Bed Bath & Beyond (Nasdaq:BBBY) is proving it can thrive during a domestic recession, as sales and earnings during its most recent quarter grew nicely. Indications are that this will prove challenging over the longer term, though a number of smaller store concepts could save the day and same-store sales will inevitably rebound.
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Second Quarter Results
Sales eked out a 3.3% gain, to $1.9 billion, as new-store growth offset a modest 0.6% compression in same-store sales. During the quarter, Bed Bath opened a net eight namesake stores, three buybuy BABY locations and a single Harmon Face Values, a health and beauty retailer. As of quarter-end, just 10.7% of the total company store count consisted of non-namesake stores, including the two mentioned above (19 and 43 stores, respectively), as well as 53 Christmas Tree Shops. All stores specialize in domestic and home furnishings merchandise, though they obviously cater to individual store concepts.
Lower inventory and other sales cost benefits boosted gross profits by $34 million, or 4.6%. SG&A also decreased slightly to account for 28.8% of sales. The end result was an 18.5% operating profit improvement, to $222 million. Higher income taxes offset the bottom-line gains, but share buybacks allowed earnings to grow a very healthy 13%, to 52 cents per diluted share.
The Competitive Landscape
Linens 'n Things is nearing complete liquidation, while beleaguered Pier 1 Imports (NYSE:PIR) posted another double-digit drop in sales, as comps fell 7.6%. Williams Sonoma (NYSE:WSM) also posted a double-digit sales decline, as comps in every major retail concept (namesake stores Pottery Barn and Pottery Barn Kids) fell rather dramatically.
Bed Bath ended the quarter with no long-term debt and over $1 billion in cash, or over $4 per share. Solid working capital management also allowed for a more than doubling in operating cash flow and lower capex boosted free cash flow by a significant amount as well.
The Bottom Line
Bed Bath is proving it can outcompete rivals and remained solidly profitable despite a very challenging consumer spending environment. The demise of archrival Linens 'n Things is surely helping, but until same-store sales growth rebounds, there isn't much chance for consistent profit growth, which will be needed to justify a hefty forward P/E multiple (fiscal year end of February) of just under 20.
This could be tough, as the namesake store base is arguably mature and each concept must compete with larger big-box retailers, such as Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), that have gotten increasingly savvy in stocking their shelves with the unique kitchen and other home items that Bed Bath specializes in. Bed Bath does have a number of other appealing store franchises, but it will be some time before they account for a significant amount of sales or earnings. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
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