Housing Troubles Douse Bed Bath & Beyond

The once-strong performer finally shows wear and tear.
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SAN FRANCISCO -- The housing slump is starting to make things messy at

Bed Bath & Beyond

(BBBY) - Get Report


Shares slid as much as 11% Friday, though they recently recovered some ground, after the home-products retailer projected fourth-quarter earnings

well below Wall Street's targets. As well, the company's third-quarter report showed a drop in margins for the period, and only a slight increase in its same-store sales, or sales at stores open at least a year.

While Bed Bath & Beyond shares have taken hits over the past year as investors fear the ramifications of the housing slump, the lackluster outlook from the historically strong company was jarring. The weakness caused some to wonder if even stellar performers can sidestep the country's larger economic woes much longer.

David Strasser, an analyst for Banc of America Securities, said that although Bed Bath & Beyond is managing its business as well as can be expected, there is still plenty of reason to be concerned about 2008, especially in light of the long-lasting weakness seen among

Home Depot

(HD) - Get Report



(LOW) - Get Report

and other housing-related retailers whose sales and earnings rapidly disintegrated once the slowdown began.

"A difficult housing market seems to have fully caught up with the company," Strasser wrote of Bed Bath & Beyond in his research.

He added that Bed Bath & Beyond's performance is also an indication of slower spending by midtier consumers, a factor that has also hurt discount chain


(TGT) - Get Report

. Last week, Target -- also a former outperformer -- slashed its projections for December same-store sales.

The latest jobs report only compounded worries for retailers. Stocks were sinking Friday after the Labor Department reported that the U.S. economy added only 18,000 jobs in December, well below the 70,000 that economists had been expecting.

The unemployment rate -- often viewed as closely tied to consumer spending -- jumped to 5% from 4.7% in November.

The S&P Retail Index recently was down 3.7%, with shares of

J.C. Penney

(JCP) - Get Report

falling 6.2%,


(M) - Get Report

down 5.9% and


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sliding 4.9%. Bed Bath & Beyond shares recently were down 5.1% to $25.99.

Gary Balter, an analyst for Credit Suisse, said he has been tempering estimates for the retailers he covers for some time now as a result of concerns over consumer spending and margin pressures.

"Yet as we saw last night from one of the better quality names, the weakness in the consumer and the pressure on margins is unprecedented in this decade and we have no confidence that spending and margins will improve anytime soon," he wrote in his research, which came before the jobs report. "That points to estimates likely being still too high for most retailers, with those tied in to the home most vulnerable to further reductions."

Adrianne Shapira, an analyst for Goldman Sachs, pointed to margin troubles in Bed Bath & Beyond's third-quarter report. She wrote that its profit problems stem from increased coupon redemption, higher inventory acquisition costs and a negative shift in the retailer's product mix.

"We expect strong levels of coupon redemption to pressure gross margins into the fourth quarter as Bed Bath & Beyond and competitors continue to float incentives to drive traffic," Shapira wrote in her research.

Balter said that "Bed Bath & Beyond should be a poster child for success," noting that its merchandising is on par with some of the best retailers in the industry. The company has been using its cash to supplement earnings growth and gross margins, despite some evidence of pressure, he said.

"In that regard, investors should view this name as a proxy for non-consumer electronic spending in America," he wrote. "If this is a proxy, 2008 is going to be a very challenging year again with those more exposed to housing worse off."

Balter said Bed Bath & Beyond has pulled well ahead of competitors like privately held Linen's 'n Things, which he believes is highly levered and running negative EBITDA, or earnings before interest, taxes, depreciation and amortization.

"We would expect that smaller players may also not survive the weakness in 2008, which is another good signal for BBBY," he wrote. "Unfortunately the good news is likely two years away and we have to get through 2008 first to see it."