Is the Recent Decline in Bed Bath & Beyond an Opportunity to Buy or a Sign to Stay Away?

Bed Bath & Beyond (NASDAQ: BBBY  ) , the company behind retailers such as Bed Bath & Beyond, buybuy BABY, and Cost Plus World Market, recently announced its first-quarter earnings and the stock reacted by making a sharp move to the downside; the stock set new 52-week lows during this decline, so let's break down the company's results and outlook on the rest of the year to determine if now is the time to initiate a long-term position or if we should stay away.

Source: Bed Bath & Beyond

The lackluster results
Bed Bath & Beyond released its first-quarter report for fiscal 2014 after the market closed on June 25 and the results came in below analysts' expectations; here's an overview:

Metric Reported Expected
Earnings Per Share $0.93 $0.95
Revenue $2.66 billion $2.69 billion

Source: Benzinga

Earnings per share came in flat and revenue increased 1.7% from the year ago period, as comparable-store sales increased 0.4%. The company noted that the increase in comparable-store sales was driven by an increase in the average transaction size, but this was partially offset by a decline in the overall number of transactions.

Source: Bed Bath & Beyond

Gross profit decreased 0.2% to $1.03 billion and operating profit decreased 6.9% to $300.7 million, and in relation the gross margin contracted 70 basis points to 38.8% and the operating margin contracted 110 basis points to 11.3%. On the conference call, Bed Bath & Beyond's management attributed the large dips in these profitability measures to increased coupon use, increased expenses related to free shipping offers on its websites, a shift in the mix of merchandise sold to lower-margin items, and increased selling, general, and administrative expenses.

Source: Bed Bath & Beyond

Although the above statistics were disappointing, the quarter was a complete downer, as Bed Bath & Beyond noted that it repurchased about 4.2 million shares of its common stock for approximately $273 million; about $861 million now remains on the company's share repurchase authorization announced in December of 2012, so it would be a positive sign if it were to accelerate repurchases following the sharp drop in its share price.

Lastly, the company opened five new stores during the first quarter which included two Bed Bath & Beyond stores, one buybuy BABY store, one Cost Plus World Market, and one Christmas Tree Shops and That! store; the company now operates 1,504 total stores in all 50 of the United States, the District of Columbia, Puerto Rico, and Canada.

In summary, it was a very discouraging start to the year for Bed Bath & Beyond and the sentiment surrounding the report only worsened when the company went on to provide its outlook on the second quarter...

Source: Bed Bath & Beyond

What does BBBY expect going forward?
As mentioned before, Bed Bath & Beyond went on to provide its outlook on the second quarter, stating that it expects earnings per share in the range of $1.08-$1.16, revenue growth in the range of 2%-4%, and comparable-store sales growth of 1%-3%; however, this outlook came in mixed compared to analyst expectations, which called for earnings per share of $1.20 and revenue growth of 3.6%. 

Bed Bath & Beyond went on to add that it anticipates earnings-per-share growth in the mid-single digit percentage range for the full year of fiscal 2014 along with revenue growth of 4% and comparable-store sales growth of 3%; on a positive note, these estimates met analysts' expectations of earnings per share of $5.06 and revenue of $11.93 billion for growth of 5.6% and 3.7%, respectively. 

So should we be long-term buyers?
After reviewing Bed Bath & Beyond's quarterly results and its outlook going forward, I believe the substantial decline in its stock was warranted and I do not believe this is an opportunity to buy. Here are my three top reasons as to why I do not want to own it:

  1. Failing to meet expectations: This was the third consecutive quarter in which Bed Bath & Beyond failed to satisfy Wall Street's expectations. Investors cannot afford for this trend to continue, because it will continue to cause sell-offs in the stock.
  2. Margins: Not only did the company show little or no growth in revenue and earnings per share, it also reported much higher expenses, which led to significant margin hits. It is never a good sign when retailers resort to increased coupon promotions to drive customer traffic, especially when this past quarter did not include the holiday season; holidays are when additional promotions are necessary and expected.
  3. Slowed growth: Bed Bath & Beyond is only expected to grow earnings by 5% in fiscal 2014 and fiscal 2015, showing that it is no longer the high-growth company it once was. Investors want to own a company for high growth or the pairing of slower growth and a dividend, but Bed Bath & Beyond does not offer either.
For the reasons above, I must reiterate that I do not believe in buying Bed Bath & Beyond today. However, if you already own a position, I recommend that you revisit the reasons for your initial investment and determine if they still apply today; this may be a situation where your investment style says to add to the position or this may be the time to cut your losses and walk away.

The Foolish bottom line
Bed Bath & Beyond's dismal first-quarter results sent its shares more than 9% lower and I believe more room to the downside remains for the retail giant. Foolish investors should avoid making a new investment in it today. If you are a current shareholder, I believe you should take a step back and reevaluate the company to determine if you should continue to hold it, add to the position, or cut your losses and run for the hills.

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Comments from our Foolish Readers

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  • Report this Comment On June 28, 2014, at 1:04 PM, looklistenlearn wrote:

    I appreciate the reasoning behind your conclusion but would like to point out that retail has come through a difficult period as has the rest of the economy. There are many weaker players out there both from an operational and financial standpoint and over the next few years we will likely see a realignment of retail where on-line is a larger proportion of sales and bricks and mortar will augment that business and serve larger markets. Poor operators and small players will need to merge or disappear. BBBY has its problems. They will need to revisit their product mix and find margin in new lines / products but they are intact, operating at a high level, have a well respected organization. I can't see how these problems which are more structural that operational in my mind somehow spells doom for BBBY. I had a position some time ago but sold out when I thought it was 'fully valued' since then it has gone way up and now way down. I bought a small position mid week when everyone was wringing their hands. Time will tell.

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Joseph Solitro

A fan of innovation, strong fundamentals, and all things baseball. Follow on Twitter @JoeySolitro. Fool on!

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