Our long term recommendation on
Bed Bath & Beyond Inc.
(
BBBY
), remains intact at Neutral, given its strong quarterly
performance, robust outlook, store growth initiatives and strong
financial position, offset by macroeconomic challenges impacting
consumers as well as intense competition from specialty stores.
Furthermore, downward estimate revisions due to projections of
poor margins prove to be an impediment.
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. This sturdy foothold coupled
with its strategic effort to align merchandise according to
regional climate and demographics offer a strong competitive
advantage while strengthening its well-established position in
the market.
The company also enjoys a superior bargaining power compared
to peers like
Target Corporation
(
TGT
) and
Wal-Mart Stores Inc.
(
WMT
), given its policy of restricting dependence on a single
supplier.
Bed Bath & Beyond's second-quarter 2012 earnings rose 5.4% to
98 cents 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, which jumped 12.1%
year over year, driven by the recently completed acquisitions as
well as the increase in comparable-store sales and new store
openings.
Management reiterated earnings growth in the high-single to a
low-double-digit range for fiscal 2012, while for the
third-quarter it projected earnings between 99 cents and $1.04
per share.
Moreover, 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. The company
expects to open a total of 45 stores across all concepts in
fiscal 2012. We believe the company's store growth initiatives
along with its focus on boosting online presence and making
technological advancements should bode well for future sales.
Looking ahead, the company's major capital intensive initiatives
include developing its website for better shopping experience;
setting up a new 800,000 square feet e-commerce fulfillment
center in Pendergrass, Georgia; and the building of a new IT data
center to back the company's ongoing technology initiatives.
The company's total capital spending in fiscal 2012 is
anticipated to be $300 million, focusing mainly on new stores and
existing store refurbishments, information technology
enhancements and other important future projects.
On the flip side, the company expects operating margins to suffer
in fiscal 2012, given the assumptions of advertising expense
similar to fiscal 2011 and continued mix shift toward low-margin
categories. This has caused our earnings estimates to descend
over the past month. Estimates for fiscal 2012 have witnessed a
1.3% decline to $4.63 per share, representing a year-over-year
growth of nearly 14%.
Further, the consumer centric nature of the retail industry turns
out to be an impediment for the company in a few ways. Firstly,
the macroeconomic challenges including increase in fuel and
energy costs, credit availability, unemployment levels, and high
household debt levels, continue to weaken the purchasing power of
consumers. This may ultimately impact the company's growth and
profitability.
Also, Bed Bath & Beyond's success mainly depends on
predicting and quickly responding to changes in fashion, consumer
demands and demographics. Failure to keep pace with changes in
merchandise trends, consumer tastes, spending patterns and
consumer lifestyle could result in excess inventories,
significantly impacting the company s financial condition as well
as the top and bottom lines.
Balanced by the pros and cons explained above and in sync with
our long-term stance, Bed Bath & Beyond retains a Zacks #3
Rank, which implies a short term Hold rating.
BED BATH&BEYOND (BBBY): Free Stock Analysis
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TARGET CORP (TGT): Free Stock Analysis Report
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