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BED BATH & BEYOND INC. (NASDAQ:BBBY)

Yesterday, Bed Bath & Beyond Inc. reported the company's financial results for its first quarter of 2012. The stock fell 11% in after-market trading to almost $65 on the news. Let's analyze the earnings conference call and see if this dip creates a buying opportunity.

The company reported diluted earnings per share of $0.89 for the quarter ending on May 26, 2012, which is an increase of almost 24% year over year. The company also reported basic earnings per share of $0.90, which display an improvement of almost 22% from 1Q2011.

Seems all good, but that is not the case. The stock didn't dive on the reported EPS for the most recent quarter. It dove on the forecasted earnings per share, which are less than the consensus analyst's estimates of $1.08. The company is expecting the second quarter diluted EPS to be somewhere in the range of $0.97 to $1.03, down almost 5% from analysts' estimates. If we look at the sales data that was released, we can easily see how the comparable sales for the company have slowed down as well. Comparable store sales in the first quarter increased by approximately 3.0%, compared with an increase of approximately 7.0% in the first quarter of the previous year.

Expected

Reported

YOY growth

Q12012

EPS

$0.85

$0.89

24.00%

Revenue growth

3%

3%

G. Margins

40.50%

40%

Reasons for the Miss

Strategic acquisitions: BBBY agreed in May to buy Cost Plus Inc. for almost half a billion dollars in cash. Cost plus is a retailer selling home items that include furniture, gifts and holiday items. If the deal is completed by the second quarter, it would cut the company's earnings by several cents per share in the second quarter. Moreover, Integration costs would be a major concern for BBBY.

The Threat from Amazon (NASDAQ:AMZN): Also, the company has started to put more and more money into its online business to combat the rising threat that comes from Amazon, which launched a website by the name casa.com. The website is extremely convenient for shoppers, with no shipment charges for orders over $50, and delivery in two days. Moreover, the products are competitively priced. The increased competition from Amazon has also put pressure on BBBY's margins, which have continued on a downward trend since February. A shift toward lower margin products has also been responsible for the contraction in margins.

Thus, the decision to invest aggressively in its online business is perhaps another reason for a weak forecast in the second quarter, as the company tries to recover the sales lost to Amazon. Capital expenditures for the current year are expected to be in the range of $275-to-$300 million, which includes the development of an improved website and an 800,000-square-foot e-service center in Georgia. The company has a strong balance sheet with no debt and cash of around $2 billion, which is sufficient to meet its CAPEX requirements going forward.

The chart below shows how the stock has outperformed the market as well as its peers, Wall-Mart (NYSE:WMT), and Target (NYSE:TGT) on a YTD basis, yielding around 25%.

The stock has maintained an upward trend since the start of the year and we expect it to move higher in the future. We believe that the company's investment in its online business, as well as its strategic acquisitions in Cost Plus Inc. and Linen holdings (LLC) will bring synergy to its operations and help it in reducing costs, the results of which will be evident in the second half of the year. Despite the downward pressure on its margins currently, BBBY has the highest gross and operating margins among its peers, WMT and TGT. It has a strong balance sheet with no debt and a high current ratio. It has a P/E multiple of 18x, at a discount to the industry average, indicating it might be undervalued at current levels.

Future Catalysts:

  • Strategic acquisitions of Cost Plus and Linen holdings.
  • Investment in the online business.

BBBY's stock is considerably off its 52-week highs while the stocks of WMT and TGT are trading around their respective 52-week highs. In such a scenario, if the market is sluggish for a few days, BBBY may see its stock drop further. However, the stock's technical support level is roughly around $65 (see chart below), and based on the recent stock drop in the last session to exactly the same levels, we would recommend buying the stock.

Source:marketwatch.com

Source: Buying Opportunity In Bed Bath & Beyond