By and  on March 8, 2002

NEW YORK -- Bed Bath & Beyond may be the beauty industry's next formidable player. On Tuesday, March 5, the domestics superstore gained instantaneous access to the health and beauty aids industry with the all-cash acquisition of Cedar Grove, N.J.-based Harmon Stores Inc. The purchase price was not disclosed.

Harmon's 27 units, which generate an estimated $40 million to $50 million in annual sales, could help the specialty retailer learn about beauty -- a product area analysts said Bed Bath & Beyond has identified as a potential area of growth.

"Strategic benefits of this deal include BBBY gaining valuable expertise into new merchandising categories," stated a report written by Dan Wewer and Michael Baker of Deutsche Banc Alex. Brown.

Ron Curwin, Bed Bath & Beyond's chief financial officer and treasurer, admitted that the chain currently has a "very limited selection" of personal care items, which includes a small array of shower gels, soaps and accessories. A visit to a store located on East 61st Street revealed a modest selection of bath and body products and accessories manufactured by Earth Therapeutics and Homedics.

Analysts noted that the product overlap between the two retailers is minimal, however, beauty seemed the most likely of categories to appeal to the specialty retailer. "The acquisition helps [Bed Bath & Beyond] learn a new product category, like beauty, which they haven't sold very much of, pretty quickly," said one analyst, who asked not to be named.

Harmon is known for its competitive pricing and a deep inventory of high-margin cosmetics and toiletries. It does not operate pharmacies.

Bed Bath & Beyond, based in Union, N.J., operates 396 stores across the country and sells household products, fixtures and furnishings. The company maintains an everyday-low-pricing strategy and competes with other superstores, such as Linens 'n Things, as well as department stores. The deal, said Curwin, will not affect Bed Bath & Beyond's fiscal 2001 results, which will be released April 3. It also isn't expected to have a material effect on 2002 results. The retailer generated sales of $2.4 billion for the year ended March 3, 2001.Curwin said that Harmon's 600 employees will soon meet with Bed Bath & Beyond's human resources department to get familiarized with the company. Harmon's principals, which consists of various members of two families, include Harmon's co-founder Newton Sheldon, and Robert Germano, Harmon's chief executive officer. Germano will report to Bill Waltzinger, responsible for corporate development for Bed Bath & Beyond. Harmon employees will continue to report to Germano.

Harmon operates 21 stores in New Jersey, five stores in New York (none in New York City) and one in Connecticut. Stores average 6,000 to 6,500 square feet and are typically freestanding units or located in strip malls. Along with beauty, the merchandise mix includes seasonal products, food, over-the-counter remedies, greeting cards, film and other general merchandise. The entrance is typically lined with trial sizes of sharply priced health and beauty aids. Its beauty department is carpeted and well lit like the rest of the store.

Harmon recently made a major push in stocking niche cosmetics brands, in addition to major lines like Maybelline, Cover Girl, Revlon and L'Oreal. Young girls are targeted with collections such as Petunia, Traffic Jam, Jane and Bonne Bell. Hard-to-find brands, such as Sorme, Palladio, Rubiglo, Irene Gari and Dermablend, are also part of the assortment, along with a large selection of skin care products. Several islands house promotional merchandise and almost an entire aisle is devoted to nail care. Prestige fragrances are stocked behind a service counter and include everything from Halston to Calvin Klein. Professional hair care is another well-developed department with a vast array of brands, including Sebastian, Artec and Paul Mitchell.

The acquisition, aside from opening the beauty door for Bed Bath & Beyond, also looks to put Harmon on an aggressive growth path.

According to a report by Alan Rifkin of Lehman Bros., as many as 75 Harmon stores could be operating by 2005. The Deutsche Banc Alex. Brown report confirmed Harmon's growth potential and added: "Harmon will continue to operate under a separate banner."

Analyst reports also noted that both retailers share a similar core customer profile: females with reasonable levels of income. These synergies, stated the Deutsche Banc Alex. Brown report, "present BBBY with some cross-selling opportunities. This could include potential links between the two companies' e-commerce sites."Harmon marks Bed Bath & Beyond's first acquisition in 31 years of business. The company was founded in 1971 by Leonard Feinstein and Warren Eisenberg, who remain co-chief executive officers of the company.

While analysts believe the retailer has been offered deals in the past, exactly what set the Harmon deal above others is unclear, aside from the beauty opportunity.

"Given management's conservative nature and exceptional track record, however, we are inclined to trust management's judgment on this one," stated the Deutsche Banc Alex. Brown report.

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