Stick A Fork In Bed Bath & Beyond

| About: Bed Bath (BBBY)
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Summary

BBBY missed on revenue and earnings for the quarter-ended November.

Operating income margins fell to 7% from 10% in the year earlier period.

Comparable sales declined while the costs to attract customers continued to expand.

Stick a fork in BBBY.

Bed Bath & Beyond (NASDAQ:BBBY) reported quarterly earnings Wednesday and it was a disappointment on several fronts. The company reported revenue of $2.96 billion and EPS of $0.85. BBBY missed on revenue by $50 million and missed on EPS by $0.13. The stock was down over 7% mid-morning on Thursday. I had the following takeaways on the quarter.

Comparable Store Sales Were Mixed

The company continues to struggle with top-line growth, which is a red flag. BBBY has been transitioning more of its sales online to capture the change in buying patterns. Comparable store sales were down 1.4% during the quarter compared a 0.4% decline in the year earlier period. Comparable store sales through digital channels grew 20%, yet fell in the low-single-digit percentage range from stores. Sales through physical locations continue to stymie the company.

With interest rates at record low levels, the environment has been conducive for housing, and home furnishing stores like BBBY. The Fed has turned hawkish and is expected to raise rates a few more times in 2017. Rising rates could eventually slow home sales and home furnishings. If BBBY's sales have stagnated when rates were low, then what will happen in a rising rate environment?

Operating Income Declines Could Be Intractable

BBBY's operating income margin declined to 7% from 10% in the year earlier period. Falling operating income margins amplify the pain of flat to declining top-line growth. Operating income of $211 million was down 24% sequentially and off 28% Y/Y. SG&A expense was about 30% of revenue this quarter, up from 28% in the year earlier period. The increase was due to an increase in salaries and technology expenses. Rising online revenue probably portends a rise in technology expenses as the company perfects its online model, and attempts mines customer data to better understand buying patterns.

As Housing Goes So Goes BBBY

According to the company's Form 8-K, management expects total FY 2016 EPS at the low end of the $4.50 to $5.00 range it has earned over the past several years. Through the first nine months of the fiscal year, BBBY reported EPS of $2.76. It would have to generate EPS of $1.74 for the fourth quarter to reach full-year EPS of $4.50. In effect, the company would have to grow Q4 EPS by 100% sequentially. That sounds like a stretch.

Long term, I am bearish on the stock. The revenue, earnings and business prospects of Bed Bath & Beyond are tied to the housing market. Housing starts should be highly correlated to the sale of domestic home furnishings.

Since the Financial Crisis, housing starts peaked at 1.34 million in October 2016. Short-term interest rates are rising and so are mortgage rates. If rising rates slow housing - which I expect it will - it could also choke off sales of home furnishings.

Conclusion

BBBY's revenue continues to stagnate while gross margins decline and SG&A expenses expand. I expect its top-line growth to worsen in a rising rate environment. Stick a fork in 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. I have no business relationship with any company whose stock is mentioned in this article.