Bed Bath & Beyond (BBBY) shares are skidding on lackluster second-quarter results. But while Friday’s action looks like it’ll be unfavorable, BBBY stock is offering up a buying opportunity that can take advantage of a healthy consumer spending trends.
Bed Bath & Beyond reported second-quarter earnings of $1.21 per share, up from the $1.17 per share in earnings the same time last year and in line with Capital IQ estimates. Bed Bath’s sales rose year-over-year, too — to $2.995 billion from $2.945 billion — but fell just shy of the analyst consensus of $3.03 billion. Comparable-store sales rose 0.7%, whereas the Street expected a 2.1% gain.
With shares sliding to fresh 52-week lows in response (Bed Bath shares are off more than 20% year-to-date), buyers have a fresh opportunity to review the true potential of BBBY stock, which proves a promising play in the healthy retail sector.
With BBBY stock well off its peak the past year of $79.64, investors face a price-to-earnings ratio of 11.6 for Bed Bath & Beyond stock that sits below most of its peers. After all, Kirkland’s (KIRK), which caters to home needs albeit more toward home decor than Bed Bath & Beyond, has a price-to-earnings ratio of 23.5 and Williams-Sonoma’s (WSM) ratio is 23.7. Pier 1 Imports (PIR), while offering a price-to-earnings ratio of 11.6, on par with Bed Bath & Beyond, has reported its own disappointing financial results and is straddled with high inventory.
Perhaps the most telling positive indicator for BBBY stock’s future is the robust housing market. While far from its booming heyday, the housing market has been charging toward a recovery. Most recently, new home sales in August were 552,000, up 12% from July and 5.7% from August 2014.
The housing market has ample room to run, with a pent-up demand from millennials who are saddled with student loan debt and not quite in a position to buy. Of course, more new home sales should translate into more sales for Bed Bath & Beyond as demand increases for items a home needs — kitchenware, bathware, shower curtains and the like.
But even with its cheap price and positive underlying economic drivers, BBBY does have one sizable challenge on its plate: maintaining its role as a one-stop shop amid increasing competition.
The retailer, with its aggressive marketing strategy of offering steep coupon discounts that foster a sense of urgency, still has room to promote its convenience, especially as retailers like Target (TGT) and Amazon.com (AMZN) are in prime positions to usurp Bed Bath & Beyond’s loyal customers.
Bed Bath & Beyond, with a total of 1,520 stores, also operates World Markets, Christmas Tree Shops and Buy Buy Baby. It also operates Of a Kind, an e-commerce website with specially commissioned, limited edition items from fashion and home designers. Street analysts are lukewarm on BBBY stock with a few buy ratings among mostly hold ratings.
For the third quarter, BBBY is projecting earnings of $1.14 to $1.21 per share, a range that encompasses the Street view of $1.19 per share. Bed Bath & Beyond also recently approved a $2.5 billion stock buyback program, which can further improve the P/E ratio and signals that Bed Bath & Beyond itself thinks BBBY stock is indeed a bargain now.
“Our Board authorized this new share repurchase program based upon its continued confidence in our Company’s long-term growth potential, financial outlook and cash flow generation,” Bed Bath & Beyond CEO Steven Temares said in a statement.
Bottom Line
For investors wanting to tap into a stock leverage upswings in both retail spending and the housing market can find BBBY stock, with its competitive valuation, an opportune buy.
As of this writing, Rebecca McClay did not hold a position in any of the aforementioned securities.
