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

Results of Operations

Three Months Ended November 29, 2003 vs. Three Months Ended November 30, 2002

Net sales for the third quarter ended November 29, 2003 were $1.175 billion, an increase of $238.7 million or approximately 25.5% over net sales of $936.0 million for the corresponding quarter last year.  Approximately 31% of the increase was attributable to Bed Bath & Beyond new store sales and 49% of the increase was attributable to Christmas Tree Shops, Inc. (“CTS”) sales.  (See Note 7 “Acquisitions” in the notes to the unaudited consolidated financial statements).  The increase in comparable store sales in the third quarter of 2003 was 6.4%.  The increase in comparable store sales is due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings, a strong focus on customer service and the continued success of the Company’s advertising program.  Approximately 53% and 47% of Bed Bath & Beyond store sales for the third quarter were attributable to sales of domestics merchandise and home furnishings, respectively.

Gross profit for the third quarter of 2003 was $487.0 million or 41.5% of net sales, compared with $386.2 million or 41.3% of net sales during the third quarter of 2002.  The increase in gross profit as a percentage of net sales was primarily attributable to an improved markup on the mix of Bed Bath & Beyond product purchased partially offset by a lower markup on the mix of CTS product purchased.

Selling, general and administrative expenses (“SG&A”) were $325.5 million in the third quarter of 2003 compared with $267.0 million in the same quarter last year and as a percentage of net sales were 27.7% and 28.5%, respectively.  The decrease in SG&A as a percentage of net sales was primarily attributable to a decrease in costs associated with new store openings, occupancy costs and other store expenses, partially offset by an increase in payroll and payroll related items and advertising expenses.

As a result of the foregoing, operating profit increased to $161.5 million, compared with the $119.2 million during the third quarter of 2002.

Interest income was $2.0 million for the third quarter of 2003 compared to $2.9 million for the third quarter of 2002 due to a decrease in the average investment interest rate partially offset by an increase in cash invested.

The effective tax rate was 38.5% for both the third quarter of 2003 and 2002 due to the weighted average effective tax rate remaining consistent in the states in which the Company currently conducts its business.

As a result of the factors described above, net earnings increased to $100.5 million, compared with $75.1 million in the third quarter of 2002.

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Nine Months Ended November 29, 2003 vs. Nine Months Ended November 30, 2002

Net sales for the nine months ended November 29, 2003 were $3.180 billion, an increase of $564.2 million or approximately 21.6% over net sales of $2.616 billion for the corresponding period last year. Approximately 44% of the increase was attributable to Bed Bath & Beyond new store sales and 34% of the increase was attributable to CTS sales.  The increase in comparable store sales for the first nine months of 2003 was 5.6%.  The increase in comparable store sales is due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings, a strong focus on customer service and the continued success of the Company’s advertising program.

Gross profit for the first nine months of 2003 was $1.313 billion or 41.3% of net sales, compared with $1.075 billion or 41.1% of net sales during the first nine months of 2002.  The increase in gross profit as a percentage of net sales was primarily attributable to an improved markup on the mix of Bed Bath & Beyond product purchased partially offset by a lower markup on the mix of CTS product purchased.

SG&A was $905.5 million in the first nine months of 2003 compared with $763.3 million in the same period last year and as a percentage of net sales were 28.5% and 29.2%, respectively.  The decrease in SG&A as a percentage of net sales was primarily attributed to a decrease in costs associated with new store openings, occupancy costs and other store expenses, partially offset by an increase in advertising expenses and payroll and payroll related items.

As a result of the foregoing, operating profit increased to $407.8 million, compared with the $311.6 million during the first nine months of 2002.

Interest income was $7.2 million for the first nine months of 2003 compared to $8.5 million for the first nine months of 2002 due to a decrease in the average investment interest rate partially offset by an increase in cash invested.

The effective tax rate was 38.5% for both the first nine months of 2003 and 2002 due to the weighted average effective tax rate remaining consistent in the states in which the Company currently conducts its business.

As a result of the factors described above, net earnings increased to $255.2 million, compared with $196.9 million in the first nine months of 2002.

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 569 Bed Bath & Beyond stores and 30 Harmon stores at the end of the third quarter of 2003, compared with 489 Bed Bath & Beyond stores and 29 Harmon stores at the end of the corresponding quarter last year. Additionally, the Company acquired 23 CTS stores as of June 19, 2003 and subsequently opened one additional store in the second quarter of 2003 bringing the total number of CTS stores to 24.

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At November 29, 2003, Company-wide total square footage was approximately 20.3 million square feet. Bed Bath & Beyond store space grew to approximately 19.2 million square feet at the end of the third quarter of 2003 from approximately 17.2 million square feet at the end of the third quarter of last year.

During the third quarter of fiscal 2003, the Company opened 55 Bed Bath & Beyond stores. Including the stores opened through the third quarter, the Company plans to open approximately 86 Bed Bath & Beyond stores by the end of the fiscal year.

Financial Condition

Total assets at November 29, 2003 were approximately $2.779 billion compared with approximately $2.189 billion at March 1, 2003.  The net increase of $590.2 million arose from an increase in current assets of $372.6 million and an increase in non-current assets of $217.6 million.

