Bed Bath and Beyond (BBBY) Plunges Despite Topping Earnings Estimates

Yesterday, shareholders of retail giant Bed Bath and Beyond (BBBY: Charts, News) learned the harsh lesson that nothing is certain in today's slippery, fear-driven markets. The company, a component of the S&P 500 index, posted third quarter earnings of $228.5 million, or 95 cents per share, a 28% improvement over the previous year and topping analyst expectations of 89 cents.

Revenue, however, came in at $2.34 billion, missing analysts' forecasts by $250 million. Shares were brutally punished for this miss, sliding as much as 6% during Thursday trading. Although the company attempted to calm investors with strong guidance, estimating fourth quarter earnings between $1.28 to $1.33 per share, and ending the year with $3.85 to $3.92 per share, investors weren't impressed, citing far stronger guidance in previous quarters.

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To American shoppers, Bed Bath and Beyond is a familiar sight, with 1,171 stores across all 50 states, Puerto Rico and Canada. The company's retail division is divided into its flagship stores - which sell domestic household merchandise - as well as Christmas Tree Shops, buybuy BABY stores, Harmon stores as well as Harmon Face Values stores. The company has made few adjustments since the end of November, opening one new buybuy BABY store and closing one Harmon store. The company is also expanding into Mexico via a joint venture, with two Home & More stores operating in Mexico City. The company's growth outlook is heavily tied to new home sales, employment rates as well as overall consumer sentiment.

The company's same-store sales growth, its main barometer of retail performance, came in at 4.1%, topping some analysts' expectations of 2-4%, but missing the whisper estimate of 5%. In addition, it marks a decrease from the 5.6% growth it posted in the second quarter and a decrease from the 7% it posted in the prior year quarter. Analysts have also pointed out that Bed Bath and Beyond's numbers are moving contrary to the direction of the improving economy - the company posted stronger numbers when its industry peers were weaker in the second quarter (posting 1.3% growth), but posted weaker numbers while they were stronger (posting 4% growth in the third quarter). The company also struggled with comparisons with past performance. Investors had grown accustomed to same-store sales growth in excess of 6%-7% based on previous quarters.

As the American holiday shopping season sets records across multiple retail industries, analysts believe that Bed Bath and Beyond stands to gain considerable sales volume, but most of it coupon-based - implying lower margins per sale. However, bullish analysts, such as John Marrin of Jeffries, state that the margin performance was solid on lower markdowns and lower ad expense. In addition, Marrin noted, For the first time in over five years, sales growth was in line with industry growth. Despite some positive comments, most analysts agree that the company has to overcome major economic headwinds as well as a choppy retail environment that may become the norm for the next one or two years.

Shares of Bed Bath and Beyond have indeed been on a choppy ride, bouncing in a 52-week range between $44.79 and $63.83. Although Thursday's drop was steep, shares are still up nearly 25% for the year, outperforming the broader market. The company attributed its stability to strong sales and steady spending, which have helped offset rising commodity costs. To increase shareholder value, the company recently repurchased 5.6 million shares of outstanding stock for approximately $328 million. Shares currently trade 13 times forward earnings with an approximate PEG ratio of 1.

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Published on Dec 23, 2011
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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