Bed Bath & Beyond (BBBY), the home furnishings giant, is trading lower this morning (-12%) after reporting Q3 (Nov) earnings results after the close yesterday. The stock initially moved higher, but started to fall during the call.
Everyone is familiar with Bed Bath & Beyond (BBBY), but some details are probably not well known. The company operates a chain of retail stores under the names Bed Bath & Beyond in the US and Canada. It also operates other chains, including Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon, Harmon Face Values or Face Values, buybuy BABY and World Market, Cost Plus World Market or Cost Plus.
In addition, the company operates Of a Kind, an e-commerce website that features limited edition items from emerging fashion and home designers; One Kings Lane (acquired in June 2016), an authority in home décor and design, offering a unique collection of select home goods, designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer catering to cooking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services.
The company also operates Linen Holdings, a provider of a variety of textile products serving the hospitality, cruise line, healthcare and other industries. Additionally, the company is a partner in a joint venture which operates retail stores in Mexico under the name Bed Bath & Beyond. BBBY currently has a total of 1,558 stores, including 1,020 Bed Bath & Beyond stores, 280 stores under the names of World Market, Cost Plus World Market or Cost Plus, 118 buybuy BABY stores, 83 stores under Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, and 57 stores under the names Harmon, Harmon Face Values or Face Values.
Just a word on One Kings Lane, which is an online retailer of furniture, home goods, designer and vintage items. One Kings Lane operates using a flash sales model where items on heavily discounted for a limited time. They also offer complimentary interior design services at two design studios located in San Francisco and New York. BBBY sees One Kings Lane as serving as a cornerstone for Bed Bath & Beyond's growing offerings in furniture and home décor.
Turning to the NovQ results, Bed Bath & Beyond reported EPS of $0.44, which was a good bit above market expectations while revenue was flat YoY at $2.95 bln, which was also a bit better than expectations. NovQ same store comps came in at -0.3%, which was actually a bit better than the -2.6% comps in AugQ and -2.0% comps in MayQ. Comps from customer-facing digital channels (online/mobile) continued to have strong growth while comps from stores declined in the low-single-digit percentage range. In terms of full year guidance, the company reaffirmed prior EPS guidance of about $3.00. It's not clear if this guidance is GAAP or non-GAAP.
On the call, BBBY talked about how it is trying to grow its furnishings and décor category. This is an important category for BBBY, not only for building credibility as the expert for the home, but also for driving incremental top line growth. The company has been improving its assortment, marketing, supply chain and customer experience. Categories seeing strong growth are rugs, furniture, lighting and home office.
While BBBY experienced better-than-expected revenue, margins took a bit of a hit. Gross margin came in at 35.2%, down from 37% in the prior year period. This was primarily due to a decrease in merchandise margin and increase in coupon expense, resulting from increases in redemptions and the average coupon amount. BBBY spent more on marketing and increased its promotional offerings.
In sum, investors are not too happy with BBBY's NovQ results. While revenue came in strong and the -0.3% comps were a nice improvement from the prior two quarters, it seems the upside came at the expense of margins as BBBY got more promotional in the quarter. The stock has been under pressure for much of 2017, but had been climbing higher the past 5-6 weeks (+23%) heading into this report as retailers in general had been doing well. However, this report is being seen as a disappointment. Hopefully, results will improve in Q4 (Feb) during the all-important holiday season. On a final note, keep an eye on home décor peers: HOME, PIR, WSM, KIRK, W, ETH, RH, TCS, SHOS, HOFT.