1 Stock To Be Watched Very Closely

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Feb 13, 2015

With not much improvement in its share price, in the last one year, Bed Bath & Beyond (BBBY, Financial) has been an average performer. Lower consumer spending and overall weakness in the economic environment have been the key reasons for this performance. However, the situation has changed. With an increase in average income of the people, there has been an uptick in the consumer spending in the U.S. Also, the housing activity has picked up pace, which has resulted in higher demand for home products.

Bed Bath & Beyond, however, reported a mixed quarter recently, wherein its quarterly numbers were mixed. The top line missed the Street's expectations, whereas the bottom line was ahead of the estimates. Let's take a look.

The mixed bag of numbers

The top line of the company rose 3% to $2.94 billion, over last year. This was slightly lower than the analysts' estimate of $2.97 billion. Revenue was driven by comp sales growth of 1.7%. Although the comp sales were lower than the estimate of 2% to 3%, it was higher than that of last year's quarter. Also, the comp sales metric was driven by an increase in the number of transactions and the average transaction size. Further, the company added 6 new stores, which helped the revenue grow.

However, the bottom line dropped 5% to $1.23 per share, over last year's quarter. But it was higher than the analysts' estimate of $1.19 per share. The gross margins of the retailer shrank 80 basis points to 38.4% during the quarter. This decline in margins was due to higher redemption of coupons as well as higher shipping charges.

Moving on

Although housing activity slowed down in November, it was strong throughout 2014 and is expected to get better in the future too. Also, the Builder Confidence has risen in the last one year. But, factors such as a highly promotional environment and growing competition from other online retailers are the biggest threats to the company.

Nonetheless, the company is making a number of moves to grow its business. It is expanding its product portfolio in order to attract more customers. It is also expanding its presence by opening stores in the new regions. For instance, Bed Bath & Beyond opened its first BABY store in Canada in December, expanding its footprint in Canada.

Another strength of the retailer is its omni-channel services. It sells items through more than one platform, including physical stores, through websites and mobile apps. The online business is a point of focus for the company since it has been growing largely. Online sales grew 40% during the quarter as the company offers more than 200,000 SKUs, much more than last year. Moreover, it has expanded its products to new categories.

However, the worst news that disheartened the investors was the fact that the company lowered its outlook for the year. It now expects revenue to grow between 2.4% and 3.6% from an earlier forecast of 3.4% to 3.9%. But it raised its guidance for the bottom line. Earnings are now expected to be in the range of $5.05 per share to $5.09 per share from $5.0 per share to $5.08 per share earlier.

The bottom line

The home products retailer is expected to do well as the housing industry continues to improve. Further, its efforts to expand its products, geographical presence and the e-commerce business, should help the company grow. Moreover, it made share repurchases during the quarter, which boosted the bottom line further. These factors make the company's future look bright. Investors should keep a close watch on this company.