Neutral on Bed Bath & Beyond

We retain our long-term Neutral recommendation on Bed Bath & Beyond Inc. (BBBY - Analyst Report), a leading operator of merchandise and home furnishing stores in the U.S. The company posted strong third-quarter earnings per share while raising its guidance for fiscal 2011.

However, concerns regarding a sluggish recovery in the economy coupled with intense competition from specialty stores and mass merchandisers remain, threatening the company’s bottom-line.

Bed Bath’s third-quarter earnings per share of 95 cents, which is the eleventh consecutive beat, handily surpassed the Zacks Consensus Estimate of 88 cents and was up 28% from the year-ago quarter. The improved results were attributable to strong sales and higher margins. The company's lower payroll and occupancy expenses as a percentage of net sales led to lower selling, general and administrative expenses, eventually resulting in an operating margin expansion.

Going forward, Bed Bath & Beyond expects to deliver fourth-quarter 2011 earnings per share between $1.28 and $1.33. Fiscal 2011 earnings per share are expected to be in the range of $3.86 to $3.92, an increase of 22% to 25% from the prior-period level, up from the previous forecast of 22% to 25%.

Management guided comparable-store sales to increase in the range of 2% to 4% in the fourth quarter, triggering a 4% to 6% growth in net sales. Fiscal 2011 comps are expected to increase 5% with net sales increasing 7% to 8%.

Further, Bed Bath is strategically expanding its store count. The company has planned to make a capital expenditure of $275 million for new store openings while remodeling the existing stores. Since the beginning of fiscal 2011, Bed Bath & Beyond opened 36 stores, and is planning to increase the total number of new store count to approximately 39 by the end of the year. As of the quarter-end, the company operated nearly 1,171 stores.

Moreover, a strong countrywide network of stores coupled with the 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.

Bed Bath & Beyond operates in a highly fragmented industry and faces competition from larger retailers such as Target Corporation (TGT - Analyst Report) and Wal-Mart Stores Inc. (WMT - Analyst Report) as well as from departmental and specialty stores. Being in a highly-competitive industry, Bed Bath may find it difficult to execute and implement new business strategies, which in turn, will impact its operations adversely.

Bed Bath’s business also has a seasonality aspect to it, thus generating stronger results in the second and fourth quarters. This exposes the company to significant risks if the seasons fail to favorably deliver.

Currently, Bed Bath & Beyond holds a Zacks #2 Rank, implying a short-term ‘Buy’ rating on the stock.

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