Bed Bath & Beyond Almost Had It This Time

After reporting a dismal third quarter last night, Bed Bath & Beyond (NASDAQ: BBBY  ) fell almost 13% in early trading today. Like a well-spoken but incompetent cousin, the homewares brand fell short of expectations, with earnings inching up only slightly on a small increase in sales. Sources are already confirming that next year's Christmas party is likely to contain lots of gentle pats on the head and Aunt Gertrude saying, "Oh, maybe next time, dear."

Effort < Expectations
In the third quarter, Bed Bath & Beyond increased comparable sales by 1.3% over 2012. Unfortunately, the market was looking for an increase of more than 2%. That shortfall meant that the company was almost certain to miss analysts' earnings expectations, which it did -- putting up only $1.12 per share compared to an expectation of $1.15. By now, management has put all the streamers back in the boxes as neatly as possible, hoping to return them tomorrow along with the one bottle of champagne that didn't get popped prematurely.

Bed Bath & Beyond suffered this quarter from a failure to get meaningful momentum out of its coupons and specials. The company's gross margin fell as a result of increased coupon redemption and a shift to lower-margin products. The problem was that the increase in coupon redemption didn't drive sales higher, as it should have. As a result, margin fell and sales grew slower than expected.

Home improvement fails to catch at Bed Bath & Beyond
Last year should have been a banner year for Bed Bath & Beyond. The gains in the home prices market helped boost other businesses like Williams-Sonoma (NYSE: WSM  ) and Home Depot (NYSE: HD  ) as new owners took over existing homes, making them into their own dream houses. Those new homeowners helped push Williams-Sonoma's last reported quarter comparable sales up 8.2% over the previous year.

Home Depot has also benefited mightily, getting strong enough foot traffic to ease off promotions and expand its operating margin. That's led to an increase in earnings per share, and helped kick shares up 29% over the last 12 months. For comparison, Williams-Sonoma has increased its share price by 27%, while Bed Bath & Beyond has only managed a 22% increase after today's fall.

The future
The company's third-quarter failure was combined with an updated fourth-quarter guidance that is now looking forward to smaller gains. In the end, it's not really the bad news that the big drop today would have suggested. Bed Bath & Beyond still has a chance to catch up to other brands, if it can manage its coupon usage and sales mix a bit better at the end of its fiscal year.

Investors who sit tight will likely be in a good spot if management can make a few adjustments. This earnings statement wasn't the bottom falling out, just the market reassessing where the business really stands. The next meeting with Aunt Gertrude isn't going to be all hugs and congratulations, but I bet Bed Bath & Beyond still gets an ugly sweater under the tree.

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