Bed Bath & Beyond To Continue To See Margin Pressure In Fiscal 2018
Bed Bath & Beyond (NASDAQ: BBBY) is scheduled to announce its fiscal first quarter earnings on Wednesday, June 27. The company had a relatively difficult 2017, as its performance has been mostly below its guidance and market expectations. The retailer’s stock is now trading 10% lower than its price at the beginning of the year, with much of the decline coming after its disappointing fiscal 2018 guidance, and driven by its costly battle to ward off competition from internet retailers such as Amazon. The company’s stock was also down more than 50% in the past year. The primary reasons for the steep declines were lower store comparable sales and shrinking margins.
In fiscal 2017, Bed Bath & Beyond’s comparable sales growth from customer-facing digital channels continued the trend of year over year strong growth. While comparable sales completed in store declined in the mid-single-digit percentage range from the corresponding period in the prior year, resulting in an overall comparable sales decline of 1.30%. Going forward, we expect this trend to continue into fiscal 2018 as well. We have created an Interactive Dashboard which outlines our expectations for the company’s Q1 and full year fiscal 2018 results. You can change expected revenue, operating margin and income margin figures for the company to gauge how it will impact expected EPS.
Margin Pressure To Continue
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Bed Bath & Beyond’s operating margin fell to 9.07%, down 310 basis points, in the fourth quarter. Both gross (-210 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. To add to that, the company is also grappling with fixed operating store costs while the 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. 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
Going forward, we expect the company to report first quarter revenues of around $2.7 billion (flat y-o-y) and earnings of 38 cents per share (30% decline y-o-y).
For full-year 2018, Bed Bath & Beyond expects a relatively flat to a slightly positive increase in consolidated net sales. The company also expects comparable sales growth in the low single-digit percentage range on the back of continued strong growth in the customer-facing digital channels. However, we expect margin pressure to continue in fiscal 2018, due to an increase in net direct-to-customer shipping expense, growth in coupon expense, and continued investment in the company’s customer value proposition and the ongoing shift to its digital channels.
In addition, the company expects its full-year capital expenditures to range between $375 million and $425 million. Bed Bath & Beyond plans to open 20 new stores and close approximately 40 stores in 2018. The retailer also expects its net diluted earnings per share to range in the low to mid $2 range for fiscal 2018.
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