The Election Killed Bed Bath & Beyond's Q3 Momentum

Deutsche Bank maintains its Hold rating on the shares of Bed Bath & Beyond Inc. (NASDAQ: BBBY), which reported third-quarter comps and EPS below plan, as the elections offset the positive sales momentum both before and afterwards, including a solid Black Friday.

Quarterly Print Summary

• Q3 EPS $0.85 versus the estimated $0.98.
• Q3 revenue of $2.955 billion versus estimated $3.01 billion.
• Q3 comps down ~1.4 percent.
• FY 2016 seen at low end of $4.50–$5 versus $4.73 estimate.

Analyst's Commentary

The EPS miss comes despite somewhat better than expected gross margin performance as several recent acquisitions weighed on SG&A dollars.

“While BBBY remains committed to long-term viability through multiple investments and acquisitions, these are negatively impacting near-term results,” analyst Mike Baker wrote in a note.

Baker said the commentary on the call seems to imply that cost pressures should continue to persist into FY 2017 as the company is focusing on differentiation that is potentially becoming more expensive to produce.

But, Baker believes the visibility into the sales benefit from these initiatives remains somewhat cloudy as the company is focused on the long term /very long term.

“We also believe BBBY is now looking to invest more in price in an effort to wane customers off of the 20% “big blue” coupon, which has been weighing on profitability for several years,” Baker continued.

The analyst also noted that the company would not fully cycle the 1 Kings Lane and Pmall acquisitions until second half of 2017, implying elevated SG&A dollars in the first half of 2017.

Analyst's Adjustments

As such, Baker cut his fourth-quarter EPS estimate to $1.79 from $1.83 and FY 2016 estimate to $4.53 from $4.70. He also trimmed his FY 2017 EPS estimate to $4.57 from $4.82.

However, Baker raised his target price to $48 from $42 as he rolled over the price target from FY 2017 to FY 2018 EPS.

At last check, shares of Bed Bath & Beyond were down 8.66 percent at $41.62.

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