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Summary

  • Bed Bath & Beyond delivered a disappointing earnings report. The stock was down 7% after-hours.
  • Retailers are under scrutiny after Coach's disappointing June 19th Investor Day.
  • I expect Bed Bath & Beyond to experience additional share declines and lose Wall Street support near-term.

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Bed Bath & Beyond Inc. (NASDAQ:BBBY) announced fiscal first-quarter earnings Wednesday, and it was not pretty. The company reported earnings of $0.93 per diluted share. However, its fiscal 1Q earnings were lower than last year's, as higher costs offset an increase in revenues. Shares fell over 7% in after-hours trading. The details are as follows:

  • Net sales of $2.7 billion were 1.7% higher than last year.
  • Gross profit was approximately 38.8% of net sales versus 39.5% in the corresponding period last year. Gross margin was negatively affected by higher levels of discounting to drive traffic into the stores.
  • Selling, general and administrative expenses for the fiscal quarter were 27.5% of net sales versus 27.2% in last year's fiscal first quarter.
  • Total operating expense increased about 2.9%, outpacing the 1.7% revenue growth.
  • Operating income margin was about 1.1% lower than last year's fiscal first quarter.

Based upon my previous article, the U.S. economy's contraction does not bode well for Bed Bath & Beyond and other cyclical stocks long-term:

Home furnishings is a cyclical business; as the economy declines one would expect Bed Bath & Beyond's revenues and earnings to also decline ... After GDP shrank at a 1% annual rate in the first quarter of 2014, it appears my prognostications on the economy are being realized.

Retailers Under Scrutiny?

Coach Inc. (NYSE:COH) is another retailer experiencing difficulties. During its June 19th investor day, Coach warned of double-digit revenue declines, 70 store closings and pressure on gross margins in its next fiscal year. The company also admitted that it had under-invested in the business and missed key fashion trends - a death knell for a fashion brand. According to the Wall Street Journal:

"For the first time publicly, Coach admitted that it had under-invested in its core business, was selling product that lacked innovation, and was dealing with a much more competitive environment than ever before," Mr. Boruchow said. "While the tone of the presentation was fairly downbeat, we were pleased to see the company finally admit to the issues that have plagued the business over the past 12 months."

The stock fell nearly 9% the following day; the stock has declined approximately 13% in total since the infamous Investor Day. However, Wall Street analysts have soured on Coach. Wells Fargo's Paul Lejuez is not sold on Coach's turnaround plan, citing the difficulty for a retailer to change its brand. Wednesday, Bank of America Inc. downgraded the stock from "Undefined" to "Underperform", noting the earnings downside risk from the company's turnaround efforts. Bank of America lowered its price target from $38 to $31 per share.

Caught In Coach's Backdraft?

Coach's disappointing Investor Day put additional focus on Bed Bath & Beyond's quarterly report. Since the company too operates in the retail space, analysts will be keen to determine if it faces similar branding or discounting problems as Coach. Worse yet, analysts may determine that amid a declining economy, all cyclical stocks should receive negative sentiment. Moreover, amid record highs for the S&P 500 (NYSEARCA:SPY) and fears of a market correction, this is not a good environment in which to disappoint Wall Street. I expect [i] analysts to sour to Bed Bath & Beyond, and [ii] the stock to trade lower until the company can prove itself with consistent financial results.

Conclusion

Bed Bath & Beyond delivered a disappointing fiscal 1Q earnings report. The stock traded down 7% after-hours. I expect more declines in the shares and loss of Wall Street support in the near term. I rate the stock a sell.

Disclosure: The author is short COH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Is Bed Bath & Beyond The Next Coach?

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