Key Takeaways From Bed Bath & Beyond’s Q2 Earnings

Bed Bath & Beyond (NASDAQ:BBBY) reported weaker than expected second quarter fiscal 2016 results as both its earnings and revenue missed analysts’ estimates for the second consecutive quarter this year. The company reported a marginal decline in revenue to $2.99 billion, which missed consensus estimates by $60 million. This decline was primarily due to a fall of approximately 1.2% year-over-year (y-o-y) in comparable sales, partially offset by 1% growth in non-comparable sales including new stores and the One Kings Lane acquisition (One Kings Lane will be excluded in the company’s comparable sales growth calculation until the anniversary of the purchase, i.e. June 2017).

This negative comparable sales growth in the second quarter was attributable to a decline in the number of transactions, partially offset by an increase in the average transaction amount. Comparable sales growth from the customer-facing digital channels grew in excess of 20% y-o-y in the second quarter, which made up for the weak traffic in stores. The company’s selling, general and administrative (SG&A) expenses increased 5.7% y-o-y to $836 million due to the inclusion of One Kings Lane. Bed Bath & Beyond posted diluted earnings of $1.11 per share, which declined 8% y-o-y, and also missed the consensus estimates by $0.06.

Margin Pressures Still Continue

Bed Bath & Beyond’s gross margin continued to face pressure in Q2 2016. The company’s gross margin declined by 70 basis points, moving from 38.1% in Q2 2015 to 37.4% in Q2 2016. The company identified a decrease in merchandise margin and an increase in coupon redemption (which it has been using to attract customers in light of price competition from online retailers) as the primary factors behind this decline. The impact of higher coupon redemption was partially offset by a lower average coupon amount.

Another factor that weighed on Bed Bath & Beyond’s gross margin was the increase in net direct-to-customer shipping expenses, as the company expanded its online business. The inclusion of One Kings Lane pulled down the company’s gross margin by approximately 12 basis points in Q2 2016. ^[1]

Higher SG&A Expenses

The company’s expansion of its omni-channel model entailed higher SG&A and technology expenses, weighing on its operating margin over the course of the quarter. SG&A expenses as percentage of net sales increased by 240 basis points on a year-over-year basis to around 28%. This increase was attributable to higher payroll-related expenses and increased technology-related costs including depreciation. The higher SG&A expenses resulted in a lower operating profit margin on a year-over-year basis. Operating profit margin in Q2 fiscal 2016 stood at 9%, 300 basis points lower than 12% in Q2 fiscal 2015.

Future Outlook

Reuters’ compiled analyst estimates forecast revenues of $3.03 billion and earnings of $1.00 per share for Q3 2016, implying growth of about 3% and (-8)%, respectively. For full year 2016, the company continues to forecast its earnings per diluted share in the range of $4.5 to $5.0. It also maintains to open approximately 30 stores in new markets in fiscal 2016.

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1. Bed Bath & Beyond’s (BBBY) Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, Sep 21 2016 [↩]