Investors had good reasons to be pessimistic heading into the fiscal first-quarter report from Bed Bath & Beyond (BBBY). The specialty retailer announced a brutal sales decline back in April while predicting a rebound on both the top and bottom lines that would start in the second half of 2022.
Bed Bath & Beyond's late June earnings report showed worsening demand trends and ballooning net losses. These factors make management's broader rebound plan seem far too optimistic. Let's take a closer look.
Worse demand trends
Management said in mid-April that customer traffic was rapidly shifting away from its core growth niche of home furnishings. That move intensified through the first quarter.
Comparable-store sales fell 27% through late May in the Bed Bath & Beyond brand and dropped about 5% in the buybuy Baby segment. Comps three months ago declined by 15% and were up slightly in those two chains, respectively, implying no stabilization yet in the demand slump.
Executives didn't try to sugarcoat the results. "There was an acute shift in customer sentiment," incoming CEO Sue Gove said in a press release, "and ... pressures have materially escalated." The retailer noted challenges, including inventory shortages and oversupplies, along with far weaker demand in areas that had been popular in earlier phases of the pandemic.
The profit hit
As you might expect, there was a serious financial penalty associated with that sales decline. Bed Bath & Beyond logged a 24% gross profit margin, which is down nine percentage points compared to a year earlier. Net losses ballooned to $358 million from $51 million, in part because the chain had to write off a large volume of obsolete inventory.
BBBY Operating Margin (TTM) data by YCharts.
Similar to what Target noted in its last earnings report, Bed Bath & Beyond was hit with higher transportation and inventory holding costs, which were tougher to pass along to consumers in this low-demand environment. "Our first-quarter results are not up to our expectations," Gove said.
Looking ahead
Investors might take comfort in the fact that almost all of the profitability hit that the retailer took is from transitory issues like cost spikes and inventory write-down charges. Bed Bath & Beyond is clearly taking its challenges seriously, too, as illustrated by the company's decision to change the leadership team and appoint Gove immediately as an interim CEO.
It isn't clear that a major strategic pivot can get this business back to profitable growth, though. After all, Bed Bath & Beyond is losing market share in a shrinking industry and was showing sharp margin declines even before this latest update.
Those factors could convince investors to keep away from this volatile stock, perhaps in favor of more successful retailers. Bed Bath & Beyond has resources to support it through the next two years of management's three-year transition plan.
But its last few earnings updates imply that it may take longer than that before investors start seeing anything approaching stable sales and profit growth from this business.
