Summary of BED BATH & BEYOND INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Bed Bath & Beyond Inc. and subsidiaries (the "Company") is a chain of retail stores, operating under the names Bed Bath & Beyond ("BBB"), Christmas Tree Shops ("CTS"), Harmon and Harmon Face Values ("Harmon") and buybuy BABY (See "Acquisition," Note 11). The Company sells a wide assortment of merchandise principally including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. The Company's objective is to be a customer's first choice for products and services in the categories offered, in the markets in which the Company operates.

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

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, consumer preferences and spending habits, general economic conditions, 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. During the three and nine months ended December 1, 2007, the Company faced a challenging retailing environment related to the home.

As discussed in more detail below, the following represents an overview of the Company's financial performance for the periods indicated:

† For the three and nine months ended December 1, 2007, the Company's net sales were $1.795 billion and $5.116 billion, respectively, and increased by 10.8% and 10.7%, respectively, as compared to the three and nine months ended November 25, 2006.

† Comparable store sales for the fiscal third quarter of 2007 increased by approximately 0.8%, as compared with an increase of approximately 4.6%, for the corresponding period last year. Comparable store sales for the fiscal nine months of 2007 increased by approximately 1.5%, as compared with an increase of approximately 4.8%, for the corresponding period last year.

A store is considered a comparable store when it has been open for twelve full months following its grand opening period (typically four to six weeks). Stores relocated or expanded are excluded from comparable store sales if the change in square footage would cause meaningful disparity in sales over the prior period. In the case of a store to be closed, such store's sales are not considered comparable once the store closing process has commenced.

† Gross profit for the three months ended December 1, 2007 was $747.9 million or 41.7% of net sales compared with $704.1 million or 43.5% of net sales for the three months ended November 25, 2006. Gross profit for the nine months ended December 1, 2007 was $2.126 billion or 41.6% of net sales compared with $1.972 billion or 42.7% of net sales for the nine months ended November 25, 2006.

† The effective tax rate was 33.6% and 35.0% for the three and nine months ended December 1, 2007, respectively, and 35.8% and 36.3% for the three and nine months ended November 25, 2006, respectively.

† For the three and nine months ended December 1, 2007, the Company's net earnings per diluted share increased to $0.52 (or $138.2 million) and $1.44 (or $389.9 million), respectively, as compared to $0.50 (or $142.4 million) and $1.36 (or $388.4 million), respectively, for the corresponding periods last year. The increases in net earnings per diluted share include the impact of the Company's repurchases of its common stock.

Results of Operations

Net Sales

Net sales for the three months ended December 1, 2007 were approximately $1.795 billion, an increase of $175.5 million or approximately 10.8% over net sales of approximately $1.619 billion for the three months ended November 25, 2006. For the three months ended December 1, 2007, approximately 50% of the increase in net sales was attributable to an increase in the Company's new store sales, with the remainder of the increase primarily attributable to a one week calendar shift in the current year's quarter

end, the acquisition of buybuy BABY (acquired on March 22, 2007) and the increase in comparable store sales.

The increase in comparable store sales for the fiscal third quarter of 2007 was approximately 0.8%, as compared with an increase of approximately 4.6% for the corresponding period last year. The comparable store sales calculation for the three months ended December 1, 2007 compares the thirteen weeks in the third quarter of fiscal 2007 to the same calendar thirteen weeks in the prior year, so that the week after Thanksgiving in fiscal 2007 is compared to the week after Thanksgiving in fiscal 2006. The Company believes the smaller increase in the comparable store sales percentage versus the same period last year was primarily due to the challenging retailing environment related to the home. The overall comparable store sales increase was particularly impacted by lower comparable store sales in those areas of the Country significantly affected by housing market issues, notably Arizona, California, Florida and Nevada.

For the three months ended December 1, 2007, sales of domestics merchandise and home furnishings for the Company accounted for approximately 45% and 55% of net sales, respectively. For the three months ended November 25, 2006, sales of domestics merchandise and home furnishings for the Company accounted for approximately 47% and 53% of net sales, respectively.

For the nine months ended December 1, 2007, net sales were approximately $5.116 billion, an increase of $493.3 million or approximately 10.7% over net sales of approximately $4.622 billion for the nine months ended November 25, 2006. For the nine months ended December 1, 2007, approximately 55% of the increase in net sales was attributable to an increase in the Company's new store sales, with the remainder of the increase primarily attributable to the acquisition of buybuy BABY, the increase in comparable store sales and a one week calendar shift during the current year.

Comparable store sales for the fiscal nine months of 2007 increased by approximately 1.5%, as compared with an increase of approximately 4.8% for the corresponding period last year. The comparable store sales calculation for the nine months ended December 1, 2007 compares the thirty-nine weeks in the nine months of fiscal 2007 to the same calendar thirty-nine weeks in the prior year. The Company believes the smaller increase in the comparable store sales percentage versus the same period last year was primarily due to the challenging retailing environment related to the home and the results of a few key markets most affected by certain macroeconomic factors related to the home.

