Source: Bed Bath & Beyond.

Bed Bath & Beyond (NASDAQ:BBBY) was crashing by 8.7% on Thursday, as investors reacted with pessimism to the company's latest earnings report. While the stock looks attractively valued at current levels, financial performance leaves much to be desired. Smaller and more dynamic competitors such as Restoration Hardware (NYSE:RH) and Williams-Sonoma (NYSE:WSM) could be better alternatives for investors searching for companies with superior growth rates in the industry.

You get what you pay for
Total sales during the first quarter of 2014 came in at $2.66 billion, an unexciting increase of 1.7% versus $2.61 billion reported in the first quarter of fiscal 2013, and lower than analysts' forecasts of $2.69 billion for the period. Comparable-store sales were almost flat, increasing only 0.4% versus the year-ago quarter.

Gross profit margin declined to 38.8% of sales, versus 39.5% of revenues in the same quarter during the prior year, and net income fell to $187 million from $202.49 million.

Share repurchases allowed the company to reduce its share count, and this buffered the impact of declining net income on earnings per share. Net earnings per share remained flat at $0.93; however, this was still below analysts' forecasts of $0.94 per share.

Forward guidance was also quite disappointing: Bed Bath & Beyond expects comparable sales to increase between 1% and 3% during the second quarter, and by approximately 3% for the full year. Management expects declining margins during the year because of a higher proportion of sales coming from lower-margin categories and increased coupon expenses, among other factors.

Bed Bath & Beyond is trading at an attractive valuation, the stock has a P/E ratio around 12.5 times earnings for the last year, and this is a significant discount versus an average P/E ratio of more than 18 for companies in the S&P 500, according to data from Morningstar.

However, you get what you pay for with Bed Bath & Beyond; the company is facing serious difficulties when it comes to generating sales growth, and lack of brand power means it needs to aggressively compete on prices, which is having a considerable negative impact on margins.

Bed Bath & Beyond vs. Restoration Hardware and Williams-Sonoma
While Bed Bath & Beyond is struggling with uninspiring sales growth and falling profit margins, things are very different for competitors Restoration Hardware and Williams-Sonoma. Both companies are smaller than Bed Bath & Beyond, and they also have better pricing power. Importantly, their brands and designs seem to be resonating much better with consumers.

Restoration Hardware is clearly firing on all cylinders. Revenues during the quarter ended on May 3 increased 22% to $366.3 million. This was above analysts' expectations of $346 million, and also higher than the company's own guidance of between $345 million and $350 million for the quarter.

Comparable brand revenues, which includes direct sales, increased by an outstanding 18% during the period. Direct revenues were $176.4 million, a 24% increase versus the same period in 2013.

Restoration Hardware also delivered increased profit margins during the last quarter, gross profit margin expanded by 20 basis points, from 33.8% of sales to 34%. Adjusted diluted earnings per share grew 200% to $0.18. This was materially better than the average earnings estimate of $0.10 per share for the quarter, and also above the company's guidance of $0.09 to $0.11 per share.

Williams-Sonoma is not growing as rapidly as Restoration Hardware, but the company announced solid sales performance and profitability figures during the last quarter.

Sales during the quarter ended on May 4 grew 9.7% to $974 million on the back of a 10% increase in comparable-brand revenue. The number was better than Wall Street analysts' expectation of $943 million in revenue.

Williams-Sonoma has done a great job at adapting to the online retail revolution, and booming e-commerce sales are generating impressive performance in the direct-to-consumer segment. Direct-to-consumer sales grew 17.2% during the last quarter, for a total of $491 million during the period, and accounting for 50% of total revenues.

Williams-Sonoma's gross profit margin increased by 20 basis points, to 37.8% of sales versus 37.6% in the year-ago quarter. Earnings per share came in at $0.48, a 20% annual increase, and considerably better than the $0.44 per share expected on average by Wall Street analysts

The difference in performance between Bed Bath & Beyond and its smaller competitors Restoration Hardware and Williams-Sonoma is quite staggering, and there is no reason to expect a reversal of fortunes anytime soon.

Foolish takeaway
Bed Bath & Beyond looks quite attractive from a valuation point of view; however, stagnant sales and falling profit margins are big reason for concern. Restoration Hardware and Williams-Sonoma could be much better choices in the industry.