Bed Bath Beyond

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KEL082 Revised April 1, 2007 ARTUR RAVIV AND TIMOTHY THOMPSON Bed Bath & Beyond: The Capital Structure Decision “Bed Bath & Beyond’s earnings report could have been called Bed Bath & Brag,” according to the New Jersey newspaper The Record in April 2004.1 However, Bed Bath & Beyond (BBBY) had the performance to back up its boastfulness. Since going public in 1992, the home goods retailer, based in Union, New Jersey, had never missed an earnings estimate. For fiscal year 2003 (ending February 29, 2004) BBBY announced net income of $399 million on net sales of $4.5 billion, representing 22 percent growth in revenue and 32 percent growth in income over the previous fiscal year (see Exhibit 1 through Exhibit 4 for financial information). In 2004 BBBY was amidst a large-scale expansion after adding 85 new stores in the preceding fiscal year. This growth had been financed internally with cash from operations. As analysts noted in summer 2003, the growing cash position of the company was causing return on equity to deteriorate. For a management constantly seeking ways to improve shareholder return, adding debt to the balance sheet was one possibility. In early 2004 interest rates were at an all-time low, making it an attractive time to consider issuing debt and executing either a share repurchase or a one-time special dividend. Company History and Overview BBBY was founded in 1971 by Warren Eisenberg and Leonard Feinstein. Initially, Eisenberg and Feinstein opened two stores, one in New York and one in New Jersey, under the name bed n bath. These small specialty stores carried primarily bed linens and bath accessories. In 1985 the company opened its first superstore, carrying a full line of domestics merchandise (bed linens, bath items, and kitchen textiles) and home furnishings (kitchen and tabletop items, small appliances, and basic housewares). In 1987 the

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