Bed Bath & Beyond (BBBY), the home furnishings giant, is trading down sharply this morning (-12%) after reporting Q1 (May) 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 1,546 stores, including 1,022 Bed Bath & Beyond stores, 276 stores under the names of World Market, Cost Plus World Market or Cost Plus, 113 buybuy BABY stores, 80 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 $0.58, which was a good bit below expectations while revenue was roughly flat, up 0.1% YoY to $2.74 bln, which was also a bit shy of expectations. MayQ same store comps came in at -2.0% vs -0.5% last year and vs +0.4% in Q4 (Feb). Comps from customer-facing digital channels were in excess of 20%, while comps from stores declined in the mid-single-digit percentage range during MayQ.
In terms of guidance, the company said that, at this time, it's not updating its full year modeling assumptions provided during its April 5 conference call. Although Q1 (May) is typically the least impactful quarter in terms of annual sales and earnings, and while the company continued to have strong growth in its customer-facing-digital channels this quarter, the company says it did experience increased softness in transactions in stores, as well as higher net-direct-to-customer shipping expense, coupon expense, and advertising costs during the quarter.
BBBY says it remains to be seen whether these challenges were more pronounced in, or unique to, Q1 (May) due to the smaller sales base in this period, and/or a later start to the summer selling period. After Q2 (Aug), co believes it will have better visibility to the full-year and, if necessary, will update its full-year modeling assumptions at that time.
On the call, management talked about its challenges in terms of declining foot traffic in stores and the opportunities presented by omni-channel retailing. In terms of BBBY's efforts to boost its digital/online channels, both web and mobile, results continue to grow at a very healthy pace, driven in part by a customer experience that keeps getting better. BBBY has been adding to its online product assortment and service offerings, improving its content to be more inspirational, making enhancements to search and navigation, and creating a more frictionless check-out experience.
In terms of its brick-and-mortar stores, BBBY is always working to optimize the profitability of its real estate portfolio. The pace of its store openings has slowed, and BBBY has increased the number of store closings over the past several years. And as leases come up for renewal, if the company cannot reach acceptable terms with landlords, it would expect the pace of store closings to increase. At the same time, BBBY is making investments to evolve and improve existing store formats, enhance omni-channel services, integrate technology tools, and create a more experiential shopping environment in its physical stores.
In merchandising, BBBY has many initiatives underway that support its objective to be viewed as the expert for the home and heartfelt life events. For example, it's increasing its online offering on the Bed Bath & Beyond website, and specifically increased its offering of personalized products by leveraging its recently acquired capabilities from PMall. These newer items are resonating well with customers and BBBY will continue to add to the mix of product it offers. Other merchandising initiatives include an expanded window room offering, a tabletop makeover, a virtual bedding initiative, and a life-stage focus on college. The idea is to create differentiation for BBBY from other retailers.
In sum, investors are not too happy with BBBY's MayQ results/comps and they are probably a little concerned that management decided not to update its full year modeling assumptions. 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 $30 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.
The good news is that, during the Q&A on the call, management said that the first three weeks of Q2 (Aug) is tracking better or slightly better than last quarter. Sales in AugQ have been generally in-line with what the company had anticipated when it provided guidance back in April. But it's still very early in the quarter, so don't read too much into it. Also, keep in mind that Q1 (May) is always BBBY's weakest, and probably least important, quarter for the year. Hopefully, there are signs of improvement in Q2 (Aug). On a final note, keep an eye on home décor peers: HOME, PIR, WSM, KIRK, W, ETH, RH, TCS, SHOS, HOFT.