In the face of a poor consumer environment, Bed Bath & Beyond (BBBY) released earnings last week that topped consensus on both the top and bottom lines. I’ve been behind this name since early January, because it is one of the best retail plays in the market, along with Wal-Mart (WMT).

Although earnings were down year-over-year on lower gross margins and the lack of leverage from comps (which came in at just 0.8%), core free cash flow remained strong at $70 million thanks to a conservative pace at rolling out new stores. Management has said they are taking the process of expanding the company’s store base - currently at 890 of the flagship Bed Bath & Beyond name, with 1300 targeted domestically - slowly to see if they can benefit from advantageous leasing opportunities that might arise in a soft environment. Given that the company used a higher degree of promotional activity in the most recent quarter, I’d much prefer to have Bed Bath pause its rapid expansion of the past several years and target a lesser number of higher-quality locations. This also is smart from a perspective of preserving liquidity; like many cash-rich companies, Bed Bath has auction-rate security (ARS) investments that have become illiquid to the tune of $320 million. While I don’t see this causing any problems several quarters out, it’s times like these in particular where it’s much better not to be in debt - just ask Linens ‘n Things (LnT)…

Speaking of which, LnT’s liquidation process is unfolding, and looks slated to be completed in this current quarter. While the merchandise liquidation of a competitor is going to either force Bed Bath to get nearly as promotional and take a gross margin hit or forego sales, it is certainly a longer-term positive for Bed Bath; I’ve seen estimates of marginal EPS accretion from capturing LnT business ranging from 21 cents to 50 cents. Applying a 14x earnings multiple to that range gives additional upside of 10-25%, and because most of that will be recorded as same-store comps business for Bed Bath, those numbers could look very good this time around next year.

I like BBBY because financially, it has been one of the most consistent profit generators of any company over the last decade. Now, its business is getting very choppy between consumer headwinds and competitor bankruptcies, so look for fluctuations - particularly poor comps numbers this summer that result in sell-offs - as an opportunity to get into this stock. While Q2 could be rocky and that could even spillover into part of Q3, I think the net/net is that LnT’s disappearance will be a huge catalyst to helping drive BBBY’s incremental profitability in otherwise soft times.

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