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Our long term recommendation on Bed Bath & Beyond Inc. (BBBY - Analyst Report), 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 - Analyst Report) and Wal-Mart Stores Inc. (WMT - Analyst Report), 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.

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