A month has gone by since the last earnings report for Bed Bath & Beyond (BBBY - Free Report) . Shares have lost about 9.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Bed Bath & Beyond due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Bed Bath & Beyond Q4 Earnings Beat, Sales Miss
Bed Bath & Beyond reported mixed fourth-quarter fiscal 2018 results, wherein the bottom line outpaced the Zacks Consensus Estimate but the top line missed. With this, the company’s earnings marked second straight beat, while sales lagged for the third straight time.
Q4 in Detail
Bed Bath & Beyond reported earnings of $1.20 per share in the fiscal fourth quarter, which outpaced the Zacks Consensus Estimate of $1.11.
Net sales fell nearly 11% to $3,307.9 million and also came below the Zacks Consensus Estimate of $3,333 million. This downside can be primarily attributed to one less week in the fiscal fourth quarter versus the year-ago period. Also, a shift in the calendar negatively impacted the top line.
Soft comparable sales (comps), which dipped roughly 1.4% mainly due to mid-single-digit decrease in sales from stores, were probably the reason for the decline. Moreover, soft comps impacted the company’s overall sales, which fell short of the estimates and also declined year over year.
Nevertheless, robust sales at the company’s customer-facing digital networks partly offset the comps decline. Moreover, management issued an upbeat earnings outlook for fiscal 2019.
While gross profit plunged roughly 14% to $1,146.9 million, gross profit margin also contracted 120 basis points (bps) to 34.7%. Decline in gross margin was mainly due to lower merchandise margin coupled with higher coupon expenses. Rise in coupon expenses was on account of increased average coupon amount, partly negated by fall in the number of redemptions.
However, SG&A expenses fell 6.3% to $933.7 million in the quarter. As a percentage of net sales, SG&A increased 140 bps to 28.2% mainly owing to higher technology-related costs. Further, the company reported adjusted operating profit of $213.2 million that tumbled nearly 49.6%. Additionally, adjusted operating margin shrank 500 bps from the prior-year quarter to 6.4%.
Bed Bath & Beyond ended the fourth quarter with cash and investments of roughly $1 billion, which reflects an improvement of roughly 35% from the end of last fiscal. Moreover, long-term debt totaled $1,487.9 million and total shareholders' equity came in at $2,560.3 million as of Mar 2, 2019.
Further, the company ended fiscal 2018 with retail inventories of roughly $2.6 billion at cost, down 5% year over year, stemming from its continuous focus on inventory-optimization initiatives.
In fiscal 2018, the company generated a cash flow of about $918.3 million from operating activities while deploying nearly $325.4 million toward capital expenditures.
Share Buyback & Dividend
In the reported quarter, Bed Bath & Beyond repurchased stock worth nearly $78 million, reflecting about 5.2 million shares.
Additionally, the company’s board declared a hike in quarterly dividend to 17 cents per share from the prior payout of 16 cents. The new dividend will be payable Jul 16, 2019, to its shareholders of record as of Jun 14.
In fourth-quarter fiscal 2018, Bed Bath & Beyond opened three outlets, which included two buybuy BABY stores and one World Market store. Simultaneously, the company shuttered 21 stores comprising 11 flagship stores, seven World Market outlets, two Harmon stores, and one Christmas Tree Shops store.
As of Mar 2, 2019, the company had 1,533 stores in operation, consisting of 994 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 277 stores under the labels World Market, Cost Plus World Market or Cost Plus; 124 buybuy BABY stores; 81 stores under the labels Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; 55 stores under Harmon, Harmon Face Values or Face Values names; and two retail stores under the label One Kings Lane. Additionally, the company’s joint venture operates 10 flagship stores in Mexico.
In fiscal 2019, management intends to open about 15 stores. Simultaneously, it expects to close down nearly 40 stores including mostly flagship ones.
Management also provided updates on the Transformation Plan, through which it targets mid-and-long-term revenue growth, near-term gross margin expansion, near-term SG&A improvements and sustainable outstanding operational support.
It expects to boost revenue growth by focusing on portfolio strategy alignment, including product assortment, customer engagement, learnings from Next Generation Lab stores and expanded online experience. 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. Furthermore, the company will focus on spending in human capital, data, process improvements, repositioning its flagship brand and reinforcing the global sourcing capabilities.
Bed Bath & Beyond also informed that the company’s board of directors has been making a detailed review of its composition, governance structure and compensation practices. Also, the board is pacing up with the refreshment program. Going forward, it plans to make some additional changes to the board.
Management has issued financial targets for fiscal 2019, 2020 and long term. For fiscal 2019, the company now estimates net earnings per share to increase marginally to $2.06-$2.15, which includes 5 cents per share in severance and shareholder activity fees. Excluding the charges that are anticipated to be incurred in the first quarter of fiscal 2019, net earnings per share are estimated to be $2.11-$2.20. In fiscal 2018, the company recorded adjusted earnings of $2.05 per share.
For fiscal 2020 and long term, management aims at accomplishing double-digit growth rates in net earnings per share. This will be backed by gains from the company’s transformation plan and capital allocation plan. Also, operating margin expansion of more than 300 bps is likely to drive the company’s bottom line.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -74.02% due to these changes.
Currently, Bed Bath & Beyond has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Bed Bath & Beyond has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.