Foolish Forecast: Bed Bath & Beyond the Good News

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It's a tough economy out there. So will the bed bugs bite Bed Bath & Beyond's (Nasdaq: BBBY) second-quarter 2008 earnings on Wednesday? Let's see what Wall Street thinks might be hiding under the covers.

What analysts say:

• Buy, sell, or waffle? Twenty-three analysts follow Bed Bath, which garners seven buy ratings, a dozen holds, and four sells.
• Revenues. On average, they're looking for sales to rise 5% to $1.86 billion.
• Earnings. Profits are predicted to plummet 16% to $0.46 per share.

What management says:
No two ways about it: Bed, Bath surprised me last quarter, delivering positive comps, 6% sales growth, and a smaller-than-expected decline in profits. But as good (or should I say, less bad than predicted) as the quarter was, management isn't done yet, insisting that it's focused on the "long-term ... work[ing] to continue to distance ourselves from our competitors by striving to be our customers' first choice for the products we offer."

What management does:
This sounds good in theory, but in practice, Bed, Bath isn't adding any distance to its lead over the competition. To the contrary, every passing quarter brings the chain's profitability lower and lower, and closer and closer to the single-digit operating margins sported by stores like Target (NYSE: TGT), Williams-Sonoma (NYSE: WSM), and Wal-Mart (NYSE: WMT).

Margins	3/07	6/07	9/07	12/07	3/08	5/08
Gross	42.8%	42.7%	42.5%	42%	41.5%	41.1%
Operating	13.4%	13.2%	12.9%	12.5%	11.9%	11.2%
Net	9%	8.8%	8.7%	8.4%	8%	7.5%

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:
Speaking of competitors, things haven't been going so hot lately for the firms operating closest to Bed, Bath's market niche. Linens n' Things filed for bankruptcy in May. Williams-Sonoma cut its estimates last month (around about the time KeyBanc was downgrading Bed, Bath.) Most recently, Pier 1 (NYSE: PIR) disappointed investors again last week, and the news out of Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) last month wasn't much better.

While I'd love to say that Bed, Bath is different, the truth is that I foresee similar trends at Triple-B. You see, in the last two quarters, sales have been up only 1% on average over their year-ago levels. Inventories, in contrast, were averaging 9% higher. To me, that looks like a recipe for further discounts to keep merchandise moving, smaller profit margins in consequence, and lower profits on the bottom line.

If that's the case, though, then why does Fool co-founder and Motley Fool Stock Advisor co-advisor Tom Gardner argue that Bed, Bath is a "Great buy"? Read Tom's midyear update on Bed, Bath and all his other stock picks (for free!) and find out.