Why Bed Bath & Beyond’s Stock Price Has Declined By Nearly 50% This Year

Bed Bath & Beyond (NASDAQ: BBBY) started the year on a weak note, as the company’s 2017 performance thus far has been mostly below its guidance and market expectations. In fact, post-Q2 earnings, the retailer’s stock reached a 52-week low of $22.10 per share, and the company’s stock is now trading at 45% lower than its price at the beginning of the year. In addition, the stock is also down close to 50% year-over-year (y-o-y). Below we underline certain key factors that likely contributed to this decline in the company’s stock price.

Weak Q2 Earnings – The company’s revenue declined 2% y-o-y, largely due to a 2.6% decrease in comparable sales. Also, the retailer posted diluted earnings of 67 cents per share, which declined 40% y-o-y. Management noted that the second quarter was difficult primarily due to the unfavorable impact of restructuring charges related to the realignment of store management structure and costs associated with hurricanes Irma and Harvey.

Lower Fiscal 2017 Guidance – Bed Bath & Beyond revised its full-year guidance after the weaker-than-expected fiscal first half of 2017. Accordingly, it expects net sales to be relatively flat, as it plans to spend on organizational changes and transformational initiatives going forward. The company also expects comparable sales to decline compared to the slightly positive previous guidance. In addition, the company expects net earnings per diluted share for the full-year to be around $3 compared to previous $4.

Amazon Effect – The company faces growing competition from the likes of Amazon, as the shift to online sales has hindered Bed Bath & Beyond’s top line growth, and we do not expect this trend to subside anytime soon. In fact, the company’s stock has been witnessing a decline since early 2015 for the same reason, primarily due to its heavy reliance on physical store sales. Although comparable sales from the company’s customer-facing digital channel continue to see strong growth in excess of 20%, comparable sales from its stores continue to decline in the mid-single-digit percentage range. This could also mean that online sales are cannibalizing in-store sales. E-commerce accounts for more than 18% of houseware and home furnishings sales in the U.S., and that proportion is likely to grow.

Margins Continue To Shrink – Bed Bath & Beyond’s operating margin fell to 5.8%, down 360 basis points, in the second quarter. Both gross (-100 bps) and net margins were further compressed as well. The company identified an increase in net direct-to-customer shipping expenses as the primary reason for the decline in gross margins, which resulted from more promotional shipping activity, as the retailer’s free shipping threshold in Q1 2017 was lowered to $29, compared to $49 for about half of Q1 2016. Additionally, the company is also grappling with fixed operating store costs while the store traffic continues to decline, leading to further margin pressure.

Our Take

We have a price estimate of $24.63 per share for Bed Bath & Beyond, which is 9% higher than the current stock price. We believe that the company can bounce back despite the near-term headwinds. The company is looking for ways to cut down on its promotional activities going forward – as promotions put pressure on the margins. The company is also planning to strike a balance between physical and online sales, with omnichannel retailing. Bed Bath & Beyond has started its loyalty program Beyond+ (1-year membership for $29), which offers a 20% off on all purchases, either in-store or online, as well as free shipping for all online orders with no minimum required. The launch of Beyond+ could help increase customer stickiness, eventually leading to some revenue growth if the results are favorable. Also, the company is now looking to increase the pace of store closures as leases come up for renewal (if favorable terms are not negotiated) and working on redesigning its existing stores to better execute an integrated retail format. In addition, given that the company’s investment in digital initiatives have come later than many of its competitors, it does have a lot of scope to grow further and offset the declining foot traffic. The company’s online business now represents roughly 15% of its overall sales.

Have more questions about Bed Bath And Beyond? Please refer to our complete analysis for Bed Bath & Beyond  

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