlier this year at about 4.5%. Then the long-end run away from the central bank. But over the summer, long-term yields started to head back down and they crossed the short-term yields on the way.
  I still wouldn’t mind seeing another 25 or 50 basis points from the Fed. I think we’ve forgotten how high inflation-adjusted short-term rates can go. I think the basic rule should be to keep interest rates about 3% above the core rate of inflation during an expansion. And during a recession, real rates should be close to zero as possible without going negative.

• Our Remarkable Growth
  Eddy Elfenbein, September 19th, 2006 at 10:45 am

  
  Investors these days hear a lot about “the rise of China” or the “rise of India.” In today’s Wall Street Journal, Michael Milken points out:

  China and India combined to produce nearly half the world’s economic output in 1820 compared to just 1.8% for the U.S. Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets. (Hat tip: Prof. Mankiw).

  On a related note, Investor’s Business Daily comments on Sweden’s economy:

  And it’s wrong to praise Sweden’s current economic performance. Sweden ranks 14th worldwide in per capita income now, but in 1970 it ranked fourth. That’s a big drop.
  The average Swede earns $29,800 a year. Not bad, you say? That’s less than the average person in Mississippi. Some model.