It's Really Going Bed Bath & Beyond

| About: Bed Bath (BBBY)

Home goods retailer Bed Bath & Beyond (NASDAQ:BBBY) reported Q4 2012 earnings growth of 14% to $1.68 a share on April 10, and shares climbed on the news. For the full year, the company grew earnings by 12% to $4.56 a share. Net sales for the full year were approximately $10.9 billion, approximately 14.9% higher than in the fiscal full year of 2011. Additionally, the company noted that it benefited by approximately $.05 a share due to the extra week occurring in the 4th quarter. During FY2012, the company, through expansion efforts and acquisition efforts, grew its retail footprint by 16% to 42 million sq. feet. As of Q1 2013, the company now operates a total of 1,474 stores across all of its brand concepts. During FY13, the company has laid out a framework to open 45 new stores.

While many BBBY investors have remained focused on recent acquisitions such as World Market and Linen Holdings, Bed Bath & Beyond remains focused on its growth strategy and enhancing the consumer shopping experience. It is important to note that these acquisitions were both accretive during fiscal 2012 and are expected to enhance shareholder value over time. Net sales for the fiscal fourth quarter were approximately $3.4 billion, approximately 24.5% higher than in the prior year. Of the total increase, approximately 57% was the result of the inclusion of World Market and Linen Holdings for 13 weeks. These accretive acquisitions were initially expected to remain a drag on earnings growth by some analysts, which we will get to further in this article.

When we look at comp-store sales for Bed Bath & Beyond, there remains some concerns as weakness in consumer spending continues to create impediments for retailers. Fourth-quarter comp-store sales increased by approximately 2.5%, compared with an increase of approximately 6.8% last year. For the fiscal full year, comp-store sales increased by approximately 2.7% compared with an increase of approximately 5.9% last year. These increases in comp-store sales for each of the fiscal fourth quarter and the full year of 2012 were attributed to an increase in the average transaction amount, partially offset by a decrease in the number of transactions. Ideally, investors would like to see not only an increase in the average transaction but also an increase in total transaction count assuming greater foot traffic for the company. In a struggling economy, with high energy and food costs, the middle-income consumer is becoming more frugal and/or cost-conscious. As such, the Bed Bath & Beyond core consumer was squeezed out during FY12 to some degree, which we see in the measured results through the number of transactions.

Another sore spot in the Q4 2012 earnings report were gross profit margins. Gross profit for the fiscal fourth quarter was approximately 41% of net sales compared with approximately 42.6% of net sales for the fourth quarter of 2011. Investors were likely hoping to see a return to gross margin expansion in the quarter, however, this has yet to be achieved due to the following:

  • Increase in coupons due to increases in both the redemption and the average coupon amount.
  • Increase in markdowns.
  • Shift in the mix of merchandise sold to lower margin categories.
  • Inclusion of World Market and Linen Holdings decreased gross profit as a percentage of net sales for the fiscal fourth quarter by approximately 45 basis points.

The company recently rededicated itself to rebranding and updating its e-commerce site in order to drive greater consumer awareness and appeal. The results of these efforts remain to be seen although management speaks in high confidence of pending results. It should also not be lost on investors that the company's recent venture into the Mexican market is showing signs of strong adoption. The company has plans to grow in the region this fiscal year by adding two additional stores.

Naturally, growth takes a certain amount of capital expense and on the Q4 2012 Earnings Conference Call, management laid out these expenses for investors to consider.

  • Increasing omni-channel capabilities through upgrading mobile sites and apps.
  • Enhancing network communications in stores and implementing point-of-sale improvements. (This likely points to mobile payment solutions)
  • Growing and developing of IT, analytics and e-commerce groups to lead omni-channel initiatives and evolve marketing so as to take advantage of the opportunities to personalize offers to customers.
  • Retrofitting energy-saving equipment in stores that allows them to run more efficiently.

Let's turn to guidance at this time. The company is modeling an increase of 2% to 4% in comparable-store sales for the first quarter and for the full year. Taking into account that the prior year was a 53-week year, and including the newly acquired companies, BBBY is modeling consolidated net sales to increase by 17% to 19% for the first quarter and approximately 5% to 7% for the full year. BBBY offered net earnings per diluted share to be approximately $0.88 to $0.94 for the fiscal first quarter of 2013. The company guided FY13 earnings to $4.80-$5.10 a share. BBBY repurchased 5.3 million shares during the fiscal fourth quarter of 2012. As of March 2, 2013, the remaining balance of the current share repurchase program authorized in December 2012 was approximately $2.4 billion.

It is going to be an uphill battle for Bed Bath & Beyond in 2013 and we would suggest to investors that the retail sector as a whole will struggle at least through the first half of 2013. Consumer spending seems to be contracting as we take a look deeper into North America's employment data and Monthly Retail Sales Report. With BBBY's two major markets existing in North America we first take a look at Canada's latest job's data. Canada's March Jobs Report showed that the country shed 54,000 jobs against expectations of 8,000 jobs being created. Here is what Derek Holt of Scotiabank had to say about the recent economic data in the Canadian jobs report:

This is the ugliest Canadian jobs report since February 2009 and the details generally back up the headline weakness. While we can't read that much into one month's report in a very volatile series, job market momentum has waned into 2013 off of 2012 strengths. On a year-to-date basis, Canada has shed 26,000 jobs concentrated upon this morning's print but also a 21,900 drop in January that combined to offset the 50,700 rise in February.

