Bed Bath & Beyond Inc. reported earnings this evening, which disappointed most investors. The stock fell 4.4% in after hours trading to $65.75 a share. The miss was a result of a recent acqusition by BBBY. Bed Bath & Beyond reported 2Q EPS of $0.98 versus $0.93 last year. Management noted that, excluding the impact from acquisitions, EPS would have been at the higher-end of guidance of $0.97-$1.03.

Bed Bath & Beyond earnings model from Goldman Sachs

Net income decreased 2.2% to $224.3 million, compared to $229.4 million last year.

Gross margin decreased 127 basis points to 39.83%, of sales. The decline was due primarily to higher couponing (redemptions and average amount increased), a continued mix shift to lower margin products and the inclusion of Cost Plus in results, which has lower gross margins.

Same-store sales increased 3.5%, versus 5.6% last year. Total sales increased 12.1% to $2.59 billion from $2.31 billion last year. Management noted that of this increase, 57% was due to the acquisitions, 29% due to the comp increase and the remaining 14% attributable to new stores.

Management maintained full year EPS guidance for a high-single to low-double digit percentage increase, with comps of 2-4%.

Total inventory increased 14.8% $2.43 billion at the end of 2Q, versus the 12.1% increase in 2Q sales. On a per square foot basis, inventories decreased 2.2%.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) ended the quarter with $908.7 million in cash/short term investments vs. $1.74 billion last year. The decrease was primarily due to the two acquisitions, which were financed with cash on-hand. Core cash holdings were $744.5 million, versus $1.02 billion last year, while short-term investments were $164.3 million versus $724.9 million last year. Long-term investments were $82.5 million, versus $113.7 million last year.

Capital expenditures totaled $87.3 million in 2Q, versus $56.5 million last year.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) repurchased shares totaling $199 million in 2Q (3.1 million shares). Approximately $414 million remains under the current authorization, which the company still expects to complete by year-end.

During 2Q, BBBY opened 5 new Bed Bath & Beyond Inc. (NASDAQ:BBBY) stores, 3 buybuy BABY stores, 2 Harmon stores and 1 Christmas Tree Shoppe, ending the period with a total of 1,449 locations.

Goldman Sachs is raising its forecasts for Bed Bath & Beyond Inc. (NASDAQ:BBBY).

Goldman Research notes:

We our raising our EPS estimates to reflect the impact of the CPWM acquisition; 2012 goes to $4.80 from $4.66, 2013 goes to $5.18 from $5.05, and 2014 goes to $5.77 from $5.60. The changes reflect EBIT from the deal, lower interest income (as Bed Bath & Beyond Inc. paid for the asset with cash on hand), and a nominal change in assumed buyback prices.
Beyond the quarter and the realization of short-term accretion, we see more of a mixed outlook. While 2Q forecasts assume no improvement, Bed Bath & Beyond Inc. has lost share,  with online being a potential driver. And, it now operates more concepts than most firms in our coverage, including Bed Bath & Beyond Inc., Buy Buy Baby, Christmas Tree Shops, and Cost Plus, with little transparency to sales and profit drivers. As an offset, a rollout of CPWM stores-within-stores could stimulate BBBY traffic at
reasonable margins, though the timing is uncertain.

Valuation
Our 12-month price target moves to $77 from $74 based on our estimate hikes. Our price target is based on risk/reward (relative P/E).

(Disclosure: No position in any securities mentioned in this article)