Bed Bath & Beyond’s Earnings Preview: Expect Steady Topline Growth & Weak Margins

Bed Bath & Beyond (NASDAQ:BBBY) is scheduled to release its Q3 fiscal 2014 earnings on January 8th. (Fiscal years end with February.)   While its margins are likely to be a concern yet again, we expect the retailer to report steady topline growth on the back of a housing market recovery. During the September – November quarter, the overall home furnishing market registered robust growth, as sales of new and existing homes accelerated. Since Bed Bath & Beyond is the strongest home goods retailer in the market, we expect its revenue growth to have outpaced the industry growth in the aforementioned period. In fact, the retailer had recorded 4.3% growth in its overall revenues in the June-August quarter, while the market growth was slower than 3%.

During the second quarter of fiscal 2014, the coupon redemption rate and average coupon amount at Bed Bath & Beyond rose, even  as buyers continued to exhibit cautious spending behavior. This weighed heavily on the retailer’s gross margins, a factor that was likely an issue in the following quarter as well. Also, the company stated that it is planning to ramp up investments in the omni-channel arena, to gain a competitive advantage over the pure play online retailer, Amazon (NASDAQ:AMZN). In fact, Bed Bath & Beyond’s SG&A rate had gone up 40 basis points in Q2 on account of higher investments, and the company might report similar increase yet again. This can put a downward pressure on its profits.

Our price estimate for Bed Bath & Beyond stands at $75, which is just below the current market price.

See our complete analysis for Bed Bath & Beyond

Topline: Market Grows With Housing Recovery

Home goods retailers are impacted by the number of house sales, as new occupants tend to spend more on home improvement, decor and furnishing items. Following the first quarter, house sales in the U.S. gained some steam in the latter half of 2014, with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.05 million in August, 5.18 million in September and 5.26 million in October. The figure for October was the highest sales figure in over a year, and almost 3% above the previous years’s level. Although purchases of previously owned homes slowed down notably in November, declining 6.1% to 4.93 million, the overall quarter still looked good. ^[1]

Sales of New homes were at 455,000 in September and 458,000 in October, and both these figures were well above the adjusted figure of 430,000 for 2013. ^[2] While November was slow for new home sales as well, as they declined 1.6% to 438,000 units, builders continued to increase inventory displaying conitnued confidence in the market. ^[3]

The builder confidence index soared to a nine-year high of 59 in September, before easing back to 54 in October. ^{[4] [5]} Interestingly, builder confidence bounced back to 58 in November, even though home sales eased off a bit during the month. ^[6] It must be noted that a reading of over 50 is considered a sign of belief among builders that new home sales will rise going forward and hence, the November slowdown seems a temporary one.

In fact, the home furnishing market growth remained steady in November. The overall “furniture and home furnishing” market had grown 2.1% during the month, which was faster than its growth in the preceding month. Overall, the market grew by 1.9% during the quarter, which suggests that Bed Bath & Beyond likely registered revenue growth in excess of 3.0%.  ((Furniture & Home Furnishing Stores, United States Census Bureau))

Bottomline: Heavy Discounting & Increase In Expenses Might Have Continued

During the second quarter of 2014, Bed Bath & Beyond’s gross margins had declined by 90 basis points, due to higher coupon usage and a higher free shipping threshold. However, the impact of increased coupon usage was more severe, considering the fact that the retailer’s margins in Q2 were 30 basis points below its margins in Q1, and both quarters had the same free shipping threshold. This indicates that buyers may be increasing relying on discount coupons to shop at Bed Bath & Beyond, and they might have accelerated coupon usage at the start of the holiday season. Therefore, we have sufficient reasons to believe that coupon redemption rate and average coupon amount would have gone up in the third quarter.

Since Bed Bath & Beyond planned to be aggressive in the deployment of its omni-channel initiatives, we believe that SG&A as a percent of revenue likely rose during the quarter. In fact, the company had said in its previous earnings call that incremental expenses related to its initiatives will increase overall costs as percentage of revenues in the short term. Due to weaker gross margins and higher expenses, Bed Bath & Beyond’s operating margins declined by 130 basis points in Q2 fiscal 2014, and we expect its margins fell by a similar or a higher amount in the third quarter of fiscal 2014.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Housing in Uneven Recovery as Home Sales Decrease: Economy, Bloomberg, Dec 23 2014 [↩]
2. Housing Data, National Association of Home Builders [↩]
3. New Home Sales Fall 1.6% in November, NAHB, Dec 23 2014 [↩]
4. Builder Confidence Rises Two Points In August, NAHB, Aug 18 2014 [↩]
5. Builder Confidence Hits Highest Level Since November of 2005, NAHB, Sept 17 2014 [↩]
6. Builder Confidence Rises Four Points in November, NAHB, November 18 2014 [↩]