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Homes goods retailer Bed Bath & Beyond (BBBY) reported mixed second quarter results Wednesday afternoon (for first quarter results, click here). Revenue increased 12% year-over-year to $2.6 billion, slightly better than expected. Earnings were a few cents short of expectations, growing 5.4% year-over-year to $0.98, yet we weren't really disappointed by the slight miss since the figure remained within the firm's guidance range.

Net sales gains were boosted by the inclusion of Cost Plus World Market in consolidated results; however, the firm still posted a strong same-store sales gain of 3.5%, which was near the high end of the company's guidance range. Gross margins fell considerably to 39.8% from 41.1% in the same period a year ago. We suspect Cost Plus, which posted gross margins of 32% during its last quarter as a publicly-traded entity, is the main contributor to the margin decline. Still, given the strong same-store sales gain, which excludes Cost Plus, the core Bed Bath & Beyond stores are performing well. SG&A also negatively impacted profitability, expanding 70 basis points (as a percentage of revenue) year-over-year, to 26.7%. Again, we think Cost Plus is the culprit, but we believe the company's strong management team will be able to improve profitability over time. However, consolidated gross margins may ultimately be slightly lower than historical standards due to the nature of Cost Plus' business.

Going forward, the firm expects to earn $0.99-$1.04 per share in the third quarter, roughly in-line with the consensus estimate of $1.02, and it remains on track to meet its full-year guidance of high-single to low-double digits growth. We continue to like the company as housing remains strong, but we think shares are fairly valued. The firm scores a 6 on our Valuentum Buying Index (our stock-selection methodology), meaning we aren't willing to add shares to the portfolio of our Best Ideas Newsletter at this time.

Source: Not Ready To Pull The Trigger On Bed, Bath & Beyond