R3: BBBY: Consistency Repeats Itself

R3: REQUIRED RETAIL READING

April 8, 2010

TODAY’S CALL OUT

It is said that history repeats itself.  It can also be said that consistency repeats itself.  BBBY continues to be the poster child for this theme as evidenced by 4Q results. Yet again, the ‘BBBY is too expensive’ case proves thin.  Even with lofty expectations and “whispers” that to some seemed like a stretch, expectations were handily exceeded.  There is very little to criticize or critique here.  The results speak for themselves. 

Earnings of $0.86 per share were $0.13 ahead of the Street.  Same store sales were up 11.5%, representing the second quarter in row of sequential acceleration on a one and two year basis.  Gross margins expanded by 180 bps, benefitting from a continued decrease in couponing, reduced markdowns, and solid inventory management.  Recall that we have been bullish on the multi-year opportunity that still lies ahead for BBBY, which in part results from dramatically reducing couponing in the wake of capacity reductions in the home furnishings sector.  SG&A as a percentage of sales improved by 270 bps, also reflecting lower coupon circulation, lower ad expenses, and leverage on payroll and central costs.  The balance sheet remains solid, with inventories up 7.1% against a 16.7% increase in total sales. Additionally, the company ended the year with $1.7 billion in cash and no debt.  Square footage growth for 2010 is as expected, with 60 stores in the pipeline representing 5% growth.   All in, this quarter was very consistent with the prior two quarters- with a slight sales acceleration. 

For anyone that has been following our positive stance on BBBY for a while, we recognize these posts may seem repetitive.  For now and for at least the next few quarters we remain confident that this type of performance will continue.  Tight inventories, reduced couponing, expense control,  coupled with same store sales and store growth, make this one of the most consistent stories in retail.  And this holds true even after the earnings upside we saw over the back half of 2009. 

We believe the biggest mistake coming out of the this quarter would again be to “take the trade”.  Earnings guidance calls for 10-15% growth in 2010. We’re looking for 25% and that may be conservative.  Yes, expectations continue to rise, but it’s important to put 4Q results in perspective.    This is just the third quarter in a row (after 10) in which gross margins have improved.  Sales are accelerating, as they should when a macro recovery is underway and the company’s biggest direct competitor is now gone for just over a year.  And, some day management may actually put the cash balance to work.

Eric Levine

Director

R3: BBBY: Consistency Repeats Itself - BBBY

LEVINE’S LOW DOWN 

  • Despite a meaningful pick up in same store sales trends at Family Dollar in the month of March, management noted that they still see a pronounced payroll cycle. In fact, there has been no meaningful change over the past couple of quarters in the low income consumer’s behavior relative to the payroll cycle. While they did not elaborate any further, perhaps this status quo behavior suggests that the recent acceleration in sales is less related to the low income and more attributable to a higher income customer.
  • According to luxury website innovator, James Gardner of createthe Group, consumers are more likely to buy when consumers recommend outfits or products to other consumers, rather than brands themselves doing the merchandising. In fact, the conversion rate on the area of Juicy Couture’s site where consumers put together their own looks and then post them to other consumers is 162% higher than the traditional ecommerce offering. With that said, expect to see more “user generated” merchandising make its way across the internet. Recall that this is consistent with recent surveys that suggest consumers trust peers more than they trust brands.
  • Rumor has it that Japanese fast-fashion chain UNIQLO is headed to midtown Manhattan to fill one of the most expensive retail locations in New York. The space which was formerly the home of Brooks Brothers on Fifth Ave. occupies 70,000 square feet and supposedly commands an annual rent of $30 million! This would mark the chain’s second stateside location, with the other located in Soho. For anyone who hasn’t seen the concept first-hand we highly recommend a store visit. Clever merchandising, deep value pricing, and an extremely colorful in-store environment makes for long lines almost every day of the week.

HEDGEYE CALENDAR

R3: BBBY: Consistency Repeats Itself - Calendar

MORNING NEWS 

Consumer Credit Declines in February - Consumer credit in the U.S. declined in February more than anticipated, indicating Americans are reluctant to take on more debt without further improvement in the labor market. Borrowing fell $11.5 bn, the most in three months, after a revised $10.6 bn January gain that was twice as much as initially estimated, the Federal Reserve said today in Washington. The drop was the 12th in 13 months and shows consumer purchases, which account for about 70% of the economy, will be limited until households become more optimistic about the recovery. Confidence to finance spending may be restored if employment keeps rising after a March payroll gain that was the biggest in three years. <bloomberg.com/news>

