Bed Bath’s Earnings Plunge on Acquisition Costs

Comparable sales from customer-facing digital channels grew by over 20% during Q3 FY16

b1Household merchandise retailer Bed Bath & Beyond Inc. (NASDAQ: BBBY) announced its financial results for Q3 FY16 on December 21st, 2016. The Union, New Jersey-based Company sells domestics merchandise and home furnishings under the names Bed Bath & Beyond, Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon or Harmon Face Values, buybuy BABY and World Market, Cost Plus World Market or Cost Plus.

With the recent acquisition of One Kings Lane in June 2016, Bed Bath offers a unique collection of home goods, designer, and vintage items. The Company also operates Linen Holdings, a provider of a variety of textile products, to institutional customers in the hospitality, cruise line, and healthcare industries. Read more about Bed Bath’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Bed Bath’s net sales inched up 0.1% to $2.955 billion from $2.952 billion in the year ago same period. Comparable sales decreased by 1.4% during the reporting quarter compared to a decrease of about 0.4% in Q3 FY15. Comparable sales from customer-facing digital channels grew by over 20%, while comparable sales from physical stores declined in the low single-digit percentage range during the reporting quarter.

b2During Q3 FY16, Bed Bath’s profitability took a beating on account of higher coupon, shipping, expenses, technology investments, and wage increases. Gross profit fell to $1.09 billion from $1.11 billion in the year ago corresponding quarter, while operating profit plunged to $211.28 million from $292.85 million in the prior year same period. As a result, the Company’s Q3 FY16 net earnings plunged to $126.42 million, or $0.85 per diluted share, from $177.81 million, or $1.09 per diluted share, in the year ago comparable period.

As consumer shopping preferences continue to shift to digital, the Company’s investments are focused on driving a better omni-channel experience. Moreover, Bed Bath is expected to gain a competitive edge over other general mass merchandisers that offer lower quality products after its acquisition of One Kings Lane. Bed Bath mainly competes with discount department stores such as The Home Depot Inc. (NYSE: HD) and Wal-Mart Inc. (NYSE: WMT), which have a huge benefit in terms of economies of size and scope.

b3Unlike many large retailers like The J.C. Penney Company (NYSE: JCP), Macy’s Inc. (NYSE: M), Kohl’s Corp. (NYSE: KSS), and Sears Hometown and Outlet Stores Inc. (NASDAQ: SHOS), which shut down stores during Q2 FY16, Bed Bath is not looking at closing stores. Rather, the Company feels that having a broad network of brick and mortar locations is a big advantage that can help drive online sales and serve as shipping locations.

To increase footfall and consumer traffic, Bed Bath is increasing the amount of personalization for customers both in stores and online. The Company is also increasing targeted efforts around life events like college, babies and weddings and optimizing online chat features for consumers. Some stores will also roll out the popular buy online, pick-up in store features.

Other highlights

Acquisition of PersonalizationMall.com: On November 23rd, 2016, Bed Bath announced the acquisition of PersonalizationMall.com (PMall.com), an online retailer of personalized products based in Burr Ridge, Illinois, for approximately $190 million in cash.

PMall.com has a fully integrated, proprietary technology platform that drives quality, speed, and efficiency throughout the process of personalizing products to customers’ unique preference. PMall.com offers an extensive range of products that can be customized through a variety of different personalization processes including sublimation, embroidery, digital printing, engraving, and sandblasting. PMall.com’s vertically integrated ecommerce platform includes an automated personalization process and rapid order fulfillment, resulting in a differentiated customer experience.

The acquisition of PMall.com would help expand Bed Bath’s offerings in the growing product personalization category and brings a complementary portfolio of differentiated products that commemorate all types of special occasions.

Store updates: As of November 26th, 2016, the Company had a total of 1,541 stores, including 1,021 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico and Canada, 278 stores under the names of World Market, Cost Plus World Market or Cost Plus, 111 buybuy BABY stores, 79 stores under the names Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, and 52 stores under the names Harmon, Harmon Face Values or Face Values. During Q3 FY16, the Company opened 5 Bed Bath & Beyond stores, 4 buybuy BABY stores and 1 Harmon Face Values store, and closed 8 Bed Bath & Beyond stores. In addition, the Company is a partner in a joint venture which operates 8 stores in Mexico under the name Bed Bath & Beyond.

Cash and cash equivalents: Bed Bath ended Q3 FY16 with cash, cash equivalents, and short-term investment securities of $473 million versus $490.7 million in the same period last year. Merchandise inventories grew to $3.26 billion versus $3.21 billion in the year ago corresponding period.

b4Stock repurchase and dividends: The board of directors declared a quarterly dividend of $.125 per share to be paid on April 18th, 2017 to shareholders of record at the close of business on March 17th, 2017. During Q3 FY16, the Company repurchased approximately $76 million of its common stock, representing approximately 1.8 million shares, under its existing $2.5 billion share repurchase program. As of November 26th, 2016, the program had a remaining balance of approximately $1.9 billion, and is expected to be completed sometime in fiscal 2020.

Guidance for FY16

Management reiterated its guidance for FY16 EPS of between $4.50 to just over $5.00 that it has earned over the past few years, and keeping with the slight dilution anticipated from the Company’s purchase of One Kings Lane and PersonalizationMall.com as well as current business trends. Management also continues to expect full-year comparable sales to be flat to up 1%, with net sales expected to grow about 125 to 140 basis points higher than the increase in comp sales. Additionally, margins are likely to weaken further due to continued technology investments, wage increases, and the expected impact of higher coupon and shipping expenses.

Although the benefits from the acquisition of One Kings Lane and PersonalizationMall.com may not be visible in the near term, the Company expects these initiatives to drive the company’s top line in the subsequent quarters.

Stock Performance

b5Bed Bath & Beyond’s stock ended the day at $40.77, slipping 1.47%, at the close on Friday, December 23rd, 2016, having vacillated between an intraday high of $41.95 and a low of $40.26 during the session. The stock’s trading volume was at 4,249,610 for the day. The Company’s market cap was at $6.29 billion as of Friday’s close.

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