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Bed Bath & Beyond Performs Dismally: Soft Margins to Blame?

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Bed Bath & Beyond Inc. (BBBY - Free Report) is grappling with multiple headwinds like strained margins over past few quarters, soft comparable store sales (comps) and decline in number of store transactions. These factors have also hurt the company’s recently reported second-quarter fiscal 2018 results, wherein the top and bottom line lagged the estimates and the latter fell year over year. Following the dull quarterly results, management trimmed its fiscal 2018 guidance as well.

Let’s Delve Deep

Bed Bath & Beyond’s trend of strained gross and operating margins continued in the fiscal second quarter, which marked the ninth straight quarter of soft margins. While the gross margin contracted 270 basis points (bps) in the reported quarter, operating margin shriveled 300 bps. Gross margin was dented by decline in merchandise market, higher direct-to-customer shipping expenses and rise in coupon expenses owing to increased average coupon amounts. Lower gross margin coupled with higher SG&A expenses dented operating margin in the quarter.

For fiscal 2018, it continues to project gross margin deleverage mainly owing to investments in the customer value proposition and constant shift to the digital channels. Moreover, SG&A is estimated to increase on account of investments toward transformation, thus weighing on operating margin. Though the company expects to witness operating margin contraction lower than that in fiscal 2017, it will be negative.

In addition, soft comps have been hurting the company’s top line for quite a while now, due to decline in number of transactions in its stores. Comps dipped 0.6% in the fiscal second quarter owing to mid-single digits in-store sales decline. This decline follows 0.6% each in first-quarter fiscal 2018 and fourth-quarter fiscal 2017, and 0.3%, 2.6% and 2% in the third, second and first quarters of fiscal 2017, respectively. For the current year, management projects comps to be relatively flat with the prior-year number versus comps increase in the low-single digit percentage range, guided earlier.

These apart, management slightly cut down its net sales model for fiscal 2018 compared with earlier anticipation of net sales to remain relatively flat to marginally up year over year. The lowered view was also a result of the anticipated impacts from Hurricane Florence, and tariffs on imports from China. Earnings per share for the fiscal year are envisioned to be at the lower end of its earlier guided range, at about $2.00. Earnings per share were earlier expected to be in the low-to-mid $2 range. This guidance is also significantly lower than $3.12 earned in fiscal 2017.

Is There a Silver Lining?

Bed Bath & Beyond remains committed to its Transformation plan to deliver a seamless experience to its customers. Also, the company has been strategically expanding its store count and increasing the productivity of existing stores. For fiscal 2018, the company targets opening 20 new stores, mainly comprising Buybuy BABY and Cost Plus World Markets stores. In the long run, it expects to operate over 1,300 Bed Bath & Beyond stores across the United States and Canada.

Additionally, its share-holder friendly moves bode well. During the fiscal second quarter, the company bought back 2.1 million shares for nearly $41 million, under the current buyback plan of $2.5 billion. Management declared a quarterly cash dividend of 16 cents per share, payable Jan 15, 2019.

Further, the company has been making investments toward technology projects, including digital advancements and development of new systems, and other important future projects. Bed Bath & Beyond expects to deploy about $375-$425 million as capital expenditures in fiscal 2018.

Bed Bath & Beyond, which shares space with Tractor Supply Company (TSCO - Free Report) , Office Depot, Inc. (ODP - Free Report) and Five Below, Inc. (FIVE - Free Report) , also remains on track to attain its long-term financial goals.

Wrapping up

Though the afore-mentioned initiatives look encouraging, Bed Bath & Beyond will take time to revive its financial performance and aid a turnaround.

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