Bed Bath & Beyond Inc. (BBBY - Free Report) has lately been reeling under sluggish mall traffic, which has been a key impediment to its performance. The company is not immune to the troubles of the retail sector characterized by soft traffic at stores due to the growth of e-commerce, as well as currency headwinds and other macroeconomic concerns.
Notably, shares of this Zacks Rank #5 (Strong Sell) company have lost 44.7% year to date, significantly wider than the industry’s decline of 16.2%. Moreover, the stock has fallen a substantial 16.7% since reporting earnings on Sep 19, underperforming the industry’s 1.9% downside. That said, let’s delve deeper and find what’s hurting the company’s performance lately.
Negative Surprise Trend
The company’s share price decline can primarily be attributed to its dismal surprise history. Notably, the company has posted negative earnings and sales surprises in five of the trailing six quarters. Further, top and bottom-line results for second-quarter fiscal 2017 lagged estimates for the second straight time and dipped year over year. Results continued to be hurt by sluggish store traffic and escalated costs, somewhat compensated by strength witnessed across the company’s customer-facing digital network. Moreover, the effects of Hurricane Harvey also had an unfavorable impact on the results.
Soft Outlook & Downtrend in Estimates
The dismal first half, the estimated impact from Hurricane Harvey, higher costs related to the company’s new transformation plans and expectations that these trends will persist compelled management to trim forecasts for fiscal 2017. The company now projects net sales growth rate to be flat for fiscal 2017 (which includes a 53rd week), compared with the previous guidance of a low to mid-single-digit percentage increase. Further, it envisions earnings per share of nearly $3.00, down 30% from the year-ago period. Earlier, the company projected earnings per share to decline in the range of a low-single-digits percentage to 10%.
Consequently, the Zacks Consensus Estimate witnessed a downtrend in the last seven days. The Zacks Consensus Estimate for the third quarter and fiscal 2017 dipped 43.7% and 20.5%, respectively, to 41 cents per share and $3.15 per share.
Strained Margins to Remain an Impediment
Additionally, Bed Bath & Beyond has been grappling with soft margins for five quarters now. While gross margin contracted 100 basis points (bps) in second-quarter fiscal 2017, it declined 90 bps in the preceding quarter. Moreover, the company witnessed a gross margin decline of 60 bps, 80 bps and 70 bps in the fourth, third and second quarters of fiscal 2016, respectively.
Gross margin in the fiscal second quarter was hampered by higher direct-to-customer shipping expenses, lower merchandise margin and a rise in coupon expense on account of increased redemptions. This along with a rise in selling, general and administrative (SG&A) expenses caused operating margin to decrease 360 bps year over year, which marked the company’s fifth straight quarter of operating margin decline.
Further, the company continues to anticipate that gross margin will decline in fiscal 2017. It also expects SG&A deleverage on account of 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.
Though the company’s transformation plan is on track to deliver a seamless customer experience, the challenges in the retail sector are far from fading. Notably, the majority of the sector players are looking for ways to counter the growth of e-retailers. Meanwhile, margins and top and bottom lines trends of the sector participants continue to suffer.
While most players are struggling, there are a few retailers where investors can place bet on. These include Five Below Inc. (FIVE - Free Report) , Build-A-Bear Workshop, Inc. (BBW - Free Report) and Sally Beauty Holdings, Inc. (SBH - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Five Below has a long-term EPS growth rate of 28.5%. Further, the stock has returned 29.3% year to date.
Build-A-Bear has delivered an average positive earnings surprise of 73.7% in the trailing four quarters. Moreover, it has a long-term earnings growth rate of 18%.
Sally Beauty has improved 8.7% in the last three months. Further, the company has a long-term EPS growth rate of 5.6%.
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