Option Trade
Bed Bath & Beyond Inc. (NASDAQ:BBBY) Calls
Tuesday, April 07, 2015

**OPTION TRADE: Buy the BBBY May 2015 77.500 call (BBBY150515C00077500) at or under $3.20, good for the day. Place a protective stop loss at $1.20 and a pre-determined sell at $5.50.

by Ian Harvey

April 07, 2015

Introduction

Bed Bath & Beyond Inc. (NASDAQ: BBBY), a specialty retailer of domestic merchandise and home furnishings, will report the results of its fiscal fourth-quarter after the market closes on April 8th. Analysts forecast earnings of $1.81 per share, up from $1.60 during the same period last year, based on revenues of $3.37 billion.

The stock is about flat on the year, with shares appreciating a modest 0.2%, which allows for plenty of scope to fulfill this call option trade when the positive earnings are presented.

There are a couple of factors that are benefiting Bed Bath & Beyond Inc.:-

• Increase in consumer confidence,

• Lower fuel costs which allows consumers more discretionary spending to apply to home improvement purchases, and

• People are more likely to invest money back into their homes due to strong housing market.

Bed Bath & Beyond Inc. has been able to grow its earnings quite well, and when they hit the consensus estimate this quarter, it should mark year over year earnings growth of 13%, which will bring buyers into the stock and allow it to add to its modest yearly gains so far.

Technical Details

Bed Bath & Beyond has a one year low of $54.96 and a one year high of $79.64. The stock’s 50-day moving average is $75.00 and its 200-day moving average is $72.00.

The company has a market cap of $13.98 billion and a P/E ratio of 15.54.

Bed Bath & Beyond Inc., as part of the Services sector (Home Furnishing Stores) closed yesterday at $77.49 gaining 0.90%, a change from open of 1.61% after trading at a volume of 2,334,735 shares.

Bed Bath & Beyond Inc.’s weekly performance is 4.09% and EPS growth this year of 5.00%.The monthly performance ended at 3.28% and currently has a YTD performance of 0.83% in the Home Furnishing Stores industry.

Earnings

Bed Bath & Beyond last posted its quarterly earnings results on Thursday, January 8th. The company reported $1.23 earnings per share for the quarter, beating the analysts’ consensus estimate of $1.19 by $0.04. The company had revenue of $2.94 billion for the quarter.

During the same quarter last year, the company posted $1.12 earnings per share. Bed Bath & Beyond’s revenue was up 2.7% compared to the same quarter last year. Analysts expect that Bed Bath & Beyond will post $5.05 EPS for the current fiscal year.

High Expectations by Analysts

For the quarter, analysts expect Bed Bath & Beyond to report revenue of $3.37 billion. If this is met, it will mean that sales have risen by 5.3% during the fourth quarter compared to the same quarter a year earlier. Based on the company's historical performance, this jump in revenue will likely be driven by an increase in Bed Bath & Beyond's number of stores in operation combined with, to a much smaller extent, higher comparable store sales.

From a profitability standpoint, expectations are even higher. For the quarter, analysts expect Bed Bath & Beyond to report earnings per share of $1.81. If this occurs, it will represent a 13.1% improvement over the $1.60 per share reported in the fourth quarter of 2013 and will be driven by rising sales and a decrease in share count year-over-year.

Past Performance

The past five years have been truly impressive for this brick-and-mortar retailer. Between 2009 and 2013, the company's revenue jumped nearly 47% from $7.83 billion to $11.50 billion. According to management, most of this increase has been driven by Bed Bath & Beyond's rising store count, which jumped 36% from 1,100 locations at the end of its 2009 fiscal year to 1,496 locations at the end of its 2013 fiscal year. Sales growth has, however, been aided by the business's comparable store sales growth, which has increased by 25.3% over this five-year timeframe.

Looking at earnings, the picture has been even better. Between 2009 and 2013, Bed Bath & Beyond saw its net income jump 70% from $600.03 million to $1.02 billion. On top of benefiting from a strong increase in sales, the business enjoyed margin expansion in the area of its selling, general and administrative expenses, which fell from 28.5% of sales to 25.7% (though investors should take note that this metric has been on the rise since the end of the retailer's 2012 fiscal year). Due to a series of share buybacks, the company's earnings per share have risen even more, climbing by roughly 108%, which should have investors happy.

Driving Factors

Bed Bath & Beyond’s strategic initiatives, including store expansion, enhancement of e-commerce capabilities and improvisation of customer services, are showing results as evident from its third-quarter fiscal 2014 performance. Further, looking at the improving housing market, it is expected that the company’s sales to grow at an impressive pace.

Though the company has slightly adjusted its sales guidance for the fourth quarter based on its year-to-date performance and expectations for the rest of the quarter, it has retained its earnings guidance for the same.

The company expects fourth-quarter earnings per share in the range of $1.78–$1.83.

Analysts Opinions

Bed Bath & Beyond has recently received a “BBB+” credit rating from analysts at Morningstar. The firm’s “BBB+” rating suggests that the company is a moderate default risk. They also gave their stock a two star rating.

Also, Bed Bath & Beyond’s stock had its “hold” rating reiterated by Zacks in a note issued to investors on Monday, March 30th. Zacks’ analyst wrote…..

“Bed Bath & Beyond posted solid third-quarter fiscal 2014 results, following which the company raised its earnings forecast for fiscal 2014. We are impressed with the company’s focus on strategic initiatives, including store expansion, enhancement of eCommerce capabilities and improvisation of customer services. Further, the company’s debt-free balance sheet and cash flow generating capacity provides increased visibility to drive future growth. However, the company’s margins, which have been negatively impacted by a rise in coupon expenses and an increase in net direct-to-customer shipping expense, remain a concern. Alongside, the company continues to face macroeconomic headwinds.”

The company has also been the subject of a number of other research reports:-

• Analysts at Oppenheimer upgraded shares of Bed Bath & Beyond from a “market perform” rating to an “outperform” rating and raised their price target for the stock from $69.00 to $85.00 in a research note on Monday, January 26th.

• Analysts at Canaccord Genuity reiterated a “buy” rating and set a $88.00 price target on shares of Bed Bath & Beyond in a research note on Sunday, January 11th.

• Analysts at S&P Equity Research downgraded shares of Bed Bath & Beyond to a “hold” rating and set an $80.00 price target on the stock in a research note on Friday, January 9th.

• Finally, analysts at Goldman Sachs reiterated a “sell” rating and set a $73.00 price target on shares of Bed Bath & Beyond in a research note on Friday, January 9th.

Four equities research analysts have rated the stock with a sell rating, ten have issued a hold rating, six have issued a buy rating and one has assigned a strong buy rating to the company. The stock currently has a consensus rating of “Hold” and an average target price of $72.62.

Conclusion

Despite the fact that Bed Bath & Beyond's shares have soared in value over the past year, it appears that there could be more upside to come. Using forecasted earnings for the business's current fiscal year, shares are trading at 15.2 times earnings.

While the future is always uncertain, particularly in the retail industry, the company's strong performance, driven largely by increased store count, has proven a boon for management and investors alike. Based on this historical performance, as well as the reasonable multiple that shares are going for today, it is reasonable to assume that this call option trade will come to fruition.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the BBBY May 2015 77.500 call (BBBY150515C00077500) at or under $3.20, good for the day. Place a protective stop loss at $1.20 and a pre-determined sell at $5.50.



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