Bed Bath & Beyond Q1: Strains On Brick And Mortar Retail Sales

| About: Bed Bath (BBBY)

Summary

Bed Bath & Beyond has suffered from poor sales growth and gross margin contraction.

Q1 retail reports overwhelmingly showed strains on brick & mortar retail sales.

Will we hear greater details concerning the acquisition of One Kings Lane.

Bed Bath & Beyond (NASDAQ:BBBY) will report their Q1 2016 results on Wednesday after the closing bell. As the last in a long line of retail reports, Bed Bath & Beyond's results are highly anticipated by investors who have already witnessed the retail sector fall apart over the last 30 days or so. After Bed Bath & Beyond reported its Q4 2015 results and guidance for FY16, shares have remained in a protracted downtrend, recently falling to as low as $41.78 a share before bouncing off that level.

Expectations are somewhat low for Bed Bath & Beyond as its peers have largely outlined a rather underwhelming brick & mortar trend in retail sales. Target (NYSE:TGT), Kohl's (NYSE:KSS), J.C. Penney (NYSE:JCP) and Macy's (NYSE:M) all reported sub par quarterly sales results with some lowering estimates for Q2 2016. Having said that, the average analyst estimate for Bed Bath & Beyond's 1st quarter is for the company to increase sales by 1.4% on 1-2% comps. The retailer is expected to show an earnings decline of roughly 7% with earnings falling to $.86 a share from $.93 a year ago.

As far as trending results on a YOY basis is concerned, in Q1 2015 the company grew revenues roughly 3.1% on 2.2% comps. Additionally, the company grew online sales some 35% during the 1st quarter a year ago and will be fortunate to grow online sales 25% this year in the 1st quarter. During Q1 2015, Bed Bath & Beyond exhibited continued gross margin contraction from 38.8% to 38.1% in the period. As a more immediate measure of identifiable stresses on Bed Bath & Beyond sales, the company reported another 110 basis point, gross margin contraction to close out 2015.

It remains to be seen if Bed Bath & Beyond can turnaround its profit and sales performance that have been flagging for some time. Even with the company's large and dedicated share repurchase program in place, the company has not been able to improve the share price performance. As such, the company attempted to further entice investors with a newly instituted dividend to end 2015. But the dividend, at least for the time being, has fallen on deaf ears as investors have largely avoided shares of BBBY. For those who have participated by owning shares of BBBY over the last several months, the stock has pretty much languished toward the lower end of the $40 range.

Most recently, Bed Bath & Beyond announced the acquisition of One Kings Lane in an all cash deal. The deal will not affect Q1 earnings, but will be slightly dilutive in the 2nd quarter. With all the money that Bed Bath & Beyond has spent in the digital sales channel over the last 3 years, the acquisition of an online flash sale retailer like One Kings Lane is somewhat bewildering. The acquisition of One Kings Lane also comes at a low-point in the online retailers operation. One Kings Lane had been trying to sell itself coming into 2016 and after it continued to find its business under pressure. As a flash sale retailer of discount home goods, it is possible that the One Kings Lane platform can serve as a liquidation channel for Bed Bath & Beyond. Where One Kings Lane had always been strapped for inventory, Bed Bath & Beyond boasts robust inventories of goods throughout the year due to its substantial buying power. It is within reason that one can view this strategic acquisition as providing Bed Bath & Beyond its own dedicated discount retail chain, except in the digital world. Having said that, with One Kings Lane formerly raising hundreds of millions in capital over the last two years, it makes me wonder if Bed Bath & Beyond participated in any of those funding rounds only to find such an investment underwater. In such a case and if Bed Bath & Beyond still saw some value in One Kings Lane, at a discount, maybe the earlier investment forced the latter actions. For a deeper dive into the curious case of this acquisition investors might read my recent publication titled "Bed Bath & Beyond's Curious Acquisition Of One Kings Lane".

Bed Bath & Beyond has a history of taking languishing companies and rolling them into the big-box brand. More than a decade ago, Bed Bath & Beyond began acquiring smaller brands and founded a strategy of unifying the brand and products under one roof. Harmon Face Values is an example of this strategy. Some 12 years after acquiring the small retail chain, Bed Bath & Beyond continues to refine the Harmon store-within-a-store concept.

As a consultant with the Bed Bath/Harmon strategy back in 2004-2006, I participated with mapping out remodels and implementing the Harmon within a Bed Bath concept. Typically, Harmon store concepts will only be placed within A-A+ volume Bed Bath & Beyond stores. These stores tend to be in upper income or high traffic volume locations that generate sales of $30mm+ annually. Aventura, Florida was one of the first pilot test for the store-within- a-store concept locations in Florida back in 2005. The Aventura, Florida Bed Bath & Beyond store has grown to not only include Harmon Face Value products, but also a fine china shop in one of South Florida's more ritzy regions.

When Bed Bath & Beyond acquired the Harmon brand it was a very small and niche market concept. This allowed Bed Bath & Beyond to shape the future of the brand and its positioning in the marketplace. As such, the acquisition proved to be of great value and a winning proposition for consumers. Since the Harmon acquisition, Bed Bath & Beyond has also acquired buybuy Baby! and Cost Plus World Market. These two acquisitions have proven more difficult to expand and profit from, but Bed Bath & Beyond continues to strategize on ways to implement these store concepts under the Bed Bath & Beyond umbrella.

To further its merchandising evolution, Bed Bath & Beyond is also including a Harmon shop within the new Bed Bath store slated to open in Brooklyn. Known as the Liberty View project, the location will include Bed Bath along with Harmon, buybuyBaby and Cost Plus World Market.

With these acquisitions over the years, Bed Bath & Beyond desired to meet a greater audience of consumers and at different stages of their life cycles. It remains to be seen how profitable these acquisitions can or will become and as the Company's CEO suggests meeting consumers' needs is of greater importance than profitability with some of these efforts.

Heading into Bed Bath & Beyond's earning call, shares are continuing to trade at less than 10 x earnings and continue to appear cheap when compared to peers. It remains to be seen if shares are a value proposition or a value trap. The question an investor in BBBY has to ask him/herself is "Do I believe that Bed Bath & Beyond was a standout retailer during Q1 2016"? It's hard to imagine that while many retailers missed their Q1 revenue guidance and lowered Q2 revenue expectations that Bed Bath & Beyond fared any better given its revenue and gross margin issues. I sure hope the company can turn things around and deliver a better outlook for investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.