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. 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, general economic conditions including the housing market, fuel costs, and the overall macroeconomic environment, unusual weather patterns, consumer preferences and spending habits, competition from existing and potential competitors, and the ability to find suitable locations at acceptable occupancy costs to support the Company's expansion program.

The difficult conditions affecting the overall macroeconomic environment continued to impact the retail sector in general and the Company. The Company believes factors such as the increase in the unemployment rate and issues specific to the housing industry, including a decline in home values in conjunction with a downward trend in home sales, have negatively impacted consumer confidence and the level of discretionary spending by consumers, resulting in an adverse impact on the Company's net sales, net earnings and operating cash flows. The Company cannot predict whether, when or the manner in which these economic conditions will change.

Recently, a number of businesses in the retail industry, including a significant competitor of the Company, have announced their liquidations. The Company's results have been impacted and may continue to be impacted by these liquidations, including those within its sector of retailing. The Company believes this continued 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.

In light of the risks posed by the current macroeconomic environment, the Company continues to work to systematically review all expenditures with the goal of prudently managing its business. At the same time, the Company remains committed to making the required investments in its infrastructure to help position the Company for continued success. The Company continues to scrutinize and prioritize its capital needs while continuing to make investments, principally for new stores, existing store improvements, and other projects whose impact is considered as important to its future.

The following represents an overview of the Company's financial performance for the periods indicated:

† Net sales in fiscal 2008 (fifty-two weeks) increased approximately 2.3% to $7.208 billion; net sales in fiscal 2007 (fifty-two weeks) increased approximately 6.5% to $7.049 billion over net sales of $6.617 billion in fiscal 2006 (fifty-three weeks).

† Comparable store sales for fiscal 2008 decreased by approximately 2.4% as compared with an increase of approximately 1.0% and 4.9% in fiscal 2007 and 2006, respectively. Comparable store sales percentages are calculated based on an equivalent number of weeks for each annual period.

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. Since the first quarter of fiscal 2008, buybuy BABY has been included in the Company's comparable store sales calculation.

† Gross profit for fiscal 2008 was $2.873 billion or 39.9% of net sales compared with $2.925 billion or 41.5% of net sales for fiscal 2007 and $2.835 billion or 42.8% of net sales for fiscal 2006.

† Selling, general and administrative expenses ("SG&A") for fiscal 2008 were $2.199 billion or 30.5% of net sales compared with $2.087 billion or 29.6% of net sales for fiscal 2007 and $1.946 billion or 29.4% of net sales for fiscal 2006.

† The effective tax rate was 37.8%, 35.0% and 36.3% for fiscal years 2008, 2007 and 2006, respectively. The changes in the effective tax rate between fiscal 2008, fiscal 2007 and fiscal 2006 are due to the recognition of certain discrete tax items in each respective fiscal year.

† Net earnings for the fiscal year (fifty-two weeks) ended February 28, 2009 were $1.64 per diluted share ($425.1 million), compared to fiscal 2007 (fifty-two weeks) net earnings of $2.10 per diluted share ($562.8 million) and fiscal 2006 (fifty-three weeks) net earnings of $2.09 per diluted share ($594.2 million). Net earnings per diluted share include the impact of the Company's repurchases of its common stock.

During fiscal 2008, 2007 and 2006, the Company's capital expenditures were $215.9 million, $358.2 million and $317.5 million. Included in fiscal 2007's capital expenditures were costs associated with a new distribution center and a new E-service fulfillment center to support the Company's growth.

Since May 2008, the Company, through a joint venture, operates two stores in Mexico under the name "Home & More." The cost of investment in the joint venture totaled approximately $4.8 million, including fees.

The Company plans to continue to expand its operations and invest in its infrastructure to reach its long-term objectives. In fiscal 2009, the Company expects to open approximately 50 to 54 new stores, including approximately 35 BBB stores throughout the United States and Canada, approximately six to eight CTS stores, approximately eight to ten buybuy BABY stores and one Harmon store. During fiscal 2008, the Company opened a total of 67 new stores, including 49 BBB stores throughout the United States and Canada, 11 CTS stores, one Harmon store and six buybuy BABY stores and closed one Harmon store. The Company currently has no outstanding bank borrowings, and for fiscal 2009, expects its operations to be entirely funded from internally generated sources.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated (i) selected statement of earnings data of the Company expressed as a percentage of net sales and
(ii) the percentage change in dollar amounts from the prior year in selected statement of earnings data:

                                                        Fiscal Year Ended
                                              Percentage                    Percentage Change
                                             of Net Sales                    from Prior Year
                                 February 28,    March 1,    March 3,    February 28,    March 1,
                                     2009          2008        2007          2009          2008

Net sales                               100.0 %     100.0 %     100.0 %           2.3 %       6.5 %

Cost of sales                            60.1        58.5        57.2             5.1         9.0

