There doesn't seem to be a path for Bed Bath & Beyond (BBBY -1.82%) to break out of this downward trajectory it's on. Although management tries to put up a brave front and even reiterated for the year its outlook for earnings guidance, investors are casting a jaundiced eye at such prospects.
The headwinds in retail are real, sales growth at the home-goods retailer are slumping, and even the coming Christmas holiday doesn't look cheerful. But here are the top five things Bed Bath & Beyond wanted investors to take away from its latest earnings report.
1. Customers really aren't shopping our stores anymore.
Although Bed Bath & Beyond recorded rather anemic revenue growth of 1.7% in the second quarter -- only slightly better at 2.2% when you strip out currency fluctuationsl -- sales at its stores are falling, with bricks-and-mortar revenues down 1% in the quarter. Where the home-goods retailer is seeing strength is in e-commerce, where it said sales were up more than 25% year over year, and it was forecasting similar growth for the full year.
The retailer, though, continues to build out its physical footprint, opening a total of six new stores in the second quarter. It's added two more since the start of the third quarter. But since it's self-funding the construction of these new stores out of its cash flows (and of its new distribution center), the need for them to provide a decent return becomes critical, but according to CEO Steven Temares, "the combination of store openings and closings are part of our ongoing strategy to optimize both our market profitability and market coverage."
2. But even Internet sales can't improve comps that much.
Comparable-store sales growth has slowed considerably during the past year, and Bed Bath & Beyond has lowered expectations for what it can achieve. After saying it believed it could achieve at least 3% growth in 2015, it qualified that outlook by dialing it back last quarter to 2% to 3% growth. Now, however, the home-goods retailer is lowering the floor just a little bit more, saying it's modeling 1% to 3% growth this year.
Comps are a key retail metric because they strip out growth achieved by opening more stores, the negligible 0.7% increase it achieved in the second quarter, or 1.1% adjusted for currency changes, was still well below the 2% to 3% increase the company had guided toward.
Yet as Temares says, "As our digital and physical channels continue to converge, the physical stores remain central to serving our customers and provide us a tremendous opportunity to be close to them."
3. New store openings are playing a larger role in our growth than do comps.
Two years ago, Bed Bath & Beyond was experiencing weak sales growth as more than half of its revenues were coming from opening new stores rather than customers returning in greater numbers to ones it already had open. But it turned that around last year, and often doubled comp sales from the prior period.
Now they look like they're on the decline again, and for the first time in over a year, the percentage of quarterly sales growth that were attributable to new store openings exceed 50%. And the portion that represented comps growth was a mixed bag anyway, as CFO and treasurer Sue Lattman pointed out, were due to "an increase in the average transaction amount partially offset by a slight decrease in the number of transactions."
4. Buybacks will keep artificially inflating per-share earnings.
The big news in the quarter was Bed Bath & Beyond's new $2.5 billion share repurchase authorization. It ran through its previous $2 billion buyback (there's still $305 million outstanding on it), and it's the only reason the retailer's earnings have been able to maintain their pace.
Were the second quarter's per-share profits calculated with the same number of shares outstanding as it had a year ago, Bed Bath & Beyond's earnings would have been 13% lower.
According to Lattmann, "Since our first share repurchase authorization back in December 2004 and through August 29, 2015, the Company has returned more than $9.1 billion of cash to shareholders through repurchases, representing over 170 million shares."
It needs the current authorization to keep its earnings up during the coming rough waters, but anticipates completing the new program sometime in its fiscal 2019 year.
5. We're spending so much just to tread water that profits will be pinched.
The transition to an e-commerce-heavy model means it's had to spend lots of money on upgrading its technology, but Bed Bath & Beyond has also maintained its pace of discounting to attract customers as well as increasing the amount it spends on digital advertising. All of this has eroded the home-goods sellers profit margins. Gross, operating, and net margins have all slid in recent quarters, with net margins dipping to some of their lowest levels since the Great Recession.
What this amounts to is spending a lot of money simply to run in place. It's investing heavily, but it's not advancing. Of course, it's not sinking, either -- and Bed Bath & Beyond's ability to generate strong free cash flow underscores the strength of its balance sheet and its operations, but there is no indication there will be a tailwind coming anytime soon to lift its stock higher.
CFO Lattmann says expect those investments to continue into the near future, as they will "continue to represent a significant portion of our planned capital expenditures for the year."
What all this means for investors
Just like last quarter, Bed Bath & Beyond faces a weak retail environment and hasn't been able to counteract it with better-than-expected guidance. Absent such catalysts, there's not much reason to expect its stock to do anything other than what it's been doing and that's going down.