We retained our Neutral stance on specialty retailer, Bed, Bath & Beyond Inc. (BBBY - Free Report) , that also retains a Zacks Rank #3 (Hold). The company’s strong quarterly performance, robust outlook, store growth initiatives and healthy financial position underline its strength. However, soft margin trends, macroeconomic challenges, and intense competition compel us to be on the sidelines at this juncture.
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. For the rest of fiscal 2012, the company plans to open 2 buybuy BABY stores, bringing the total store openings for the fiscal year to 41 across all concepts. 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 third-quarter 2012 earnings that rose 8.4% to $1.03 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 of 15.3% year over year, driven by the recently completed acquisitions as well as the increase in comparable-store sales and new store openings.
Management now projects earnings between $1.60 and $1.67 for the fourth quarter and in the range of $4.48 to $4.54 per share for fiscal 2012, reflecting growth of 10% to 12%.
On the flip side, the company expects weak operating margins in fiscal 2012, given the consolidation of World Market and Linen Holdings' financial results, the ongoing capital initiatives, the inclusion of the 53rd week, assumptions of an increase in coupons and continued mix shift toward low-margin categories. This has caused the Zacks Consensus Estimate for fiscal 2012 to decline 1.5% to $4.56 per share in the last 30 days.
Further, Bed Bath’s business is seasonal in nature and typically generates stronger results in the second and fourth quarters. As a result, the company is exposed to significant risks if the seasons fail to deliver favorably. Additionally, the company’s customers remain sensitive to macroeconomic factors, which may negatively impact their discretionary spending, and in turn mute the company’s performance.
Other Stocks to Consider
Besides Bed Bath & Beyond, other stocks to consider in the specialty retail sector are Target Corporation (TGT - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) . These companies carry a Zacks Rank #3 (Hold).