Bed Bath & Beyond Rallies After Q3 Print, But Analysts Aren't Buying It

Retailer Bed Bath & Beyond Inc. BBBY suffered its worst trading day in history in late September in reaction to its fiscal second-quarter results. The company's third-quarter report Wednesday marked an improvement in performance highlighted by an earnings beat and better guidance. Here's how the Street reacted. 

The Analysts

• Credit Suisse's Seth Sigman maintains a Neutral rating on Bed Bath & Beyond with a price target lowered from $18 to $16.
• Citi's Kate McShane maintains at Sell.
• Morgan Stanley's Simeon Gutman maintains at Underweight, unchanged $13 price target.
• Bank of America Merrill Lynch's Curtis Nagle maintains at Underperform, unchanged $11 price target.
• Wells Fargo's Zachary Fadem maintains at Underperform.

Credit Suisse: Weakness Remains

The most notable takeaway from Bed Bath & Beyond's Q3 is that both sales and gross margins remain "weak," which implies continued market share losses, Sigman said in a note.

Yet the retailer's cost optimization and other initiatives can limit margin declines and create "some stabilization" in 2019, the analyst said. 

Bed Bath & Beyond needs to focus less on prioritizing profit above sales growth and more on improving its competitive positioning, Sigman said. The company faces growing competition from new retailers and online channels, so any upside in the stock is contingent on the company showing sales growth and, more importantly, market share growth, he said. 

Citi: No Confidence In Outlook

Investors should "appreciate" management's dedication to improve the business, but it's difficult to envision margin pressures easing without any signs of top-line growth, McShane said in a note. Exiting the earnings report, the retailer is unlikely to be able to reduce ad spending or coupon promotions without denting sales, she said. 

It's unclear how Bed Bath & Beyond can eliminate $300 million in costs next year in an accretive way given management's "spotty track record in setting annual guidance," the analyst said. 

Related Link: Raymond James: Bed Bath & Beyond Could Be Unbound After Q2 Report

Morgan Stanley: Digging Beyond The Headlines

Bed Bath & Beyond's earnings beat of 18 cents versus the consensus estimate of 17 cents looks good, but "only on the surface," Gutman said in a note.

When excluding certain one-time items in the quarter, including a $30-million gain — or 16-cent benefit — from the sale of a building, the company's underlying EPS was 2 cents per share, the analyst said.

The EBIT margin was 200 basis points lower and in-line with the Street's estimate, but excluding the one-time real estate transaction, the EBIT margin would have been lower by 300 basis points, he said. 

Investors pointing out that the real estate sale was offset by a shift in advertising spend in the quarter should note that the top-line performance was weaker, Gutman said. 

Bank Of America: 2019 Guidance 'Aggressive'

Bed Bath & Beyond's guidance for flat or similar earnings in the coming fiscal year includes a a one-time gain that contributed 8 percentage points to earnings, Nagle said in a note. After a difficult period that included 26 consecutive quarters of EBIT declines, it is difficult to imagine how the company is "anywhere near an inflection or stabilization," he said. 

Until Bed Bath & Beyond is able to show evidence that a sustainable turnaround is in place, 2019's outlook looks "aggressive," and the research firm continues to model a 32-percent decline in earnings, the analyst said. 

Wells Fargo: 'Short-Lived' Upside

Bed Bath & Beyond's earnings report was "not as good as the headline" suggests due to the one-time real estate transaction, Fadem said in a note. The one-time gain likely wasn't factored into consensus estimates and is now calculated in management's $2 EPS outlook for fiscal 2018 and 2019, he said. 

This sets up a scenario where it will be "very difficult" for the retailer to hit its targets, and the immediate stock reaction to the upside could prove to be "short-lived," the analyst said. 

Price Action

Bed Bath & Beyond shares were up 16.56 percent at $14.29 at the close Thursday. 

Related Link: Bed Bath & Beyond's Woes Will Continue, Analyst Says

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