Declining Traffic, Shrinking Margins To Impact Bed Bath & Beyond’s Q3 Results

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Bed Bath & Beyond

Bed Bath & Beyond (NASDAQ: BBBY) is scheduled to announce its fiscal third quarter earnings on Wednesday, December 20. The company has had a relatively difficult 2017, as its performance thus far has been mostly below its guidance and market expectations. In fact, the retailer’s stock is now trading almost 50% lower than its price at the beginning of the year. In the first six months of fiscal 2017, the company’s revenue declined marginally to $5.7 billion, primarily due to a decrease of approximately 2.4% in comparable sales, partially offset by an increase of approximately 1.6% in non-comparable sales including One Kings Lane, PMall, and new stores. The company also posted diluted earnings of $1.20 per share, which declined 37% y-o-y.

In the first six months of the year, Bed Bath & Beyond did report more than a 20% 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. We expect this trend to continue into the third quarter as well.

Our $25 price estimate for Bed Bath Beyond’s stock is almost 10% ahead of the current market price.

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Margin Pressure To Continue

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 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. 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. 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, as well as the impacts of Hurricanes Harvey and Irma.

Future Outlook

The company did not publish guidance for the current quarter, but consensus estimates for the fiscal third quarter call for earnings of $0.37 per share and revenues of $2.9 billion, implying a decline of about 56% and 2%, respectively.

For the full year 2017, Bed Bath & Beyond revised its full-year guidance after the weaker-than-expected first half of fiscal 2017. Accordingly, it now 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.

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

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