Back on Jan 9th I took a look at Bed Bath & Beyond (BBBY) after the company issued disappointing Q3 results and lowered current quarter guidance. Analysts labeled the results “low quality” as they only seemed to benefit from a lower than expected tax rate and share buybacks. From July to Dec 2014 the company bought back $1.1 billion worth of shares in an accelerated share repurchase. (They still leave $2 billion of the existing program). The stock declined almost 7% following the results, which was astounding to me as it came from 52 week highs:
The stock has since filled in the gap, but failed to make a new high with the broad market. I suspect the gap fill is reflective of investor enthusiasm for all retailers that have 100% of their sales coming from the U.S. (so no headwind from dollar strength) while also having their consumers benefit from low gas at the pump.
The stock is trading at 14x expected fiscal 2016 earnings growth of 7% on 3% sales growth, is not exactly expensive to its history but ain’t exactly cheap for a company that pays no dividend.
The next identifiable event is the company’s Q4 results due April 8th after the close. That seems like a long time from now. In the interim, I suspect that bad weather in the northeast, the California port closing, weak housing data, Amazon etc etc is likely to weigh on the stock. If oil were to go up quickly I have to assume that would be perceived as negative for retailers like BBBY, and frankly if it stays here or goes lower I suspect it will be more reflective of lack of demand, and in that scenario not great for them either.
Options prices, while down significantly from their pre Q3 earnings levels remain slightly elevated, meaning long premium trades are not yet a no brainer:[caption id="attachment_51068" align="aligncenter" width="600"] BBBY 1 yr chart of 30 day at the money IV from Bloomberg[/caption]
Considering the volatility in stock over the last year, a long premium bearish structure at these levels of vol that captures the next earnings event makes sense. The problem is April regulars have not been listed, but will be on Monday. We’d love to catch the stock near here or higher and may look to an April 75/67.5 put spread or similar. We’ll circle back on this on Monday.