Bed Bath & Beyond (NASDAQ:BBBY) is still shrinking. The specialty retailer this week posted holiday-quarter sales results that continued its recent negative trends of falling customer traffic and declining profitability. However, management had a few pieces of good news for investors, including surprising progress at reining in expenses. The retailer is also more optimistic about its long-term plan to return to core earnings growth by 2020.
CEO Steven Temares and his team provided detail on that improving outlook in a conference call with Wall Street analysts on Wednesday. Below are a few highlights from that presentation.
Aiming for profits over sales growth
[O]ur third-quarter net sales growth was somewhat moderated by actions taken during the quarter in support of our stronger bias toward driving profitability improvement over near-term sales growth.
-- CFO Robyn D'Elia
Bed Bath & Beyond's market share results weren't strong. Sales slumped 2% at existing locations and overall growth was less than 3% after factoring in e-commerce gains. The good news is that decline marked an improvement from the prior quarter, when sales fell 5% at its existing stores.
Moreover, management said the sales drop was made worse by their decision to scale back on profit-crushing initiatives. Bed Bath & Beyond removed lots of low-margin products from its inventory, for example, and raised its free-shipping threshold for online orders during the holiday season. These moves pressured revenue growth but helped shore up profitability. Still, gross margin declined just as investors feared it would, down to 33% of sales from 35% a year ago.
Fixing the balance sheet
We ended the quarter with approximately $1 billion in cash and investments, an increase of approximately $460 million, which is nearly double the amount of cash and investments we had at the end of the fiscal 2017 third quarter. We also ended the quarter with retail inventories of approximately $2.9 billion at cost, which represents a reduction of about 6% compared to the end of the third quarter last year.
The retailer came into the holiday season with a relatively healthy balance sheet, and it exited the period in an even better financial position. Inventory levels fell despite the higher revenue. Bed Bath & Beyond raised cash from a real estate sale and from a few store closings, too. Finally, the company's expenses were a bit lower than expected.
Together, these trends contributed to an improving cash position that gives the chain plenty of flexibility as it works to return to a sustainable profit growth pace.
Ahead of schedule
[W]e remain focused on our financial goals of moderating the declines in our operating profit and net earnings per diluted share and re-establishing growth in both. [And] we are ahead of plan. Based on our preliminary assumptions, we now believe that our fiscal 2019 net earnings per diluted share will be about the same as this year.
Bed Bath & Beyond has been telling investors to brace for several years of declining operating margins as executives work to shift the business toward a more sustainable earnings profile. Operating profit is running at just $210 million through the last nine months, for example, compared to $424 million in the year-ago period.
That bleak outlook is improving, though. Temeres and his team now believe earnings declines will peak during this fiscal year and that profits will hold steady in 2019.
The company still has major challenges to face before it can claim a real rebound. Traffic continues to decline at its physical stores, for one, and its online sales channel isn't performing nearly as well as more established e-commerce peers. Bed Bath & Beyond relies too much on deep discounts from its coupon mailer to generate sales, too.
But its revenue is inching higher overall and its financial picture is brightening, which means investors might have overreacted by pushing shares down 50% in 2018.