For the nine months ended December 1, 2007, sales of domestics merchandise and home furnishings for the Company accounted for approximately 45% and 55% of net sales, respectively. For the nine months ended November 25, 2006, sales of domestics merchandise and home furnishings for the Company accounted for approximately 47% and 53% of net sales, respectively.

Gross Profit

Gross profit for the three months ended December 1, 2007 was $747.9 million or 41.7% of net sales compared with $704.1 million or 43.5% of net sales for the three months ended November 25, 2006. Gross profit for the nine months ended December 1, 2007 was $2.126 billion or 41.6% of net sales compared with $1.972 billion or 42.7% of net sales for the nine months ended November 25, 2006. The decreases in gross profit as a percentage of net sales for the three and nine months ended December 1, 2007 were attributable to a number of factors, including an increase in coupon redemptions associated with a heightened promotional environment, an increase in inventory acquisition costs and a shift in the mix of merchandise sold, as the Company experienced a higher percentage of sales of home furnishings.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") for the three months ended December 1, 2007 was $544.7 million or 30.4% of net sales compared to $492.9 million or 30.4% of net sales for the three months ended November 25, 2006. SG&A as a percentage of net sales was relatively flat for the three months ended December 1, 2007 compared to November 25, 2006 primarily due to a relative decrease in payroll and payroll-related items (due to a non-recurring $7.2 million charge in the fiscal third quarter of 2006 related to the review of stock option grants and procedures), offset by a relative increase in advertising expense for the current quarter as a result of increased distribution of advertising pieces in response to a heightened promotional environment.

SG&A for the nine months ended December 1, 2007 was $1.548 billion or 30.3% of net sales compared to $1.393 billion, or 30.1% of net sales for the nine months ended November 25, 2006. SG&A as a percentage of net sales increased for the nine months ended December 1, 2007 compared to November 25, 2006 due to a relative increase in advertising expense as a result

of increased distribution of advertising pieces in response to a heightened promotional environment partially offset by a relative decrease in payroll and payroll-related items (including a non-recurring $7.2 million charge in the fiscal third quarter of 2006 related to the review of stock option grants and procedures).

Operating Profit

Operating profit for the three months ended December 1, 2007 was $203.2 million, or 11.3% of net sales, compared to $211.1 million, or 13.0% of net sales, during the comparable period in 2006. For the nine months ended December 1, 2007, operating profit was $578.6 million, or 11.3% of net sales, compared to $579.5 million, or 12.5% of net sales, during the comparable period in 2006. The decreases in operating profit as a percentage of net sales for the three and nine month periods ended December 1, 2007 were primarily a result of the deleverage in the gross margin.

Interest Income

Interest income was $5.0 million and $21.6 million for the fiscal three and nine months ended December 1, 2007, respectively, compared to $10.6 million and $30.2 million for the corresponding periods last year. Interest income decreased primarily as a result of lower cash balances principally due to increased share repurchases during the current year.

Income Taxes

The effective tax rate was 33.6% and 35.0% for the three and nine months ended December 1, 2007, respectively, and 35.8% and 36.3% for the three and nine months ended November 25, 2006, respectively. The tax rate for the three months ended December 1, 2007 included an approximate $8.0 million benefit principally due to the effective settlement in the quarter of certain discrete tax items from ongoing examinations. The tax rate for the nine months ended December 1, 2007 included an approximate $17.1 million benefit primarily due to the effective settlement of certain discrete tax items from ongoing examinations, the recognition of favorable discrete state tax items and from changing the blended state tax rate of deferred income taxes.

The Company expects that FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48") may, over time, create more volatility in the effective tax rate from quarter to quarter because the Company is required each quarter to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.

Net Earnings

As a result of the factors described above, net earnings were $138.2 million for the fiscal third quarter of 2007 and $389.9 million for the fiscal nine months of 2007, compared with $142.4 million and $388.4 million for the corresponding periods in 2006, respectively.

Expansion Program

The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets and the expansion or relocation of existing stores. As a result of this program, the Company operated 859 BBB stores, 39 CTS stores, 40 Harmon stores and 8 buybuy BABY stores (acquired as of March 22, 2007) at the end of the fiscal third quarter of 2007, compared with 795 BBB stores, 35 CTS stores and 38 Harmon stores at the end of the corresponding quarter last year. At December 1, 2007, Company-wide total store square footage was approximately 29.5 million square feet.

The Company opened 28 BBB stores, 3 CTS stores and 1 Harmon store during the third quarter of fiscal 2007. Including the 44 BBB stores opened in the fiscal nine months, the Company plans to open approximately 70 BBB stores (including its first store in Canada, which opened on December 6, 2007) in fiscal 2007; however, it is possible that approximately 3 to 5 of these openings may occur subsequent to year-end in March 2008. Additionally, including the 5 CTS stores opened in the fiscal nine months, the Company plans to open 6 to 7 CTS stores and 1 buybuy BABY store in fiscal 2007. The continued growth of the Company is dependent, in large part, upon the Company's ability to execute its expansion program successfully.

