Back in June, Bed Bath & Beyond (NASDAQ:BBBY) issued what seemed like a lowball forecast for the second quarter of its 2021 fiscal year. The iconic retailer called for sales (adjusted for divestitures) to come in somewhat lower than 2019 levels, despite low-single-digit comp-sales growth.
Meanwhile, U.S. home-furnishings demand has jumped more than 20% over that period. Bed Bath & Beyond also estimated that it would generate adjusted earnings per share (EPS) between $0.48 and $0.55.
On Thursday, the home-furnishings specialist reported that Q2 results fell short of its modest expectations. As a result, Bed Bath & Beyond stock plunged 22% -- and for good reason: The retailer's turnaround plan looks like too little, too late.
From bad to worse
Three months ago, Bed Bath & Beyond described its first-quarter results as "strong," but that was clearly an exaggeration. Total sales for the company's continuing operations lagged its result for the first quarter of fiscal 2019 by about 6%. Moreover, Bed Bath & Beyond logged a sizable net loss under generally accepted accounting principles (GAAP) and posted a meager adjusted profit of $0.05 per share.
If anything, its second-quarter results were even worse. Revenue came in at $1.99 billion, missing the company's guidance range of $2.04 billion to $2.08 billion. Comparable sales slipped 1%, and total sales for Bed Bath & Beyond's core retail banners fell 11% year over year. Store traffic decelerated significantly in August, presumably due to the surge in COVID-19 cases associated with the Delta variant.
Additionally, Bed Bath & Beyond reported Q2 adjusted gross margin of 34%, missing its forecast of 35% to 36%. Management blamed surging freight costs and supply-chain issues for the miss.
Moreover, Bed Bath & Beyond continues to exclude lots of markdowns on older merchandise from its adjusted gross margin on the theory that they relate to a one-time change in the company's merchandise strategy. GAAP gross margin was just 30.3%.
The net result was a GAAP loss of $73 million ($0.72 per share) and a tiny adjusted profit of $4 million ($0.04 per share), down from adjusted EPS of $0.50 a year ago.
More wishful thinking?
Management indicated that business trends remained poor in September. For the third quarter -- which runs through late November -- it projects that sales will slip to between $1.96 billion and $2 billion on flat comparable sales. Adjusted gross margin should land between 34% and 35%, enabling the company to post adjusted EPS between breakeven and $0.05.
Bed Bath & Beyond also reduced its full-year guidance. It now expects adjusted EPS between $0.70 and $1.10 on net sales of $8.1 billion to $8.3 billion and adjusted gross margin between 34% and 35%.
However, these expectations could still prove unduly optimistic. Bed Bath & Beyond is banking on a recovery in November just to reach breakeven this quarter. And its full-year forecast implies a massive earnings turnaround in the fourth quarter.
A show-me story
New CEO Mark Tritton is implementing much-needed changes at Bed Bath & Beyond. The company is renovating hundreds of stores to offer a less cluttered shopping experience, investing in new private brands, and upgrading its digital and omnichannel capabilities.
However, large numbers of former Bed Bath & Beyond customers have already moved on. Winning them back will be extremely difficult, given the intense level of competition in the retail industry. While Bed Bath & Beyond is still in the early innings of its turnaround attempt, it's telling that the brand has continued to hemorrhage market share this year.
Indeed, Bed Bath & Beyond can't match the cost structure of most of its big rivals in the home market. The need to offer competitive prices will therefore weigh on its profitability. So while Bed Bath & Beyond stock may look cheap after its big drop on Thursday, investors shouldn't be tempted to invest in this struggling retailer.