Shares of Bed Bath & Beyond (NASDAQ:BBBY) reached a new 52-week low this week, having drifted downward since the company released first-quarter earnings last Wednesday. What triggered the slump, and is now a good time to pick up some shares?
As usual, the company's press release was brief, providing a quick overview of the quarter and the key income, balance sheet, and cash flow statements. Sales for the quarter rose a nice 12.2%, same-store sales growth was a strong 4.9%, and earnings matched analysts' average estimates, growing only 6.1%. These calculations included stock-based compensation expenses, but there were fewer shares outstanding during the current quarter, since management has been repurchasing its stock. That should have made the per-share numbers a bit stronger, but higher costs offset any potential upside.
So why was the market upset? For one thing, the company reduced next quarter's guidance by a penny. In addition, operating margins were a bit weak, because selling, general, and administrative expenses' (SG&A) 19% growth outpaced sales. For this year, the company is guiding earnings of $2.17 per share, also a couple of cents below prior consensus. That's a forward P/E of just more than 15, which seems very reasonable given the company's strong growth track record.
In my last article on Bed Bath, I noted that free cash flow generation has been strong. That was not the case this quarter, as an 85% increase in capital expenditures ate up almost all the operating cash flow, reducing free cash flow. One quarter doesn't make a trend, but this is definitely something to monitor. Some bearish investors believe the company will also feel the pinch of a slowing housing market, or lose customers because of higher gas prices or a potentially slowing economy.
There are a few developing chinks in Bed Bath's armor, but its reputation as one of the better-run retailers remains intact. If customers start shopping less, the company should be better able to withstand any problems than weaker competitors such as Linens 'n Things (which was just acquired by Apollo Management), Pier 1 Imports (NYSE:PIR), and Cost Plus (NASDAQ:CPWM).
The longer-term outlook also remains robust, since management still believes it can nearly double the number of its current 751 namesake stores. As I've mentioned before, Bed Bath is no longer expanding fast enough to interest growth investors, nor is it troubled enough to show up on the radar screens of the value crowd. That's A-OK for growth-at-a-reasonable-price investors like me. Stay tuned, Fools; this one could pan out eventually for new investors, since its weaker share price seems to have improved its margin of safety.
Bed Bath & Beyond is a Motley Fool Stock Advisor pick. You can dig through David and Tom Gardner's investment hamper in search of more market-beating picks with a free 30-day guest pass.
Fool contributor Ryan Fuhrmann is long shares of BBBY but has no financial interest in any other company mentioned. Feel free to email him with feedback or to further discuss any companies mentioned. The Fool has an ironclad disclosure policy.
