No Comfort for Bed Bath & Beyond
Slowing same-store sales growth and falling margins should continue to weigh on Bed Bath & Beyond’s results
Bed Bath & Beyond reports quarterly results Thursday. PHOTO: ANDREW HARRER/BLOOMBERG NEWS
That is the harsh reality facing Bed Bath & Beyond Inc., one of a slew of retailers struggling to adapt to rapidly changing shopper habits.Late to the e-commerce game, the home-furnishings retailer has only recently invested heavily in its online presence. The strategy has yielded mixed results.
And while the stock is down 40% over the past 12 months, it appears the tough times may get worse before they get better.
Bed Bath & Beyond late last month cut earnings guidance for its fiscal third quarter due to lower-than-expected sales. So when the retailer actually reports results on Thursday for the quarter that ended in November, the attention will fall squarely on holiday guidance and its 2016 outlook.
PHOTO: THE WALL STREET JOURNAL
Bed Bath & Beyond, which sells everything from bedding and kitchen appliances to coffee makers and vacuums, is focused on a three-pronged sales strategy: selling online, in its brick-and-mortar stores, and on mobile. While the retailer is growing online sales, they only represented about 8% of total sales in its second quarter.
Those efforts have put additional pressure on margins already hurt by sales promotions. That is because free shipping tends to drive online margins lower, a factor that doesn’t impact brick-and-mortar sales. The retailer’s operating margins have fallen in each of its past three fiscal years. And while online sales growth is important, it has a tendency to shift overall sales rather than increase the total pie.
Making matters more difficult, Bed Bath & Beyond’s same-store sales growth has slowed on a fiscal basis for the past five years. Analysts estimate third-quarter same-store sales fell 0.4%, which would be the first quarterly decline since the financial crisis.
With Bed Bath & Beyond opening stores at a rapid clip over the past three years, and operating 1,520 stores as of this summer, that is particularly problematic.
Granted, Bed Bath & Beyond shares look cheap. The stock, which trades near a five-year low, fetches nine times earnings projected over the next 12 months. That is its lowest multiple since November 2008.
But the shares are cheap with good reason. Investors should look beyond this retailer.
