Morgan Stanley Reviews Bed Bath & Beyond Earnings

In a report published Thursday, Morgan Stanley analyst Simeon Gutman maintained an Underweight rating on

, while reducing the price target from $74 to $71, after the company reported soft 1Q earnings, exhibiting pressure on its profits. Bed Bath & Beyond reported its quarterly EPS at $0.93, a penny short of the consensus, despite a lower share count that benefited the figure by a few cents. Although EBIT was down 9 percent y/y, the company was able to report flat y/y EPS due to share buybacks. EBIT margins contracted 135 bps. Comps increased 2.2 percent, "implying 280 bps of sequential deceleration on a two year basis," analyst Simeon Gutman said. Cash flow from operations declined 18 percent y/y, after having declined by 31 percent in Q1 last year. Free cash flow was down about 30 percent y/y to $82 million. "If this trend continues, coupled with a difficult profit picture, it will make it increasingly challenging for BBBY to hold flat to slightly positive EPS growth. Declining core FCF will eventually catch up to the business and potentially pressure share repurchase activity," Gutman pointed out. In the report Morgan Stanley noted, "We think the market has been waiting for a sign of an EBIT margin inflection…With Q1 results, however, it is clear the business is not at the inflection point just yet." The results indicate that the company's "profitability trends are worsening." Gross margins contracted by ~70 bps y/y in Q1, marking the 14th consecutive quarter of margin declines. "Most of the decline in Q1 was a result of increased promotions, coupons, & higher shipping costs," Gutman added.