Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Bed Bath & Beyond’s Struggles Deepen

By Demitri Kalogeropoulos - Jul 12, 2019 at 8:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The growth outlook just got cloudier for this specialty retailer.

Investors were already bracing for bad news from Bed Bath & Beyond ( BBBY -1.60% ). The specialty retailer in fiscal 2018 endured its third consecutive year of falling sales and declining profitability, and the short-term outlook seemed to suggest things would get worse before they got better.

On Wednesday, the retailer announced fiscal first-quarter results that supported that bleak assessment. Its sales trends deteriorated as it generated a net loss for the period. Worse yet, the new management team could give investors no assurance that stabilization was on the way for either the top or bottom lines.

A man holding shopping bags.

Image source: Getty Images.

Market share losses and cost spikes

Bed Bath & Beyond's comparable-store sales dropped by 1% last year, just as they had in each of the previous two fiscal years. While that pace matched management's initial outlook for 2018, it also reflected a more significant market share loss, given that peers like Walmart ( WMT 1.51% ) and Target ( TGT 0.84% ) simultaneously notched some of their strongest customer traffic gains ever.

The retailer's struggles only deepened in its fiscal Q1 2019. Comps dove by a painful 7%, compared to gains of 5% by Target and 3% by Walmart. Part of its slump can be blamed on a timing shift around the Easter holiday. However, it's also clear that Bed Bath & Beyond has fallen behind many of its peers when it comes to delivering a compelling in-store shopping experience. "We need to give our customers a reason to keep shopping in our brick-and-mortar stores," interim CEO Mary Winston said during the earnings call.

The chain's financial metrics showed plenty of strain on profit margins as it works to balance its competing goals of stabilizing sales and reining in promotions. Gross profit dropped to 34.5% of sales from 35% a year ago due to lower prices.

Selling expenses also jumped as Bed Bath & Beyond continued building out its e-commerce infrastructure. Together, these negative profit trends pushed operating income into negative territory even after adjusting for a $400 million goodwill impairment charge.

A cloudier picture

Winston and her team didn't issue any concrete predictions for investors that might point to an approaching end to Bed Bath & Beyond's current struggles. Inventory levels fell at a slower rate than sales this past quarter, which suggests more pricing pressures ahead. That factor, plus the weak customer traffic trends so far this year, have executives forecasting that sales will land near the low end of their previous guidance range of $11.4 billion to $11.7 billion. Revenue was $12 billion in fiscal 2018, and peaked at $12.3 billion in the prior year.

Earnings will likely be at the low end of executives' prior outlook, too, landing at around $2.11 per share, not counting the significant non-cash charges management booked this quarter.

The good news is that Bed Bath & Beyond is making lots of aggressive moves aimed at arresting its slide, including lowering costs and right-sizing its store base through lease renegotiations. Its cash position gives it plenty of flexibility to see these initiatives through.

Yet, with market share trends worsening, it's hard to tell whether the company is closer to the end or the beginning of its multiyear turnaround effort. Add in the extra uncertainty regarding leadership as the company continues its search for a permanent CEO, and investors have all the reasons they need to avoid this stock for now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
BBBY
$17.86 (-1.60%) $0.29
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$137.51 (1.51%) $2.04
Target Corporation Stock Quote
Target Corporation
TGT
$247.57 (0.84%) $2.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.