Bed Bath & Beyond Offers More Than Meets the Eye

Home-goods retailer Bed Bath & Beyond (NASDAQ: BBBY  ) surprised investors on Wednesday, April 9, in a big way. The retailer announced a dismal outlook for the first quarter and fiscal-year 2014.

Investors were pleased that Bed Bath & Beyond's earnings per diluted share fell in-line with analyst estimates for the fourth quarter and came close to meeting estimates for full year of 2013. Unfortunately, the applause was cut short upon hearing Bed Bath & Beyond's outlook for 2014, sending the company's stock falling 4.2% to $65 a share following the market close.

Clearly, the company didn't give investors what they were looking for in terms of fiscal-year 2014 guidance; however, there may be more to the company than what currently meets the eye.

Not the greatest of results
Bed Bath & Beyond is no doubt hoping the cold, snowy weather has stopped and spring has begun. It was forced to close a number of stores between December and February for multiple days on end due to bad weather conditions. In March, the company stated that its fourth-quarter sales suffered on account of snow and other storms, causing operations to stop for brief periods.

While earnings per diluted share for the fourth quarter fell within the company's guidance and were on target with analysts' estimates of $1.60 a share, or $333.3 million, earnings fell 4.8% from the same period in fiscal 2012 when earnings totaled $373.9 million, or $1.68 a share. In addition, net sales dropped by 5.8%, totaling $3.203 billion, falling just shy of analysts' estimates of $3.22 billion in the fourth quarter.

Comparable-store sales were not as high as the company had planned on, but the company still achieved an increase of 1.7%. Thankfully, full-year results yielded a much better performance.

A much stronger year than before
Bed Bath & Beyond reported solid net earnings for fiscal-year 2013 along with a boost in net sales compared to fiscal 2012. Net earnings per diluted share for the year totaled $4.79, with earnings amounting to $1.022 billion. This compares to fiscal-year 2012 when the company earned $4.56 a share, or $1.038 billion. 

Analysts expected the company to earn $4.80 a share, meaning the company missed estimates by one penny. Net sales, on the other hand, jumped 5.4% for the year totaling $11.504 billion compared to the previous year when net sales totaled $10.519 billion. Although net sales were affected by weather conditions and store closures, preventing in-store sales from taking place, the company's net sales still saw year over year growth.

Comparable-store sales, unfortunately, were not as high as in fiscal 2012 when comparable sales increased by 2.7%; instead, they increased by 2.4%, for which the company blames "disruptive weather conditions." 

Discouraging outlook for 2014
While Bed Bath & Beyond's full year results for 2013 were pleasing to analysts, its weak guidance for fiscal 2014 ultimately took center stage in the eyes of investors. Along with a weak fiscal 2014 outlook, Bed Bath & Beyond also announced much lower guidance for the first quarter, expecting to earn between $0.92 and $0.96 per diluted share.

Analysts, on the other hand, set their earnings estimate for the first quarter at $1.02, which after the company's announcement is probably not in the cards for Bed Bath & Beyond. In addition, the company's CEO stated that net earnings per diluted share would likely increase in the mid-single digits for fiscal 2014. 

Investors were obviously hoping to hear a more optimistic outlook with earnings increasing in the double digits. While investors did not hear what they wanted, shareholders have much to look forward to as the company continues to make necessary improvements to ensure long-term sustainability and advancement.

FY 2014: Year of implementation at a superior retailer
Despite Bed Bath & Beyond's low earnings guidance for FY 2014, shareholders have much to look forward to as the home goods retailer invests in its omni-channel business. During an earnings call in early October, company CEO Steven Temares announced the company's current strategy and efforts: 

"...enhance network communications in stores, as well as develop future point-of-sale improvements and grow and develop the IT, analytics, marketing and e-commerce groups to lead our omnichannel initiatives."

Already the company has updated its websites for Bed Bath & Beyond as well as buybuy BABY to improve the customer shopping experience through online retail, social networking sites, and mobile apps.

What shareholders should not forget is that Bed Bath & Beyond has proven its ability to invest in its business profitably. The company had an average 2013 overall and is projecting very modest growth in 2014. This may be disappointing to Wall Street in the short term, but they should not forget the fact that the management of Bed Bath & Beyond has built an amazing business, one that not only generates above-averages returns on equity but returns that are higher than both retailing giants Target (NYSE: TGT  ) and Wal-Mart  (NYSE: WMT  ) :

Company Name

FY 2011 ROE

FY 2012 ROE

FY 2013 ROE

Bed Bath & Beyond

25.2%

24.5%

25.9%

Target 

18.5%

18.1%

12.1%

Wal-Mart Stores

22%

22.3%

21%

Bed Bath & Beyond is simply a better business from this perspective. While Target and Wal-Mart are strong performers as well, Bed Bath & Beyond provides investors with a greater profit for their investment. Furthermore, over the past three fiscal years, Bed Bath & Beyond has managed to increase its return on equity unlike Wal-Mart and Target, whose return on equity has fallen.

Foolish takeaway
With its latest earnings release, Bed Bath & Beyond produced average results. This coupled with management's FY 2014 guidance might lead investors to believe that Bed Bath & Beyond has lost its edge and the shares should be avoided. This, however, would be a mistake.

Shareholders of the company own an extremely good business that generates great returns on invested capital -- all with no leverage to speak of. All Bed Bath & Beyond needs to do now is capitalize on its strengths -- selling home goods, pricing its products competitively, and offering customers top-notch service. The recent pullback in the company's shares represents a fantastic opportunity for Foolish investors to own a great retailer for years to come.

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