Sell Bed Bath & Beyond Into Earnings

| About: Bed Bath (BBBY)

Summary

BBBY reports quarterly earnings after-hours.

The company has increased its online presence, but it has come at a cost.

Gross margins are in decline due to higher discounting and higher shipping expenses.

Operating income margin declines appear intractable due to higher technology expenses.

Stagnant revenue growth and declining margins make BBBY a sell.

Bed Bath & Beyond (NASDAQ:BBBY) releases quarterly earnings after-hours today. Analysts expect revenue of $3.01 billion and EPS of $0.98. The revenue estimate is flat versus the $2.99 billion the company reported last quarter. Investors should focus on the following key items.

Comparable Store Sales Data Is Mixed

BBBY is having difficulty growing its top line. Stagnant sales at department stores like Macy's (NYSE:M) have somewhat spooked investors away from retail stocks. The Amazon (NASDAQ:AMZN) threat also appears to be omnipresent. BBBY has tried to transition more of its sales to online. The results have been mixed. Comparable sales for the quarter ended August 2016 decreased by about 1.2% as compared to a 0.7% increase in the year earlier period.

Comparable sales through online websites and mobile applications increased by more than 20%. This is encouraging. The ability to compete with Amazon and meeting customer trends requires retailers to embrace online sales trends, not run from them. BBBY appears to be catching on.

Declining Margins Appear Intractable

In order to get stagnant revenue growth, BBBY has to pay up for it. That higher price is materializing in the form of lower margins. Gross margin for the quarter ended August 2016 was 37.4%; this compares unfavorably to the 38.1% margin from the year earlier period. The deterioration in margins was primarily attributable to an increase in coupon expense, and increase in shipping costs. BBBY's online operations increased free shipping to customers in order to drive sales. As the company continues to tweak its online model, its margins could fall further.

The company's operating income margin was even worse, falling to 9% versus 12% in the year earlier period. Operating income of $281 million was off nearly 20% Y/Y. SG&A costs as a percentage of revenue ticked up to 28% versus 26% in the year earlier period. The increase was due to an increase in salaries and technology expenses. Again, the more the company perfects its online model the more technology it will have to spend to maintain it. I expect operating income margins to continue to fall until BBBY becomes more efficient online.

Takeaway

Stagnant revenue growth and declining margins are foreboding. Rising rates could slow housing demand and reduce traffic to BBBY's physical and online stores. BBBY is a long-term sell.

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. I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Home Furnishing Stores, Earnings
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