Overview of Bed Bath & Beyond’s Q3 Results And Q4 Outlook

Bed Bath & Beyond‘s (NASDAQ: BBBY) earnings per share came in ahead of market expectations while its revenues slightly missed the consensus mark in its fiscal third quarter earnings. The company stated that it is ahead of its plan to moderate operating profit declines and grow net earnings per diluted share by fiscal 2020. Further, the retailer also believes that its fiscal 2019 net earnings per diluted share will be about the same as fiscal 2018. The company continues to guide for net earnings per diluted share for the full year 2018 to be about $2.00. Below we highlight some of the most notable items from the Q3 earnings release. We have also created an interactive dashboard on what to expect from Bed Bath & Beyond’s fiscal Q4 and fiscal 2018, which outlines our forecasts for the company. You can change the expected revenue, operating margins and net margin figures for the company to gauge how it will impact its earnings.

We recently revised our price estimate for BBBY downwards to $14, which is almost 15% ahead of the current market price, on account of lower expected fiscal fourth quarter revenue and earnings per share estimates.

Growth in Revenues, Decline In Earnings in Q3

In the third quarter, Bed Bath & Beyond’s revenue grew 3% year-over-year (y-o-y) to $3 billion, as a 1.8% decrease in comparable sales was offset by an increase in non-comparable sales, including One Kings Lane, PMall, and new stores. The retailer saw strong sales growth from customer-facing digital channels and a mid-single digit percentage decline in sales from its stores. The overall decline in comparable sales reflected a decline in the number of transactions in stores, partially offset by an increase in the average transaction amount. In terms of capital expenditures, the company spent $256 million in the first nine months of fiscal 2018, of which about 70% was spent on technology projects, including investments in digital capabilities and the development and deployment of new systems and equipment in stores. The retailer also posted diluted earnings of 18 cents per share, which declined 60% y-o-y.

Margin Pressures Continue In Q3

Bed Bath & Beyond’s gross margins continued to face pressure in the third quarter as well. The company’s gross margin declined by approximately 220 basis points (bps), from 35.3% in Q3 2017 to 33.1% in Q3 2018. The company identified an increase in net direct-to-customer shipping expenses as the primary reason for this decline, which resulted from more promotional shipping activity. In addition, a decrease in merchandise margin and an increase in coupon expense also reduced the company’s gross margins in the quarter. On the cost side, Bed Bath & Beyond’s selling, general and administrative (SG&A) expenses increased slightly to around $950 million.

Future Outlook

Going forward, Bed Bath & Beyond expects its fourth quarter revenues to decline in high single-digit percentage. This is largely due to the fiscal calendar shift resulting from the 53rd week in the prior year, which also moved the post-Thanksgiving week from the fourth quarter into the third quarter. For full-year 2018, Bed Bath & Beyond now expects its comparable sales growth to decline by 1%, compared to a previous outlook of flat growth. We expect margin pressure to continue through 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, including the impact from BEYOND+ and College Savings Pass programs, as well as the ongoing shift to its digital channels. In addition, the company expects its full-year capital expenditures to range between $350 million and $400 million. Bed Bath & Beyond continues to expect to open a net 20 new stores (with the majority being buybuy BABY and Cost Plus World Market stores) and close approximately 40 stores (with the majority being Bed Bath & Beyond stores) for fiscal 2018.

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