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Investors Shun Bed Bath & Beyond, Walgreens Growth Deals

NEW YORK ( TheStreet) -- After growing earnings from post-recession lows, companies like Bed Bath & Beyond (BBBY - Get Report) and Walgreens (WAG) have recently cut their biggest ever acquisitions in an effort to retool earnings prospects and growth.

The problem is that in a lukewarm earnings environment, investors have punished both companies - in part - for the moves. Now, it's time for investors to question whether widespread corporate austerity can be a long-term opportunity for the companies that are mapping out new growth plans.

In May, Bed Bath & Beyond (BBBY - Get Report) cut its biggest-ever acquisition when it bought Cost Plus World Market (CPWM) for nearly $500 million, in a deal that was seen as a way to combat a slowdown at the brick-and-mortar home goods store. Initially, the move pushed Bed Bath & Beyond to all-time highs over $75 a share as many perceived the deal to be a smart growth play.

After announcing a second quarter sales and profit margin slowdown on Wednesday and providing a cloudy outlook for the remainder of 2012, investors are punishing Bed Bath & Beyond shares, pushing them nearly 15% lower to $62.96 in Thursday trading, erasing share gains since the Cost Plus deal. But faced with less-than-stellar comparable store sales and earnings, the strategic benefits of the acquisition may be all the more clear.

Many analysts reacted to the Union, N.J.-based retailers share slump as overdone, citing high expectations for Bed Bath & Beyond's M&A and continued strong execution by management. Credit Suisse analyst Gary Balter, who raised his Bed Bath & Beyond price target to $91 after the Cost Plus acquisition, said there was "little to like" in the company's earnings and guidance. When pressed to decide whether the earnings show growth has peaked at Bed Bath & Beyond or if the company's M&A will revive sales, Balter remains a bull.

"We believe investors are overreacting to the costs of the acquisitions and underestimating the benefits," wrote Balter in a note reacting to earnings. "We are especially excited by the Cost Plus acquisition, which we believe can provide significant sourcing and comp opportunities in the future," he added, noting that part of Bed Bath & Beyond's guidance miss comes from costs associated with the acquisition that should have been expected.

After successfully competing with the likes of Web-based competitor Amazon (AMZN)and big box retailers, acquiring new channels of growth may not be such a bad bet for Bed Bath & Beyond, after posting a 30%-plus three year growth rate of earnings.
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