English: Bed Bath & Beyond (Photo credit: Wikipedia)
Bed Bath & Beyond
BBBY : NASDAQ : US$57.95
BUY Target: US$72.00
COMPANY DESCRIPTION
Bed Bath & Beyond sells a wide assortment of merchandise including home furnishings, domestics, giftware, health and beauty care items, and infant and toddler merchandise. BBBY operates around 1,000 Bed Bath & Beyond stores, 265 Cost Plus World Markets, 75 Christmas Tree Shops, 80 buybuy BABY locations, and 45 Harmon stores
Investment recommendation
BBBY reported Q3 EPS of $1.03, $0.03 ahead of our estimate and $0.01 above consensus. SSS increased 1.7% on top of +4.1%, versus our forecast of +3.5% and consensus at +3%. Hurricane Sandy negatively impacted SSS by 90bps in Q3. This was offset by a smaller yr./yr. increase in the SG&A expense rate than we had modeled. A lower tax rate added $0.04 of upside to our EPS estimate, partially offset by a higher interest expense. BBBY guided for Q4 EPS of $1.60-$1.67, $0.08 below prior consensus. We are maintaining our BUY rating with shares trading at 11x our F2013 EPS estimate (excluding cash of $3.46 per share) and 6x F2013E EV/EBITDA based on the after-hours quote.
Investment highlights
The addition of Cost Plus resulted in a market share gain in Q3. We calculate that the company’s share of the home furnishings market increased 160bps in the quarter to 23.5% based on total sales reported by the U.S. Census Bureau.
We are lowering our Q4 EPS estimate by $0.10 to $1.66. We increased our SG&A expense rate forecast by 70bps driven by continued integration costs and infrastructure investments. We are reducing our gross margin estimate by 30bps as a result of higher couponing and negative mix shift.
Our DCF-generated price target moves from $73 to $72.
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