Sell-Side Analysts Harp On Bed Bath & Beyond's Margin Trajectory Despite Q4 Beat

Bed Bath & Beyond Inc. (NASDAQ: BBBY) reported Wednesday fourth-quarter earnings of $1.84 per share compared to $1.91 per share last year, which included a $0.06 per share gain. Net sales were up 3.4 percent to $3.5 billion, achieved on the back of a 0.4 percent increase in comps. The results exceeded expectations. For 2017, the company modeled revenue decline in the range of low-single digit-percent to 10 percent.

A Story In Transition

Credit Suisse said it believes Bed Bath & Beyond is a story still in transition, with the firm expecting continued testing and investing to weigh on earnings and cash flow in the medium term. Making sense of the 2017 outlook, the firm's analysts Seth Sigman, Kieran McGrath and Alexander Thompson said the outlook suggests elevated investment period will continue into 2017.

That said, the analysts raised a question on whether the guidance is conservative enough.

The firm lowered its 2017 earnings per share estimate to $4.29, while it established 2018 guidance of $4.18 per share. The firm continues to be at Neutral on Bed Bath & Beyond but lowered its price target to $38 from $39.

Operating Margin Inflection Point Pushed Further Into The Future

Reviewing the results, Loop Capital Markets said it thinks the long-awaited operating margin inflection point continues to get pushed further out into the future. Analyst Anthony Chukumba attributed Bed Bath & Beyond's better-than-expected fourth-quarter results to overly pessimistic expectations.

The 2017 guidance was worse than expected, the analyst said. The firm also referred to the company's investment plans for 2017, which included expanding membership program test, piloting same-day delivery in several markets and opening a new customer contact center.

Loop Capital reiterated its Sell rating on the shares of Bed Bath & Beyond, with a $35 price target.

UBS Sees Another Year Of Declining Profits

UBS analyst Michael Lasser viewed that the company's 2017 outlook calls for another year of declining profits. The guidance implies about 150 basis point of operating margin degradation at its mid-point, suggesting that the company will continue to invest to position itself in the new digital world.

"Looking ahead, its guidance implies another year of significant operating margin erosion. We believe it will be tough for the stock to work meaningfully from current levels unless its margins stabilize," UBS said.

UBS has a Hold rating and $41 price target on the shares of Bed Bath & Beyond.

At the time of writing, Bed Bath & Beyond shares were surging up 4.18 percent to $39.38 on roughly three times their average volume.

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