Shares of Bed Bath & Beyond (NASDAQ:BBBY) have pulled back over 8% since the company reported fiscal fourth quarter earnings last month, undoing some of the gains the stock has seen in the past year. Shares now trade where they did back in November. In the midst of this weakness, here are the top five things the home goods retailer wants shareholders to keep in mind.
1. The weather and West Coast port slowdown hurt more than we care to admit
While Bed Bath & Beyond was able to find alternate shipping routes during the West Coast ports dispute, the slowdown still impacted sales.
Comparable sales growth came in at 3.7%, below management projections of 4% to 5% for the quarter. The shipping problems were only exacerbated by the frigid weather that struck many regions in February. What had started off as a solid fourth quarter due to a relatively buoyant holiday season turned downright frosty with the cold snap.
As CEO Steven Temares noted, the company had actually been on track with sales and comps "until the latter part of February, when the adverse weather conditions worsened" across the U.S.
So despite how pleased management was with how the quarter turned out, the home goods store still came up short of analyst expectations.
2. Comparable sales are not getting any better
For the current fiscal year, comparable store sales are only expected to grow 2% to 3%. Management had previously been modeling at least 3% growth but is now expecting the lower range to be its new normal. In fact, CFO Susan Lattman says the company will not enjoy some of the tailwinds that benefited its results last year.
"We had some one-time benefits in 2014, which we are not modeling to the same extent, or at all, in 2015, and we are modeling some incremental expenses in 2015 that we didn't have in 2014," Lattman said.
For example, the company will see an unfavorable impact of $0.13 just from the credit card fee litigation settlement from last year. Canadian currency fluctuations will also swipe $0.05 per share from its results.
3. But we are still financially sound
Although margins slipped across the board in the quarter, the balance sheet remains strong. Bed Bath & Beyond did take on $1.5 billion in debt to finance an accelerated repurchase of $1.1 billion worth of stock, but it was still able to generate $855 million in free cash flow and expects that to continue this year as well.
As Lattman noted, ever since the "first share repurchase authorization back in December 2004, and through February 28, 2015, the company has returned more than $8.5 billion of cash to shareholders through repurchases, representing over 162 million shares."
4. So much so we will be self-funding our store development
The company currently operates 1,513 stores in all 50 states, the District of Columbia, Puerto Rico, and Canada. They break down as follows:
- 1,019 Bed Bath & Beyond stores
- 270 World Market, Cost Plus World Market, or Cost Plus stores
- 96 buybuy BABY stores
- 78 Christmas Tree Shops, Christmas Tree Shops & That, or And That
- 50 stores under the names Harmon or Harmon Face Values.
It also has five Bed Bath & Beyond stores operating in Mexico City with two more opening outside of the city this year.
Management is planning on opening 30 new stores companywide and Lattman indicated a significant number of them "will be self-developed, where Bed Bath & Beyond will be responsible for the construction and other improvement cost."
5. We were omnichannel before it was cool
This year, Bed Bath & Beyond will increase and enhance the use of emerging technologies to better understand and engage with its customers. But as early as 2002, the retailer was enabling associates to help customers order items they could not find in store through its Beyond Store site.
While many retailers have finally realized the importance of meeting their customers needs regardless of where or how they shop, Bed Bath & Beyond was an early practitioner and it continues to evolve its services. As Temares points out, "Bed Bath & Beyond has been operating as an omnichannel retailer long before it became the norm."
Indeed, comparable sales completed through customer-facing websites and via mobile applications grew in excess of 40% in 2014, while comps completed in stores were up just slightly more than 1%. The retailer plans on investing more money into its omnichannel services through the coming year.
What all this means for investors
The problem for Bed Bath & Beyond is that the retail environment is weakening, as evidenced when the company fell short of expectations and provided relatively weak guidance.
Trading at about 13.5 times forward earnings estimates, the home goods retailer is not particularly expensive. However, with its enterprise value trading at 15 times free cash flow, it is not exactly cheap either. Its stock is valued at a discount to rivals like Restoration Hardware and Williams-Sonoma but without any catalysts ahead to spark real growth, it does not seem like there is a compelling reason to buy in at current levels.