Now let's take a look at the latest Non-Farm Payroll Report from the U.S. Government, which showed that during the month of March, only 88,000 jobs were created against an expectation of 190,000 jobs. The 88,000 jobs created was the smallest increase since last June -- and nearly half-a-million people stopped looking for work last month, according to data issued by the Labor Department. The labor and employment picture dramatically turned negative in March, which could foreshadow a sign of things to come for not just Bed Bath & Beyond, but for retailers in general.

We'll turn our attention now to the latest Monthly Retail Sales data released by the U.S. Census Bureau.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $418.3 billion, a decrease of 0.4 percent (±0.5%)* from the previous month, but 2.8 percent (±0.7%) above March 2012. Total sales for the January through March 2013 period were up 3.7 percent (±0.5%) from the same period a year ago. The January to February 2013 percent change was revised from +1.1 percent (±0.5%) to +1.0 percent (±0.2%). Retail trade sales were down 0.6 percent (±0.5%) from February 2013, but 2.6 percent (±0.8%) above last year. Nonstore retailer s were up 13.5 percent (±2.3%) from March 2012 and auto and other motor vehicle dealers were up 7.4 percent (±2.1%) from last year. The advance estimates are based on a subsample of the Census Bureau's full retail and food services sample. A stratified random sampling method is used to select approximately 5,000 retail and food services firms whose sales are then weighted and benchmarked to represent the complete universe of over three million retail and food services firms. Responding firms account for approximately 65% of the MARTS dollar volume estimate. For an explanation of the measures of sampling variability included in this report, please see the Reliability of Estimates section on the last page of this publication.

The results from the latest Monthly Retail Sales data dramatically underperformed economists' expectations. Many attribute the underperformance of the data to the recent sequester and extended winter season, which curtailed consumer spending YOY during the period reported. In light of the recent data on consumer spending and employment, BBBY investors have the benefit of management's guidance being offered in April, when Q1 2013 was completed and with greater knowledge of advanced results from the quarter past. However, it is important to note, that most recently on April 16, Target Corp. (NYSE:TGT) lowered Q1 2013 expectations for earnings growth and full-year earnings estimates. The company now expects its first-quarter 2013 comparable-store sales growth will be approximately flat, due to softer-than-expected sales trends particularly in seasonal and weather-sensitive categories across the store. As a result, Target expects its first-quarter adjusted EPS will be slightly below the low end of the prior guidance of $1.10 to $1.20.

Some analysts remain bullish on shares of BBBY despite the headwinds the company faces in 2013, while others remain bearish. Jefferies analyst John Marrin reiterated a Buy rating on Bed Bath & Beyond and raised the price target from $72.00 to $76.00. In the report, Marrin noted:

The page has been turned on a difficult FY13 and as we scan ahead to the next chapter, we see a year of easy sales compares in a macro environment that we believe should create opportunities to drive outperformance on the top line against low expectations. That said, fears around margin pressures from e-commerce could keep enthusiasm subdued until a clearer profitability picture emerges.

Even Goldman Sachs recently raised its price target for shares of BBBY, as the firm has been consistently inaccurate with its estimates. Goldman Sachs analyst Matthew J. Fassler reiterated a Sell rating on Bed Bath & Beyond and raised the price target from $59.00 to $62.00. In the report, Fassler noted:

BBBY delivered choppy 4Q2012 results that nonetheless met Street expectations. Sales met forecast, while EPS fell short; we mis-modeled the profitability of recent acquisitions (we were too aggressive). EBIT did fall slightly short of Street forecasts; the EPS upside reflected tax rate and share count. The 1Q2013 guidance ($0.88-$0.94) tracked below consensus ($0.95) and inline with our estimate going in ($0.89), while implied annual guidance ($4.78-$5.10, based on EPS up mid-single-to-low-double-digits) that bracketed the Street ($5.03) and GS ($4.93) going in.

Oppenheimer also weighed in on the latest earnings results from Bed Bath & Beyond.

We view the Q4 (Feb. 2013) results and initial FY13 (Feb. 2014) guidance that Bed Bath & Beyond reported last night as a "step in the right direction" for the chain.

Sales picked up modestly with comps improving to +2.5% vs. +1.7% in Q3 (Nov.). Gross margins remain under pressure. Guidance implies improving EPS growth trends through 2013 after a still weakish Q1 (NYSE:MAY). We remain of the view that recent pressures on the BBBY P&L reflect transitory more than structural issues.

Indications of better EPS expansion over the next few quarters should encourage the market to lift the BBBY multiple to a level more consistent with the company's attractive longer term growth prospects. Our rating on BBBY is Outperform.

Oppenheimer reiterated its $71 price target on BBBY shares.

Capital Ladder Advisory Group's successful analysis of BBBY operations throughout 2012 culminated in our price target achievement in Q4 2012. With this in mind we are currently analyzing the state of the economy as it pertains/correlates to the overall Bed Bath & Beyond business. In spite of easy year-over-year comparisons the company will witness this year, the macro environment remains challenging as evidenced in J.C. Penny's (NYSE:JCP), Target Corp and Best Buy's (NYSE:BBY) recent struggles. Improvements in overall operations at BBBY could stimulate an outperformance of initial guidance offered by the company as easily as continued contraction in end-demand could weigh on company results. Investors should continue to monitor the economic data related to end-demand as a precursor to results. At this time, we suggest that shares of BBBY are nearing full valuation under the scope of recently released results and the given the status of consumer demand trends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.