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In our last article on Bed Bath & Beyond (NASDAQ:BBBY), we had been bullish based on the strategic acquisition of Cost Plus and Linen Holdings, and investments in the online business to counter competition from e-commerce giant Amazon (NASDAQ:AMZN). Linen Holdings and Cost Plus were acquired during June 2012, and their operations are included in the results for Q22012. Since our recommendation, the stock has appreciated 12%. Today, the stock is down 8% after its Q22012 earnings report. It missed analyst estimates of $1.02/share by posting $0.98/share, though it beat revenue estimates. This dip is a good opportunity to buy BBBY as Q3 guidance is inline with expectations and the company has healthy financials. The stock is also trading 17% off from its 52 week highs.

Q2 results:

The company reported diluted EPS of $0.98; this means an increase of 5.4% YoY, although it is slightly below what the Street expected (1.02/share). The company had earlier guided to Q2 EPS of $0.97-$1.03. Net sales increased by 12% over Q22011 and beat analyst expectations. Analysts were expecting $2.54 billion in sales, while the company posted $2.593 billion as opposed to approximately $2.314 billion last year.

Comparable store sales were up 3.5% (does not include the positive effect of Linen Holdings and Cost Plus acquisitions). Last year, same store sales showed a gain of 5.6% in Q22012.

Guidance:

For Q3, the company offered guidance of $0.99/share to $1.04/share. Analysts were expecting $1.02/share, which is the mid-point of the guidance range. For the whole year, the company guided to high single to low double digit growth for FY2013. Analysts expect $4.69/share, 15% above last year's $4.06/share.

Other Performance:

The company continues to expand. It opened 5 stores under the Bed Bath & Beyond name, 3 buybuy BABY stores, 2 Harmon Face Values stores, and a Christmas Tree Shops store.

BBBY's profit margin (trailing twelve months) and operating margin (trailing twelve months) are higher than Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). Long-term debt-to-equity ratio is zero as well. Cash flow from operations for this quarter saw a slight decline on a YoY basis ($472 million for Q2 vs $486 million) due to a rise in inventory. However, these cash flows are more than enough to fund capital expenditures of approximately $275-$300 million expected for this year, as well as share repurchases.

The company does not pay dividends, but it repurchases shares. In Q22012, it bought back $199 million worth of shares, which leaves $414 million under the current authorization for share repurchases.

Valuation:

The company has forward P/E of 13x and an average last 5-year P/E multiple of approximately 16x. The valuation based on these multiples and analyst consensus expectations is:

*FY2015 EPS calculated by applying the 11% expected long term growth rate on FY2014 EPS.

These valuations show that there is still some upside left. The 52-week high is $75.5. Target has forward P/E of 13x as well, while Wal-Mart is trading at a forward multiple of 14x. Both these companies are approximately trading at their 52-week highs.

Oppenheimer reduced its rating for BBBY from Outperform to Perform yesterday, while maintaining an $80 target price and an upbeat outlook for the long term. It cited near term pressure on profits, based on the fact that opportunities to gain market share are not as abundant now as before, and coupons are a significant attraction for traffic.

To reiterate, we recommend buying BBBY on today's dip to benefit from its upside potential, healthy financial condition, and strategic acquisitions.

Source: Buy Bed Bath & Beyond On This Dip