Bed Bath & Beyond (BBBY 13.79, +1.53, +12.48%), the home furnishings giant, is trading higher today (+12%, after pushing to +20% last night) after the company reported Q3 (Nov) results last night. It was a pleasant surprise for investors. The NovQ results themselves were decent, though the -1.8% comp sales metric was lackluster. However, investor focus seems to really be concentrated on the company’s indicated longer-term outlook.
Three things were positive:
- First, BBBY reaffirmed FY18 EPS guidance of approximately $2.00. After a big guide down last quarter, a reaffirmation is being viewed as a positive.
- Second, BBBY said that FY19’s EPS would be similar to that of FY18, implying earnings of approximately $2.00. This would be well ahead of market expectations. This latter point is a key catalyst behind the stock’s ascent today.
- Third, BBBY also said that it is ahead of plan with respect to its longer-term financial goals to moderate the declines in operating profit and EPS, this year and next, and to grow net EPS by 2020.
It's well known that BBBY has been in turnaround mode for
some time. A main element of the company’s transformation has involved the prioritization
of profitability above sales growth. The company has been eliminating less
profitable SKUs from its assortment, making adjustments to its free shipping
thresholds (increased to $39 from $29), and modifying pricing algorithms.
The company has also been rethinking its store format. BBBY is focusing on cleaner sight lines, less clutter, and better cross-merchandising. It has identified some 40 stores to designate as "working labs" in which BBBY tests new and different product assortments and arrangements and evaluate visual merchandising presentations, re-imagining the in-store experience in search of the best-performing model. Once this beta process has yielded actionable insight, the company intends to efficiently roll out these new store experiences to a larger number of stores.
Another key strategy has been to focus more on decorative furnishings, a category that the company believes to be more resilient to online competition. is the company continues to shift the sales mix within the category to more proprietary products; its upcoming introduction of the exclusive Bee & Willow line, the first of six in-house decorative furnishing brands on-deck for introduction in 2019 and 2020, serves this effort. The Bee & Willow Home Collection, which will be featured in all stores as well as online, comprises a mix of modern farmhouse and cottage furnishings including furniture, lighting, rugs, wall décor, seasonal accessories, and more. More than 150 stores will present Bee & Willow furniture vignettes. The assorted products of the line will be available in full by March 2019.
In sum, Briefing.com's view coming into this report was that if BBBY had another terrible combination of results and guidance like it did last time, investors would start to question whether BBBY can survive in the world of online competitors. Today's report provides a glimmer of hope. We like that BBBY has been focusing more on profitability than sales growth, and we like the focus on proprietary brands, only available at BBBY.
It's still early, and BBBY has a long history of getting investors' hopes up only to disappoint. The stock is off its highs from last night as some sell side analysts seem to believe that BBBY is being a bit optimistic in its FY19 EPS projections. This will be an interesting name to watch over the next year or two. But if BBBY can achieve flat EPS in FY19 and grow again in FY20, this stock could get back on track. On a final note, at $2.00 next year, the stock is trading at a forward P/E of less than 7x, which is quite low. BBBY also has a dividend yield of around 5%, which is quite nice. Let's just hope they can deliver this time around.