Bed Bath and Beyond reported 1Q earnings that were drastically below what were already low expectations heading into the quarter.  The company reported EPS of $0.53, which was well-below consensus of $0.66, and the stock declined 12% on Friday.

There have been some contrarians that have come out in defense of the company, arguing that Bed Bath & Beyond generates significant free cash flow and returns much of that in the form of share buybacks and dividends.

But here's why that argument is misguided. This sort of defense works for a company like Staples, where profitability is stable, and net income is flat. This is not the case for Bed Bath & Beyond, which has deteriorating fundamentals across the board. Free cash flow will eventually follow, meaning that share buybacks and repurchases are not sustainable.

To show this, I'll first walk through the deterioration in fundamentals. I'll then connect this to free cash flow and show how that hurts the free cash flow outlook going forward. Finally I'll address what I see as the bull case is for the stock.

Over the last year, Bed Bath & Beyond has declined 12% vs the S&P 500's 5% gain. I detailed the bear case for Bed Bath and Beyond back in mid February, and the bear case has largely played out since that time. Going forward, a key issue will rest on whether BBBY will be able to re-accelerate its top line growth, and how quickly.

Last week, I wrote about Bed Bath & Beyond's 1Q15 results and about some concerns surrounding the company's guidance for the year. Specifically, I wrote that Bed Bath & Beyond may miss its top-line guidance due to difficult comparisons. In response, some have noted that online sales should account for that 2-3% growth; if one breaks out comps by online vs. retail, the company would only need brick and mortar to break even, as it did last quarter, and for online to contribute another 2-3% to comps. 

Bed Bath and Beyond reported 1Q15 results that were slightly below consensus expectations. Revenue once again grew at the low end of expectations and operating margin declined at a greater rate than expected. As I wrote in the past, Bed Bath & Beyond's bear thesis has largely played out as the company has suffered from increasing competition. Moving forward, it's difficult to see what might provide a boost to their top-line revenue or reverse the profitability declines. 

BBBY reports 1Q15 results after market close on Wednesday, June 24th. Recall that I outlined the bear case in February, which has thus far largely played out. Here's what professional investors are expecting.

Bed Bath and Beyond reported 4Q (ending February) yesterday after market close that were in line with consensus estimates, but were worse than they appeared. Primarily, sales were below expectations, and profitability (operating margin) continues to be pressured. Additionally, management's guidance points to just moderate sales growth and continued margin pressure in 2015. As I detailed in a prior post, Bed Bath & Beyond sales and earnings growth is slowing as competition heats up. Management's heavy share repurchases provide some downside protection, but the deteriorating fundamentals are likely to limit any share price appreciation moving forward. 

There's a bull case and a bear case for every stock. However, it's not always obvious what the arguments are on either side. In Bed Bath and Beyond's case, the bull thesis is readily apparent: a strong (debt free) balance sheet, high free cash flow generation, strong brand, ramping online sales, and low valuation. In this article, I'll detail the ugly, lesser-known bear argument, which could point to a stock in the low $60 range.