Struggling home goods retailer Bed Bath & Beyond (NASDAQ: BBBY) is set to report its second-quarter results after the market closes today. The company may get a boost from a strong consumer environment, which has helped other retailers post record results. But earnings will almost certainly decline, continuing a yearslong trend of margin erosion.
What happened last time
Bed Bath & Beyond matched analyst expectations when it reported its first-quarter results in June, but comparable sales declined. Overall comparable sales were down 0.6%, with comparable-store sales slumping by a mid-single-digit percentage. Growth in digital sales partly made up for the weak performance from the company's stores.
Bed Bath & Beyond's first-quarter earnings included a $0.06-per-share reduction related to severance costs that wasn't included in the company's modeling assumptions. Adjusted for that charge, Bed Bath & Beyond's earnings were ahead of analyst expectations, although the bottom line tumbled regardless of which number is used.
What analysts are expecting
For Bed Bath & Beyond's second quarter, analysts are expecting minimal sales growth and another earnings decline:
Will a rising tide lift all boats?
There's at least one reason to believe that Bed Bath & Beyond could trounce analyst estimates. Strong consumer spending has lifted the results of other major retailers in the second quarter, including Target and Walmart, and it could potentially do the same for Bed Bath & Beyond.
Target put up its best results in years in the second quarter, producing comparable-store sales growth of 4.9% on store traffic growth of 6.4%. Walmart put up comparable-store sales growth of 4.5%, driven by both higher traffic and higher spending. Both companies also enjoyed robust online sales growth of around 40%.
Target CEO Brian Cornell commented during that company's earnings call in August that the strong consumer environment was "perhaps the strongest I've seen in my career." If Bed Bath & Beyond can't join in and capitalize on consumers pulling out their wallets, the chances of a turnaround will take a hit.
Not all retailers are enjoying robust sales, so strong results certainly aren't a lock for Bed Bath & Beyond. Most notably, department store J.C. Penney put up abysmal second-quarter numbers and slashed its full-year guidance despite the strong consumer environment.
Keep an eye on margins
Bed Bath & Beyond has been suffering from slumping margins for years, and there has yet to be a sign that the retailer's profitability is bottoming out. Even if the company can produce comparable-sales growth in the second quarter, investors should focus on the bottom line.
Gross margin was just 35% in the first quarter, down from 36.5% in the prior-year period. Bed Bath & Beyond was able to produce gross margins above 40% as recently as 2012, but those days are over. Competition from online retailers and the company's overreliance on 20%-off coupons to drive sales have taken their toll.
Operating costs have also been rising faster than revenue, leading to steep declines in earnings. Operating expenses jumped 3.6% year over year in the first quarter, despite the sluggish revenue growth. A lower gross margin and higher operating costs led operating income to plunge 45%.
Bed Bath & Beyond has yet to find its footing in a new age of retail. Both Target and Walmart have taken aggressive steps to drive customers to their stores and to grow their online sales, and both are succeeding. Bed Bath & Beyond, on the other hand, seems to be stuck.
A solid quarter driven by strong consumer spending will certainly be good news. But the company desperately needs to stabilize its margins. The market won't give the stock anything more than a rock-bottom valuation until it does.
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