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Bed Bath & Beyond Stumbled Again Last Quarter

By Adam Levine-Weinberg - Jul 14, 2019 at 10:07AM

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The home furnishings retailer's 6.6% sales drop makes its financial targets for fiscal 2019 seem rather unrealistic.

Fiscal 2018 was a year to forget for Bed Bath & Beyond ( BBBY -6.66% ). Comparable store sales slipped 1.1%, and adjusted earnings per share tumbled 34% to $2.05 as margin pressure ramped up. As recently as 2015, adjusted EPS exceeded $5.

On the bright side, Bed Bath & Beyond's management team indicated on the Q4 earnings call in April that earnings would return to growth this year. However, on Wednesday, the company reported that sales fell even more than expected in the first quarter of fiscal 2019. This makes it seem unlikely that the struggling home furnishings retailer will reach its targets this year.

Another dreadful quarter

Bed Bath & Beyond reported its worst sales performance yet in the first quarter, as comp sales plunged 6.6%. This was worse than the company's forecast for a 5% to 6% comp sales decline. Total revenue also fell 6.6%, reaching $2.57 billion, just shy of the average analyst estimate of $2.58 billion.

To be fair, some of Bed Bath & Beyond's sales decline was intentional. The company made a number of strategy adjustments designed to prioritize profitability over sales, such as removing less profitable items from its assortments, making some items ineligible for coupon discounts, and raising the spending threshold for free shipping. It also shifted some marketing spending from the first quarter to the fourth quarter, which should boost sales later in the year.

Two people's hands holding a Bed Bath & Beyond gift card

Bed Bath & Beyond's sales plummeted 6.6% year over year in the first quarter. Image source: Bed Bath & Beyond.

That said, these moves didn't actually allow Bed Bath & Beyond to stabilize its profit margin last quarter. Adjusted EPS fell to $0.12 from $0.38 in the first quarter of fiscal 2018. Gross margin slipped to 34.5% from 35% in the prior-year period, while operating expenses rose to 32.9% of sales from 31.7% of sales a year earlier.

The EPS result did beat the average analyst estimate of $0.08, but that was a small consolation, given how far Bed Bath & Beyond's sales and earnings plunged last quarter.

The fiscal 2019 outlook looks shaky

Longtime Bed Bath & Beyond executive Steven Temares abruptly resigned as CEO two months ago. He was replaced on an interim basis by Mary Winston, a recent addition to the board.

Winston said she is confident in the full-year guidance the company released in April, albeit with the caveat that sales and adjusted EPS will probably come in at the lower end of the ranges provided then. That would put sales at $11.4 billion, down from $12 billion last year, and adjusted EPS at $2.11, up 3% year over year.

Still, it doesn't inspire confidence that Bed Bath & Beyond has already retreated to the low end of its guidance ranges just a few months into the fiscal year. Moreover, management is counting on steady improvement in sales trends over the next few quarters to reach its targets: improvement that hasn't actually begun yet. If sales trends remain near current levels, Bed Bath & Beyond is likely to miss its full-year earnings target by a wide margin.

Risks still outweigh the potential rewards

Bed Bath & Beyond stock may appear cheap, as it trades for less than six times the company's projected fiscal 2019 EPS. However, considering how bad the first-quarter earnings report was, investors can't have confidence in Bed Bath & Beyond's earnings projections.

Management is making some sensible moves to boost earnings, such as closing underperforming stores, renegotiating leases to reduce rent expense, improving Bed Bath & Beyond's private-label operations, cutting overhead spending, and optimizing store labor based on current sales trends. The company even hinted that it will consider exiting some of its smaller, non-core retail banners.

Nevertheless, all the cost-cutting in the world won't save Bed Bath & Beyond if sales continue to decline year after year. Management hasn't presented a clear plan for reinvigorating sales growth, and that isn't likely to change anytime soon, given that the company is just starting the search for a permanent CEO. And with sales falling during good economic times, it's frightening to think of what might happen to the iconic home furnishings retailer during the next recession.

Until Bed Bath & Beyond shows more tangible signs of progress toward stabilizing its sales and earnings, investors should steer clear of the stock.

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.

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