Key Takeaways From Bed Bath & Beyond’s Q4 Earnings

Bed Bath & Beyond (NASDAQ:BBBY) reported better-than-expected results for the fourth quarter fiscal 2016, after missing earnings per share and revenue estimates for three straight quarters. In the fourth quarter, the company’s revenue increased 3% year-over-year (y-o-y) to $3.53 billion, which was in line with consensus estimates, primarily due to a 3% y-o-y increase in non-comparable sales, including PMall, One Kings Lane and new stores, and a 0.4% y-o-y increase in comparable sales.

This positive comparable sales growth in the fourth quarter was attributable to an increase in the average transaction amount, which was partially offset by a decrease in the number of transactions in stores. Comparable sales growth from the customer-facing digital channels grew in excess of 20% y-o-y in the fourth 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 11% y-o-y to $913 million due to an increase in advertising expenses and an increase in payroll and payroll related expenses. Bed Bath & Beyond also posted diluted earnings of $1.84 per share, which declined 4% y-o-y, but beat consensus estimates by 7 cents.

Margin Pressures Still Continue

Bed Bath & Beyond’s gross margins continued to face pressure in Q4 2016. The company’s gross margin declined by approximately 60 basis points (bps) from 38.6% in Q4 2015 to 38% in Q4 2016. The company identified an increase in net direct-to-customer shipping expenses as the primary reason behind this decline. This expense was a result of more promotional shipping offer activity, which included a change in the Bed Bath & Beyond free shipping thresholds from $49 last year to $29 this year, and free shipping for the first few days of the quarter, which included Cyber Monday. In addition, 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 and PMall also reduced the company’s gross margins by approximately 12 bps and 19 bps, respectively, in the fourth quarter. ((Bed Bath & Beyond’s (BBBY) Q4 2016 Results – Earnings Call Transcript, Seeking Alpha, Apr 5 2017))

Higher SG&A Expenses

Bed Bath & Beyond’s SG&A expenses increased as a percentage of net sales by 180 bps on a year-over-year basis to 25.8%. This increase was primarily due to payroll and payroll-related items, including wage increases, further investments in technology including related depreciation, and advertising expenses. The inclusion of One Kings Lane and PMall increased the company’s SG&A expense as a percentage of net sales by approximately 15 bps and 5 bps, respectively, in the fourth 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 $2.81 billion and earnings of 75 cents per share for Q1 2017, implying growth of about 3% and (6%), respectively.

For full year 2017, Bed Bath & Beyond expects a low to mid single-digit percentage increase in consolidated net sales. The company also expects flat to slightly positive comparable sales for the full year, on the back of continued strong growth in the customer-facing digital channels. However, we expect margin pressures to continue in fiscal 2017 as well, due to increase in net direct-to-customer shipping expense and coupon expense. In addition, the company expects its full year capital expenditure to range between $400 million and $425 million, of which more than half of the spend is planned for technology-related projects in support of its growing omni-channel capabilities, including website and mobile applications. The retailer plans to open 30 new stores and close approximately 15 to 20 stores in 2017. The company also expects its net diluted earnings per share to decline in the range of low single-digit to 10% in fiscal 2017, due to continued margin pressures from ongoing investments and higher anticipated tax rate.

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