Three months ago, Bed Bath & Beyond (BBBY 0.61%) reported its first quarterly increase in comparable store sales since fiscal 2016. Last week, the retail conglomerate announced that comp sales grew again in the third quarter of its 2020 fiscal year. It also reported a sizable increase in gross margin, leading to year-over-year improvement in its adjusted earnings.
New Bed Bath & Beyond CEO Mark Tritton and his team are presenting these achievements as clear signs that the turnaround plan they introduced last year is already paying off. Reality is a little more complicated, though. In some respects, the company is clearly on the right track. However, its ability to keep sales stable or growing in the years ahead remains uncertain.
Bed Bath & Beyond delivers another decent quarter
Bed Bath & Beyond's comparable sales rose 2% year over year last quarter. Digital comparable sales surged 77%, more than offsetting a 15% decline in store-based comp sales. That said, comp sales growth slowed from the previous quarter's 6% pace, as the latest wave of the COVID-19 pandemic pinched store traffic, particularly late in the quarter. Furthermore, total sales fell 5% year over year to $2.6 billion, reflecting store closures and the sale of various non-core parts of the business.
The most impressive part of Bed Bath & Beyond's third-quarter performance was that adjusted gross margin rose by 3.1 percentage points year over year, reaching 35.4%. This enabled the company to eke out a small adjusted profit of $0.08 per share, after posting an ugly $0.38 adjusted loss per share a year earlier.
Bed Bath & Beyond also made significant progress toward its asset-sale goals last quarter. The company sold its Christmas Tree Shops chain, a related distribution center, and its institutional Linen Holdings business for combined proceeds of approximately $246 million ($238 million net of certain adjustments). More recently, it agreed to sell Cost Plus World Market -- its final non-core banner -- for $110 million. These deals will bring Bed Bath & Beyond's full-year asset sale proceeds to more than $600 million. The company is returning most of this cash to shareholders by repurchasing $375 million of stock in fiscal 2020.
Questions about the sales trajectory
While Bed Bath & Beyond has reported respectable sales results in recent quarters, it has benefited from a huge surge in home demand this year. In fact, its comp sales growth pales in comparison to other home-focused retailers.
For example, TJX Companies' HomeGoods chain reported a 15% increase in comparable store sales last quarter. Total sales rose 19%. At Home posted even more incredible numbers, with comp sales surging 44% and total sales skyrocketing nearly 48% year over year. Even more remarkably, both chains delivered this phenomenal growth through in-store sales. HomeGoods doesn't sell online yet (though that is about to change), while At Home just launched its e-commerce business last year.
Management barely mentioned this industrywide tailwind during Bed Bath & Beyond's conference call last week. The company pointed to recent market share gains in the bed category and "improving trends" in the bath and kitchen categories. The distinction between share gains and "improving trends" suggests that Bed Bath & Beyond is merely losing share at a slower pace in the bath and kitchen categories now. And one must wonder whether the failure to mention any other categories implies that other parts of the business are losing share even faster than they were a year or two ago.
Most troublingly, Tritton said in response to an analyst question, "I think we see great data that shows that the home trend will be sticky. This is part of people's lives now and their expectation of creating joy and comfort at home." Management seems to be counting on a continued surge in demand for home-related items. Yet people have finite budgets. As the economy reopens, it seems far more likely that consumers will redirect spending from their homes to experiences like vacations and dining out.
An incredibly risky stock
Bed Bath & Beyond's bumbling prior management team left plenty of room for improvement for the iconic retailer. Tritton's team is already driving gross margin expansion through better inventory management, supply chain improvements, and tighter control over promotions. The company has further opportunities in this vein, and should also benefit from a healthier store base after the company completes its ongoing store closure program.
However, Bed Bath & Beyond is still bleeding market share. Unless management fixes that, the company's revenue could plummet if industry growth slows over the next year or two -- which seems virtually inevitable. Revenue declines could quickly wipe out the tailwind from Bed Bath & Beyond's gross margin initiatives.
The company's aggressive share buyback program will add to the volatility. If management's turnaround plan succeeds, the buybacks will magnify investors' gains. But if the plan fails to rejuvenate sales, the buybacks will leave the company with less financial flexibility to pursue other options. These factors make Bed Bath & Beyond stock an extremely risky investment.