CEOs A Little Less Confident on the Future - While declining to 62 from 64 in the final quarter of 2009 after gains in each of the four quarters last year, the measure is still in positive territory. According to the board, a reading of more than 50 reflects more positive than negative responses. “Ceo’s continue to rate current economic and industry conditions favorably, but expectations are that the pace of growth will not pick up in the months ahead,” said Lynn Franco, director of The Conference Board Consumer Research Center. “Hiring plans are improved from last year, but less than a third expect employment levels to increase this year.” In the most recent survey, 71 percent of ceo’s assessed current economic conditions as having improved when compared with six months ago, down from 75 percent last quarter. <wwd.com/business-news>

Protesters Paralyze Bangkok, Shut Down Malls - Major malls in downtown Bangkok are losing millions of dollars daily after being forced to close since Saturday by thousands of antigovernment protesters who have paralyzed the district. The losses will mount if the demonstrators keep retailers shut during the 10-day Thai New Year celebration, Songkran, which begins Friday. “We make a lot of money during Songkran. That’s huge for us,” said a spokesman for Siam Paragon Development Corp., which operates Bangkok’s luxury Siam Paragon mall. <wwd.com/business-news>

Talbots Seals the Deal, Finally - After six deadline extensions, The Talbots Inc. finally completed its warrant exchange offer with BPW Acquisition Corp., allowing the retailer to acquire the special purpose acquisition company on Wednesday. Talbots said that in addition to closing the BPW deal, it repurchased about 29.9 mm of shares held by former majority stockholder Aeon Inc., which constituted a 54% stake in the specialty retail firm. <wwd.com/business-news>

M&S Fourth-Quarter Sales Growth Quickens More than Anticipated on Fashion - Marks & Spencer Group Plc, the U.K.’s biggest clothing retailer, said sales growth accelerated more than anticipated in the fourth quarter as shoppers bought new fashion ranges. <bloomberg.com/news>

Fast Retailing Raises Profit Forecast by 5.2% on HeatTech Underwear Sales - Fast Retailing Co., Japan’s largest clothing retailer, raised its full-year profit forecast 5.2 percent and said it may list shares overseas, where it expects operating profit to more than quadruple this fiscal year. <bloomberg.com/news>

H&M Starts the Year Strong - Hennes & Mauritz AB, the world’s third-largest fashion retailer, saw net profit jump 45.2% in the first quarter as new store openings in South Korea and Israel and an early Easter boosted sales in its stores despite lingering economic doldrums. Same-store sales rose by 2% in the quarter. H&M said total sales rose 21% in March versus the same month a year earlier, while same-store sales were up 9% following a dip in February. The March increase was partly due to calendar effects, which contributed 2% points, and by a positive effect from Easter falling one week earlier than it did in 2009, it said. <wwd.com/business-news>

R3: BBBY: Consistency Repeats Itself - H M

Nike Tiger Commercial - Nike Inc. plans to air a new television commercial featuring Tiger Woods and a voice recording of the golfer's late father. It's the first ads featuring the golfer since revelations about his extramarital affairs. Check out the video: www.youtube.com/nikegolf. <http://www.sportsonesource.com/>

Sports Direct Makes Offer for Faith - Sports Direct is among five bidders to have made offers to invest in footwear specialist Faith, it is understood.  <http://www.drapersonline.com/>

Sales for Shoes.com Slump in 2009 - Sales were down across all major channels, including Shoes.com, for Brown Shoe Co. last year. Shoes.com recorded a decrease in web sales of 8.2% to $68.1 million from $74.2 million in 2008, while total and specialty retail sales also fell. <http://www.internetretailer.com/>

ColdwaterCreek.com Garners the Fastest March Response Time - ColdwaterCreek.com gave shoppers the fastest high broadband access time among large web retailers last month, says Gomez, the web performance division of Compuware. <http://www.internetretailer.com/>

Bluefly Gets Inside Customers’ Closets With its New Social Media Strategy - The off-price fashion apparel retailer launched this week BlueflyClosetConfessions.com as a social media site where consumers can upload photos and videos displaying favorite items from their own closets. <http://www.internetretailer.com/>

Web Retail Sales Grew 18.4% in March, MasterCard says - It was the eight consecutive month of double-digit growth in e-retail sales, says the monthly MasterCard Advisors SpendingPulse report. <http://www.internetretailer.com/>

Claire's Becomes Twilight Destination - Fashion accessories and jewelry chain, Claire's, has become a destination retailer for Twilight Saga merchandise across 831 branches in the U.K. and Europe throughout 2010. The first products hit Claire's stores on March 22 with the DVD release of The Twilight Saga: New Moon. The retail program will be supported by dedicated Twilight Saga areas in-store and a window presence. <licensemag.com>