Bed Bath & Beyond (BBBY +0.00%) is tossing out a lot more than just the bathwater. The home goods retailer's business has become so damaged that for the second consecutive quarter, it was forced to take a massive impairment charge related to its goodwill and brand, bringing the total that it has written off to nearly $1 billion.
Although adjusted earnings beat analyst expectations, sales continue to fall and comparable-store sales plunged at nearly twice the rate forecast. There's a new management team, but the latest earnings report indicates it has a very steep hill to climb to bring the retailer back.
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A business in serious decline
The home goods chain said sales in its fiscal 2019 first quarter fell 6.6% to $2.6 billion as comps cratered by a like amount, worse than the 3.8% decline analysts had been expecting. It reported net losses of $371 million, or $2.91 per share, compared with net profits of almost $44 million, or $0.32 per share, a year ago.
However, Bed Bath & Beyond said it took impairments to goodwill and on its trade name of $401 million, or some $3.03 per share, which was on top of the $510 million impairment it took last quarter. When adjusted for the writedown, the retailer's earnings were $0.12 per share, a big drop from last year's $0.38 profit, but ahead of Wall Street's expectations of $0.08.
But just because analysts thought the business was going to collapse more than it actually did doesn't make this performance any better, a fact interim CEO Mary Winston acknowledged when she said the retailer recognizes "there needs to be a fundamental change in our approach to executing the Company's business transformation."
Time for a new direction
Yet as bad as this quarter's performance was, investors should have expected there would be little change in the direction the company was heading. They need to view it as a new base for where it will now be heading, though it won't be quick.
Winston says Bed Bath & Beyond has begun reviewing how best to implement its four-point plan to resurrect itself, which includes growing sales again, resetting the company's cost structure, optimizing the asset base, and changing the organizational structure. That means constructive progress won't be seen immediately.
Management may sell off less-strategic assets, such as some of the many store concepts collected over the years, as well as reining in costs, including compensation. It says there also needs to be a way to better connect with consumers without having to give away profits with unrelenting discount coupons.
Bed Bath & Beyond seems to be making a fast start on that last point, noting its coupon expense declined in the quarter, primarily as a result of mailing fewer coupons and seeing fewer being redeemed. Though that was offset somewhat by an increase in the average coupon amount that was redeemed.
Weak sales are expected to continue. Although it is maintaining the full-year outlook it provided last quarter, the company thinks both sales and earnings will now come in at the lower end of the ranges it provided: $11.4 billion to $11.7 billion in sales, and $2.11 to $2.20 in per-share profit.
It's going to take time
While investors ought to give the new management team enough time to right the sinking ship, it doesn't mean they need to put money into it. Just like a large ship needs a wide arc to make a U-turn, so too does Bed Bath & Beyond need a wide berth to complete its turnaround.
There's no guarantee that even a new board and CEO can fix what's wrong at the retailer, so watching from the sidelines is the safest bet for now.
