Home goods retailer Bed Bath & Beyond (BBBY) is facing headwinds on multiple fronts heading into tomorrow afternoon’s first-quarter earnings report, and its doesn’t bode well for BBBY stock bulls.
Currently, Wall Street is looking for earnings of 94 cents per share from BBBY, a penny better than last year. Revenue, meanwhile, is seen advancing 3.3% year-over-year to $2.74 billion.
Fundamentally, Bed Bath & Beyond has struggled despite improving economic indicators that should have helped firm up the company’s bottom line. During the past four quarters, BBBY has missed Wall Street’s expectations twice, matched once and topped estimates once.
Data from EarningsWhisper.com reveals a first-quarter whisper number of 95 cents per share, but even a penny better than the consensus may be a bit too much to ask from BBBY at the moment.
Why? Because the foreign currency headwinds that plagued fourth-quarter results have not shifted. In fact, Bed Bath & Beyond warned that first-quarter results would bear the brunt of currency fluctuations.
Additionally, the company has indicated that expenses could be on the rise in fiscal 2015 due to increased technology costs, litigation settlements, and higher compensation and benefits expenditures. Should any of these costs show impact on first-quarter results, BBBY stock could be in trouble.
Click to Enlarge BBBY stock is also facing a troubled technical backdrop. The shares are down nearly 8% in the past two months, and BBBY has been unable to break above resistance at its declining 50-day moving average. Making matters worse, the stock’s 200-day moving average recently completed a bearish cross above its 50-day counterpart. This technical formation often precedes poor price action over the short-to-intermediate term.
With poor fundamentals and technicals, it should come as no surprise that sentiment is quite dour on BBBY stock. For instance, only six of the 27 analysts following BBBY rate it a “buy” or better, compared to 16 “holds” and five outright “sell” ratings. Furthermore, the 12-month consensus price target rests at $74.50, representing a meager premium of just 5.7% to yesterday’s close.
Short sellers are also anticipating poor performance from BBBY. During the most recent reporting period the number of BBBY shares sold short jumped 8% to 14.6 million. Normally, with nearly 9% of its float sold short, a stock would stand a favorable chance of benefiting from a short squeeze, but Bed Bath & Beyond would have to really wow investors in order to spook these shorts into buying back their positions so soon.
Turning to the options front, short-term speculative traders have also sided with the BBBY stock bears. Currently, the June/July put/call open interest ratio for BBBY rests at 1.0, with puts and calls resting in parity. The ratio for weekly Jun 26 series options, however, rises to 1.26, with puts clearly finding favor over calls.
Overall, weekly Jun 26 implieds are pricing in a potential post-earnings move of about 5.4% for BBBY stock. This places the upper bound near $74.30, while the lower bound lies at $66.70. A rally would leave BBBY short of resistance at the $75 level, while a selloff would breach round-number support at $70 and send the stock toward fresh annual lows.
2 Trades for BBBY Stock
Put Spread: When this much pessimism is levied against a stock, I’m tempted to look for a contrarian angle for a trade. However, with BBBY performing poorly across the board in terms of trading indicators, I’m not convinced the company can offer much that will counteract the prevailing headwinds. As such, I’m leaning toward a bear put spread ahead of tomorrow’s earnings report.
Traders siding with the bears might want to consider a Jul $65/$70 bear put spread. At last check, this spread was offered at $1.38, or $138 per pair of contracts. Breakeven lies at $68.62, while a maximum profit of $3.62, or $362 per pair of contracts, is possible if BBBY closes at or below $65 when July options expire.
Call Sell: If betting directly against BBBY stock isn’t your style, you might consider entering a weekly Jun 26 series $77 strike call sell position. Such a trade is especially useful if you already own BBBY stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $77.
At last check, this option was bid at 22 cents, or $22 per contract. A sold call allows you keep the premium as long as BBBY stock closes below $77 at expiration. On the downside, if BBBY rallies above $77 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
