Investors were bracing for bad earnings news from Bed Bath & Beyond (BBBY 2.81%) but were still shocked by Wednesday's reporting. The specialty retailer announced weak third-quarter sales and a $30 million operating loss. The executive team, which just recently stepped in to lead the company, asked for investor patience as it completes its transformation plan over the next few months. Yet shareholders were stunned to hear the chain withdraw its 2019 outlook while it works on that rebound.
In a conference call with Wall Street analysts, new CEO Mark Tritton and his team explained the challenge ahead while maintaining that a full recovery is possible. Below are some highlights from that presentation.
Not going according to plan
These results are unsatisfactory and underscore the imperative for change and strengthen our sense of priorities and purpose.
The consumer company noted customer traffic strength during the core shopping period encompassing Black Friday. The calendar shift around the holidays resulted in a difficult comparison with the prior year period, too. After this move is adjusted for, the reported 8% decline in comparable store sales turns into a more modest 4% slump.
Yet management was clear that demand weakness during the wider third-quarter period was worse than expected. Tritton said the chain's poor showing, including its falling traffic and 1 percentage-point decline in adjusted gross profit margin, demonstrated that major changes are required to put the business on a path to achieving any kind of stable long-term earnings growth.
The foundation for growth
We have a clear mandate to reestablish our authority as the preferred omni-channel home destination.
Citing consumer research results that show a strong awareness of and affinity for the Bed Bath & Beyond brand, executives said the chain has a "tremendous opportunity" to grow in the massive home goods retailing category. That's not happening today, for several reasons including competitive encroachment by mass retailers like Walmart and Target.
In fact, without naming these companies specifically, Tritton suggested that Bed Bath & Beyond's best path back to growth involves mimicking their successful transitions into multichannel selling. "We will be leaning into the digital space to make it easier and more convenient for our customers to shop with us," he explained, "including quickly evolving ... to a full 'buy online, pick up in store' model during the first half of fiscal 2020."
We're experiencing short-term pain, some of which has been self-inflicted.
Executives believe market-share losses and earnings pressure will continue at least into the fourth quarter, in part due to execution issues around inventory management and the lack of robust digital shopping options. That cloudy operating situation is occurring at the same time as major upheaval at the top ranks of the business tied to last month's departure of six senior-level executives. Together, these issues threaten Bed Bath & Beyond's short-term trends so significantly that management decided to pull its 2019 financial guidance.
That's a drastic step that implies more difficult sales and earnings results over the next few months, meaning shareholders won't have much good news to cling to between now and the company's scheduled update on its transformation plan, set for some time in the spring.