Investors had low expectations heading into Bed Bath & Beyond's (BBBY) latest earnings report. But Wall Street was still surprised by the scope of the home furnishing retailer's struggles through the holiday selling period.
The company endured another double-digit sales slump over the three months that ended in late February. Profitability dove, too, as it stumbled through inventory, supply chain, and staffing problems.
There were a few bright spots in the report, but the company appears to be moving further away from the rebound that management has been predicting for the past year or so.
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Another disappointment
Bed Bath & Beyond reported a brutal 22% drop in sales for its fiscal 2021 fourth quarter (ended Feb. 26). Sure, some of that slump came from its shrinking store base, which is helping the business become more efficient.
However, revenue also fell 12% at existing locations. That result represents worsening sales trends compared to the 7% decline the company reported three months ago.
Management blamed supply-chain challenges, the rise of the omicron variant, and geopolitical turbulence for pressuring customer traffic. However, these issues didn't stop rivals like Target from posting strong fourth-quarter growth.
In contrast to its bigger peers, Bed Bath & Beyond couldn't secure enough inventory to keep its shelves fully stocked. "The lack of available inventory to sell proved to be a continuing impediment...into the early part of 2022," CEO Mark Tritton said in a press release.
Taking a profit hit
The chain also noted soaring expenses that pushed the company into adjusted losses compared to modest profitability a year ago. Gross profit margin dropped to 29% of sales from 33% of sales, and the operating loss expanded to $165 million from $24 million.
Executives tried to cast the margin declines in a more positive light, saying that profitability would have risen without supply-chain cost spikes. The adjusted gross margin beat expectations, they explained in a conference call with Wall Street analysts.
The opening of new distribution centers should help fix the supply-chain challenges over the next several quarters, leading to improving earnings results. "The modernization of our operational foundation will be important tailwinds as we emerge from the current environment," Tritton said.
Looking ahead
Bed Bath & Beyond is entering the second year of a transformation process that management said will require three years of strategic and financial adjustments. But growth trends might get worse before they get better.
Comparable-store sales and gross profit margin metrics will each remain weak in the first half of fiscal 2022, according to management's outlook. Look for improvements starting in the second half of the year, they predict.
Investors should be a bit skeptical about that rebound forecast, given that most growth metrics are moving in the wrong direction today compared to industry peers. Until there's concrete evidence that Bed Bath & Beyond can generate sustainable sales growth, you might want to look to more successful retailing businesses for market-beating returns.
