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Bearish View on Bed Bath & Beyond

Zacks Equity Research

We reiterated our long-term Neutral recommendation on Bed Bath & Beyond Inc. (BBBY) with a target price of $69.00.

Why the Reiteration?

Bed Bath & Beyond is a leading operator of domestic merchandise and home furnishing stores in the U.S. A strong countrywide network of more than 1,100 stores, coupled with its strategic effort to align merchandise according to regional climate and demographics impart it a competitive edge and strengthen its position in the market.

Moreover, the company is strategically expanding its store count while increasing productivity of existing stores at the same time. In the long run, the company expects to operate over 1,300 Bed Bath & Beyond stores across the U.S. and Canada, and plans to expand other concepts from coast to coast.

Further, the company continually reviews and prioritizes its capital needs, making strategic investments to position itself for long-term success. Apart from sustained capital investment in store expansion/refurbishment, the company is investing to upgrade its information technology. Major projects include mobile sites and apps upgrade, enhancement of network communications in stores, implementation of point-of-sale improvements and building as well as equipping and staffing its new IT Data Center to support ongoing technology initiatives.

A debt-free balance sheet and robust liquidity position provide Bed Bath & Beyond with adequate financial flexibility. On the flip side, the company’s third-quarter fiscal 2013 top and bottom-line results were disappointing as both missed the Zacks Consensus Estimate. The company also provided a tempered outlook for the fourth quarter of fiscal 2013.

Additionally, the company’s margins remained soft during the third quarter due to increase in coupons, and their redemption and shift in the mix of merchandise sold to lower margin categories. Going forward, we expect this weakness to continue due to persistence of the above factors in the remainder of fiscal 2013 and the ongoing consolidation of World Market and Linen Holdings.

Moreover, the company altered its operating profit margin forecast, expecting it to deleverage for both the fourth quarter and fiscal year. The seasonality of its business and macroeconomic challenges also offer considerable resistance.

Other Stocks to Consider

Currently, Bed Bath & Beyond carries a Zacks Rank #4 (Sell). However, better-ranked retail stocks include Barnes & Noble, Inc. (BKS), Staples, Inc. (SPLS) and Tractor Supply Co. (TSCO). While Barnes & Noble carry a Zacks Rank #1 (Strong Buy) Staples and Tractor Supply have a Zacks Rank #2 (Buy).

Read the Full Research Report on BBBY
Read the Full Research Report on SPLS
Read the Full Research Report on TSCO
Read the Full Research Report on BKS

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