After well over five years of meeting or beating analyst estimates, retailing superstar Bed Bath & Beyond (NASDAQ:BBBY) finally met its match last quarter, falling short of consensus expectations by two whole cents. Can this Motley Fool Stock Advisor recommendation find the right side of the bed once more when it reports its Q4 and full-year 2006 numbers tomorrow?

What analysts say:

  • Buy, sell, or waffle? Twenty-five analysts follow the company, giving it 11 buy ratings, a dozen holds, and a pair of sells.
  • Revenues. On average, they're looking for 15% quarterly sales growth to $1.94 billion.
  • Earnings. Profits are predicted to grow 16%, to $0.78 per share.

What management says:
As already mentioned, Bed Bath & Beyond disappointed investors last quarter, turning in 12% sales growth, but just 11% profits growth and inventories that swelled by 15% compared with the end of last year's Q3. Free cash flow also declined.

While refraining from trying to spin the news as good, management did seem to suggest it was what it was -- just one bad quarter following 20-odd great quarters -- reaffirming its confidence in the business with a $1 billion share buyback program.

What management does:
Much as I'd like to take that at face value, the numbers shown below do appear to suggest a deterioration in the company's business. Gross margins may still be on the rise, but operating and net margins are clearly on a downtrend -- and have been for quite some time.

Margin

8/05

11/05

2/06

5/06

8/06

11/06

Gross

42.6%

42.7%

42.8%

42.9%

42.9%

43.1%

Operating

15.5%

15.6%

15.6%

15.4%

15.1%

14.9%

Net

10.0%

9.9%

9.9%

9.6%

9.4%

9.3%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In his November update on Bed Bath & Beyond's performance for subscribers to Stock Advisor, Fool co-founder Tom Gardner seemed to foreshadow the company's current weak spell, warning investors to "anticipate softening sales," yet at the same time marveling that "the company continues its pattern of low double-digit growth."

Considering that even after last quarter's letdown, Bed Bath & Beyond is still expected to turn in 15% growth in both sales and earnings tomorrow, the investment thesis here seems intact. That said, the rise in inventories we saw last quarter does concern me. And in fact, this trend has continued for a couple quarters now, with inventory increases outpacing sales growth about 15% to 12% on average. Rather than fret over whether the company hits or misses earnings tomorrow, I'd suggest investors focus more on this inventory picture. After all, quarters come and quarters go -- but unsold inventory tends to stick around until a retailer bites the bullet, slashes prices, and suffers further margin declines as a result.

Looking for further Foolish views on Bed Bath & Beyond? Check out "Dueling Fools: Bed Bath & Beyond," in which two Foolish pugilists debate the firm's merits as they compare it with rivals such as Pier 1 (NYSE:PIR), Restoration Hardware (NASDAQ:RSTO), Target (NYSE:TGT), and Williams-Sonoma (NYSE:WSM).

Bed Bath & Beyond is also a Motley Fool Inside Value recommendation. Need new ideas for your money? Talk stocks with other investors and our analysts when you give our newsletters a try.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.