Bed Bath & Beyond Shares Fall On Lower-Than-Expected Q4 Revenues & Weak Margins

Bed Bath & Beyond’s shares fell by close to 3% in after-hours trading after its Q4 fiscal 2014 revenues missed consensus estimates. The company reported a 4.2% increase in revenues to $3.33 billion, while the consensus estimate was $3.37 billion. Bed Bath & Beyond’s comparable sales grew by approximately 3.7%, missing its own guidance of 4-5% growth. For the full year, revenue growth was 3.3%. This was in line with the reduced revenue guidance the company  issued at the end of fiscal Q3 2014. ^[1]

Due to the nature of its business, Bed Bath & Beyond’s performance is affected by the broader trends in the housing market. The housing market witnessed a slowdown over this quarter which contributed to slower growth in revenues. New residential projects undertaken reduced and the NAHB/Wells Fargo Housing Market Index also witnessed a decline. This, accompanied with West Coast port disruptions and extreme weather conditions, contributed to slow revenue growth for Bed Bath & Beyond in the fourth quarter of fiscal 2014. Bearing these factors in mind, a 4.2% increase in revenues can be considered to be modest growth for Bed Bath & Beyond. Hence, this narrow miss in revenues should not be a huge concern for investors.

Our price estimate for Bed Bath & Beyond stands at $79.26, which is higher than 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

Through the year, Bed Bath & Beyond spent increasingly on enhancing its omni-channel retail model. This was an important strategic move to compete with online retailers that offer products at greater convenience and discounts to customers. The company discussed the success of these efforts in its earnings call for Q4 fiscal 2014. Comparable sales consummated through customer facing websites and mobile applications grew in excess of 40%, during this quarter.  The number of digital orders placed via mobile devices doubled on a year-over-year basis in fiscal 2014. The company also noted strong trends in the number of reserve online, pick up in store transactions.

From these figures, it is evident that the company’s omni-channel model is picking up momentum. The company plans to continue spending on this initiative through fiscal 2015. While this may continue to impact margins in the short term, these investments are necessary to adapt to the changing retail environment. In the long term, the progressive omni-channel development will assist the home goods retailer’s revenue growth and should result in incremental store sales as well.

Bed Bath & Beyond’s Q4 fiscal 2014 net earnings declined 3.7% to $321.1 million. However, due to 11.8 million shares being repurchased in Q4 fiscal 2014, basic net earnings per share increased by approximately 13% to $1.83. This beat EPS consensus of $1.80. However, shrinking gross margins and rising expenses remain a concern for the company’s bottom-line growth. During the quarter, the retailer’s gross margins declined 80 basis points year-over-year to 39.7% due to an increase in coupon expense, driven by a higher redemption rate and partially offset by a small decrease in average coupon amount. Through the year, with the given economic environment, U.S. shoppers are exploiting all 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.

During the fourth quarter of fiscal 2014, year-over-year SG&A expenses as a percentage of revenues reduced by 20 basis points to 23.8%. The primary driver in the decrease was a reduction in occupancy expenses. Overall, Bed Bath & Beyond’s operating margins fell by approximately 50 basis points year-over-year to 15.9%, in line with the movement of gross margins and SG&A expenses.

Moving forward, as the housing recovery continues to look weak, Bed Bath & Beyond anticipates a 2-3% increase in comparable sales for both the first quarter and full fiscal 2015. It also suggests that net sales will increase about 70 basis points above comparable sales in the first quarter, and by 90 basis points above comparable sales in the full year. ^[2] Expenses related to enhancement of the omni-channel retail model will also continue to persist. We expect this to continue to put pressure on gross margins in Q1 fiscal 2015.

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1. Bed Bath & Beyond Inc. Reports Results For Fiscal 2014 Fourth Quarter And Full Year, Bed Bath & Beyond [↩]
2. Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q4 2014Results – Earnings Call Transcript, Seeking Alpha [↩]