Bed Bath & Beyond ( BBBY) shares tumbled Thursday after the company's second-quarter earnings report raised fears that its growth story is over.But some analysts say it's too soon to throw in the towel on the leading retailer in the home-furnishing segment. After the bell on Wednesday, BB&B reported second-quarter net income of $120 million, or 39 cents a share, up from $97.2 million, or 32 cents a share, in the same period last year. Revenue increased 15% to $1.3 billion, up from last year's $1.1 billion. On the bright side, BB&B continued its streak of never missing Wall Street's earnings estimates through 12 years as a public company. But it also extended a more recent and troubling trend, which has kept its stock in the basement this year. Second-quarter comparisons cooled, up just 4.8% in the latest quarter compared with 5.9% in the year-ago quarter. Bed Bath & Beyond's growth is clearly decelerating, which explains its sagging stock price, analysts say. Annual revenue has grown an average of 26% since 1998, but they expect that to slow to 14% over the next five years. That's why the stock is currently trading at just 21 times 2005 earnings, compared with its historical price-to-earnings valuation of nearly 35. On Thursday, the shares closed down $1.99, or 5%, to $37.59. Still, Donald Trott, analyst with Jefferies & Co., rejects the idea that the company is running out of room to grow. He noted that specialty stores in the home-goods space, like Bed Bath & Beyond and its closest competitor, Linens N'Things ( LIN), now account for about 20% of market share, and that figure has been increasing by about 100 basis points a year. In other markets, specialty stores usually account for between 30% and 40% of market share.
"We see the percentage of market share for specialty stores in home furnishings continuing to go up, with Bed Bath & Beyond being the leader in the phenomena," Trott said. (He doesn't own shares of the stock, and his firm has no investment banking relationship with the company.) "There still is a lot of expansion opportunities left in them." But even though Bed Bath & Beyond could take share from rivals, there's little question that the home-furnishings market is saturated. In 1998, the company increased its square footage by 33%. In 2000, it added 24%, and this year, it is estimated to grow by only 12%. "Obviously, when you get this decrease at the rate at which you're growing your capacity, you're going to get a slowdown in sales growth," said David Magee, an analyst with SunTrust Robinson Humphrey. (His firm owns shares in the company but has no investment banking relationship.) Magee said the dynamics of the stock are in transition. No longer will the driving force be increasing comparable sales, but instead, acquisitions and larger profit margins. "Acquisitions and margin improvement are fine, but they're more complex, less easy to analyze and often result in lower P/Es," he said. "That's probably why we've come down here, but now, I think we have an opportunity to lean in the other way because sales will likely be more visible soon." Wall Street is watching BBY's acquisition of Christmas Tree Shops, a chain of 23 stores selling giftware and household items in New England. As a regional retailer, Christmas Tree Shops has room to grow and a loyal customer base, which has meant sales per square foot of more than $400, compared with $250 at Bed Bath & Beyond Stores. Bed Bath & Beyond also acquired Harmon Stores, a health and beauty aid retailer with growth potential, in 2002. With virtually no debt on its books and cash totaling $846 million at the end of the quarter, up from $617 million at the same time last year, BB&B can afford more acquisitions.
"Given their strong free-cash flow, I think it's likely that they'll start to pay out a dividend, and I think they'll start to look at share repurchases as well," said Anthony Chukumba, an analyst with Morningstar. Chukumba accepts that lower valuations may be appropriate for Bed Bath & Beyond, given the saturation levels. But he said there is still room for organic growth, and given management's track record, he expects to see new sales channels and opportunities. "They're an incredibly well-run and consistent organization," Chukumba said. "It's always been head and shoulders above its competitors." Analysts point to the bridal registry business as a battleground that is ripe for Bed Bath & Beyond. It also faces potential opportunities in catalogs and the internet. Skeptics point to the likelihood of a housing slowdown, but others say Bed Bath & Beyond is well positioned for a secular trend of baby boomers focusing more on their homes as they get older and retire. Chukumba calls it the "cocoon effect," and Trott identified the trend as "trading up." Even if the housing market cools, the market for household goods remains stable. The well-to-do have extra money, and Bed Bath & Beyond may be primed to serve them. "There are now 40 million households that have been identified to be 'trade up' mode," Trott said. "The possession, which for most people is their most significant material possession, is their home. It's also the material possession that says the most about how you want to project yourself in the world. People with extra money are embellishing their homes and treating themselves to more frills and upgrades."