Bed, Bath & Beyond Earnings Preview: Margin Pressure Is The Issue, But Went Long The Stock

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 |  About: Bed Bath & Beyond Inc. (BBBY)
by: Brian Gilmartin, CFA

Summary

Online sales channel pressuring margins?

Bed, Bath & Beyond is buying back a lot of stock.

Growth expected to improve modestly through 2015.

Bed, Bath & Beyond (NASDAQ:BBBY) is scheduled to report its fiscal q1 '15 financial results after the bell on Wednesday, June 25, 2014.

Analyst consensus is expecting $0.94 in earnings per share (EPS) on $2.690 bl in revenue for expected year-over-year growth of 1% and 3%, respectively.

On the q4 '14 call, BBBY management guided to 1%-2.5% comps for the retailer. Store traffic was an issue in late calendar '13, and the rough winter didn't help.

BBBY had a tough q4 '14 as revenue fell 6%, operating income fell 12% and EPS fell 5%. The weather (naturally) was a reason for the tough q4 '14, but also what was thought to be continued online sales pressure, and a housing-related retail niche business of BBBY's that sits squarely in the path of Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) in terms of its ability to be disintermediated away.

YTD, the stock is down about 23% from its $79.86 close on 12/31/13.

Here was our most recent article on BBBY. We have less than a 1% position in the stock.

This morning's May Existing Family Home Sales rose almost 5%, which was one of the best data points we've had on housing relative to expectations in some time.

However no question most of the housing data of late has been weaker, as this chart from Soberlook from last week reveals.

Using the forward 4-quarter revenue and EPS estimates for fiscal '15, here is what the analysts are looking for in terms of expected growth the next 4 quarters:

BBBY est est est est
year-over-year growth 2/15 q4 11/14 q3 8/14 q2 5/14 q1 2/14 q4 11/13 q3 8/13 q2 5/13 q1 2/13 q4 10/12 q3 7/12 Q2 4/12 q1 1/12 q4 10/11 q3 7/11 q2 4/11 q1 1/11 q4 10/10 q3 7/10 q2 4/10 q1
Revenues ($'s Thousand's) 5% 4% 3% 3% -6% 6% 9% 18% 24% 15% 12% 5% 9% 7% 8% 10% 12% 11% 12% 13%
Cost of Goods Sold n/a n/a n/a n/a -5% 7% 10% 19% 28% 18% 14% 6% 10% 7% 8% 9% 11% 12% 11% 12%
Gross profit n/a n/a n/a n/a -7% 4% 8% 16% 20% 12% 9% 3% 8% 7% 9% 11% 13% 10% 13% 16%
* SG&A n/a n/a n/a n/a -3% 5% 8% 24% 30% 18% 15% 1% 0% 2% 0% 3% 5% 4% 5% 5%
Operating Income n/a n/a n/a n/a -12% 4% 7% 3% 9% 1% -2% 8% 19% 17% 25% 28% 24% 24% 34% 58%
Interest Income/(Expense) n/a n/a n/a n/a 122% -142% -723% -79% -108% 419% -114% -291% 81% -130% -672% 7% 186% 171% -78% -71%
Income pre-tax n/a n/a n/a n/a -12% 5% 6% 3% 8% 1% -1% 8% 20% 16% 24% 28% 25% 25% 33% 57%
*income tax expense n/a n/a n/a n/a -14% 10% -2% 14% 10% -2% 0% -3% 13% 8% 22% 23% 23% 25% 31% 55%
Net earnings n/a n/a n/a n/a -11% 2% 11% -2% 7% 2% -2% 15% 24% 21% 26% 31% 25% 25% 34% 58%
diluted share outstanding n/a n/a n/a n/a -7% -6% -6% -6% -6% -6% -7% -7% -6% -6% -5% -5% -3% -2% 0% 2%
F/D EPS 8% 6% 3% 1% -5% 9% 15% 4% 14% 8% 9% 24% 32% 28% 33% 38% 30% 28% 35% 53%
Click to enlarge

Source: Thomson Reuters estimates and internal spreadsheet

Current consensus is looking for modest EPS and revenue acceleration for BBBY over the next 4 quarters, which would be a nice change from the last quarter.

However to get there, (i.e., modest forward growth) BBBY would need to fix this margin pressure:

est est est est
Margin analysis 2/15 q4 11/14 q3 8/14 q2 5/14 q1 2/14 q4 11/13 q3 8/13 q2 5/13 q1 2/13 q4 10/12 q3 7/12 Q2 4/12 q1 1/12 q4 10/11 q3 7/11 q2 4/11 q1 1/11 q4 10/10 q3 7/10 q2 4/10 q1
Gross margin n/a n/a n/a n/a 40.5% 39.2% 39.4% 39.5% 41.0% 39.8% 39.8% 40.0% 42.6% 40.9% 41.1% 40.6% 43.0% 40.9% 40.9% 40.3% 42.6%
y/y change n/a n/a n/a n/a -0.51% -0.60% -0.39% -0.45% -1.58% -1.16% -1.27% -0.65% -0.38% 0.04% 0.15% 0.34% 0.39%
Operating margin n/a n/a n/a n/a 16.5% 13.1% 13.8% 12.4% 17.6% 13.4% 14.1% 14.1% 20.2% 15.2% 16.1% 13.7% 18.4% 13.9% 13.9% 11.7% 16.5%
y/y change n/a n/a n/a n/a -1.13% -0.31% -0.28% -1.76% -2.58% -1.85% -1.98% 0.43% 1.75% 1.33% 2.16% 1.97% 1.88%
Net income margin n/a n/a n/a n/a 10.4% 8.3% 8.8% 7.8% 11.0% 8.6% 8.7% 9.3% 12.8% 9.8% 9.9% 8.6% 11.3% 8.6% 8.5% 7.2% 10.1%
y/y change n/a n/a n/a n/a -0.59% -0.34% 0.18% -1.57% -1.86% -1.14% -1.26% 0.77% 1.53% 1.16% 1.41% 1.41% 1.24%
Click to enlarge

Source: Internal spreadsheet

The one glaring positive to BBBY is the 8% free-cash-flow yield and the lack of any long-term debt on the balance sheet.

BBBY is presently buying back shares at a healthy clip, spending more than even its free-cash-flow generation, but if it wanted to drive shareholder value, it could repo more with debt issuance.

Trading at 12(x) earnings for 5% expected growth in fiscal '15, it looks like the fiscal '16 and '17 earnings are starting to turn higher. There continues to be pressure on this year's estimate, at least pre-earnings.

Our internal intrinsic value estimate for BBBY is $70 per share, while Morningstar currently values the stock at $73.

The intrinsic value estimates leave BBBY trading at a 15% discount (roughly) to where we think fair value is, thus we have bought some BBBY for a trade for now, maybe longer depending on what we see Wednesday night.

In our eyes, the CostPlus acquisition was a good way for BBBY to buy rather than build. Whether BBBY management is realizing all those expense synergies remains to be seen. We've always felt this was a strong management team.

We think this is a critical quarter for BBBY, however, with sentiment around Consumer Discretionary pretty negative and around housing-related negative as well, even just a decent quarter from BBBY would likely drive a nice pop in the stock.

Disclosure: The author is long BBBY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.