by Ed Elfenbein | January 10, 2014 11:53 am
After the closing bell on Wednesday, Bed Bath & Beyond (BBBY) released a disappointing earnings report. For the third quarter (Sep-Oct-Nov), the home furnishings company earned $1.12 per share. That was three cents below Wall Street’s forecast.
Previously, the company had said they expected Q3 to range between $1.11 and $1.16 per share. So technically, BBBY hit their own guidance, but the Street was expecting more (and so was I). Net sales rose 6% from last year’s third quarter. Comparable store sales, which is a key metric for retailers, rose by 1.3%. Honestly, that’s not that great. So far this year, BBBY has earned $3.20 per share for the first three quarters, and that’s a nice increase over the $2.89 per share from the same period last year.
But the bad news is that BBBY cut their Q4 guidance. I was afraid this might happen. The previous range was $1.70 – $1.77 per share. Now it’s $1.60 – $1.67 per share, so 10 cents at both ends. That lowers their full-year range from $4.88 – $5.01 per share to $4.79 – $4.86 per share. I had been expecting the company to clear $5 per share for the year. For some context, last year, BBBY earned $4.56 per share.
Thursday was ugly. The stock got crushed for a 12.5% loss. I know this is painful and I apologize for the volatility, but traders aren’t always so rational. In fact, this kind of thing has happened to BBBY before. Eighteen months ago, BBBY got hammered for a one-day loss of 17%. What happened? They had actually beaten expectations but lowered their quarterly and full-year guidance.
The odd thing is that once those results were known, many months later, they really weren’t that far off from Wall Street’s original estimate. Before the June 2012 plunge, Wall Street had expected full-year earnings of $4.63 per share, and as I had mentioned before, they earned $4.56 per share last year. So the market panicked with a 17% drop in response to (what turned out to be) an earnings adjustment of less than 2%. Not surprisingly, the aftermath of the sell-off was a great buying opportunity. This is exactly why we like high-quality stocks.
Now let’s break down some of the numbers. For Q3, Bed Bath & Beyond’s EPS grew by 8.7% while their sales rose by 6%. Of that sales increase, 78% came from comp store sales and 2% came from new stores. BBBY’s gross margins fell a bit due to inventory acquisition costs, shoppers using more and larger coupons and a shift towards lower margin goods. Expenses for selling, general and administrative dropped a bit partially thanks to lower payroll costs.
There are also a few technical points. Bed Bath & Beyond doesn’t use three-month quarters; they use 13-week quarters. Since one year isn’t exactly 52 weeks, every so often, they have to use a 14-week quarter. Last year’s fourth quarter was a 14-weeker so the comparisons aren’t quite apples to apples. Also, the date range isn’t the same either (this is important because it covers the important holiday shopping season).
For Q4, BBBY sees comp store sales rising by 2% to 4%, instead of the earlier projection of 3.5% to 5.5%. Net sales are expected to fall by -3.9% to -5.7%. Again, that’s with one less week of sales. The company estimates that adjusting for the missing week, Q4 sales growth will range from -0.3% to +1.6%.
Bed Bath & Beyond didn’t have a lot to say about the coming fiscal year, but they did say they anticipate opening 30 stores next year. They also continue to have a very strong balance sheet. I expect more details in April when the Q4 report comes out.
This is where our locked-and-sealed strategy comes to the test. Lots of investors would dump BBBY at the first sign of trouble, but I’m not doing that. This is a very well-run outfit that really had a fairly minor adjustment to their earnings outlook. The shares are going for a bit over 14 times this year’s earnings. Sure, the one-day plunge ain’t a lot of fun, but that’s how the stock market works. The long-run is still in our favor and I’m sticking with BBBY.
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