One week ago today, previewing Bed Bath & Beyond's (NASDAQ:BBBY) Q1 earnings report, I asked:
So just how bad are things at Bed, Bath? Well, as of the end of last fiscal year, management was predicting something in the neighborhood of a 10%-15% decline in earnings this year -- call it $1.80 in per-share profits, give or take. That's assuming the U.S. economy doesn't worsen, and that comps are no worse than 'slightly negative' this year.
A couple days later, Bed Bath & Beyond released its reply: An earnings report showing sales up more than expected, profits down less than expected, and surprise, surprise -- positive comps! Sales of $1.6 billion for the quarter exceeded expectations at 6% year-over-year growth. Profits of $0.30 per share were $0.03 better than Wall Street had feared. And the comps? At 0.8%, they're not much to brag about -- but they're decidedly not negative.
The bad news
Meanwhile, margins continue their slow erosion. Comparing this year's first quarter with last year's, gross margins shed 180 basis points as they fell to 39.8%. Operating margins dropped further still, to 7.2%. And the net came to just 4.7%. So while we're not talking Wal-Mart (NYSE:WMT)-level profit margins yet, we're definitely closing in on the Target (NYSE:TGT) level, and they're about neck-and-neck with Williams-Sonoma (NYSE:WSM).
The worse news
Judging from the stock price, investors seem to have liked the news regardless, perhaps because Bed Bath & Beyond "beat earnings." Me, I'm not so psyched, and for a couple of reasons. First, inventories are up 11% versus one year ago (and 7% from the previous quarter.) To my Foolish mind, when inventories rise faster than sales, this suggests discounts lie ahead. Discounts that will hurt profit margins, perpetuating their slide. Sure, the company's still not losing money like a Pier 1 (NYSE:PIR) or Cost Plus (NASDAQ:CPWM), but it's headed in their general direction. Continuously declining margins can't be good for the stock price.
The worst news
Moreover, management may be coming to this realization as well. At the end of March, it was authorized to repurchase $967 million in shares; Bed Bath & Beyond bought back a mere $14 million worth of shares last quarter. That follows $102 million in buybacks in Q4 2007, $103 million in Q3, and $239 million in Q2. With every passing quarter, management spends less and less money on its shares -- which suggests to me that it thinks those shares will fall further.
If that's the case, though, then why does Fool co-founder and Motley Fool Stock Advisor co-advisor Tom Gardner argue that Bed Bath & Beyond is a "Great buy"? Read Tom's midyear update on the company and all his other stock picks (for free!) and find out.
