Bed Bath & Beyond Earnings Preview: What Wall Street's Saying

NEW YORK (TheStreet) -- Has the home furnishings wave rolled over?

Bed Bath & Beyond (BBBY) reports fiscal second-quarter earnings after markets close on Tuesday and consensus estimates are calling for earnings of $1.14 a share on revenue of $2.89 billion, an increase of just 2% from last year, according to Thomson Reuters. Same-store sales are expected to rise 1.5% for the fiscal second quarter, according to Consensus Metrix.

Analysts have been concerned about the strong competition that Bed Bath & Beyond and other stores including Pier 1 Imports (PIR) and Williams-Sonoma (WSM) face from online rivals as well as the increasingly promotional environment for the home furnishings industry as a whole.

Bed Bath & Beyond shares have declined 14.8% over the past 12 months. Shares were down 0.9% to $63.12 on Tuesday. Here's what analysts said ahead of Bed Bath & Beyond's earnings.

Kate McShane, Citigroup (Neutral; $70 PT)

We believe conference call topics will center around: 1) SSS momentum, 2) extent of couponing and promotions, 3) update on e-Commerce investments, 4) competitive environment, and 5) updates to guidance.

We remain on the sidelines until BBBY can reverse the decelerating comp trend and see its gross margin improve on less coupon dependence from its customers. The tech investments may eventually pay off but may also continue to pressure BBBY's operating margin unless the company sees a significant sales lift.

Daniel Hofkin, William Blair (downgraded to Market Perform from Outperform on Sept. 22)

We acknowledge that Bed Bath remains a strong retail operator, in terms of in-store merchandising (quality of display and breadth of product/brand offerings), a more entrepreneurial store-level culture than the average retailer, and still-above-average margins and ROIC. Moreover, while e-commerce is still a low-single-digit percentage of sales (by our estimates), the company has begun to make more aggressive investments over the past 18 months to enhance its multichannel capabilities, and the newer websites for Bed Bath and buybuy BABY (launched in summer 2013) are considerably improved from their prior versions.

Still, we believe that Bed Bath let too much time pass before starting to develop a strong multichannel platform and that competition from e-commerce players and retailers with more developed multichannel platforms will likely continue to intensify. We estimate that Bed Bath is likely to remain in stepped-up investment mode for a number of years, as it works to make its pricing (and pricing image) more competitive, develop more targeted and dynamic marketing (based on customer-level basket analysis), and invest further in a state-of-the-art multichannel supply chain (particularly e-commerce fulfillment centers). Thus, while we believe that Bed Bath is making advisable strategic moves at this point, we estimate that operating margins and ROIC could remain under pressure for some time, and it can be difficult for retail stocks to outperform the market against this sort of backdrop (even if these headwinds are already somewhat discounted by investors).

Jessica Schoen Mace, Nomura Securities (Neutral; $65 PT)

We expect the company to continue its program of renovating and repositioning stores, as well as to add health products or specialty food merchandise to certain locations. We believe the company may include health and beauty products, baby/specialty food, or beverages in as many as 300 locations over time.

Our comp estimate of 1.5% for 2Q, which includes the important back-to-school period, reflects some caution regarding the overall environment and traffic declines in two of the last four quarters. We acknowledge the promotional competitive environment mentioned by several other companies during the quarter, and note the potential headwind it may have caused to both top-line growth and profitability.

Matthew Fassler, Goldman Sachs (Sell: $64 PT)

We reiterate our expectation that margins at BBBY will remain under pressure as the company invests in price and omnichannel initiatives. Our most recent pricing study shows BBBY is slowly becoming more competitive, with price gaps on a smaller proportion of items; that said, its 7.5% price gap vs. AMZN (excluding extreme outliers) remains significant and suggests the need for additional cuts to achieve optimal parity (excluding coupons).

The company appears to have provided adequately conservative 2Q14 margin guidance; our 2Q EBIT margin decline forecast of -121bp is at the aggressive end of BBBY's guided range of -115 to -180bp of erosion, yet in line with 1Q trends. But, the midpoint of sales guidance implies modest acceleration in SSS trends, as macro measures of the market slowed. And, we still think 2H guidance could prove aggressive. Signs of promotional activity in the broader home furnishings universe, based on results and comments from peers, most notably WSM and PIR, also drive questions about earnings visibility.

TheStreet Ratings team rates BED BATH & BEYOND INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate BED BATH & BEYOND INC (BBBY) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, reasonable valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • BBBY's revenue growth has slightly outpaced the industry average of 0.0%. Since the same quarter one year prior, revenues slightly increased by 1.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Specialty Retail industry and the overall market, BED BATH & BEYOND INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • BED BATH & BEYOND INC reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, BED BATH & BEYOND INC increased its bottom line by earning $4.81 versus $4.58 in the prior year. This year, the market expects an improvement in earnings ($5.01 versus $4.81).
  • 38.80% is the gross profit margin for BED BATH & BEYOND INC which we consider to be strong. Regardless of BBBY's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 7.04% trails the industry average.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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