Bed Bath & Beyond (NASDAQ:BBBY) isn't any closer to returning to profitable sales growth. Instead, the specialty retailer just delivered a quarterly report featuring weaker revenue than management had predicted, while profit margins took another step lower.
On the conference call with investors, interim CEO Mary Winston and her team didn't have much concrete data they could point to that would indicate that a turnaround was on the way. However, they did express confidence that the chain would eventually recover with help from a few major initiatives that are being rolled out across its store base. Let's take a closer look at what management had to say about the quarter and their rebound strategy.
A tough quarter
[Comparable-store] sales from our stores declined in the high single-digit percentage range, partially offset by slight growth in comp sales from our customer-facing digital channel.
-- CFO Robyn D'Elia
After comp sales fell by about 1% in each of the last three fiscal years, the trend worsened at the start of fiscal 2019. Comparable-store sales dropped 7% in Q1, modestly trailing management's initial target. That result translated into a market share loss in the e-commerce channel as the company scaled back on its free shipping offers.
The bigger concern was plunging customer traffic at the retailer's physical stores. "It is clear that the company has not kept pace with how the customer has evolved and how consumers shop today," Winston said.
Profit trends are improving
To be clear, our efforts will be focused on opportunities to drive profitable sales growth.
Bed Bath & Beyond's strategy prioritizes profitability over sales growth, with initiatives that include cutting popular but low-margin products from its offerings, reducing coupon usage, raising prices, and cutting back on e-commerce promotions. Each of these moves contributed to the quarter's sharp sales decline.
The good news is that these moves also slowed the chain's profit pinch. Gross margin fell by 0.5 percentage points, which was an improvement over the prior quarter's 1.2 percentage-point slump.
A plan for stability
Our ultimate objective is to find the right balance between our physical and digital presence within the markets we serve and to deliver the shopping experience our customers want.
Executives didn't articulate how they plan to convince customers to return to Bed Bath & Beyond's stores except to say that the chain has all the necessary ingredients for growth, including an attractive and expanding industry and a strong brand. Management is focused on updating and improving the in-store experience, but it's hard to see how their latest efforts will differ from those of the past year.
Yet investors should see concrete changes around the store base as the company completes its review of its real estate assets this year. After looking at each location's profitability, it's likely that Bed Bath & Beyond will announce a restructuring plan aimed at right-sizing the business and reducing its cost burden.
As we move forward, taking into consideration both the work to be done in our transformation as well as continuing challenges and broader retail environments, we are taking a more conservative approach to our outlook for the remainder of fiscal 2019.
The chain now predicts that sales and profits will land at the low end of the guidance range they issued at the start of 2019, and that portends a fourth consecutive year of falling sales with profitability faring only slightly better. Executives couldn't estimate when the rebound might take hold since the company is searching for a permanent CEO and has several major restructuring initiatives in the works. Given the weakening traffic trends, investors have to assume things might get worse in the short term as they wait for more clarity.