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Bed Bath & Beyond Plays Poker on Wall Street

By Rich Smith - Updated Apr 5, 2017 at 8:04PM

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I'll see your earnings warning, and raise you a full house of upgrades.

Bed Bath & Beyond (NASDAQ:BBBY) shareholders have better reason than most to "hate Mondays" today.

Nothing against Mondays per se, mind you. It's just that whatever happens today will pale in comparison to the absolute fabulosity that was last week.

Last Tuesday, Bed Bath & Beyond (3B) released news tailor-made to send its stock to the distressed merchandise room: This quarter's profits, previously expected to range from $0.41 to $0.47, are now looking more like $0.31 to $0.35. That's a 25% discount off previously predicted profits, and roughly a 36% plunge in profits from what 3B earned this time last year.

Like I said, this should have sent the shares to the cellar for a whoopin', but before they could begin moving in that direction, out came Friedman, Billings, Ramsey with an upgrade on the stock, and saved the day. FBR suggested that Bed Bath should see improvement in its sales due to the collapse of one of its biggest rivals, Linens 'n Things.

No sooner had FBR made its prediction, than SunTrust and KeyBanc echoed the sentiment, and by week's end this had become the prevailing wisdom on Wall Street, as Raymond James boarded the train with an upgrade of its own. RJ labeled Bed Bath one of the "highest quality" companies that "will likely benefit in the early portion of a recovery scenario," then proceeded to praise 3B's "enviable" sales and operating margins. (With good reason. Within a retail grouping that includes such marquee names as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Williams-Sonoma (NYSE:WSM), and Pier 1 (NYSE:PIR), 3B is the only chain currently earning a double-digit margin.) When all was said and done, Bed Bath & Beyond shares closed out the week more than 20% higher.

So why am I not jumping for joy? Because while I acknowledge the bare facts of the analysts' compliments, I simply cannot agree with their conclusion. Is 3B best of breed? It may very well be. Has Linens 'n Things' bankruptcy hurt 3B's sales due to its liquidation sales? Almost certainly. But why, pray tell, does this mean we should now buy Bed Bath & Beyond?

The fact is, earnings are going to be down in the near term. Yet Bed Bath & Beyond still shows the highest rate of inventory growth in its group. And the company's free cash flow still doesn't measure up to its reported net earnings. Accounting profits for the past year may have exceeded $500 million, but cash profits came to less than $200 million.

Foolish takeaway
To me, last week's price surge looks less like the beginning of a rally, and more like a fine excuse to make an exit before things turn ugly again. Sorry, Bed Bath, for ruining your Monday.

Rich disagrees with the analysts on this one, but the more important question is: Do the folks at Motley Fool Stock Advisor, who recommended 3B in the first place, still have faith in it? Pick up a free trial to the newsletter and find the answer.

Fool contributor Rich Smith does not own shares of any company named above, but Wal-Mart and Bed Bath & Beyond are Motley Fool Inside Value selections; Bed Bath & Beyond is a Motley Fool Stock Advisor pick; and the Fool owns shares of Bed Bath & Beyond. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
BBBY
$10.10 (3.17%) $0.31
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$128.71 (-0.12%) $0.16
Target Corporation Stock Quote
Target Corporation
TGT
$169.28 (2.52%) $4.16
Williams-Sonoma, Inc. Stock Quote
Williams-Sonoma, Inc.
WSM
$153.97 (3.85%) $5.71
Pier 1 Imports, Inc. Stock Quote
Pier 1 Imports, Inc.
PIRRQ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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