Morgan Stanley Says Bed Bath & Beyond's Q3 Beat 'More Of The Same,' Lowers Price Target

Bed Bath & Beyond Inc. BBBY reported third-quarter results Wednesday, highlighted by a top- and bottom-line beat — but Morgan Stanley remains bearish.

The Analyst

Morgan Stanley's Simeon Gutman maintains an Underweight rating on Bed Bath & Beyond's stock with a price target lowered from $23 to $22.

The Thesis

Bed Bath & Beyond did report a top and bottom-line beat and comps in the quarter fell just 0.3 percent against a consensus estimate that called for a 2.4-percent decline, Gutman said in a Thursday note. (See the analyst's track record here.) 

But gross margin was 60 basis points lower than expected and fell 174 basis points from the same quarter a year ago, the analyst said. Moreover, on a two-year and three-year basis, the retailer's gross profit dollar growth fell sequentially,  so the comp beat seen in the reported quarter is of "low quality," Gutman said. 

Overall, the third quarter is "more of the same," the analyst said. Once a retailer enters a "challenged" period defined by same-store sales declines and/or gross margin slippage, investors should focus on gross profit dollar change, he said. This metric "demonstrates the health of the underlying franchise," Gutman said, and in the third quarter the metric got worse at Bed Bath & Beyond. 

The retailer's commentary regarding the fourth quarter implies it will be a "difficult" one, as the comp outlook for the full year implies a fourth-quarter reading of negative 3 percent at best, Gutman said. And the profit outlook implies incremental gross profit dollar and margin pressures.

Price Action

Shares of Bed Bath & Beyond were trading lower by nearly 5 percent ahead of Thursday's market open.

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