On Apr. 5, Bed Bath & Beyond Inc. (BBBY, Financial) reported $3.5 billion in net sales and diluted earnings per share of $1.84 for the quarter ending February 2017. Although the company had higher net sales compared to the prior-year quarter, earnings declined approximately seven cents per share. The weaker earnings performance suggests Bed Bath & Beyond is losing competitive power to companies like Tractor Supply Co. (TSCO, Financial) and TJX Companies Inc. (TJX, Financial).
Brief company and industry overview
The New Jersey-based home furnishings retailer sells an eclectic variety of branded bed, bath and kitchen accessories in over 1,500 stores around North America. As discussed in the company’s 2016 10-K filing, Bed Bath & Beyond strives to offer its products at the appropriate price and present them in a distinctive manner that maximizes customer convenience and perception. The company also has strong customer service, especially for important life events including weddings, graduations and baby showers.
Bed Bath & Beyond operates in the “highly competitive retail industry,” which includes companies like Tractor Supply Co. and TJ Maxx. These two companies also offer products and services that BBBY produce, presenting Bed Bath & Beyond “no assurance that [such operations] will have a material adverse effect” on its earnings performance.
Company reports poor earnings for fiscal 2016
Bed Bath & Beyond reported weak earnings for the 12 months from March 2016 to February 2017, including net earnings of $4.58 per diluted share and net sales of $12.2 billion. These values represent a decrease of about 42 cents per diluted share and an increase of $0.1 billion from the prior year respectively. Comparable sales for fiscal 2016 dropped 0.6% from fiscal 2015 values as comparable sales from stores dropped approximately 2% to 3% for the year.
CEO Steven Temares reported that although the company made significant investments to evolve the company and deliver a “strong foundation of differentiated” products and services, management still expects net earnings to decline as much as 10% for the 12 months from March 2017 to February 2018.
Company has weak outlook for 2017 relative to its competitors
Although the company has a profitability rank of 8, Bed Bath & Beyond still has declining growth potential for 2017. The company’s operating margin, net margin and return on assets have dropped near a 10-year low. Over the past five years, the company’s operating margin and gross margin lost about 5.3% and 1.7% per year respectively.
Bed Bath & Beyond currently has a fair Piotroski F-score of 5, suggesting a modest business operation. For about nine of the past 10 years, the company scored a 1 for just five of the nine criteria: positive net income, positive cash flow from operations, cash flow return on assets less than return on assets, changes in leverage and changes in shares outstanding. Table 1 details the breakdown of the company’s Piotroski F-score.
Table 1: Breakdown of Bed Bath & Beyond’s Piotroski F-score, Past 10 Years
Over the past 15 years, Bed Bath & Beyond generally had weak F-scores compared to its peers. While all three companies had volatile F-scores, both Tractor Supply Co. and TJ Maxx had higher F-scores than Bed Bath & Beyond did in approximately 80% of the past 60 quarters. Additionally, the company’s F-score has seldom exceeded 7 since 2012.
Bed Bath & Beyond’s financial strength ranks a modest 6 out of 10, with interest coverage of about 15.6 and just 32 cents in cash for every $1 of debt. The company’s cash-debt and equity-asset ratios are both near a 10-year low, suggesting potential for long-term financial distress.
Conclusions
As the company reported weak earnings and offered a poor fiscal 2017 outlook, Bed Bath & Beyond’s stock price traded 3% lower than its previous close of $38.98 per share.
Although the company trades significantly below its Peter Lynch earnings line and price-sales valuations, Bed Bath & Beyond is a potential value trap due to declining profit margins.
Disclosure: I do not have a position in the stocks mentioned.
Start a free 7-day trial of Premium Membership to GuruFocus.
