Q2 Earnings Preview: Bed, Bath & Beyond Likely Had Another Sluggish Quarter As Industry Growth Remains Soft
Bed Bath & Beyond (NASDAQ:BBBY) is expected to release its Q2 fiscal 2015 earnings on September 24th [1]. In the last three months, the company’s stock price slumped by 15% compared to the 6% decline in the Nasdaq composite index, during the same period. The decline started after the company’s Q1 earnings, when it announced a sharply lower net profit margin of 5.8%, 120 basis points lower than the year-ago period’s number. The company also lowered its expectations for the rest of the fiscal year and said that earnings growth is likely to be relatively flat.
We believe that the trend seen in Q1 likely continued into Q2, keeping sales growth low. Movement in industry sales growth in the U.S. also indicates the same, as discussed below. We have a price estimate of $70 for Bed, Bath & Beyond’s shares, which is about 15% above the current market price.
See our complete analysis for Bed Bath & Beyond
Retail Sales Growth Remained Low
Retail Sales growth in the United States stayed in low single digits this quarter, much like the previous three months, as indicated in the figure below [2]. BBBY’s sales growth tends to follow a similar path to that of the overall industry sales.
In Q1, the company’s sales increased by 3.1% on an year-over-year basis, with a majority of the sales coming from stores that had been open for at least an year. While sales growth in stores likely remained in the same region this quarter, we believe the company’s online sales continued to outpace the overall growth rate, owing its investments in the omni-channel model. However, the rapid expansion in online sales seen in the recent quarters, i.e. between 30% and 40%, might not be sustainable in the long run.
The Need To Build A Competitive Advantage Over Online Retailers
In addition to growing its online presence, we think that BBBY should also focus on finding ways to draw customers to its stores and build a competitive advantage over its online rivals. For example, it could follow Best Buy’s (NYSE:BBY) model of creating experience centers within stores to make the customer journey much more fulfilling compared to that during an online purchase. Moreover, customers might add a few more things to their carts when they visit a store in addition to the actual planned purchase.
While the solution might not be as obvious because of the difference in product categories that the two company’s sell (i.e. home furnishing vs. electronics), we believe an opportunity to emulate the model certainly exists. In the long-run, such a competitive advantage will help the company stay away from price wars, which is already weighing on its margins. For example, in Q1 fiscal 2015, BBBY’s gross margin declined by 70 basis points, falling to 38.1%, from 38.8% in the same period an year ago. The primary cause for the decline was an increased level of coupon redemption, which the company has been using to tackle online retailers like Amazon (NASDAQ:AMZN).
It is quite likely that the margin pressure has continued into Q2, considering that BBBY hasn’t found a way out yet, other than competing on price. However, we hope the company’s management realizes the need for a “plan B” before much more time passes.
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