Key Takeaways From Bed Bath & Beyond’s Q3 Earnings
Bed Bath & Beyond (NASDAQ:BBBY) reported relatively weak results for the third straight quarter this year, as both the company’s earnings and revenue missed analysts’ estimates in this quarter. The company reported a marginal increase in revenue to $2.96 billion, which missed consensus estimates by $50 million. This marginal growth was primarily due to approximately 1.5% year-over-year (y-o-y) growth in non-comparable sales including new stores and the One Kings Lane acquisition, partially offset by a 1.4% y-o-y decrease in its comparable sales.
This negative comparable sales growth in the third 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 third quarter as well, while comparable sales growth from stores declined in the low single-digit percentage range. The company’s selling, general and administrative (SG&A) expenses increased 7.2% y-o-y to $881 million due to the inclusion of One Kings Lane and PersonalizationMall.com (PMall). Bed Bath & Beyond also posted diluted earnings of 85 cents per share, which declined 22% y-o-y, and missed consensus estimates by 13 cents.
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Margin Pressures Still Continue
Bed Bath & Beyond’s gross margins continued to face pressure in Q3 2016. The company’s gross margin declined by approximately 80 basis points (bps) from 37.8% in Q3 2015 to 37% in Q3 2016. The company identified an increase in net direct-to-customer shipping expenses (as a result of more promotional shipping) as the primary reason behind this decline. This expense was largely due to changes in the company’s free shipping threshold this year to $29 from $49 last year in the comparable quarter. Moreover, a rise in coupon expenses also lowered the company’s gross margins, which in turn resulted from an increase in coupon redemption and average coupon amount. To add to that, the inclusion of One Kings Lane also reduced the company’s gross margin by approximately 13 bps in the third quarter. ((Bed Bath & Beyond’s (BBBY) Q3 2016 Results – Earnings Call Transcript, Seeking Alpha, Dec 21 2016))
Higher SG&A Expenses
Bed Bath & Beyond’s SG&A expenses increased as a percentage of net sales by 190 bps on a year-over-year basis to 29.8%. This increase was primarily due to payroll and payroll-related items, including wage increases, further investments in technology including related depreciation, and advertising expense. The inclusion of One Kings Lane increased the company’s SG&A expense as a percentage of net sales by approximately 15 bps in the third quarter. The higher SG&A expenses resulted in a lower operating profit margin on a year-over-year basis.
Future Outlook
Reuters’ compiled analyst estimates forecast revenues of $3.39 billion and earnings of $1.81 per share for Q4 2016, implying a slight decline. For full year 2016, the company continues to forecast its earnings per diluted share in the lower range of $4.5 to $5.0. Bed Bath & Beyond expects its full year 2016 comparable sales to decline by approximately 50 bps, and its net sales to increase about 1% y-o-y. The retailer also expects pressure to continue on its gross margins because of the extension of its $29 free shipping threshold and slight pressure from One Kings Lane and PMall.
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