Bed Bath Will Keep You Up Nights

 | Dec 20, 2012 | 9:30 AM EST
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Back in September, I thought Bed Bath & Beyond (BBBY) was a short and that the stock would fall out of bed. I didn't think the company could make the November quarter, and I surmised it would miss on the fourth quarter as well. 

Well, last night the company reported its fiscal third quarter (ended November), and earnings per share came in at $1.03, a penny ahead of estimates. Revenue rose 15.2% year over year to $2.7 billion, which was in line with the Street. But then management cut fourth-quarter estimates, now estimating EPS at between $1.60 and 1.67 vs. the $1.75 estimate.

In my September article, I said Street estimates were too high for the back half of the fiscal year. I noted the company would have to post a 23% increase in fourth-quarter revenue just to make the consensus estimate. Given that sales only grew 11.6% in last year's fourth quarter, it seemed like a stretch for Bed Bath to hit targets this year -- and that's what happened. In an effort to support the stock, management announced a $2.5-billion-share buyback.

I don't think a repurchase is enough to support the stock. While this name has been highly regarded by investors, I think the competitive pressure is getting to it. Margins have been weak for some time; the May quarter, in fact, posted the weakest margins (39.9%) since 2008. This quarter, Bed Bath blamed super storm Sandy for the dismal 1.7% same-store-sales number. In the year-earlier period, it had reported a 4.1% comp.

The company's no-advertising and no-sales policies are hurting its results. Competitors like Macy's (M) have ramped up the number of white sales, as well as the coupons and discounts, and that company has broadened its assortment as well.  It's just not sheets and towels at Macy's. The company has become a powerhouse in small-kitchen electrics with unbeatable prices. While Bed Bath & Beyond certainly has a much larger selection of housewares, other competitors -- like Ikea and The Container Store -- are keeping the pressure on, too. Both chains have been aggressively expanding throughout the U.S.

While I've closed out my short position from September, I would look for another opportunity here. To short sellers like me, Bed, Bath & Beyond is the gift that keeps giving. I think the company needs to change its ways and become more competitive. Investors who are long this stock will have many restless nights.

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