Bed Bath & Beyond Earnings Preview: Housing Slowdown To Weigh On Results, But Pent-Up Demand Could Help

Home goods retailer Bed Bath & Beyond (NASDAQ:BBBY) is scheduled to release its Q1 fiscal 2014 earnings on June 25 after market close. Following two consecutive quarters of earnings misses, the retailer’s results are expected to remain under pressure in this quarter as well. During its Q4 earnings call, the company slashed its EPS guidance for the first quarter to $0.92-$0.96. If Bed Bath & Beyond is able to meet its guidance, it will reflect an improvement of 2-2.5% over its Q1 fiscal 2013 earnings per share. Analysts expect the retailer’s earnings per share to be around $0.95 and revenues to be around $2.69 billion, which would be an increase of 2.9% year-over-year.

Being a home goods retailer, Bed Bath & Beyond’s sales are somewhat dependent on the housing environment in the U.S. While the housing recovery gained some momentum over the last year, it has slowed down lately due to rising prices and mortgage rates. This has discouraged buyers from spending on home decor and improvement products, which is also evident from Home Depot‘s (NYSE:HD) and Lowe’s (NYSE:LOW) recent results. This trend is likely to have a negative impact on Bed Bath & Beyond’s results as well. On the other hand, significant pent-up demand due to the harsh winter season might have had a positive impact on the retailer’s store traffic during the recently concluded quarter. It will be interesting to see that which of the two aforementioned factors had a stronger impact on the retailer’s Q1 fiscal 2014 results.

Our price estimate for Bed Bath & Beyond stands at $78.80, implying a premium of over 25% to the market price.

See our complete analysis for Bed Bath & Beyond

Housing Slowdown Will Impact Sales

Sales of existing homes in the U.S. have declined of late, from a seasonally adjusted annual rate (SAAR) of 4.87 million in December to 4.6 million in February, and 4.59 million in March. While the month-over-month decline in March 2014 wasn’t significant, existing homes sales during the month were 7.5% lower than what they were in the same quarter last year. During the month, new home sales also fell to 4.07 million from 4.37 million in February. Although sales of new and existing homes somewhat rebounded in April, they remained well below last year’s levels. Existing home sales in April 2014 represented 7% year-over-year decline and new home sales were 3% below what they were in April 2013. ^[1] The slowing housing recovery was also visible in May, when housing starts across the U.S. went down by 6.5% to a seasonally adjusted annual rate of about 1 million units. ^[2]

The average interest rate on a 30-year fixed-rate mortgage this year was around 4.36% through April, up from 3.45% last year in April. ^[3] Lending rates have been on a rise since last year, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. High mortgage prices, coupled with high housing rates, are hurting consumer affordability, which is impacting sales of retailers such as Home Depot, Lowe’s, and Bed Bath & Beyond.

However, Pent-Up Demand Can Help

After a slump in the first three months of 2014, sales trends in the U.S. revived notably in April and continued to improve in May. The U.S. witnessed a harsh winter season this year, which kept many buyers away from stores. This resulted in significant pent-up demand that eventually lifted retail sales growth in April. The group of eight retailers tracked by Thompson Reuters reported a 6.4% rise in sales during the month. According to consulting firm AlexPartners, a lot of pent-up demand was unmet even after strong sales in April, which boosted the results of several retailers in May. While Bed Bath & Beyond isn’t one of the retailers tracked by Thompson Reuters, we expect it to have enjoyed the impact of pent-up demand. ^[4]

However, the surge due to significant pent-up demand was accompanied by heavy discounting across the U.S. retail industry. As a result, the redemption of Bed Bath & Beyond’s discount coupons could have gone up towards the latter half of the quarter, which would have negatively impacted its same store sales and gross margins. Nevertheless, the retailer’s sales will still be better in comparison to the early part of the year, when its sales were bogged down by low store traffic on account of relentless weather.

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1. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
2. Housing Production Falls 6.5 Percent in May, National Association Of Home Builders, Jun 17 2014 [↩]
3. U.S. existing-home sales fall slightly, The Wall Street Journal, Apr 2014 [↩]
4. Weather, Discounts Boost May Retail Sales, The Wall Street Journal, Jun 5 2014 [↩]