Liquidity and Capital Resources

The Company has been able to finance its operations, including its expansion program, through internally generated funds. Net cash provided by operating activities for the nine months ended December 1, 2007 was $239.9 million as compared with $217.7 million in the corresponding period of fiscal 2006. The increase in net cash provided by operating activities in 2007 compared to 2006 was primarily the result of an increase in net earnings, as adjusted for non-cash expenses, primarily depreciation. There were no significant changes in the net components of working capital.

Inventory per square foot was $60.91 as of December 1, 2007 and $60.06 as of November 25, 2006. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales growth.

Net cash provided by investing activities for the nine months ended December 1, 2007 was $349.0 million as compared with net cash used of $187.7 million in the corresponding period of fiscal 2006. The increase in net cash provided by investing activities was primarily attributable to an increase in the redemptions of investment securities, net of purchases, that was partially offset by an increase in capital expenditures and the payment for the acquisition of buybuy BABY.

Net cash used in financing activities for the nine months ended December 1, 2007 was $611.8 million as compared with $22.7 million of net cash provided by financing activities in the corresponding period of 2006. The net cash used in financing activities in 2007 was primarily attributable to common stock repurchases of $631.7 million.

Seasonality

The Company exhibits less seasonality than many other retail businesses, although sales levels are generally higher in August, November and December and generally lower in February and April.

Review of Equity Grants and Procedures and Related Matters

As described in a Form 8-K dated October 10, 2006, in June 2006, the Company's Board of Directors appointed a special committee of independent directors to carry out a review with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares, as a result of which the measurement dates for various grants were revised. As a consequence, as described in the Company's Annual Report on Form 10-K for the fiscal year ended March 3, 2007 ("2006 Form 10-K"), the Company (i) recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, and pursuant to Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements in Current Year Financial Statements," decreased beginning retained earnings for fiscal 2006 by such amount, and (ii) recorded $8.2 million of expense for fiscal 2006. As described in a Form 8-K dated December 28, 2006 and the Company's 2006 Form 10-K, the Company's Board of Directors also approved during fiscal 2006 a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences arising under Section 409A of the Internal Revenue Code. No executive officers received any payments under such remediation program. The Company continues to cooperate with the inquiry of the SEC regarding the Company's stock option grant practices.

The United States Attorney's Office for the District of New Jersey has concluded its inquiry with respect to matters arising out of and related to the Company's historical stock option grants and procedures and related matters and has indicated it will take no further action related to this matter.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), "Business Combinations." SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. SFAS No. 141R determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS No. 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the "fair value option"). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS No. 159 is effective for fiscal years

beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.

Critical Accounting Policies

See "Critical Accounting Policies" under Item 7 of the Company's Fiscal 2006 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on May 2, 2007 and incorporated by reference herein. There were no changes to the Company's critical accounting policies except as follows.

Inventory Valuation: Merchandise inventories continue to be stated at the lower of cost or market. Inventory costs for buybuy BABY, acquired in March 2007, are calculated using the first-in, first-out cost method.

Income Taxes: During the first quarter of fiscal 2007, the Company adopted FIN
48. Under FIN 48, the Company recognizes the tax benefit from an uncertain tax position only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities.

The Company expects that FIN 48 may, over time, create more volatility in the effective tax rate from quarter to quarter because the Company is required each quarter to determine whether new information changes the assessment of both the probability that a tax position will effectively be sustained and the appropriateness of the amount of recognized benefit.

Forward-Looking Statements

This Form 10-Q may contain forward-looking statements. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan, and similar words and phrases. The Company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the Company's control. Such factors include, without limitation: changes in the retailing environment and consumer preferences and spending habits; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; general economic conditions; unusual weather patterns; competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the cost of labor, merchandise and other costs and expenses; the ability to find suitable locations at acceptable occupancy costs to support the Company's expansion program; and matters arising out of or related to the Company's stock option grants and procedures and related matters, including the outcome of the informal inquiry commenced by the SEC, the possibility that the SEC may not agree with all of the special committee's findings and recommendations and may require additional or different remediation, any other proceedings which may be brought against the Company by the SEC or other governmental agencies, any tax implications relating to the Company's stock option grants, the outcome of the shareholder derivative actions filed against certain of the Company's officers and directors, and the possibility of other private litigation relating to such stock option grants and related matters. The Company does not undertake any obligation to update its forward-looking statements.

Available Information

The Company makes available as soon as reasonably practicable after filing with the SEC, free of charge, through its website, www.bedbathandbeyond.com, the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, electronically filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.