Bed Bath & Beyond Falls On Sales Miss, But Profit Decline Is A Bigger Problem

Bed Bath & Beyond‘s (NASDAQ:BBBY) shares fell by close to 5% in after-hours trading, after its Q3 fiscal 2014 revenues missed the consensus estimate. The company reported 3% rise in its revenues to $2.94 billion, while analysts expected the figure to be around $2.97 billion. Bed Bath & Beyond’s comparable sales grew by just 1.7%, missing its own expectations of 2%-3% growth. For the full year, the retailer slashed its revenue growth guidance to 2.4%-3.6%, down from its earlier guidance of 3.4%-3.9%. It also lowered its comparable sales growth outlook from 2.6%-3.1% to 2.4%-2.7%.

Bed Bath & Beyond’s sales are mainly dependent on the housing environment in the U.S., given that it is the largest retailer of home goods in the country. While housing recovery was steady through most of 2014, it slowed down significantly in November, which appears to be the reason why Bed Bath & Beyond’s growth in the quarter was weaker than expected. However, in the context of uneven housing recovery and extremely promotional environment, 3% is a good enough growth figure and a narrow revenue miss should not worry investors. In fact, the Builder Confidence Index over the past several months has been very strong, indicating a growing belief among the builder community that home sales will rise notably going forward. This should please Bed Bath & Beyond, who will look to attract these potential home buyers with its expansive product variety and enticing shopping experience.

Our price estimate for Bed Bath & Beyond stands at $75, which is just below the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Bed Bath & Beyond

Bed Bath & Beyond said in its earnings call that customers are increasingly using its omni-channel services through more than one platform. They are purchasing similar products from physical stores as well as websites and mobile apps. During the quarter, comparable sales through Bed Bath & Beyond’s customer facing, online websites and mobile applications increased a very strong 40%, while comparable store sales remained flat. The company’s online channel, though small at the moment, has shown tremendous promise, and it will remain one of the key focus areas in the near-medium term. While robust online growth will assist the home goods retailer’s revenue growth, progressive omni-channel development should result in incremental store sales as well. 

Bed Bath & Beyond’s Q3 net income declined 5% to $225.4 million or $1.23 per share, but remained ahead of the consensus estimate of $1.19 per share. The company even raised its full year EPS projections slightly to $5.05-$5.09, from its earlier guidance of $5.00-$5.08. However, shrinking gross margins and rising expenses remain a concern for the company’s bottomline growth. During the quarter, the retailer’s gross margins declined 80 basis points year over year to 38.4%, driven by an increase in the coupon redemption rate and higher direct-to-consumer shipping expenses. In the current economic environment, U.S. shoppers are exploiting all the available options to get the best possible price. They are making more purchases online where products are usually cheaper, and increasingly using discount coupons whenever possible, including at Bed Bath & Beyond. Moreover, Bed Bath & Beyond has provided an additional incentive to its buyers to shop online, with the reduction of its free shipping threshold to $49. ^[1] These factors are impacting the company’s gross margins.

During the third quarter, Bed Bath & Beyond’s SG&A expenses as percentage of revenues increased 30 basis points to 26.4%. The primary driver for the increase was the rise in technology and advertising expenses. In line with its plans to develop a strong omni-channel platform, the company continued to invest in various technologies, that pushed its technology expenses and related deprecation rate 40 basis points higher. Overall, Bed Bath & Beyond’s operating margins fell 110 basis points year over year to 12.0%. The company may have performed better than expected in Q3 in terms of profits, but it does not reflect strong bottomline performance. Although Bed Bath & Beyond’s increasing SG&A expenses on account of omni-channel investments may eventually help its topline growth, it needs to find a way to operate with fewer discounts and counter the impact of online shift.

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1. Bed Bath & Beyond Q3 fiscal 2014 earnings transcript, Jan 8 2015 [↩]