Bed Bath & Beyond’s Earnings Preview: Expect Slow Revenue Growth & Weak Margins
Bed Bath & Beyond (NASDAQ:BBBY) will release its Q4 fiscal 2014 earnings on April 8th (fiscal year ends in February). We expect the company to see slow revenue growth due to the frail housing recovery and intense competition from online retailers. We also expect gross margins to face downward pressure, as coupon redemption rates likely remained high. Moreover, higher operatiing costs associated with technology upgrades might have a negative impact on Bed Bath & Beyond’s profit growth.
During the September-November quarter, the overall home furnishings market registered robust growth, as sales of new and existing homes accelerated. However, this trend did not sustain in the December-February quarter. U.S. furniture and home furnishings store sales saw a 1% drop, as the housing market displayed unstable signs of recovery. [1] We expect this slowdown to impact Bed Bath & Beyond’s revenue growth for Q4 fiscal 2014.
Increases in the coupon redemption rate and average coupon amount weighed heavily on the retailer’s gross margins in Q3 fiscal 2014. We believe this trend continued in the fourth quarter as well. We also believe the company continued to increase its investment in new technology to move towards an omni-channel model, which will drive its operating costs higher.
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Our price estimate for Bed Bath & Beyond stands at $79.26, which is just over the current market price.
See our complete analysis for Bed Bath & Beyond
Slow Revenue Growth Due to Weak Housing Recovery
Due to the nature of its business, Bed Bath & Beyond’s performance is affected by the broader trends in the housing market. During the December-February quarter, the number of new residential projects undertaken saw an overall decline. This number reduced from one million in December 2014, to fewer than 900,000 in February 2015. [2]
The NAHB/Wells Fargo Housing Market Index (HMI), which measures the overall sentiment of the housing market by surveying home builders, declined more than 5% during this quarter. [3]
Builder confidence index saw a three-point drop overall, during the December-February time period. However, it continued to remain at healthy levels despite the decline. [4]
These numbers provide an insight into the unstable recovery in the housing markets, as fewer people are willing to invest in building new homes and the overall sentiment in the housing market is seeing a decline. Therefore, we believe that Bed Bath & Beyond would have struggled to attract customers during the fourth quarter.
We also believe the harsh weather conditions experienced in the U.S. over the December-February period would have resulted in lower foot traffic in retail stores. However, incremental revenues from the progress on the omni-channel strategy should have had a marginal offsetting impact.
We Expect Margins to Face Pressure
We believe that margins will remain a concern for Bed Bath & Beyond due to increased coupon redemptions, as well as higher operatiing costs due to increasing technology expenses.
During the September-November quarter, the increase in coupon redemptions resulted in gross margin falling by 80 basis points on a year-over-year basis. [5] We anticipate that coupon redemption rates remained high in Q4 as well, as consumers continued to spend cautiously in a recovering economy.
As Bed Bath & Beyond continues to implement and expand its omni-channel model, operatiing costs are expected to rise. In Q3 fiscal 2014 earnings call, the retailer stated that it anticipates higher technology costs, both in dollar terms as well as in the percentage of net sales in conjunction with the technology investments. [5] While there may be short term impact on margins, these investments are necessary to adapt to changing retail environment.
Bed Bath & Beyond’s operating margin declined by 110 basis points in Q3 fiscal 2014. We believe the company would have registered a similar decline in the fourth quarter as well. [6]
One of the bigger selling points of Bed Bath & Beyond with its customers is its easy returns and exchange policy. In March 2015, the company revised its returns policy for customers, making them stricter. [7] This can be looked at as a measure to counter weakening margins, which further substantiates our expectation for Q4 fiscal 2014 results.
Notes:- US Furniture and Home Furnishings Store Sales, YCharts [↩]
- United States Housing Starts, Trading Economics [↩]
- United States NAHB Housing Market Index, Trading Economics [↩]
- Builder Confidence Slightly Lower in February on Harsh Weather Conditions, National Association of Home Builders [↩]
- Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩] [↩]
- Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
- Bed Bath & Beyond alters generous return policy, CNBC [↩]