On June 23, Bed Bath & Beyond, Inc. (BBBY) reported first-quarter 2010 earnings of 52 cents a share, and handily surpassed the Zacks Consensus Estimate of 48 cents. This marked the 5th consecutive quarter of improving trends on the heels of double-digit topline growth coupled with higher margins.
Bed Bath & Beyond now expects to deliver second-quarter 2010 earnings between 59 cents and 63 cents a share. For fiscal 2010, earnings per share are expected to rise by 15% over 2009.
Quarterly Review
The company posted revenue of $1,923 million, up 13.5% from the year-ago quarter. Bed Bath has been witnessing increasing trends in comparable-store sales. After falling 0.6% in second-quarter 2009, comparable-store sales continued to increase in the subsequent quarters. In the quarter under review, comparable-store sales climbed 8.4% compared with a decrease of 1.6% in the prior-year quarter.
Double-digit, top-line growth — coupled with a reduction in coupon redemption and inventory acquisition costs — led to the increase in gross margin by 90 basis points to 40.3%. Bed Bath & Beyond’s cost containment efforts led to the cut in selling, general and administrative expenses and advertising expenses, which eventually resulted in an operating margin expansion of 330 basis points year over year.
Management now sees comparable-store sales to rise by a low single-digit percentage in the second half of 2010 compared to a mid-single-digit percentage growth in second-quarter 2010, attributable to tough comparisons and lumpy economic conditions expected in the second half of the year. The company expects comparable-store sales to trigger net sales by a high single-digit percentage in second-quarter 2010 and a mid-single-digit percentage in the second half of fiscal 2010.
Management indicated that the company is in good shape and has the ability to enhance profit, increase shareholder value and market share in future.
For a full coverage on third quarter earnings, read: Bed Bath & Beyond Beats
Agreement of Analysts
Estimate revision trends depict a positive sentiment among analysts for the upcoming fiscal years 2010 and 2011. Over the last 7 days, 11 of the 24 analysts covering the stock have revised their estimates upward, while only two have moved in the opposite direction for fiscal 2010. A similar trend has been noticed for fiscal 2011, where 9 of the 24 analysts covering the stock have lifted their estimates while, only 3 have lowered their estimates in the last 7 days.
However, for the second and third quarters, analysts’ expectation remains somewhat mixed. For the second quarter, 4 out of 20 analysts providing estimates for the quarter have raised their estimates, with 8 analysts expecting earnings per share to go down. For the third quarter, only 3 out of 21 analysts providing quarterly numbers have lowered their estimates, while 10 moved in the opposite direction.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Bed Bath & Beyond depicts an optimistic outlook of analysts for fiscal 2010 and 2011. Over the last 7 days, estimates for fiscal 2010 and 2011 have increased by a penny. However, the estimate for Bed Bath & Beyond’s second quarter has decreased by 1 cent, while for the third quarter the estimate has remained stagnant.
Our Recommendation
Our short-term recommendation on the stock is ‘Hold’ while we are ‘Neutral’ on the stock in the long term.
Bed Bath & Beyond represents a strong brand with solid growth opportunities. Industry consolidation, good visibility for cross merchandising opportunities, future growth potential for newer concepts, and strong balance sheet and cash flow should continue to augur well for the company. Further, Bed Bath & Beyond is well positioned to benefit from recent positive housing turnover trends which should support sales for home furnishing retailers in fiscal 2010.
Bed Bath & Beyond reported better-than-expected results. However, the company would experience a weak second half as the company faces a tough comparison and expectation of limited expense savings, attributable to Bed Bath & Beyond’s already exceptionally lean cost structure.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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