Shares of Bed Bath & Beyond Inc. BBBY have decreased 47.6% in a year due to continued softness in gross and operating margins. In second-quarter fiscal 2018, the company reported gross and operating margin decline for the ninth straight time. The stock also underperformed the industry that declined 8.3% in the past year.
Notably, higher expenses have been hurting the company’s margins. In second-quarter fiscal 2018, gross margin contracted 270 basis points (bps) on higher coupon expenses due to rise in average coupon amounts. Decline in merchandise margin coupled with higher net direct-to-customer shipping expenses were added deterrents. Lower gross margin along with escalated SG&A expenses led operating margin contraction of 300 bps, up 50 bps from the fiscal first quarter.
Unfortunately, the company expects the soft margins trend to continue in fiscal 2018. Management projects gross margin deleverage mainly due to investments in the customer value proposition and constant shift to the digital channels. Further, SG&A expenses are estimated to increase on higher cost of investments toward transformation. Operating margin is also expected to contract, but lower than 310 bps recorded in fiscal 2017.
Furthermore, Bed Bath & Beyond has been witnessing soft comparable sales (comps) for the past few quarters largely due to lower store transactions. Comps dipped 0.6% in the fiscal second quarter on mid-single digits decline in in-store sales, somewhat offset by robust sales at the customer-facing digital networks. For fiscal 2018, management projects comps to be relatively flat year over year.
Will Bed Bath & Beyond Bounce Back?
While the above factors make us apprehensive, Bed Bath & Beyond’s transformation plan and store-expansion initiatives remain encouraging. With regard to transformation, the company continues to invest in areas such as supply chain, customer fulfillment, merchandising and e-commerce to drive sustainable profitability. Moreover, Bed Bath & Beyond is leveraging its current associate base to properly execute the growth strategies.
These apart, Bed Bath & Beyond remains committed to expand its store count and improve productivity of existing stores. The company is consistently focusing on renovating and relocating stores to adapt to the changing market conditions to suit consumer preferences. In fiscal 2018, management targets opening 20 stores, mainly comprising Buybuy BABY and Cost Plus World Markets stores.
Meanwhile, the company has been witnessing robust sales at customer-facing digital networks, which is likely to continue in fiscal 2018.
Bed Bath & Beyond optimally allocates its capital, making the right investments to help position itself for long-term success and enhance shareholder returns. The comapny mainly allocates its capital toward technology projects, including digital advancements and development of new systems, new store openings and refurbishment of existing stores, and other important projects.
Moving ahead, management expects to allocate more than half of the capital spending toward technology-related projects to improve its omni-channel capabilities.
We expect the company’s strategies to cushion the dismal stock performance, but this will take time.
Presently, Bed Bath & Beyond carries a Zacks Rank #3 (Hold). Moreover, the Zacks Consensus Estimate for the company’s earnings has largely remained stable before its third-quarter fiscal 2018 earnings release, which is a couple of weeks away.
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