Bed Bath & Beyond (BBBY) #3 [9]

11:13 ET (22-Sep-05)

37.98 +0.56: Bed Bath & Beyond, which typically meets or exceeds earnings estimates, reported yet another meaningful quarter of growth - topping analyst expectations for the 15th straight quarter. The home-furnishings retailer on Wednesday said earnings for the period increased 17.8% to $141.4 million, or $0.47 per share, compared with $120 million, or $0.39 per share, a year earlier. The latest results were a penny better than the average analyst forecast, according to Reuters Estimates.

Net sales for the quarter jumped 12.3% to $1.43 billion - in-line with the consensus estimate of $1.44 billion - helped by a 4.5% gain in same store sales. The growth in same store sales comes on top of an increase of approximately 4.8% in the year ago period and amidst disappointing results at other home furnishings retailers, including Cost Plus (CPWM), Linens 'n Things (LIN), and Pier 1 Imports (PIR), over the past few quarters.

Separately, as a result of Hurricane Katrina, which struck the Gulf Coast at the beginning of the fiscal third quarter, and its aftermath, the company said that two Bed Bath & Beyond stores in the region have had to suspend operations. Although several other stores were affected by the storm as well, they have since resumed operations. Overall, the impact on operations is expected to be limited.

As evidenced by its solid second quarter performance, BBBY continues to demonstrate fundamental strength with gross margin up 30 basis points to 42.0%, operating margin up 40 basis points to 15.2%, and 10 basis points of SG&A leverage, as well as improving new store productivity. However, the stock, which is down nearly 20% from the 52-week high reached in July, continues to be unduly punished by investors. The decline arguably reflects the company's maturing growth prospects and the lack of upside surprises that BBBY has been accustomed to in the past. Although BBBY continues to generate consistent results, current growth prospects have seemingly been priced into the stock, effectively impeding price appreciation.

Nonetheless, BBBY remains the leader among home-furnishings retailers. Given its still meaningful growth potential, as well as significant opportunity to expand its Christmas Tree Stores concept, the company appears undervalued at the current price level. As such, the recent pullback in shares provides a compelling opportunity to capitalize on BBBY's market-leading position and attractive valuation. Currently, the stock trades at roughly 20x estimated FY06 earnings, a discount to its peers LIN and PIR.