Bed Bath’s Earnings Plunge on Lower Margins, Higher Costs

Comparable sales from customer-facing digital channels grew by over 20% during Q2 FY16

Source: Company's Website
Source: Company’s Website

Household merchandise retailer Bed Bath & Beyond Inc. (NASDAQ: BBBY) announced its financial results for Q2 FY16 on September 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 on June 14th, 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.

Q2 FY16 financial highlights

During Q2 FY16, Bed Bath’s net sales slipped 0.2% to $2.98 billion from $2.99 billion in the year-ago period. Comparable sales decreased by 1.2% compared to an increase of about 0.7% in the year-ago period. 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.

During Q2 FY16, Bed Bath’s profitability took a beating on account of higher coupon, shipping, expenses, technology investments, and wage increases. Gross margins plunged 37.4% while operating margins fell 9.4%, down from 38.1% and 11.7%, respectively, in the year-ago quarter.

In all, the Company’s net earnings plunged 17% to $167 million during Q2 FY16 from $201.7 million in the year-ago period. Diluted EPS fell 8% to $1.11 compared with $1.21 per diluted share in the year-ago 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.

Unlike 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 One Kings Lane: Bed Bath acquired One Kings Lane Inc., a home décor and design specialist that offers a unique collection of home goods and vintage items, in an all-cash deal on June 14th, 2016. One Kings Lane works directly with home furnishings brands, vintage dealers, and designers. It also offers complimentary interior design services at its two design studios located in San Francisco and New York in the U.S. The purchase price of the deal was reported to be $30 million, a huge discount from a valuation of nearly $1 billion that One Kings Lane had secured when it raised more than $100 million from investors in early 2014.

Agreement with Alliance Data Systems: Bed Bath signed a long term agreement with Alliance Data Systems Corp. (NYSE: ADS) to develop a co-branded credit card in June 2016. This agreement will help Bed Bath identify potential new customers through Alliance Data’s analytical marketing expertise using a multi-channel approach, while leveraging some of Alliance Data’s proprietary in-store and online capabilities. Bed Bath has been losing market share due to intense competition from e-commerce players, and attractive rewards could aid in engaging customers going forward.

Store updates: As of August 27th, 2016, the Company had a total of 1,539 stores, including 1,024 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, 107 buybuy BABY stores, 79 stores under the names Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, and 51 stores under the names Harmon or Harmon Face Values. During Q2 FY16, the Company opened three Bed Bath & Beyond stores, one Cost Plus World Market store and two buybuy Baby stores. In addition, the Company is a partner in a joint venture which operates eight stores in Mexico under the name Bed Bath & Beyond.

Stock repurchase and dividends: The board of directors declared a quarterly dividend b2of $0.125 per share, to be paid on January 17th, 2017, to shareholders on record at the close of December 16th, 2016. Also the company repurchased roughly $121 million of its common stock under its existing $2.5 billion share repurchase program. There is $2 billion remaining under the plan, which is expected to be completed in the latter half of FY19 or FY20.

Cash and cash equivalents: Bed Bath ended Q2 FY16 with cash, cash equivalents, and short-term investment securities of $577.84 million versus $696.4 million in the same period last year.

Guidance for FY16

Management reiterated its guidance for FY16 EPS of between $4.50 per share to just over $5.00 per share that it has earned since FY12, and keeping with the slight dilution anticipated from the Company’s purchase of One Kings Lane and current business trends. Management also continues to expect full-year comparable sales to be flat to up 1%, with net sales expected to increase about 125 to 140 basis points higher than the increase in comp sales. Additionally, the company stated that its 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 partnership with Alliance Data and the acquisition of One Kings Lane may not be visible in the forthcoming earnings, the Company expects these initiatives to drive the company’s top-line in subsequent quarters.

Stock Performance

b3Bed Bath & Beyond’s stock ended the day at $43.50, gaining 0.16%, at the close on Friday, September 23rd, 2016, having vacillated between an intraday high of $44.00 and a low of $43.36 during the session. The stock’s trading volume was at 2,790,012 for the day. The Company’s market cap was at $6.72 billion as of Friday’s close.

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