Wednesday afternoon, home store Bed Bath & Beyond (click ticker for report: ) reported lackluster third-quarter sales growth. Revenue fell short of expectations, up 15% year-over-year to $2.7 billion. Earnings, on the other hand, jumped 8% year-over-year to $1.03 per share, a penny better than consensus expectations. Though we don’t expect a material change to our valuation, we plan to update our report soon.
Earnings guidance was the real disappointment, as the company provided a fourth quarter earnings range of $1.60-$1.67 per share compared to the consensus calling for $1.75 per share. During the company’s prepared remarks, it blamed the integration of Cost Plus World Market and Linen Holdings for half of the margin weakness in the fourth quarter, with the balance attributable to higher couponing and an unfavorable product mix. Given the firm’s long-term track record of managing Bed Bath & Beyond incredibly well, we think it will be able to improve profitability at World Market, though it could take a year or two.
Not only was guidance relatively weak, but the firm also posted lackluster same-store sales expansion during the third quarter. The 1.7% growth rate the company posted during the third quarter was negatively impacted by 0.9 percentage points as a result of Hurricane Sandy, but even a 2.6% growth rate is disappointing, in our view. The company should disproportionately benefit from a housing recovery, but we think it could still lag homebuilders and home-repair stores such as Home Depot (click ticker for report: ). It takes some time for actual housing market improvements to translate into increased consumer confidence.
Overall, we were a bit disappointed by the quarterly performance, and we aren’t too excited about the company’s guidance for the fourth quarter. The firm’s total capital expenditures for fiscal year 2012 are easily manageable, and we think the company’s decision to expand its share repurchase program to $2.5 billion (nearly 20% of the market cap at current levels!) could be a fantastic allocation of capital. Shares are now trading below the low end of our fair value estimate range, so the share buyback should benefit shareholders.
Still, the firm only scores a 4 on the Valuentum Buying Index (our stock-selection methodology) at the time of this writing, so we’ll wait for its technicals to improve before we’d consider adding the company to the portfolio of our Best Ideas Newsletter.