The stakes are unusually high for Bed Bath & Beyond's (NASDAQ:BBBY) upcoming earnings report. After all, the retailing chain owes shareholders an update on its rebound strategy following a poor sales showing over the holiday season.
But it will be just as important to learn how management plans to respond to the recent move by activist investors aimed at tossing out the executive team. Bed Bath & Beyond in late March referred to this as an "attack" against the company, so there will likely be more combative words about it in the company's earnings report on Wednesday, April 10.
Yet management has also promised that the chain's transformation progress will become clearer this year, and its fiscal first-quarter announcement will be an important opportunity to put hard numbers behind that optimistic prediction.
The struggling store base
Sales fell by 2% in the most recent quarter to land a bit below the prior quarter's 1% drop. As it has for over a year now, Bed Bath & Beyond reported that online sales growth partly offset slumping customer traffic at its physical stores, which are seeing revenue decline by around 5% these days.
Management said in January that these results were held back by a few executive actions aimed at improving the quality of its revenue base. Specifically, Bed Bath & Beyond removed lots of low-margin products from its shelves while at the same time raising the free-shipping threshold for e-commerce orders. Executives were happy with the early results of these moves aimed at prioritizing profitability over sales growth, but investors will find out this week whether they further pressured the retailer's market share.
There are good reasons to expect better news on the bottom line. Bed Bath & Beyond has been scaling back on price cuts and focusing on selling higher-margin products. It is being more restrained in targeting digital sales at the expense of profits, too.
These moves didn't stop gross profit margin from falling to 33% of sales from 35% last quarter, so investors will be looking for signs of stabilizing profitability this week. The good news is the company entered the selling period with light inventory levels, which puts it in an ideal position to protect margins this quarter and in the coming fiscal year -- assuming customer traffic trends haven't worsened significantly.
Beating back the attack
CEO Steven Temares and his team will issue an update on their short-term and long-term rebound outlook in a forecast that will take on added weight given the recent attack from activist investors. As it stands today, the company believes earnings will hold steady in fiscal 2019 before beginning to march higher again in 2020. That outlook constitutes an upgrade from their past prediction of harder profit declines.
Another quarter of progress in cutting costs would advance the retailer further ahead of its original earnings rebound plan. However, investors are likely to demand evidence that the company can return to sales growth at the same time. Management tried to assure shareholders in late March that their turnaround initiatives are working, and that fiscal 2019 will deliver a clearer view of that rebound. Executives' ability to continue leading the company could rest on whether investors like the picture that's emerging over the next several quarters.