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Bed Bath & Beyond’s (BBBY) Q2 Earnings Miss, View Intact

Zacks

Bed Bath & Beyond Inc. BBBY reported soft results for second-quarter fiscal 2016, as both sales and earnings lagged our estimates for the second consecutive time. Moreover, results declined year over year, adding another dark spot to the already murky quarter.

The company’s quarterly earnings of $1.11 per share declined 8.3% year over year and were well below the Zacks Consensus Estimate of $1.17.

BED BATH&BEYOND Price, Consensus and EPS Surprise

BED BATH&BEYOND Price, Consensus and EPS Surprise | BED BATH&BEYOND Quote


Deeper Insight

The home-furnishing retailer’s net sales dipped 0.2% to $2,988.2 million, also falling short of the Zacks Consensus Estimate of $3,058 million. This reflects the company’s dismal sales trend, as it has been delivering lower-than-expected top-line results for nearly 12 straight quarters now, with the exception of the fourth quarter of fiscal 2015.

The year-over-year decline in sales was a result of a fall in comparable store sales (comps), somewhat compensated by a rise in non-comp sales, which comprise new stores and results from the recently acquired One Kings Lane.

Comps slipped 1.2%, owing to a fall in transaction count, partly compensated by a rise in average transaction amount. While comps from customer-facing digital networks soared by more than 20%, that at stores fell at a low-single digit rate.

Moving ahead, Bed, Bath & Beyond’s gross profit dropped 2.1% to $1,116.9 million in the reported quarter, while the gross profit margin contracted 70 basis points (bps) to 37.4%, mainly due to soft merchandise margins coupled with a rise in coupon costs. This was partially negated by a marginal fall in average coupon amount.

Operating profit plunged 19.7% to $281 million and the operating profit margin contracted about 240 bps from the prior-year quarter to 9.4%.

Financial Position

Bed Bath & Beyond ended the quarter with cash and cash equivalents of $577.8 million, long-term debt of $1,491.3 million, and total shareholders' equity of roughly $2,574 million.

During first-half fiscal 2016, the company generated cash flow of about $468.2 million from operating activities, while deploying $185 million toward capital expenditure. Capital expenditure for fiscal 2016 is still envisioned in a range of $400–$425 million.

Share Buyback & Dividend

During the second quarter, the company bought back 2.7 million shares for nearly $121 million, under its current buyback plan of $2.5 billion. As of Aug 27, 2016, Bed Bath & Beyond had shares worth $2 billion remaining under its existing program, which is anticipated to conclude in the back half of fiscal 2019 or through fiscal 2020.

Also, the company, which paid its first quarterly dividend in Jul 2016, announced a quarterly cash dividend of 12.5 cents per share, payable on Jan 17, 2017, to shareholders on record as of Dec 16.

Store Update & Other Developments

During the reported quarter, Bed Bath & Beyond opened six new stores, including three namesake stores, two buybuy BABY stores and one Cost Plus World Market store. Further, the company opened a namesake and BABY store each, since the end of the second quarter, alongside shuttering a namesake outlet. Also, it remains on track to introduce about 30 new stores in fiscal 2016, with plans of closing nearly 15 stores over the same time frame.

Management revealed the introduction of its latest inbound freight facility in Lewisville, TX. The facility, which opened in the second quarter, is expected to start shipping to customers in October. Meanwhile, the company remains focused on managing retail inventories efficiently, so as to cater to the ever-changing customer demands.

Outlook

Management remains committed toward driving future growth on the back of its strategic investments, omnichannel development and enhancement of its product assortments through innovation. Considering these factors, its planning assumptions and the current business trends, together with the expected impact from the company’s recent acquisition of One Kings Lane, management reiterated its fiscal 2016 earnings and comps guidance.

Bed Bath & Beyond projects comps growth for fiscal 2016 in the range of flat to a 1% increase, while sales are now anticipated to be 125–140 bps greater than comps, compared to the previous prediction of a 170 bps increase. The company stated that it will not include One King Lane’s buyout in its comps calculation until one year of completion of the acquisition.

Further, management continues to expect gross margin and selling, general and administrative expense deleverage in fiscal 2016.

Considering all factors, the company still envisions fiscal 2016 earnings per share in the range of $4.50 to a little over $5.00.

Stocks to Consider

Bed Bath & Beyond currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry worth considering are Big 5 Sporting Goods Corp. BGFV, Five Below, Inc. FIVE and ULTA Salon, Cosmetics & Fragrance, Inc. ULTA, each with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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