Bed Bath & Beyond: Margin Pressure Sends Shares Lower

| About: Bed Bath (BBBY)

Shares of Bed Bath & Beyond Inc. (NASDAQ:BBBY) fell up to 5% in after-hours trading on Wednesday. The retailer of merchandise for kitchens, bathrooms and domestic warehouse reported its second quarter revenues after the close.

Second Quarter Revenues

Bed Bath & Beyond reported second quarter revenues of $2.59 billion, up 12.1% on the year. Comparable sales rose by 3.5% in the second quarter, compared to a growth of 5.6% last year. Comparable same store sales growth came in at the high end of the 2%-4% guided range. Gross margins compressed by 130 basis points to 39.8%, as input costs jumped 14%.

The company net earned $224.3 million, down 2.2% from last year's earnings of $229.4 million. Earnings per diluted share rose from $0.93 last year to $0.98 in 2012. Earnings came in at the low end of the guided range of $0.97-$1.03 per share. On average, analysts expected the company to earn $1.02 per share.

The company repurchased approximately 3.1 million shares, for a total consideration of $199 million. At the end of the quarter, the company had $414 million remaining under its current authorized share repurchase program.

During the quarter the company closed two acquisitions. Bed Bath & Beyond bought Cost Plus Inc for $550 million. Furthermore, it bought privately held Linen Holdings LLC for $105 million.


For the third quarter, Bed Bath & Beyond reported earnings per diluted share of $0.99-$1.04. Analysts expected the company to guide for third quarter earnings of $1.02 per share.

For the full year of its fiscal 2012, the company expects to increase earnings per share in the high single-digit to low double-digit range. Earnings are driven by the fact that its fiscal year of 2012 has 53 weeks. The acquisition of World Market and Linen Holdings will add to earnings as well.


Bed Bath & Beyond ended its second quarter with $908 million in cash, equivalents and short-term investments. The company operates without any meaningful debt, for a net cash position of around $900 million.

For the first six months of 2012, the company reported revenues of $4.8 billion. Net income came in at $431 million, or $1.87 per diluted share.

Factoring in a 5% drop in after-hours trading, the market values the company at $15.2 billion. The operating assets are valued at roughly $14.3 billion. The market currently values the company around 1.4 times annual revenues and 14 times annual earnings.

Currently, Bed Bath & Beyond does not pay a dividend.

Investment Thesis

Year to date, shares of Bed Bath & Beyond have gained some 14%. Shares rose from $60 at the start of the year to $75 by June of the year. In June, shares fell back to $60 after Bed Bath & Beyond warned for the second quarter results.

Over the past five years, shares have more than doubled. From lows of $20 in the beginning of 2009, shares rose to $65 at the moment. Bed Bath & Beyond expanded its annual revenues from $7.2 billion in 2008 to a level north of $10 billion in 2012. Net earnings rose from $425 million to around $1 billion in 2012. The company retired roughly 10% of its shares outstanding over the same period.

Wednesday's results indicate that June's warning was not a one-off. Earnings came in at the low end of the guided range. In April of this year, I was already cautious for the short-term prospects, given the strong price appreciation at the start of 2012. Net margins might have peaked, today I reiterate my stance.

Although the valuation is fair and revenues are expected to grow, net income might remain under pressure. Input costs are on the rise, and net margins might have just peaked. I remain on the sidelines.

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.