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Can Bed Bath & Beyond Get Back on Track Next Week?

By Demitri Kalogeropoulos - Sep 27, 2019 at 8:16AM

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Investors have some big questions heading into the retailer's next earnings report.

Investors aren't sure what to make of Bed Bath & Beyond's ( BBBY 6.08% ) business as we approach the peak holiday selling period. The specialty retailer's stock had been up as much as 60% in 2019 before plunging to a 30% loss by mid-August.

Shares have rebounded slightly as the company approaches its fiscal second-quarter earnings report on Wednesday, Oct. 2. But that modest rally could easily disappear if the company can't show progress in its turnaround plan.

Let's take a closer look.

Crowded escalator in a busy shopping mall

Image source: Getty Images.

Growth goals

If the company has hit on a reliable path back to growth, there's no evidence of it in its recent earnings reports. Sales at existing locations, or comps, dropped 7% in the first quarter to mark a brutal start to the year. That metric has ended up lower by an average of roughly 1% in each of the last four fiscal years, but recent customer traffic declines suggest Bed Bath & Beyond investors may see much lower results in 2019.

That uncertainty puts the focus squarely on sales growth this week, with most investors who follow the stock expecting to see revenue fall about 6% to $2.76 billion. The more important metrics to watch will be customer traffic and market share. The good news is that management is aware of the fact that the chain has lost step with how customers want to shop, both in physical stores and online. For the narrative to change, Bed Bath & Beyond will need to show progress in winning back at least some of that sales momentum this week.

Margin trade-off

Every retailer has to balance sales growth goals against profitability targets, but that trade-off has been even trickier for Bed Bath & Beyond lately. Its shoppers tend to wait for its dramatic price cuts, often announced in the periodic mailers it sends around to surrounding areas. These sales help support the consumer discretionary stock's customer traffic but have pressured profitability.

Interim CEO Mary Winston and her team have done a good job of reducing the chain's reliance on these margin-busting sales, both by scaling back on promotions and by cutting out less-profitable products. Yet these moves are exacerbating Bed Bath & Beyond's customer traffic problems, and so the company needs to find a sustainable balance in this trade-off. Hopes are modest going into this week's report, but progress might show up in rising gross profit margin in the context of stabilizing sales trends.

The bigger picture

A more stable growth picture would mark just the first step in a multiyear effort to turn the business around. Bed Bath & Beyond's recovery plan will likely involve shifting resources away from its network of stores and toward the online selling channel. The company's next CEO will also have to decide whether it makes sense to pivot into different product niches or to make other aggressive changes to the store footprint.

The organization is still searching for that permanent leader, with a hire likely over the next few weeks. Still, investors won't have a good idea about the CEO's strategy until he or she gets settled into the new role following what's likely to be a tough holiday shopping season for Bed Bath & Beyond.

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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