A Closer Look At Bed Bath & Beyond’s Disappointing 2017 Performance

Bed Bath & Beyond (NASDAQ: BBBY) has had a relatively difficult 2017, as its performance has been mostly below its guidance and market expectations in the fiscal first half. Although the company’s revenue and EPS estimates came in ahead of the consensus in the third quarter, the company’s stock reacted negatively as it reported a 50% year-over-year (y-o-y) decline in its net profits. Overall, the retailer’s stock is now trading almost 45% lower than its price at the beginning of the year. In the first nine months of fiscal 2017, the company’s revenue declined 1% y-o-y to $8.6 billion, primarily due to a decrease in its comparable sales, partially offset by an increase in non-comparable sales including One Kings Lane, PMall, and new stores.

In the first nine months of the year, Bed Bath & Beyond reported an increase in its comparable sales growth from customer-facing digital channels over the corresponding period in the prior year. However, this increase was not able to offset the company’s declining foot traffic from its physical stores, which declined in the mid-single-digit percentage range. In this period, Bed Bath & Beyond also posted diluted earnings of $1.64 per share, which declined 41% y-o-y. In terms of capital expenditures, the company spent $264 million in the first nine months of 2017, of which more than 40% was spent on technology projects including investments in digital capabilities and the development and deployment of new systems and equipment in stores. In addition, the company’s selling, general and administrative (SG&A) expenses increased 6% y-o-y to $2.7 billion due to an increase in advertising expenses and an increase in payroll and payroll related expenses during this period.

Margin Pressures Still Continue

In the first nine months of 2017, Bed Bath & Beyond’s operating margin fell to 4.9%, down 320 basis points. Both gross (-120 bps) and net margins were 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 part of Q1 2016. In addition, a decrease in merchandise margin and an increase in coupon expenses also reduced the company’s gross margins in this period. To add to that, the company is also grappling with fixed operating store costs while store traffic continues to decline, leading to further margin pressure.

Bed Bath & Beyond is trying to focus on cutting down its promotional activities – as promotions put pressure on margins – in order to reverse these negative trends. Bed Bath & Beyond is seeking to change shoppers’ reliance on coupons with the launch of its membership loyalty program Beyond+. We expect the launch of Beyond+ to help increase customer stickiness, eventually leading to some revenue growth going forward, assuming the results are favorable. However, the margin pressure will likely continue in the near term due to increases in the overall expense structure for the accelerated spending associated with the company’s organizational changes and transformational initiatives.

Future Outlook

For the full year, Bed Bath & Beyond revised its full-year guidance after the weaker-than-expected fiscal first half. It continues to expect its comparable sales to decline in the low single-digit percentage range. The company also expects its net sales to be relatively flat to slightly positive, due to the store management restructuring charges in the second quarter, technology-related expenses including related depreciation and the cost related to Hurricanes Harvey and Maria. In addition, the company continues to expect net earnings per diluted share for the full-year to be around $3.

Our $23 price estimate for Bed Bath & Beyond’s stock is slightly ahead of the current market price.

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

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