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Bed Bath & Beyond Inc. (BBBY - Analyst Report) reported robust fiscal third-quarter 2012 results with earnings per share of $1.03 marginally beating the Zacks Consensus Estimate of $1.02. Quarterly earnings also rose 8.4% from 95 cents reported in the year-ago quarter, while it remained within the company’s guidance range of 99 cents – $1.04.

The company’s earnings per share include the performances of the newly acquired World Market (Cost Plus Inc.) and Linen Holdings from their respective dates of acquisition.

Sales

Bed Bath & Beyond's top line jumped almost 15.3% to $2,701.8 million in the third quarter from $2,343.6 million in the year-ago quarter. The year-over-year rise in sales was primarily driven by the recently completed acquisitions as well as the increase in comparable-store sales and new store openings. However, the company's top line missed the Zacks Consensus Estimate of $2,736 million.

Comparable-store sales rose 1.7% compared with a 4.1% rise in the prior-year quarter. Comps for the quarter exclude the results from the World Market and Linen Holdings acquisitions. During the quarter, comp-store sales were affected by Hurricane Sandy, which lowered comps by 0.9%.

Quarterly Synopsis

Gross profit margin for the quarter declined 110 basis points to 39.8% from 40.9% in third-quarter 2011. Margins suffered a downside mainly due to increased coupons and their redemption and shift in the mix of merchandise sold to lower margin categories.

During the quarter, Bed Bath’s higher payroll and occupancy expenses as well as higher advertising expenses led to an increase in selling, general and administrative expenses as a percentage of net sales, which eventually resulted in operating margin contraction of about 180 basis points to 13.4% from the prior-year quarter.

Financial Position

Bed Bath & Beyond ended the quarter with cash and cash equivalents of $672.3 million compared with $765.8 million in the year-ago quarter. Moreover, shareholders' equity at year-end stood at $3,977.1 million versus $3,910.5 million in the prior-year quarter.

During the quarter, the company repurchased nearly 3.1 million of its outstanding shares, valued at about $191 million. Therefore, as of third-quarter end, the company had nearly $223 million remaining under its share repurchase program of $2.0 billion, authorized in December 2010.

Further, the company authorized a new share repurchase program slated to buy back shares worth $2.5 billion. The company plans to commence this new program once its existing $2.0 billion authorization is completed.

Stores Update

In the third quarter, the company inaugurated 4 Bed Bath & Beyond stores, 7 buybuy BABY stores, 6 World Market Stores, and 1 Christmas Tree Shops store operating under the name andThat!. andThat! is a new name which has been evolved for the Christmas Tree Shops concept.  

As of Nov 24, 2012, the company operated 1,003 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 264 World Market, Cost Plus World Market, and World Market Stores; 74 Christmas Tree Shop or andThat! stores; 78 buybuy BABY stores and 47 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,466.

Bed Bath & Beyond is also a partner in a joint venture, which operates two stores in the Mexico City market under the name "Home & More."

Stepping into fiscal fourth-quarter of 2012, Bed Bath has so far opened 1 Bed Bath & Beyond store and 2 buybuyBABY stores.

Management Guidance

Accounting for the additional 53rd week in fiscal 2012 and including the newly acquired businesses, management expects net sales to increase by 24% to 26% in the fourth quarter and by 15% for the full year. Further, the company projects a comparable store sales increase of 2% to 4% for both the fourth quarter and fiscal 2012.

On the cost side, the company expects depreciation in fiscal 2012 to be nearly $195 million. Additionally, the consolidation of World Market and Linen Holdings' financial results, the company’s major capital initiatives, the inclusion of the 53rd week, assumptions of an increase in coupons and continued mix shift toward low-margin categories is expected to deleverage operating profit margin for the fourth quarter.

Bed Bath & Beyond expects to deliver fourth-quarter 2012 earnings per share between $1.60 and $1.67. Moreover, the company projects fiscal 2012 earnings per share to increase by 10% to 12%, including one additional week in this fiscal year, to $4.48 to $4.54.

For the remainder of fiscal 2012, the company plans to open 2 buybuy BABY stores, bringing the total store openings for the year to 41 across all concepts.

Moreover, Bed Bath projects a total capital spending, including World Market and Linen Holdings, of about $325 million to $350 million in fiscal 2012, mainly slated for new stores and existing store refurbishments, information technology enhancements and other important future projects.

Our Take

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 to Bed Bath & Beyond, while simultaneously 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.

Currently, Bed Bath & Beyond holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. The company retains a long-term Neutral recommendation on the stock.

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