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Bed Bath & Beyond Feels Drag on Consumer

The retailer's lower outlook shows weak home sales and higher energy prices are making shoppers more cautious with their spending

Fed Chairman Ben Bernanke’s recent remarks aside, the unprecedented earnings shortfall expected by Bed Bath & Beyond (BBBY) appears to offer clear proof that the weak housing market is starting to spill over into other parts of the economy.

After the market close on June 4, the home furnishings retailer said it reduced its estimated earnings for the fiscal first quarter ended June 2 to between 36 and 38 cents per share from an earlier forecast of 39 cents per share. It now expects sales at stores open at least one year to be roughly 1.6% higher, compared with a projected increase of 3% to 5%.

But net sales for the quarter are expected to climb about 11% from the year-ago period. Bed Bath & Beyond posted a profit of 35 cents per share in the first quarter of 2006.

The bite that anemic home sales has taken out of consumer spending is harder to deny when Bed Bath & Beyond says it’s hurting. This is the first time since the company went public 15 years ago that it has lowered its earnings forecast.

Shares of Bed Bath & Beyond were down 5.5% at $38.25 on the Nasdaq on June 5. Other home-related retail stocks weakened, with Williams-Sonoma (WSM) down 3.2% at $32.68, Pier 1 Imports (PIR) off 1.7% at $7.36, and Ethan Allen Interiors (ETH) trading 2.1% lower at $35.95.

“Home sales are falling off, cash-outs [by refinancing mortgages] are down, and higher interest rates are all leading to a slower trend rate in retail,” said Timothy Allen, an analyst at Jefferies & Co.

In downgrading the stock to neutral from buy on Tuesday, Goldman Sachs blamed the earnings hit on a convergence of factors that, in addition to a weak housing sector, included aggressive competition and rising oil prices.

Cowen and Company and William Blair & Co. both affirmed their outperform ratings, citing the company’s long-term growth opportunities and leadership position among home furnishings retailers. The stock’s low valuation -- 7.6 times earnings before interest, taxes, depreciation and amortization for fiscal year 2008 –- and potential downside protection from ongoing share buybacks should encourage investors who are focused on the longer term to take advantage of the stock’s weakness before the company reports first-quarter earnings on June 27 and accumulate shares, Cowen said in a research note.

Retail weakness in April and home-related pressures may have led Bed Bath & Beyond to discount prices and increase spending on marketing, which ended up reducing profit margins, Deutsche Bank Securities said in a research note.

Compared with declining same-store sales reported recently by other home-related retailers, Bed Bath & Beyond’s projected 1.6% increase isn’t that bad, said Allen at Jefferies & Co.

Once the market gets over its initial surprise, it’s likely to discount the lower guidance, as it has with other home-related stocks, Allen predicted. “Not that I would expect an immediate bounce in Bed Bath & Beyond [shares], but they’re just as exposed as anyone else.”

But investors who have written off other home-related retail stocks for 2007 and are waiting until next year to buy them will likely do the same with Bed Bath & Beyond, he said.

(Allen said he doesn’t own the stock and that Jefferies has no banking relationship with Bed Bath & Beyond. Cowen and Company doesn’t do investment banking with the company.)

Bogoslaw is a reporter for BusinessWeek's Investing channel.

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