Bed Bath & Beyond (BBBY 14.69, -4.12, -21.90%), the home furnishings giant, is
trading sharply lower today after reporting Q2 (Aug) earnings results
last night. EPS fell 46% year/year to $0.36, which was well below market
expectations. Revenue was roughly flat year/year at $2.94 bln, which was
slightly below expectations. BBBY also lowered full year EPS guidance. It now
expects EPS at the low end of prior guidance. BBBY now expects EPS of approximately
$2.00 vs prior guidance in the low to mid $2.00 range.
Comparable store sales were also disappointing. The market had been hoping that this would be the quarter where it returns to growth after five quarters of negative comps. But it was not to be, as AugQ comps were -0.6% vs market expectations of a slight gain. The company’s performance included strong sales growth from customer-facing digital channels. However, sales from stores declined in the mid-single-digit percentage range.
BBBY has been in turnaround mode. The retail giant has been struggling in terms of how to thwart online competitors like Amazon (AMZN). A problem for BBBY is that its retail categories are very susceptible to online competition. Other large retailers like TGT and WMT have had some success weathering such competition, in part by introducing features such as two-day shipping and mobile pick-up that are geared toward online buyers, but BBBY's catalog is not similarly centered on everyday purchase items, so their issues effectively adapting to competition are a little different.
On the call, BBBY said that, toward that turnaround goal, it has been spending money with a focus on transforming the company and re-establishing earnings growth. BBBY says its transformation is taking root. It has chosen to progress on many initiatives at once in order to encourage quicker improvement. To that purpose, BBBY has beefed up in areas including data analytics, supply chain, customer fulfillment, merchandising, life stages, e-commerce, portfolio management and IT.
One specific step that BBBY is taking as part of its transformation strategy and to strengthen its competitive position is boosting its decorative furnishing segment, which features products such as furniture, lighting, rugs, art, mirrors, and wall décor, with the goal of establishing BBBY as the trusted expert for the whole home. The ramp in this segment is still in its early stages, but BBBY notes that it is beginning to see some positive results. Through the end of the second quarter, BBBY has added about 42,000 decorative furnishing SKUs, yielding a total assortment count increase of approximately 37% year/year. Progress toward increasing profitability in the Decorative Furnishings category has also included a comprehensive review of its offering and the elimination of some less profitable SKUs. This may have short-term implication on sales.
BBBY is also opening next-generation stores. The chain remains on track to have a total of approximately 40 next-generation stores by this upcoming spring. Beyond these 40, BBBY has identified the next 125 stores that carry the potential to become next-generation stores.
Another strategy involves bolstering its offerings catered toward moving to college. BBBY's goal is to become the destination for college shopping, offering a wide selection of products and great values, along with differentiated services, offered online, in-store, and on-campus, with the goal of making the transition to campus more convenient and less stressful for students and their parents and to introduce BBBY to college-bound students.
In sum, BBBY says it continues to remain focused on its goals of moderating the declines in operating margin and EPS for the next two years and growing EPS in 2020. BBBY cautions that the actions it is taking may negatively impact sales and profitability in the short term. Overall, investors are not too happy with BBBY's AugQ results/comps. While it was good to hear that BBBY keeps making changes, it seems that because they are trying to do a lot all at once, EPS will experience a near-term impact.
Investors had been hoping that AugQ would be the quarter when BBBY finally returns to positive comps, but those wishes were not met. With the stock down big today, it's clear that at least some investors are starting to question whether BBBY, as a retailer whose offerings center on once-in-a-while purchases, can identify and adopt strategies that will suitably enable it to survive in this world of online competitors.
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