Bed Bath & Beyond Inc. (BBBY - Free Report) is failing to impress investors due to multiple headwinds like soft comparable-store sales (comps) and margin pressures, among others. Though the company has impressive earnings and sales surprise history, along with solid store-growth endeavors, these are not reflected in its share price performance.
Shares of this Zacks Rank #4 (Sell) have lost 34.4% in the past year against the industry’s 21% rally. Much of this downside is attributed to the company’s eight-quarter long trend of strained margins, which remains a headwind in fiscal 2018.
Lower number of store transactions has been adversely affecting the company’s comps and top line. Consequently, lower sales are hurting the gross margin, which, coupled with higher expenses, are weighing on the operating margin. In first-quarter fiscal 2018, gross margin fell 150 basis points (bps) while operating profit margin contracted 250 bps. Higher net direct-to-customer shipping expenses and rise in coupon expenses due to increased average coupon amounts, as well as higher SG&A expenses, dented margins in the reported quarter.
Unfortunately, this dismal margins trend is expected to continue in fiscal 2018. Bed, Bath & Beyond projects gross margin deleverage on continued investment in the customer value proposition and the constant shift to the digital channels. Further, higher SG&A expenses are estimated on account of investments toward transformation, which is likely to hurt operating margin. However, the company expects to witness operating margin contraction lower than that in fiscal 2017.
Meanwhile, comps dipped 0.6% in the fiscal first quarter due to a mid-single-digit decline in sales at stores. Though management projects comps to increase in the low-single-digit percentage range for the fiscal, declining store traffic remains a major headwind. Consequently, management envisions fiscal 2018 earnings per share to come in the low-to-mid $2 range, down from $3.12 earned in fiscal 2017.
Additionally, analysts are pessimistic about the company’s prospects, as evident from the downtrend in its earnings estimates in the past 30 days. The Zacks Consensus Estimate of 48 cents for the fiscal second quarter and $2.29 for fiscal 2018 has declined 2% and 0.4%, respectively.
Can the Stock Bounce Back?
Despite these above-discussed challenges, Bed Bath & Beyond has been expanding its store count, which is encouraging. Further, the company is increasing the productivity of existing stores by adjusting the breadth and depth of its merchandise offerings to suit customer preferences. Evidently, it targets opening 20 stores in fiscal 2018, mainly comprising Buybuy BABY and Cost Plus World Markets stores. Moreover, the company is witnessing robust sales at its customer-facing digital networks that are expected to continue in fiscal 2018.
Additionally, 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.
While the company’s financial goals look appealing, it remains to be seen whether these will help revive the stock’s momentum any time soon.
Better-Ranked Stocks in the Retail Space
Urban Outfitters, Inc. (URBN - Free Report) has pulled off an average positive earnings surprise of 17.7% in the last four quarters and it currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Zumiez Inc. (ZUMZ - Free Report) has delivered an average positive earnings surprise of 9.6% in the trailing four quarters and it presently has a Zacks Rank #1.
Five Below, Inc. (FIVE - Free Report) , a Zacks Rank #2 (Buy) stock, has an impressive long-term earnings growth rate of 28%.
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