Well, at least it didn't come as a total surprise.
Earlier this week, I outlined a few of the problems facing home-furnishings retailer Bed Bath & Beyond (NASDAQ:BBBY):
- Slumping sales.
- Contracting profit margins.
- The newest risk of having its cash frozen in ice-cold auction-rate securities.
In the past week or so, we’ve gotten a taste of weakness from Williams-Sonoma (NYSE:WSM), Sealy (NYSE:ZZ), and Hooker Furniture (NASDAQ:HOFT). Literally any retailer connected to housing is facing some hard times lately. So whether you focused on the company’s individual problems or on rising trends in the industry, one thing was clear -- Bed Bath would be reporting a rough end to fiscal 2007, with perhaps more bad news to come.
And so it did
On both counts. Bed Bath wrapped up 2007 with a report that came in light on sales, ending the year with $7.05 billion in revenue. That made for just 6.5% growth overall, of which 1% was same-store sales growth (the rest came from new store openings). Free cash flow headed in the other direction, dropping 13% in comparison to fiscal 2006. GAAP profits, however, defied my prediction of a miss, instead beating estimates by a penny. That left Bed Bath with $2.10 per share in earnings -- a penny better than last year. Thank heavens for small blessings, because the news went downhill from there, as profits per share were boosted solely from buybacks since net income for the year dropped 5.35%.
Peering into a future featuring "no significant change in the macroeconomic environment," Bed Bath predicts essentially flat to slightly negative comps in 2008. Combined with continuing margin pressure, that should mean profit will see a percentage decline in the low to mid-teens this year. Management didn’t offer exact figures, but I’d call it $1.76 to $1.86.
Or is it?
Double-digit percentage declines may not sound like "good news" to you, but there's the very real possibility that things will be even worse. So far, we're still talking a decline in the "teens" for the year. But in Q1 in particular, management warned us to expect $0.26 to $0.30 in per-share earnings. Why is that worrisome? Because in last year's Q1, the firm earned $0.38 per share. Dropping to the $0.28 midpoint in the new guidance implies a percentage decline in excess of 26% in Q1 -- and management hasn't yet explained how it plans to shave off 10% of that decline over the next three quarters.
For my money, that's the real question still to be answered.
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