Why Is Bed Bath & Beyond Underperforming?

Overall, this earning season has seen some pretty solid results from a variety of home-goods retailers, which can partly be attributed to a continuing recovery in the U.S. housing market. Companies such as Restoration Hardware (NYSE: RH  ) and Williams-Sonoma (NYSE: WSM  ) reported impressive growth in earnings and revenue for their respective quarterly reports, which generally bodes well for the industry.

However, not all home-furnishing chains managed to come up with such encouraging results, as Bed Bath & Beyond (NASDAQ: BBBY  ) failed to meet analyst projections and also gave uninspiring guidance. Why is the company lagging behind the competition?

Underwhelming numbers
Like many other brick-and-mortar retailers, Bed Bath & Beyond is suffering from the success of e-commerce, which is driving down store traffic and putting pressure on sales growth. 

Net income for the first quarter came in at $187.1 million versus $202.5 million a year ago, while earnings per share of $0.93 trailed estimates by $0.02. Revenue rose by an unimpressive 1.7% to $2.657 billion, also trailing the $2.69 billion consensus estimate. Same-store sales rose by only 0.4% compared to last year's 3.4% rise, while analysts were expecting the important retail metric to rise by 2%.

Shares were down by around 7% following the report as investors mulled over the miss. Adding to the drop was the company's weak guidance, as it now expects second-quarter earnings of $1.08-$1.16 per share, while analysts were expecting $1.20 on average.

While it makes sense to blame poor results from a retail chain on the rise of e-commerce, this does not apply in all cases. There are several chains in the home-furnishing industry that are doing perfectly well despite increased competition from online competitors, which leads one to believe that Bed Bath & Beyond may simply be falling out of fashion.

Still going strong
Restoration Hardware and Williams-Sonoma are two of the main players still delivering strong growth in the industry. Restoration Hardware especially has a history of big earnings beats, which was once again evidenced in its latest earnings report. The company is in the middle of a major real estate revamp, which is meant to increase traffic as well as sales.

Whatever management is doing, it seems to be working. First-quarter EPS of $0.18 tripled year over year, smashing the analyst consensus as well as the company's own previous guidance. Revenue was up 22% for the period, and the company is projecting annual sales of between $4 billion and $5 billion once the real estate transformation is complete.

Williams-Sonoma, while not growing quite as fast, is still putting up a very solid performance. For the quarter ended on May 4, the company delivered a 9.7% increase in net sales, with all brands delivering a strong increase in comparable sales. West Elm did especially well, with comp sales up 18.8%.

Encouragingly, the direct-to-consumer channel now accounts for around half of overall sales, with the company's online presence clearly boosting its competitive position in the face of an increased rivalry from e-commerce retailers. The results are evidence of the company's strong execution in a tough market, as its multichannel, multibrand approaches seem to be paying off.

So why is Bed, Bath and Beyond lagging behind?
While the earnings report doesn't go into much detail, we can point to a number of factors impacting the company's performance. First of all, its online channel is woefully inadequate according to some analysts, while Restoration Hardware's online sales, for example, are booming. Despite investments in this channel, there isn't much notable improvement to be seen.

Second, while Restoration Hardware and Williams-Sonoma portray themselves as luxury lifestyle brands, Bed Bath & Beyond seems to have no such aspirations, and as such may be regarded as less trendy by consumers. Consumers with more money to spend may prefer these more upscale chains, while budget-conscious consumers will be turning to online retailers for cheaper deals.

Finally, Bed Bath & Beyond has been experiencing a contraction in margins, which points to weak execution. While some of this decline can be attributed to greater investments and expenses, these do not seem to be bearing fruit yet. Additionally, higher coupon redemption has been weighing on margins, as the company's customer base is on the lookout for value. Considering the company's unspiring guidance going forward, the weakness looks set to continue.

The bottom line
Bed Bath & Beyond once again delivered uninspiring results, as the company missed on earnings and revenue and also provided guidance that came in below analyst estimates. While the rise of e-commerce is partly to blame for the weak results, the fact that competitors such as Restoration Hardware and Williams-Sonoma are still doing well suggests that the company is suffering from poor execution, an unspiring brand image, and a weak online presence.

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