Bed Bath costs rise; fending off Amazon

NEW YORK Wed Jun 20, 2012 7:14pm EDT

NEW YORK (Reuters) - Bed Bath & Beyond Inc (BBBY.O) gave a weaker-than-expected profit outlook for the current quarter as it spends sooner than expected to improve its e-commerce business, sending the U.S. home goods chain's shares down about 11 percent.

The retailer's decision to invest more aggressively in its e-commerce business comes as online goliath Amazon.Com (AMZN.O) rolls out more incentives for shoppers to buy home goods online.

In February, Amazon launched home furnishings website Casa.com, which some analysts said could represent a potential competitive threat to Bed Bath.

"It seems like Amazon is really starting to lap through this home furnishings space," said BB&T Capital Markets analyst Anthony Chukumba, stressing the decline in gross margin at Bed Bath in the recently concluded fiscal first quarter as well as the fourth quarter of last year.

Customers are also buying a greater percentage of lower-margin products, Chief Financial Officer Eugene Castagna said during a conference call with analysts.

Bed Bath is now spending money on a new e-commerce distribution center, a new data center and a new website and some of the expenses came earlier than previously expected.

The company currently sees the incremental operating costs associated with these major initiatives to be about 9 cents a share, occurring primarily in the second half of fiscal 2012.

Shares in the retailer had risen 27.1 percent this year through Wednesday afternoon, outperforming the 19.3 percent increase for the Standard & Poor's retail index .RLX, as shoppers have been more willing to spend on their homes.

Bed Bath shares fell 11 percent to $65.80 in extended trading on Wednesday after issuing its outlook, down from their $73.67 close in regular trading. The stock hit its highest level ever on Tuesday, closing at $75.84.

The retailer, which has stores in the United States, Puerto Rico and Canada, sees earnings of about 97 cents a share to $1.03 a share in the fiscal second quarter. Analysts on average were looking for a profit of $1.08 a share in the period, according to Thomson Reuters I/B/E/S.

SPENDING SPREE

E-commerce is not the only area where Bed Bath is investing.

The company has also been on an acquisition spree. It recently agreed to buy smaller rival Cost Plus Inc CPWM.O for about $495 million in cash, giving Bed Bath access to new markets, customers and more unique products.

On Wednesday, Bed Bath said its second-quarter outlook excluded Cost Plus as the deal had not yet been completed.

If the deal is completed by the second quarter, it would cut earnings by several cents a share in the second quarter and increase earnings slightly in the second half of the year, the company said.

Bed Bath also said this month it bought textile distributor Linen Holdings LLC for about $105 million cash to boost its sourcing capabilities and gain access to new customers.

Bed Bath posted earnings of $206.8 million, or 89 cents a share, for its fiscal first quarter that ended May 26, compared with $180.6 million, or 72 cents a share, a year earlier.

Analysts on average had forecast 84 cents a share.

Sales rose 5.2 percent to $2.22 billion, compared with the average analyst estimate of $2.25 billion.

(Reporting By Dhanya Skariachan; Editing by Bernard Orr and Tim Dobbyn)

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