Bed Bath & Beyond (BBBY) is cued up to report its Q1 2013 earnings the week of June 24. Since the company last reported earnings in April, the stock has meandered higher by about 10%. On a year-to-date basis, shares of BBBY are up almost 27%. The company engaged in multiple acquisitions during FY 2012, which should serve to help grow both the top and bottom lines in FY 2013. The significant commitment to repurchasing shares will also continue to provide a tailwind for EPS growth in the short term.
I am, however, inclined to move to the sidelines ahead of this quarterly earnings report for a specific reason. I think expectations, in the short term, are being driven by some of the growth numbers that are being put up by peer retailers in the home furnishings segment. Restoration Hardware (RH) was the latest home furnishings retailer to annihilate earnings just last week, sending its share soaring higher. Pier 1 (PIR) and Williams-Sonoma (WSM) also trade at P/E multiples of over 20x on a trailing 12 months basis compared to BBBY at ~15x.
However, these companies differentiate themselves from BBBY with their unique product assortments, the majority of which can only be found in their stores. BBBY does carry some proprietary product assortment and gained an additional foothold in this market with its World Market acquisition in 2012. However, the number of unique SKUs found in BBBY stores pales in comparison to its competitors.
It is this differentiating factor that BBBY seems to be lacking, putting the company in competition with retail behemoths such as Amazon (AMZN). One analyst recently touted how the coupon strategy in place at BBBY was a catalyst for the company as it would allow them to price certain items cheaper than what they are listed for on Amazon. Amazon makes dirt cheap margins on its retail business. BBBY runs a business with gross margins close to 40% as seen in the company's 2012 operating results. Attempting to drive business by offering coupons to beat Amazon on pricing is not a long-term strategy. This will only succeed insofar as it drives additional traffic to the store to stimulate purchases of higher margin items, in addition to those coupon sale items.
Positioning for Q1 2014 Earnings
BBBY can continue to drive value in the short term through its significant free cash flow and commitment to returning that cash to shareholders in the form material share repurchases each year. The company has a little growth engine (no pun intended) in its BuyBuyBaby branded stores that should also continue to aid operating results, as the company has significant room to expand the store count for this brand.
Shares of BBBY currently trade for around $71 with a 52 week range of ~$54 to ~$76. The stock has been rocked a few times in the last year when earnings results missed expectations. While this remains a relatively cheap name in retail, on a peer comparison basis, BBBY has potentially more downside risk to its business model based on its product assortment. In the near term, I am concerned that gross margins could come under pressure which would be a negative for the stock.
To position for this earnings report, I would suggest selling out-of-the-money put options that would generate income and provide a lower entry point for buying BBBY should shares fall. I would target the January 2014 $62.50 strike price, which would currently pay a premium of ~$2.50. This equates to a 4% return on the investment between now and January 2014, and an annualized return of ~7%.
This is a company that is safe to own, but I rather would generate a bit of income on the name with the investment strategy shown above than buy the stock at these levels. If it goes higher, I would be happy with a 7% annualized return on the investment. Should the stock fall, this trade positions investors for BBBY to fall over 15% before the investment would lose money. At that point in time, investors would own BBBY shares at $60 ($62.50 -- $2.50 premium earned), which is a much more attractive entry point on the stock given the potential risks that could materialize as competition continues to be fierce.