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Bed Bath & Beyond (BBBY) Down Despite Q1 Earnings & Sales Beat

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Bed Bath & Beyond Inc. (BBBY - Free Report) delivered better-than-expected results in first-quarter fiscal 2018, wherein the top and bottom line outpaced the Zacks Consensus Estimate. In fact, this marked the company’s third straight quarter of earnings and sales beat.

However, decline in comparable sales (comps) along with contraction in both gross and operating margin has hurt the investor sentiment. Consequently, shares of the company decreased 5.2% in after-market trading on Jun 27. Also, management reiterated its outlook for fiscal 2018, wherein earnings projection is significantly lower than the prior-year period.

Yet, this Zacks Rank #3 (Hold) stock has gained 13.3% in a month, outperforming the industry’s 5.5% rise.

Q1 in Detail

Bed Bath & Beyond’s quarterly earnings of 32 cents per share outpaced the Zacks Consensus Estimate of 31 cents. We note that the company adopted a new revenue recognition accounting standard, FASB ASC 606, Revenue from Contracts with Customers in the quarter under review.

Net sales of this home-furnishing retailer came in at $2,753.7 million, which inched up 0.4% from the prior-year quarter number. The reported figure also came ahead of the Zacks Consensus Estimate of $2,745 million. This upside can be attributed to the company’s transformation efforts and other customer-centric initiatives, somewhat offset by soft comps.

Comps dipped 0.6% due to decline in sales at stores in mid-single digits rate, which was somewhat offset by robust sales at its customer-facing digital networks.

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

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

While gross profit fell 3.5% to $964.8 million, gross profit margin contracted 150 basis points (bps) to 35%. Higher net direct-to-customer shipping expenses and rise in coupon expenses on account of increased average coupon amounts led to the margin contraction. This along with a rise in SG&A expenses caused the operating profit to plunge nearly 44.8% to $81.2 million. Further, the operating profit margin contracted 250 bps from the prior-year quarter to 2.9%.

Financial Position

Bed Bath & Beyond ended the quarter with cash and cash equivalents of $678.6 million, long-term debt of $1,492.2 million and total shareholders' equity of roughly $2,904.2 million.

In first-quarter fiscal 2018, the company generated cash flow of about $245 million from operating activities, while deploying nearly $97.8 million toward capital expenditures.

Share Buyback & Dividend

In the reported quarter, the company bought back 1.2 million shares for nearly $22 million, under the current buyback plan of $2.5 billion. As of Jun 2, 2018, Bed Bath & Beyond had shares worth nearly $1.5 billion remaining under its existing program.

Furthermore, the board declared a quarterly dividend of 16 cents per share, payable Oct 16, 2018 to shareholders of record as of Sep 14.

Store Update

In first-quarter fiscal 2018, Bed, Bath & Beyond introduced seven stores and shuttered two stores, including a Bed Bath & Beyond outlet and one Cost Plus World Market store. Stores introduced included one Bed Bath & Beyond, four World Market and two buybuy BABY stores.

As of Jun 2, 2018, the company had 1,557 stores in operation, comprising 1,017 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 279 stores under the labels World Market, Cost Plus World Market or Cost Plus; 121 buybuy BABY stores; 83 stores under the labels Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; and 57 stores under Harmon, Harmon Face Values or Face Values names. Additionally, the company’s joint venture partnership operates 10 flagship stores in Mexico.

In fiscal 2018, management intends to open about 20 stores, mainly Buybuy BABY and Cost Plus World Markets. It also expects to shut 40 stores in the same period.

Fiscal 2018 Forecasts

Following the solid quarterly results, management reaffirmed its guidance for fiscal 2018, which unlike fiscal 2017 will have 52 weeks. In addition, Bed Bath & Beyond is on track with its three-year financial goals. Notably, these goals include achieving comps growth starting in fiscal 2018; moderating declines in operating profit and net earnings per share in fiscal 2018 and 2019 as well as improving net earnings per share by fiscal 2020.

For fiscal 2018, the company expects consolidated net sales to remain relatively flat to marginally up year over year. Driven by persistent growth in the customer-facing digital channel, Bed Bath & Beyond envisions comps to increase in the low-single digit percentage range.

Meanwhile, Bed, Bath & Beyond continues to project gross margin deleverage in fiscal 2018 mainly owing to continued investment in the customer value proposition and the constant shift to the digital channels. SG&A is estimated to increase on account of investments toward transformation. However, the company expects to witness operating margin contraction lower than that in fiscal 2017. Depreciation expenses are anticipated to be in the $315-$325 million range. Furthermore, it continues to expect tax rate in the band of 26-27% for the fiscal.

Considering all these factors, the company continues to envision fiscal 2018 earnings per share to be in the low-to-mid $2 range. In fiscal 2017, Bed, Bath & Beyond delivered adjusted earnings per share of $3.12. In addition, the Zacks Consensus Estimate for fiscal 2018 is pegged at $2.29.

For fiscal 2018, management still projects capital expenditures to lie between $375 million and $425 million.

Better-Ranked Stocks in Retail Space

Big 5 Sporting Goods Corporation (BGFV - Free Report) pulled off an average positive earnings surprise of 10.5% in the last four quarters and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five Below, Inc. (FIVE - Free Report) has an impressive long-term earnings growth rate of 27.7% and a Zacks Rank #2 (Buy).

Tractor Supply Company (TSCO - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 13.2%.

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