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Can Bed Bath & Beyond (BBBY) Strategies Help It Turnaround?

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Bed Bath & Beyond Inc. (BBBY - Free Report) has been reeling under persistently sluggish mall traffic. This has significantly impacted the company’s stock performance, which declined significantly year to date.

Bed Bath & Beyond’s shares have declined 43.6% year to date, significantly wider than the industry’s fall of 10.3%. Further, the stock has declined 6.7% since third-quarter fiscal 2017 earnings results (reported on Dec 20). Though the company beat on both top and bottom-line estimates in the quarter, earnings declined year over year while sales remained flat. Further, a bleak comparable store sales (comps) and earnings outlook for fiscal 2017 remain concerns.

 

Nonetheless, the company’s transformation plan, shareholder-friendly moves and strategic expansion of stores bode well. That said, let’s analyze the pros and cons of the Zacks Rank #3 (Hold) company.

What’s Troubling Bed Bath & Beyond?

Earnings Continue to Decline, Comps Remain Soft

Though the company’s top- and bottom-line surpassed estimates in the third quarter, earnings declined year over year. This marked the company’s first earnings and sales beat after two consecutive misses. Though sales gained from prudent marketing spend and increased promotional offerings, this led to higher advertising costs and lower margins which impacted the bottom line. Further, results were hurt by soft comps due to lower average transactions in stores, somewhat mitigated by greater average transaction amount. Comps at stores fell at a low-single digit percentage rate, while comps from customer-facing digital networks improved.

Soft FY17 Outlook Mars Estimates

Driven by comps performance so far in the fourth quarter and expectations for the rest of the year, the company issued a bleak comps and earnings outlook for fiscal 2017. It expects comps to decline in the low single-digit percentage range. Further, the company continues to envision fiscal 2017 earnings per share of roughly $3.00, which reflects a decline of more than 30% from the year-ago period.

Consequently, the company’s estimates witnessed a downtrend over the last seven days. The Zacks Consensus Estimate for the fourth quarter and fiscal 2017 moved down by 3 cents and 1 cent, respectively, to $1.38 per share and $3.00 per share. Moreover, estimates for fiscal 2018 moved north by 3 cents to $2.59 per share.

Margin Pressures to Persist

Bed Bath & Beyond has been grappling with soft gross and operating margins for six quarters now. While the gross margin contracted 180 basis points (bps) in third-quarter fiscal 2017, operating margin dipped 340 bps. Strained margins trend is attributed to higher shipping and coupon expenses as well as rise in SG&A expenses. Further, the company continues to anticipate the gross margin to decline in fiscal 2017, alongside expecting SG&A deleverage on account of higher payroll and payroll-related costs; advertising expenses; restructuring charges associated with store management incurred in the second quarter and expenses related to Hurricane Harvey and Maira.

Will Strategic Initiatives Drive Growth?

Transformation Plan

The company remains on track with various transformation efforts to become customers’ first preference. Firstly, the company focuses on improving operational efficiency, which includes transformation of information technology group and related business processes to meet consumers’ evolving demand. It has also set up a strategic portfolio management office (SPMO) to allocate resources toward more profitable areas.

Secondly, the company is undertaking several customer-centric plans like enriching product assortment and improving services that in turn will continue to boost online sales, driving the company’s growth.

Store Expansions

Bed Bath & Beyond is  expanding its store count strategically, while increasing the productivity of existing stores. Evidently, the company targets opening 25 new stores in fiscal 2017, which pertains to all store concepts — including new formats and underpenetrated markets. In the long run, it expects to operate over 1,300 stores across the United States and Canada, and also plans to expand other concepts from coast to coast. Moreover, the company remains focused on expanding, renovating and relocating stores to adapt to the changing market conditions.

Capital Allocation: Boosting Omni-channel Capabilities

Bed Bath & Beyond continually reviews and prioritizes its capital needs. The company incurred $264 million as capital expenditure in the nine months of fiscal 2017, and anticipates deploying about $ 350-$400 million in fiscal 2017. Looking ahead, the company expects to allocate more than half of the capital spending planned for 2017 toward technology-related projects, in support of the growing omni-channel capabilities.

Do Retail-Miscellaneous Stocks Grab Your Attention? Check These

Investors interested in the same industry may consider Hibbett Sports Inc. HIBB, Tractor Supply Company TSCO and KAR Auction Services Inc. KAR. While Hibbett sports a Zacks Rank #1 (Strong Buy), Tractor Supply and KAR Auction carry a Zacks Rank #2 (Buy), each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports delivered an average positive earnings surprise of 25.5% in the trailing four quarters. It has a long-term earnings growth rate of 2.2%.

Tractor Supply posted an average positive earnings surprise of 1.6% in the trailing four quarters. It has a long-term earnings growth rate of 14%.

KAR Auction Services delivered an average positive earnings surprise of 7.3% in the trailing four quarters. It has a long-term earnings growth rate of 13.4%.

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