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Bed Bath & Beyond (BBBY) Falls on Q2 Earnings Miss, View Cut

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Bed Bath & Beyond Inc. reported second straight quarter of lower-than-expected results in second-quarter fiscal 2017. Apart from lagging the Zacks Consensus Estimate, both the top and bottom lines fell year over year. Results continued to be hurt by sluggish store traffic and escalated costs, somewhat compensated by continued strength witnessed across the company’s customer-facing-digital network. Moreover, Hurricane Harvey also had an unfavorable impact on the results this quarter.

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

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

The dismal first half, estimated impact from Hurricane Harvey, higher costs related to the company’s new transformation plans and expectations of the current trends to continue compelled management to trim its forecasts for the fiscal. As a result, the company’s shares lost 12.8% in the after-market trading session on Sep 19.  In fact, year to date, Bed Bath & Beyond’s shares have declined 32.7% , worse than the industry’s 13.6% downside.


 
Q2 in Detail

The company’s quarterly adjusted earnings of 75 cents per share declined 32.4% year over year, coming well below the Zacks Consensus Estimate of 95 cents. Results were hurt by about 2 cents from expenses related to Hurricane Harvey and 1 cent from the adoption of new accounting standard. The bottom line was also hit by costs related to investments in enhancing customer service and product satisfaction, alongside improving marketing and technology.

Management recently revealed plans to speed up the process of realigning its store management organization as part of its efforts to enhance omni-channel operations and focus on customers. On including the 8 cents impact from restructuring costs related to the aforementioned plans, earnings plunged 39.6% to 67 cents per share.

Further, the home-furnishing retailer’s net sales dipped 1.7% to $2,936.4 million, which fell short of the Zacks Consensus Estimate of $3,006.1 million. Sales were primarily hurt by soft comparable store sales (comps), somewhat compensated by gains from a 0.9% rise in non-comp sales including PMall, One Kings Lane and new stores.

Comps in the quarter under review dropped 2.6%, resulting from lower transactions in stores, somewhat offset by greater average transaction amount. While comps from customer-facing digital networks improved over 20% for the 13th time in a row, comps at stores fell at a mid-single digit rate.

Bed, Bath & Beyond’s gross profit declined 4.3% to $1,068.6 million in the quarter with gross profit margin contracting 100 basis points (bps) to 36.4%. The fall in gross margin stemmed from higher direct-to-customer shipping expenses, lower merchandise margin and a rise in coupon expense on account of increased redemptions. This could be only partly offset by lower average coupon amount.

The decline in gross profit, along with a rise in SG&A expenses led the operating profit to deteriorate nearly 40% to $168.8 million. Likewise, the operating profit margin contracted about 360 bps from the prior-year quarter to 5.8%.

Financial Position

Bed Bath & Beyond ended the quarter with cash and cash equivalents of about $464 million, long-term debt of $1,491.8 million, and total shareholders' equity of roughly $2,721.7 million.

In the first half, the company generated cash flow of about $364.7 million from operating activities, while deploying nearly $177 million toward capital expenditure.

Share Buyback & Dividend

During the second quarter, the company bought back 1.8 million shares for nearly $56 million, under the current buyback plan of $2.5 billion. As of Aug 26, Bed Bath & Beyond had shares worth $1.6 billion remaining under its existing program.

Further, the company declared a quarterly cash dividend of 15 cents per share, which is payable on Jan 16 to shareholders on record as of Dec 15.

Store Updates

During the first quarter, Bed, Bath & Beyond introduced five stores, including one namesake, one andTHAT! and one buybuy BABY store, along with two World Market outlets. The company also shuttered a World Market store during the quarter. The company ended the second quarter with 1,550 stores, including 1,023 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 277 stores under the labels — World Market, Cost Plus World Market or Cost Plus; 114 buybuy BABY stores; 81 stores under the labels — Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; and 55 stores under Harmon, Harmon Face Values or Face Values names.

Further, the company has opened three more stores and closed another store, since the end of the second quarter. In fiscal 2017, management intends to open 25 new stores, while it plans to close 15 stores.

Transformation Efforts on Track: What Lies Ahead?

Management highlighted that it is on track with various transformation efforts to become the customers’ first choice. Firstly, the company is focused on improving operational efficiency, which includes transformation of information technology group and related business processes to meet consumers’ evolving demand. In this regard, the company adopted a new model to better recognize and prioritize its technology related needs. Also, it has set up a strategic portfolio management office (“SPMO”) to allocate its resources toward more profitable areas. Notably, through the SPMO, management is creating an integrated portfolio of strategies to improve gross margin, optimize inventory levels, enhance supply chain and implemen customer service transformation.

Further, the company is undertaking several customer-centric plans like enriching its product assortment; improving services and providing a more seamless experience to customers. This also includes plans to continue boosting online sales, which remains a major growth driver for the company. Incidentally, management expects the current trends of robust customer-facing digital sales and sluggish in-store transactions to continue in fiscal 2017.

Updated Forecasts

Bed Bath & Beyond now projects net sales for fiscal 2017 (which includes a 53rd week) to remain flat year over year, compared with the previous guidance of increase in the low to mid-single digit percentage range. The view cut is mainly accountable to the estimated impact from Hurricane Harvey and Irma. Further, comps are anticipated to drop at a rate similar to that witnessed in the first half. Earlier, the company projected comps growth in the range of flat to up marginally.

Management still expects gross margin to decline in fiscal 2017 owing to a rise in shipping and coupon expenses. Also, SG&A expense deleverage is anticipated in fiscal 2017 due to higher payroll and payroll-related costs; costs related to technology and buyouts of One Kings and PMall; restructuring charges associated with store management and expenses related to Hurricane Harvey. Depreciation expense is likely to be in the range of $310-$320 million, while interest expense is anticipated in a band of $75-$80 million.

Considering all these factors, the company now envisions fiscal 2017 earnings per share to be roughly $3.00, which reflects an over 30% decline from the year-ago period. This also compares unfavorably with the current Zacks Consensus Estimate of $4.02. Earlier, management had projected earnings per share to decline in the range of low-single digits percentage to 10%.

Additionally, the company projects capital expenditure for fiscal 2017 to range from $350-$400 million. Over half of this is likely to be spent on tech projects to support the company’s omni-channel initiatives.

Key Picks in BBBY’s Space

Five Below, Inc. (FIVE - Free Report) has a long-term earnings growth rate of 28.5% and has a superb earnings surprise history. Further, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Build-A-Bear Workshop, Inc. (BBW - Free Report) , with a long-term earnings growth rate of 18% carries a Zacks Rank #2 (Buy).

Sally Beauty Holdings, Inc. (SBH - Free Report) which carries a Zacks Rank #2, has delivered back-to-back positive earnings surprises in the past two quarters.

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