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Bed Bath & Beyond Making Its Own Luck
The demise of an archrival and improving trends for shoppers may be the ideal recipe for Bed Bath & Beyond (Nasdaq:BBBY) shareholders to start seeing sustainable gains on their investment. It's been quite a dry spell on the stock appreciation front over the past few years, but improvements at the company's underlying operations could pave the way for steady profits going forward.
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Second-Quarter Sales Review
Bed Bath's financial results releases are always short, to the point, and present objective data about each quarter. During the second quarter of its fiscal year it detailed that total sales jumped 11.6% to $2.1 billion as same-store sales improved 7.4% and the firm opened five new namesake stores and two buybuy BABY locations that sell baby merchandise and compete with Babies R Us . Since the end of the quarter it has opened another namesake store, another two buybuy BABY sites and a single Christmas Tree Shops, which sells off-price merchandise and competes with the likes of Big Lots (NYSE:BIG) and TJX Companies (NYSE:TJX), though it focuses less on apparel and more on home goods.
The vast majority of stores are namesake stores. Of the 1,111 stores operated as of the end of August, 87.5% were Bed Bath & Beyond locations. The next largest is Christmas Tree Shops, which accounted for 5.5% of the store base; 3% were buybuy BABY and the rest were made up of several smaller concepts, including a joint venture in Mexico.
Profit Recap
Gross profit improved 13.1% on lower sales costs and were likely driven by the sale of higher-profit merchandise as consumers grow less cost-conscious during an improving economy. Corporate and SG&A costs rose a modest 4.8% and allowed operating income to jump 33.7% to $296.9 million, or a very healthy 13.9% of sales. Share buybacks helped push net income growth to 34.5%, or 70 cents per diluted share.
Outlook
Management expects third-quarter earnings between 61 cents and 65 cents per diluted share and full-year earnings growth of about 20%, which is ahead of previous expectations of 15%. Analysts currently project full-year sales growth of 8.7% to $8.5 billion and earnings of $2.79 per share.
Bottom Line
The demise of archrival Linens 'n Things is surely helping BBBY's sales and profit momentum, as is improved consumer spending on home-related items. Rival Williams-Sonoma (NYSE:WSM) echoed the improvement during its most recent quarter as comps jumped at its namesake and Pottery Barn concepts, as did Pier 1 Imports (NYSE:PIR).
At a forward P/E near 16, Bed Bath's stock already discounts much of the profit improvement its underlying operations are experiencing, but the fundamentals could quickly catch up to the valuation if the company returns to its heyday of growing the top and bottom line in the double digits. Current indications are that this is possible, especially if management starts ramping up the growth of the smaller concepts. (To learn more, see Analyzing Retail Stocks.)
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IN PICTURES: 7 Ways To Position Yourself For Recovery
Second-Quarter Sales Review
Bed Bath's financial results releases are always short, to the point, and present objective data about each quarter. During the second quarter of its fiscal year it detailed that total sales jumped 11.6% to $2.1 billion as same-store sales improved 7.4% and the firm opened five new namesake stores and two buybuy BABY locations that sell baby merchandise and compete with Babies R Us . Since the end of the quarter it has opened another namesake store, another two buybuy BABY sites and a single Christmas Tree Shops, which sells off-price merchandise and competes with the likes of Big Lots (NYSE:BIG) and TJX Companies (NYSE:TJX), though it focuses less on apparel and more on home goods.
The vast majority of stores are namesake stores. Of the 1,111 stores operated as of the end of August, 87.5% were Bed Bath & Beyond locations. The next largest is Christmas Tree Shops, which accounted for 5.5% of the store base; 3% were buybuy BABY and the rest were made up of several smaller concepts, including a joint venture in Mexico.
Gross profit improved 13.1% on lower sales costs and were likely driven by the sale of higher-profit merchandise as consumers grow less cost-conscious during an improving economy. Corporate and SG&A costs rose a modest 4.8% and allowed operating income to jump 33.7% to $296.9 million, or a very healthy 13.9% of sales. Share buybacks helped push net income growth to 34.5%, or 70 cents per diluted share.
Outlook
Management expects third-quarter earnings between 61 cents and 65 cents per diluted share and full-year earnings growth of about 20%, which is ahead of previous expectations of 15%. Analysts currently project full-year sales growth of 8.7% to $8.5 billion and earnings of $2.79 per share.
Bottom Line
The demise of archrival Linens 'n Things is surely helping BBBY's sales and profit momentum, as is improved consumer spending on home-related items. Rival Williams-Sonoma (NYSE:WSM) echoed the improvement during its most recent quarter as comps jumped at its namesake and Pottery Barn concepts, as did Pier 1 Imports (NYSE:PIR).
At a forward P/E near 16, Bed Bath's stock already discounts much of the profit improvement its underlying operations are experiencing, but the fundamentals could quickly catch up to the valuation if the company returns to its heyday of growing the top and bottom line in the double digits. Current indications are that this is possible, especially if management starts ramping up the growth of the smaller concepts. (To learn more, see Analyzing Retail Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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