Source: The Motley Fool.

Bed Bath & Beyond (NASDAQ:BBBY) stock was falling by 1.7% on Wednesday after official market hours, as investors reacted with disappointment to the company's financial report for the quarter ended on May 30. Many companies in the retail business are being hurt by an increasingly promotional retail environment and growing competition from online players, and Bed Bath & Beyond is no exception.

Putting sales over earnings
Net sales for the first quarter of fiscal 2015 were $2.74 billion, a 3.1% increase versus $2.66 billion reported in the same quarter last year. Comparable sales grew 2.2% year over year, including a 0.3% unfavorable impact from fluctuations in the Canadian currency exchange rate.

Wall Street analysts were on average expecting $2.74 billion in revenues and a 2.5% increase in comparable store sales, so total revenue was in line with expectations. Comps were only marginally below forecasts, and they would have been in line with estimates when excluding the impact from currency movements, so sales were roughly in accordance with forecasts.

Margins were under heavy pressure, though. Gross profit margin came in at 38.1% of sales, a decline from 38.8% in the year-ago quarter. Also, sales, general, and administrative expenses grew faster than sales, increasing by 5.6% and weighing on profits. In this context, Bed Bath & Beyond delivered declining operating profits, in the neighborhood of $273.3 million versus $300.7 million in the first quarter of fiscal 2014.

Merchandise inventories increased 5.4% during the quarter. Since inventories are rising at a faster rate than sales, this could mean that the company isn't moving its products from the shelves rapidly enough, which is typically a sign of more pricing discounts and increasing margin pressure in the coming quarters.

Net income during the last quarter was $158.5 million, a considerable 15% decline from $187 million in the same quarter during the previous year. Earnings per diluted share were flat year over year at $0.93, one cent below the $0.94 Wall Street analysts forecasted on average.

The importance of buybacks
Bed Bath & Beyond is repurchasing lots of shares, which is a big positive in terms of earnings per share, since a reduced share count increases earnings per unit. However, investors may want to keep a close eye on the company's repurchase program and whether management will continue repurchasing stock at this rate over the middle term.

The company repurchased $385 million in common stock during the quarter, or approximately 5.3 million shares. The weighted diluted share count declined 15% year over year, so buybacks were the main reason the company managed to deliver stable earnings per share in spite of the decline in net income.

As of May 30, the remaining balance of the existing $2 billion share-repurchase program was approximately $499 million, and the business produced less than $72 million in free cash flow during the last quarter. This means that Bed Bath and Beyond can't sustain the current buyback rate without resourcing to debt in the future, so it makes sense to assume that buybacks will slow down substantially in the coming quarters.

Management is modeling a 2% to 3% increase in comparable sales during both the current quarter and the remainder of the year. Net earnings per diluted share are modeled to be between relatively flat and a mid-single-digit percentage increase for the fiscal full year. This seems to be indicating no big change in the main trends when it comes to sales and earnings.

Bed Bath & Beyond is putting sales over earnings, resorting to coupons and discounts to sustain revenue in a challenging industry landscape. Big buybacks are buffering the earnings decline, but the business isn't producing enough cash to sustain current buybacks indefinitely. For this reason, management needs to find a better strategy to sustain sales growth without hurting profit margins too much in the future.