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Can Bed Bath & Beyond's Growth Efforts Offset Margin Woes?

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Bed Bath & Beyond Inc. (BBBY - Free Report) is riding high on its strategic initiatives including the transformation plan and store-rationalization efforts. In addition, the company has been progressing toward accomplishing its long-term financial target of higher net earnings per share by fiscal 2020. However, Bed Bath & Beyond has been grappling with margin woes for quite some time now.

Nevertheless, shares of this Zacks Rank #2 (Buy) company have gained 45.4% year to date, outperforming the industry’s 25.7% rally.

Let’s Delve Deep

Bed Bath & Beyond remains well on track with its transformation plan, positioning the company well for success in a dynamic retail landscape. With respect to its accelerated transformation plan, the company targets reaching mid-and-long-term revenue growth, near-term gross margin expansion, near-term SG&A improvements and sustainable outstanding operational support. Meanwhile, its focus on portfolio strategy alignment including product assortment, customer engagement, learnings from Next Generation Lab stores and expanded online experience is expected to boost revenue growth.

Apart from increasing productivity of its existing stores, Bed Bath & Beyond is in the process of increasing its store count that is likely to generate higher sales. Management targets opening 15 stores in fiscal 2019. Simultaneously, it expects to close nearly 40 underperforming stores including mostly the flagship ones. Moreover, to adapt to the changing market conditions, the company remains focused on expanding, renovating and relocating stores. Its Next Generation Lab stores, where the company is testing various experiences and visual merchandising, are expected to boost customer experience and drive overall sales and profitability.

Additionally, Bed Bath & Beyond maintains a disciplined capital approach, making suitable business investments and shareholder-friendly moves. Notably, it ended fiscal 2018 with cash and investments of roughly $1 billion, which reflects an improvement of roughly 35% from fiscal 2017.

For the current fiscal year, the company anticipates capital expenditures of about $350-$375 million. Bed Bath & Beyond mainly allocates its capital expenditures toward technology projects including digital advancements as well as the development of IT infrastructure and new systems, store expansion, and other important projects.

Recently, the company increased its quarterly dividend to 17 cents per share from the prior payout of 16 cents. The new dividend is payable Jul 16, 2019.

Despite these positives, Bed Bath & Beyond reported soft margins for 11 straight quarters now. Lower merchandise margin coupled with higher coupon expenses is weighing on gross margin. This, along with higher SG&A expenses have been hurting operating margin. Nevertheless, margins are likely to improve through changes in assortment mix to increase sales, supply chain, and modifications in pricing and coupon strategy. Improvements in store labor model, marketing initiatives and lower occupancy expenses are expected to optimize SG&A.

Moreover, the company remains on track to moderate declines in operating profit and earnings per share in fiscal 2019. Notably, management noted that fiscal 2018 was a year ahead of its model, and expects fiscal 2019 adjusted earnings of $2.11-$2.20 to increase slightly than $2.05 earned in fiscal 2018. Also, it estimates the operating margin rate between almost flat and marginally better than fiscal 2018. Operating margin of more than 300 basis points is likely to drive the company’s bottom line in the long term.

Bottom Line

We note that Bed Bath & Beyond is making efforts to resolve its margin issues. However, its trend of strained margins cannot be ignored. Backed by its solid afore-mentioned growth initiatives, the company is expected to overcome margin pressures. Moreover, the company has a VGM Score of A, which indicates its upside potential.

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