Do Bed Bath Beyond’s Symptoms add up to Best Buy Disease?

Bed Bath Beyond’s (BBBY)’s 17% share price plunge June 20 had an eerily familiar ring to it for anyone who follows that other repeating-B, Best Buy (BBY). Since no investor wants to experience the Best Buy scenario – its 15% share price plunge in December was quickly followed by another 15% drop; no relief in sight – we wanted to know whether Bed Bath’s data looks anything like Best Buy’s pre-crash.

BBBY Chart

BBBY data by YCharts

On the basics, Bed Bath and Best Buy have a lot in common. Both are big box specialty retailers that had roughly equivalent $12 billion market caps a year ago. Both companies usually have strong enough balance sheets to earn strong fundamentals ratings from YCharts Pro. Both face tough online competition from the likes of Amazon (AMZN).

The crisis at electronics retailer Best Buy came to light late last year when earnings revealed a weak Thanksgiving selling season. Although it confirmed its forecasts then, things quickly went from bad to worse when the company announced a store-closing plan that investors deemed too wussy. There’s been little comfort in recent results.

BBY Revenues TTM Chart

BBY Revenues TTM data by YCharts

At Best Buy, there were earlier clues to the trouble ahead. Revenue growth had come to a halt. Bed Bath has not had this sort of difficulty.

BBBY Revenues TTM Chart

BBBY Revenues TTM data by YCharts

Worse, it appears that Best Buy maintained its sales levels only by discounting its products, operating profit margins plummeting. Again, this is not Bed Bath’s problem.

BBBY Operating Margin TTM Chart

BBBY Operating Margin TTM data by YCharts

However, an unexpected dip in gross margins hit Bed Bath’s share price recently. That decline was caused by the company’s ubiquitous use of discount coupons, a practice it has taken grief for before. A tax credit helped hide the extent of the problem.

Best Buy missed earnings forecasts in the quarters ahead of the December revelation, and those stumbles were dragging down the share price throughout 2011. In contrast, Bed Bath’s consistency in doing what it says it could had pushed up its share price some 30% in the year ahead of its most recent results. That said, Wall Street isn’t buying Bed Bath’s Best Buy-like reaffirmation of its current year profit forecasts. A lot of earnings forecasts were cut.

For investors touting Bed Bath as a buy these days – and there are many – Bed Bath properties beyond those eponymous stores are reasons for optimism in these shares. Later this year, Bed Bath will close a $550 million acquisition of 259 Cost Plus, which runs Ikea-like stores selling furniture and exclusive food and drinks too. (There are roughly 1,000 Bed Bath stores.) Despite recent skepticism over forecasts, Wall Street generally admires Bed Bath’s management team and believes in its ability to profitably integrate.

Bed Bath’s real challenge, just like Best Buy’s, continues to be convincing customers to buy their very discretionary products at a time when household budgets are tight. Most people can live without new sheets and towels and patio sets -- almost everything this company sells, really. But when more people have good jobs, and home sales pick up, that extra B should make Bed Bath a very nice contrast to Best Buy.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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