by Will Ashworth | January 9, 2014 8:54 am
Bed Bath & Beyond (BBBY) announced third-quarter earnings after the markets closed Wednesday. While the numbers were decent, investors were looking for more and sent BBBY stock down 9% in after-hours trading.
The last two years have been polar opposites for the retailer of household goods with BBBY stock producing a good year in 2013, up 44% after falling down 4% in 2012 — 20 percentage points worse than the S&P 500. What’s in store for BBBY over the next few quarters? Q3 earnings will give us a peak into what investors can expect in 2014. If after-hours trading is any indication, investors might be ready to dump their BBBY stock.
Good idea? Bad idea? Let’s have a look.
It’s hard to know what investors feel is the biggest disappointment at BBBY — the fact that it missed the Capital IQ consensus estimate of $1.15 by three cents or that it lowered its Q4 earnings range by 10 cents from $1.70-$1.77 down to $1.60-$1.67. With analysts expecting $1.79 in the fourth quarter I suspect investors are more concerned about the lower guidance.
Also of concern, although it’s unlikely to affect BBBY stock, is the fact it produced same-store sales growth of just 1.3% in Q3. That’s 40 basis points lower than last year’s comparable sales and 170 to 270 basis points lower than the number quoted by the Wall Street Journal’s Ahead of the Tape segment based on FactSet research.
With the economy getting stronger, either BBBY’s Q4 guidance is incredibly conservative or something has happened to its business model that’s putting increased pressure on its profit margins and ultimately BBBY stock.
It’s possible that promotional activity is up, but that generally helps same-store sales which leads me to believe that it might actually be losing market share to competitors. It’s difficult to say who those competitors might be, but likely candidates include TJX (TJX), Pier 1 Imports (PIR), Williams-Sonoma (WSM) and others.
This clearly isn’t good for the short term. Investors are acutely aware of the troubles retailers faced over the holiday season. And bears are looking for any indication that the problems faced by weaker retailers over the holidays have carried over to traditionally stronger companies like BBBY. With a 44% gain over the past year and a big question mark hanging over BBBY’s future prospects, it wouldn’t surprise me if BBBY shorts hammer its stock for the next week or two.
Long-term investors need to take a deep breath. At the low-end of BBBY’s estimate for fiscal 2013 it expects to generate $4.79 in earnings per share, approximately 5% higher than a year earlier. While some might be disappointed by these results, you should remember that its earnings per share were just $1.64 five years ago. Through a combination of growth and share repurchases, earnings per share have increased by 24% on an annualized basis.
Every business goes through cold spells. This one allows committed investors to buy more BBBY stock at lower price.
Only if you want to hate yourself in 12 to 18 months. BBBY stock is taking a breather, which actually started more than three months ago.
As of Jan. 8, BBBY stock is up just 5% over the past 90 days. Meanwhile, the S&P 500 gained 10% in the same period. Now it looks as though BBBY is headed for a 10%-plus decline over the next few trading sessions, which is going to shake the hands of all but the most committed.
But the financials at BBBY are strong, so don’t fall for the head fake. Instead, be ready to buy when the BBBY downdraft subsides.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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