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Weak Margins Hurt Bed Bath & Beyond: Is it Likely to Revive?

Zacks Equity Research

Bed Bath & Beyond Inc. BBBY is going through a rough phase mainly due to its strained margin trend and soft comparable sales (comps). Consequently, the company’s stock is losing investor’s confidence. Shares of the company have declined 57.8% in a year against the industry’s growth of 3.7%.

The company is battling margin pressures for 12 straight quarters now. Higher expenses, including SG&A, due to escalated technology-related costs coupled with lower merchandise margin have been hurting its margins. In first-quarter fiscal 2019, gross margin contracted 50 basis points (bps). Moreover, the company incurred operating loss of $406.8 million against income of $81.2 million in the prior-year quarter. This has been denting its bottom-line growth, clear from an earnings decline of 68.4% reported in the fiscal first quarter, despite beating estimates.

 



In addition, Bed Bath & Beyond is witnessing soft comps for the last few quarters primarily due to a fall in the number of store transactions. Comps dipped 6.6% in the fiscal first quarter, driven by a decline in comps at stores in a high-single-digit percentage range, slightly offset by higher comps at customer-facing digital channels. Soft comps trend is weighing on the company’s top line, which lagged estimates for four straight quarters now.

Consequently, management updated outlook for fiscal 2019. It now expects net sales and adjusted earnings to be at the lower end of its earlier guidance ranges of $11.4-$11.7 billion and $2.11-$2.20 per share, respectively. In fiscal 2018, Bed Bath & Beyond generated sales of $12.03 billion. However, the company’s bottom line view displays growth from $2.05 earned in the last fiscal year.

Efforts to Counter Headwinds

Bed Bath & Beyond is trying all means to adjust to the changing retail landscape, wherein the competition has intensified. It remains well on track with its transformation plan, positioning it well for success in the dynamic retail landscape. Management set four major near-term priorities — boost top-line growth, reset cost structure, review and optimize its asset base with its portfolio of retail banners, and refine the organization structure.

Recently, the company announced headcount reduction at its headquarters in New Jersey and other select locations, as part of its transformation strategy. This move will enable Bed Bath & Beyond to simplify its corporate structure, facilitating efficient realignment of resources within the business. These actions have resulted in roughly 7% reduction of corporate staff, including vice presidents, directors, managers and professional staff. For fiscal 2019, pre-tax net savings are expected to be about $18.9 million, owing to the timing of these changes.

Additionally, the company continues to target reaching mid and long-term revenue growth, near-term gross margin expansion, near-term SG&A improvements, and sustainable outstanding operational support. It expects to boost revenue growth by focusing on portfolio strategy alignment — including product assortment, customer engagement, learnings from Next Generation Lab stores and expanding online experience. Margins are likely to improve through changes in assortment mix to increase sales, supply chain, and modifications in pricing and coupon strategy. Improvements in store labor model, marketing initiatives and lower occupancy expenses are expected to optimize SG&A. Furthermore, the company will focus on spending on human capital, data, process improvements, repositioning its flagship brand and reinforcing the global sourcing capabilities.

These initiatives place Bed Bath & Beyond well to accomplish its long-term financial targets — including delivering net earnings per share growth by fiscal 2020. Moreover, the company is on track to reduce declines in operating profit and earnings per share in fiscal 2019. Also, management expects operating margin to be more than 300 bps in the long term.

Bottom Line

Although the company’s long-strained margins trend cannot be ignored, we expect its turnaround efforts to offset the headwinds going forward. Encouragingly, Bed Bath & Beyond has a Zacks Rank #3 (Hold) at present.

3 Better-Ranked Retail Stocks

Boot Barn Holdings, Inc. BOOT pulled off average positive earnings surprise of 26.1% in the trailing four quarters. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Canada Goose Holdings Inc. GOOS, with an impressive long-term earnings growth rate of 28.5%, presently has a Zacks Rank #2 (Buy).

Ulta Beauty, Inc. ULTA currently has an expected long-term earnings growth rate of 18.4% and a Zacks Rank #2.

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