Bed Bath & Beyond: Hitting the Limit?


By Nanette Byrnes As has become its habit in recent years, Bed Bath & Beyond (BBBY) beat Wall Street estimates again on June 23, reporting earnings of 27 cents a share for the first quarter, 2 cents north of the consensus estimate. The earnings, which were up almost 43% from first-quarter 2003, grew much faster than sales, which rose 23%, to $1.1 billion. Sales at stores open at least one year gained 5%, also better than last year's rate.

Fueling much of the Union (N.J.)-based retailer's growth has been a robust expansion of the 592-store chain, which specializes in decorative and furnishing items for the home. Bed Bath & Beyond, lead by CEO Steven Temares, opened 94 stores in the past year, 17 in the most recent quarter. Perhaps because of that, inventories rose to $53 million, from $11 million last year. But despite the rapid roll out, costs seem to have been kept in check, with expenses rising more slowly than sales this quarter.

In Bed Bath & Beyond's earnings conference call, Temares said the company has chalked up 12 years of uninterrupted earnings growth since its IPO in June, 1992, and has been debt-free for the past eight years. He credited the strength to Bed Bath & Beyond's decentralized organizational structure, which leaves much of the store-specific merchandising up to the store manager. Temares repeatedly noted that he's "extremely pleased with the operating performance of our new stores," which are averaging sales per square foot at the high end of his desired range of $160 to $185. Wall Street earnings-per-share estimates of $1.55 to $1.58 for full-year 2004 were deemed "reasonable" by CFO Ronald Curwin.

LAGGING STOCK. BB&B's rapid growth and long track record of rising earnings have generated increased expectations. The stock, in the $35 to $40 range recently, trades at a lofty 28 times trailing earnings, vs. a multiple of less than 18 for archrival Linens N Things (LIN). Bed Bath & Beyond's strong historical performance earned it a spot on this years' growth-driven BusinessWeek 50 (see BW, 4/5/04, "The Best Performers").

Keeping its edge may be increasingly tough, however. Earlier this month, Linens N Things hired a well-regarded veteran of Kohl's Department Store (KSS), Jack E. Moore, to take on the post of president and COO. And with all the expansion BB&B has already completed, the retailer could be running out of prime real estate to locate future domestic emporiums. In fact, the stock has underperformed this year, dropping 6.6% over the past 12 months, vs. a 15.8% rise for the S&P 500-stock index. (It hit a 52-week high of $44 a share in December, 2003.)

By focusing on merchandise and adding new lines like gourmet food and paint, BB&B has so far traded on its strength to great success. Sales have doubled in the last five years, and earnings have tripled. Net sales last year were $4.5 billion, and net income was $399 million.

HOW MUCH MORE? In the conference call, BB&B co-founder and co-chairman Warren Eisenberg emphasized that even with the chain's growth, it holds only a small fraction of the total $85 billion home-goods market. He believes that the outfit has the ability to grow to well more than 1,000 stores in the U.S. "We expect to continue to widen the performance gap developing between us and other operators in our industry," he said. "I feel confident 2004 will be another record year."

So far, BB&B has shown a facility for competing as a niche player at a time when many superstores have struggled against dominant mass marketers like Target (TGT) and Wal-Mart (WMT). CEO Temaras still has plans to open an additional 80 to 90 stores this year. The question for investors: How long can this pace be sustained? Byrnes is a senior writer for BusinessWeek New York


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