The turnaround in Bed Bath & Beyond (NASDAQ:BBBY) that everyone has been waiting for has finally arrived -- at least that's what the home goods retailer wants you to believe. CEO Steven Temares told analysts during the company's third-quarter earnings conference call that Bed Bath & Beyond is ahead on its plan to transform itself and is on track to return to earnings growth by 2020.
Competition is taking its toll
Maybe it was the retailer's earnings guidance for the fiscal year that prompted Bed Bath & Beyond's stock to surge 20%, as it said it expects to report $2 per share in earnings for the full year, which would handily beat Wall Street's expectations of $1.60. Unfortunately, that's flat from last year's results and follows management's big cut to earnings guidance earlier in the fiscal year.
Bed Bath & Beyond continues to face competition from Amazon.com and Walmart, not to mention Target, Wayfair, and a host of other retailers.
The impact is evident in the chain's falling comparable-store sales figures, which dropped 1.8% in the quarter, much worse than the 0.3% decline of the year-ago period; it's the seventh consecutive quarter it has recorded falling comps. The drop-off also seems to be accelerating, even though we're in a period of relative consumer strength. The holiday season was especially robust, so the falling comps mean the company is losing market share.
The numbers aren't what they seem
Also declining were Bed Bath & Beyond's profit margins, which contracted sharply across the board, further suggesting the chain is still being highly promotional. And considering the comps numbers, the discounts are fairly ineffectual. Yet the anemic net sales growth of 2.6% also means Bed Bath & Beyond can't take its foot off the discounting pedal, or its sales will decline.
The one good thing it had this quarter was an inordinately low tax rate of just 9.2% thanks to tax reform. Last year, the rate was 35.3%. But that distorts its bottom line and makes its results look better than they were.
It should also be noted that the retailer benefited from the sale of a building for a gain of about $28 million. Absent its inclusion, the company would have seen earnings of around $0.02 per share. (It also recorded some $26 million in higher expenses due to new revenue recognition rules.)
The gains may be fleeting
The competitive environment for Bed Bath & Beyond isn't improving; it's actually becoming more fierce. The retailer's relevance to consumers has dramatically eroded over the years and still seems to be declining, notwithstanding the changes it's made to how it presents merchandise and its the greater emphasis on digital commerce.
So while management says that the retailer is on its path forward, the numbers tell a different story, one that should worry investors. Bed Bath & Beyond is improving in areas that really aren't crucial while suffering degradation in those that are.
To really turn itself around, the retailer needs a strong uptick in sales, to get customers back into its stores, and to keep its profits from falling. There's nothing in any of Bed Bath & Beyond's comments that indicates any of this is about to happen, or that it will next year, either. The rally in its stock price may have resulted from the hope that the few gains it saw won't be fleeting, but the evidence suggests otherwise.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Wayfair. The Motley Fool has a disclosure policy.