Gross profit                             39.9        41.5        42.8            (1.8 )       3.2

Selling, general and
administrative expenses                  30.5        29.6        29.4             5.4         7.3

Operating profit                          9.3        11.9        13.4           (19.6 )      (5.8 )

Earnings before provision for
income taxes                              9.5        12.3        14.1           (21.0 )      (7.3 )

Net earnings                              5.9         8.0         9.0           (24.5 )      (5.3 )

Net Sales

Net sales in fiscal 2008 (fifty-two weeks) increased $159.4 million to $7.208 billion, representing an increase of 2.3% over $7.049 billion of net sales in fiscal 2007 (fifty-two weeks), which increased $431.5 million or 6.5% over the $6.617 billion of net sales in fiscal 2006 (fifty-three weeks). For fiscal 2008, the increase in net sales was generated by the Company's new store sales increase of 4.6% partially offset by the decrease in comparable store sales. For fiscal 2007, approximately 82% of the increase in net sales was attributable to an increase in the Company's new store sales, 26% of the increase was attributable to the acquisition of buybuy BABY, 15% of the increase was attributable to the increase in comparable store sales, all partially offset by 23% as a result of an additional week of sales in fiscal 2006.

For fiscal 2008, comparable store sales for 874 stores represented $6.746 billion of net sales; for fiscal 2007, comparable store sales for 792 stores represented $6.457 billion of net sales; and for fiscal 2006, comparable store sales for 683 stores represented $6.069 billion of net sales. For fiscal 2008, the decrease in comparable store sales was approximately 2.4%. Net sales and comp sales continued to be negatively affected by the economic slowdown including issues specific to the housing industry and the liquidation sales of a number of retailers, including a significant competitor. For fiscal 2007, the increase in comparable store sales was approximately 1.0%. This increase reflected the continued consumer acceptance of the Company's merchandise offerings and advertising programs, but was negatively affected by the economic slowdown, in general, and by issues specific to the housing and mortgage industries in particular. In those areas of the Country that were reported to be the most significantly affected by these issues, notably Arizona, California, Florida and Nevada, sales were noticeably weaker than in less affected areas.

Sales of domestics merchandise accounted for approximately 43%, 44% and 46% of net sales in fiscal 2008, 2007 and 2006, respectively, of which the Company estimates that bed linens accounted for approximately 13%, 14% and 15% of net sales in fiscal 2008, 2007 and 2006, respectively. The remaining net sales in fiscal 2008, 2007 and 2006 of 57%, 56% and 54%, respectively, represented sales of home furnishings and other items. No other individual product category accounted for 10% or more of net sales during fiscal 2008, 2007 or 2006.

Gross Profit

Gross profit in fiscal 2008, 2007 and 2006 was $2.873 billion or 39.9% of net sales, $2.925 billion or 41.5% of net sales and $2.835 billion or 42.8% of net sales, respectively.

The decrease in gross profit between fiscal 2008 and 2007 as a percentage of net sales was primarily due to an increase in inventory acquisition costs, an increase in coupon redemptions and the shift in the mix of merchandise sold as the Company continues to experience a higher percentage of sales of home furnishings. The decrease in gross profit between fiscal 2007 and 2006 as a percentage of net sales was primarily due to an increase in coupon redemptions associated with a heightened promotional environment, an increase in inventory acquisition costs and the shift in the mix of merchandise sold, as the Company continued to experience a higher percentage of sales of home furnishings.

Selling, General and Administrative expenses

SG&A was $2.199 billion or 30.5% of net sales in fiscal 2008, $2.087 billion or 29.6% of net sales in fiscal 2007 and $1.946 billion or 29.4% of net sales in fiscal 2006. The increase in SG&A between fiscal 2008 and 2007 as a percentage of net sales is primarily due to the 2.4% decline in comparable store sales, resulting in relative increases in occupancy costs (including rent, depreciation and real estate taxes), as well as relative increases in payroll-related items (including salaries and benefits). Also contributing to the increase in SG&A as a percentage of net sales were relative increases in advertising expenses, including increases in postage, paper and other production costs. The increase in SG&A between fiscal 2007 and 2006 as a percentage of net sales was primarily due to a relative increase in advertising expense as a result of increased distributions of advertising pieces in response to the heightened promotional environment and a relative increase in occupancy costs and other expenses, partially offset by a relative decrease in payroll and payroll related items (including a non-recurring pre-tax charge of $30 million in fiscal 2006 related to the Company's remediation program intended to protect its employees from certain adverse tax consequences arising pursuant to Internal Revenue Code
Section 409A).

Operating Profit

Operating profit for fiscal 2008 was $673.9 million or 9.3% of net sales, $838.0 million or 11.9% of net sales in fiscal 2007 and $889.4 million or 13.4% of net sales in fiscal 2006. The year over year decreases in operating profit as a percentage of net sales were a result of changes in gross profit and SG&A, as discussed above.

