Bed Bath & Beyond Inc. (BBBY, Financial) recorded better-than-expected fourth-quarter 2017 results on Wednesday, surpassing both top and bottom line estimates for the second consecutive quarter. Despite the beat, shares tanked to near a 10-year low. The drop in comparable sales, lower profitability margins and a gloomy outlook for fiscal 2018 seemed to have hurt investors' sentiments.
Shares plunged 20% on Thursday following the home furnishing retailer’s soft outlook for fiscal 2018 earnings, which it expects to come in around $2 to $2.5 a share, compared with analysts’ estimates of $2.77 a share.
Diving into the number pool
Bed Bath & Beyond's quarterly adjusted earnings stood at $1.48 per share, beating the consensus estimate of $1.41. Its earnings were impacted by a $10.5 million charge related to the Tax Cuts and Jobs Act, causing earnings to decline 19.6% from the prior-year quarter.
Revenue grew 5.2% from the prior-year quarter to $3.72 billion, beating expectations of $3.68 billion. The sales improvement was attributed to the retailer’s turnaround efforts along with other customer-centric initiatives, which partially helped compensate for the soft comps.
The retailer’s same-store sales declined 0.6% due to a reduction in the number of store transactions. This was, to a certain extent, moderated by greater average transaction value. Comparable sales from customer-facing digital networks showed improvement, but some stores dropped by a mid-single-digit rate. According to Bloomberg, comps have fallen in eight of the past 10 quarters.
Bed Bath & Beyond's cash and cash equivalents stood at $346.1 million, with total long-term debt of $1.5 billion. The company generated $859.7 million in cash from operational activities and used $375.8 million in capital expenditures.
Margins drop
The quarterly gross profit for the company slipped 0.7% to $1.3 billion, and the gross profit margin fell 210 basis points to 35.9%. The margin decline is due to higher shipping expenses, thinner merchandise margins and an increase in promotional expenses, including coupons that were redeemed by customers during the quarter. In fact, the average coupon value was also increased during the period.
Moreover, selling, general and administrative expenses rose, impacting the operating profit, which slipped nearly 21.6% to $337.1 million. This led to the operating profit margin declining about 310 basis points from the year-ago quarter to 9.1%.
Rising competition
Bed Bath & Beyond is now facing increased competition from several retailers that are stepping up their game in home furnishing. During the earnings conference call, company executives acknowledged that expanding its digital platform is becoming imperative to better compete with Amazon (AMZN, Financial), Walmart (WMT, Financial) and other retailers.
The challenge Bed Bath & Beyond is faced with is it will have to be prepared for increased marketing expenses while offering competitive prices to stay relevant and effectively battle its e-commerce rivals. Dung the conference call, CEO Steven Temares said:
"We have spent the last few years driving the digital experience in terms of getting customers to understand us as a digital choice for them, and in the world we compete, that's necessary to introduce customers to us as a digital choice. We've been doing that to some degree at the expense of profitability."
Aggressive discounting backfires
Another key area of concern for Bed Bath & Beyond is the aggressive discounting policy it uses to drive sales. This has a great bearing on the company’s earnings. Spending so much on promotions through coupons and vouchers may not be a sustainable idea to boost revenue and increase footfall or online traffic in the long term. The company may have historically seen its revenue increase due to such promotions, but too much dependency could be a warning sign for a rather weak retail strategy.
While the company’s performance outlook is dismal, hurting investors’ sentiment, it will be interesting to watch how the home furnishing retailer works to get back on track.
Disclosure: I do not hold any positions in the stocks mentioned in this article.
