Increased Coupon Redemption And Higher Expenses Hurt Bed Bath & Beyond’s Q1 Results

Shares of home goods retailer Bed Bath & Beyond (NASDAQ:BBBY) fell by almost 10% after the company’s Q1 fiscal 2014 results and second quarter guidance fell short of analysts’ estimates. The company’s earnings per share came in at $0.93, slightly below the consensus estimate of $0.95. The retailer guided second quarter EPS at $1.08-$1.16, while analysts were expecting the EPS to be around $1.20. Bed Bath & Beyond cited slow revenue growth, lower gross margins and higher operating expenses as primary reasons for low profitability. The company’s revenues increased by just 1.7% to $2.66 billion, trailing analysts’ estimate of a 2.9% increase to $2.69 billion. Comparable sales improved by a marginal 0.4% during the quarter, while the figure was 3.4% in the same quarter last year. ^[1]

While the slowing housing market is making Bed Bath & Beyond’s revenue growth strenuous, increased coupon redemption is weighing on its gross margins. During the quarter, the retailer’s gross margins shrunk by 70 basis points driven by an increased redemption rate and higher average coupon amount. The retailer’s SG&A rate also rose as it invested heavily in mobile and online technologies, as part of its strategy to strengthen its online business. These factors will continue to weigh on the retailer’s profits in the near term.

Our price estimate for Bed Bath & Beyond stands at $78.80, implying a premium of over 25% to the market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Bed Bath & Beyond

Higher Coupon Redemption, Free Shipping And Shift In Sales Mix Weighing On Gross Margins

During Q1 fiscal 2014, Bed Bath & Beyond’s gross profit margin declined from 39.5% to 38.8% primarily due to an increase in coupon expenses, which resulted from an increase in redemption and higher average coupon amount. In addition, increased customer shipping expenses due to the retailer’s free shipping threshold and a shift in sales mix to low margin categories also weighed on its margins. Higher coupon redemption has been a drag on Bed Bath & Beyond’s margins for some time now, and we expect it to remain this way in the near term on account of weak consumer spending. Due to sluggish U.S. economic growth and higher home prices, U.S. shoppers might look to reduce their budget for home decor and improvement products. Subsequently, they will look for cheaper products at Bed Bath & Beyond and other home improvement retailers, which will continue to facilitate a shift in sales mix to low margin products. Although added expenses due to free shipping will continue to put pressure on Bed Bath & Beyond’s gross margins in the near term, their impact will gradually subside. ^[2]

Increased Investment In Technologies Adding To Operating Expenses

During the quarter, Bed Bath & Beyond’s operating expenses increased at a faster rate than its sales growth, resulting in a 30 basis points rise in its SG&A expense rate. Driven by increased investments in mobile technologies, the company’s operating expenses increased by 2.9%, which drove its SG&A expenses as percentage of revenues from 27.2% in Q1 fiscal 2013 to 27.5% in the recently concluded quarter. Bed Bath & Beyond has been investing heavily in new technologies and infrastructure to revamp its online platform in the wake of growing threat from Amazon (NASDAQ:AMZN). ^[2]

During the holiday quarter, store traffic in the U.S. declined substantially due to the relentless weather, which subsequently boosted online sales. While online giant Amazon enjoyed this trend, Bed Bath & Beyond was at the receiving end due to its small online channel. The home goods retailer is now investing more in its e-commerce business to add new functionality and assortments to its online and mobile websites. It is accelerating the deployment of systems and equipment to take advantage of new technologies. Alongside, the company is strengthening its IT, analytics, marketing and e-commerce groups, and developing a platform where products ordered online can be shipped directly from stores or vendors’ warehouses. Bed Bath & Beyond is also opening an additional distribution facility to support the needs of its online and store business. The company stated in its earnings call that while these investments are necessary, they will weigh on its profits in the near term. ^[2]

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1. Bed Bath & Beyond’s Profit Falls 7.6% On Higher Costs, The Wall Street Journal, Jun 25 2014 [↩]
2. Bed Bath & Beyond’s Q1 fiscal 2014 earnings transcript, Jun 25 2014 [↩] [↩] [↩]