Bed Bath & Beyond: Q1 2015 Revenues Meet Estimates, Margins Lower Than Expected

Bed Bath & Beyond’s (NASDAQ:BBBY) shares fell by approximately 2.5% in after-hours trading after its Q1 fiscal 2015 EPS of $0.93 missed consensus estimates by $0.01. On a year-over-year basis, EPS at Bed Bath & Beyond remained completely flat. The company reported a 3% year-over-year increase in revenues to $2.74 billion, meeting consensus estimates. Comparable sales for the quarter increased by approximately 2.2%, or 2.5% on a constant currency basis. The company continues to expect the remainder of the fiscal year to be one of slow growth. It models net earnings per diluted share for the full year to lie between relatively flat to mid single digit percentage growth. ^[1]

We currently have a price estimate of $70.29 for Bed Bath & Beyond’s shares. However, this will be revised shortly in light of the recent earnings release.

See our complete analysis for Bed Bath & Beyond

Bed Bath & Beyond is affected by the overall trends in the housing market. In the March-May time period, which constitutes Q1 fiscal 2015 at Bed Bath & Beyond, the housing market saw improving trends which helped support net sales growth. 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.((United States Housing Starts, Trading Economics)) New home sales witnessed a 13% increase over this time period, moving from 484,000 in March to 546,000 in May. ((United States New Home Sales, Trading Economics)) The improving trends in the housing market bolstered sales growth at Bed Bath & Beyond in Q1 fiscal 2015.

Net sales increased by 3.1% over this quarter on a year-over-year basis.  Of this increase, 70%  was attributable to the increase in comparable sales, while the remainder 30% came from new store openings. Majority of the increase coming from comparable sales indicates that the most of the overall increase in sales is coming organically. This is good news for Bed Bath & Beyond. Over the past few quarters, the company has also been investing increasingly in its omni-channel model to stay competitive with its online counterparts in the retail industry, the results of which have now started to show. Though the company does not report sales by medium of execution, it did reveal that comparable sales through its online platforms (website and mobile application) increased by more than 35% over this quarter. Orders being placed through the mobile application continued to see the highest rate of growth, as it did in the previous quarter. ^[2]

On the other hand, margins at Bed Bath & Beyond continued to face pressure in Q1 fiscal 2015. The gross margin declined by 70 basis points, moving from 38.8% in Q1 fiscal 2014 to 38.1% in Q1 fiscal 2015.  The company identified increased coupon redemption, which it has been using to attract customers in light of price competition from online retailers like Amazon (NASDAQ:AMZN), as the reason why gross margins remained under pressure over the quarter. The impact of higher coupon redemption was partially offset by lower average coupon amount. Another factor that weighed down gross margins was the increase in net direct to customer shipping expenses, as the company expands its online model. ((Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha))

The company’s expansion of its omni-channel model entailed higher SG&A and technology expenses, weighing on the margins of the company over the course of the quarter. SG&A expenses as percentage of revenues increased by 60 basis points on a year-over-year basis. The increase was attributable to higher technology and digital advertising expenses related to the company’s omni-channel model expansion. ((Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha)) The higher SG&A expenses resulted in lower operating profit margin on a year-over-year basis. Operating profit margin in Q1 fiscal 2015 stood at 10%, 130 basis points lower than 11.3% in Q1 fiscal 2014.

Net margin also witnessed a decline on a year-over-year basis. This was primarily because the net interest expense in Q1 fiscal 2015 increased approximately 9x on a year-over-year basis. This increase is primarily related to interest on $1.5 billion of senior unsecured notes. ((Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha)) Net margin in Q1 fiscal 2015 stood at 5.8%, displaying a 120 basis point reduction on a year-over-year basis.

Overall, even as sales picked up some steam, increased expenses in technology expansion continued to put pressure on margins at Bed Bath & Beyond. The company expects to continue investing in this model over the remainder of the year as sales have been bolstered by the company’s online platforms. However, we do not expect the omni-channel model to achieve scale in the near future. The company is modeling EPS in the range of $1.18-$1.23 in Q2 fiscal 2015, which is relatively flat compared to the $1.17 EPS achieved in Q2 fiscal 2014. For the full year, the company expects EPS to be between relatively flat to seeing mid single digit percentage growth.  ((Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha))

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1. SEC Filings: Form 8-K, Bed Bath & Beyond [↩]
2. Bed Bath & Beyond’s (BBBY) CEO Steven Temares on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha [↩]