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Bed Bath & Beyond Earnings: Another Disaster

By Adam Levine-Weinberg – Jan 8, 2022 at 4:08AM

Key Points

  • Bed Bath & Beyond entered 2021 with high hopes for making progress on a long-awaited turnaround.
  • On Thursday, the company released its second consecutive weak earnings report, with sales and earnings both missing management's guidance.
  • Without more concrete evidence that Bed Bath & Beyond's turnaround is gaining traction, investors should avoid the stock.

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The home furnishings icon's business is deteriorating rapidly.

A year ago, many investors believed that Bed Bath & Beyond (BBBY 0.44%) was on a path to return to relevance in the retail industry. Fiscal 2021 started out reasonably well, as the company logged a small profit in what tends to be a seasonally weak quarter.

Unfortunately, Bed Bath & Beyond's sales and earnings trends deteriorated again as the year progressed. On Thursday, the home furnishings specialist released another dreadful earnings report.

The turnaround stops turning

Bed Bath & Beyond ended its 2020 fiscal year on a high note. Comparable sales rose 4% in its fiscal fourth quarter, which ended on Feb. 27, 2021. Meanwhile, adjusted earnings per share (EPS) grew 5% to $0.40. The first quarter of fiscal 2021 was fairly successful, too. Comparable sales increased 3% relative to fiscal 2019, gross margin expanded, and the company managed to generate adjusted EPS of $0.05.

Following that performance, management projected that the company would record adjusted EPS between $0.48 and $0.56 on sales of $2.04 billion to $2.08 billion in the second quarter. Bed Bath & Beyond also raised its full-year sales guidance by $200 million to a range of $8.2 billion to $8.4 billion and boosted its forecast for full-year adjusted EBITDA to a range of $520 million-$540 million. Lastly, it introduced a full-year adjusted EPS outlook of $1.40 to $1.55.

The exterior of a Bed Bath & Beyond store.

Image source: Bed Bath & Beyond.

However, a sales slowdown that began in August caused Bed Bath & Beyond to miss its Q2 revenue guidance. Quarterly sales totaled $1.99 billion. Surging freight costs and other supply chain issues weighed on the company's profitability, too, causing adjusted EPS to plunge 92% year over year to just $0.04: far below management's forecast.

The poor second-quarter performance forced Bed Bath & Beyond to reduce its full-year forecast. Its revenue guidance came down by $100 million, and the retailer slashed its adjusted EBITDA outlook to a range of $425 million to $465 million and its EPS forecast range to $0.70-$1.10.

A big step backward

Even this updated guidance seemed overly optimistic at the time, as it relied on a rapid rebound starting in November. In reality, sales trends continued to worsen in October and didn't recover much in November. For the full third quarter, comparable sales declined 7% and revenue plummeted 14% year over year to $1.88 billion, missing the midpoint of Bed Bath & Beyond's guidance range by about $100 million.

This sales miss weighed heavily on profitability. As a result, the company posted an adjusted loss of $0.25 per share, whereas it had expected to earn a small profit.

With freight and supply chain challenges continuing and the omicron variant impacting sales, Bed Bath & Beyond doesn't expect much improvement this quarter. For the full fiscal year, management now expects breakeven results at best, negative free cash flow, and adjusted EBITDA between $290 million and $310 million: down about 43% from what it anticipated six months ago.

A person cooking on a stove, with various cooking implements hanging in the background.

Image source: Bed Bath & Beyond.

Avoid this dangerous stock

Despite the awful Q3 earnings report, Bed Bath & Beyond stock actually jumped 9% on Thursday. Perhaps shareholders were satisfied with management's excuses for the poor quarterly performance (such as inventory shortages and supply chain issues impacting the distribution of its printed ads). Perhaps a return of meme stock traders lifted the stock. Or maybe investors were just heartened that Bed Bath & Beyond still plans to finish its $1 billion share repurchase program by the end of fiscal 2021.

Nevertheless, Bed Bath & Beyond stock looks less attractive than ever today. To put it bluntly, the business is declining rapidly as Bed Bath & Beyond hemorrhages market share. While management is taking reasonable steps to drive better sales and earnings results, the company faces formidable competition, and the turnaround effort may fail.

Moreover, with earnings and free cash flow on track to be breakeven or negative in fiscal 2021, share buybacks are just eroding the company's future financial flexibility. Until Bed Bath & Beyond's turnaround effort shows much more tangible signs of progress, investors should put their money elsewhere.

Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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