Bed, Bath & Beyond Still a Winning Stock Pick

Shares of big box retailer Bed Bath & Beyond (NASDAQ:BBBY) closed near its 52-week high on Wednesday afternoon but plunged 13% after the company released conservative earnings estimates for the second quarter. Is this consolidation a red flag for problems down the road or a tremendous buying pressure? Let’s discuss the answer.

Company Overview

If you have a kid in college or if you are in charge of your home’s decor, you have probably stepped foot in a Bed Bath & Beyond. There are over 1,000 of these stores spread across North America and they specialize in selling home furnishings as well as food, giftware, beauty care items as well as baby merchandise.

However, this company is anything but a one-trick pony; Bed Bath and Beyond also operates a number of other store chains, including Christmas Tree Shops, Harmon, Harmon Face Values and buybuy Baby.

Industry Breakdown

As to be expected, this company falls under the Home Furnishing Stores Industry. Now, there are only seven companies in the industry, but Bed Bath & Beyond scores towards the top on most fundamental metrics.

To start, BBY has the largest market capitalization and also has the highest earnings growth and long-term growth rate. The company’s sales growth is second only to Pier 1 Imports (NYSE:PIR). Nonetheless, the company could stand to improve its return on equity (ranked third in the industry) and its price/earnings to growth ration (ranked fifth).

Interestingly enough, Bed Bath & Beyond’s main competitors don’t fall in this industry, but are other “big box” and department stores: Macy’s (NYSE:M), Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) represent the biggest threat to Bed Bath & Beyond. All four of these companies are A- or B-rated in my PortfolioGrader tool.

Earnings Rundown

After the closing bell yesterday, company leadership announced solid operating results for the first quarter. Compared with Q1 2011, profit climbed 24% to $206.8 million, or 89 cents per share. Analysts expected earnings of 85 cents per share so the company posted a 5% earnings surprise. Over the same period, sales advanced 5% to $2.22 billion. Sales at stores open more than a year rose 3% this quarter.

The company also announced that it repurchased over $300 million of its own stock; Bed Bath and Beyond plans to repurchase an additional $613 million in the coming quarters. However, shares of BBBY gapped down after the company announced its earnings guidance of 97 cents to $1.03 per share for the second quarter. This is below the Street view of $1.08 per share.

The company is being conservative because it is factoring in its decision to acquire retailer Cost Plus Inc. If the deal closes in the second quarter, this will decrease Bed Bath and Beyond’s earnings for that quarter. However, after the initial transaction costs have been absorbed the deal should be accretive to the company’s 2012 earnings.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. The past 12 months have been good to BBBY; this stock has remained firmly in buy territory. That’s mostly because buying pressure for this stock has remained quite strong; BBBY receives an A for its Quantitative Grade.

Meanwhile, Bed Bath & Beyond has maintained strong fundamentals. Six of the eight fundamental metrics, including earnings growth, cash flow and operating margin growth are B-rated and return on equity is A-rated. The only real area for improvement is the company’s C-rated sales growth. BBBY receives a B for its Fundamental Grade.

Bottom Line

As of this posting on June 21, I consider BBBY an A-rated buy. You wouldn’t know this from yesterday’s panic sell, but the Cost Plus acquisition will bolster Bed Bath and Beyond’s earnings down the road.

Recommendation: A-rated Buy

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