What's Beyond For Bed Bath & Beyond?

The retailer is pursuing rapid expansion, but that could strain its winning formula

In a low, unadorned, yellow brick building, around the bend from a stretch of middle-class homes in suburban Union, N.J., sits the headquarters for Bed Bath & Beyond Inc. (BBBY ). A single small sign lists the home-furnishings retailer as one of the building's several tenants. To find the actual entrance, you have to drive around back.

That's typical of a chain where the style is aggressively low-key. CEO Steven H. Temares and co-founders Warren Eisenberg and Leonard Feinstein rarely give interviews. They also don't like to pose for photos, speak at conferences, or accept awards. Their quarterly conference calls with analysts often last only 15 minutes, after which they skip the usual question-and-answer time.

But then, you can afford to keep mum when your numbers speak so eloquently. The retailer rang up $3.7 billion in sales in fiscal 2002, which ended last February. That figure is expected to climb 22% this fiscal year, to $4.5 billion. Meanwhile, 2002 operating profit jumped 39%, to $480 million, and double-digit gains are expected again this year and next. In fact, in December, when competitors such as Pier 1 Imports (PIR ), Target (TGT ), and Wal-Mart Stores (WMT ) were warning of weak Christmas trends, Bed Bath & Beyond raised its earnings estimate for the year to $1.27 a share, from $1.25. It's a performance that earned Bed Bath & Beyond, with 569 locations, the No. 12 slot on the BusinessWeek 50 ranking of top-performing companies.

Bed Bath & Beyond became a big chain, in large part, by operating like a little one. It has been vigilant about catering to local tastes to draw in customers. Manhattan stores, for instance, are now beginning to stock wall paint. But you won't find it in suburban stores, where customers are well-served by home-improvement giants like Home Depot Inc. (HD ). In Bed Bath's style of retailing, in fact, store managers pick 70% of their own merchandise. That fierce local focus has helped the chain evolve from one that began by selling little more than linens into one that can stock everything from picture frames to imported olive oil. And it does so with operating margins of 13%, better than smaller rivals such as Pier 1 and more than double Wal-Mart's. The strategy has stoked a decade of torrid returns, with a stock price that has risen fortyfold since a 1992 initial public offering.

But now some worry that the chain's quirky character may be hard to maintain as it expands. "They've had an incredible run, and it has been a wonderful growth story. But every opportunity has its limits," warns Sanford C. Bernstein & Co. analyst Colin McGranahan, who is recommending that investors sell the stock. He worries that with a dearth of prime locations for new stores, the chain will be forced into less lucrative smaller markets or larger ones crowded with such rivals as Wal-Mart and Linens 'n Things Inc. (LIN ). Moreover, expansion could threaten each location's unique personality. That variation has been possible in large part because suppliers deliver direct to the stores. But the practice becomes unwieldy as more stores are added.

All those growth issues must be faced while management is in transition. Co-founders Eisenberg, 73, and Feinstein, 66, are now co-chairmen and have stepped away from day-to-day management. Wrestling with the challenges of growth while maintaining the spirit that has made the company a success falls to Temares, 45. A lawyer without a day of retail experience, he joined the chain in 1992 to deal with real estate. Temares was reluctant at first. He came back six times for interviews before taking the job. It turned out to be a good fit; by 1997, he was running all of operations. Director Klaus Eppler says that when the board considered him for CEO, his management skill was a big plus. "Steve is very good on detail," he says.

He'll have to be to achieve his goal of expanding to 1,050 stores over the next few years. A self-critical type who speaks so quickly he sometimes trips over his own words, Temares has already made some important moves. When he joined in 1992, Bed Bath operated with only a single personal computer. Now its information systems reach every store and are serviced by a staff of more than 160. Temares has also begun the company's first vendor compliance rules, which penalizes them for incomplete or late shipments. In addition, he's working on logistics. While some suppliers still ship direct, Temares is encouraging centralized shipping for some widely sold goods. He also added three independent board members last year to a group criticized for its close ties to management.

DEVOTED APOSTLE. Temares brushes away criticism that finding the real estate to expand profitably may be hard. He say the company has identified, not just by town but by intersection, where it wants every additional store to go. He is also expanding existing stores where the market warrants it. Of his roughly 19 million square feet of retail space he estimates 12 to 14 million could be profitably expanded.

But this is no revolution. Indeed there seems to be no more devoted apostle of the founders of the chain than Temares. Eisenberg and Feinstein started Bed Bath with two stores in 1971, just as "big box" retailing was catching on. But they were also savvy enough to keep managerial peace by instituting a division of labor as the chain grew. For the most part, Eisenberg stuck to merchandising, while Feinstein focused on everything else. "Maybe that separation helped," says Ron Eisenberg, Warren's son, who is now a retailer in his own right (box). "I marvel at their relationship. The culture they created at the company is almost an outgrowth of how they are with each other, their mutual respect." In fact, no one can remember ever seeing the two men fight.

Even after they brought the company public, they continued to play by their own rules. Bed Bath avoids most advertising in favor of direct mail. That helps keep prices low compared with department stores. Managers are always promoted from within -- even experienced ones start on the floor, so they can learn the culture. The chain has no debt and until this year hadn't done an acquisition. "We run the company the same way today as when we were private," says Eisenberg. "When we were private we didn't plan the profits. We just did everything we thought was right, and the profits were always there. We still do everything that we think is right, long term and short term, and it comes out right."

FORAY INTO ACQUISITIONS. Today Eisenberg and Feinstein focus on strategy rather than operations. In the last two years they negotiated the purchase of two small chains. Harmon Stores Inc., a health and beauty retailer, is already being brought into some Bed Bath stores. Christmas Tree Shops, a 24-store chain that sells closeout and discounted products year-round, is likely to be expanded on its own. Maintaining growth will be tough, but it's hard to argue with the company's track record or management's unabashed optimism. "The opportunities are all ahead of us," says Temares. A bold promise he just might keep.

By Nanette Byrnes in Union, N.J.

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