Why did Bed Bath & Beyond drop about 20%?

Bed Bath & Beyond (BBBY) is more or less a household name now. I can't remember the last time I didn't receive a twenty percent off one item coupon in the mail. Almost every other week there seems to be another coupon from BBBY.

In the last three years, Bed Bath & Beyond has increased gross sales by 41% from 2009 to 2010, 32% from 2010 to 2011, and 25% from 2011 to 2012. Net profits in 2009, 2010, 2011, and 2012 were approximately $425M, $600M, $791M, and $989M. In addition, the company had been repurchasing stock since 2004! You can imagine the surprise I had on my face when I saw that the stock dropped by about 24% from about $76 a share to about $57 a share. 

We had to figure out why the stock dropped so much in one day. Was it because it had missed earnings? What about the fact that people were just taking profits? How can the stock just tank so much in a couple days? This is not a penny stock. Bed Bath & Beyond has to be doing well; otherwise how would they be able to purchase Cost Plus Inc a publicly traded company for about $105M. 

After careful investigation, it appears that the general consensus in Wall Street is that the company's Q2 earnings guidance was below the Street's. For that reason people panicked. The company lowered its Q2 guidance based on the fact that the previous calculation did not factor in information related to the Cost Plus Inc. acquisition. Integration and transaction costs will negatively affect Q2 earnings.

To me this from a technical and fundamental point of view looks like a quick way to make a profit by going long. There is a gap we need to fill at about $66 and support is just at the bottom blue line. We see our first test of resistance at just below $64 a share.

Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.

Disclosure: I am long BBBY.

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