Bed, Bath & Beyond — How to Play Wednesday’s Earnings Report

Bed, Bath & Beyond (NASDAQ: BBBY ) reports earnings for the quarter ending Aug.
31, 2011, after the market closes Wednesday. Retail stocks have been slammed
during the summer swoon, but Bed Bath & Beyond has bucked the trend. Since
mid-July, shares of the company have actually gained 2%. But it will take a
strong earnings report for the stock to improve upon those gains this week. On
some levels, selling retail stocks across the board makes sense. If a double-dip
recession materializes, consumers will bear the brunt of the pain. Spending
likely will decrease, and profits in the space will decline. Earnings results
give market participants a better gauge of the current environment, including a
clearer view of the short-term future. Stock values are meant to be a
discounting of future cash flows. When there is a wide disparity between
speculation and actual results, traders can exploit the difference for gains.
Operating performance for Bed, Bath & Beyond has been quite strong during the
past year, with the company beating estimates in each of the past four quarters:
For the current period, the average Wall Street estimate is for the company to
make 84 cents per share. That number is two cents higher than where the average
estimate stood 90 days ago. For the full year ending Feb. 28, 2012, profits are
expected to be $3.68 per share. In the following year, the number is $4.23 per
share, or 15% higher. At current prices, Bed, Bath & Beyond trades for 16 times
earnings. In the middle of August, Wall Street firm Cowen upgraded the company
to outperform from neutral, citing valuation, strong competitive position and
growth potential. During the past 12 months, BBBY shares have gained an
impressive 42%: In a market of uncertainty, proven winners are seeing share
values increase after reporting strong earnings results. In the retail space,
cosmetic and fragrance retailer Ulta (NASDAQ: ULTA ) gained 15% in the day of
trading after it reported earnings that beat estimates and included strong
guidance. Guidance has been of particular importance for companies reporting
results recently. In the case of Bed, Bath & Beyond, recent earnings results
would indicate another quarter of profits that will beat expectations. For the
stock to rise of any significance, future guidance will need to be strong. A
closer look at recent share performance shows the company selling off in July. A
strong August rally thanks to the Wall Street upgrade erased those losses.
Retail sales were strong in August for many retailers. That bodes well for Bed,
Bath & Beyond. With the company trading at a level equal to its expected growth
rate, there is room for this stock to continue what has been a strong run of
late. When Ulta reported results, its shares trade for a hefty 34 times earnings
well above its expected profit growth rate of 25%. I expect a strong report
from Bed, Bath & Beyond on Wednesday. Shares could gain 3% to 5% or more as a
result. Other companies reporting results this week include: AutoZone (NYSE: AZO
), General Mills (NYSE: GIS ), FedEx (NYSE: FDX ), CarMax (NYSE: KMX ) and
Carnival Corp. (NYSE: CVL ).