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We reaffirmed our Neutral stance on specialty retailer, Bed Bath & Beyond Inc. (BBBY - Analyst Report), based on the company’s strong quarterly performance, impressive outlook and store growth initiatives. However, company’s margin performance is a cause of concern, given the soft trends witnessed of late.

Why Reiterate?

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 and has a focus on offering merchandise to suit consumer preferences.

We remain impressed by the company’s initiatives of expanding and renovating stores, boosting online presence, incorporating technological advancements and revivifying its merchandise mix to enhance productivity. Such measures bode well for future sales.

Bed Bath & Beyond’s efforts are paying off well, as evinced by its first-quarter fiscal 2013 earnings that rose 4.5% to 93 cents per share, benefiting from the performances of World Market (Cost Plus Inc.) and Linen Holdings. Moreover, the company’s earnings were in line with the Zacks Consensus Estimate.

This Zacks Rank #3 (Hold) company also witnessed sales growth of 17.8% year over year, driven by the aforesaid acquisitions as well as increase in comparable store sales and new store openings.

Management projects fiscal 2013 earnings per share in the range of $4.84–$5.01, while second-quarter fiscal 2013 earnings per share are estimated to range from $1.11–$1.16. Net sales are expected to rise 7% to 9% in the second quarter and 5% to 7% for fiscal 2013.

On the flip side, the company’s margins remained soft during the first quarter due to higher operating costs, increase in coupons and their redemption, higher markdowns and shift in the mix of merchandise sold to lower margin categories.

Going forward, we expect this weakness to continue due to persistence of the above factors in fiscal 2013 as well as the ongoing consolidation of World Market and Linen Holdings.

Other Stocks to Consider

Apart from Bed Bath & Beyond, other stocks that are worth a look in the specialty retail sector include KAR Auction Services, Inc. (KAR - Snapshot Report), Five Below, Inc. (FIVE - Snapshot Report) and PetSmart, Inc. (PETM - Snapshot Report). All the stocks carry a Zacks Rank #2 (Buy).

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