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We have retained our Neutral stance on specialty retailer, Bed Bath & Beyond Inc. (BBBY - Analyst Report), based on the company’s strong quarterly performance, robust outlook and store growth initiatives. However, skepticism prevails over the company’s margins performance given the soft trends witnessed of late.

Why Neutral?

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 along with strict focus on aligning merchandise to suit consumer preferences, bolstering its position in the market.

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. We believe these initiatives along with its focus on boosting online presence and making technological advancements should bode well for future sales.

The initiatives are paying off well, as evident from the company’s fourth-quarter 2012 earnings that rose 13.5% to $1.68 per share, benefiting from the results of World Market (Cost Plus Inc.) and Linen Holdings.

If we look at the company earnings surprise history, this Zacks Rank #3 (Hold) company has surpassed the Zacks Consensus Estimate in 2 out of 4 quarters, recoding an average beat of 1.00%. In the last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate.

The company also witnessed robust sales growth of 24.5% year over year, driven by the aforesaid acquisitions as well as the increase in comparable-store sales and new store openings.

Management now projects earnings per share in the mid-single-digit to low-double-digit percentage range for fiscal 2013, while first-quarter fiscal 2013 earnings per share are estimated to range from 88 cents – 94 cents. Net sales are expected to rise 17% to 19% in the first quarter and by 5% to 7% for fiscal 2013.

On the flip side, the company’s margins remained soft during the fourth quarter of fiscal 2012, driven by higher operating costs, increase in coupons and their redemption, increased 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

Besides Bed Bath & Beyond, other stocks to consider in the specialty retail sector are Cabela’s Inc. (CAB - Analyst Report), Big 5 Sporting Goods Inc. (BGFV - Analyst Report) and Hot Topic Inc. . Of these stocks, Cabela’s and Big 5 carry a Zacks Rank #1 (Strong Buy), while Hot Topic has a Zacks Rank #2 (Buy).

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