Yahoo Finance Bed Bath & Beyond Inc. (BBBY) Stock Earnings Show Challenges Ahead
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At this point, if Bed Bath & Beyond Inc. (NASDAQ:BBBY) stock isn’t a buy, then perhaps no brick-and-mortar retailer is. Management is clearly aware of the pressures of e-commerce, and adapting in response.
Source: Mike Mozart via Flickr
Online comparable sales rose 20%-plus last year. BBBY stock trades at less than eight times earnings, with revenue and profits holding up reasonably well.
The nature of Bed Bath’s business and the need to see — and feel — its products would seem to protect it somewhat from competition from Amazon.com, Inc. (NASDAQ:AMZN), Wayfair Inc (NYSE:W) and other online retailers.
By retail standards, Bed Bath is performing rather well. Earnings per share have held in the $4.50-$5 range for the past five years. Comparable-store sales are basically flat the past two years, and guided positive for FY17. And yet BBBY stock not only has a single-digit EPS multiple, but trades just off its lowest level in almost seven years.
Bed Bath’s first-quarter earnings report on Thursday afternoon will be the company’s first chance to show that it can be an outlier in the brick-and-mortar space, and that a 55% decline in BBBY stock since the beginning of 2015 has been an overreaction. But I’m skeptical.
Bed Bath & Beyond is performing well relative to other retailers. But that’s precisely the problem for BBBY stock.
Will Sales Finally Erode?
Bed Bath & Beyond same-store sales have been solid the past few years. Bed Bath averaged 2.5% annual growth between FY12 and FY14, before a deceleration to 1% in FY15 and a 0.6% decline last year. On the company’s Q4 conference call in April, management guided for flat to slightly positive performance in FY17.
In those numbers, sales through digital channels have risen nicely — 20%-plus last year and 25%-plus the year before — while in-store sales have declined. So as important in Q1 as the overall sales number will be how Bed Bath & Beyond is generating those sales. Bed Bath has made a series of online-focused acquisitions over the past year: One Kings Lane, PersonalizationMall.com, Chef Central and interior design platform Decorist.
BBBY didn’t spend a lot of cash on the purchases, spending just $12 million for One Kings Lane, which was once valued at about $900 million. But clearly Bed Bath & Beyond is trying to position itself for e-commerce. If there’s evidence in Q1 that the strategy is working, some of the pressure on BBBY stock may be relieved.
But that will only be the case if revenues are good enough to boost margins. It’s there that Bed Bath & Beyond has a real problem, and where the challenges affecting U.S. retail more broadly are highlighted by BBBY’s performance.
Bed Bath & Beyond Margins
The problem for U.S. brick-and-mortar retailers is operating deleverage. Bed Bath’s flat revenue sounds reasonably solid in a time when many retailers are posting sales declines. But given wage and rent inflation, stable revenue leads to lower margins and lower profits.
That’s been the case for Bed Bath & Beyond, and a key problem for BBBY stock. EPS was stable in FY15, down less than 1% excluding a one-time benefit. It fell 10% last year, but share repurchases boosted the number. Net income, excluding that one-time impact, declined 18% year-over-year.
FY18 EPS is guided to decline as well, with a bulk of the impact coming in Q1. A higher tax rate (due to stock-based compensation accounting changes) will hit the quarter, one reason analysts are projecting EPS of just 66 cents, down from 80 cents a year ago. But from a longer-term perspective, it looks like Bed Bath & Beyond profits will continue to decline.
Gross margin is being hit by free shipping offers through the company’s digital channel. SG&A is guided to deleverage again in FY17, due to rising in-store wage and medical expenses, among other factors.
To drive any upside from current levels, Bed Bath & Beyond needs to get margins stabilized. But the reason why U.S. retail stocks more broadly have declined so heavily is that it’s nearly impossible to do so without sales growth. That vicious cycle is why a modest change in revenue expectations has led many sector stocks, including BBBY, to decline 20%-plus. And it’s why investors should have little confidence that BBBY has a major rebound ahead.
BBBY Stock and Q1 Earnings
All told, Q1 seems unlikely to change the long-term case for BBBY stock all that much. Seasonality will limit the market impact of quarterly sales. Short interest in BBBY stock — about 10% — is much lower than much of the space, dimming the likelihood of a short squeeze.
But it will give more color on Bed Bath & Beyond’s long-term prospects. And it’s unlikely that it will be enough to change the long-term trajectory of BBBY stock, even if low expectations drive a post-earnings gain. Bed Bath & Beyond management has done a nice job in a tough environment. The company is responding to online competition. Revenue is stable.
And, again, that’s precisely the problem. There aren’t a lot of levers to pull, or much in the way of costs to cut. The economy is solid, if not spectacular. There isn’t an upside driver left.
BBBY is going to see in-store sales decline, it’s going to see lower margin on online sales, and it’s going to have to compete aggressively on price. That combination implies steadily lower earnings for some time to come. That in turn, means an 8x earnings multiple is not cheap. In fact, it sounds about right.
As of this writing, Vince Martin has no positions in any securities mentioned.
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