Home goods retailer Bed Bath & Beyond (BBBY) released earnings last week, coming in on the higher end of the range given the first week of December. Total sales were down just under 1% looking at quarterly comparisons, and same-store comps clocked in down more than 5%. In addition to the standard poor macro environment, Bed Bath can point to the liquidation of rival retailer Linens ‘n Things as depressing results. Taken in that context, the top-line results were solid, although net earnings are still down substantially QoQ (-35%) and on an ongoing fiscal year basis (-24%) despite share count shrinking marginally.

Bed Bath’s outlook continues to be grim, with next quarter’s EPS estimates anticipating another -35% decline in QoQ EPS amid a mid-single digit decline in same-store comp sales. Including reclassified long-term investments in with cash, BBBY trades for 16x the low-end of this year’s earnings. At face value, that’s a very reasonable multiple, but earnings have been dropping of late and a major risk now is that trailing multiples bear no representation to the future of the business. For what they’re worth, consensus estimates put next fiscal year’s earnings as being flat to slightly higher at $1.57; this could prove optimistic, although the disappearance of a major competitor will help. Still, I think a lower earnings range of $1.30 to $1.40 is more accurate to work with, and that implies a forward valuation around 18x earnings net of cash.

Operating cash flow for the fiscal year remains positive at $100 million, although that’s down sharply from the comparable period last year. The full year results will be much more telling to see how Bed Bath managed and worked through inventories in Q4. Free cash flow could actually end up higher year-over-year because CapEx has been cut from 2.2x depreciation last fiscal year to 1.25x so far this year. Additionally, total book value has increased more than 15% in the last year, and after accounting for the share repurchase effect, book value per share is up 18% YoY – impressive, to say the least.

Bed Bath’s earnings call was relatively non-eventful because they do not have a public Q&A. As would be expected, sales are slow and margins are down somewhat. Less capital spending is planned, but the emphasis is on striking the right balance between preserving the strong balance sheet and optimal long-term positioning. And, as a side note, about 20% of the auction-rate securities were redeemed at par during the quarter, although more than $200 million are still outstanding.

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