Interest Income

Interest income in fiscal 2008, 2007 and 2006 was $9.4 million, $27.2 million and $43.5 million, respectively. Interest income decreased in fiscal 2008 compared to fiscal 2007 primarily as a result of lower interest rates. Interest income decreased in fiscal 2007 compared to fiscal 2006 primarily as a result of lower cash balances principally due to share repurchase activity in fiscal 2007.

Income Taxes

The effective tax rate was 37.8% for fiscal 2008, 35.0% for fiscal 2007 and 36.3% for fiscal 2006. For fiscal 2008, the tax rate included an approximate $0.8 million benefit primarily due to the recognition of certain discrete tax items and the changing of the blended state tax rate of deferred income taxes. For fiscal 2007, the tax rate included an approximate $21.6 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 Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48") will continue to create volatility in the effective tax rate from year to year because the Company is required each year 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.

EXPANSION PROGRAM

The Company is engaged in an ongoing expansion program involving the opening of new stores in both new and existing markets, the expansion or relocation of existing stores and the continuous review of strategic acquisitions.

In the 17 year period from the beginning of fiscal 1992 to the end of fiscal 2008, the chain has grown from 34 to 1,037 stores. Total square footage grew from 0.9 million square feet at the beginning of fiscal 1992 to 32.1 million square feet at the end of fiscal 2008. During fiscal 2008, the Company opened a total of 67 new stores, including 49 BBB stores throughout the United States and Canada, 11 CTS stores, one Harmon store and six buybuy BABY stores, and closed one Harmon store, all of which resulted in the aggregate addition of approximately 1.9 million square feet of store space. The Company opened its first international BBB store in Ontario, Canada in December 2007 and opened three additional stores in Canada during fiscal 2008. Since May 2008, the Company, through a joint venture, operates two stores in Mexico under the name "Home & More."

The Company plans to continue to expand its operations and invest in its infrastructure to reach its long-term objectives. In fiscal 2009, the Company expects to open approximately 50 to 54 new stores, including approximately 35 BBB stores throughout the United States and Canada, approximately six to eight CTS stores, approximately eight to ten buybuy BABY stores and one Harmon store. The Company currently has no outstanding bank borrowings, and for fiscal 2009, expects its operations to be entirely funded from internally generated sources.

LIQUIDITY AND CAPITAL RESOURCES

Fiscal 2008 compared to Fiscal 2007

The Company has been able to finance its operations, including its expansion program, through internally generated funds. Net cash provided by operating activities in fiscal 2008 was $584.0 million, compared with $614.5 million in fiscal 2007. Year over year, the Company experienced a decrease in cash provided by net earnings, partially offset by lower cash used for the net components of working capital (primarily income taxes payable and merchandise inventories offset by merchandise credit and gift card liabilities and accrued expenses and other current liabilities).

Inventory per square foot was $51.24 as of February 28, 2009, a decrease of approximately 4.4% from $53.58 as of March 1, 2008. The Company continues to focus on optimizing inventory productivity while maintaining appropriate in-store merchandise levels to support sales.

Net cash used in investing activities in fiscal 2008 was $113.1 million, compared with net cash provided by investing activities of $101.7 million in fiscal 2007. In fiscal 2008, net cash used in investing activities was primarily due to $215.9 million of capital expenditures partially offset by $107.6 million of redemptions of investment securities. In fiscal 2007, net cash provided by investing activities was due to $545.8 million of redemptions of investment securities, net of purchases, partially offset by $358.2 million of capital expenditures and $85.9 million in payment for the acquisition of buybuy BABY.

Net cash used in financing activities in fiscal 2008 was $26.8 million, compared with $705.5 million in fiscal 2007. The decrease in net cash used in financing activities was primarily attributable to a decrease in common stock repurchases in the current year.

Fiscal 2007 compared to Fiscal 2006

Net cash provided by operating activities in fiscal 2007 was $614.5 million, compared with $613.6 million in fiscal 2006. Year over year, the Company experienced an increase in cash provided by net earnings, as adjusted for non-cash expenses (primarily deferred taxes and depreciation), which was offset by a decrease in the net components of working capital (primarily decreases in accounts payable and income taxes offset by an increase in merchandise inventories).

Inventory per square foot was $53.58 and $54.18 as of March 1, 2008 and March 3, 2007, respectively.

Net cash provided by investing activities in fiscal 2007 was $101.7 million, compared with net cash used in investing activities of $397.7 million in fiscal 2006. The increase in net cash provided by investing activities was attributable to an increase in the redemptions of investment securities, net of purchases, that was partially offset by the payment of $85.9 million for the acquisition of buybuy BABY and an increase in capital expenditures to $358.2 million in fiscal 2007 from $317.5 million in fiscal 2006.

