Bed Bath & Beyond Toughs It Out

Despite the housing downturn, the home furnishings retailer is still posting modest, though slower, growth

Investors didn't seem to know what to make of Bed, Bath & Beyond's (BBBY) latest earnings release.

A retailer of products for the home, it's been hit by the housing slump. Worries that U.S. consumers might slow down their spending have also taken their toll. Profit margins shrunk in the second quarter.

However, Bed, Bath & Beyond is still growing and generating plenty of cash. It announced plans to buy back another $1 billion in shares, which will help earnings per share if not total profits in future years. And, at a time when many other retails are turning in disappointing results, Bed, Bath & Beyond's numbers look stellar by comparison.

Bed, Bath & Beyond reported earnings of 55 cents per share after the close of trading Sept. 26, up from 51 cents one year earlier. That met analysts' estimates excluding a one-time tax benefit. In pre-market trading Sept. 27, Bed, Bath and Beyond shares were up. But in the regular trading session, the shares opened lower, and then rose into positive territory briefly at midday before falling back.

At mid-afternoon Sept. 27, Bed, Bath & Beyond shares were off 24 cents, or 0.71%, trading at $33.59.

The chain's closely watched same-store sales number is an example of the muddle. Same-store sales were up 2.2%, a solid result in tough times but well below the 4.8% growth a year ago. It also misses the company's goal of 3 to 5% growth.

"Given the challenging environment, BBBY deserves credit for achieving relative earnings stability," wrote Oppenheimer (OPY) analyst Bernard Sosnick. "That, along [with the share buyback program] should provide further inducement for value investors to consider riding out a storm with BBBY shares."

Still, Sosnick and other analysts say, the upside for the stock should be limited until the storm clears, i.e. housing comes out of its slump and consumers step up their purchases of home goods.

There are other challenges for Bed, Bath & Beyond. Promotional costs were up, hurting profits. Also, Sosnick notes, Macy's (M) launched a new Martha Stewart (MSO) line of furnishings that competes directly with the company's offerings.

On the plus side, many analysts applauded the chain's expansion plans. Bed, Bath & Beyond is opening its first Canadian store, for example. It owns small chain of baby stores, called Buy Buy Baby, which will add more stores. Demographic trends, including rising fertility rates and "affluent boomer grandparents," make this a promising strategy, according to CIBC (CM) analyst Vivian Ma.

The retailer is also accelerating the growth of its Christmas Tree Shop chain.

In response to the Sept. 27 report, several analysts lowered their earnings forecasts for future quarters and 2008. Standard & Poor's analyst Michael Souers lowered his estimates; he cited the worry that Bed, Bath & Beyond will have to spend more on ads and promotions to keep shoppers buying. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

Yet, many analysts say, for Bed, Bath & Beyond, it could be a lot worse.

Ma wrote that she expects "a challenging business environment" for the rest of 2007. But, even if sales only grow slowly, "it will likely be in a stronger competitive position than many of its peers."

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