The $372.6 million increase in current assets was primarily attributable to a $104.7 million increase in cash and cash equivalents (which amount is net of acquisition payments of approximately $175.5 million relating to CTS) and a $252.1 million increase in merchandise inventories, which was principally the result of new Bed Bath & Beyond store space and the acquisition of CTS.

The $217.6 million increase in non-current assets was primarily attributable to a $130.4 million increase in goodwill and an $82.2 million increase in net property and equipment (both primarily the result of the acquisition of CTS).

Total liabilities at November 29, 2003 were $979.1 million compared with $736.9 million at March 1, 2003, an increase of $242.2 million.  The increase was primarily attributable to a $166.5 million increase in accounts payable resulting from an increase in Bed Bath & Beyond merchandise inventories and the acquisition of CTS, and a $93.8 million increase in accrued expenses and other current liabilities due to the continued expansion of Bed Bath & Beyond and the acquisition of CTS.

Shareholders’ equity was $1.800 billion at November 29, 2003 compared with $1.452 billion at March 1, 2003.  The increase primarily reflects net earnings for the first nine months of fiscal 2003 and additional paid in capital from the exercise of stock options.

Capital expenditures for the first nine months of fiscal 2003 were $79.2 million compared with $122.5 million for the corresponding period last year. The decrease was primarily attributable to expenditures for leasehold improvements, furniture, fixtures, and information technology for the 79 new Bed Bath & Beyond stores opened during the first nine months of fiscal 2003, compared to expenditures for furniture, fixtures, leasehold improvements and information technology for the 92 new Bed Bath & Beyond stores opened and two stores relocated in the same period last year.

For fiscal 2003, the Company believes that, following the acquisition of CTS, its current operating cash flow, working capital, and cash and cash equivalents on hand will be sufficient to meet its obligations in the ordinary course of business including capital expenditures and new store openings. (See Note 7 “Acquisitions” in the notes to the unaudited consolidated financial statements).

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that it believes to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In particular, judgment is used in areas such as the provision for sales returns, inventory valuation using the retail inventory method, impairment of assets, impairment of goodwill and indefinitely lived intangible assets, vendor allowances and accruals for self insurance, litigation and store openings, expansions, relocations and closings. Actual results could differ from these estimates.

Sales Returns: Sales returns, which are reserved for based on historical experience, are provided for in the period that the related sales are recorded.

Inventory Valuation: Bed Bath & Beyond merchandise inventories are stated at the lower of cost or market, using the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. At any one time, inventories include items that have been marked down to the Company’s best estimate of their fair market value. Actual markdowns required could differ from this estimate.

Impairment of Assets: The Company periodically reviews long-lived assets for impairment by comparing the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between asset carrying values and the present value of the estimated net cash flows. The Company does not believe that any material impairment currently exists related to its long-lived assets.

Impairment of Goodwill and Indefinitely Lived Intangible Assets: As a result of the adoption of SFAS No. 142, the Company reviews goodwill and other intangibles that have indefinite lives for impairment annually and otherwise when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values.  Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. (See Note 7 “Acquisitions” in the notes to the unaudited consolidated financial statements).

Vendor Allowances: The Company receives various types of allowances from its merchandise vendors, which are based on negotiated terms. These allowances are recorded when earned as a reduction of cost of sales or as a reduction of other costs in accordance with the provisions of the FASB’s Emerging Issues Task Force Issue No. 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”

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Self Insurance: The Company uses self insurance for a number of risks including worker’s compensation, general liability, automobile liability and employee related health care benefits (a portion of which is paid by its employees). Liabilities associated with these risks are estimated in part by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.

Litigation: The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business which is based on available information and advice from outside counsel, where appropriate. As additional information becomes available, the Company reassesses the potential liability related to its pending litigation and revises its estimates as appropriate.

Store Opening, Expansion, Relocation and Closing Costs: Store opening, expansion, relocation and closing costs are charged to earnings as incurred. Prior to the adoption of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which was effective for any exit or disposal activity initiated after December 31, 2002, costs related to store relocations and closings were estimated and provided for in the period in which management approved the relocation or closing of a store.  Actual costs related to store relocations and closings could differ from these estimates.

Acquisitions

On June 19, 2003, the Company acquired Christmas Tree Shops, Inc. (“CTS”).  The results of CTS’s operations have been included in the consolidated financial statements since the date of acquisition. At the date of acquisition, CTS, headquartered in South Yarmouth, Massachusetts, operated 23 stores in 6 states.  CTS is a retailer of giftware and household items selling a broad assortment of merchandise in many categories including home décor, giftware, housewares, food, paper goods, and seasonal products at low prices.

The aggregate all cash purchase price was $194.4 million, net of cash acquired, including $18.9 million in deferred payments payable in cash over the next three years.

On March 5, 2002, the Company acquired Harmon Stores, Inc., a health and beauty care retailer, which did not have a material effect on its consolidated results of operations or financial condition.

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: general economic conditions, changes in the retailing environment and consumer spending habits, demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; unusual weather patterns;

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competition from existing and potential competitors; competition from other channels of distribution; pricing pressures; the ability to find suitable locations at reasonable occupancy costs to support the Company’s expansion program; and the cost of labor, merchandise and other costs and expenses. 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(a) or 15(d) of the Securities Exchange Act of 1934.