We maintain our Neutral recommendation on Bed Bath & Beyond, Inc. (BBBY). A strong countrywide network of more than 1,100 stores coupled with the strategic effort to align merchandise according to regional climate and demographics offers a strong competitive advantage and strengthens its well-established position in the market.
Furthermore, the company purchases its merchandise from approximately 5,500 suppliers, primarily from domestic sources, while some overseas, with the company’s largest supplier not accounting for more than 5%. This reduces the company’s dependence on a single supplier as well as increases its bargaining power.
Also, Bed Bath & Beyond has reported ten consecutive quarters of improving trend. Its earnings for second-quarter 2011 rose approximately 33% to $0.93 per share compared with the prior-year quarter’s earnings of $0.70, on the heels of high single-digit growth in sales and improved margins. Bolstered by better-than-expected quarterly earnings, the company has raised its fiscal 2011 earnings guidance range. Bed Bath & Beyond now expects earnings per share for fiscal 2011 to increase by 22% to 25%, a rise from the previous forecast of 15% and 20%.
On the flip side, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending and, in turn, the company’s growth and profitability.
Moreover, the company operates in a highly fragmented industry and faces competition from larger retailers, such as Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT), as well as departmental and specialty stores. Bed Bath may find it difficult to execute and implement new business strategies in such a competitive industry, thereby, impacting its operations adversely.
Additionally, the company’s business is seasonal in nature and typically generates stronger results in the second and fourth quarters. As a result, the company is exposed to significant risks if the seasons fail to favorably deliver.
BED BATH&BEYOND (BBBY): Free Stock Analysis Report
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