Investors reacted to Bed Bath & Beyond's (NASDAQ:BBBY) earnings with about as much enthusiasm as though they'd received knitted woolen underwear for Christmas. Accustomed to moderate outperformance and generally positive guidance, shareholders didn't like the news that earnings at the Motley Fool Stock Advisor recommendation merely matched the average estimate and that next year's earnings estimates would need about a $0.10 shave.
I don't think you could say there's anything wrong with the company, per se. Same-store sales were up 3.1%, which was at the lowish end of the expected range (and the year-over-year comp wasn't too terribly difficult), and gross margins actually improved a bit. Not so good news, though, came in management's discussions about a very promotional retail environment -- in other words, there's a whole lotta advertising and discounting going on out there, and that's making it tougher on these guys.
Not helping matters is that year-to-date free cash flow is lagging last year's performance, and structural free cash flow is basically flat. Throw in a sequentially worse cash conversion cycle, and you have some more ammunition with which to shoot this stock.
Looking at this company, though, I'm struck by a thought that, somehow, this seems familiar. Perhaps we're seeing Bed Bath & Beyond at the cusp of going through what Motley Fool Inside Value pick Home Depot (NYSE:HD) went through a few years back. Home Depot was a great growth stock and carried rich multiples to earnings until about 2002-2003. Then investors got worried about the company's growth potential, as well as competition from Lowe's (NYSE:LOW) and whatnot, and took the shares down hard from more than $50 to about $20.
There are some similarities in the analysts' chatter about Bed Bath & Beyond. People are worried that this company's sales were a product of the spike in new-home building activity as well as the housing-refi ATM phenomenon that put a lot of cash into consumers' pockets -- and then into the coffers of retailers like Coach (NYSE:COH), Motley Fool Stock Advisor recommendation Best Buy (NYSE:BBY), and so on. So even though there isn't a Lowe's-type store to threaten Bed Bath & Beyond -- Williams-Sonoma (NYSE:WSM) isn't quite a straight comp, and Linens 'n Things (NYSE:LIN) and Sears Holdings' flagship chain aren't in the same league -- there are nevertheless the same "how do they grow now?" worries facing the retailer.
The good news is that the company is likely to remain among the best retailers around, and if times get tough, it will probably increase its lead. The bad news is summed up pretty succinctly by referring to Home Depot's stock-price history -- Home Depot saw its multiple and price both cut more or less in half. And that could happen here, too. If it does, though, that'll be a great chance for patient investors to grab some cheap shares.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
