We retained our Neutral stance on specialty retailer,
Bed, Bath & Beyond Inc.
), that also retains a Zacks Rank #3 (Hold). The company's strong
quarterly performance, robust outlook, store growth initiatives
and healthy financial position underline its strength. However,
soft margin trends, macroeconomic challenges, and intense
competition compel us to be on the sidelines at this juncture.
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Bed Bath & Beyond, a leading operator of merchandise and home
furnishing stores in the U.S., enjoys a strong countrywide
network of more than 1,100 stores along with strict focus on
aligning merchandise to suit consumer preferences, bolstering its
position in the market.
We remain impressed by the company's initiatives of expanding and
renovating stores as well as its focus on refreshing its
merchandise mix to boost productivity. For the rest of fiscal
2012, the company plans to open 2 buybuy BABY stores, bringing
the total store openings for the fiscal year to 41 across all
concepts. We believe these initiatives along with its focus on
boosting online presence and making technological advancements
should bode well for future sales.
The initiatives are paying off well, as evident from the
company's third-quarter 2012 earnings that rose 8.4% to $1.03 per
share, benefiting from the results of the newly acquired World
Market (Cost Plus Inc.) and Linen Holdings. The company also
witnessed robust sales growth of 15.3% year over year, driven by
the recently completed acquisitions as well as the increase in
comparable-store sales and new store openings.
Management now projects earnings between $1.60 and $1.67 for the
fourth quarter and in the range of $4.48 to $4.54 per share for
fiscal 2012, reflecting growth of 10% to 12%.
On the flip side, the company expects weak operating margins in
fiscal 2012, given the consolidation of World Market and Linen
Holdings' financial results, the ongoing capital initiatives, the
inclusion of the 53rd week, assumptions of an increase in coupons
and continued mix shift toward low-margin categories. This has
caused the Zacks Consensus Estimate for fiscal 2012 to decline
1.5% to $4.56 per share in the last 30 days.
Further, Bed Bath's business is seasonal in nature and typically
generates stronger results in the second and fourth quarters. As
a result, the company is exposed to significant risks if the
seasons fail to deliver favorably. Additionally, the company's
customers remain sensitive to macroeconomic factors, which may
negatively impact their discretionary spending, and in turn mute
the company's performance.
Other Stocks to Consider
Besides Bed Bath & Beyond, other stocks to consider in the
specialty retail sector are
Wal-Mart Stores Inc.
). These companies carry a Zacks Rank #3 (Hold).