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FINANCIAL ACCOUNTING

WAC for EMBA 2012

Roll No.2012-04-A016

Case Title:

Bed Bath & Beyond (abbreviated as BBBY)

Supplementary reading: Assessing a Firm's Future Financial Health and Financial Statement Analysis Assignment Submitted By: Roll No.2012-04-A016

Case Analysis:
Question No.1
Assessment of BBBYs Business Operating Strategy? BBBYs business strategy consisted of following major components: 1. Outstanding Value: BBBY delivered outstanding value by offering name brand and better quality merchandise at every-day low prices. It offered 20-40% below than the department stores price. This meant that customer could shop any day at BBBY & get the sale price. BBBY was able to earn good margins despite selling goods at low prices for several reasons. First, store managers were trained to sell high margin products. Second, private label goods were obtained at low costs and were sold along with the branded items. Third, central buying office was involved in all initial purchases, enabling BBBY to obtain best prices. 2. The Super Store Format: BBBY stores covered 40000 SFT on average and were packed from floor to ceiling with merchandise. This enabled one-stop shopping for customers.Further, BBBYs policy not using warehouses & shipping all inventory directly to the store ensured that merchandise was almost always in-stock. 3. Superior Customer Services: Goal was to produce happy customers with their experience at BBBY that they become word-of-mouth advertisers for stores. From parking lot to check-out line, customer facilitation was ensured. Most of the items could be returned without a sales receipt. 4. Store Operations: The merchandise in a Bed Bath & beyond was organized into 11 specialty stores i.e. Sheets & comforters, Dinnerware & Glassware, Shower & bath accessories, House wares & Gadgets, Pillows, Kitchen & Table Linen, Closet & Storage, Cookware & Electrics, Childrens merchandise, Towels & Rugs, Lifestyle & Lighting. Wide selection encouraged the customers to shop the entire store. Store managers were encouraged to continuously adjust the merchandise mix to suit local market tastes.
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FINANCIAL ACCOUNTING

WAC for EMBA 2012

Roll No.2012-04-A016

Local store manager was responsible for manually monitoring stocking levels & reordering merchandise as required from over 160 suppliers. To maintain a motivated and high quality workforce, BBBY provided extensive training in class room as well as on floor. BBBYs policy Promotion from within provided opportunities for capable employees resulting in a low turnover in management ranks. 5. Low Expense Structure due to: No use of separate warehouses Little advertising Stores located in low cost malls

Assessment of BBBYs Growth strategy? BBBY is engaged in an ongoing expansion program involving opening of new stores and expansion/replacement of existing stores with new, larger stores. As a result of this, the number of stores has increased from 22 (in 1989) to 45 at the end of 1993 and total covered are of stores increased from 350000 SFT to 1512000 SFT.A major portion of the increase in the Net sales was attributable to new store sales. New stores sales contributed 70-80% of the sales increased during 1989 to 1993.As companys growth is dependent on opening of new stores,so 10 new stores are being planned in 1994 & 15 in 1995.Managements goal is to expand sales & square footage @ 30% per year for the next 3 years. During expansion, policy of leasing is to be preferred rather owning. Each new 40000 SFT store requires an initial investment of $3 million, if BBBY did not build the store. Are these strategies consistent with one another? What if any changes would you make to these strategies? No these strategies are not consistent as following aspects are needed to be taken into account: i. BBBYs policy of word-of-mouth advertising needs review.In order to meet stiff growth targets in future,a rigorous advertising & branding campaign is a MUST for BBBYs business sustainability. ii. In view of aggressive expansion plan being undertaken by the company,only in-house managerial talent is not sufficient.New managerial talent i.e experts/professionals must be hired to tackle the complex business setup.

FINANCIAL ACCOUNTING

WAC for EMBA 2012

Roll No.2012-04-A016

Question No.2
Assess BBBYs current performance? Evaluate the keys to its success? How have the important performance measures changed over time?

By emphasizing Value,Variety & outstanding customer service throughout over rapidly expanding chain of nation-wide Super Stores ,BBBY continued strong sales & earning growth in fiscal 1993.

As per Exhibit1,net sales increased 197 % since 1989 & net earnings increased 156%.Earning per share improved from 36cents (in 1991) to 63cents (in 1993).

Exhibit:1 Parameter End of Fiscal Year 1992 1991 216.7 167.5 15.9 11.9 126.1 97.5 33652148 32754402 38 34 917000 31.9 55.4 30.8 38.64%

Net Sales* Net Earnings* COGS* No. of shares No of stores Total store space 1512000 1128000 (SFT) Working capital* 54.4 34.5 Total assets* 121.4 76.6 Shareholders 77.3 54.6 Equity* ROE 28.20% 29.12% Avg Payment 35.4 28.3 Period in days Assets Turnover 2.51 2.82 Assets/Equity 1.57 1.57 Merchandise 75 43.1 inventory* Net Earnings per 0.63352774 0.47248098 share NB: * marked parameters in $ million

1993 305.7 21.8 177.7 34410490 45

1990 134.2 10.3 79.9 27

1989 102.7 8.5 60.8 24

625000 461000 15.5 36.2 23.6 9.3 33.5 15.3

43.64% 55.56%

5.25 1.79 40.6 0.36331

3.7 1.53

FINANCIAL ACCOUNTING

WAC for EMBA 2012

Roll No.2012-04-A016

How does BBBY compare to its competitors ? What is driving BBBYs superior ROE? How sustainable are BBBYs current ROE & growth rate? BBBYs ROE is 33.18% at the end of fiscal 1993 as compared to its competitors Strounds (14.51%),Lechters (8.47%) & JC Peney (11.21%).This superior ROE was due to more gross profit earned by BBBY with lesser Cost of Goods Sold as well as more assets turnover ratio of 3.

Question No.3
What potential problems are likely to be encountered as BBBYs management attempts to implement its expansion plan? How is BBBY planning to finance its growth? Will internally generated funds & borrowings available under $20 million credit facility be sufficient to fund BBBYs normal as well as its expansion program for remainder of fiscal 1994 & next fiscal 1995? In order to implement the expansion plan for fiscal 1994 & 1995,BBBY requires to arrange estimated funds amounting to $80 million for establishment of 25 new superstores &

expansion of old stores.BBBY believes that during 1994,internally generated funds ,supplemented by borrowings available at the credit facility & possibly an additional debt facility ,will be sufficient to fund its both normal operations & continuation of its expansion program. In my opinion,BBBY will confront major challenges while implementing its expansion plan: Reorganization of HR setup due to quantum jump in business growth Additional funding arrangement to face the stiff industry competition

Only internally generated funds & $20 million credit facility is not sufficient for the Company.An additional funding source is a MUST to meet the companys set goals for fiscal 1994 & 1995.

FINANCIAL ACCOUNTING

WAC for EMBA 2012

Roll No.2012-04-A016

Question No.4
If BBBY requires additional funding for its expansion program,what form of funding should the company use debt or equity? Does BBBY have additional debt capacity? And is its equity priced favorably for an offering?

BBBY should opt for raising funds through Equity in fiscal 1994 & additional fund raising through Debt facility in fiscal 1995.During fiscal 1994,the outstanding revolving debt $ 13.3 million be got retired through sale proceeds of the stock. In fiscal 1995, required funding be raised through debt facility.