Two quarters down, one to go, and Bed Bath & Beyond (NASDAQ:BBBY) investors aren't feeling optimistic about the fiscal third-quarter report lying between the former and the latter. Are they right to worry? Let's take a sneak peek at tomorrow's earnings report and find out.

What analysts say:

  • Buy, sell, or waffle? Only 20 analysts still follow Bed Bath, down three from last quarter. Their ratings have waxed slightly more optimistic, however, with Triple-B now garnering eight buys, 10 holds, and a pair o' sells.
  • Revenue. On average, they're looking for sales to flatline at $1.79 billion.
  • Earnings. Profits are predicted to plummet more than a third to $0.33 per share.

What management says:
Surprised at the profits picture? You shouldn't be. Bed Bath told us as much just last month, when management sliced its expected take by 25%, predicting the final number will come in somewhere between $0.31 and $0.35.

What management does:
Margins are a-tumblin', and you probably shouldn't expect to see anything different tomorrow. Last time we checked, Bed Bath & Beyond’s inventory report got an "F" when graded on the curve against peer retailers. At some point, management is just going to have to bite the bullet and clear out stale inventories at a discount -- which tells me that as bad as margins look now, they must eventually get worse.

Margins

6/07

9/07

12/07

3/08

5/08

8/08

Gross

42.7%

42.5%

42%

41.5%

41.1%

40.7%

Operating

13.2%

12.9%

12.5%

11.9%

11.2%

10.6%

Net

8.8%

8.7%

8.4%

8%

7.5%

7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So with so much bad news floating around, why is Wall Street more optimistic about Bed Bath today than in quarters past? Two reasons:

  • First, analysts recognize that Linens 'n Things' bankruptcy, and more recent round-the-clock liquidation sales, have hurt Triple-B's business. Simply put, it's hard to hold the line on profits when your nearest rival is holding an everything-must-go sale. (Best Buy (NYSE:BBY) shareholders can sympathize. They're going through much the same thing in conjunction with Circuit City's bankruptcy.) But by this time next quarter, Linens 'n Things should be history.
  • Second, you know those ever-falling Triple-B margins? They're still the best in the business. Look anywhere else in retailing -- Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Williams-Sonoma (NYSE:WSM), or Pier 1 (NYSE:PIR) -- and you'll find single-digit margins remain the norm. 

For now, at least, Bed Bath's profit margins remain beyond the reach of any of its competitors. For now.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

Wal-Mart, Home Depot, Best Buy, and Bed Bath & Beyond are Motley Fool Inside Value selections. Bed Bath & Beyond and Best Buy are also Motley Fool Stock Advisor picks and Motley Fool holdings.