Shares of Bed Bath & Beyond (BBBY -0.86%) dropped to a multiyear low on Sept. 27, after the retailer's second-quarter numbers fell short of expectations. Its revenue stayed flat year over year at $2.94 billion, missing estimates by $20 million, as its comparable-store sales dipped 0.6%.
On the bottom line, its net income plunged 48% to $48.6 million, or $0.36 per share, which missed estimates by $0.14. The company expects to post flat comps growth for the full year and for its earnings per share to drop about 36% -- compared to the consensus forecast for a 27% decline.
It also expects "moderating declines" in its operating profit and EPS for this year and next, before finally achieving EPS growth in fiscal 2020. In other words, investors shouldn't expect things to improve for this brick-and-mortar retailer anytime soon. But can contrarian investors find any reasons to "get greedy" with this stock while others are fearful?
What happened to Bed Bath & Beyond?
Bed Bath & Beyond sells home goods and other products at 1,018 locations in the United States, Puerto Rico, and Canada. It operates 10 Bed Bath & Beyond locations in Mexico through a joint venture.
The company also owns 281 Cost Plus/World Market stores, 121 Buy Buy Baby stores, 83 Christmas Tree/That! stores, and 57 Harmon/Face Value stores. It acquired these banners over the past 16 years to boost revenue, but those purchases also overextended its brick-and-mortar presence as it faced tougher competition from Amazon (AMZN 0.04%) and Walmart (WMT 1.47%), both of which offer similar products with a wider selection of other goods.
Bed Bath & Beyond has struggled to retain younger and upscale shoppers, who seem to favor Williams-Sonoma's (WSM -2.56%) namesake, Pottery Barn, and West Elm stores. That's a big part of why analysts expect Williams-Sonoma's revenue and earnings to rise 7% and 20%, respectively, this year.
In addition, Bed Bath & Beyond's stores are big and inefficient. The average Bed Bath & Beyond store has a floor space of nearly 44,000 square feet, yet only generated $239 in sales per square foot last year. The average Williams-Sonoma store has a floor space of just over 10,000 square feet, and generated $392 in sales per square feet last year.
Stuck in a cycle of slashing prices to boost sales
With Amazon and Walmart stealing away its low-end shoppers, and Williams-Sonoma luring away its high-end customers, Bed Bath & Beyond's only option is to slash prices to prop up its sales growth.
That's why its gross margin dropped from 36.4% in the prior-year quarter to 33.7%. During the conference call, CFO Robyn D'Elia blamed the contraction on "an increase in coupon expense, a decrease in merchandise market and an increase in net direct-to-customer shipping expense." In other words, it offered bigger discounts, still lost shoppers, and spent more money on shipments for online orders.
At this point, Bed Bath & Beyond should consider shuttering stores and reducing the size of some of its locations. Yet the company still opened three more stores (one Bed Bath & Beyond and two World Market stores) during the quarter to bring its total store count to 1,560 -- presumably to buoy its top-line growth.
A terrible turnaround strategy
Bed Bath & Beyond's main turnaround strategy is its Beyond+ membership program, which offers customers free shipping (with no minimum purchase) and a 20% discount on their entire order for just $29 per year. It's unclear how Bed Bath & Beyond can make a profit by offering those desperate benefits -- since it already needs to match Amazon's and Walmart's retail prices to stay competitive.
The simple answer is that it can't make a profit with Beyond+, and it's using it as a loss-leading strategy to counter Amazon's and Walmart's free-shipping options in the hopes of retaining more customers. That's why it expects its operating profit and EPS to slump until 2020.
The company believes that expanding Beyond+, using big data and AI algorithms to adjust prices, adding in-home services, and improving its customer experience across its channels will help it return to growth by 2020. Unfortunately, that plan sounds far too optimistic and fails to address any of the aforementioned problems with its business model.
Avoid this falling knife
Back in April, I told investors to avoid Bed Bath & Beyond because it was the prime example of an "Amazoned" retailer. There's simply no real reason for shoppers to keep visiting Bed Bath & Beyond, and the retailer's desperate attempts to win them back will crush its earnings growth for the foreseeable future.