Earnings Preview: Bed Bath & Beyond — Margins Will Remain Under Pressure Due To Increasing Costs

Bed Bath & Beyond (NASDAQ:BBBY) is slated to release its Q1 fiscal 2015 earnings on June 24th after market close, and we expect its profits to remain under pressure once again.  (Fiscal years end with February.) The company’s net earnings declined by over 3% in Q4 fiscal 2014 due to increased coupon redemption, higher investments in technology, and the frail housing recovery. For Q1 fiscal 2015, analysts expect the retailer’s earnings per share to come in at $0.94 and hence remain flat year over year. It may be worth noting that Bed Bath & Beyond failed to meet the consensus EPS estimate in Q4 fiscal 2014, which may happen again this quarter.

In the December to February quarter, U.S. furniture and home furnishings store sales saw a 1% drop, as the housing market displayed unstable signs of recovery. However, this figure’s downward trend ceased and it remained relatively flat in the March to May quarter. ^[1] Overall, the housing market has seen signs of improvement over this time period and we expect that this will give Bed Bath & Beyond’s top-line growth a slight push.

Increases in the coupon redemption rate and average coupon amount weighed heavily on the retailer’s gross margins in Q4 fiscal 2014. We believe this trend continued in the fourth quarter as well. The company also indicated its intention to continue investing in new technology to move towards an omni-channel model through fiscal 2015, which will drive its operating costs higher.

Our price estimate for Bed Bath & Beyond is $70.29, approximately in line with its current market price.

See our complete analysis for Bed Bath & Beyond here

Improving Housing Market Will Boost Revenue Growth

Due to the nature of its business, Bed Bath & Beyond’s performance is affected by the broader trends in the housing market. Between March and May, the number of new residential projects undertaken saw a rise, after declining through the December-February period. This number increased from 944,000 in March 2015 to over 1 million in May 2015. In April 2015, this number stood at over 1.3 million new projects undertaken, the highest level since 2008. ^[2] Though there was a decline between April and May, the housing starts statistic continues to remain at healthy levels signaling continued gradual recovery in the housing market. ^[3] New home sales between March and April increased 6.8% as they moved from 484,000 to 517,000. ^[4] The NAHB/Wells Fargo Housing Market Index (HMI), which measures the overall sentiment of the housing market by surveying home builders, also increased this quarter, moving from 52 index points in March 2015 to 54 index points in May 2015. ^[5]

Overall, these numbers provide insight that the recovery in the housing markets has picked up pace. More people are willing to invest in building new homes and the overall sentiment in the housing market is also slowly rising. As new home sales increase and people furnish their new homes, we anticipate that sales at Bed Bath & Beyond would witness a rise.

Bed Bath & Beyond is also continuing to make progress on its online and mobile channels. We expect that the incremental revenues from the omni-channel strategy also supported overall revenue growth in the to-be-reported quarter.

Increasing Costs Will Continue To Put Pressure On Margins 

Bed Bath & Beyond has recently faced intense pressure from online retailers. As the company continues to establish its own footing in the online retail space, it will have to offer increasingly attractive prices to customers to remain competitive with online giants such as Amazon (NASDAQ:AMZN). To be able to offer attractive prices, we expect that the retailer will have to switch its sales-mix to lower margin products. We anticipate that Bed Bath & Beyond’s coupon offering policy, which is one of the most attractive features that keeps customers coming back to the specialty home furnishings retailer, will continue to remain aggressive over this period. As a result of this, we expect Bed Bath & Beyond saw high coupon redemption rates as well as high average coupon rates in the quarter. As a result, we believe that maintaining this policy to increase sales weighed on the retailer’s margins. Additionally, since Bed Bath & Beyond’s omni-channel model is still being implemented and expanded, the incremental costs from the expansion efforts will likwly continue to outrun the revenue growth derived from this channel, again putting pressure on the company’s margins over the quarter.

Overall, we expect SG&A costs and operating costs to witness a rise as the company streamlines its operations to support the omni-channel model. We anticipate that the expected increase in revenues will be offset by the increasing costs and cause margins to remain relatively flat over Q1 fiscal 2015.

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

1. US Furniture and Home Furnishings Store Sales, YCharts [↩]
2. United States Housing Starts, Trading Economics [↩]
3. Housing Starts Fall as U.S. Single-Family Projects Decline, Bloomberg [↩]
4. United States New Home Sales, Trading Economics [↩]
5. United States NAHB Housing Market Index, Trading Economics [↩]