Question 1: Assess BBBY business, operating, and expansion strategies. Are these strategies consistent with one another? What, if any, changes would you make to these strategies?

Solution:

The Company's strategy is to achieve this objective through excellent customer service, an extensive breadth and depth of assortment, everyday low prices, and introduction of new merchandising offerings and development of its infrastructure.

Company was more concentrate on offering the better quality merchandise found at department stores at price or below the department store sales price. They were 20% to 40 % below department store regular prices. Because of low pricing customer no longer had to “wait for sale”. In BBBY private label goods were sold along with the branded products at low price. The central buying office was involved in all initial purchases, enabling BBBY to obtain the best price. BBBY was intent on preserving value during the expansion process.

Bed Bath & Beyond had the superstores format mean covered at 40000 square feet and were packed fro ceiling with merchandise of a breadth and depth unmatched by most competitors. Their policy was not using warehouse and shipping all inventory directly to stores ensured that merchandise was almost always in the stock.

The main success behind the BBBY was they were more customer oriented. Their goal went beyond simply satisfying customers to producing customers so happy with their experience at BBBY. Because of satisfying customer they became word of mouth advertisers for the stores.

Operating in the highly competitive retail industry, the Company, along with other retail companies, is influenced by a number of factors including, but not limited to, general economic conditions including the housing market, the overall macroeconomic environment and related changes in the retailing environment, consumer preferences and spending habits, unusual weather patterns, competition from existing and potential competitors, and the ability to find suitable locations at acceptable occupancy costs to support the Company's expansion program.

Although there appears to be some indication of improvement in economic conditions, the difficult conditions affecting the overall macroeconomic environment continued to impact the retail sector in general. The Company belief that the uncertainty in the macroeconomic environment and factors such as the high unemployment rate and issues specific to the housing industry, including a reduction in home values, continued to negatively impact consumer confidence and the level of discretionary spending by consumers. The Company cannot predict whether, when or the manner in which these economic conditions will change.

The Company belief that this industry consolidation will provide an opportunity to gain market share and to improve its competitive position over the long term; however, the Company cannot, with any level of certainty, estimate the impact these liquidations will have on its future results of operations.

Question 2: Assess BBBY's current performance. Evaluate the keys to its current success. How have the important measures changed over time? How does BBBY compare to its competitors? What is driving BBBY's superior ROE? How sustainable are current ROE and growth rate?

Solution: They have 30 superstores out of a total base of 50 stores and are actively converting smaller stores into 15K – 20K sq. foot super stores.It generated sales of $158,081,000 which is a 52% of the BBBY. It has a sustainable growth rate % of 14.51, in comparison to BBBY’s 33.18% and a Gross profit/sales % of 31.89%. It has a lower inventory Turnover ratio, of 3.99, which means sales generation over inventory is less frequent than BBBYs. They have a collection period of 2.97 days, in comparison to BBBY having none. They are not a public company, yet, have a better sales per square foot owing to the smaller sizes of their stores.Letchers: Average store size of a Letchers is less than 3500 square feet, smaller than the super stores. They have a sustainable growth rate of 8.57%, better inventory turnover than Strouds and longer collection period of 4.48 days. Their stock price is trading at around the half of the price of BBY’s shares.J.C. Penny: They are at 1300 locations and 300 department stores. Their store reach is large, with 1266 across the region. Their share price was way above others , at 48.63$. Their wide presence and affirmative growth rate of 11.21%, increase in the comparable store sales of 9.7%, and low P/E ratio provide to the market price.Key to success and better ROECost effective operations1)     Not maintaining a central warehouse space .By using floor to ceiling fixturing, the floor was also being used to store stock, thereby eliminating the need for a warehouse.2)    Opting to go for lease instead of owning the stores helped BBBY to cut their costs. Also this allowed them to choose only high quality sites when compared to their competitors who had to settle down for stores closer to their warehouses.3)    Low spends on advertising compared to competitors, relying majorly on word of mouth and discounts. Products were priced 20-40% below department store prices.4)    Customer centric: The stores aimed at being a one stop shop for all customer needs. They offered a large variety at low costs .Empowering store managers helped them serve their customers better. Sustaining the current ROE and growth rateNet sales of BBBY increased by 41.1% in 1993, to 305.8 million and net earnings per share for 1993 was $0.64, which is a 36% growth from the previous years. The store space also increased by 34% and the company is planning to expand into 10-12 more superstores.

Question 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?

Solution 4: The Company has to exercise the option which is more feasible and profitable. If the company plans to raise capital through equity then it has to evaluate the return on equity being promised to the shareholders on its shares in sync with the growth.

Now Price of the share on 8/8/94 $27.38Outstanding shares 33.79 mPrice/Earning 42.8Market/Book 11.97

Beta Value(Historical Compustat)(β) 1.7Now Return on US T-Bills, 30 yrs can be taken as risk free return(Rf) 7.48So returnNow Cost of Equity(Market rate of return)(Ke) =

Rf+β(Rm-Rf)

=7.48+1.7(14.55-7.48)

= 7.48+12.02= 19.50

P = D/Ke-g42.8 = 1/19.5-g

G =(42.8*19.50-1)/42.8

= 17.16The growth of 17.16% seems to meet the expectations of the company.

However, the company has to design its funding strategy very cautiously. It can take the following steps:

1) Company can issue convertibles, which has call option after three years. Company should be able to convert it in equity as early as possible.2) Company can take the risk of issuing share capital and take care of its share price in the future.