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One of the premier management teams in all of household furnishings and staples - Bed Bath & Beyond (NASDAQ:BBBY) - reports their fiscal 2nd quarter earnings on Wednesday, September 25th after the bell.

Consensus analyst expectations are looking for $1.15 in earnings per share on $2.8 billion in revenues for expected year-over-year (y/y) growth of 14% and 8% respectively.

If those numbers are met, this will be the first quarter of the last 5 that BBBY has been able to leverage revenue growth into better EPS growth.

One table tells the story for BBBY:

BBBY's historical Revenue, Operating Income and EPS growth

Rev

Growth

Op Inc

Growth

EPS

Growth

7/13 (est)8% 14%
4/1318%3%4%
1/1324%9%14%
10/1215%1%8%
7/1212%-2%9%
4/125%8%24%
1/129%19%32%
10/117%17%28%
7/118%25%33%
4/1110%28%38%
1/1112%24%30%
10/1011%24%28%
7/1012%34%35%
4/1013%58%53%

* Source: internal spreadsheet from BBBY earnings reports and 10-Q

The reader can quickly see how operating income compressed dramatically starting mid-2011, but the stock didn't hit an all-time-high of $76 in mid-2012.

One reason operating income has compressed is dramatic growth in SG&A in the last 8 quarters. Here is the table on y/y SG&A growth:

SG&A growth for BBBY last two years
qtr endSG&A Growth (y/y)
4/1324%
1/1330%
10/1218%
7/1215%
4/121%
1/120%
10/112%
7/110%

* Source: internal spreadsheet from earnings reports

The reason for the sharp SG&A increases were the CostPlus and Linen Holdings acquisitions, which if we excluded the acquisitions and reported SG&A pro-forma, year-over-year increases would be less than 100 bp's or 1%.

Margins have compressed for the last 4 quarters, both gross and operating margin. We would like to see margins stabilize and be slowly accretive over time.

We think BBBY is fairly valued in the mid $70's, with our internal model valuing BBBY at $81, and Morningstar's intrinsic value at $70.

Consensus earnings and revenue expectations, are looking for 10% - 11% EPS growth on 6% to 7% revenue growth the next 3 years, with the stock trading at 14(x) 2014 earnings, and 12(x) cash-flow.

Technically, the stock is trading at $75 today, and could be a potential "double-top" with its high at $76 in mid-2012.

We would not own in front of Wednesday's earnings report. Instead wait for the breakout above the mid $70's if BBBY reports solid earnings on Wednesday night.

To conclude, BBBY is one of the best management teams in the business, but aggressive couponing and weak comp's in addition to heavy SG&A increases as a result of the acquisitions which haven't yet been streamlined, have hurt the stock.

The e-commerce and website initiatives are a plus.

We want to own the stock again, we just want to own the stock at a far bigger discount to fair value.

Source: Bed Bath & Beyond: Fairly Valued At $75, Like It Better At $50 - $55