On Wednesday, Bed Bath & Beyond (NASDAQ:BBBY) reported that sales surged 49% to $1.95 billion last quarter, beating analysts' estimates. Adjusting for Bed Bath & Beyond's decision to sell off its non-core retail banners last year, sales jumped 73% year over year.
Following this strong recovery from the COVID-19 pandemic, Bed Bath & Beyond raised its guidance for fiscal 2021. CEO Mark Tritton said: "We have started the year in a position of strength and are clearly on track to accomplish our goals." As a result, Bed Bath & Beyond stock jumped as much as 31% on Wednesday and ended the day with an 11% gain.
However, Bed Bath & Beyond's results were not nearly as good as management would have investors believe. Let's take a look.
Revenue bounces back, mostly
While Bed Bath & Beyond's sales skyrocketed on a year-over-year basis last quarter, most of the company's stores had been closed for the majority of the prior-year period. Investors need to look at the comparison to the first quarter of fiscal 2019 for a clearer view. Moreover, it's important to adjust for Bed Bath & Beyond's sale of several non-core businesses over the past year, including Christmas Tree Shops and Cost Plus World Market.
In April, Bed Bath & Beyond reported that sales for its core go-forward business totaled $2.08 billion in Q1 2019. Thus, with sales of $1.95 billion last quarter, it has almost -- but not quite -- gotten back to its pre-pandemic sales volume. Similarly, while the company raised its full-year sales forecast to a range of $8.2 billion to $8.4 billion, that compares unfavorably to its core go-forward sales of $9 billion two years ago.
On a comparable basis, which excludes stores that have opened or closed over the past two years, Bed Bath & Beyond says that sales increased 3% compared to the first quarter of fiscal 2019.
Adjusted gross margin beat management's expectations at 34.9%. However, this figure excluded significant markdown costs related to Bed Bath & Beyond's changing merchandise strategy. Under generally accepted accounting principles (GAAP), gross margin came in at 32.4%, down from 34.5% two years ago, which was already low by historical standards.
As a result, Bed Bath & Beyond posted a GAAP net loss of $0.48 per share in the first quarter. On an adjusted basis, it eked out a razor-thin profit of $0.05 per share.
Still losing market share
In his earnings report commentary, Tritton said that Bed Bath & Beyond is "recapturing market share." Literally speaking, that's true. According to Census Bureau data, sales in the furniture and home furnishings category rose 88% year over year in the three-month period ending in May (roughly corresponding to Bed Bath & Beyond's fiscal first quarter). Meanwhile, sales rose 96% for Bed Bath & Beyond's namesake chain.
However, comparing to the first quarter of 2019, it's clear that Bed Bath & Beyond has lost a huge amount of market share since the pandemic began. Bed Bath & Beyond's sales have decreased compared to two years ago, despite 20%-plus growth for the overall furniture and home furnishings category.
This market share loss is particularly notable given that bankruptcies of other home furnishings retailers -- most notably, Pier 1 Imports -- have put a lot of market share up for grabs since early 2019.
By contrast, first-quarter sales for TJX Companies' HomeGoods unit jumped 53% compared to two years ago. Home department sales rose 47% at Target and 11% at Kohl's over the same period. Even Macy's -- which was still struggling with a slow recovery in mall traffic last quarter -- managed to post modest growth in its home department compared to Q1 2019.
Bed Bath & Beyond's new management team has a reasonable plan for getting the iconic retailer back to health. The company's investments in new private brands and more attractive stores are especially promising.
Thus, Bed Bath & Beyond certainly has turnaround potential. But management does investors a disservice by overstating the retailer's progress. As home-related spending normalizes following the surge that began last spring, Bed Bath & Beyond's sales will go into reverse unless it can start making durable market share gains.
With Bed Bath & Beyond shares trading for more than 20 times forward earnings, investors should steer clear of this turnaround stock until it shows clearer signs of progress.