Bed Bath & Beyond Gross Margins Continue To Contract In Q1 2016

| About: Bed Bath (BBBY)


Gross margin contraction still negatively impacting earnings and sales.

Balance sheet experiencing stresses that may become a growing concern.

Bed Bath & Beyond reduces comp sales forecast.

As expected, Bed Bath & Beyond (NASDAQ:BBBY) failed to show an improvement in gross margin performance during the Q1 2016 period. This resulted in the company missing on both the top and bottom line with regards to analyst expectations. The average analyst estimate for Bed Bath & Beyond's 1st quarter was for the company to increase sales by 1.4% on 1-2% comps. Unfortunately, the company reported negative same store sales growth (low-single digits) with digital sales growth of roughly 25% during the quarter. The retailer was expected to show an earnings decline of roughly 7% with earnings falling to $.86 a share from $.93 a year ago. And unfortunately, Bed Bath & Beyond reported a bottom line miss with earnings of only $.80 a share in the 1st quarter of 2016.

Net sales for the quarter were approximately $2.7 billion, flat with the first quarter of last year, due to an increase in net sales from new stores offset by a decrease in comp sales. Comp sales for the quarter decreased by approximately 50 basis points in total, attributable to a decrease in the number of transactions, partially offset by an increase in the average transaction amount.

I have been reporting and analyzing Bed Bath & Beyond's operations for the last 11 years and have identified a continuing issue with the company's gross margins that are ever contracting. For this reason and ahead of the company's quarterly release I offered to investors that they should continue to focus on this key metric. It has been a means to forecast the company's future prospects be them great or of detriment to company results and shareholders. In my article titled "Bed Bath & Beyond Q1: Strains On Brick And Mortar Retail Sales", I offer investors a more recent depiction of Bed Bath & Beyond's gross margin issue.

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.

With successive articles analyzing the Bed Bath & Beyond business intra-quarter, I offered investors a closer look at ongoing operations. Some of these articles are easily accessed via and bulleted below:

With all that being said, Bed Bath & Beyond's first quarter gross margin performance continued on-trend. Gross margin for the first quarter was approximately 37.4% as compared to approximately 38.1% of net sales in the first quarter of last year. The decrease was primarily due to, in order of magnitude, a decrease in merchandise margins and an increase in coupon expense as a result of increases in both redemptions and average coupon amount.

Regardless of the multiple years of capital expenditures in excess of $350mm annually or all the investments the company has made with regards to remodels, new store openings and digital build out, the company still can't offset it's challenged brick and mortar issues. The retailer continues to differentiate its product line and compete in all areas of retail, but it continues to be for naught and at the expense of its share price performance.

If you were looking for good news in the way of the retailer's balance sheet, it won't be found. Bed Bath & Beyond finished the quarter with approximately $645,000 million in cash and cash equivalents and investment securities. In the same period a year ago, the company had $793mm in cash, cash equivalents and investment securities. The cash draw on the balance sheet is pretty significant and not sustainable at these levels. As such this will become of increasing concern should other metrics not improve for the balance of the year.

There were very few positives to offer from the latest Bed Bath & Beyond quarterly results, even as the company held their conference call with analysts and avoided answering their questions directly. CEO Steven Temares is well known for his contempt of analysts and offered nothing short of this in his backhanded comments during the conference call. Mr. Temares even went so far as to denigrate an analyst on the call for asking more than one question and in succession.

Steven Temares

You're the first one to break the rule, David. I was wondering who that would be, so let's see who had money on David.

Unfortunately, I've had the opportunity to be in the presence of Mr. Temares during a store visit/walk. He's quite the condescending individual and lends little to the education process of his store staff. In short, the store teams give what they can in preparation of a "Temares" visit for which is rendered in vain through his awfully condescending engagement with the store team. With this anecdotal experience I would implore investors to read the transcript from the latest conference call and extrapolate the tone of Mr. Temares' engagement with analysts firsthand. Back on September 21, 2015 Mr. Temares was examples as a "People to Watch in 2016" by HomeWorld Business. The price of BBBY shares on September 21st was $60.50ish. The price has only declined since then and with great significance. Bang up job Steven!

I can't recall how many times the executive team avoided answering a question directly or asked for the analyst question to be revised. Even upon revising the question for management's benefit, the Bed Bath & Beyond team was less than forthcoming other than to suggest they see no meaningful change to the consumer or economic landscape.

With regards to the remainder of the fiscal year, the company reduced its comp store sales guidance from 1-2% down to 0-1% inclusive of digital sales. This would bring 2016 net sales growth of roughly 170 basis points. The earnings guidance remained unchanged even in the face of a dismal Q1 result and what appears to be a continuation of gross margin deleveraging and comp sales guidance being lowered. There is not a good deal of logic in the earnings guidance being left unchanged without a significant boost in share repurchases and as the company admittedly stated they don't envision a change in the consumer landscape or competitive environment facing retailers. From the trends in place, the company's stated understanding of the consumer and retail environment being an obstacle for profitable growth, continued deleveraging of gross margins and lowered comp sales for the year, I would propose investors consider the possibility that earnings disappoint or become less relevant. Shares of BBBY, after falling nearly 5% in after hours yesterday have since rebounded into positive territory. Jefferies Group, Goldman Sachs (NYSE:GS), Credit Suisse and Telsey Advisory Group and JP Morgan Chase (NYSE:JPM) all lowered their price targets today on shares of BBBY.

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.

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