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Tickers in this Article: BBBY, BIG, TJX, WMS, PIR
Specialty retailer Bed Bath & Beyond (Nasdaq:BBBY) reported an impressive third quarter that saw sales and profits grow in the double digits. The company continues to fire on all cylinders and is benefiting from a more favorable spending environment as well as the demise of an archrival. Growth over the long haul is more uncertain, as is downside protection for investors given the current earnings multiple. IN PICTURES: 20 Tools For Building Up Your Portfolio

Third-Quarter Review
Net sales increased 11.1% to $2.2 billion as comparable store sales rose a robust 7% and the company opened five namesake stores, five Christmas Tree Shops stores and seven buybuy BABY locations. The vast majority of the company's store base consists of the namesake stores, but growth of the smaller concepts has been increasing. The Christmas Tree Shops offer discounted home furnishings and apparel to compete with the likes of Big Lots (NYSE:BIG) and TJX Companies' (NYSE:TJX) Marshall's and Home Interiors concepts while buybuy BABY competes primarily with Babies R Us. Total company store count at quarter end was 1,127 stores, and management sees the potential for more than 1,300 stores in the U.S.

Cost controls sent operating income ahead 24.2% to $305.1 million. Net income ended up jumping 24.7% to $188.6 million, or 74 cents per dilutes share. This beat analyst profit expectations.

Outlook
During its earnings conference call, management said to expect earnings between $2.86 and $2.90 per diluted share. Analysts project full-year sales growth of more than 10% for total sales of $8.6 billion. Consensus profit expectations call for earnings of $2.90 per share, which would represent year-over-year growth of more than 24%.

Upside Potential
The third quarter came in ahead of Bed Bath's internal targets. The company, along with rivals Williams Sonoma (NYSE:WSM) and Pier 1 Imports (NYSE:PIR) continues to benefit from a return of consumer spending and the demise of archrival Linens 'n Things during the last recession. It also has a reputation as one of the best run and most conservative retailers out there. Zero long-term debt illustrates management's conservatism as all new stores are funded through internally generated capital.

Bottom Line
The only thing not to like about the investment story is the earnings valuation. At the current share price, the forward P/E is 15. This isn't a lofty multiple if the company can keep growing profits in excess of 20% annually, but it leaves less room for downside. Right now, it's difficult to estimate how fast the firm can grow once the temporary effects of an improving economy and the loss of Linens 'n Things wear off. Additionally, based on the capacity for an estimated total store count of 1,300, it appears new store expansion potential is much more limited than it was in the past. (For related reading, see Analyzing Retail Stocks.)

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