Bed Bath & Beyond (NASDAQ:BBBY) will kick off its fiscal 2018 year on June 27 with its fiscal first-quarter earnings report set to publish after the market closes. The fact that its stock recently touched a 10-year low suggests that investors aren't expecting much good news from the specialty retailer. Its last fiscal year, after all, was marked by declining sales and reduced profitability as customers chose other places, especially online providers, to fill their home furnishing needs.
Those negative trends aren't likely to have changed in the last few months, but Bed Bath & Beyond might have a few surprises for shareholders on Thursday.
The biggest disappointment in Bed Bath & Beyond's latest fiscal year was its sales performance. Customer traffic trends were negative in 2017, and that headwind more than offset modest growth in the online business to send comparable-store sales lower by 1.3%. That result marked the second straight year of negative sales at existing locations and was a slight worsening from the prior year's 0.6% drop.
Yet CEO Steven Temares and his executive team said in April that the worst is likely behind them. In fact, they expect the company to return to sales growth in the new fiscal year with help from an expanding economy and a range of improvements that they're making to their merchandising, pricing, and online selling strategies. Bed Bath & Beyond will have to support that optimistic forecast with numbers in this report that show firmer sales trends in both its online and physical selling channels.
The news isn't much better on profitability, as gross profit margin fell for its second straight year in 2017, dropping to 36% of sales from 37.5%. At the same time, Bed Bath & Beyond spent more cash on things like wages and advertising, and on building out its online sales channel. As a result, operating profit margin for the year dived to 6.2% of sales, compared to 9.3% in 2016. It was nearly 12% of sales in fiscal 2015.
Executives made optimistic comments about their profitability position back in April, saying that the 6% decline in inventory that they managed last year left the company in good shape for 2018. The stores are packed with products that are "tailored to meet the anticipated demands our customers," CFO Sue Lattmann said in a conference call.
Thus, investors will be watching trends in gross profit margin for signs that the leaner inventory position is actually helping lift results. Another weak quarterly outing on this score, meanwhile, would confirm many investors' fears that Bed Bath & Beyond is facing bigger, more fundamental challenges to its operating model.
A low bar to clear
The retailer issued a painful earnings forecast in April. This prediction sees operating margins and earnings per share falling in fiscal 2018 and fiscal 2019, although executives hope that the pace of declines will moderate over that time. This means shareholders are being asked to wait until after the company completes its fourth consecutive year of falling profits before an earnings rebound can take place starting in 2020.
The fact that this forecast is already so bleak suggests it will be hard for Bed Bath & Beyond to shock investors with unexpected bad news on Thursday. That scenario is still possible, though, considering that executives have projected improving sales and gross profit trends in the new fiscal year, which might not materialize.