Bed Bath & Beyond (BBBY), the home furnishings giant, is trading down sharply this morning (-16%) after reporting Q2 (Aug) earnings results after the close yesterday.
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 1,550 stores, including 1,023 Bed Bath & Beyond stores, 277 stores under the names of World Market, Cost Plus World Market or Cost Plus, 114 buybuy BABY stores, 81 stores under Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, and 55 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 AugQ results, Bed Bath & Beyond reported non-GAAP EPS of $0.78, which was a good bit below expectations while revenue fell 1.7% YoY to $2.94 bln, which was also shy of expectations. AugQ comps came in at -2.6%, a bit worse than the -2.0% comps in MayQ. Comps from customer-facing digital channels were in excess of 20%, while comps from stores declined in the mid-single-digit percentage range during AugQ.
In terms of full year guidance, the company is now modeling EPS of about $3.00. It's not clear if this guidance is GAAP or non-GAAP but it appears to be well shy of market expectations. The balance of the EPS results are expected to be split approximately 20% in Q3 (Nov) and 80% in Q4 (Feb).
On the call, management said that in Q2 (Aug) it saw a continuation of its early fiscal 2017 trends, namely strong growth in its customer-facing digital channels and increased softness in the physical stores. In addition, expenses were higher due to the accelerated realignment of its store management structure and the impact of Hurricane Harvey, as well as planned investments (product fulfillment, customer service, marketing and technology). Overall, BBBY concedes that AugQ results were softer than anticipated back in April when the company provided its 2017 modeling assumptions. As a result, BBBY lowered full year guidance.
A significant undertaking has been the transformation of BBBY's IT group, related business processes and its approach to technology generally to better compete against online competitors. BBBY says it has adopted a new model that allows it to better prioritize and deliver against its ever-increasing technology roadmap. Along these lines, the company recently hired a new Chief Information Officer and its first Chief Technology Officer. In addition, BBBY has established a strategic portfolio management office, or SPMO, to better focus resources and expedite results.
Going beyond IT and in a more general sense, BBBY is seeking to have a more differentiated and complete product assortment of the right quality product at the right price. BBBY also wants to provide better services and to deliver a more personalized and inspiring customer experience. Each of these objectives is being supported by numerous ongoing initiatives across all channels.
One area BBBY wants to improve on is furniture and decor. The company sees this category as a significant sales growth opportunity and an important contributor to further establishing BBBY as the expert for the home. The company has accelerated its efforts to build an assortment that covers a variety of different styles and price points. Although its assortment is still small in comparison to larger furniture retailers, over the past 18 months, BBBY has added nearly 200,000 furniture and decor SKUs online with One Kings Lane representing about one-third of them.
In sum, investors are not too happy with BBBY's AugQ results/comps and this follows a disappointing MayQ result in June. Online competition is a real conundrum for BBBY and its stock price has suffered. After trading near $80 in early 2015, the stock is now in the $23 range and has been steadily declining for months. It's good to see the company beefing up its online offering but they are still being greatly impacted by online competition and BBBY will remain primarily brick-and-mortar. It's not clear how much they can do to stem this tide. On a final note, keep an eye on home décor peers: HOME, PIR, WSM, KIRK, W, ETH, RH, TCS, SHOS, HOFT.