Investors weren't expecting good news from Bed Bath & Beyond (BBBY) this week, given that almost all of its stores were closed for most of the fiscal second quarter. COVID-19 did, in fact, hurt sales and push the retailer further into net loss territory and higher financial stress.

But the report was just as bad for shareholders who were hoping to see concrete signs that Bed Bath & Beyond has a bright future ahead as a multichannel retailer.

Sure, its digital sales spiked in April and May as people prioritized spending on home appliances and furnishings. Yet the chain doesn't appear on track to repeat success stories that investors have seen from national retailers like Target (TGT 0.96%).

A woman holding a smartphone in one hand and a credit card in the other.

Image source: Getty Images.

A no-good quarter

Bed Bath & Beyond deserves credit for navigating through some terrible selling conditions. It quickly closed almost all its locations to observe COVID-19 social distancing efforts, and then moved to slash costs and pivot toward e-commerce sales when the shutdown appeared set to continue for more than a few weeks. Without all those initiatives, sales would have declined more than the 49% drop that the retailer reported, and operating losses would have been much higher than the $461 million figure it announced.

The chain achieved other modest financial victories, including a 15% decline in selling expenses and relatively flat inventory holdings. Neither of these trends is objectively great news since revenue and sales volumes fell at a much faster pace than either expenses or inventories. But Bed Bath & Beyond made the best out of an unprecedented sales slump.

The digital future

Investors weren't treated with much good news on the digital front, either. Yes, e-commerce sales spiked by 82% over the three-month period and doubled during maximum lock-down weeks in April and May. Bed Bath & Beyond said that 40% of those orders came from customers who were new to its online platform, and about 10% came from shoppers who had never tried the brand. That suggests there's still a draw for its offerings that span popular home furnishings categories.

But the chain struggled to profit from this new business. The shift toward digital sales was the main factor behind slumping gross profitability, with gross margin falling by 8 percentage points to 27% of sales. Target and Walmart each noted some margin pressure when they made their omnichannel pivots a few years ago, but nothing that dramatic. Instead, Target's quick fulfillment options were a key factor behind rising profit margins last year.

The new normal

Bed Bath & Beyond seems to be pivoting toward a more digital focus anyway, with plans to close over 200 stores while maintaining new offerings like curbside pickup and store-based online fulfillment. That's another way that this growth story differs from multichannel winners Target and Home Depot, two retailers that have added to their store networks even as demand shifted online.

It's possible that the disruptive impact of COVID-19 is masking some positive underlying growth trends that will deliver real benefits from Bed Bath & Beyond's more integrated selling posture. But that's a risky bet to make today, especially considering the retailer was struggling with market share challenges even before the pandemic hit. In that context, investors would be better off waiting for signs of firming profitability before buying into any rebound story.