Investors Brace for a Tough Earnings Report From Bed Bath & Beyond

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Investors are downright pessimistic about Bed Bath & Beyond's (NASDAQ: BBBY) recovery hopes heading into its third-quarter earnings report, set for the afternoon of Jan. 9. Sure, the resulting multiyear low for the stock creates the potential for a rally if the specialty retailer can outperform those rock-bottom expectations.

However, there are good reasons for Wall Street's sour outlook, including the fact that the company is on track to post its third straight year of declining sales, with profits likely to fall for at least the next two years.

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With those broader trends in mind, let's take a closer look at what investors can expect to hear from Bed Bath & Beyond on Wednesday.

Sales are shrinking

Many national retailers are experiencing the best customer traffic results they've seen in years, but that positive trend hasn't helped Bed Bath & Beyond. Instead, sales at its existing locations fell by around 5% last quarter to mark no real improvement in its recent demand trends.

Growth in the e-commerce channel is helping almost completely offset the losses in customer traffic at its stores so that overall sales are inching higher. Yet the retailer is still losing ground to rivals like Walmart, Amazon, and Wayfair. For the fiscal third quarter, which includes Bed Bath & Beyond's back-to-school offering, executives are projecting more of the same, with digital sales offsetting declines at its physical locations. Investors who follow the stock are predicting revenue will land at around $3 billion to mark a 3% increase, year over year.

Profitability pinch

The outlook gets bleaker when it comes to profitability. Bed Bath & Beyond has had to scale up its reliance on discounting to keep inventory moving, and that initiative pushed gross profit margin down to 34% of sales last quarter from 36% a year earlier. Sure, fewer shoppers are coming into stores holding the coupons the company mails out, but the ones who do are taking advantage of deep price cuts.

The third major stress on its business is an aggressive pivot toward the online business. This segment has more promising growth prospects but requires lots of costs to scale up on a national level. It's also a niche that requires management to build up a different set of skills that they haven't yet mastered. Executives said back in September that these "learnings" include things like pricing, product assortment, free shipping price thresholds, and digital advertising allocation.

While efficiency will take time to develop in the online channel, the spending is having an immediate -- and negative -- impact on the books. Expenses are up as a percentage of sales for several quarters running and will likely continue that trend in the third quarter.

Looking beyond

It's too early to write off Bed Bath & Beyond as a lost cause. Sales are still climbing overall, and the chain has some positive financial attributes, including a strong cash position. The retailer has lots of flexibility to make strategic changes, too, thanks to its light inventory levels and the fact that a large portion of its store base is coming up for lease renewals over the next year or so.

These assets should buy the company time to get its rebound on firmer footing. Shareholders might demand more aggressive moves like closures and restructuring, though, if Bed Bath & Beyond can't show progress toward its goal of stabilizing its profit free-fall soon.

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