Bed Bath & Beyond acquires specialty 'Christmas' chain - Christmas Tree Shops Inc

DSN Retailing Today, July 7, 2003 by Mike Duff

MORRISTOWN, N.J.--At its annual meeting on June 26, Bed Bath & Beyond pointed to highly successful fiscal 2002 and first quarter fiscal 2003 results, but perhaps the highlight of the meeting was management's addressing the acquisition of Christmas Tree Shops, a move the company announced about a week earlier.

News of the acquisition even overshadowed a Bed Bath & Beyond milestone. The chain opened its 500th store early last month.

Bed Bath & Beyond executives said they would look at Massachusetts-based Christmas Tree Shops as an expansion vehicle and as part of efforts to cross-fertilize merchandising in the now three banners they supervise.

Leonard Feinstein, cochairman of the board, told DSN Retailing Today, that Christmas Tree Shops had much to recommend it. Bed Bath & Beyond executives liked the operation, the strong traffic flow and the company management. Yet, in the final consideration, a third factor weighted heavily in Bed Bath & Beyond's decision to purchase the company, "We like that the customers like it," Feinstein said.

Christmas Tree Shops was Bed Bath & Beyond's second acquisition over the past two years. The earlier acquisition, discount HBA specialist Harmon, grew by two units to a total of 29 stores in 2002, but Bed Bath & Beyond recently added a third Harmon boutique to its flagship stores, this one in Elmsford, N.Y. More Harmon boutiques will be forthcoming, said a Bed Bath & Beyond executive. New initiatives with Christmas Tree Shops will take place as administrative realignment and distribution factors permit.

The announcement of the Christmas Tree Shop deal, an all-cash transaction of approximately $200 million, was made on June 19, a day after the company reported a first quarter earnings increase of 24.2%.

Positive results certainly aren't startling for Bed Bath & Beyond. The company reported sales for the fiscal year ended March 1, 2003, of $3.67 billion versus $2.93 billion in the year-earlier period. Net earnings in fiscal 2002 were $302.2 million, or $1 per diluted share, versus $219.6 million, or 74 cents per diluted share, in the preceding annum.

On June 18, Bed Bath & Beyond reported net earnings for the first quarter ended May 31,2003, of $57.5 million, or 19 cents per share, a 24.2% gain from the year-earlier period. Sales advanced 15.1% in the quarter to $893.9 million, while comparable-store sales grew by 4.4%, over an increase of 13.2% in last year's period.

In a conference call announcing the first quarter results, Steven Tamares, Bed Bath & Beyond president and ceo, said, "We have experienced 44 consecutive quarters of uninterrupted earnings growth since our IPO in June 1992. Since that date, our net earnings have more than doubled in every three-year period, an accomplishment that I believe is unmatched in all of retailing and of which we are extremely proud."

With no debt on its balance sheet and a stated intent at looking for acquisition opportunities, Bed Bath & Beyond still caught some observers by surprise with Christmas Tree Shops. Bed Bath & Beyond won't say much about its intentions for the chain. An executive told DSN Retailing Today that the company preferred to keep its cards close to the vest, at least until its initial merchandising moves appeared in stores. So the retailer doesn't want to comment extensively on any plans it has for Christmas Tree Shops. Specifically, the executive refused to compare plans Bed Bath & Beyond holds for Christmas Tree Shops with the initiatives it has pursued with Harmon Stores. However, with more than 500 Bed, Bath & Beyond stores in operation and a stated potential in the United States of about 950 outlets, the company only has about five more years of organic growth available to its flagship chain, a fact that certainly would prompt executives to start looking around for new growth platforms.

In announcing the acquisition, Tamares said: "Christmas Tree Shops' product mix is compelling and extremely well priced, with a significant portion of their merchandise represented by self-developed items or opportunistic buys. There is a uniqueness to their concept that has earned strong customer allegiance. We view Christmas Tree Shops' merchandise offerings and their knowledge base as extremely complementary to Bed Bath & Beyond' s and, as such, present the combined operations with a myriad of opportunities. We are very pleased that Christmas Tree Shops' management team will remain in place and continue to oversee their business."

Lehman Bros. analyst Alan Rifkin visited a Christmas Tree Shop in Connecticut soon after the acquisition and said in a research note, "Overall, we came away very positive on the viability of the chain, and we are upbeat on the growth opportunities presented by Bed Bath & Beyond's acquisition of Christmas Tree Shops. We estimate sales per square foot at [the Christmas Tree Shop] Orange, Conn., store [at] roughly $500, well above the chain average of $430." He added, "In addition to seasonal and focus items, Christmas Tree Shops continuously sells a variety of home-related goods, including furniture, wall decor, rugs, lighting, tableware, candles, cooking and cutlery items, consumables, storage products, cleaning items, books, toys, greeting cards and giftware."