Sleep Soundly with this Stock
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
How do you feel when you are awarded a coupon from your favorite shop, especially when you are actually planning to go out for shopping? It definitely feels special and sometimes you end up buying extra than what you had actually planned, courtesy the coupon. In fact, you start becoming loyal towards that brand because of that personal touch they gave you and made your shopping experience better.
This strategy not only makes the customer happy, but it also goes a long way in getting more customers to the company’s stores. Such was the case with the home goods seller, Bed Bath & Beyond (NASDAQ: BBBY), which posted rocking first quarter results recently. But what surprised me was the fact that the shares fell drastically after the announcement. Let’s analyze what happened.
A Dig into The Quarter…
Though the top line surged a meager 5.1% to $2.2 billion, the effect multiplied making the bottom line grow by a whopping 24% with an earnings per share of 89 cents. The discount coupons issued by the company were the biggest contributor and it attracted customers on a large note. This is how Bed Bath and Beyond fought with the prevailing economic conditions, driving consumer demand. A key indicator for this was the growth in comparable store sales of 3%, pushed up by the boost in the average ticket size. But everything comes for a price. Therefore, the home furnishing retailer had to take a hit on its gross margins in an effort to keep customers flowing into its stores.
The New Jersey based retailer is known for its expansion and growth strategy. Apart from opening 2 Bed Bath & Beyond stores, 4 buybuy BABY stores and 1 Christmas Tree shop store, it plans to open another 40 stores in the months to come. Moreover, it is on the verge of closing its buyout of another home décor retailer, Cost Plus (NASDAQ: CPWM), which is expected to benefit the acquirer in many ways. Cost Plus not only offers home furnishing items but also provides food and beverages which is a major area where Bed Bath & Beyond eyes to benefit from. The home furnishing chain expects to attract a crowd by having a specialty food department, with the help of Cost Plus, in some of its stores.
This might help the company to fight against the online retailers such as Amazon (NASDAQ: AMZN) who has made the N.J. based retailer insecure with its decision to enter the home furnishings section. Though the main issue would be the margins since the online giant is known for having the lowest prices offered. This might hurt Bed Bath & Beyond’s margins further.
Moving on to the issue of negative reaction from the investors on the quarterly results, the key factor was the light second quarter outlook issued by the company. The investors were disenchanted with the guidance of 97 cents to $1.03 per share with a 5% to 7% increase in revenue. A probable cause for a dull outlook was the cautious consumer spending and the discount coupons which are expected to hamper the chain’s profitability.
Cost cutting initiatives and continuous growth in terms of market presence and store count has helped Bed Bath & Beyond to have a place for itself. It has been posting better than expected results since 2009 and has been returning cash to shareholders with its repurchase programs. A weak quarterly outlook should not hamper the growth potentials of the company, even though it might be sacrificing margins at the moment. Bed, Bath and Beyond margins are taking a hit but the company is able to get more customers into its stores. And with all those expansion plans in place, I believe the retailer is well-placed to push up both its top line and margins in due time.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com and 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.If you have questions about this post or the Fool’s blog network, click here for information.