Bed Bath & Beyond's Q4 Print Fails To Pull Back The Curtain On Margin Trajectory

Investors were cheering Bed Bath & Beyond Inc. BBBY's fourth-quarter earnings report as the stock gained more than 5 percent Thursday. But not everyone on the Street is impressed, including UBS's Michael Lasser who maintains a Neutral rating on the company with an unchanged $41 price target.

According to Lasser, Bed Bath & Beyond's earnings report did come in better than expected, but the company did not provide any insight into its long-term margin profile and showed no signs of abating.

Operating Margins Peaked In 2011

Gross margin did benefit seven basis points from acquisitions but overall gross margins fell 50 basis points. Also, SG&A deleveraged 140 basis points driven by the company's investments. Also, the company's EBIT dollars fell 11 percent despite a 3.4 percent increase in sales. In fact, operating margin has fallen 720 basis points since its 16.5 percent peak in fiscal 2011.

Looking forward, Lasser noted Bed Bath & Beyond's guidance implies another year of "significant" operating margin erosion while the analyst is estimating an earnings per share decline of up to 10 percent in the coming year.

On the positive side of the story, Bed Bath & Beyond's comp in the quarter was 0.4 percent, which was ahead of the consensus estimate of 0.3 percent and was better than many of its peers. Digital sales also continued to track above 20 percent.

Bottom line, Lasser stated that it will be "tough" for the stock to perform well from its current levels unless the company manages to stabilize its margins.

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