Net cash used in financing activities in fiscal 2007 was $705.5 million, compared with $250.3 million in fiscal 2006. The increase in net cash used in financing activities was primarily attributable to common stock repurchased of $734.2 million in fiscal 2007 compared to $301.0 million in fiscal 2006 under the Company's stock repurchase program.

Auction Rate Securities

As of February 28, 2009, the Company held approximately $216.6 million of net investments in auction rate securities. Beginning in mid-February 2008 due to current market conditions, the auction process for the Company's auction rate securities failed and continues to fail. These failed auctions result in a lack of liquidity in the securities but do not affect the underlying collateral of the securities. All of these investments carry triple-A credit ratings from one or more of the major credit rating agencies and the Company believes that given their high credit quality, it will ultimately recover at par all amounts invested in these securities.

During fiscal 2008, the Company entered into an agreement with the investment firm that sold the Company a portion of its auction rate securities to redeem at par approximately $43.2 million of these securities. This agreement provides for, among other things, the option to redeem these securities at par during fiscal 2010. The Company recorded a net pre-tax other-than-temporary impairment loss of approximately $1.8 million related to these securities and also recorded $1.8 million of pre-tax income to reflect the fair value of the option to redeem these securities at par value. This resulted in no impact on the Company's net earnings for fiscal 2008 and the Company anticipates that any future changes in the fair value of the related auction rate securities will be offset by the changes in the fair value of the option with no material impact to the Company's net earnings.

The remainder of approximately $176.0 million of these securities at par had a temporary valuation adjustment of approximately $2.6 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed to be temporary, it was recorded in accumulated other comprehensive loss, net of a related tax benefit of approximately $1.0 million, and did not affect the Company's net earnings for fiscal 2008.

The Company does not anticipate that any potential lack of liquidity in its auction rate securities, even for an extended period of time, will affect its ability to finance its operations, including its expansion program and planned capital expenditures. The Company continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. These investments are primarily classified as non-current assets until the Company has better visibility as to when their liquidity will be restored. The classification and valuation of these securities will continue to be reviewed quarterly.

During fiscal 2008, approximately $107.6 million of auction rate securities were redeemed at par. Subsequent to the end of fiscal 2008 through April 20, 2009, the Company additionally redeemed approximately $1.1 million at par.

Other Fiscal 2008 Information

At February 28, 2009, the Company maintained two uncommitted lines of credit of $100 million each, with expiration dates of September 3, 2009 and February 26, 2010, respectively. These uncommitted lines of credit are currently and are expected to be used for letters of credit in the ordinary course of business. In addition, under these uncommitted lines of credit, the Company can obtain unsecured standby letters of credit. During fiscal 2008, the Company did not have any direct borrowings under the uncommitted lines of credit. As of February 28, 2009, there was approximately $7.1 million of outstanding letters of credit and approximately $45.5 million of outstanding unsecured standby letters of credit, primarily for certain insurance programs. Although no assurances can be provided, the Company intends to renew both uncommitted lines of credit before the respective expiration dates.

The Company believes that during fiscal 2009, internally generated funds will be sufficient to fund its operations, including its expansion program and planned capital expenditures.

Between December 2004 and September 2007, the Company's Board of Directors authorized, through several share repurchase programs, the repurchase of $2.950 billion of its shares of common stock. The Company was authorized to make repurchases from time to time in the open market or through other parameters approved by the Board of Directors pursuant to existing rules and regulations. The Company has approximately $919 million remaining of authorized share repurchases as of February 28, 2009. The execution of the Company's current share repurchase program will consider current business and market conditions, including but not limited to, the liquidity of its auction rate security investments.

The Company has contractual obligations consisting mainly of operating leases for stores, offices, warehouse facilities and equipment, purchase obligations and other long-term liabilities which the Company is obligated to pay as of February 28, 2009 as follows:

                                                   Less than 1                                   After 5
(in thousands)                        Total           year         1-3 years     4-5 years        years

Operating Lease Obligations (1)    $ 3,162,758    $     424,635    $  794,043    $  642,554    $ 1,301,526
Purchase Obligations (2)               418,697          418,697             -             -              -
Other long-term liabilities (3)        315,421                -             -             -              -

Total Contractual Obligations      $ 3,896,876    $     843,332    $  794,043    $  642,554    $ 1,301,526

(2) Purchase obligations primarily consist of purchase orders for merchandise and capital expenditures.

(3) Amounts recorded as deferred rent and other liabilities and income taxes payable in the Consolidated Balance Sheet as of February 28, 2009 have been reflected only in the Total column in the table above as the timing and/or amount of any cash payment is uncertain. Deferred rent and other liabilities are primarily comprised of deferred rent, workers' compensation and general liability reserves and various other accruals.

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 October.

INFLATION

The Company does not believe that its operating results have been materially . . .