Thursday, May 28, 2015

Citi Cuts Bed, Bath To Hold On Weak Forecast, Earnings Growth

On Thursday, Bed, Bath & Beyond (BBBY) after its earnings forecast disappointed. Citigroup's Kate McShane also downgraded the stock from Buy to Neutral on the news, lowering her target price from $85 to $72.

McShane writes that excluding the effect of her conservative assumptions for share repurchases, earnings per share growth looks to be virtually flattish for the next two years. The announcement Thursday night indicates that "the company is facing a 2nd straight year of top-line deceleration driven by both slowing new store openings and modest comp growth." Moreover, she writes, she doesn't see an inflection point for gross margin in the next year, as she had previously thought possible, and she is concerned about the "ongoing increasing negative impact from couponing."

She notes that while investments in technology may improve Bed, Bath's omni-channel experience, this strategy will continue to weigh on EPS, and she now likes Williams Sonoma (WSM) as a better way to get exposure to favorable trends in home furnishings.

Her new estimates:

Lowering our FY15 EPS from $5.36 to $5.04 –We are taking down our EPS estimates on a slower comp environment over the next few years which will make it more difficult to leverage expenses, especially in light of continued investments in the omni-channel experience. Plus, the mix shift toward lower margin products may persist and the couponing reliance appears to be a permanent overhang. Lastly, the square footage expansion story for FY15 was less than we had expected and the opportunity to get a sales lift from square footage growth may be waning.


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