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Bear of the Day: Bed Bath & Beyond (BBBY)

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Bed Bath & Beyond (BBBY - Free Report) reported a second straight quarter of lower-than-expected results in its Q2 fiscal 2017 report last week. Not only did the company miss consensus expectations on both the top and bottom lines, but these results fell on a year-over-year basis as well.

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.

My colleague Neena Mishra wrote about BBBY as Bear of the Day in late June after their Q1 report when the stock was still trading above $30 and she concluded then...

"In addition to disappointing foot traffic in malls, the retail space is going through a shift toward online shopping, particularly from Amazon. With tightening labor markets, wage pressure has also started hurting retailers. BBBY stock is down about 25% year-to-date but a rebound any time soon does not appear likely."

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 standards. The bottom line was also hit by costs related to investments in improved customer experience.

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%.

Bottom line: The death of brick-and-mortar retail may be premature and overexaggerated, but until the EPS estimates for BBBY stop going down and start going back up, I'd shop for retail investments elsewhere.

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