Bed Bath & Beyond (NASDAQ:BBBY), the company behind retailers such as Bed Bath & Beyond, buybuy BABY, and Cost Plus World Market, recently announced its first-quarter earnings and the stock reacted by making a sharp move to the downside; the stock set new 52-week lows during this decline, so let's break down the company's results and outlook on the rest of the year to determine if now is the time to initiate a long-term position or if we should stay away.
The lackluster results
Bed Bath & Beyond released its first-quarter report for fiscal 2014 after the market closed on June 25 and the results came in below analysts' expectations; here's an overview:
|Earnings Per Share||$0.93||$0.95|
|Revenue||$2.66 billion||$2.69 billion|
Earnings per share came in flat and revenue increased 1.7% from the year ago period, as comparable-store sales increased 0.4%. The company noted that the increase in comparable-store sales was driven by an increase in the average transaction size, but this was partially offset by a decline in the overall number of transactions.
Gross profit decreased 0.2% to $1.03 billion and operating profit decreased 6.9% to $300.7 million, and in relation the gross margin contracted 70 basis points to 38.8% and the operating margin contracted 110 basis points to 11.3%. On the conference call, Bed Bath & Beyond's management attributed the large dips in these profitability measures to increased coupon use, increased expenses related to free shipping offers on its websites, a shift in the mix of merchandise sold to lower-margin items, and increased selling, general, and administrative expenses.
Although the above statistics were disappointing, the quarter was a complete downer, as Bed Bath & Beyond noted that it repurchased about 4.2 million shares of its common stock for approximately $273 million; about $861 million now remains on the company's share repurchase authorization announced in December of 2012, so it would be a positive sign if it were to accelerate repurchases following the sharp drop in its share price.
Lastly, the company opened five new stores during the first quarter which included two Bed Bath & Beyond stores, one buybuy BABY store, one Cost Plus World Market, and one Christmas Tree Shops and That! store; the company now operates 1,504 total stores in all 50 of the United States, the District of Columbia, Puerto Rico, and Canada.
In summary, it was a very discouraging start to the year for Bed Bath & Beyond and the sentiment surrounding the report only worsened when the company went on to provide its outlook on the second quarter...
What does BBBY expect going forward?
As mentioned before, Bed Bath & Beyond went on to provide its outlook on the second quarter, stating that it expects earnings per share in the range of $1.08-$1.16, revenue growth in the range of 2%-4%, and comparable-store sales growth of 1%-3%; however, this outlook came in mixed compared to analyst expectations, which called for earnings per share of $1.20 and revenue growth of 3.6%.
Bed Bath & Beyond went on to add that it anticipates earnings-per-share growth in the mid-single digit percentage range for the full year of fiscal 2014 along with revenue growth of 4% and comparable-store sales growth of 3%; on a positive note, these estimates met analysts' expectations of earnings per share of $5.06 and revenue of $11.93 billion for growth of 5.6% and 3.7%, respectively.
So should we be long-term buyers?
After reviewing Bed Bath & Beyond's quarterly results and its outlook going forward, I believe the substantial decline in its stock was warranted and I do not believe this is an opportunity to buy. Here are my three top reasons as to why I do not want to own it:
- Failing to meet expectations: This was the third consecutive quarter in which Bed Bath & Beyond failed to satisfy Wall Street's expectations. Investors cannot afford for this trend to continue, because it will continue to cause sell-offs in the stock.
- Margins: Not only did the company show little or no growth in revenue and earnings per share, it also reported much higher expenses, which led to significant margin hits. It is never a good sign when retailers resort to increased coupon promotions to drive customer traffic, especially when this past quarter did not include the holiday season; holidays are when additional promotions are necessary and expected.
- Slowed growth: Bed Bath & Beyond is only expected to grow earnings by 5% in fiscal 2014 and fiscal 2015, showing that it is no longer the high-growth company it once was. Investors want to own a company for high growth or the pairing of slower growth and a dividend, but Bed Bath & Beyond does not offer either.
The Foolish bottom line
Bed Bath & Beyond's dismal first-quarter results sent its shares more than 9% lower and I believe more room to the downside remains for the retail giant. Foolish investors should avoid making a new investment in it today. If you are a current shareholder, I believe you should take a step back and reevaluate the company to determine if you should continue to hold it, add to the position, or cut your losses and run for the hills.
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Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.