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Bed Bath & Beyond (BBBY) Down on Q3 Earnings & Sales Miss

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Shares of Bed Bath & Beyond Inc. (BBBY - Free Report) fell nearly 11% during the close of trading session on Jan 7, following its third-quarter fiscal 2020 results, wherein both top and bottom lines lagged the Zacks Consensus Estimate. Results were hurt by COVID-related headwinds, including dismal store traffic, significant shipping constraints and increased freight expenses. Although adverse impacts of COVID-19 weighed on third-quarter store sales in its BABY business, it returned to growth in December.

Moreover, the company reported second successive quarter of comparable sales and profit growth. Solid cash flow and a strong balance sheet remained key upsides. Encouragingly, management announced to reinitiate shareholder returns.

Apart from these, it undertook several measures for the recent holiday season, including enhanced omni-channel facilities — contactless new store and curbside pickup, and same-day delivery services — for which it received positive customer feedback. Also, demand remained strong during the holiday season. Keeping in these lines, the company noted that total enterprise comparable sales were sturdy in the first month of the fiscal fourth quarter.

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

Q3 in Detail

Bed Bath & Beyond reported adjusted earnings of 8 cents per share for the fiscal third quarter, missing the Zacks Consensus Estimate of 20 cents. However, the figure reflects a sharp improvement from a loss of 38 cents reported in the year-ago quarter. This uptick was mainly attributed to improved margins and lower expenses.

Net sales came in at $2,618 million, down 5% year over year due to the sale of non-core businesses and store closures. Moreover, it lagged the Zacks Consensus Estimate of $2,756 million. Also, digital sales rose roughly 75% in the reported quarter. Several omni-channel services, such as Buy-Online-Pick-Up-In-Store and Curbside Pickup, contributed to digital sales growth.

Evidently, BOPIS now accounts for more than 16% of total digital sales. Driven by its strong omni-channel capabilities, Bed Bath & Beyond witnessed new customer acquisition to the tune of more than 2 million in the reported quarter. On the flip side, in-store sales fell 17% in the reported quarter.

During the quarter, comparable sales (comps) grew 2% year over year driven bygrowth in the Bed Bath & Beyond banner and strong digital comps. Home Organization, Kitchen Food Prep, Bedding, Bath and Indoor Décor acted as key growth categories, with combined comp sales growth of 11%.

Also, these categories collectively accounted for two-thirds of total Bed Bath & Beyond unit sales in the quarter under review. Moving on, the company has increased investments in these key categories to strengthen its position in the home space.

During the five-day holiday sales period from Thanksgiving to Cyber Monday, the company witnessed double-digit growth year over year in overall comps for the core U.S. Bed Bath & Beyond banner, with digital comps up roughly 69%, which more than offset the in-store comps decline of 24%.

Adjusted gross profit advanced 4.1% to $926.2 million in the fiscal third quarter. Moreover, adjusted gross margin expanded 310 basis points (bps) to 35.4% on positive product mix, higher markdowns, better promotions, as well as lower distribution and fulfillment costs. On the flip side, adverse digital channel mix and elevated shipping costs acted as deterrents.

Meanwhile, SG&A expenses fell 4.5% to $890.7 million, driven by reduced advertising expenses and lower payroll.

Further, the company incurred an operating loss of $122.8 million, wider than a loss of $29.8 million in the year-ago quarter.

Financial Position

Bed Bath & Beyond ended the fiscal third quarter with cash and investments of roughly $1,462.6 billion. Long-term debt totaled $1,190.3 million and total shareholders' equity was $1,400 million as of Nov 28, 2020. In the quarter, cash provided by operating activities came in at $43.5 million along with nearly $38 million in capital expenditures.

The company lowered gross debt by roughly $500 million via bond offer and loan repayment. That said, management boasts liquidity of nearly $2.2 billion, driven by a solid cash flow of $244 million.

As the company intends to restart shareholder returns, the total share repurchase program has been raised to up to $825 million, an increase from $675 million. Also, it launched a $375 million worth of ASR, which is likely to be completed by Feb 27, 2021.

Looking Ahead

Although Bed Bath & Beyond refrained from providing sales and earnings view for the fiscal fourth quarter, it anticipates positive sales momentum to continue in the digital platform. However, in-store traffic is likely to remain drab.

Total enterprise comps for fiscal fourth quarter is envisioned to be nearly flat year over year, with net sales expected to decline at a double-digit rate. This might be due to store closures and the divestiture of non-core categories.

Also, gross margin and adjusted EBITDA are projected to be flat year over year. However, adjusted EBITDA margin is likely to be higher year over year in the said quarter, driven by better promotions, improved product mix, lower distribution and fulfillment costs, and higher markdowns to mitigate rising freight costs.

For fiscal 2020, guidance for adjusted EBITDA has been lifted to $500-$525 million, up from $500 million guided earlier. Also, the solid sales trend is likely to continue in the digital space and among key growth categories. Apart from these, management remains focused on optimizing costs and improving margins.

Moving on, it noted that its core portfolio banner work is nearing completion in the fiscal fourth quarter. Such endeavors will help fund its transformation plans and position it well for a solid start to fiscal 2021.

Business Developments

Driven by the fact that almost two-thirds of baby customers shopped online during the fiscal third quarter, Bed Bath & Beyond upgraded and re-launched its buybuy BABY app in November 2020. Moreover, sales from its mobile app rose more than two-fold year over year.

Encouragingly, the company introduced same-day delivery services on bedbathbeyond.com and buybuybaby.com during the said quarter. Also, it partnered with Shipt and Instacart to provide same-day delivery services to customers of Bed Bath & Beyond and buybuy BABY banners. Further, it highlighted that its stores will remain open despite government restrictions.

Store Updates

This Zacks Rank #3 (Hold) company shut down four Bed Bath & Beyond stores during the reported quarter and 75 additional stores in December. It currently remains on track to close 42 more stores. By the end of fiscal 2021, roughly 200 underperforming Bed Bath & Beyond stores will be closed.

Apart from these, it is progressing well with the store remodeling program, wherein proof-of-concept stores will showcase destination categories, bed, bath, kitchen, and storage products. The company is now iterating this within 10 Houston stores, which is likely to be completed by February 2021. This three-year-long plan will be executed on more than 450 stores accounting for nearly 60% of its sales.

Price Performance

We note that the stock has declined 12.7% in the past three months against the industry’s 14.5% growth.

Stocks to Watch

DICK’S Sporting Goods (DKS - Free Report) has an expected long-term earnings growth rate of 5.6% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports (HIBB - Free Report) has an expected long-term earnings growth rate of 17%. Also, the company has a Zacks Rank #1.

Five Below (FIVE - Free Report) , a Zacks Rank #2 (Buy) stock, has an expected long-term earnings growth rate of 21%.

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