Bed,bath,and beyond gift registry

The nation's largest home goods retailer is rolling forward despite the various outside forces that seem determined to bring the retail economy to a grinding halt. While many other well-regarded retailers are cutting back on financial guidance and store openings in the face of bleak prospects, this leading home specialist is developing bold new initiatives in a variety of areas, including food, fine china and HBC, intended to keep its business moving forward.

Bed Bath & Beyond seems to lead a charmed life, but from conference calls, discussions with executives at public meetings and analyst reports, a picture emerges of a company that succeeds by being adaptable and by playing to specific strengths.

One strength has been continuity of leadership. The founders, Warren Eisenberg and Len Feinstein, remain as co-chairmen of the board, but at the company's last conference call, Bed Bath & Beyond announced that Steve Tamares, president and coo, would assume the ceo title that had been held jointly by the co-chairs. Tamares has been with the company since 1992 and held the titles of director of real estate and general counsel before becoming president. Ron Curwin, cfo, joined the company in that position in 1994. Matt Fiorilli, now senior vp of stores, entered the B3 executive lineup as director of store operations, eastern region in 1994, and Arthur Stark, cmo since 1994, joined the company in 1997 and got his washroom key in 1994 as director of store operations, western region.

Despite the substantial tenures with the company, Tamares, Fiorilli and Stark all are in their forties. Thus, Bed Bath & Beyond has experience dating back to the company's founding in 1971, as well as people who can apply lessons learned for many years to come. And a decade's tenure at B3 is fairly substantial considering that it only went public at about the time Tamares joined the company.

In the company's year-end conference call, Eisenberg called 2002 a great year. "By all measures, we exceeded expectations," he said.

Fiscal 2002 net earnings reached $302.2 million, or $1 per share, versus 2001 net earnings of $219.6 million, or 74 cents per share, a gain of about 37.6%. Fiscal 2002 was the 11th consecutive year of record earnings since Bed Bath & Beyond's 1992 IPO, the company noted. Net sales for fiscal 2002 were $3.7 billion, a gain of 25.2% year over year. Comparable store sales .increased 7.9%, over 7.1% in fiscal 2001.

The year-end figures were boosted by strong fourth quarter results. Alan Rifkin, a Lehman Bros. analyst, noted that B3 posted an earnings per share of 35 cents in the fourth quarter versus 28 cents in the period last year, exceeding management guidance and the consensus estimate of 33 cents. "We had previously indicated that we would not be surprised to see a 1-cent upside and therefore view the 2-cent upside as very impressive," he stated in an earnings note. Aram Rubinson, a Banc of America Securities analyst, said that fourth quarter comps may have decelerated from recent quarters, coming in at 4.1%, but they remain among the tops in retail. He said that sales per square foot, according to his model, gained 5% to $229 per square foot as gross margin gained 20 basis points and SG&A dropped by 90 basis points.

He noted, "A solid performance came despite six fewer holiday sales days in December, nasty snowstorms in February and a difficult comparison [+11.9%] all quarter long."

At year's end, the company operated 490 Bed Bath & Beyond stores in 44 states, including 95 new units, seven of which had been expected to open in fiscal 2003. Total store space grew to 17.3 million square feet, an increase of 17.2%.

B3 is going to maintain its store opening pace in 2003, but is adding a measure of "flexibility," Eisenberg noted. Essentially, the company is planning to open somewhere between 80 and 90 stores. But it doesn't want to commit to a number just yet. Looking over the retail landscape, executives have determined that opportunities may arise through the year as some stores fail in the current economic environment. Bed Bath & Beyond wants to be in a position to be opportunistic in regards to new stores that might become available.

Michael Baker, an analyst with Deutsche Bank Securities, pointed out in an earnings note that 12% square-footage growth--based on an new store estimate of 88 for 2003--represents a deceleration from 2002, but the company opened seven stores early. Also, the retailer has focused on opening stores that are smaller than average. In 2001, for example, Bed Bath & Beyond opened stores that typically were about 30,000 square feet compared with the 37,000-square-foot overall unit average. Executives said that effort to hold down new store size will continue. "Bed Bath & Beyond continues to have success with smaller, more efficient stores, likely due to its improving supply chain," Baker said. "This leads to the gap between square-footage growth and store count growth and also contributes to improving return on capital, due to lower Cap-Ex."

For his part, Rubinson stated: "We much prefer to see companies moderate square-footage growth earlier in their growth curve so as to ensure a steady return on invested capital. With years of growth still ahead, we believe Bed Bath & Beyond appears to be a rare example of a retailer that is aging gracefully."

Aging shouldn't be at all confused with retiring. The retailer remains dynamic, adding new operations and experimenting frequently. For instance, Bed Bath & Beyond had developed a substantial, if limited, food business and a fine china operation. Building on candy and related novelties, the company has added sauces and other products that have the sort of gourmet appeal its cookware sets elicit.

The expansion of fine china is tied into the company's gift registry initiative and a recognition that many customers still want formal dishware. Even if they only wind up owning one set, whatever store sells it makes a very nice sale.

Both food and fine china assortments vary significantly with the size of the store, as is the case with other B3 departments. After all, some B3 units are in the 20,000-square-foot range, while others are larger than 80,000 square feet. And while some departments are built around a substantial core offering no matter what the store size--and categories like cookware, domestics and cleaning are included here--others shrink to a greater extent in the smaller units and gain more significantly in the larger stores. Storage, for example, is exponentially larger in the biggest B3s.

Yet, the recent initiative that has gotten the most attention is the purchase of Harmon Discount. Bed Bath and Beyond acquired the 27-unit Harmon Discount cosmetics and HBC chain early in 2002. According to B3 executives, three key factors made the purchase attractive: Harmon was a successful privately held specialist for nearly three decades--just about as long as Bed Bath & Beyond operated before going public; it features exceptional merchandising; and it has strong, hands-on management. At last year's annual meeting, Feinstein threw in one more good reason for Bed Bath & Beyond's Harmon acquisition: "We have the same customer," he said.

At the time of purchase, Harmon units averaged about 6,500 square feet of floor space with a chain-wide area of 178,000 square feet. The Harmon departments operating inside the New Jersey B3s function as HBA/cosmetics departments under the banner, "Harmon at Bed Bath & Beyond." Soon after the first New Jersey test store opened, Rubinson visited and estimated that about 4,200 square feet of space was dedicated to the Harmon department.

Harmon raised a storm of speculation among B3 observers when the deal was first announced and the guesswork about Bed Bath & Beyond's intentions continues. Bed Bath & Beyond executives simply won't articulate a definitive strategy on Harmon. Just about everyone agrees that Harmon was a purchase with possibilities. In making a comparison with the competition, Rubinson said pricing in the initial test store was about 11% below a nearby CVS drug store.

A major concern relating to the purchase and subsequent store-within-a-store test regarded cross-fertilization and its relevance in the circumstance. Some questioned the appeal of Harmon products to B3 shoppers. However, Rubinson said that during his visit, 49% of the Bed Bath & Beyond shoppers who were tracked took a look around the Harmon section and 21% actually made a purchase, indicating that the department had an appeal to a fair proportion of B3 goers.

Bed Bath & Beyond executives have acknowledged the potential of the Harmon name to draw consumers familiar with the store into Bed Bath & Beyond locations, thus building frequency, an issue with home goods retailers. They also have acknowledged the possibility the Harmon concept represents as a growth vehicle as the Bed Bath & Beyond format matures.