Bed Bath & Beyond Shares Tumble In Sympathy Over Poor Retail Q1 2016 Results

| About: Bed Bath (BBBY)

Summary

Shares of BBBY fall on concern over the retail environment.

Bed Bath & Beyond changes payroll structure for salaried, nonexempt employees.

Bed Bath & Beyond could be a takeover target with a unique business model.

Bed Bath & Beyond (NASDAQ:BBBY) has found itself in the investor's "show me" phase world. In other words, they have offered a dividend, consistent buybacks and consistent market underperformance with regards to sales and earnings. As such, even with a better outlook offered recently, shares are not responding to any of the aforementioned variables. While growing sales in 2015 slightly and alongside an earnings decline, earnings are once again expected to fall in 2016 by a small amount. But again, sales are expected to rise by roughly 2% for 2016. The biggest problem the home goods retailer has, however, is how they achieve this sales growth. Nearly all of the company's sales growth is coming from the online channel and at the expense of gross margins, which have been in a tail spin over the last couple of years.

I've offered to readers and investors in the past that not much has changed at Bed Bath & Beyond, until recently and for which there has been no reporting. It is coincidental that last week the New York Post published an article denoting severe cost cutting measures at J.C. Penney (NYSE:JCP) and only recently Bed Bath & Beyond went through the exact same exercise… and then some. Let's take a brief look at what the New York Post articulated, and later to be found true, concerning J.C. Penney before I report on Bed Bath & Beyond's cost cutting measures in light of spending elsewhere.

JCPenney, faced with unexpected light sales in mid-April, slashed payroll, froze overtime and took other drastic cost-cutting steps in an attempt to protect its bottom line, The Post has learned.

The article goes on to discuss a few other subjective points, but nonetheless, upon disseminating Q1 2016 results that missed analysts' top line estimates, J.C. Penney did confirm payroll cost cutting dedication through the quarter. Additionally, the retailer's CEO discussed a dedication to this action through the remainder of the year in an attempt to improve results going forward.

Where it becomes of particular concern to those who follow and/or invest in shares of BBBY is that the home goods retailer has also amended its payroll operations as of last month. In April, the company internally decided to change its department manager classification so it no longer issued over-time to said employees of designation. In the past, Bed Bath & Beyond department managers were salaried, non-exempt employees that worked 45 hours a week. The 5 hours over the Federal overtime mandate were paid as overtime hours. As of April, department managers had their status changed and were moved to an hourly wage. The retailer has mandated that no-overtime will be approved going forward.

When reviewing Bed Bath & Beyond's trending quarterly results, we find the retailer on a collision course, as if it hasn't already collided, with the growing trend toward online sales. Couple this with the retailers dependency on couponing and a core clientele demographic issue and we come to recognize how hard it has been for Bed Bath & Beyond to grow earnings beyond the aspects of financial engineering.

I would be of the opinion, based on the recent retail reporting cycle, that Bed Bath & Beyond has not been able to segment itself away from the trends during the 1 st quarter. Those trends resulting from an unseasonably warm winter, poor Q1 consumer spending and retail sales likely found the home goods retailer in like struggles. As such, the retailer likely engaged in a structural employee payroll mandate to offset deteriorating sales. At the very least, the retailer took this action as a long-term measure to help stem the tide against further margin contraction.

On April 25 th, I offered an outlook for shares of BBBY and in consideration of the understood retail environment as well as Bed Bath & Beyond's recent results. My prescient thoughts on shares of BBBY are highlighted in an article titled "UVXY Hits New Lows: New Trades In Play And On Deck".

I'm of the opinion that financial engineering will not lift shares of BBBY significantly and given the continued pressures on gross profits that are seemingly endless, shares will track downward over the next 60-day period, at least. I'm looking to short shares of BBBY around $50 if the market will bear such a price. I'd like to see shares revisit their recent lows below $42 where I would take profits, but it all depends on market conditions.

While I did make some money on shorting shares of BBBY recently, I didn't stick around to see shares express my targeted price. Even so, I would now offer that share price performance of BBBY will likely be dependent on earnings coming out this week for retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). With J.C. Penney missing top line results in Q1, Macy's (NYSE:M) missing both top and bottom line results and Kohl's (NYSE:KSS) also missing top and bottom line results, retail stocks were crushed last week…and rightfully so. We shall see what happens with shares of BBBY as they are close to a new 52-week low. One analyst believes the stock could fall as low as $35 over the next year.

Bradley Thomas at KeyBanc Capital Markets rates Bed Bath at Underperform. He expects the stock to fall to $35 in the next year, citing continued headwinds.

Still, even Thomas concedes "we do believe management is taking the right steps to create a stronger more competitive company".

As I have offered a couple times this year, and primarily with the consideration that BBBY does throw off a lot of cash every quarter, the retail industry is "over-retailed" and ripe for consolidation. At present valuations, shares of BBBY are quite compelling, but could find themselves further depreciated and even more compelling. I am of the opinion that BBBY represents a good takeover or acquisition candidate given its business model and assortment is unique to the retail world. They are and aren't a department store in that they do not, by and large, offer apparel, footwear, jewelry and consumables in stores, but rather home goods. As such, retailers dedicating huge advertising budgets and floor space to compete in the home goods business segment could benefit from acquiring this type of dedicated retailer of scale. Retailers like Macy's, Target, J.C. Penney and Kohl's overlap and are forced to compete more efficiently with private label brands, but placing Bed Bath & Beyond with any of the named retailers gives them a distinct advantage as a brick and mortar and e-commerce retailer.

Disclosure: I am/we are long JCP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Presently, I own shares of JCP and have hedged shares effectively at $8.49 and $8.05. My JCP holdings represent less than 2% of my investable capital for 2016.