No Comfort Provided By This Retailer

ABHISHEK is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bed Bath & Beyond (NASDAQ: BBBY) operates a chain of retail stores that sells a wide assortment of domestic merchandise. The company and its subsidiaries operate under the names Bed Bath & Beyond, Christmas Tree Shops, Harmon, and Harmon Face Values and buybuy BABY. Shares of house wares retailer fell sharply after the company reported fiscal third-quarter sales that fell short of Wall Street’s expectations. The reason behind this is the tepid housing market that has discouraged many people from selling their homes and moving, this cuts down on demand for the kind of furnishings sold by Bed Bath & Beyond.

Financial highlights

The fiscal third quarter performance, BBBY reported a third quarter net earnings per diluted share of $1.03, an increase of approximately 8.4% over last year. Net sales for the fiscal third quarter were approximately $2.7 billion, approximately 15.3% higher than in the prior year. Of this increase, approximately 79% was the result of the inclusion of World Market and Linen Holdings, approximately 11% was attributable to the increase in comp store sales and the remaining 10% resulted primarily from new stores. Bed Bath & Beyond has held down administrative and operating costs and avoided deep markdowns, protecting margins, but on the other hand; Retailers are also paying more for goods, putting pressure on profit margins.

Future insights

The weak housing market remains at risk, and if the economy doesn't improve consumers may cut back on their spending. For a retailer, Capital Expenditure is typically into new store openings, and it is becoming clear (this could still be temporary) that BBBY has maintained the pace of new store openings, even as cash-from operations (CFO) has begun to fade. The company's board also authorized a $2.5 billion stock buyback program which reflects the board's continued confidence in our company's long-term growth potential, financial outlook and cash flow generation.

To stay competitive, Bed Bath & Beyond's plan includes an update of its technology and website and a roll out of specialty food and beverage sections in its stores, an addition made possible by the acquisition of Cost Plus World Market.  However, the question rises whether BBBY will be able to convert the Cost Plus brand into the kind of productivity BBBY has got from their own stores. But still BBBY is positive on this aspect.

Competitor Analysis

Macy's (NYSE: M) sells a range of merchandise, including apparel and accessories for men, women, and children; cosmetics; home furnishings and other consumer goods through retail stores and websites. For the first nine months of 2012, Macy's generated revenues of $18.3 billion. The company earned net $605 million, or $1.45 per diluted share. The company is on track to generate annual revenues of $27 billion, on which the company could earn $1.3-$1.4 billion, or $3.35-$3.40 per diluted share. Macy's announced the increase in the share repurchase authorization to $1.86 billion. The addition of $1.5 billion to the current repurchase program gives the company an authorization to retire up to 12.0% of the company's shares outstanding at current price levels which is intended to create value for the shareholders.

Target (NYSE: TGT) operates general merchandise stores in the United States.  Target has been reporting solid financial results since years. For the third quarter it earned $637 million, or 96 cents per share. This includes a 15-cent gain from the pending sale of its credit-card receivables portfolio. Adjusted earnings per share were 90 cents, which is up about 4.3% when compared to the same quarter last year. Target also provided fourth quarter guidance of $1.64 to $1.74. Target's business model is well-suited for the current economic environment. Consumers are looking for value but they also want quality brand-name merchandise which is what this company offers. Also, it is a great stock to consider for dividend growth. Overall, it has stable business models and dividend growth potential is also high.

Bottom line

Bed Bath & Beyond recently has struggled to keep profitability improving as the retailer has shifted toward a lower-margin assortment of merchandise, customers redeem coupons in droves and online competition increases.  Capital Expenditure is obviously pressuring the cash-flow statement, so Cost Plus could actually have a beneficial impact on cash-flow if BBBY slows store growth for a bit. Moreover, given the current state of affairs for BBBY we aren’t shorting the stock but we don’t have the reason to own it. So avoid it in the portfolio as of now.

 


abhishekjain524 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Bed Bath & Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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