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Will Soft Margins Hurt Bed Bath & Beyond (BBBY) Q1 Earnings?

Zacks Equity Research

Bed Bath & Beyond Inc. BBBY is slated to release first-quarter fiscal 2019 results on Jul 10.

The company delivered a positive earnings surprise in three of the last four quarters. However, it reported an average trailing four-quarter miss of 2.3%.

The Zacks Consensus Estimate for first-quarter earnings is pegged at 8 cents, which remained stable over the past 30 days. This reflects a significant decline from 32 cents earned in the prior-year quarter. For quarterly sales, the consensus mark stands at $2,580 million, indicating nearly 6.3% decline from the year-earlier quarter figure.

Bed Bath & Beyond Inc. Price and EPS Surprise

Bed Bath & Beyond Inc. Price and EPS Surprise

Bed Bath & Beyond Inc. price-eps-surprise | Bed Bath & Beyond Inc. Quote

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Bed Bath & Beyond has been battling margin pressures for 11 straight quarters now. Higher coupon expenses and lower merchandise margin have been denting the gross margin. This coupled with higher SG&A expenses, as a percentage of sales, persistently affected its operating margin. Going ahead, margins will continue to remain weak. The company expects deleverage in gross margin during first-quarter fiscal 2019 but lesser than that in fourth-quarter fiscal 2018. Additionally, SG&A is anticipated to be higher due to fixed cost including technology and occupancy expenses, which might hurt operating margin.

Moreover, the company has been witnessing soft comparable store sales (comps) for a while due to a decline in sales from stores. Comps are expected to decline 5-6% in the to-be-reported quarter, mainly due to the shift of the Easter holiday as well as planned shift in advertising from the first quarter to the fourth quarter of fiscal 2019.

Strained margins and soft comps trend remain a threat to the company’s top and bottom lines in the fiscal first quarter. Consequently, management had earlier provided a soft earnings outlook for first-quarter fiscal 2019. It estimates adjusted earnings per share of 7-12 cents for the quarter.

Nevertheless, Bed Bath & Beyond’s store-rationalization efforts and transformation plan appear encouraging. The company remains focused on expanding, renovating and relocating stores to adapt to the changing market conditions. Additionally, the Next Generation Lab stores, where the company is testing various experiences and visual merchandising, are expected to boost customer experience, and in turn, drive sales and profitability.

Meanwhile, robust sales at its customer-facing digital networks are driving the company’s top line, which is likely to continue in the fiscal first quarter.

Bed Bath & Beyond also remains well on track with its transformation plan. Notably, the company targets reaching mid-and-long-term revenue growth, near-term gross margin expansion, near-term SG&A improvements and sustainable outstanding operational support.  By focusing on portfolio strategy alignment including product assortment, customer engagement and expanded online experience, it expects to boost revenues.

Zacks Model

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Bed Bath & Beyond has an Earnings ESP of 0.00% and a Zacks Rank #5, which make surprise prediction inconclusive.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the perfect mix of elements to outshine estimates this time around:

Chipotle Mexican Grill, Inc. CMG has an Earnings ESP of +7.84% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumber Liquidators Holdings, Inc. LL has an Earnings ESP of +12.50% and a Zacks Rank #3.

Dunkin' Brands Group, Inc. DNKN has an Earnings ESP of +0.92% and a Zacks Rank #3.

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