Bed Bath & Beyond (BBBY) Up 7.4% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Bed Bath & Beyond (BBBY). Shares have added about 7.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Bed Bath & Beyond due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Bed Bath & Beyond Q3 Earnings Top, Sales Lag

Bed Bath & Beyond reported mixed third-quarter fiscal 2018 results, wherein the bottom line outpaced estimates while the top line missed the mark. With this, the company’s earnings reverted to a positive trend, after recording a miss in the last reported quarter, whereas sales lagged for the second straight time. Further, management updated sales and earnings guidance for fiscal 2018.

Management stated that the company is well ahead of its plan on achieving long-term financial goals that include moderating the operating profit and net earnings per share decline in fiscal 2018 and 2019. However, it expects to witness net earnings per share growth by fiscal 2020.

Q3 in Detail

Bed Bath & Beyond reported earnings of 18 cents per share in the fiscal third quarter, which outpaced the Zacks Consensus Estimate by a penny. Further, earnings were in line with the company’s model but declined 59.1% from the year-ago quarter.

Net sales rose 2.6% to $3,032.2 million but lagged the Zacks Consensus Estimate of $3,041 million. Moreover, comparable sales (comps) dipped roughly 1.8% in the reported quarter due to a mid-single-digit decrease in sales from stores, somewhat offset by robust sales at the company’s customer-facing digital networks.

While gross profit fell 3.6% to $1,003.7 million, gross profit margin contracted 210 basis points (bps) to 33.1%. This downside was mainly due to lower merchandise margin coupled with higher coupon expenses. Rise in coupon expenses was on account of increased average coupon amount, partly negated by fall in the number of redemptions. Gross margin contraction, coupled with 2.3% rise in SG&A expenses, caused operating profit to tumble nearly 54.3% to $49.5 million. Additionally, operating margin shrank 300 bps from the prior-year quarter to 1.6%.

Financial Position

Bed Bath & Beyond ended the quarter under review with cash and investments of roughly $1 billion. Moreover, long-term debt totaled $1,492.4 million and total shareholders' equity was $2,903.3 million as of Dec 1, 2018.

Further, the company’s retail inventories summed roughly $2.9 billion at the end of the fiscal third quarter, down 6% on inventory optimization initiatives.

In the first nine months of fiscal 2018, the company generated cash flow of about $665.4 million from operating activities while deploying nearly $256.5 million in capital expenditure.

For fiscal 2018, management projects capex between $350 million and $400 million.

Share Buyback & Dividend

In the reported period, the company repurchased stock worth nearly $8 million, reflecting approximately 527,000 shares.

Additionally, the company’s board declared a quarterly cash dividend of 16 cents per share, payable as of Apr 16, 2019, to shareholders of record as of Mar 15.

Store Update

In third-quarter fiscal 2018, Bed Bath & Beyond introduced four outlets, inclusive of two World Market stores, one buybuyBABY outlet and one One Kings Lane store. Moreover, the company shuttered 15 stores, comprising 13 flagship shops and one World Market plus Christmas Tree Shops outlet each.

As of Dec 1, 2018, the company had 1,550 stores in operation, consisting 1,005 namesake stores across 50 states, the District of Columbia, Puerto Rico and Canada; 282 stores under the labels World Market, Cost Plus World Market or Cost Plus; 122 buybuy BABY stores; 82 stores under the labels Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!; 57 stores under Harmon, Harmon Face Values or Face Values names; and two retail stores under the label One Kings Lane. Additionally, the company’s joint venture operates 10 flagship stores in Mexico.

In fiscal 2018, management intends to open about 20 stores, mainly of buybuy BABY and Cost Plus World Market brands. Simultaneously, it expects to close down nearly 40 stores, including mostly flagship ones.

Outlook

Following the company’s mixed quarterly results, management updated guidance for fiscal 2018, which, unlike fiscal 2017, has 52 weeks. Consolidated net sales are projected to decrease in a low-single digit, with decline in comps of about 1% in fiscal 2018. Further, the company is wary of a decline in net sales in a low-double-digit percentage range for the fiscal fourth quarter due to the fiscal calendar shift from the 53rd week.

Bed Bath & Beyond continues to project gross margin deleverage in fiscal 2018, mainly due to investments in the customer value proposition and digital channels. SG&A is estimated to increase on account of spending on transformational efforts. However, the company still anticipates witnessing operating margin contraction, albeit lower than the fiscal 2017-level. Depreciation expenses are predicted to be $325-$335 million compared with $320-$330 million mentioned earlier. Furthermore, it expects the tax rate to be roughly 24% for fiscal 2018.

Considering all these factors, management now envisions fiscal 2018 earnings per share to be about $2 compared with the earlier guidance, which was assumed to be at the lower end of $2. In fiscal 2017, Bed Bath & Beyond delivered adjusted earnings per share of $3.12.

For fiscal 2019, management estimates comps to dwindle in a low-single digit, attributable to declining store traffic. Moreover, operating margin is projected to match the fiscal 2018 figure, driven by the company’s ongoing efforts and analysis of its overall expenses, including efficiencies in stores and corporate functions. Further, earnings per share and capital expenditure are forecasted to remain similar to the fiscal 2018 level.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Bed Bath & Beyond has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Bed Bath & Beyond has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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