Bed Bath And Beyond

Bed Bath and Beyond's Business Risk

Bed Bath & Beyond Inc. is a nationwide chain of 575 retail stores selling domestics merchandise (bed linens, bath items, and kitchen textiles) and home furnishings (kitchen and tabletop items, small appliances, and basic house wares). In 2003 Bed Bath and Beyond reported annual revenues (gross profit) of approximately $1.8 billion, net income of $339 million and net sales of $4.5 billion, representing 22% growth in revenue and 32% growth in income as compared to the previous year. In addition to the 575 Bed Bath and Beyond stores, BBBY also owns 30 Harmon Stores, a discount health, and beauty aid retailer, and 24 Christmas Tree Shops, a retailer of home dйcor, giftware, and seasonal merchandise. Results of operations for both the Harmon Stores and the Christmas Tree Shops are included in the companies consolidated results of operations and have been since the date of acquisition.

Bed Bath and Beyond is currently the largest superstore domestics retailer, although their market share is only 4%. Competitors like Target, Wal-Mart and JC Penney offer a wider variety of merchandise such as apparel and electronics. Since 2002 growth has been a result of acquiring the Christmas Tree Shops and the Harmon Stores. In addition BBBY believes that their product offerings, customer service and advertising program have contributed to the company's financial success.

Business risk in the case of BBBY is low if you only consider that the products they sell are produced by name brand companies, so any products needing repair could be sent directly to the name brand company. By passing BBBY and that BBBY has no control over the quality of the products they sell and that there are no significant switching costs. However, their degree of operating advantage is high at 2.93 (Exhibit 1) which would indicate high business risk. If management adds fixed operating costs to their business operations, without an increase in sales, the firm's profit declines and it becomes possible for total costs--variable plus fixed--to exceed sales and the firm to report a loss.

Bed Bath and Beyond Cash and Debt-to-total Capital

While BBBY's balance sheet is strong, there are risks of having too much cash. Namely the risk of not attracting or keeping investors, because of their desire to maximize their returns. When an investor sees to much cash on the balance sheet, they may question the company's ability to manage their capital structure efficiently, and therefore question their ability to maximize shareholder value. While BBBY uses their cash for store growth and small acquisitions, they should also be focusing on using their cash to increase shareholder value.

If BBBY were to use $400 million in excess cash and $636.3 million in borrowed funds to repurchase it's shares they would increase their basic earnings per share from 1.35 to 1.41 and their diluted earnings per share from 1.31 to 1.37 (exhibit 2). If BBBY were to use $400 million in excess cash, and borrow $1.27 billion to repurchase their shares, they would decrease their basic earnings per share from 1.35 to .70 and their diluted earnings per share from 1.31 to .72 (exhibit 2).

Repurchasing