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BBBY Q2 Earnings Beat by a Penny

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Bed Bath & Beyond Inc. (BBBY - Free Report) reported earnings of $1.16 per share for second-quarter fiscal 2013 that came a notch ahead of the Zacks Consensus Estimate of $1.15, and rose 18.4% from the year-ago quarter earnings of 98 cents.

Quarter in Detail

The company’s top line jumped 8.9% to $2,823.7 million in the second quarter from $2,593.0 million in the year-ago quarter. The year-over-year rise in sales was primarily driven by the inclusion of World Market and Linen Holdings, an increase in comparable-store sales (comps) and new store openings. Moreover, Bed Bath & Beyond’s top line surpassed the Zacks Consensus Estimate of $2,816.0 million.

Comps rose 3.7%, primarily driven by an increase in the transaction count and the average transaction amount.

Gross profit came in at $1,113.5 million, up 7.8% from the comparable year-ago level. However, gross profit margin for the quarter declined 40 basis points (bps) to 39.4% from 39.8% in second-quarter fiscal 2012. Margins suffered a downside mainly due to a rise in coupons, driven by higher redemptions as well as increase in the average coupon amount, and mix shift in products sold to lower margin categories.

Selling, general and administrative (SG&A) expenses surged 8.4% year over year to $723.7 million and as a percentage of sales it contracted 10 bps to 25.6%. During the quarter, Bed Bath & Beyond’s higher advertising costs offset by lower professional fees and store expenses led to a decline in SG&A expenses as a percentage of net sales.

Consequently, operating margin contracted about 30 bps to 13.8% from the prior-year quarter. However, in dollar terms, operating profit increased 6.7% to $389.8 million.

Financial Position

Bed Bath & Beyond ended the second quarter with cash and cash equivalents of $383.3 million compared with $744.5 million at the end of the prior-year quarter. Moreover, shareholders’ equity as of Aug 31, 2013, stood at $4,026.7 million versus $3,920.1 million as of Aug 25, 2012.

During the quarter, the company repurchased nearly 3.5 million of its outstanding shares, valued at about $257.0 million. Therefore, as of second-quarter end, the company had nearly $1.8 billion remaining under its share repurchase program of $2.5 billion, authorized in Dec 2012.

Stores Update

In the second quarter, Bed Bath & Beyond inaugurated 1 Bed Bath & Beyond store, 1 Christmas Tree Shops store, 3 buybuy BABY store and 1 Harmon Face Values store. As of Aug 31, 2013, the company operated 1,009 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada; 266 World Market or Cost Plus World Market stores; 74 Christmas Tree Shop or andThat! stores; 86 buybuy BABY stores and 49 stores under the names Harmon or Harmon Face Values, thereby bringing the total store count to 1,484.

Additionally, Bed Bath & Beyond is in a joint venture operating 3 stores in Mexico City under its namesake brand.

Stepping into the third quarter of fiscal 2013, Bed Bath has so far opened 1 World Market store and 2 Bed Bath & Beyond stores.

Taking into account the 17 stores opened so far in fiscal 2013, the company anticipates its total store openings for the year to be in the mid-30s. Additionally, the company continues to renovate and relocate its stores across all concepts.

Management Guidance

Management expects net sales to increase by 6% to 8% in the third quarter and decline by 2% to 4% in the fourth quarter. However, on a 13-weeks comparable basis, excluding the effect of the additional 14th week in fiscal 2012, net sales are expected to rise by 1% to 3% in the fourth quarter of fiscal 2013.

Further, the company projects a comparable store sales increase of 1% to 3% for the third quarter and 3.5% to 5.5% for the fourth quarter.

On the cost side, the company expects depreciation in fiscal 2013 to be nearly $220.0 million. Additionally, the company expects operating profit margin to be flat for the third and fourth quarter and marginally deleverage for fiscal 2013.

Net interest expense for the third and fourth quarters are each expected to include about $2.2 million in World Market net interest expense, mainly due to the addition of sale-leaseback obligations in connection to its distribution facilities. Further, tax provision for the third quarter is projected to be about 37.5%. For the fourth quarter and full year, the company expects tax provisions of about 37%.

Bed Bath & Beyond expects to deliver third-quarter fiscal 2013 earnings per share between $1.11 and $1.16 and fourth-quarter earnings of $1.70 to $1.77. Moreover, the company raised its lower-end fiscal 2013 earnings per share guidance to $4.88 from $4.84 projected earlier. Therefore, Bed Bath & Beyond’s new earnings guidance for fiscal 2013 ranges between $4.88 and $5.01, compared with $4.84 – $5.01 forecasted earlier.

Additionally, Bed Bath & Beyond projects a total capital spending, including that of World Market and Linen Holdings, of about $350 million in fiscal 2013, mainly slated for new outlets and existing store renovation, information technology advancement and other important future projects.

Other Stocks to Consider

Bed Bath Beyond currently holds a Zacks Rank #3 (Hold). Other stocks worth considering in the retail industry are Cabela’s Inc. , Five Below Inc. (FIVE - Free Report) and Tractor Supply Company (TSCO - Free Report) , all of which carry a Zacks Rank #2 (Buy).

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