Wednesday afternoon, home goods retailer Bed Bath & Beyond (click ticker for report: ) posted solid second quarter results thanks to an improving housing market. Revenue increased 8.9% year-over-year to $2.8 billion, slightly above consensus estimates. Earnings-per-share of $1.16 was an improvement of 18% compared to the year-prior and a penny above consensus expectations. Year-to-date, free cash flow sits at $365 million, equal to 6.7% of revenue.
Comp Sales Growth
Image Source: Company Filings, Valuentum
Comparable sales growth accelerated during the second quarter, registering a number that was 3.7% higher than that of the previous year. The two-year stacked comp for the period sits at 7.2%, which we believe is a solid growth rate in a modest retailing environment. Management offers little sales commentary, but we think the revenue expansion has been a byproduct of the strengthening housing market.
Going forward, the firm anniversaries a relatively weak second half of 2012, so we anticipate continued positive comparable sales growth. Home Depot (click ticker for report: ) and Lowe’s (click ticker for report: ) sounded positive about the second half of fiscal year 2013, and we think the trend will spill over to Bed Bath & Beyond.
Margins
Gross margins at Bed Bath & Beyond declined slightly during the period, falling 40 basis points year-over-year to 38.4%. Management cited increased couponing and coupon acceptance, which we doubt will be a long-term headwind. We don’t think the couponing activity translates into a “cautious consumer,” but instead, we think it is emblematic of the Bed Bath & Beyond business model, which involves incredible amounts of 20%-off coupons.
Source: Bed Bath & Beyond
SG&A declined 10 basis points year-over-year to 25.6% of total revenue. The decline was mostly attributable to lower acquisition-related expenses, and the firm even admitted to a slight increase in advertising spending. With IT infrastructure on the docket for the second half of fiscal year 2013, we do not believe this figure will come down this year.
Guidance
Looking forward, management is expecting solid same-store sales growth in the second half of fiscal year 2013, predicting same-store sales expansion of 1-3% during the third quarter and growth of 3.5-5.5% during the fourth quarter. Management increased the low-end of its fiscal 2013 earnings guidance range by $0.04 to $4.88-$5.10 per share—in line with consensus estimates.
Valuentum’s Take
Overall, we were pleased with the firm’s second-quarter results, and we think it will continue to ride a strong housing tailwind to sales growth. Management is determined to repurchase as much of the company as possible, as it has dedicated more than 90% of its operating cash flow to share repurchases during the past two years. However, we fear share buybacks aren’t the best use of the firm’s capital at this time, as shares look fairly valued (a value-neutral activity). We’re not rushing to add Bed Bath & Beyond to the portfolio of our Best Ideas Newsletter at this time.
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