BBBY: Reality Isn't So Bad

Solid quarter for BBBY across the board.  Beat our $0.67 estimate driven almost entirely by leverage on better than forecast sales.  Comps came in at 7.4%, street was looking for just below 6%.

  • GM’s improved 56bps.  First quarter that results prove they can expand gross margins on top of last year’s gains.  Important event our view given that this provides less reason to be concerned about tougher near-term compares.  On a two year basis, GM’s were up 107bps, but still below 2006 peak 2Q levels of 42.2%.  To get back to peak, there is still room to expand GM’s by 130 bps.
  • SG&A leveraged better than expected on better topline results.  Absolute dollars came in line with our projections, up 4.8%.  Same dollar increase % as reported in Q1.  On a rate basis, SG&A improved by 174 bps as a % to sales.
  • Inventories up 8.5%, sales up 11.6%.  Sales/inventory spread continues to erode, although still positive on an absolute basis.  See SIGMA below for the trend.
  • Biggest surprise to us was the same store sales results and the share buyback activity. BBBY purchased $193 million or 4.9 million shares in the quarter, the biggest commitment to the buyback we’ve seen in a long, long time.  The balance sheet remains in solid shape, ending the quarter with $1.6 billion in cash/securities. There is more room to go here.
  • Guidance for 3Q of $0.61-$0.65, Street at $0.64 within the guided range.  Management took up full year to 20% EPS growth, which equates to $2.75.  Street currently at $2.71.  We still see results coming in closer to $2.80 for the year.

All in a solid quarter.  Incremental positives include gross margin gains on top of gross margin gains, stepped up share repurchase, and less than expected conservatism from management on the outlook.  Incremental negative is the erosion of the sales/inventory spread.  Yes, the latter point is nitpicky.  This was a solid result all around and it is consistent with the results we’ve seen over the past four quarters.  We continue to believe the de-layering of the multi-year period in which BBBY engaged in aggressive promotional activity and couponing remains key to driving EBIT margin expansion over the next year.  The quarter only adds confidence to this view.

BBBY: Reality Isn't So Bad - bbby2q

Eric Levine

Director