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Bed Bath & Beyond: Too Much Risk, Too Few Customers

Posted: Dec 05, 2008 08:30 AM by Glenn Curtis

Tickers in this Article: JCP, WMT, TGT, BBBY

I love going to stores that sell housewares. I don't know what it is, but I can look at kitchen electronics, throw pillows or decorative lampshades for hours and not get bored. I also have a knack for going into these stores and spending a lot of money, which may be why it's one of the few hobbies I have that my wife whole-heartedly supports.

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Unfortunately, I seem to be in the minority these days. People simply aren't shopping for housewares, and it's tearing into the revenue of retailers like Bed Bath & Beyond (Nasdaq:BBBY). The home outfitter has seen a sharp decline in sales and recently had to slash its third-quarter earnings expectations because of the slowdown.

Ratcheting Things Down
Bed Bath & Beyond now expects to earn 31-35 cents per share in its fiscal Q3. This is a reduction from the prior guidance of 41-47 cents per share, and it's below analyst estimates of 40 cents per share. The company is also expecting a same-store sales decline of 5.6%.(To explore the controversies surrounding forward-looking expectations, read Can Earnings Guidance Accurately Predict The Future?)

On January 7, the company is expected to disseminate its full Q3 results.

Company Overview
Bed Bath & Beyond is neither a new chain nor a retail stalwart like J.C. Penney (NYSE:JCP), which has been around since the early 1900s. It was founded in 1971; it has more that 900 stores and in fiscal 2008 it generated in excess of $7 billion in sales. Basically, it's a solid middle-of-the-road retailer that has seen its share of bad times, but nothing quite like this I would venture.

With the bursting of the housing bubble, spending on housewares has dried up. People are saving money for necessities and cutting back on discretionary spending - exactly the kind of spending that Bed Bath & Beyond counts on. We've already seen the bankruptcy of rival Linens-N-Things, and the environment will only get tougher for Bed Bath & Beyond as consumers trade down to low-cost retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). (For more on these companies, read Analyzing Retail Stocks.)

Why Investors Should Steer Clear
Personally, I love shopping at Bed Bath & Beyond, but that doesn't make it a good investment right now. Here are my concerns:

Retailers in general will be fighting tooth and nail for customers in the coming months and that this will hurt Bed Bath & Beyond's business.
I'm still not convinced that people are going to return to the spending mindset any time soon. This showdown is going to last awhile.
Although the stock isn't trading a the bottom of its 52-week low like some other companies, it is still about 35% off its 52-week high, which means the potential for tax-loss selling is there.
We have no guarantees that further guidance cuts aren't in the works. We've seen reductions on top of reductions, so it is difficult to bank on the latest round being the last round.

Bottom Line
As a shopper, I'm a fan of Bed Bath & Beyond, but as an investor, this is not an attractive company right now. Like most retailers, it has the potential to pop when discretionary spending picks up again, but right now there are simply too many risks and too few customers.

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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