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Bed Bath & Beyond Pours A Tepid Q2

Posted: Oct 03, 2007 12:21 PM by Glenn Curtis

Tickers in this Article: BBBY, HD, LOW, TGT, WMT

Since June, house ware retailer Bed Bath & Beyond's (Nadsaq:BBBY) share price has been on a steady slope downward. The question everyone wants answered is: "Can the well-known retailer turn things around in the near-term?"

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Honestly, I think it's going to be tough.

Lukewarm Second Quarter
Sure, the company managed to grow its revenue at about a 10% clip in the period, but its performance was roughly in-line with Wall Street estimates. (To learn more, see Strategies For Quarterly Earnings Season.)

Although the company earned 55 cents per share, which was about 3 cents north of Wall Street expectations, the news wasn't overly exciting, considering that baked into those results was a $5.8 million tax benefit. Backing out that number, EPS was about 52 cents. Also, its same store sales were up just 2.2%, which in my mind, isn't anything to write home about.

Rivals Are Struggling
I think the environment has actually worsened against this company over the past several months, and that unfortunate trend may continue. The real estate market and high gas prices have taken their toll on consumer spending.

Big-name, deep-pocketed retailers including Wal-Mart (NYSE:WMT) are struggling.

Even Target (NYSE: TGT) was forced to reduce its same-store-sales estimates for the month of September, and Target had been a retail leader. Also struggling are the home improvement stores such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). These stores sell many of the same products that Bed Bath & Beyond sells, and if they're struggling and I can’t see how Bed Bath & Beyond is going to be any different.

Another problem is that we are heading into tax loss selling season, and consumers are likely to have their wallets pinched even further, thanks to rising utility costs.

Disturbing Trend
There are more problems with BBBY that concern me as well. For instance, the average earnings estimate for fiscal 2008 has come down a penny from $2.20 to $2.19 a share over the last 30 days. During that same time, the average estimate for the following year has come down from $2.48 a share to $2.47 a share. The minor decline is hardly catastrophic, to be sure, but I don't like the trend, and I would argue that it's not likely to draw investors to the company.

I think it could take several quarters for the sell side to become more comfortable with the company and its earnings outlook going forward.

The Bottom Line
All that said, I’m not a total bear on Bed Bath & Beyond. In fact, I think its got prime locations, a great name, a decent store format, a solid merchandise mix, and reasonable long-term growth potential. I also like its stock repurchase program.

Finally, if and when retail does rebound, and demand for household-related wares does perk up, the company is well-positioned to reap the benefits. However, right now there are too many unknowns in the equation for me to get involved. If the stock were to shed its price a bit more, then maybe it would be worth deeper analysis and consideration.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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