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Bed Bath & Beyond (BBBY) Q3 Earnings Top, Up 17% on ’19 View

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Bed Bath & Beyond Inc. BBBY reported mixed third-quarter fiscal 2018 results wherein the bottom line outpaced estimates while the top line missed the mark. With this, the company’s earnings reverted to a positive trend after a miss in the previously reported quarter whereas sales lagged for the second straight time. Further, management updated sales and earnings guidance for fiscal 2018.

Following the above earnings release, shares of the company rallied 16.8% in after-market trading yesterday. Momentum in the stock can mainly be attributed to the company’s earnings per share view for fiscal 2019, which surpassed the analysts’ expectations.

Management stated that the company stays well ahead of its plan on achieving the long-term financial goals that include moderating the operating profit and net earnings per share decline in fiscal 2018 and 2019. However, the company expects to witness net earnings per share growth by fiscal 2020.

However, this Zacks Rank #4 (Sell) stock has lost 12.1% in the past three months against the industry’s 0.5% rise.

Q3 in Detail


Bed Bath & Beyond reported earnings of 18 cents per share in the fiscal third quarter, which outpaced the Zacks Consensus Estimate by a penny. Further, earnings were in line with the company’s model but plunged 59.1% from the year-ago quarter.

Net sales rose 2.6% to $3,032.2 million but fell short of the Zacks Consensus Estimate of $3,041 million. Moreover, comparable sales (comps) dipped roughly 1.8% in the reported quarter due to mid-single-digit decrease in sales from stores, somewhat offset by robust sales at the company’s customer-facing digital networks.

Bed Bath & Beyond Inc. Price, Consensus and EPS Surprise

Bed Bath & Beyond Inc. Price, Consensus and EPS Surprise | Bed Bath & Beyond Inc. Quote

While gross profit fell 3.6% to $1,003.7 million, gross profit margin also contracted 210 basis points (bps) to 33.1%. This downside was mainly due to lower merchandise margin coupled with higher coupon expenses. Rise in coupon expenses was on account of increased average coupon amount, partly negated by fall in the number of redemptions. Gross margin contraction coupled with a 2.3% rise in SG&A expenses caused the operating profit to tumble nearly 54.3% to $49.5 million. Additionally, operating margin shrank 300 bps from the prior-year quarter to 1.6%.

Financial Position

Bed Bath & Beyond ended the quarter under review with cash and investments of roughly $1 billion. Moreover, long-term debt totaled $1,492.4 million and total shareholders' equity came in at $2,903.3 million as of Dec 1, 2018.

Further, the company’s retail inventories summed at roughly $2.9 billion at the end of the fiscal third quarter, down 6% on inventory optimization initiatives.

In the first nine months of fiscal 2018, the company generated cash flow of about $665.4 million from operating activities while deploying nearly $256.5 million toward capital expenditures.

For fiscal 2018, management projects capex between $350 million and $400 million.

Share Buyback & Dividend

In the reported period, the company repurchased stock worth nearly $8 million, reflecting approximately 527,000 shares.

Additionally, the company’s board declared a quarterly cash dividend of 16 cents per share, payable Apr 16, 2019 to shareholders of record as of Mar 15.

Store Update

In third-quarter fiscal 2018, Bed Bath & Beyond introduced four outlets inclusive of two World Market stores, one buybuyBABY outlet and one One Kings Lane store. Moreover, the company shuttered 15 stores comprising 13 flagship shops and one World Market plus Christmas Tree Shops outlet each.

As of Dec 1, 2018, the company had 1,550 stores in operation, consisting of 1,005 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 282 stores under the labels World Market, Cost Plus World Market or Cost Plus; 122 buybuy BABY stores; 82 stores under the labels Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; 57 stores under Harmon, Harmon Face Values or Face Values names; and two retail stores under the label One Kings Lane. Additionally, the company’s joint venture operates 10 flagship stores in Mexico.

In fiscal 2018, management intends to open about 20 stores, mainly of buybuy BABY and Cost Plus World Market brands. Simultaneously, it expects to close down nearly 40 stores including mostly flagship ones.

Outlook

Following the company’s mixed quarterly results, management updated guidance for fiscal 2018, which unlike fiscal 2017 has 52 weeks. Consolidated net sales are projected to decrease low single-digits with comps slip of about 1% in fiscal 2018. Further, the company is wary of net sales fall in low double-digit percentage range for the fiscal fourth quarter due to fiscal calendar shift from the 53rd week.

Bed Bath & Beyond continues to project gross margin deleverage in fiscal 2018, mainly due to investments in the customer value proposition and the digital channels. SG&A is estimated to increase on account of spending on transformational efforts. However, the company still anticipates to witness operating margin contraction, albeit lower than the fiscal 2017-level. Depreciation expenses are predicted to be in the $325-$335 million range compared with the $320-$330 million band, expected earlier. Furthermore, it expects the tax rate to be roughly 24% for the fiscal 2018.

Considering all these factors, management now envisions fiscal 2018 earnings per share to be about $2 as compared to the earlier guidance, which was assumed to come in at the lower end of $2. In fiscal 2017, Bed Bath & Beyond delivered adjusted earnings per share of $3.12. The Zacks Consensus Estimate is currently pegged at $1.94 for fiscal 2018.

For fiscal 2019, management estimates comps to dwindle in low single-digits, attributable to lower store traffic. Moreover, operating margin is projected to match the fiscal 2018 figure, driven by the company’s ongoing efforts and the analysis of its overall expenses including efficiencies in stores and corporate functions. Further, earnings per share and capital expenditures are forecast to remain similar to fiscal 2018-level. The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $1.57.

You May Count on Better-Ranked Stocks in the Retail Space

Abercrombie & Fitch Co. ANF outpaced earnings estimates in each of the trailing four reported quarters, the average being 88.6%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DICK'S Sporting Goods, Inc. DKS currently carries a Zacks Rank #2 (Buy). Further, the company pulled off average positive surprise of 25.5%.

Tractor Supply Company TSCO has a Zacks Rank of 2 and an expected long-term earnings growth rate of 12.2%.

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