Bed Bath & Beyond (NASDAQ:BBBY) struggled mightily in fiscal 2018, and the home furnishings giant started this year on the wrong foot, too. Comparable store sales fell 6.6% in the first quarter of fiscal 2019, causing adjusted earnings per share to plunge to $0.12 from $0.38 in the prior-year period.

Nevertheless, following the disappointing first-quarter results, management reiterated its forecast that adjusted earnings per share would grow modestly in fiscal 2019. However, Bed Bath & Beyond's turnaround plan is gaining traction at a very slow pace, as evidenced by its weak performance in the second quarter. This has left the company in a perilous position in the event of further setbacks to its business.

Another subpar quarterly report for Bed Bath & Beyond

Last Wednesday, Bed Bath & Beyond released its Q2 earnings report, and the results weren't impressive. Comparable store sales fell 6.7% -- roughly in line with the company's first-quarter performance -- and total sales declined 7.3% to $2.7 billion.

On the bright side, Bed Bath & Beyond improved its adjusted gross margin by 0.2 percentage points year over year last quarter, after posting gross margin declines throughout fiscal 2018 and in the first quarter of fiscal 2019. It also reduced its adjusted selling, general, and administrative (SG&A) expenses by about 5% year over year.

This wasn't enough to fully offset the negative impact of falling sales on profitability, though. As a result, Bed Bath & Beyond's adjusted operating profit plunged 25% year over year, adjusted net income fell 19%, and adjusted EPS dropped about 11%: from $0.38 to $0.34. Despite this earnings decline, management said that it expects adjusted EPS to rise to between $2.08 and $2.13 for fiscal 2019 as a whole, up from $2.05 a year ago.

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

Bed Bath & Beyond's earnings declined again last quarter. Image source: Bed Bath & Beyond.

There are a lot of caveats in the earnings numbers

On the surface, Bed Bath & Beyond's 11% adjusted EPS decline last quarter doesn't seem disastrous. Considering that EPS plunged from $5.04 in fiscal 2015 to just $2.05 last year, it might seem that the company is close to turning the corner -- particularly because it is still projecting modest adjusted EPS growth for the full year.

However, Bed Bath & Beyond's performance last quarter was worse than its "adjusted" results would suggest. First, one-time tax benefits boosted adjusted EPS by $0.04. Otherwise, Bed Bath & Beyond would have reported a 21% decline in adjusted EPS to $0.30.

Second -- and more importantly -- Bed Bath & Beyond took a massive $194 million inventory writedown last quarter, to reflect its plans to aggressively reduce inventory in its stores. Including this writedown, gross margin plunged by 7 percentage points in Q2, and Bed Bath & Beyond reported a big loss. This unusual move may have boosted last quarter's adjusted gross margin by rolling normal clearance markdowns into the big inventory writedown that was excluded from the company's adjusted results.

Third, Bed Bath & Beyond's guidance excludes the impact of the latest round of tariffs. CFO Robyn D'Elia said the tariffs could reduce EPS by up to $0.10 this year. Including an impact at that level, Bed Bath & Beyond's full-year guidance would no longer point to an increase in adjusted EPS.

Bed Bath & Beyond needs to move faster

Interim CEO Mary Winston has laid out a reasonable profit improvement plan for Bed Bath & Beyond. The strategy is centered around reducing inventory and growing private-label sales to boost gross margin, renovating top stores to boost traffic and sales, and aggressively cutting costs. The company also may sell some of its real estate and divest one or more of its noncore brands, which would raise cash that could be returned to shareholders or used to pay down debt.

That said, this plan may not be sufficient to offset the headwinds that Bed Bath & Beyond is facing. Based on the timing of tariff implementation, the company will face a much bigger drag from tariffs in fiscal 2020 than it will this year. Bed Bath & Beyond's sales base is still eroding rapidly in the face of stiff competition from nimble e-commerce and off-price rivals. Moreover, many economists believe the U.S. economy could fall into a recession in the next year or two, which would add to the retailer's woes.

In short, Bed Bath & Beyond needs to move even more aggressively to stabilize and right-size its business. Otherwise, the next recession could erode what's left of the company's once-lofty profit margin, putting Bed Bath & Beyond's long-term survival at risk.